How Many Of Us Are ‘Poor’?

The government is likely to bring in a new measure for identifying the number of poor in India. We give you a simple explanation of the shifting line of poverty in India.

If news reports are to be believed, the NITI Aayog is likely to bring in a new measure for identifying the number of poor in India. This could mean bidding goodbye to the traditional method of estimating poverty in India, which got the United Progressive Alliance (UPA) government into quite a pickle, though quite a pointless one.

The Hollow Hullabaloo

The controversy arose in 2011 when the Supreme Court was hearing a public interest litigation (PIL) filed by the People’s Union for Civil Liberties (PUCL) on release of foodgrain to districts hit by malnutrition. The Court asked the government to file an affidavit on the estimation of poverty, which the Planning Commission did. These estimations were based on the method laid down by the Suresh Tendulkar-led Expert Committee. The Court then directed the Planning Commission to “revise norms of per capita amount looking to the price index of May 2011 or any other subsequent dates”.

The Commission submitted a poverty line for June 2011, using the Tendulkar formula and factoring in inflation during the interim period. This gave a poverty line of Rs 4,824 monthlyhousehold consumptionfor urban areas and Rs 3,905 for rural areas. The quest for over-simplification saw this monthly household consumption being broken down into how much a person spends on consumption per day, resulting in the now-infamous Rs 32 and Rs 26 a day figure for urban and rural areas respectively.

This makes for great headlines – clueless reporters and other bleeding hearts rushed to show how it was impossible to live on Rs 32 a day – but presents an extremely distorted picture. A household budget is different from an individual budget; some expenses will be shared; Rs 32 a day for an individual is not the same as Rs 4824 a month for a household. But the poverty industry, sundry jholawalas as well as a sensation-seeking media – and the current ruling party in government – went to town with this figure.

Political management of economic issues has never been the forte of any Indian government and the UPA – no exception to this rule – could only deploy Planning Commission deputy chairman Montek Singh Ahluwalia to explain, clipped accent and all, the complex formula on poverty estimation. But the Rs 32-a-day figure proved more seductive and stuck and the UPA, pushed to the backfoot, announced that this measure would not be used to decide entitlements for welfare schemes but only to estimate poverty levels at a macro level. That did not stop the criticism, however, and the government appointed another committee, this time under C. Rangarajan, to suggest another method for estimating poverty.

 What is a poverty line and how is it drawn?

A poverty line separates the poor from the non-poor. There are two kinds of poverty lines – an absolute line and a relative line.

The absolute line (which India and most countries use) is a normative measure – it is based on a certain assumption of what people need to meet their basic needs. It estimates what this basket of goods and services costs for a typical family, either annually or monthly (though the latter is the norm) and this becomes the poverty line. This absolute line can be estimated in two ways – on food energy intake or nutrition standards or cost of basic needs (generally food, clothing and shelter).

The relative line is drawn as a percentage of the average income or consumption of a country. This is more common in European countries, and the median is generally set at 60 per cent. So a poor household has 60 per cent of the median income. In the United States, the median is set at 40 per cent.

How does India estimate poverty?

The first attempt to draw a poverty line in India post-independence was in 1962, when a working group of the Planning Commission suggested a national minimum consumption expenditure of Rs 100 per household per month at 1960-61 prices for rural areas and Rs 125 for urban areas. The figure was based on recommendations for a balanced diet by the Nutrition Advisory Group of the Indian Council of Medical Research (ICMR). This did not include spending on health and education – the government was supposed to provide this.

In 1979, a task force led by Y.K. Alagh set a poverty line based on a calorie requirement recommended by a Nutrition Expert Group in 1968 – 2,400 kilocalories (kcal) per person per day in rural areas and 2,100 kcal in urban areas. The monetary equivalent of these norms was worked out on the basis of the 1973-74 household consumption data of the National Sample Survey. This was then adjusted for price changes in later years, using National Accounts data.

In 1993, another expert group headed by D.T. Lakdawala retained the poverty line definition of the Alagh Task Force but disaggregated this into state-specific poverty lines (rural and urban) for the base year of 1973-74 (the Alagh Task Force worked out only a national poverty line). The national poverty line was a population-weighted average of state-wise poverty ratios. This was updated using the consumer price index for agricultural labour (CPI-AL) in rural areas and consumer price index for industrial workers (CPI-IW) for urban areas. The Lakdawala formula was used from 1997 to 2011.

In 2009, another expert group headed by Suresh Tendulkar introduced some changes in the Lakdawala formula. One, it used the urban poverty line basket for both rural and urban poverty. The Lakdawala formula used separate baskets. Two, it jettisoned an estimation based purely on calorie consumption. Three, it incorporated private expenditure on health and education in poverty estimates. Four, it suggested using a mixed recall period (MRP) based consumption expenditure data against a uniform recall period (URP) based data. The MRP consumption data is based on a 365-day recall period for five non-food items and 30-day recall period for all other items. The URP consumption data uses the 30-day recall period for all items.

The Tendulkar Committee also said that the rural poverty line was too low because the method of indexing to inflation was flawed and set a higher line. This actually saw a rise in rural poverty in 2004-05 to 41.5 per cent against 28.3 per cent under the Lakdawala formula. The urban poverty level, however, was the same under both the formulas. Overall poverty levels for 2004-05 under the Tendulkar formula, at 37.2 per cent, was higher than that under the Lakdawala formula (27.5 per cent). Perhaps that is why the poverty industry did not contest the Tendulkar formula (barring a few statistical purists) till the Affidavit Controversy.

The C. Rangarajan Committee set up by the UPA government in the wake of the controversy submitted its report in June 2014. It went back to the poverty estimation based on calorie consumption and also took into account the ability of households to save. It suggested that the poverty line should be based on `certain normative levels of adequate nourishment, clothing, house rent, conveyance and education, and a behaviorally determined level of other non-food expenses’. The per capita per day expenditure works out to Rs 32 a day in rural areas and Rs 47 in urban areas. According to this formula, 30.9 per cent of the rural population and 26.4 per cent of the urban population was below the poverty line in 2011-12, which is higher than the figures under the Tendulkar formula (25.7 per cent and 13.7 per cent).

The Rangarajan formula has not, however, been adopted by the government. The Tendulkar formula continues to be used. Till now all the expert committees had used the absolute poverty measure. Will the NITI Aayog switch to an relative poverty measure? Watch this space.