What caused the steep fall in poverty reported by the Planning Commission? The evidence is mixed
Earlier this week,the Planning Commission released estimates of the incidence of poverty in 2011-12. As in virtually the entire literature on the measurement of poverty in India,these estimates are based on data on per capita consumption expenditure collected by the National Sample Survey Organisation. The estimates show that there has been a quite dramatic fall in the level of poverty. The number of people below the poverty line the threshold level of per capita expenditure below which a person is deemed poor has declined from 37 to 22 per cent in the seven years between 2004-05 and 2011-12. This is the fastest rate of poverty reduction that has been experienced in India. Moreover,the gains have been distributed across a large number of states,with several backward states such as Bihar and Uttar Pradesh also achieving significant reductions in the level of poverty.
Of course,many people will question the significance of these estimates by arguing that the Planning Commissions specification of the poverty line is set at an absurdly low level,the implication being that a correct and hence higher specification of the poverty line would mean that a much larger number of people are below the appropriate poverty line,and should be counted amongst the poor. It is,of course,a tautology that a higher poverty line will imply a greater level of poverty. However,this is a criticism about the estimated level of poverty in 2011-12,and is completely silent about the trend in the incidence of poverty.
A debate about what is the appropriate poverty line is,except for one reason,about as puerile as any discussion can be. There is no correct level,because any specification is essentially subjective and arbitrary. What is undeniably true is that a vast number of Indians are poor by any yardstick one does not need the NSS data to establish this,given that we see large numbers of the poor in our everyday lives.
A short digression is in order. Perhaps the only reason the specification of the poverty line has real significance is that the government often ties social benefits to whether individuals are poor or not. Readers will recall that this was precisely the reason why there was such a public outcry a short while ago about the fact that the Planning Commission poverty line is only Rs 32 per day per capita. A vast majority felt that individuals with per capita expenditures well above that deserve welfare benefits. Fortunately,the new food security bill,by eliminating the distinction between below the poverty line and above the poverty line,will have taken a big step in making the specification of the poverty line somewhat irrelevant.
The obvious fact that a sizeable fraction of society is poor does not mean that the NSS data are useless or that the poverty estimates based on them are of no interest. This is because it is more important to find out how the incidence of poverty is changing over time. Have the benefits of the high rates of growth accrued entirely to the rich,as some would like us to believe? Or has growth trickled down effectively to the poorest of the poor?
Tentative conclusions can be drawn about these trends from the NSS data. Consider,for instance,the latest estimates of the Planning Commission,which show a large reduction in poverty in the seven years after 2004-05. Suppose the poverty line is set at a level higher than that used by the Planning Commission. Then,both the base level of poverty,that is,the poverty level in 2004-05,as well as poverty in the terminal year,would have been higher. Unless the change in the distribution of consumption expenditure has been extremely perverse,the dramatic reduction in poverty according to the Planning Commission estimate also guarantees that there would be a sizeable reduction even if the poverty line were set a higher level.
What factors can explain the steep fall in the incidence of poverty? Obviously,the answer has important implications for public policy. The first four years of the seven-year period witnessed a high growth rate. If the trickle-down process was the major explanatory factor,this would provide strong support to those who argue that the government should focus almost entirely on removing constraints to the growth process. Eschew expenditure in the social sectors in view of the large leakages and press hard on the growth pedal, they would argue. On the other hand,if there is little evidence in support of the trickle-down process,that would provide ammunition to the advocates of policy initiatives such as the food security bill.
Unfortunately,the evidence is so mixed that no firm conclusions can possibly be drawn. Consider,first,the time profiles of growth and poverty reduction. The reduction in poverty has been higher in the latter two years of the seven-year period precisely at a time when the Indian economy was in the grip of the post-2008 global recession. So,there is no tight connection between growth rates and poverty reduction. Despite this,those who believe in the trickle-down process can still claim not without justification that the high growth witnessed in the first four years had a lagged effect on the incomes of the poor.
Second,there is no data on the what if outcomes. We do not know how the distribution of consumption expenditure would have evolved if there was no NREGA. Real wages have increased quite significantly during this period,and this must have been an important factor in reducing rural poverty. Is this because the demand for labour has increased due to high growth rates? Or is the increase in rural wages due to the effects of NREGA?
Sorting through counterfactuals requires sophisticated econometrics. At this stage,we simply do not know. In the absence of hard knowledge,prudence dictates that we walk on both feet and focus on growth with a human face.
The writer is professor,Department of Economics,University of Warwick,UK