There are no shortcuts to growth, poverty reduction

According priority to growth does not imply excluding the poor but it is important to identify those eligible for subsidies, writes NK Singh.
By NK Singh
UPDATED ON AUG 04, 2014 11:26 PM IST

Parliament has just approved the budget proposals for the current year. Work will soon commence for the next budget, perceived to be the real first budget of the NDA government. During the discussions, finance minister Arun Jaitley did seek to dispel any hiatus between pro-poor and pro-business policies. He candidly accepted that the government was both pro-poor and pro-business. This is almost as saying that there is no inherent contradiction between the approach of economists Jagdish Bhagwati and Arvind Panagariya and the contention of Amartya Sen and Jean Drèze. For enabling governments to pursue policies that would support anti-poverty programmes resources are necessary and that is why growth matters. In Why Growth Matters, Bhagawati and Panagariya have made a compelling case that “only one strategy will help the poor to any significant effect — economic growth, led by markets, overseen and encouraged by liberal state policies”.

Unfortunately, the pro-poor policies in India have become increasingly synonymous with the continuation of high subsidies. This oversimplifies the anti-poverty strategy, which must be more broad-based to secure improved access to and quality of public health, education, sanitation and universal availability of toilets, to mention a few. Provision of these public goods needs significant resources contingent on high growth.

It is, however, well accepted that growth is a necessary but not a sufficient condition for poverty elimination. The latter is dependent on priorities of resources allocation, the pattern of growth, the efficacy and quality of public delivery systems and an independent audit to evaluate outcomes. On the other hand, a pro-business policy implies an improved regulatory framework conducive to private investment, improving the ease of doing business, enhanced total factor productivity and efficiency of financial intermediations leading to high growth. According priority to growth does not imply excluding the poor; many competitive choices in selecting strategies are based on false contradictions. However, the overarching theme in any debate on subsidy rationalisation is to protect the poor and ensure what the minister said “does not become unquantifiable amount given to unquantifiable people”. This raises the question of identifying the eligible.

This government has ended the controversy on Aadhaar. It will push with speed for its pan-Indian coverage. Along with financial inclusion through provision of two bank accounts for every household, this will enable direct benefit transfers. Nonetheless the identification of the ‘eligible’ will need to address the overarching theme of an acceptable poverty line.

Poverty is defined in varied ways in different countries. Several countries in Europe and the US adopt a relative income approach. This implies that an increase in the income of the richer class will automatically set the poverty line higher with the increase in the national average income. There is merit in the argument that the definition of poverty should change with the times depending on changing consumption patterns and general living standards. But, there is a valid contention that poverty lines based on this approach will not allow tracking changes about the condition of the poor over time.

In India, the poverty line has been traditionally determined on the basis of minimum acceptable calorific intake. India’s official poverty line was fixed in 1979 by a task force that defined this as per-capita expenditure level to meet the per capita calorie requirement of 2,400 kcal in the rural areas and 2,100 kcal in urban areas. The Tendulkar Committee (2009) moved away from the calorie anchor to provide a uniform ‘poverty line basket’ for both the rural and urban population. The latest report by the Rangarajan committee has retained consumption expenditure as the basis for determining poverty, but it has added some additional parameters of expenditure in estimating the poverty line. Notwithstanding the changes in the definition of poverty several key issues remain unsettled.

First, Below Poverty Line as a measure has serious limitations on account of inclusion and exclusion errors. In the absence of an acceptable methodology on poverty estimation, the debate on poverty line remains far from resolved. Going by the existing methodology, income inequality will be higher than expenditure inequality, since the National Sample Survey Organisation doesn’t collect data on incomes there are several problems in computing income inequality. The need to revisit a consumption or income-driven approach, with price indexation, raises the broader issue of redrawing the poverty line.

Second, while there are valid concerns on the poverty line, the subject is far more complex than commonly appreciated. The implications of poverty lines that are significantly higher than those currently in use has significant implications for public finances. Since entitlements are contingent on this, a higher threshold would mean that the subsidy outgo and the money spent on anti-poverty programmes would be spread over a much larger number of people and thus would have less impact in tackling poverty. Similarly, identifying and targeting subsidies is impossible if these benefits remain delinked from the poverty line and become universal as we have in the case of food, fuel and fertiliser subsidies. This calls for a practical and independent assessment and proper identification for rationalising the subsidy burden. Another way is to increasingly move to more demand-driven programmes, accompanied by capacity-building to make sure that there is limited scope for exclusion.

Third, India’s progress on some key socio-economic parameters such as literacy, malnutrition, infant mortality, access to drinking water do not match the poverty reduction record that the present methodology might yield. A minimalistic approach which does not recognise new patterns of consumption and changing dietary habits would be misplaced. Any poverty estimate needs to recognise this inherent dynamic. Mitigating the multiple deprivations which guarantees a decent standard of living consistent with human dignity goes beyond the issue of subsistence. Improved social and physical infrastructure, use of improved delivery systems and using modern technology for cash transfer will make a significant difference.

All this of course is contingent on more growth and business which enhances revenue, improves life quality and creates gainful employment based on enhanced skills. There are no shortcuts and it is a long haul.

NK Singh is a member of the BJP and a former Rajya Sabha MP

The views expressed by the author are personal

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