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Niti Aayog approach will make more Indians poor - and it's a good thing

The Niti Aayog is heading towards a sensible – even revolutionary – decision on defining poverty that will make even breast-beating poverty-mongers and jholawallahs happy.

When last heard of under the UPA, the Rangarajan committee had recommended adopting a poverty line drawn at Rs 32 a day for people in rural areas and Rs 47 in urban areas, which means a family of five will be considered poor if its monthly expenditure is below Rs 4,800 in rural areas, and Rs 7,200 in urban areas. (Read here about various poverty lines and how they were drawn)

The Niti Aayog, Narendra Modi’s replacement for the Planning Commission, is set to break new ground under Arvind Panagariya by moving away from an expenditure-based determination of the poverty line. According to The Economic Times, a panel headed by Panagariya himself will probably suggest that 40 percent of India’s population should be considered poor based on 2011 data from the National Sample Survey Organisation (NSSO).

 Niti Aayog approach will make more Indians poor - and its a good thing

Arvind Panagariya, who heads Niti Aayog, is on the right path. Image: IBN

We don’t yet have exact details on how exactly the Aayog will identify the poor, but conceptually designating, say, the bottom 40 percent of the population as poor is a good idea.

Politically, this is an ace, as the jholawallas will be thrilled that there are now 484 million poor people on whose behalf they can vent their spleen as opposed to just 363 million under the Rangarajan committee’s poverty line. (The UPA, though, never adopted that poverty line, as it was voted out before it could do so). A drop in the numbers of the poor is always highly upsetting for the Left and jholawalla NGOs as robs them of their core reason for existence.

There are political benefits for Narendra Modi too; he can claim that the UPA left more people poor for him to lift out of poverty than the numbers they inherited in 2004.

However, going beyond facetiousness, the 40 percent cut-off is conceptually a sound move for many others reasons.

First, poverty can never be an absolute number. It is always relative. As a country becomes richer, the people considered poor will also have to be defined. In a country where everyone owns a BMW, the poverty line will have to be drawn at a level where someone who can’t afford a big car will be considered poor. No one in India would consider Americans poor; but America has an official poverty line that in 2014 was drawn at $23,850 of annual income for a family of four – about $16.5 per head per day (over Rs 1,000 daily at current exchange rates). In India, anyone earning Rs 1,000 a day (or Rs 4,000 daily for a family of four) would be considered upper middle class (or just below upper middle class).

Put another way, poverty is about those who are statistically in the lowest income or consumption categories in a given geography or country; so it is best not to define it permanently with some number like Rs 32 per head, etc. Defining the poverty cutoff at 40 percent of NSSO-defined levels is sound methodologically. It will leave every government with some poor people to think about, even if no one is starved for food, clothing or shelter.

Second, once you know 40 percent of the people is where you must focus your anti-poverty efforts, it is sensible for the government to concentrate its available resources on them. Logically, given that fiscal resources are not unlimited, the 40 percent norm should be backed up by another number - say, a commitment to devote 2 percent of GDP for subsidies or income support. The 2 percent limit is important, and will enable the government to focus available spends on the most needy. The UPA approach of creating rights and entitlement regardless of the resources available was fiscally irresponsible.

Third, it follows that the burden of poverty alleviation must shift away from product-specific subsidies to cash in most cases – especially when these subsidies relate to food, fertiliser or fuel. The Aadhaar-based direct benefits transfer scheme needs to be universalised and almost all subsidies converted to cash. This ought to be the Modi government’s biggest reform, and not just GST or the Land Bill. A shift from product-based subsidies to direct income support for the poor will clean up the system and reduce leakages and loss in transit from central (or state) coffers to the final beneficiary. It will convert the poor from beggars and supplicants to consumers. It will give them choices they never had before.

Fourth, Niti Aayog should also consider whether a one-size-fits-all 40 percent cutoff should be adopted nationally or state-wise. India has rich states and poor states; states with higher and lower poverty levels; states with lower and higher inflation. A 40 percent cutoff in the national context will artificially show high levels of poverty in states like Bihar or Madhya Pradesh or Chhattisgarh, spreading resources thinly; if, instead, the 40 percent cutoff is determined state-wise, it would enable sharper focus on the poorest among the poor in the most backward states. This may be a controversial idea, since politically we want to believe that all Indians are equal and deserve the same minimum support, but if we accept the idea that poverty is always relative, different cutoffs for different states makes sense.

Fifth, abject poverty can ultimately be defeated only by growth, improved labour skills, and job creating investment. This calls for easing rules for business and focusing skill-building efforts and investments in areas where poverty abounds. The income support plans should thus be supported by investments in areas with the maximum poverty levels as determined by the 40 percent cutoff in states. Resources should be shifted away from community-specific schemes (for minorities or the scheduled castes) to area-specific investments and income support. This will not only be non-discriminatory, but also ensure that help reaches the really poor, and not just the creamy layer among the poor or minorities.

Arvind Panagariya is on the right track – a revolutionary one. To make his new poverty definition work, the government must also move its resources and income support to the regions that are home to most of India’s poor. This is the right road to “sabka saath, sabka vikas.”

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Updated Date: May 16, 2015 13:04:07 IST