Saturday, October 1, 2011

Rs 32 a day too low a definition of poverty?

A lot of hulla balloo has been raised over the Planning Commission’s affidavit that states that only those who earn less than Rs 32 per day are considered poor in India. This number is for the urban areas; the same for the rural areas being Rs 26. The subject has become a political matter since the BJP likes to take digs at the Congress saying it wants not poverty, but the aam aadmi removed. Equally, the definition has rankled civil society activists like Aruna Roy and others. Even Rahul Gandhi has asked the Planning Commission for a re-think. What’s the real truth about this matter?

The first thing to note is that poverty is a relative concept. No matter how developed a country is, there are always going to be poor people. In fact, poverty is defined in terms that are relative to the “average income” of the country or the “median income” of the country or some such measure. By this definition, poverty in the US is set at $22,350 per year for a family of four. This comes to some $15 per head per day. At this level, there are around 20% Americans who are poor. Now many of us may find American poverty a bit of a stretch given that America is one of the richest countries in the world. But look at which sections of that country are poor. Poverty amongst blacks is about 25% of their population and we know this is true. A visit to any black neighborhood in the US is a telling story of poverty in that community. Crime follows poverty and a lot of US crime emanates from the black community. Likewise, poverty is similarly high at some 22-25% or so in the Hispanic community. In contrast, poverty amongst the Whites is just 8-9% and amongst Asian Americans around 9-10%.

In the UK, poverty is set at the level of 60% of the median income level of the country. Median income is the income at which exactly half the number of people earn more and the other half less. 60% of median income pulls the definition of poverty significantly below the mid-point. By this definition, the cut-off point for defining poverty in the UK is £ 9.5 per person per day. Using this definition of poverty, the poverty in the UK is 21.8% of its population. Using a similar definition for other European countries, the poverty level is the lowest in Sweden at 12.3% and it rises to 13.1% in Germany and 14.1% in France. These are all rich, developed countries; so clearly, poverty is a relative concept.

An international benchmark for calibrating poverty has been set by the World Bank - $1.25 per person per day measured in PPP terms. PPP stands for Purchasing Power Parity – in other words, all financial numbers are adjusted for pricing differences between two countries. Using PPP, the dollars are converted to local currency not using the official currency exchange rate but by using the PPP rates. The exchange rate between the $ and the Rupee is some Rs 48 but in PPP terms, it is about 2.6 times lesser – or Rs 18.5 or so. By this token, $1.5 converts to Rs 23…..a number much lower than the one that the Planning Commission (PC) has used for defining poverty. Look at it differently. Rs 32 converts to $1.7 using PPP rates. Besides, the basket of good being what it is for the poor – and the subsidies that the government provides to them – the PPP factor for the poor is much more than 2.6. If it is taken at 4, then the definition of poverty adopted by the PC comes to $2.7 per day per person. Now that’s not so bad at all….Clearly then, there doesn’t appear to be any hanky panky.

Let’s look at the PC definition of poverty more closely. Rs 32 per person per day for urban areas looks really low. However, let’s look at the number more realistically for a family on a monthly basis. If the poor family has 5 members (average size in urban areas may be 5 or more), then that translates to about Rs 4,800 per month. Now while this is by no means a huge sum of money, it is surely at least a reasonable figure to define a poor family. Let’s not forget that much of the spends that a poor family incurs in India are on items that are significantly subsidized by the government. Whether it’s the LPG or kerosene for cooking; the school for the children; the food grains from the PDS system; the health facilities; all are hugely subsidized. Rice is sold at some Rs 11 per kg, wheat at some Rs 8.5 per kg, Palmolein oil at Rs 26 a litre and daal at some Rs 26 a kg. Kerosene is sold at some Rs 9.5 per litre. School education is totally free as is medical treatment at a government health center. The quality of these goods and services may be suspect, and it is the poor quality that makes these poor people lead such a dreadful life…..

Look at the same monthly income figure for the rural poor. The cut-off for calling someone poor is Rs 26 per family member per month. Assuming the rural family size is a little bigger than the urban poor’s (say 5.5 members), the monthly income works out to Rs 4,300 per month. By no yardstick is this a low income for a poor family. In fact, this is a princely sum of money in the rural areas, where the cost of housing is next to nil (compared to the urban folks for whom this is a big cost item). Since most of the poor in the country come from the rural areas, the definition doesn’t appear to be unfair.

If we look at the PC’s number on an annualized basis, we get some more information about whether the Planning Commission is obfuscating the issue for political reasons or not. Taking the average spend levels at Rs 4600 per month (for rural and urban poor together), this translates to Rs 55,200 per annum. Firstly, this doesn’t look like such a bad number at all. Besides, this is the near the same number as the Per Capita Income of India (around Rs 55,000 per annum). If the definition of poor has been set at the per capita income level of the country, it’s a fairly liberal cut-off for poverty. If the poverty definition had been set much lower, one may have complained that the poverty definition was being set artificially low. Again, the intention of the PC doesn’t appear to be to fudge numbers.

Most Americans or Europeans balk at the low numbers that we use in India to define poverty. At Rs 55,200 per annum, this translates to $1200 per annum (regular exchange rate). Now that’s really pathetic, isn’t it? All of us are shocked….Less than $1 a day? But again, what people forget is that $1 in India buys you a lot more than it does in the US. In the US, $1 may buy you one measly can of Diet Coke; in India, it can buy you two square meals. Most lay people don’t immediately relate to the differences in prices between two countries and wrongly use the exchange rates for conversion purposes….

So what are we saying here? That India is not poor? No, not at all. We are extremely poor as a people; even though we are getting richer as a country. The real problem in India is the distribution of wealth. We all like to blame the government for its policies for increasing the income disparities in the country. This is true, since capitalism does lead to more income disparity. Since India now very largely follows the capitalistic model for the economy, the income disparity is bound to increase. Even though criticism of the government is valid, there is enough criticism that we the middle class needs to take as well. In our own personal lives, how often do we show willingness to share our wealth? The gains of economic prosperity of the last 20 years have accrued mostly to us urban middle class folks. Yet, when it comes to raising our domestic help’s salary, or paying higher monthly society bills so that society employees could be paid higher, we become petty and stingy. We demand that salaries of domestic help be determined by “market forces” – which given the huge migration to the cities in the past have helped push the salaries down. Now when NREGA and economic growth in states like Bihar and UP is leading to less migration and domestic help and salaries are rising, we complain that everything is becoming costlier. This hypocricy of us middle class folks is as much to blame for the income disparity as the model of economic growth followed by the country.

One last point. What is the purpose for defining poverty at all? Since poverty is a relative concept, the line dividing the poor from the “not-poor” can be set anywhere. Suppose we set it much higher. Then we will have a much higher % of people defined as poor. So what do we do with this number? Mope and cry? Change the government? Make it into another political issue and use it to attack or defend one political party v/s another? In my view, the poverty line should keep rising in line with inflation on a yearly basis, so that we know how we are faring on a year on year basis. If by this definition, poverty is declining, then that means we are making progress. Even after we make progress, it may not mean that we have become better off. At some time, we will need to recalibrate the definition of poverty and raise the level to a higher one. When we do that, the % of poverty may rise again…..but it will be based on a higher definition of poverty. This is an ongoing process. It never stops. That’s why even the US and European countries still have poverty.

The real truth is that there is nothing wrong in the PC’s definition of the poverty line. Most people who express shock at this seemingly low number have failed to understand what the number actually means. While it is a low number, we must remember that there are many subsidies that make that number more respectable. In the end analysis, we are a poor country but the number of poor is decreasing. And if we continue on the fast economic growth that we have seen in the last decade or so, we will be able to eliminate the worst forms of poverty in the next 10 years or so. That’s the only thing we must focus on…..not arguing whether Rs 32 is right or wrong.

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