Poverty Estimation in India

The recent release of the 2023-24 Household Consumption Expenditure Survey (HCES) has sparked a significant debate around poverty estimation in India. The survey reports a decline in poverty levels across urban and rural areas, but questions have arisen about the accuracy of the data and whether the poverty line is being underestimated.

What is Poverty and How is It Defined?

• Poverty in India was traditionally defined using the expenditure required for a minimum calorie diet, updated every five years based on National Sample Survey Office (NSSO)
• However, over time, discrepancies between the NSSO’s household consumption expenditure data and national accounts data led to doubts about the reliability of poverty estimates.

How Has Poverty Estimation Evolved?

• Changes in Methodology:
  • Tendulkar and Rangarajan Committees: These committees introduced new methodologies to estimate poverty, such as using different recall periods for consumption data. However, such changes have made it difficult to compare poverty estimates over time.
  • Multidimensional Poverty Index (MPI): In recent years, alternative measures, like the Multidimensional Poverty Index (MPI), have been adopted to capture poverty beyond income levels. This index considers factors like health, education, and living standards.
• The Shift to Broader Consumption: The scope of poverty definition has expanded beyond just calorie consumption to include other goods and services, reflecting modern consumption patterns. The updated methodology suggests that food expenditure now constitutes less than 50% of the total consumption basket, indicating that people now spend more on diverse needs, such as healthcare and education.

Concerns with the 2023-24 Household Consumption Expenditure Survey (HCES)

Divergence in Data: A key issue with the HCES data is the divergence between NSSO estimates and national accounts data. This divergence has been caused by:

• Changes in Recall Periods: Different recall periods for various items (7 days for some, 30 days for others) make comparisons over time challenging. Previous estimates used a uniform recall period, which is now inconsistent with the updated method.
• New Methodologies: The introduction of mixed and modified mixed reference periods (MRP and MMRP) for data collection has resulted in higher consumption estimates, which may affect poverty estimation. The methodology also now involves visiting households multiple times for better data accuracy.

Impact on Poverty Estimates: Using the new methodologies with higher consumption estimates and applying them to outdated poverty lines might show a drastic reduction in poverty, which some argue is misleading. Experts stress the need for a consistent poverty line that reflects modern consumption patterns.

Rural vs. Urban Poverty

• Changing Rural-Urban Dynamics: Data suggests that the consumption gap between rural and urban areas is narrowing. This could be because many rural areas are increasingly peri-urban in nature, with consumption patterns becoming similar to urban regions. Rural areas, historically dependent on food items, now have diverse consumption baskets that resemble those of urban areas.
  • However, the classification of rural vs. urban areas based on the 2011 Census is outdated. Many areas once categorized as rural are now urban or peri-urban in nature, which could influence poverty estimates.
• Public Policy Impact: Government initiatives such as the National Food Security Act and flagship programs aimed at poverty reduction have likely contributed to the decrease in poverty levels. However, the definition of rural and urban must be updated to accurately reflect poverty levels across regions.

Should the Poverty Line be Revised?

The Debate Over Revising the Poverty Line: There is an ongoing debate over whether the poverty line should be upwardly revised in India:

• Rangarajan Methodology: According to experts, using Rangarajan’s poverty line, which is based on a more comprehensive consumption basket, suggests that poverty in India could be as low as 10%. However, some argue that updating the poverty line alone is insufficient without re-examining the methodology.
• International Comparisons: Global poverty benchmarks, such as the UNDP’s $2.15/day threshold, suggest that India’s poverty rate could be around 12.9%. This is lower than estimates that place poverty at 25%.

Need for a Clear, Updated Methodology: Both experts agree on the need for a clear, updated methodology for estimating poverty. The methodology should reflect modern consumption patterns and include a consistent poverty line that can be applied across surveys.

Multidimensional Poverty Index (MPI) and Criticism

• What is the MPI? India’s MPI includes 12 indicators, compared to 10 in the UNDP's global MPI. This broader approach has been praised for capturing a wider range of deprivations beyond income, such as bank accounts, maternal health, and access to services.
• Criticism of MPI: Some critics argue that the MPI doesn’t capture issues like income vulnerability and future deprivation risks, which are essential for measuring long-term poverty. Additionally, once a household has access to basic services (e.g., electricity, bank accounts), it is not considered deprived in those areas, which could understate the severity of poverty.