Download Concepts and Measurement of Poverty and Inequality I

Poverty in India: Concepts,
Measurement and Trends
Manoj Panda
Centre for Economic and Social Studies (CESS),
Hyderabad
Coverage
• Introduction
• Concepts of Poverty and Poverty Line
• Measurement of Poverty
• Trends in Poverty over Time
• Variations across States and Social
Groups
• Inequality: Concept and Measurement
• Some Policy Issues
Introduction
India’s economic structure has changed
dramatically over last 5-6 decades; among the
most dynamic economies recently.
Benefits of growth not widely spread to various
sections in society, reached only marginally to
low income groups.
Similar experience of other countries too.
Question then arose: Can we guarantee to all at
least a minimum level of living necessary for
physical and social development of a person?
Absolute poverty literature grew out of this
question.
Why estimate poverty?
Poverty estimates are vital input to design, monitor and
implement appropriate anti-poverty policies.
•Analysis of poverty profiles by regions, socio-economic
groups
•Determinants - factors affecting poverty
•Relative effects of factors affecting poverty
•Allocation of resources to different regions and to various
poverty reduction programs
Precise estimates of poverty neither easy nor universally
acceptable. Yet, can act as a broad and reasonably policy
guide.
Intellectual genesis of poverty very old
Adam Smith, Ricardo, Marx: subsistence wage concept
An early empirical work by Dadabhai Naoroji, 1901
Estimated an income level “necessary for the bare wants
of a human being, to keep him in ordinary good health
and decency”. Estimated cost of food, clothing, hut, oil
for lamp, barber and domestic utensils to arrive at
‘subsistence per head’.
In the absence of income distribution data, Naoroji
compared computed subsistence level with per capita
production to draw attention to mass poverty.
Remarkable work that parallels an early work on British
poverty by Rowntree, 1901.
Poverty is multidimensional
Deprivation in income, illiteracy, malnutrition,
mortality, morbidity, access to water and sanitation,
vulnerability to economic shocks.
Income deprivation is linked in many cases to
other forms of deprivation, but do not always
move together with others.
This discussion focuses on Income poverty.
Measurement of Poverty
(Percentage of Poor)
Two basic ingredients in measuring
poverty:
(1)Poverty Line: definition of threshold
income or consumption level
(2)Data on size distribution of income
or consumption (collected by a sample
survey representative of the population)
Poverty Line (PL): Absolute vs. Relative
Relative PL defined in relative terms with
reference to level of living of another person; or,
in relation to an income distribution parameter.
Examples: 50% of mean income or median, mean
minus one standard deviation.
Absolute PL refers to a threshold income
(consumption) level defined in absolute terms.
Persons below a pre-defined threshold income
are called poor.
Indian Poverty Line
A minimum level of living necessary for physical
and social development of a person.
Estimated as: total consumption expenditure level
that meets energy (calorie) need of an average
person.
•PL comprises of both food and non-food
components of consumption.
•Considers non-food expenditure actually incurred
corresponding to this total expenditure.
•Difficult to consider minimum non-food needs
entirely on an objective basis
Relationship Between Calorie Intake and
Per Capita Expenditure
Per Capita Calorie Intake per day
3500
3000
2500
2000
1500
1000
500
0
0
100
200
300
400
500
600
700
800
Per Capita Consumption Expenditure per Month
(Rupees)
900
1000
An Example of Size Distribution of Consumption Expenditure
MPCE
%Population
0-150
150-200
200-250
250-300
300-340
340-400
400-450
450-500
500-550
550-650
650-800
800-1000
Above 1000
All classes
3.2
4.0
6.5
8.6
10.0 (half of 10% are below poverty line 320)
11.3
8.6
9.2
9.3
11.4
8.9
5.0
4.0
100.0
MPCE: Monthly Per Capita Consumption Expenditure
Poverty Line: Rs. 320 per capita per month
HCR= 3.2+4.0+6.5+8.6+5.0 = 27.3%
Incidence of poverty Vs. Under-nutrition
Classification of Population by Poverty Line and
Calorie Norm - Rural India, 1977-78
Below
Poverty
Line
Above
Poverty
Line
Total
Below Calorie
Norm
45.32
12.47
57.79
Above Calorie
Norm
12.31
29.21
42.21
Total
57.63
42.37
100.00
Source: Government of India (1993): Report of Expert Group.
Official PL in India
Originally estimated for 1973-74: Rs 49 and 56 for
rural and urban areas respectively.
Updated using an appropriate price index
(CPIAL for rural India, CPIIW for urban).
A monthly per capita consumption expenditure
of Rs. 356 and 539 for rural and urban areas
respectively for 2004-05.
More than a quarter of India’s population remain
below PL in 2004-05.
28.3% Rural
25.7% Urban
27.5% Total
Absolute no.: 302 million in 2004-05
Poverty in India: Changes over time
70
% population below PL
65
Rural HCR
Urban HCR
60
55
50
45
40
35
30
25
Up to mid-1970s – fluctuations with cycles
Since mid-1970s – continuous fall
Except a few years immediately after start
of reforms (early 1990s)
Controversies around estimates for 19992000 (under estimates poverty)
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
20
Data Contamination in 1999-2000
7-Day Recall versus 30-Day Recall
NSSO expenditure data collected on 7-day
recall period basis during 51st-54th rounds 1318% larger than that from the 30-day recall
period basis.
This difference is reduced to 3 to 4% in the
55th round. Critics attribute this reduction to mix
up of recall periods by respondents affecting
comparability with previous large-scale surveys.
The 7-day recall period reports more food
expenditure and very significant fall in poverty.
Comparison of Poverty After Reforms
Uniform Recall Period
1993-94
2004-05
Rural
37.3
28.3
Urban
32.4
25.7
Total
36.0
27.5
Mixed Recall Period
Rural
1999-2000
27.1
2004-05
21.8
Urban
23.6
21.7
Total
26.1
21.8
Poverty Head Count Ratio: Major Indian States
Poverty By Social Groups: Rural 2004-05
States
Andhra Pradesh
Assam
Bihar
Chhattisgarh
Delhi
Gujarat
Haryana
Himachal Pradesh
Jammu & Kashmir
Jharkhand
Karnataka
Kerala
Madhya Pradesh
Maharashtra
Orissa
Punjab
Rajasthan
Tamil Nadu
Uttar Pradesh
Uttarakhand
West Bengal
All India
ST
30.5
14.1
53.3
54.7
0.0
34.7
0.0
14.9
8.8
54.2
23.5
44.3
58.6
56.6
75.6
30.7
32.6
32.1
32.4
43.2
42.4
47.2
SC
15.4
27.7
64
32.7
0.0
21.8
26.8
19.6
5.2
57.9
31.8
21.6
42.8
44.8
50.2
14.6
28.7
31.2
44.8
54.2
29.5
36.8
OBC
OTHERS
9.5
4.1
18.8
25.4
37.8
26.6
33.9
29.2
0.0
10.6
19.1
4.8
13.9
4.2
9.1
6.4
10.0
3.3
40.2
37.1
20.9
13.8
13.7
6.6
29.6
13.4
23.9
18.9
36.9
23.4
10.6
2.2
13.1
8.2
19.8
19.1
32.9
19.7
44.8
33.5
18.3
27.5
26.7
16.1
Poverty By Social Groups: Urban 2004-05
States
Andhra Pradesh
Assam
Bihar
Chhattisgarh
Delhi
Gujarat
Haryana
Himachal Pradesh
Jammu & Kashmir
Jharkhand
Karnataka
Kerala
Madhya Pradesh
Maharashtra
Orissa
Punjab
Rajasthan
Tamil Nadu
Uttar Pradesh
Uttarakhand
West Bengal
All India
ST
50
4.8
57.2
41.0
9.4
21.4
4.6
2.4
0.0
45.1
58.3
19.2
44.7
40.4
61.8
2.1
24.1
32.5
37.4
64.4
25.7
33.3
SC
39.9
8.6
67.2
52.0
35.8
16
33.4
5.6
13.7
47.2
50.6
32.5
67.3
43.2
72.6
16.1
52.1
40.2
44.9
65.7
28.5
39.9
OBC
28.9
8.6
41.4
52.7
18.3
22.9
22.5
10.1
4.8
19.1
39.1
24.3
55.5
35.6
50.2
8.4
35.6
20.9
36.6
46.5
10.4
31.4
OTHERS
20.6
4.2
18.3
21.4
6.4
7.0
5.9
2.0
7.8
9.2
20.3
7.8
20.8
26.8
28.9
2.9
20.7
6.5
19.2
25.5
13.0
16.0
Poverty Measures
Head Count Ratio (HCR), Poverty Gap
(PG) and Squared Poverty Gap (SPG)
m
HCR 
n
 
PG  1
z  yi
(
)

n i 1
z
 
SPG  1
m
 z  yi 



n i 1  z 
m
2
m= no. of poor population, n = total population,
z= poverty line, yi =income of i-th person
Alternative Poverty Measures
Head Count Ratio (HCR): proportion of total
population that falls below poverty threshold
income or expenditure. Based on either national PL
or dollar-a-day PL.
Poverty Gap Index (PGI): unlike HCR, it gives us a
sense of how poor the poor are. It is equivalent to
income gap below PL per head of total population,
and expressed as a percentage of the poverty line.
Squared Poverty Gap index (SPG): Adds the
dimension of inequality among the poor to the
poverty gap index. For a given value of the PGI,
population with greater dispersion of income
among poor indicates a higher value for the SPG.
Monotonicity Axiom: Not satisfied by HCR
Transfer Axiom: Not satisfied by HCR and PGI
Incidence of poverty affected by two factors:
(1)Growth in average income (2)Distribution.
Poverty reduction fast when average income rises
and inequality falls.
Fluctuations in poverty incidence till early 1970s
primarily due to slow per capita income growth.
Incidence of poverty started to fall after mid-1970s
when there was marked acceleration in per capita
GDP growth rate to above 3 per cent.
Lorenz curve: a curve that represents relationship between
cumulative proportion of income and cumulative proportion
of population in income distribution by size, beginning with
the lowest income group.
If perfect income equality, Lorenz curve coincides with 45degree line.
Gini coefficient: a commonly used measure of inequality;
ratio of area between Lorenz curve and 45-degree line,
expressed as a percentage of area under 45-degree line.
m
L   Pi (QC i  QC i
)
 1
i 1
If perfect equality, Gini coefficient takes value 0
If perfect inequality, equals 1.
Internationally, Gini coeff. normallyranges between 0.25 & 0.7
From Household income/expenditure Survey
Compute data on each household’s income/expenditure
Rank the families from lowest income to highest income.
% of Pop. % of Inc. Cumulative Cummulative
(Pi)
% of Pop. % of Income
(QCi)
10
3.3
10
3.5
10
5.3
20
8.6
20
13.3
40
21.9
20
17.0
60
38.9
20
22.7
80
61.6
10
14.6
90
76.2
10
23.8
100
100
Lorenz Curve
Cumulative
% of Income
Cumulative % of Population
X=Area of the hatched region
Gini coefficient = [X/50]100
Average Annual Growth Rates: Real GDP
Agriculture
Industry
Service
GDP (total)
Per Capita GDP
1951-2 to 1981-82 1991-92 2000-01 2002-03 to
1980-81 to 1990- to 1999- to 2006- 2006-07
(Tenth Plan
91
2000
07
Period)
2.6
3.8
3.0
2.5
2.2
5.3
7.0
5.7
7.8
9.1
4.6
6.7
7.9
8.5
9.4
3.6
5.6
5.8
6.9
7.6
1.4
3.4
3.6
5.2
6.0
Neglect of agriculture after economic reforms even as
overall economic growth accelerated
Average Annual Growth Rate in Per Capita GSDP
Arranged by 1993-94 Per Capita GSDP
16000
6.0
14000
5.0
12000
4.0
10000
8000
3.0
6000
2.0
4000
1.0
2000
Per capita Income 1993-94
Growth Rate 1993-2004
Bihar
Orissa
Uttar Pradesh
Assam
Rajasthan
Madhya Pradesh
West Bengal
Jammu and Kashmir
Andhra Pradesh
Karnataka
Kerala
Himachal Pradesh
Tamil Nadu
Gujarat
Haryana
Maharashtra
0.0
Punjab
0
Coefficient of Variation in Per Capita GSDP
among 16 Major States
0.4000
0.3900
0.3800
0.3700
0.3600
0.3500
0.3400
0.3300
0.3200
0.3100
1993- 1994- 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 200494
95
96
97
98
99
00
01
02
03
04
05
Urban-Rural Differences in Mean Consumption Expenditure
States
Urban MPCE as % of Rural MPCE
1993-94
2004-05
Andhra Pradesh
141.5
173.9
Assam
177.9
194.8
Bihar
142.9
166.9
Chhatishgarh
180.6
232.9
Gujarat
149.8
187.1
Haryana
123.1
132.3
Himachal Pradesh
212.8
174.2
Jharkhand
190.7
232.0
Karnataka
157.2
203.3
Kerala
126.7
127.4
Madhya Pradesh
155.7
205.9
Maharashtra
194.1
202.1
Orissa
183.2
189.7
Punjab
118.0
156.6
Rajasthan
132.0
163.1
Tamil Nadu
149.0
179.4
Uttar Pradesh
141.2
151.2
Uttaranchal
166.7
158.5
West Bengal
169.9
200.0
All India
163.0
188.2
Factors affecting Poverty
Poverty depends on per capita household income
which in turn affected by employment, wage rate,
land productivity, industrialisation, expansion of
service sector and other general growth and
distribution factors
Special role of
•per capita agricultural income
•Employment and real wage rate
•Inflation rate and relative food prices
•Government expenditure
Per capita development expenditure
Social sector expenditure
Indian growth process since 1950s more or less
distribution neutral till 1980s.
Importance of a critical minimum steady growth in per
capita income for poverty reduction.
Inequality increased in recent years after reforms.
Income elasticity of poverty has fallen.
A given growth will be associated with more limited gains
for the poor
Higher growth might more than compensate the adverse
effect if fall in elasticity is small.
Reasons for weak participation of poor: limited access to
education, land, credit; low agrl growth, underdeveloped
infrastructure such as irrigation, roads, electricity in
poorer states
Demographic Dividend
• AS fertility drops, ratio of workers to non-
•
•
•
•
workers rises.
Provides an window of opportunity provided
potential workers acquire skills and find
productive employment
About a fourth of poverty reduction could be
attributed to demographic factors in India
Right economic policies critical, otherwise the
scenario could turn out to be demographic
liability
Dividend for 2-3 decades only since proportion
of older population would eventually increase
increasing dependency ratio again
Long term scenario for Poverty
• Long term growth prospects fairly optimistic: India likely to
continue among the fasted growing economies, BRIC to
dominate world economy
• India might surpass Japan and Germany in terms of total
size of the economy, yet its per capita income would be less
than world average for a long time
• Poverty could be reduced faster provided inequality is under
control, labour intensive activities must grow, removal of
rigidities in land and labour market critical for reallocation
of resources
• Government can afford to devote more resources for poverty
removal programmes: wage employment (NREGA) or self
employment type (SJSY).
Thank You