Poverty is one of the most challenging problems facing the Indian economy today. But, the recent World Bank report has given us something to cheer about. Though India still has the largest number of worlds’ poor, its poverty rate is the lowest among developing countries. It also suggests that we have been overestimating our poverty rates.
As per WB, India’s poverty rate for 2011-12 is actually 12.4% as against 29.5 % by India. This article is an attempt to explain the reasons behind the divergence between poverty figures calculated by India and the World Bank.
How is poverty measured in India?
The poverty rate is the percentage of the population living below the poverty line.
As per the Tendulkar Committee, India’s poverty line was Rs. 22.5 per day in rural areas and Rs. 28.6 in urban areas. Thus, people having consumption expenditure below Rs. 22.5 or Rs. 28.6 per day were considered poor.
According to the Tendulkar Committee, the poverty rate was 21.9% in 2011-12.
In the year 2014, the Rangarajan Committee revised the poverty line upwards to Rs. 32 in rural areas and Rs. 47 in urban areas. As per the new estimates, the poverty rate for 2011-12 was revised upwards to 29.5 %.
But as per the World Bank report, the poverty rate is just 12.4%.
Why is there a divergence between the poverty estimates?
There are two reasons for the divergence:
- World Bank‘s estimation of poverty is done according to the international poverty line of $1.9 (which was revised upwards from $ 1.25 recently in 2015). In purchasing power parity terms, $ 1.9 is equivalent to Rs. 27, which is less than the Rangarajan Committee’s poverty line.
- There was a change in methodology or reference period in surveying the number of poor: In India, poverty is calculated using Uniform Recall Period and Mixed Recall period. But, World Bank has used a modified Mixed Recall Period to calculate poverty.
What is Uniform Recall Period, Mixed Recall Period and Modified Mixed Recall Period?
- Uniform Recall Period: In this, 30-days recall period is used for all items of consumption. In other words, people are asked to recall their consumption expenditure over the last 30 days.
- Mixed Recall Period: It uses 30-day recall period for most items and one year recall for five infrequently purchased non-food items, namely clothing, footwear, durable goods, education, and health.
- Modified Mixed Recall period: World Bank has used Modified MRP to estimate poverty. In this, 7-day recall period is taken for all items and one-year recall for the five infrequently purchased items.
As per the new survey methodology, world poverty has also declined and is expected to fall under 10 % in 2015.
The President of World Bank, Jim Kong Kim remarked, “This is the best story in the world today. These projections show us that we are the first generation in human history that can end extreme poverty.”
[You may also read: Stages of the evolution of the International Monetary System]
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Reference:
Count of poor people in India may be lower, says World Bank (by Indian Express)
People do not remember what they have eaten 2 days back. How people can be asked to recall their consumption expenditure for last 30 days or one year:) :). World Bank methodology appears to be more sophisticated, but it left the scope for data affected by “seasonal consumption” since recall period is very small. What if, data is collected during a particular festival when people spend more. It may lead to underestimation of the true poverty level. I think, still there is a need for further change in methodology. World Bank and Government of India must clearly show their methodology in detail with their poverty estimates. No doubt what World Bank has done has given us something to cheer for Government but not for “Poor”.
Neeraj, I agree. There are shortcomings in the present methodology as well. Even allowing for that, World Bank’s methodology is an improvement over the past. Initially, we used 30-days recall period for food expenditure. Now World Bank has used 7-days recall period.
Of course, the poverty figures have changed only due to a shift in methodology. The poor remains poor and haven’t become rich overnight. This data can only assist in policy-making and to study the impact of the policies on poverty levels.
I do not think World Bank’s methodology is an improvement over the earlier one. Without having a complete detail of all the methodologies, it is difficult to gauge which one is the best.
No doubt, such lower estimate would not make poor richer overnight. But, such poor estimates of poverty (specially underestimation of poverty rate) would only lead to poor decision making by the policy maker. It might be possible that government reduces its welfare expenditure on the grounds of the new lower estimate. And this is not good for poor.
If we take into consideration only the recall period, then the World Bank’s methodology is definitely an improvement. India uses 30 days recall period and as you said, it is not possible to accurately recall your food expenditure over the last one month.
On the other hand, World Bank uses only 7 days recall period for food and other items. It reflects consumption expenditure more accurately.
Of course, there may be other shortcomings in the poverty estimation and under-estimation and over-estimation could both lead to poor decision-making. I meant to say that poverty estimation (however faulty) is ultimately done for the purpose of policy-making. The efficacy of the policies will always depend on the proper measurement of poverty etc.
Just one correction for MMRP:
“In the Modified Mixed Recall Period (MMRP), the consumer expenditure data is gathered from the households using the recall period of: (a) 365-days for clothing, footwear, education, institutional medical care, and durable goods, (b) 7-days for edible oil, egg, fish and meat, vegetables, fruits, spices, beverages, refreshments,processed food, pan, tobacco and intoxicants, and (c) 30-days for the remaining food items, fuel and light, miscellaneous goods and services including non-institutional medical; rents and taxes”.
Source:Report of the expert group to review the methodology for measurement of poverty, Planning Commission (2014)
Further from the report: “The poverty estimates made by the World Bank are based on the same poverty line for all its member countries. In contrast, the Planning Commission methodology uses state-specific and also region-specific (rural and urban) poverty lines. Therefore, these poverty lines capture the regional prices more precisely.
The Expert Group (Rangarajan) arrived at the conclusion that neither their[World Bank] methodological nor procedural aspects are superior to what is being used in India at present”.
Yes, no doubt that MMRP is better than MRP(& URP), also agreed by Rangarajan Committee. But World Bank estimation has many other shortcomings.
“In purchasing power parity terms, $ 1.9 is equivalent to Rs. 27”
Can you Please Elaborate, I am not able to understand this.
To calculate poverty line of India, the international poverty line of $1.9 has to be converted into rupees. One way to do it is to use the market exchange rate.(One dollar will be approximately around Rs. 64, so 1.9 dollars will be around Rs. 123). But, this is not an accurate measure of purchasing power. I will be able to buy more goods in Rs. 123 in India than $ 1.9 in the USA. It is because goods are cheaper in India and our cost of living is low.
The other way to convert dollars into rupees is through purchasing power parity. (PPP). In PPP, the market prices of a basket of goods are used to determine the exchange rate. Eg: One pen costs Rs. 12 in India and $ 2 in the USA. Then exchange rate is,1 dollars is equal to 6 rupees. (12 / 2)
The PPP exchange rate may be different than the market exchange rate. As per the World Bank’s price survey, Rs. 27 is equal to $ 1.9. It can be interpreted as: Rs. 27 should be able to buy the same amount of goods in India as $ 1.9 would in the USA.
Hope it helps 🙂