Editorial: Over-estimating poverty?

The World Bank recently published the results of a research project on global poverty. India, which has the largest absolute number of poor people however defined, is obviously a major focus of the project. The main innovation in the research methodology is the development of a new poverty benchmark, based on Purchasing Power Parity (PPP) exchange rates and domestic prices for 2005. The previous benchmark was based on 1993 numbers, which were clearly inadequate for capturing the dramatic changes in the Indian economy and, for that matter, emerging economies in general over the last decade.

From the Indian perspective, while the broad trends are indisputable, several questions arise from the numerical estimates of poverty. With the new poverty benchmark of $1.25 per capita per day, which translates into Rs 21.6 per day in urban areas and Rs 14.3 per day in rural areas at the 2005 prices, 42 per cent of Indians were estimated to be below the poverty line in 2005. This was substantially down from 60 per cent in 1981, but will still come as a shock to people, who are used to thinking of poverty incidence being in the low 20 per cent range. Very significantly, both from the perspective of the methodology for the study and the design of poverty alleviation programmes in India, the proportion of people who had less than a dollar a day, a popular benchmark, was estimated to be 24 per cent in 2005, down from 42 per cent in 1981, which brings it quite close to the official Indian estimates of poverty. This means that 18 per cent of Indians, about 200 million people, earn and spend between $1 and $1.25 a day. These are people who would not be considered poor by the system and therefore do not have access to various entitlements but have a standard of living not very different from the “official” poor. Two hundred million people falling through the cracks in this manner is, politically speaking, a ticking time-bomb.

 

This is where some concerns about the numbers are appropriate. In an article in this newspaper last week, Surjit Bhalla criticised the new PPP numbers and the benchmarks based on them as being completely inconsistent with other indicators of growth and development. His analysis suggests that, with the new numbers, emerging Asia as a region looks far worse off than with the old numbers. Virtually everybody who is doing business in emerging Asia today would dispute that fact; for most products and services, the last decade has unquestionably been a boom phase. The notion that a large number of first-time consumers for various goods and services can generate exponential rates of growth in demand for long periods of time has been validated for several products in all the countries in the region. Specifically in the Indian context, the recent record of penetration of products such as two-wheelers and mobile phones, not to mention a number of fast-moving consumer goods, challenges the estimate that there is such a large number of people on the fringes of the official poverty line. No one should dispute the fact that poverty in India is way too high and the quality of life of even the near-poor is unacceptable. However, the danger in over-estimating the problem is that it might evoke the wrong policy response, focusing on the immediate rather than the important.