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Why the economics Nobel winner’s work matters to India

analysis Updated: Oct 13, 2015 18:27 IST
Gaurav Choudhury
Gaurav Choudhury
Hindustan Times
Angus Deaton

Buying or spending behaviour remains one of the most significant markers to gauge human consumption patterns. In modern economic pedagogy it is almost always a given that at extremely low levels of income, consumption serves as a good enough approximation for spending. This line of thinking is predicated upon the assumption that individuals at the lowest end of the income scale are left with no or little surplus after accounting for the barest minimum needed for subsistence survival. This is the reason why most poverty estimations across the world, particularly for the low and middle income group countries, are primarily based on calorie-based consumption methods.

The problem with this axiomatic “consumption is equivalent to spending” approach is its rather static characteristic. This is what Angus Deaton , the Scottish-born Princeton professor who on Monday won the 2015 Nobel Prize in economics, challenged and sought to remedy through alternative analytical tools. Over the past three decades, economists and social scientists have added a substantial body of literature to Deaton’s premise, which, in its simplest form, signifies the following: spending patterns or how consumers spend their money are a function of their income and, therefore is a key determinant of demand and prices.

Read | Nobel laureate Angus Deaton changed India’s approach to poverty

Deaton’s now famous AIDS or Almost Ideal Demand System is of particular relevance to India where economists are struggling to ensure growth while keeping prices in check. The worry is that food prices are revealing a new pattern reflecting the challenges of a growing economy. As the tens of millions of people shift to higher standards of living, the focus is changing from basic needs of nutrition such as rice and coarse grains to more aspirational products like protein rich eggs, meat and fish and services like mobile phones, education and transport. This is sustaining demand in an economy in which supply shortage was the key driver of inflation in the past.

The critical question is that while as incomes cross an inflection point, this pattern changes and protein-rich foods begin to dominate carbohydrate sources, have these people moved out of poverty? Not quite, and this lies at the core of Deaton’s research. His pioneering research during the 1990s ran contrary to mainstream thinking of the time where macroeconomic policies served as the main guide for poverty-alleviation programmes. Deaton, in many ways, is an outlier—an empiricist in the club of welfare economists and choice theorists. There could be fallacies in “aggregate data” that rely on average indices of household surveys, particularly for countries such as India. Data on individual spending is critical to capture the essence of layers of customers that spread across the income scale.

The Nobel Prize for Deaton is also perhaps a reminder to governments about the state’s welfare role, particularly in shaky times. Right to live is a right to live with human dignity and access to food and essential services such as health and education form the core of this dignity. Ideal “welfare economies” like the Scandinavian nations have accomplished this redistribution, but with very high levels of taxes for the richest class. The challenge is the state, if it has to pick the tab, needs to earn more. The jury is still out on how India and similar development latecomers can draw up the ideal resource matrix to handhold those at the bottom of the pyramid. Deaton’s work can throw up a few handy clues.