Interpreting the poverty numbers

Planning Commission’s recent poverty estimates show that the number of people below the poverty line has come down from 407.1 million in 2004-05 to 269.3 million in 2011-12. The poverty ratio has declined from 45.3% to 21.9% between 1993-94 and 2011-12. It can also be seen that most of the annual average decline of poverty between 2004-05 and 2011-12 was due to a decline in poverty in the rural areas.

Govindraj Ethiraj, Editor, IndiaSpend, in conversation with Ajit Ranade - Economist, Harsh Gupta - Mint Columnist, India Enterprise Council and Prachi Salve - Policy Analyst/Writer, IndiaSpend, interprets the numbers and also looks at other trends…

Govind: Poverty in India has declined from 407 million to 269 million - all in just 7 years. Why has this happened? How has this happened? Most importantly, should we believe the numbers?

We put these questions to Ajit Ranade, chief economist at the AV Birla group and also a prominent columnist. We are also joined by Harsh Gupta, another young economist, and author of the article in IndiaSpend, Prachi Salve.

Thank you all for speaking to us and joining us today. So, let me begin with Ajit. We’ve seen these news numbers, and there has been a lot of skepticism already which has emerged in the media about the veracity of these numbers, and, of course, if it was timed to the elections. We’ll come to that later and what it means. Let’s ask the fundamental one. What do the numbers themselves stand for? What do they tell you?

Ajit: As you know Govind, the poverty definition, the poverty line definition in India has always been on the basis of calorie intake. So, you convert calories in the appropriate food basket and therefore a rupee number. To the extent that we have consistently used this methodology, it’s comparable across time. With that, I certainly think this a remarkable poverty reduction achievement in a 7-year period… you have a 15% reduction. The percentage has come down from 37% to 22%, which I believe is the fastest in any 7-year period.

Govind: So what should we believe out of these numbers? Which part should we believe and which part should we be skeptical about?

Ajit: I don’t know what you mean by believe or not believe to the extent by which we have been following a similar and consistent methodology… and they have been coming from the same source, which is the Government of India’s Planning Commission, and which is based on the National Sample Survey (NSS). To that extent, of course, you have to accept it.

But you can quibble if this is the correct way of measuring poverty. I don’t think it’s the question of believing or not believing.The question is if you accept this methodology. As you know, there is the well-known Arjun Sengupta Committee, which was again formed by the Planning Commission. They came out with the number of 77%. But their methodology was different. They were looking at people who were vulnerable - not just merely poor and they have a definition of vulnerability. So, they were looking not just at the poverty line, they were looking at how severe was the poverty. Are you just near the poverty line, are you far below the poverty line, are you just marginally poor or are you just marginally non-poor. So, if you look at continuum, moderately below, marginally below and marginally above. On that definition, they came up with 77% and in fact this number has been corroborated by the Census, which is a completely different source from the National Sample Survey. The Census actually comes to your house to see if you have a two-wheeler, if you have a watch, if you have a television. So, based on the ownership of some of these assets, their number is 80%... and of course the definition is different. The poverty definition we are discussing of 22% is the Tendulkar definition, which is consistent with our definition for the last 40-50 years. The Arjun Sengupta committee was about vulnerability. The Census definition is about some asset ownership and they exclude if you own one of 6 things.

The debate on poverty happens because people follow different definitions and once you don’t agree on a common definition then of course there will be differences.

Govind: We’ll come to two questions. What is the general definition that you should look at and preferably agree upon, and then we’ll talk about what is the best case and what is the worst case. Let me ask Harsh now. I am sure you’ve been following the numbers. Do you want to pick from what Ajit just said?

Harsh: I agree with Dr. Ranade. People have agendas on both sides. One is, if it’s comparable on both sides, that is what matters. The numbers are very interesting. The rural and urban combined was 37%, give or take. It was around 29.8% in 2009-10 and that was a drought period and now it is 21.9% for 2011-12. Since 11years, we’ve had a reduction. But the recent reduction in the numbers has been slight more than the first 5 years from 2004-09. Now, granted that was a drought year and not questioning the veracity of the numbers. But this perhaps does tell us that the poverty reduction has preceded the UPA’s massive rollout of entitlements. Perhaps the relevant question everybody is asking - is the launch of welfare programmes responsible for these numbers or is growth more responsible? But we can see if 2009-10 was a drought number then the so called “actual reduction” had already happened to some extent and the last years have simply been a catch-up. The efforts of the schemes have been back-loaded to our times. We can say it’s more because of growth and less because of the schemes.

Govind: Alright Harsh, hold your thought. We’ll come back to what that means and the political dimensions. But let’s spend a little more time on the numbers. There are some other trends that are coming out Ajit. So, it says disparities between states, rural and urban and they seem quite sharp, and the other interesting thing is that 5 states - Uttarakhand, Sikkim, Punjab, Tripura and J&K - are turning out to be much poorer than they where they were some years ago. These are the 5 states where the poor have actually become poorer by this definition as compared to what they were earlier. Why is that?

Ajit: When you say poorer, you mean poverty ratio, and the poverty ratio would vary from state to state. That’s a given. Secondly, I would expect a state which had a relatively higher poverty ratio such as UP or Bihar or Orissa, they would see a steeper fall. That is simple because of the low hanging fruit syndrome. The same thing happens in infant mortality numbers, life expectancy numbers. So, it is easy for Indian life expectancy to go from 45 to 55 to 65 years. But from 65-70 also would take a much bigger effort. These 5 states that you mentioned, they would be state-specific factors. Of course J& K has been a disturbed area and possibly Tripura also. They are smaller states. More importantly, I think the larger states, the BIMARU states had a pretty steep decline in poverty.

Govind: And Bihar is leading the pack. I’m going to come to Prachi in a moment. The other point - is there something that worries you for the moment. Let’s say we believe them for the moment. Is there something you are worried about and something we should be concerned about?

Ajit: I’m glad you mentioned it. It’s not just the headline numbers which are important. In fact, like Harsh said, these are all-India numbers, it’s an all-state average and it combines rural and average… but the dynamics of poverty are so different from rural and urban and state to state. For example, in rural India, it used to be that the poor of India live in rural areas and they are connected with agriculture. That is the conventional story but that is changing. The terms of trade have improved for rural India, the terms of trade have improved for agriculture, we’ve had consistent rise in rural wages and prices are higher because of MSP and so on. So, now the rural poor have actually got a better deal. The urban poor are getting squeezed. They are not food producers, so they don’t benefit. They actually suffer because of food inflation. So, it’s important to go beyond the headline numbers, and take it down by rural-to rural and state-to-state and that is what worries me.

Govind: So it almost seems like all the attention has been on rural India and very little on urban area.

Ajit: Rural India is where the votes come from and the Parliament seats come from… in fact, urban poor are also an important constituency.

Govind: Prachi, you were looking at some of the disparities between rural and urban and within states. Is there something you want to say or ask Ajit here?

Prachi: Yes. Along with working on poverty and other programmes, J&K and other north-eastern states are special category states for almost all the schemes. So they receive special attention and extra money. Yet you see, poverty is increasing… so I think this is one thing to be looked at and figured out.

Ajit: The special category states get special attention and that probably get reflected in per capita and NSDP. But per capita NSDP is not the same as per capita consumption spending, which is what the NSS captures. For example, you are spending a lot of money in J&K but if much of it is going to the security forces, that won’t necessarily translate into consumption spending. That is the link which is missing in these 4-5 states which you mentioned.

Govind: Harsh, is there something you would like to put across from what Ajit said?

Harsh: Yes. There has been a lot of criticism of the Tendulkar Committee report and the latest number of 27 rupees in rural areas and 32-odd rupees in urban areas. You use a rough multiplier of 2.5 in purchasing power parity (PPP), which basically corresponds to the international extreme poverty line of $1.25. It’s not that the Suresh Tendulkar Committee is especially stingy. It is very much in line with the $1.25 poverty line, which is more or less internationally accepted. The $2 line is, of course, a different one and that might have a much bigger percentage of the population. So, I think the measurement and the methodology is not the issue but the implications.

Govind: Let’s come to the next question, growth v/s redistribution. So, we had good growth and everyone agreed. A lot of economists, perhaps yourself, would say that growth is responsible for reducing poverty. Some people may argue that was redistribution and Government flagship schemes and surely that sounds like a good pole to go on with.

Ajit: But, thankfully, as Harsh pointed out, this question can be subjected to econometric tests. So, there are somewhat rigorous tests and breakdown how much of this poverty reduction can be attributed to pure GDP growth and how much of it due to other factors. So let’s just say GDP growth and non-growth factors. And I guess people who have done this believe the dominant factor to be growth. This is not a subjective thing where people have to express an opinion. It is an econometric way, a causality test to figure it out.

Govind: All this is an outcome of the good years and now we have not had good years for the last two years.

Ajit: So, if it was 50:50, the econometric test comes out at 50% GDP growth and 50% other factors then we could speculate some more. But if growth is a dominant factor then of course when you have a slowdown, this year the GDP growth is down to 5% but 2009-10 & 2010-11 the rate was 9%. So, surely we will see slow down in poverty reduction. So, this year will be when there will hardly be any progress.

Govind: The next is the larger issue which the whole country has been debating, which is the Sen-Bhagwati paradigm. The reason we are talking about it because all this in some way leads to these two interesting positions.

Ajit: I think it is a false dichotomy. To put it rather simply, it is like a chicken-and-egg situation where we are debating what came first. In fact, Bhagwati, in one of his articles, also said that Mr. Sen is putting his cart before the horse. The debate is all about sequencing. You first have to have economic growth, which requires liberalisation and liberal policies and which in turn gives you enough resources to do redistribution… or you start with redistribution and hope the redistribution capabilities are able to purchase education, skills and nutrition that leads to people being able to take growth opportunities. Ultimately, the difference is narrow. Both these economist are pro-market. I can prove it. Bhagwati, of course, has pro-market credentials but Sen’s famous work on hunger and famines said famines occur because there is inadequate purchasing power. So, you just have to ensure wages with public work programmes, and they in turn attract private traders to supply. That is the market mechanism. He himself is a libertarian. So, I think it is overplay to call them two polar opposites.

Govind: You’ve just come back after meeting Sen. He reiterated his position as a libertarian… he feels we are at that level of development where people simply don’t have adequate human capabilities, skill, nutrition, health, education to participate in the market process. Is he taking a dimmer view of the way things are in the country?

Ajit: He is severely critical. I think Modi made that comparison of the glass being half full and half empty… so I think Mr. Sen always seems to be focused on the half empty portion.

Govind: We’ve come to the point you were raising a little earlier…. the role of the Government in the whole equation and finally the Bhagwati- Sen debate. Where do you stand on this?

Harsh: I agree with Dr. Ranade that the differences are exaggerated… although Dr Sen calling himself a libertarian is pretty much strange. That might be because Ajit has just met him. I don’t think that is very accurate. There are differences in the way they look at the welfare state. Somebody like Mr. Sen has a very status quo approach…. It’s not just public work. The work has to be done by the Government, the health centres have to be done by the Government. He and activists like Aruna Roy have a certain language that a progamme like MGNREGA is not redistribution but cash redistribution, which I find to be a bit contrived. So, the differences is no longer on the supply side issues but it’s more on the welfare programmes and that is where people like Bhagwati have clearly taken a position of conditional cash transfer.

Govind: These are all point of views of our Nobel Prize winning economist, different from like say me or you. So, why should we be worried, why can’t we all listen to this and decide what is the best for us.

Harsh: My bias is more towards Bhagwati, and I think we should obviously listen to everybody but I think it is my gut instinct that Sen is more philosophical and ideological here. For example, when he was asked about the Food Security Bill, he came up with a number of 100 or 1,000 people would die per week. What is the basis of that number? He said, I needed a number so I just made a number. Something like social choice theory is a very abstract mathematical part of economics. The actual work is not very concerned with direct public policy. So, I think we have to be very cynical about idol worship in India. We have to be very careful.

Govind: Right. So, those who make the policy should be careful, those who voice their opinion have the freedom to voice their opinion. Let’s come to a quick conclusion to today’s discussion, what do these poverty numbers tell us and what should we be concerned about? Let’s ask the final question; if this were to translate into policy, what are the kind of areas we should be looking at? Forget which Government, the Sen-Bhagwati debate and so on.

Ajit: First point, I think the reduction is remarkable, and we must accept it because it’s consistent as the earlier numbers. Secondly, the same variation has been used across states, rural and urban. The data also allows you to look at inequality measures. So, you must look at the fact that while poverty has come down, inequality has worsened. If inequality has worsened, you need to focus on different policies. Also, we need to study what is happening to the urban poor….this is because it is typically the kind of constituency which does not have a voice and electoral representation unlike the rural poor… and they get squeezed both ways because they are not food producers but they suffer food inflation and they don’t have adequate Parliamentary seats.

Govind: Prachi, is there something you would like to throw to Harsh or Ajit before we wind up?

Prachi: I would just like to say that I agree with Dr.Ranade that urban poor keeps growing, and it is one area which has been neglected. Urban areas in general and urban poverty in particular. Policies need to recognise urban areas not only from the point of revenue but that more and more people are shifting to the urban areas.

Govind: Recognise the shift to urban poverty. …

Ajit: I mentioned urban because it also a territory where conditional transfers and all those experiments are easier to do. People generally have more access to bank accounts. I believe, in Delhi, there is a programme which targets people above the average poverty line but people below the poverty line as defined by the state. People in between get 600 rupees per family per month, directly transferred into a bank account, and it has been a very successful programme.

Govind: We should talk more about these programmes, at least as statistical samples can set an example at large for the country and alleviate the larger problem of poverty.

Ajit: One should not get obsessed with the poverty line. Poverty is a continuum. There are less poor, more poor, severely poor and vulnerable. This data should, in fact, give impetus to other debates. Just because you go from 27 to 28 rupees, you don’t become non-poor and neither is the problem solved.