India’s economic policies must focus on what causes growth, not what causes poverty to decline

Published: June 29, 2019 1:34:54 AM

Given the estimated large poverty decline in India over fy12-fy17, our economic policies must focus on what causes growth, not what causes poverty to decline.

gdp, gross domestic productConsumption is 60 % of GDP, and poverty is defined in terms of per capita consumption.

By Surjit Bhalla and Karan Bhasin

Today is National Statistics Day and there is a reasonable chance that the NSSO Consumer Expenditure Survey report for agricultural year (July-June) 2017-18 will be released over the next couple of weeks. Based on our analysis of existing trends in consumer expenditure and consumer prices, we predict that this will (should) unleash seismic changes in the way Indians (obviously including the Indian government) think about absolute poverty and its alleviation, macro growth policies and micro (especially agriculture) policy.

First rethink—we are not a poor country anymore, not with just 4.5% of the population classified as poor (Tendulkar poverty line of `44 per person per day in FY18 prices). And given that there has been very low inflation since then, consider this as the poverty line today.

Second rethink—we have always considered food consumption as the ultimate criterion of poverty. Hence, we have built up an elaborate (too elaborate) ecosystem of food production, consumption, and distribution. Time has come to dismantle this ecosystem—an ecosystem that is biased against the poor farmer, is biased against climate change, and is biased against the use of water and energy.

Third rethink—4.5 % of the population as poor is not right, does not sound right, and isn’t right. The rethink has to be about defining poverty in relative, not absolute terms. Most European nations have a relative definition of poverty, for instance, a fixed proportion of median income. We should move towards that by the end of 2024, when India will likely be a $5 trillion economy, or around $3,500-4,000 per capita income. This is where Indonesia is today, and where China was in FY09 (in terms of per capita income). But before we move to a relative definition, India should forthwith move towards an updated poverty line, a poverty line consistent with our income status today as a lower middle income country—note, no longer a poor economy.

Fourth rethink and something we believe that the Modi government has been involved in for the last five years—poverty is now not just about food but living standards (sanitation, housing, piped water, electricity, education, health, and jobs). And on each of these elements, the focus should shift to quality, not quantity.

Fifth rethink—recognise that we have a messed up and archaic agricultural policy—a policy that was not even fit for earlier poor economy times. But no reason to blame the past—the emphasis should be in reforming the present for a better future. Poverty is no longer about food, so free up the food producers rather than keeping them as prisoners of policy (and politicians and bureaucrats). No Essential Commodities Act, no Food Corporation of India [whoever named this bureaucratic-political-corrupt delivery of food as a Corporation?], and no Agricultural Produce Marketing Committee now called the Agricultural Produce and Livestock Marketing Act 2017 (APLM). Notice how little we have developed—farming and trade (marketing) are the oldest activities known to man and woman, and we need an Act of Parliament in 2017 to keep regulating it?! Alternative “Act”—farmers are free to buy, sell, hoard, export, import, like the rest of the 7 billion residents of this planet. And no bans please—we are no longer a poor economy.

The above rethink is not based on idle speculation but rather on analysis of trends in consumer expenditure since FY12. Consumption is 60 % of GDP, and poverty is defined in terms of per capita consumption. The latest NSSO survey is likely to show a sizeable reduction in poverty rates across the country. Our estimates for FY18 are based on the estimation of poverty line in FY18. This estimate is based on the increase in poverty line or price level (over FY12) for each state, and each urban and rural area of each state. We use the NSSO distribution for FY12, and increase the average per individual nominal consumption for each individual by the all India constant magnitude of 89%. The per individual poverty line for everyone is estimated as above. The 3.2$ middle income poverty line is obtained from the Tendulkar poverty line by multiplying the latter by 3.2/1.9 (given that the Tendulkar poverty line in FY12 is equal to PPPP$1.9). We will update our analysis in the form of a research paper once the 2017 consumption survey data is released but the findings are likely to be identical.

According to Tendulkar poverty line, poverty is today around 4.5% of the population or less than 70 million. According to a 70% higher in real terms poverty line (equivalent to PPP$ 3.2 per person per day (pppd), the World Bank poverty line for middle income economies or `75 pppd), poverty in India is estimated at 31% down from 57% in FY12. Half of these poor reside in three Hindi heartland “old” states (before reclassification) of Bihar, MP and UP. Therefore, there is a 26 ppt decline in poverty over 6 years. That is above a 4% ppt decline per year—the fastest pace of poverty decline India has ever experienced, and that to with a 70% higher poverty line.

What happened to set this record decline amidst demonetisation, GST, two drought years, and lower than potential GDP growth? We believe a large part of this decline took place due to better targeting of government programs, better targeting made possible through expanded (and extensive) use of direct benefit transfers (DBT).

Therefore, the new approach towards poverty alleviation should involve targeted income transfers. Under our proposed targeted basic income program, which is a top-up scheme, the government transfers the poverty gap (difference between per capita consumption of the household and the poverty line faced by the household) into the bank account of the poor. The cost of such a programme is likely to be between `2.5-3 trillion and it will ensure nobody has consumption below the poverty line. India’s current expense on poverty alleviation programs is approximately Rs 3.4 trillion and the cost to make one person non-poor due to the PDS in FY12 was `24,000. The same for MGNREGA was Rs 40,500. Therefore, assuming perfect targeting, a basic income program is likely to cost substantially lower that the current policies and it will ensure that poverty rate is reduced to zero based on the higher poverty line.

The direct benefit transfer mechanism of the government has been able to resolve targeting problems for a bulk of the 430 government schemes and subsidies. The current PM-Kisan program provides income support to approximately 14 crore farmers is an example of how through DBT the government can provide direct income support as its focal policy towards poverty alleviation. Such a policy is likely to help government in rationalising and consolidating its poverty reduction programs, thereby freeing up resources for other sectors in the economy.

India’s recent growth has led to a sizeable expansion in the number of taxpayers, and successive reforms over the last five years have simultaneously improved tax compliance in the country. The increase in number of individual return filers from 3.5 crore in FY13 to 6.4 crore FY17 and the improvement in revenue realisation from direct taxes reflects this improvement.

However, now the government should focus on bringing more people under the tax net at the higher income brackets. Our recommendation towards achieving the same would be to reduce both Corporate Income Tax rate and the highest Personal Income Tax rate to a flat 25%. Therefore, to improve revenue realisation from direct taxes the government should focus on improving compliance by reducing the highest slabs of the tax rate. This rethink is necessary if we are to achieve accelerated growth, and higher tax revenues.

The Indian economy requires adequate investments in critical areas such as road, railways and water. Therefore, the government needs to rationalise its expenditure and tax rates to ensure that reallocation of resources. While our pace of poverty reduction has improved over the last five years, we can augment it further through a targeted basic income policy and free up additional resources for other sectors of the economy. Times have changed and so should our policies towards poverty alleviation.

Bhalla is contributing editor, Financial Express Bhasin is a New Delhi-based policy researcher Twitter: @surjibhalla & @karanbhasin95. Views are personal

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