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Richer India makes the world poorer: Economist by Rukmini Shrinivasan

Angus Deaton, the Princeton economist regarded as world's foremost authority on cross-country income data, has cast serious doubts on the World Bank's last upward revision of global poverty figures and India's statistics are at the centre of the storm.

The world became poorer as a result of a combination of India's economic growth and its low poverty line, Deaton, who is president of the American Economic Association, said in his presidential address to the AEA in Atlanta, in the US last month. India's extremely low poverty line was so strongly depressing the average poverty line for poor countries that India's exit from this group because of its economic growth resulted in the average rising.

The international poverty line is calculated by taking the national poverty lines of a group of the poorest countries in the world, converting them to US dollars by using a Purchasing Power Parity (PPP) index, and taking a simple average. For its latest 2008 revision, the bank for the first time changed the set of poor countries used, since new data was available through its International Comparison Program (ICP), and
India was dropped on account of its growth. The new poverty line was updated from $1.08 per day at 1993 prices to $1.25 per day at 2005 prices. This raised the number of poor by 400 million to 1.4 billion.

Since India's poverty line is low compared to its living standards, as Indian average incomes rose and it moved out of the group of selected countries, the global poverty line rose and consequently so did the number of persons defined as poor, Deaton showed.

"In effect, India and the world have become poorer because India has become richer!" said Deaton in his address. If Guinea-Bissau, which has a much smaller population but a high poverty line relative to its living standards were to get richer and go past the cut-off line, the global poverty line would decrease as would the number of poor. If poverty falls in any country included in the counts, and increases nowhere else, global poverty should fall. The current procedure does not satisfy that basic requirement. Nor does it satisfy the property that global poverty should fall by no more than the fall in poverty in individual countries, Deaton observed.

An alternative procedure is to calculate the global poverty line by averaging the poverty lines of all countries, but after weighting them for the number of poor in each country. By this method, the Indian poverty line would receive about a third of the total weight, instead of being completely absent from the current $1.25 per day poverty line. Another alternative Deaton suggests is that the Indian poverty line be converted to dollars and used as the global poverty line, provided that the line does not shift if India gets richer.

Nobody ever said that India had to be in the reference group of countries forever, countered Martin Ravallion, the director of the development research group of the bank and one of three authors on whose research the 2008 revision was based, in an email to TOI.

The new sample of countries implies a higher international line, but is more representative of the developing world, Ravallion added. "As long as we agree on the principle that this line should be representative of the lines found in low-income countries, we must accept that poverty is higher than we thought by those standards," Ravallion reiterated in his email.

None of this necessarily means that poverty is improving in India. Since Deaton and the bank are discussing global poverty estimates, they do not get into the veracity of the Indian poverty line. In fact, both admit that global comparisons are mainly of significance to international NGOs, while national policy is based on country-level estimates prepared by national agencies.

At home, following a tortuous history of arguments over the Indian poverty line, the Suresh Tendulkar committee in its report to the Planning Commission two months ago suggested a significant upward revision of India's low poverty line from Rs 356.30 (rural) and Rs 538.60 (urban) per capita per month to Rs 446.68 (rural) and Rs 578.80 (urban) per capita per month for 2004-5. This is about $1.17 at 2005 PPP, closer to the World Bank's $1.25 figure. This implies that had India updated its poverty line earlier, the global poverty line might have been reset at $1.25 much earlier instead of being recently revised.