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LATEST NEWS UPDATES | GOVERNMENT AS A SERVICE by Ashok V Desai

GOVERNMENT AS A SERVICE by Ashok V Desai

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published Published on Oct 20, 2009   modified Modified on Oct 20, 2009


If a country’s national income is rising, someone in the country must be getting richer. Unless income distribution is changing, all income classes must get richer at about the same pace. If a constant standard of living is defined to classify everyone below it as poor, then as incomes rise, the proportion of the poor so defined must shrink, eventually to zero. If income grows 5 per cent a year and income distribution remains unchanged, the income of all classes will double in 15 years. If it grows at 10 per cent, it will double every eight years. This is simple, exponential arithmetic.

A rise in incomes does not lead to a proportional fall in poverty. But if we know the income distribution and can assume that it will remain constant, it is possible to predict when a particular fractile would cease to be poor. Hence it would be possible to predict the percentage of the population below the poverty level at any future point of time. If incomes rise and distribution does not change, the proportion of the poor in population will fall progressively with time. So if it is the objective simply to reduce poverty, it requires no special policy. Growth will not remove poverty amongst those with inadequate earning power — the unsupported young, old, disabled, mentally disturbed or ailing. They would require special subsidies. But the rest would cease to be poor at some point in time.

All organizations that have measured poverty with a constant poverty level have confirmed the fall in the proportion of the poor. According to the World Bank, the proportion of Indians living on less than $1 a day, equal after correction of price levels to Rs 17.20 in towns and Rs 11.40 in villages in 2005, fell from 42 per cent in 1981 to 24 per cent in 2005. The proportion living on less than $1.25 a day fell from 60 per cent to 42 per cent in the same period. Similar calculations using an Indian ‘expert group’s’ poverty line give a fall from 54.9 per cent in 1973-74 to 19.3 per cent in 2006-07.

This decline has nothing to do with ‘trickle-down’. The idea behind trickle-down is that the rise in incomes goes first to the rich and then trickles down to their servants, hangers-on, suppliers and so on. The reason why poverty goes down with growth is that incomes of all earners rise in relation to prices, or conversely, prices fall relatively to incomes. And the reason this happens is that a rise in income per head is by definition a rise in productivity per head. So with growth, the cost of inputs per unit of output falls; and if the share of wages in income does not fall, then income per unit of labour will rise. In other words, wages will buy more goods and services.

They will not buy more of all goods and services to the same extent. The ratio of prices of some goods to income will fall more than of others, and people will consume more of the goods whose relative prices fall more. Mass production and substitution of cheap plastics for expensive leather have made footwear much cheaper; so while sixty years ago most poor people went barefoot, most have some footwear today. On the other hand, the cost of middle-class housing close to town centres has gone up much more than incomes. So a higher proportion of people live far from town centres and from their place of work; and those who can afford accommodation on Marine Drive in Bombay, in Jor Bagh in Delhi or in Alipur in Calcutta today are much richer, relatively, than sixty years ago.

People will not consume more only of those goods and services that have become cheaper relatively to income. They save money on what becomes cheaper, and can transfer those savings to other goods and services. So as they get richer, they will consume more even of goods that have become more expensive.

The government runs many aid and relief programmes only for poor people; for them it has to identify the poor. The ministry of rural development does so every five years. It did so first in 1992. It defined the poor as those belonging to families getting less than Rs 11,000 a year. It got a number far larger than Planning Commission’s estimates. Obviously, taking family income led to inclusion of small non-poor families with income below Rs 11,000 and exclusion of large poor families with income above Rs 11,000; the first effect predominated. The criterion should have been in terms of income or consumption per head.

So in 1997, the ministry adopted the Planning Commission consumption limit. And it excluded families with more than 2 hectares, or a pucca house, or expensive consumer durables, or a member earning over Rs 20,000 a year. The new criterion naturally led to a figure for the poor lower than the Planning Commission estimate.

That was too low for the ministry. So in 2002, it gave families marks on each of 11 criteria such as land holding, quality of house, number of clothes, number of meals a day, type of latrine, consumer durables etc. That gave each family a score. The ministry asked every state government to choose a cut-off score which would give them families below poverty line equal to the number estimated by the Planning Commission. Many states chose far more families than they were supposed to, so there was mayhem.

So in 2007, the ministry appointed a committee to define the poverty level. This committee, chaired by N.C. Saxena, suggests exclusion from the poor of those with twice the average district landholding, a three- or four-wheeler, farm equipment, an income-tax payer or someone earning over Rs 10,000. It proposes automatic inclusion of tribals, extremely scheduled castes, beggars, households headed by minors, single women, disabled people or bonded labourers, and homeless households. The rest should be given marks based on caste or tribe, certain occupations, lack of education, certain ailments, and aged heads of household. The scores should be so used as to count half the population as poor.

Thus in the world of rural development policy, poverty has been transformed from simple lack of purchasing power to a many-headed animal. The more the heads, the greater the scope for variation and dissension; nine of the committee’s 17 members wrote personal notes of dissent. The poverty discourse has turned into a tower of Babel.

The poverty community never even mentions that the resources of the state are limited and that the personnel the government uses for identifying and subsidizing the poor are extremely corruptible. A poor country will have many poor people; a state that tries to abolish poverty with subsidies is a Sisyphus. It cannot abolish them; but it can incidentally generate enormous corruption. The national rural employment guarantee programme has done so; a study done by Anil Sharma for National Council of Applied Economic Research has provided evidence. The only people the government should try to help are the destitute and vulnerable — those who lack enough earning power. For the rest, it should maximize productivity growth, for that is what removes poverty.

The Telegraph, 20 October, 2009, http://www.telegraphindia.com/1091020/jsp/opinion/story_11634546.jsp
 

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