Poverty in India: Concepts,

Measurement and Trends

Manoj Panda
Centre for Economic and Social Studies (CESS),
Hyderabad

Coverage
Introduction
Concepts of Poverty and Poverty Line
Measurement of Poverty
Trends in Poverty over Time
Variations across States and Social
Groups
Inequality: Concept and Measurement
Some Policy Issues

Introduction
Indias economic structure has changed
dramatically over last 5-6 decades; among the
most dynamic economies recently.

Benefits of growth not widely spread to various
sections in society, reached only marginally to
low income groups.

Similar experience of other countries too.
Question then arose: Can we guarantee to all at
least a minimum level of living necessary for
physical and social development of a person?

Absolute poverty literature grew out of this
question.




Why estimate poverty?

Poverty estimates are vital input to design, monitor and
implement appropriate anti-poverty policies.

Analysis of poverty profiles by regions, socio-economic
groups
Determinants - factors affecting poverty
Relative effects of factors affecting poverty
Allocation of resources to different regions and to various
poverty reduction programs

Precise estimates of poverty neither easy nor universally
acceptable. Yet, can act as a broad and reasonably policy
guide.
Intellectual genesis of poverty very old
Adam Smith, Ricardo, Marx: subsistence wage concept

An early empirical work by Dadabhai Naoroji, 1901

Estimated an income level necessary for the bare wants
of a human being, to keep him in ordinary good health
and decency. Estimated cost of food, clothing, hut, oil
for lamp, barber and domestic utensils to arrive at
subsistence per head.

In the absence of income distribution data, Naoroji
compared computed subsistence level with per capita
production to draw attention to mass poverty.

Remarkable work that parallels an early work on British
poverty by Rowntree, 1901.


Poverty is multidimensional
Deprivation in income, illiteracy, malnutrition,
mortality, morbidity, access to water and sanitation,
vulnerability to economic shocks.

Income deprivation is linked in many cases to
other forms of deprivation, but do not always
move together with others.

This discussion focuses on Income poverty.


Measurement of Poverty
(Percentage of Poor)
Two basic ingredients in measuring
poverty:

(1)Poverty Line: definition of threshold
income or consumption level

(2)Data on size distribution of income
or consumption (collected by a sample
survey representative of the population)

Poverty Line (PL): Absolute vs. Relative

Relative PL defined in relative terms with
reference to level of living of another person; or,
in relation to an income distribution parameter.
Examples: 50% of mean income or median, mean
minus one standard deviation.


Absolute PL refers to a threshold income
(consumption) level defined in absolute terms.
Persons below a pre-defined threshold income
are called poor.


Indian Poverty Line

A minimum level of living necessary for physical
and social development of a person.

Estimated as: total consumption expenditure level
that meets energy (calorie) need of an average
person.

PL comprises of both food and non-food
components of consumption.

Considers non-food expenditure actually incurred
corresponding to this total expenditure.

Difficult to consider minimum non-food needs
entirely on an objective basis

Relationship Between Calorie Intake and
Per Capita Expenditure

0
500
1000
1500
2000
2500
3000
3500
0 100 200 300 400 500 600 700 800 900 1000
Per Capita Consumption Expenditure per Month
(Rupees)
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An Example of Size Distribution of Consumption Expenditure

MPCE %Population

0-150 3.2
150-200 4.0
200-250 6.5
250-300 8.6
300-340 10.0 (half of 10% are below poverty line 320)
340-400 11.3
400-450 8.6
450-500 9.2
500-550 9.3
550-650 11.4
650-800 8.9
800-1000 5.0
Above 1000 4.0
All classes 100.0

MPCE: Monthly Per Capita Consumption Expenditure

Poverty Line: Rs. 320 per capita per month
HCR= 3.2+4.0+6.5+8.6+5.0 = 27.3%
Incidence of poverty Vs. Under-nutrition

Classification of Population by Poverty Line and
Calorie Norm - Rural India, 1977-78
Below
Poverty
Line
Above
Poverty
Line
Total
Below Calorie
Norm
45.32 12.47 57.79
Above Calorie
Norm
12.31 29.21 42.21
Total 57.63 42.37 100.00
Source: Government of India (1993): Report of Expert Group.
Official PL in India
Originally estimated for 1973-74: Rs 49 and 56 for
rural and urban areas respectively.
Updated using an appropriate price index
(CPIAL for rural India, CPIIW for urban).
A monthly per capita consumption expenditure
of Rs. 356 and 539 for rural and urban areas
respectively for 2004-05.
More than a quarter of Indias population remain
below PL in 2004-05.
28.3% Rural 25.7% Urban 27.5% Total
Absolute no.: 302 million in 2004-05

Poverty in India: Changes over time
Up to mid-1970s fluctuations with cycles
Since mid-1970s continuous fall
Except a few years immediately after start
of reforms (early 1990s)
Controversies around estimates for 1999-
2000 (under estimates poverty)
20
25
30
35
40
45
50
55
60
65
70
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Rural HCR
Urban HCR
Data Contamination in 1999-2000
7-Day Recall versus 30-Day Recall

NSSO expenditure data collected on 7-day
recall period basis during 51
st
-54
th
rounds 13-
18% larger than that from the 30-day recall
period basis.

This difference is reduced to 3 to 4% in the
55
th
round. Critics attribute this reduction to mix
up of recall periods by respondents affecting
comparability with previous large-scale surveys.

The 7-day recall period reports more food
expenditure and very significant fall in poverty.
Comparison of Poverty After Reforms
Uniform Recall Period
1993-94 2004-05
Rural 37.3 28.3
Urban 32.4 25.7
Total 36.0 27.5
Mixed Recall Period
1999-2000 2004-05
Rural 27.1 21.8
Urban 23.6 21.7
Total 26.1 21.8
Poverty Head Count Ratio: Major Indian States
Poverty By Social Groups: Rural 2004-05
States ST SC OBC OTHERS
Andhra Pradesh 30.5 15.4 9.5 4.1
Assam 14.1 27.7 18.8 25.4
Bihar 53.3 64 37.8 26.6
Chhattisgarh 54.7 32.7 33.9 29.2
Delhi 0.0 0.0 0.0 10.6
Gujarat 34.7 21.8 19.1 4.8
Haryana 0.0 26.8 13.9 4.2
Himachal Pradesh 14.9 19.6 9.1 6.4
Jammu & Kashmir 8.8 5.2 10.0 3.3
Jharkhand 54.2 57.9 40.2 37.1
Karnataka 23.5 31.8 20.9 13.8
Kerala 44.3 21.6 13.7 6.6
Madhya Pradesh 58.6 42.8 29.6 13.4
Maharashtra 56.6 44.8 23.9 18.9
Orissa 75.6 50.2 36.9 23.4
Punjab 30.7 14.6 10.6 2.2
Rajasthan 32.6 28.7 13.1 8.2
Tamil Nadu 32.1 31.2 19.8 19.1
Uttar Pradesh 32.4 44.8 32.9 19.7
Uttarakhand 43.2 54.2 44.8 33.5
West Bengal 42.4 29.5 18.3 27.5
All India 47.2 36.8 26.7 16.1
Poverty By Social Groups: Urban 2004-05
States ST SC OBC OTHERS
Andhra Pradesh 50 39.9 28.9 20.6
Assam 4.8 8.6 8.6 4.2
Bihar 57.2 67.2 41.4 18.3
Chhattisgarh 41.0 52.0 52.7 21.4
Delhi 9.4 35.8 18.3 6.4
Gujarat 21.4 16 22.9 7.0
Haryana 4.6 33.4 22.5 5.9
Himachal Pradesh 2.4 5.6 10.1 2.0
Jammu & Kashmir 0.0 13.7 4.8 7.8
Jharkhand 45.1 47.2 19.1 9.2
Karnataka 58.3 50.6 39.1 20.3
Kerala 19.2 32.5 24.3 7.8
Madhya Pradesh 44.7 67.3 55.5 20.8
Maharashtra 40.4 43.2 35.6 26.8
Orissa 61.8 72.6 50.2 28.9
Punjab 2.1 16.1 8.4 2.9
Rajasthan 24.1 52.1 35.6 20.7
Tamil Nadu 32.5 40.2 20.9 6.5
Uttar Pradesh 37.4 44.9 36.6 19.2
Uttarakhand 64.4 65.7 46.5 25.5
West Bengal 25.7 28.5 10.4 13.0
All India 33.3 39.9 31.4 16.0
Poverty Measures
Head Count Ratio (HCR),
Poverty Gap (PG) and squared
poverty gap (SPG)



n
m
HCR =
Poverty Measures
Head Count Ratio (HCR), Poverty Gap
(PG) and Squared Poverty Gap (SPG)

( ) ) (
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SPG
m= no. of poor population, n = total population,
z= poverty line, yi =income of i-th person
Alternative Poverty Measures
Head Count Ratio (HCR): proportion of total
population that falls below poverty threshold
income or expenditure. Based on either national PL
or dollar-a-day PL.
Poverty Gap Index (PGI): unlike HCR, it gives us a
sense of how poor the poor are. It is equivalent to
income gap below PL per head of total population,
and expressed as a percentage of the poverty line.
Squared Poverty Gap index (SPG): Adds the
dimension of inequality among the poor to the
poverty gap index. For a given value of the PGI,
population with greater dispersion of income
among poor indicates a higher value for the SPG.

Monotonicity Axiom: Not satisfied by HCR
Transfer Axiom: Not satisfied by HCR and PGI
Incidence of poverty affected by two factors:

(1)Growth in average income (2)Distribution.

Poverty reduction fast when average income rises
and inequality falls.

Fluctuations in poverty incidence till early 1970s
primarily due to slow per capita income growth.

Incidence of poverty started to fall after mid-1970s
when there was marked acceleration in per capita
GDP growth rate to above 3 per cent.



Lorenz curve: a curve that represents relationship between
cumulative proportion of income and cumulative proportion
of population in income distribution by size, beginning with
the lowest income group.
If perfect income equality, Lorenz curve coincides with 45-
degree line.

Gini coefficient: a commonly used measure of inequality;
ratio of area between Lorenz curve and 45-degree line,
expressed as a percentage of area under 45-degree line.




If perfect equality, Gini coefficient takes value 0
If perfect inequality, equals 1.
Internationally, Gini coeff. normallyranges between 0.25 & 0.7



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QC QC P L
From Household income/expenditure Survey
Compute data on each households income/expenditure
Rank the families from lowest income to highest income.


% of Pop.
(Pi)
% of Inc. Cumulative
% of Pop.
Cummulative
% of Income
(QCi)
10 3.3 10 3.5
10 5.3 20 8.6
20 13.3 40 21.9
20 17.0 60 38.9
20 22.7 80 61.6
10 14.6 90 76.2
10 23.8 100 100
Lorenz Curve
Cumulative % of Population
Cumulative
% of Income
X=Area of the hatched region
Gini coefficient = [X/50]100
Average Annual Growth Rates: Real GDP

1951-2 to
1980-81
1981-82
to 1990-
91
1991-92
to 1999-
2000
2000-01
to 2006-
07
2002-03 to
2006-07
(Tenth Plan
Period)
Agriculture
2.6 3.8 3.0 2.5
2.2
Industry
5.3 7.0 5.7 7.8
9.1
Service
4.6 6.7 7.9 8.5
9.4
GDP (total)
3.6 5.6 5.8 6.9
7.6
Per Capita GDP
1.4 3.4 3.6 5.2
6.0

Neglect of agriculture after economic reforms even as
overall economic growth accelerated
Average Annual Growth Rate in Per Capita GSDP
Arranged by 1993-94 Per Capita GSDP
0
2000
4000
6000
8000
10000
12000
14000
16000
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Per capita Income 1993-94 Growth Rate 1993-2004
Coefficient of Variation in Per Capita GSDP
among 16 Major States
0.3100
0.3200
0.3300
0.3400
0.3500
0.3600
0.3700
0.3800
0.3900
0.4000
1993-
94
1994-
95
1995-
96
1996-
97
1997-
98
1998-
99
1999-
00
2000-
01
2001-
02
2002-
03
2003-
04
2004-
05
States


Urban MPCE as % of Rural MPCE
1993-94 2004-05
Andhra Pradesh 141.5 173.9
Assam 177.9 194.8
Bihar 142.9 166.9
Chhatishgarh 180.6 232.9
Gujarat 149.8 187.1
Haryana 123.1 132.3
Himachal Pradesh 212.8 174.2
Jharkhand 190.7 232.0
Karnataka 157.2 203.3
Kerala 126.7 127.4
Madhya Pradesh 155.7 205.9
Maharashtra 194.1 202.1
Orissa 183.2 189.7
Punjab 118.0 156.6
Rajasthan 132.0 163.1
Tamil Nadu 149.0 179.4
Uttar Pradesh 141.2 151.2
Uttaranchal 166.7 158.5
West Bengal 169.9 200.0
All India 163.0 188.2
Urban-Rural Differences in Mean Consumption Expenditure
Factors affecting Poverty
Poverty depends on per capita household income
which in turn affected by employment, wage rate,
land productivity, industrialisation, expansion of
service sector and other general growth and
distribution factors

Special role of
per capita agricultural income
Employment and real wage rate

Inflation rate and relative food prices

Government expenditure
Per capita development expenditure
Social sector expenditure








Indian growth process since 1950s more or less
distribution neutral till 1980s.
Importance of a critical minimum steady growth in per
capita income for poverty reduction.
Inequality increased in recent years after reforms.

Income elasticity of poverty has fallen.
A given growth will be associated with more limited gains
for the poor
Higher growth might more than compensate the adverse
effect if fall in elasticity is small.
Reasons for weak participation of poor: limited access to
education, land, credit; low agrl growth, underdeveloped
infrastructure such as irrigation, roads, electricity in
poorer states
Demographic Dividend
AS fertility drops, ratio of workers to non-
workers rises.
Provides an window of opportunity provided
potential workers acquire skills and find
productive employment
About a fourth of poverty reduction could be
attributed to demographic factors in India
Right economic policies critical, otherwise the
scenario could turn out to be demographic
liability
Dividend for 2-3 decades only since proportion
of older population would eventually increase
increasing dependency ratio again
Long term scenario for Poverty
Long term growth prospects fairly optimistic: India likely to
continue among the fasted growing economies, BRIC to
dominate world economy
India might surpass Japan and Germany in terms of total
size of the economy, yet its per capita income would be less
than world average for a long time
Poverty could be reduced faster provided inequality is under
control, labour intensive activities must grow, removal of
rigidities in land and labour market critical for reallocation
of resources
Government can afford to devote more resources for poverty
removal programmes: wage employment (NREGA) or self
employment type (SJSY).
Thank You