Economic growth is having an impact in reducing poverty: C. Rangarajan8 min read . Updated: 14 Jul 2014, 12:02 AM IST
Rangarajan on the reasons for adopting a different yardstick for measuring poverty and the changing relevance of poverty data for policy making
New Delhi: A committee headed by C. Rangarajan, a former chairman of the Prime Minister’s Economic Advisory Council (PMEAC), in a report submitted to the Planning Commission confirmed the decline in poverty, which is consistent with the findings of a previous panel headed by Suresh Tendulkar. The Rangarajan panel found India’s poverty ratio declined from 38.2% in 2009-10 to 29.5% in 2011-12. The Tendulkar committee had estimated that India’s poverty had declined from 29.8% in 2009-10 to 21.9% in 2011-12.
In an interview, Rangarajan speaks about the reasoning for adopting a different yardstick for measuring poverty to reflect the changes in the Indian economy that led to a higher estimate of the absolute number of poor, the changing relevance of poverty data for policy making and how redefining absolute poverty levels to reflect the changing patterns of living bring them closer to the relative poverty level. Edited excerpts:
What were the differences in your methodology that led to the poverty ratio determined by your panel to be higher than that of the Tendulkar committee?
We came up with an alternative, or shall we say, slightly modified methodology. We differed from the Tendulkar committee in two or three ways. One, we included not only calories, but also fat and proteins. Second, we had a minimum basket separately for rural and urban areas. The Tendulkar committee had only one basket and the difference between rural and urban areas came only because of the price differences. Thirdly, I think for the first time, certain normative requirements with respect to non-food consumption expenditures were introduced. It is, of course, very difficult, but we felt that at least for the four categories that I have mentioned earlier (adequate nourishment, clothing, house rent, conveyance and education), we should impose certain minimum expenditures or norms which should be followed. So all this resulted in our poverty line being higher than the poverty line which was indicated by the Tendulkar committee.
Would you say the findings of your report indicate that the focus of policy making should shift to relative poverty as against absolute poverty?
We have examined the problem in one of the chapters of the report, where we have given poverty as measured in terms of the median expenditure, but what comes out from our study is that poverty remains invariant—whether you measure it in terms of proportion or a certain multiple of the median expenditures. That seems to be because the distribution of the consumption expenditure among the various classes continues to remain the same and, therefore, the relative poverty estimates do not show much difference in poverty levels from one period to another period. I think since the distribution of the consumption expenditure of different classes remains the same, the better way to look at it would be to look at it in terms of absolute poverty levels. But I think the one important thing is that if the absolute poverty levels are redefined from time to time, you essentially take into account the changes that have occurred in the economy. After all, the relative poverty measurement is considered appropriate because the economy is moving forward, the average or the per capita income is increasing over a period and, therefore, poverty has also a relationship with the way the economy is moving. But if you also look at the absolute poverty line from time to time, judge it in terms of certain minimum expenditures to be incurred, you end up taking into account the changes that have occurred in the economy. That is what we have done. After a long time, we have gone to fundamentals. Both the Lakdawala committee and the Tendulkar committee did not change the consumption basket. They only allowed for adjustment in changes of prices. But what we have done is take a fresh look at the basket itself. The point is, we have now created a new basket. Look at the results. The poverty line with respect to the urban areas has gone up much more than the poverty line for the rural areas. That is precisely because we have taken normative expenditures for the four categories I have mentioned like conveyance, education, rent and so on. These are areas where expenditures have increased. Therefore, in some sense, we have taken into account the changing patterns of living and the increased expenditures on various other counts. You will also see that non-food consumption as a proportion has gone up very much. This is in conformity with what is happening on the economy. The non-food consumption is rising at a faster rate than food consumption and that is reflected in our new basket.
Your report talks about the changing relevance of poverty data for policymaking. It mentions how very few government programmes use this data for targeting beneficiaries. What is the relevance of the poverty data in current times?
That’s right. In one sense, the poverty ratios and poverty lines have been delinked from many of the programmes. Even earlier, it was only with respect to food security and public distribution system that the poverty line had a direct relationship, because the amount of foodgrain allocated to each state was determined in terms of the poverty ratio. But now, that link has been snapped under the new Food Security Act—nearly 67% of the population is covered. Therefore, the direct link between poverty levels and most of the programmes has been delinked. Nevertheless, I believe the measurement of poverty is important in finding out how far the economy has been successful in meeting the minimum requirements of the population. We need to have an understanding of how policy configuration has helped enhance living standards of people. Now, the per capita income is a measure of understanding how the economy has behaved, but that is only one measure. Another measure is how efficient or how successful the economy has been in reducing poverty and that, therefore, per capita income, combined with the behaviour of the poverty ratio, will tell us whether the economy has been successful in meeting the minimum requirements.
What are the right lessons to draw from the findings of your report?
There are two to three things that one needs to look at. Basically, one thing is to find out how the poverty ratio has moved. It is clear from the report that even according to the new methodology between 2009-10 and 2011-12, the reduction in the poverty ratio was of the order of 8.7 percentage points. That is a clear indication that growth is having an impact in reducing poverty. Therefore, while the absolute level indicates the road we are yet to travel, the changes in the ratio will give us whether the policies we are pursuing have had an impact on raising the living standards of the bottom domiciles of the population. Therefore, we need to look at it in terms of not only the absolute level but also the change that is occurring in the economy with respect to the poverty ratio. It is reassuring to see that between 2009-10 to 2011-12, both in the rural and urban areas, the poverty ratio has come down by 8.5 percentage points. To some extent, this does not fully capture the recent slowdown in growth and the impact of inflation. So, as we collect the numbers for subsequent years, that will give an indication of how the slowdown in growth and inflation have had an impact on the poverty ratio.
Would you think the rate of decline in poverty will be less if the impact of the recent slowdown in growth and high inflation is captured?
I can only guess. Probably it will. I mean, it is very clear that the earlier phase of higher growth did have an impact on poverty ratio; therefore, one might find a certain slowdown in the subsequent years as far as reduction in the poverty ratio is concerned. The right approach is to ensure that various poverty alleviation programmes are calibrated in such a way that they reach out to the bottom domiciles of the population. Growth, by itself, has its own trickle-down effect. This trickle-down effect will be stronger if the growth is also stronger. In fact, when the per capita income is growing say at 1.5%, as we had in the first four decades of independence, it would not have much effect on poverty. But if the per capita income had been growing something like 5-6%, then, as in the recent period, it would have an impact upon poverty. Therefore, what is really required is a simultaneous approach of raising the growth rate and expecting the impact of the growth to be felt on all designs of the population, and also directly addressing the vulnerable groups through appropriate programmes. I think both approaches are needed in order to bring about a reduction in the poverty ratio.
There is always criticism that drawing a poverty line leaves out the ones just above it. According to your report, monthly per capita consumption expenditure of ₹ 972 in rural areas and ₹ 1,407 in urban areas is treated as the poverty line at the all-India level. What is your take on this?
One, I don’t think it is correct to look at poverty in terms of per capita per person. As we have argued that you should look at the monthly expenditure per household. The household is normally estimated to be consisting of five members. Therefore, what we are essentially talking about is that if in the rural area, a household’s income is less than 4,860, it would be called poor, and in the case of urban area, if a household’s income is less than 7,035, it would be treated as poor. That is the best way to look at it. Secondly, obviously, any line that you draw has this implication that a household that is having one rupee more or 2 rupees more will be classified in one category rather than in another category. That is unavoidable when you have a poverty line. But, certainly, we can look at what we call a distribution of poverty. What we have given is a headcount ratio. We could analyse the same data to find out how many people come in the category of abject poverty. So, if we treat 75% of the poverty line as the cut-off for abject poverty, we could also measure what is happening to the most distressed in the society.