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Matching a measure to its meaning by Ashima Goyal

Statistics can abet illusions, unless properly understood and used. The debates on poverty line and budget deficits reflect a lack of understanding of the meaning and purpose of these measures.

India has been recently witness to furious debates on measures of poverty and budget deficits. Any measure can be used only for the purpose it is designed for. The debates in the present cases were furious, because preconceptions and emotions were triggered unrelated to the meaning of the measures. Let's first consider the one relating to the poverty line.

THE POVERTY LINE

A poverty line has a number of uses.

First, it defines a certain minimum consumption basket. When India was very poor, this minimum was specified in terms of the food necessary for survival, with the poverty line being the income required (after adjusting for inflation) to be able to afford a daily energy consumption of 2,100-2,400 calories.

Second, it can also define a minimum socially acceptable standard of living. This is a relative concept, rising with the general standard of living of a society. Therefore, the poverty line is higher in more affluent countries. In the US, where low-income families spend only about a third of their income on food, the poverty line is defined as three times the income required for attaining a minimum nutrition standard. The current international standard is $1.25 per day, adjusted for the purchasing power of the particular local currency.

In India, too, as per capita incomes have gone up, there has been a rise in socially acceptable minimum standards. The Tendulkar Committee (TC), accordingly, recalculated the poverty line to include a basic level of shelter, clothing, and medical expenditure, apart from just basic calorific requirements. The Government's recent poverty measure estimated Rs 28 per day per person in urban areas and Rs 22.50 in rural areas as sufficient to reach this new minimum standard, after correcting for inflation. These values are quite close to the purchasing power parity of the Indian rupee compared to the dollar.

A third purpose of a poverty line is to measure now many rise above it over a period of time. For this, the definition of the poverty line should not change across the two points of time being compared.

Based on this, the Planning Commission correctly used the TC definition to estimate that the poverty ratio registered a decline from 37.2 per cent in 2004-05 to 29.8 per cent in 2009-10. A higher poverty line may have yielded a larger percentage of the poor; but it would still have shown a decline over time.

The error that the Planning Commission made was in framing, by using the norm of expenditure per person per day. Indians largely think in terms of monthly family budgets. While the daily rupee figure may seem absurdly low, when translated into a monthly budget for a four person family, it works out to a more tolerable Rs 4,000-plus. That is, no doubt, still very low; but even the very poor in India do manage with such incomes. Also, pooling generates more purchasing power.

The other reason for the chorus of criticism against the Planning Commission's estimate is that socially acceptable standards of living itself have gone up in a more affluent India. The poor should be able to not only afford facilities that help them to rise above poverty, but also avoid the shocks that push them below poverty. That means training and education for their children, and being covered by various types of insurance, including medical.

The fourth use of a poverty line is as an entitlement for government programmes that deliver the above types of support. Since those hovering just above a minimum standard also stand the risk of being pushed below it, it is legitimate that entitlements should be made available for a larger percentage.

The TC estimate, to be fair, is not the basis for deciding on entitlements; so it cannot be criticised on that basis. Also, a new panel is supposed to work out a new socially acceptable minimum measure. The objective of better governance is to give quality public goods such as water, air and sanitation that are essential for good nutrition. We are all poor, when these are lacking.

GOVERNMENT DEFICITS

The post-Budget debate on the deficits has been equally misplaced, with deficits trashed regardless of their economic implications. The fiscal deficit measures the net demand from the Government — its total expenditures in excess of revenue. It is also its borrowing requirement. There is some scope for the latter since domestic savings here are high.

A deficit is worrying only if it worsens excess demand and is so large that government's debt is unsustainable. At the current juncture, there is no excess demand, as output is below potential.

Second, the government's own debt is reasonable, and given India's higher trend growth, is certainly not unsustainable. The Central Government's finances, too, had improved with the fiscal responsibility legislation. But every such law would have an escape clause. The global financial crisis and the oil price shocks following that were adequate reasons for triggering these clauses. The current levels of deficit are not worrying, if the government recommits to a new fiscal consolidation path, which it has in the recent Budget.

Taxes have been raised, expenditure growth has fallen, compared to the levels it had reached during the crisis time on account of various fiscal stimulus measures. There is also an attempt to increase the share of capital expenditure, which improves supply response.

The lesson from all this is: Statistics can abet illusions, unless properly understood and used.

(The author is Professor of Economics. IGIDR, Mumbai. blfeedback@thehindu.co.in)