Column: India close to ending extreme poverty

Updated: Aug 7 2014, 09:52am hrs
Reduction of poverty and hence, how it is measured, has long been a contentious political economy issue in India. There is general discomfort every time the headcount ratio of the number of poor, based upon an accepted methodology recommended by an expert committee, declines; this then triggers a process to revisit known issues by another expert committee. The collective conscience, it seems, expresses a sigh of relief only when the new committee recommends a methodology that raises the headcount ratio as well as the number of absolute poor. Serious policy analysis often becomes a casualty. The government, mostly at the receiving end, is left with the only comfort that the new set of estimates keeps the direction intact, i.e., the headcount ratio declines when compared with similar estimates for the previous round.

For example, estimates for the year 2004-05, based on Tendulkar method, raised the headcount ratio by almost 100 million over that estimates based upon then-existing Lakdawala norms, as the accompanying graphic shows. The former estimates were quite consistent with those of the World Bank, which were based upon a poverty line of $1.25 per day per person. The government, however, appointed a new committee once estimates for 2011-12, based upon Tendulkar norms, indicated a sharp fall in the absolute number of poor to 270 million from 407 million in 2004-05. Expectedly, the new estimates, as per the revised method suggested by the Rangarajan committee, raised the number of poor by nearly 100 million for 2009-10 and 2011-12! The number of poor, according to these new estimates released in June 2016, was 455 million in 2009-10 and 363 million in 2011-12.

Click here for graph

And now, the World Bank has just released the summary results and findings of the latest round of International Comparison Program (ICP, 2011)a global statistical partnership to collect comparative price data, estimate purchasing power parities (PPPs) and compile detailed expenditure values of countries gross domestic products. Based on these data, the Bank is expected to release its official estimates of world poverty by end-August. However, preliminary estimates by Chandy & Kharas of Brookings institution, May 2014, show a dramatic reduction of over 50% in the number of global poorto 571 million in 2010 (at 2011 PPPs) from 1,215 million in 2005 (2005 PPPs) at the Banks current poverty line of $1.25 per day per person. Lets call this the baseline scenario.

India stands out: the number of extreme poor was a mere 99 million or 8.1% in 2010, down by more than 300 million in a period of just five years. If one were to extrapolate these estimates for the year 2011-12, in line with Rangarajan committee estimates, which show a fall of nearly 100 million poor in the two years from 2009-10, we have probably achieved the millennium development goal (MDG)!

However, Chandy & Kharas believe that this excitement may not sustain as the World Bank itself is expected to revise its poverty line; they, therefore, expect the new set of official poverty estimates to be higher. Meanwhile, they themselves have put out a new set of estimates based a new, roughly-adjusted poverty line of $1.55 per day per person; for India, they also use 2011-12 survey data in place of 2009-10 survey data, the latter year being one of extreme drought. Their estimates place Indias number of extreme poor at 180 million, nearly half the Rangarajan committee estimates of 363 million.

Now, these early estimates of poverty from abroad have elicited extreme surprise and an expected suspicion about methodology. Some critiques have already dubbed these as mere statistical jugglery! One has to be careful though. Global experts have already endorsed the new set of PPPs as fairly robust, considering these qualitatively superior to the earlier round, or ICP 2005. An NBER research paper by Deaton and Aten, June 2014, has persuasively argued in favour of the methodology adopted under ICP 2011; the IMF has already accepted these data to realign its global GDP (as evident in the recent World Economic Outlook update).

If the World Bank were to retain the poverty line at a daily $1.25 dollar per capita (the base line scenario) or even adopts a line closer to the $1.55 arrived at by Chandy & Kharas (2014), we would be left with two sets of questions to delve into. First, how do we reconcile the extreme divergence between two sets of estimatesone that is globally consistent and projects a fairly optimistic picture in terms of Indias ability to achieve the MDG for 2015, and the other set of estimates from Rangarajan committee that suggest we are still far off.

But more importantly, if poverty has indeed declined as sharply as the global estimates would suggest, then what explains this dramatic success Would growth alone account for such a sharp decline Or whether governments social sector schemes played a much larger supportive role that we have refused to acknowledge Or whether a government strategy to tilt the terms of trade in favour of agriculture sector played a key role Or a combination of all these and many other factors

Needless to say that we have to wait until the World bank published its official estimates, for if it chooses to adopt a much higher poverty line, say $2.0 per capita (closure to Rangarajan committee report of $1.94) we might have surprises in store as these estimates are too sensitive at the margin.

Renu Kohli

The author is a NewDelhi-based macroeconomist