The poverty line slugfest

Written by Nilanjan Banik | Updated: Aug 9 2013, 12:26pm hrs
Currently, much of the policy debate in India is centred on the new poverty line and the Food Security Bill. Critics argue that the ruling UPA government is trying to get political mileage by claiming that there has been a reduction in the number of people living below poverty line. It is the same UPA government which uses a totally different norm when it comes to doling out subsidised food items to nearly two-thirds of Indias population under the Food Security Bill. If the government is planning to provide subsidised wheat and rice to 70% of Indias population and at the same time claiming that poverty is down from 37.2% in 2004-05 to 22% in 2011-12, then something is wrong.

Generally, poverty is measured in terms of the headcount ratio, which is the proportion of national population whose incomes are below the official threshold level of income. Since income data are hard to obtain, many countries instead use expenditures or calorie-intake data. In India, the Planning Commission computes poverty ratio on the basis of expenditure data. Based on the 55th Round (July 1999 to June 2000) conducted by NSSO, the percentage of people living below the poverty line is estimated at 27.09% in rural areas, 23.62% in urban areas, and 26.10% for the country as a whole. The data gives an estimate on the amount of money a person is required to spend to consume a minimum threshold amount of calories per day (2,400 in rural areas and 2,100 in urban areas), in addition to subsistence clothing and shelter.

In 2011, India had a new poverty line. A person spending less than R32 in urban areas and R26 in rural areas on food, health and education every day is poor. The Tendulkar committee reached this figure by calculating monthly cost on food, entertainment, school education and non-institutional health based on the National Sample Surveys Consumer Expenditure Survey, 2004-05.

Irrespective of the methodology used, everyone agrees the absolute number of people living below poverty line has fallen. As the Indian economy develops, we should brace for a stricter poverty measure. For instance, in the US, a family of four earning less than $23,000 per annum is classified as poor. The US can go for higher poverty standard as it is developed. There is little merit in discussing about what should be the correct measure of poverty.

Instead, it would make sense to debate about what other factors one should include in addition to calories such as fuel and electricity in the measurement of povertysomething the poor cannot live without. What also needs special attention is the dynamics of income distribution. An income distribution basically tells us how an entire population is distributed on an income scale, starting with very low incomes to billionaires. From the policy perspective an equal income distribution is more important than discussing as what might be the correct poverty line.

So, what does dynamics of income distribution tell us Working with district-level per-capita income data we find evidence about the increase in income inequality between rich and poor income cohorts within any given district. This result is similar to the recently published data. But what is more interesting to note is that although there is an increase in income inequality within a district, it has fallen across districts. (Anurag Banerjee and Nilanjan Banik, Is India Shining.) Categorising India into high, medium and low-income regions we find that some districts of MP, Orissa and Rajasthan have moved from being low-income to middle-income categories. Some of the fastest growing states comprise erstwhile BIMARU states such as Bihar, MP and Jharkhand. Our paper also finds evidence about the neighbourhood spillover effect. Working with per-capita district income between 1999-2000 and 2004-05 we find when income in district (i) increase by 100%, income in the neighbouring district (j) increases by 10%. Among important development indicators, closed drainage system has the maximum impact on income through own and spillover effects. Own effect reflects how the level of development (captured through development indicators) in any particular district (i) affects its own income. For 1% increase in closed drainage system, income increases between 0.96% and 2.58%. The second biggest factor is the availability of potable water. A 1% increase in availability of tap water systems within households gives rise to a 0.16-1.30% rise in income.

Many districts in India do not have a proper drainage system and lack potable water. Poor drainage systems usually have stagnated water thereby becoming a breeding place for mosquitoes. This could result in increase in malaria and water-related diseases in the vicinity, adversely affecting income. Similarly, proper potable drinking water systems have positive public health outcomes. If people are healthy, they can work harder and assimilate knowledge more efficiently, which translates into higher productivity and income growth.

Three important lessons are to be learnt from these results.

First, as India grows and urbanises an equal importance should be given to sanitation and other factors of development such as schools and hospitals. At times, faulty policy designs prevent the desired outcome. For instance, despite the success in enrolling students in primary education, there is still a vast pool of the population stuck in the agricultural sector. In fact, 75% of unemployment lies in the agriculture sector.

Second, widening of within district income inequality shows the need for more effective government intervention. Although the UPA government started several market interventions in the form of MGNREGA (labour market intervention), National Rural Health Mission (intervention in health for disadvantaged groups), etc, these schemes may not have yielded the desired result because of poor implementation and corruption. Hopefully, schemes like the direct cash transfers can help towards better implementation by stopping leakages.

Third, a fall in regional income disparity shows that growth process is spreading uniformly. The private sector (without depending too much on the government) is taking the lead in moving capital and labour to areas with lesser input costs (that is, investing more in backward districts, or second and third tier cities), contributing to uniform growth across India. What is needed is better governance to complement this growth.

The author is with Glocal University.