Rangarajan's poverty estimates: Decoding where the problem really lies

Getting a fix on the headcount of poverty is always a tricky issue as the number is rarely convincing. So when the Rangarajan committee says that the number of poor has come down from 454 million to 363 million in two years - one of which had high growth of 8.9 percent and the other was the beginning of a decline in growth to 6.7 percent, it sounds a bit baffling at first sight.

The problem really is with the definition of 'poor'. Common perception is that there are always political undertones when we try to show that the country has become prosperous while critics argue that the criteria are questionable. How can this be resolved?

We have had two eminent economists, the late Dr Tendulkar and Dr Rangarajan who have drawn a poverty line across two differing numbers: Rs 27 and Rs 32 respectively for rural areas and Rs 33 and Rs 47 for urban areas. The recent number appears more realistic compared with Rs 27, though only marginally better. The harsh critics had earlier criticised the Rs 27 criteria and challenged the Planning Commission members to live on this amount on a daily basis. While this was an extreme reaction, the issue really is as to how we arrive at such numbers. In fact, today with onions selling at Rs 30 a kg, these numbers may look quite out of place.

Are we looking at basic sustenance or do we add certain other amenities such as clothing, shelter, leisure, travel and so on? Ideally the estimator should provide the rationale and assumptions for the composition of goods covered in this number so that it defines poverty in terms of a consumption basket. If it is the calorie criteria being used, then it should be stated. In fact, the issue becomes controversial when we call it 'poverty line'. Instead if we used a criterion of say a certain income and then say that there are X number of people living on less than Y amount of income, it would sound more convincing with there being a clearly defined basket of expenditure.

The Rangarajan committee is definitely an improvement and uses two approaches, with there being convergence in the final numbers. It looks at consumption including minimum nutrition norms, clothing, education, housing etc. and also the ability or rather inability to save. But all estimates are fraught with the risk of simplification given that cost of living varies sharply across regions - especially say housing in urban areas, which distorts all calculations.

Let us look at the Rangarajan estimates. The poverty ratio has come down from 38.2 percent in FY10 to 29.5 percent in FY12 with rural poverty moving down from 39.6 percent to 30.9 percent and urban poverty ratio from 35.1 percent to 26.4 percent. Overall around 65 million people have moved up the poverty scale. This is a significant achievement any which way. One reason which has been attributed to this upward mobility is the NREGA programme where the government offers employment to farmers between seasons. If it were so, then it counters the critic's argument that NREGA did not go to the desired beneficiaries and has been fraught with leakages.

In fact, even the Tendulkar methodology using different yardsticks, delivers a similar result in terms of the number of people who have moved out of poverty even though the ratios are different: overall ratio has improved from 29.8 percent to 21.9 percent with rural poverty declining from 33.8 percent to 25.7 percent and urban from 20.9 percent to 13.7 percent. The broader question then to be asked is if poverty comes down with unchanged growth trends but with pump priming, should the government continue with NREGA which involves only Rs 30,000 crore or less than 1.8 percent of total budget outlay?

How does the cutoff match other views? The World Bank talks of $ 1.25 a day or Rs 75 a day, which is at PPP. Given that the PPP to non-PPP GDP ratio is around 2.5 times roughly, the Rangarajan cutoff mark of Rs 32 a day in rural areas comes close to the World Bank mark, which is quite satisfactory. Also if we assume a family of 4 or 5 as a typical one, then with Rs 32 the daily income required would be Rs 130-160 with a mean of Rs 145 being closer to a family of 4.5. This number can be stacked up with the wages being paid to unskilled labour. NSS data for 2011-12, which is the same used here gives an average of Rs 121 and Rs 107 per day as average daily earnings for those not covered under NREGA and those being paid the NREGA wage respectively.

Therefore, again the Rangarajan number is quite within the realm of acceptance, which would broadly speaking also cover the Tendulkar criteria.

Given that these numbers are reasonable and that the number of poor is coming down, howsoever hard it may be to believe, what are the policy implications? We are really talking of the poverty count coming down at a time when job creation has been low. Or is it that we have created income through employment programmes that do not generate wealth? Also with the subsequent two years being particularly dismal in terms of economic performance as the economy has slid from a trajectory of over 8 percent to less than 5 percent, would these poverty numbers show an upward trend again?

Further, inflation has been particularly stinging in the last two years with CPI inflation for agri labour averaging 10.5 percent in FY13 and FY14, the base for reckoning poverty would have to be revised.

The other ideological issue is whether these criteria should be used for any poverty alleviation programme? If we have decided on providing NREGA employment or target them for PDS or any other scheme of the government, it may be meaningful to use these criteria for identification. As the PDS has a dual criterion for food distribution, such identification can be considered. However, it would be necessary to really understand how these 90 million people got out of poverty because if it was based on job creation, then we have really made progress. But if it is due to cash support by the government, then both the scheme as well as the continuation of being above poor, may not be sustainable and we will have to look for alternative solutions.

The author is chief economist, CARE Ratings

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Updated Date: Jul 16, 2014 15:26:19 IST