India’s Poor Will Not Be Wished Away

Poverty remains deeply entrenched in India and appears to have increased significantly, writes Ashoka Mody, despite rosy news from India’s first consumption figures in over a decade.

The late, sharp-witted economist Michael Mussa, my first boss at the International Monetary Fund, once told me that every statistic must pass the “smell test.” I recalled this sage advice recently when Indian authorities published the first driblets of a consumption survey in over a decade. The numbers stink.

Economists have long maintained that India’s official GDP data overstate growth. Before the September 2023 G20 summit in New Delhi, the Indian National Statistical Office issued a particularly brazen overestimate. The last decennial census was in 2011. A survey highlighting stubbornly high malnutrition and anemia cost the survey’s director his job.

The last comprehensive consumption-expenditure survey in 2012 showed 22% living in poverty. The government junked a 2018 survey when leaked data indicated an increase in the poverty rate. Not surprisingly, the new partial consumption figures generated much excitement. Hastily, Surjit Bhalla, India’s former executive director at the IMF, and economist Karan Bhasin proclaimed – under the Brookings Institution’s imprimatur – that extreme poverty has been “eliminated.”

But while such misuse of statistics will amplify the India hype in elite echo chambers, poverty remains deeply entrenched in India, and broader deprivation appears to have increased as inflation erodes incomes of the poor.

Measuring poverty is a complicated task, the essence of which lies in establishing a poverty threshold. The World Bank, which initially set the international poverty line at $1 per day in 1990, updated this figure to $1.90 in 2011 to account for inflation. Only those who cannot afford to spend $1.90 per day are classified as “extremely poor.”

For India, however, the $1.90 threshold represents below-subsistence-level consumption. As economists Shaohua Chen and Martin Ravallion have noted, it allows for minimal food consumption and little else. In 2012, $1.90 translated to a meager 30 rupees a day in purchasing-power-parity terms – barely enough for two basic meals, according to the poverty expert S. Subramanian.

In analysing the recently released consumption-expenditure data, Bhalla and Bhasin seem to have converted the $1.90 threshold into rupees at the IMF-reported PPP rate of 22.9 rupees per dollar. Consequently, their analysis categorizes people as poor only if they cannot spend 45 rupees a day.

This approach is tantamount to wishing away poverty. Assuming an average annual inflation rate of 6%, as stated in the government’s press release, the set of goods that cost 30 rupees in 2012 would now cost at least 58 rupees. Moreover, low-income households face diabolical inflation inequality – higher-than-average inflation rates due to the type of goods they buy, their limited mobility (which leaves them at the mercy of local monopolists), and their inability to buy in bulk.

Regrettably, Indian authorities do not provide inflation data segmented by household income. If the annual inflation were 8.5% for the bottom half of Indian households, they would need roughly 80 rupees per day to cover their basic needs. In that case, India’s poverty rate would be around 22%, essentially the same as in 2012.

Setting the bar slightly higher underscores the grim reality. In 2014, a committee led by Chakravarthi Rangarajan, the former governor of the Reserve Bank of India, concluded that the appropriate poverty line for rural regions was 33 rupees a day – close to the World Bank’s line – while urban residents required at least 47 rupees per day to cover commuting and housing expenses. Subramanian emphasised that the urban poverty line was a gross underestimate; he estimated a daily expenditure of 88 rupees to avoid severe deprivation.

Adjusting the Rangarajan and Subramanian estimates using plausible current inflation rates leads to a stark conclusion: Urban poverty rates range between 40% and 60%, which means that 30-40% of all Indians are poor. This is likely conservative, given the sharp increase in education, transportation, and housing costs, as well as out-of-pocket medical expenses. With numerous parents forced to choose between food and their children’s education, is it any wonder that the government feels obliged to provide free supplementary grain rations to 60% of the population?

High, possibly rising, poverty can be partly attributed to the 2016 demonetisation that nullified 86% of India’s currency and to the haphazard implementation of the Goods and Services Tax of 2017, both of which caused huge distress to the vulnerable.

The COVID-19 pandemic delivered another harsh blow, causing millions of Indian workers to revert to low-productivity agricultural jobs. Today, 70 million more Indians work in agriculture than in 2018, owing to the scarcity of non-agricultural job opportunities, which are mostly confined to financially and physically precarious sectors such as construction, street vending, security, and domestic work.

Given the significant hardship faced by millions of Indians, the pre-election release of partial consumption data invites suspicion. And the Bhalla and Bhasin declaration of the end of poverty borders on the malicious. Moreover, their assertion that consumption inequality has declined sharply is risible: wealthy Indians do not report their $400 designer sneakers, Lamborghinis, or lavish parties to government surveyors.

The gap between India’s rich and poor is startling. Consider the $120 million pre-wedding celebrations for tycoon Mukesh Ambani’s son: the lad wore a $1 million watch, a superstar received $6 million to perform, and the Indian aviation authority temporarily cleared a nearby airport to fly in international celebrities.

Meanwhile, the lack of comprehensive consumption – and inflation – data makes it impossible to get an accurate picture of Indian poverty. Sadly, the government’s strategically released data and cherry-picked analysis both continue to reek.

Ashoka Mody, a visiting professor at Princeton University, previously worked at the World Bank and the International Monetary Fund. He is the author of India is Broken: A People Betrayed, Independence to Today (Stanford University Press, 2023).

Copyright: Project Syndicate, 2024.www.project-syndicate.org