The Line of the Poor

India’s official poverty estimates are based on the regular consumer expenditure surveys conducted by the National Sample Survey Organization (NSSO). These surveys, pioneered by P. C. Mahalanobis in the 1940s and 1950s (Mahalanobis and Sen in 1954) were the world’s first system of household surveys to apply the principles of random sampling established in 1920s and 1930s.

The NSSO conducts both large and small surveys while the Planning Commission uses the larger ones on the ground that they are required to estimate poverty accurately for each state and those estimates are the basis for transfers from the central government to the state governments. These official poverty estimates count the number of people living n households with monthly per capita total expenditure below a poverty line specific to state and sector (rural or urban). The poverty lines are updated periodically using a system of state-by-state price indices which are estimated separately for rural households (the consumer price index for agricultural laborers) and urban households (the consumer index for industrial laborers). Rural and urban poverty estimates for each state are aggregated for all the states and an all India poverty line is set up that matches the sum of state counts.

NATIONAL ACCOUNTS AND SAMPLE SURVEYS

Before the 1990s, the planning commission used the national accounts estimate of consumption as a control total for the surveys in estimating poverty. Thus, for example, if the ratio of national accounts to the survey estimate of mean consumption was greater than one, the commission would multiply the expenditure of each household by that ratio before calculating the number of people living in households below the poverty line. This gave rise to a debate: does the growth measured in the national accounts show up in improvements in the living standards of the poor?

During the 1990s the national accounts estimates of mean consumption grew much more rapidly than did the survey estimates. Scaling up thus would have shown a more rapid reduction in poverty in the 1990s than by the survey estimates. Those who believe that the economic growth following the reforms has been associated with large scale poverty reduction have tended to argue that national accounts are right and surveys are wrong. While the early comparisons between the national income and surveys are similar with even a coinciding show in distribution pattern of income and consumption, the recent comparisons are anything but.

The use of outdated rates and ratios in a growing economy experiencing struc­tural development will typically lead to systematic trend errors in the accounts. Con­sider the netting out of intermediate production from value added, which is frequently done using a fixed ratio. Because the degree of intermediation tends to grow as the economy becomes more complex and more monetized, the rate of growth of GDP and of consumption will be systematically overstated in a growing economy. Cooking oil, particularly vanaspati, provides a good example for India. The national accounts estimate consumption of vanaspati as total production less imports plus exports, less consumption by government or business. In an economy in which all vanaspati is used for household cooking, this gives the right answer. But as the economy grows, consumers eat more meals out, so that an increasing fraction of vanaspati is used by commercial food suppliers, restaurants, hotels, and street vendors. Consumer spending on these services is derived from (fairly shaky) data on the gross output of the services sector, adjusted to a value-added basis by deducting the value of intermediate inputs, including vanaspati. At best, this adjustment is done using one of the rates and ratios, which means progressive and increasing overstatement if intermediation increases with income and if rates and ratios are infrequently adjusted. In the case of vanaspati in India, no adjustment is made at all, so that all vanaspati used in restaurants is counted twice, helping overstate the rate of growth of consumption and GDP and to increase the ratio of national accounts to survey consumption.

METHODOLOGY

An important design issue for poverty measurement is the length of the reporting period. The NSSO had adopted a uniform 30-day recall period, based on experiments carried out by Mahalanobis and Sen (1954) in the 1950s. A ques­tionnaire with a 7-day reporting period for high-frequency items (food, pan, tobacco), 365 days for low-frequency items (durable goods, clothing, footwear, insti­tutional [hospital] medical care, and educational expenses), and 30 days for every­thing else gave poverty counts that were only half of those derived from the questionnaire with a uniform 30-day reporting period.

The reduction in measured poverty comes from two quite separate effects. The first is that a higher rate of monthly expenditure is reported when people are asked to report food, pan, and tobacco over the past 7 days rather than over the past 30 days. Higher reported expenditure, other things being equal, decreases mea­sured poverty. The second effect comes from the low-frequency items. Although the mean reported expenditure for this category decreases for the longer reporting period, the lower tail of the distribution increases. With 30-day reporting periods, most households report no purchase of low-frequency items, but in 365-day peri­ods most households report at least some purchases. Thus despite the decrease in the mean, the longer reporting period for the low-frequency items also acts to reduce measured poverty. Measures of inequality are substantially reduced by moving from a 30-day to a 365-day reporting period for low-frequency items. Because the mean falls and the bottom tail increases, measured dispersion in these purchases is much reduced, and this carries through to total expenditure. This means that it is never legitimate to compare measured inequality across surveys with different reporting periods with­out some sort of correction.

POVERTY LINE(S)

Although the recent debate on poverty in India has focused mainly on the measure­ment of expenditures, poverty lines are equally important. How they are updated and adjusted across regions or urban and rural households have a major effect on poverty estimates. In India, as in many other countries, a base poverty line is adjusted across time and space using price indexes, so the selection and construction of these indexes become a key input into poverty measurement.

The history of poverty lines in India is a case study in the interaction of science and politics, with political decisions often claiming a scientific basis, sometimes with justification, more often without. Although poverty lines are often linked to the amount of money needed for a minimally adequate diet, the use and long-term survival of poverty lines depend on policymakers and others accepting them as useful. For example, Rudra (1974), in discussing the history of Indian poverty lines up to that time and the persistence of the "magic number" of 20 rupees per head in 1960/ 61 prices shows that a food-based analysis would lead to a considerably higher number. Yet the magic number persisted, as similar magic numbers have persisted in other countries, not because they are correct but because, once established as useful in economic and political discussions, poverty lines are resistant to change.

From the late 1970s to the mid-1990s the Planning Commission used only two poverty lines for per capita household expenditure, 49 rupees for rural households and 57 rupees for urban households at 19 73/ 74 prices, which was close to the 15 percent urban price differential estimated by Bhattacharya and Chatterjee (1971) using unit value data from the National Sample Survey. The poverty lines were held constant in real terms and were converted to current rupees using the implicit price deflator of consumption in the national accounts. This process ignored interstate dif­ferences in price levels and in urban to rural price differentials. Furthermore, the national accounts consumption deflator is probably not the best measure of inflation for households near the poverty line. These problems and several others were dealt with by an expert group in 1993 (India, Expert Group on Estimation of Proportion and Number of Poor 1993). Their recommendations for new poverty lines were adopted (in somewhat modified form) by the Planning Commission, and these pov­erty lines have been used in official calculations since 1983.

The expert group poverty lines have a serious flaw, however: the urban to rural price differentials that they imply are too large to be credible. It is unclear how this happened, whether because of an error in calculation or because the price indexes used in the calculations produced the result through some unexpected cumulative effect. The state by state urban and rural poverty lines were calculated indepen­dently, without consideration of the implicit urban to rural price differentials. In any case, the average ratio of urban to rural poverty lines is around 1.4 and varies widely across states. As a result, official headcount measures of poverty are higher in urban than in rural areas in some states, and the all-India headcount ratios differ lit­tle for urban and rural areas. In Andhra Pradesh, which is the most dramatic exam­ple, the 1999/2000 official estimates give a poverty rate of 27.2 percent for urban areas and only 10.8 percent for rural areas.

Another serious issue is the accuracy of the inflation rate used in the state-level price indexes. Errors in the indexes will induce errors in the trend rate of poverty reduction. These indexes are reweighted infrequently. For example, until 1995 the consumer price index for agricultural laborers used weights based on a 1960/61 survey. And although this index and the index for industrial workers are almost cer­tainly better than the price deflator of national accounts consumption, it is unclear whether the prices or the weights that go into these indexes are the right ones for a national poverty measure.

(New benchmarks by the Planning Commission, submitted in an affidavit to the Supreme Court as part of new food security legislation, suggest that a person living on more than Rs32 ($0.64) a day in urban areas, like New Delhi and Mumbai, would no longer be classified as being below the poverty line. The threshold for rural areas would be Rs26 a day. By comparison, the World Bank’s poverty line is $1.25 a day.)

LESSONS

There is no suggestion here that the statistical failures in India in the 1990s were the result of undue interference by politicians or policymakers in data collection or publication. Yet politics in the broad sense played a role. In evaluating the reforms, the political right had an interest in showing low poverty, and the political left in showing high poverty, and this undoubtedly intensified the debate on survey design and led to the unfortunate compromise design that temporarily undermined the poverty monitoring system. This politicization of data collection and interpretation is often bemoaned. Yet political accountability is essential to poverty reduction, and policymakers have a legitimate interest in monitoring the statistical system and asking for changes that serve their interests.

Mistakes are inevitable, and survey data can be compromised by internal and exter­nal factors. Thus poverty assessments will often have to be made using imperfectly comparable surveys. India's experience illustrates the possibility of repairs to enhance the credibility of estimates. But that experience also demonstrates that repairs, however creative, are a poor substitute for the collection of clean, credible, and comprehensive data. What are convincing assumptions to one person can be unconvincing to another, and political positions inevitably influence the assump­tions that people are prepared to make or accept.