By Nitin Pai
25th July 2013
The undesirable consequences of using a macroeconomic indicator as a criterion for entitlement.
Earlier this week, the UPA government’s Planning Commission announced that there has been a significant reduction in poverty in India over the last decade—essentially, during the UPA’s two terms in office—from 37.2% in 2004-05 to 21.9% in 2011-12. In other words, while there were 407.1 million poor people in India in 2004-05, the number had come down to 269.3 million by last year. The Planning Commission uses the Tendulkar method (see Rathish Balakrishnan’s explainer on the brief history of poverty lines in India) but it is quite likely that poverty will show a decline regardless of the method adopted to measure it. This is good news.
What was meant to advertise the UPA government’s achievement has actually put it in a spot. How can the UPA government now justify providing deep, open-ended food subsidies to over 822 million people? Does subsidising food for the non-poor, at tremendous cost and contingent liability to the exchequer, have the same justification as delivering essential food to those who absolutely cannot afford it? Not quite. If the Opposition parties mount a political challenge along these lines, it is unlikely that the UPA’s dubious poverty arithmetic will prevail. If.
Let’s consider a broader issue. What is a poverty line good for? Whatever the formula used, a poverty line provides a useful estimate of the level of poverty in a population. How it changes tells us whether public policies are helping or hindering poverty alleviation. The rate of change allows us to compare—albeit in hindsight—which set of policies are more effective in raising incomes. As the Planning Commission’s figures show, poverty declined at an average rate of 0.74% between 1993-94 and 2004-05, and at 2.18% between 2004-05 to 2011-12. This correlates with the higher economic growth rates achieved in the 2000s compared to the 1990s. This is consistent with the empirical observation that economic growth lifts people out of poverty.
What the poverty line is not good for is as a selection tool to identify beneficiaries for entitlements. This is because it is practically impossible to estimate whether a particular person earns more or less than the given poverty line income. This fact is lost on many policymakers and intellectuals—just how does one assess whether a person earns less or more than Rs 33 a day? There are no objective methods to test and verify incomes—no financial records, salary slips, bank accounts and so on. So we are left with self-declaration. However, if people know that those deemed below the poverty line will receive benefits from the government, they are likely to declare themselves poor. To take one example, in 2006, 91% of the families in Karnataka state declared themselves below poverty line.
The Planning Commission can set up expert groups that propose formulas involving automatic exclusion, automatic inclusion and scoring indices. Such methods only create an illusion of accuracy while creating a political economy—read corruption and political patronage—for the procurement of Below Poverty Line (BPL) cards. Note also that once a person acquires a BPL card, she is BPL for life. Such is the bluntness of poverty line-based schemes that they presume that a person, once deemed poor, will remain poor for life. This makes the BPL card even more valuable.
Moreover, for the sake of argument, even if we assume that it is possible to perfectly assess incomes, is it sensible to deny an entitlement to a person earning Rs 34, because the poverty line is set at Rs 33? What about Rs 35? Rs 36? Where do we stop? Any number you pick is arbitrary.
What this means is that while poverty lines are useful as macroeconomic performance indicators, they are useless when used as ‘entitlement lines’. If budgets were infinite, we could live with the leakages and inefficiencies in the knowledge that those who really deserve assistance are not deprived. However, budgets are not infinite, which means that public funds end up in the hands of undeserving people, while there isn’t enough money for essential public goods like education, health, security, roads, electricity and communications. Look at the state of our government schools, hospitals, police stations and roads and ask why they are in such a decrepit condition. It is politically suicidal for any government to cut back on subsidies and entitlements. It is fairly easy, in comparison, to cut down on capital expenditure on public goods.
That’s why misusing the poverty line as an entitlement line is counterproductive—it slows down the rate at which poverty declines.