A noticeable absence in the blitzkrieg of information on the economy periodically unleashed by the Union government over the past few years has been estimates of poverty. A measure of the progress made with respect to the reduction of poverty in India is crucial to an assessment of the state of the economy of India, known to harbour the world’s largest number of poor people. The last official estimate of poverty that is comparable over time, undertaken by the Planning Commission, is for the year 2011-12. The reason behind this state of affairs is that we have not had a household consumption expenditure survey for a subsequent year, such a survey being the ideal basis for poverty estimation.
Real consumption expenditure
A consumption expenditure survey was conducted by the National Sample Survey Office (NSSO) for 2017-18, but was rejected by the government as defective. Whether this decision was taken upon the advice of independent experts is not known, but a leaked version of the report showed that real consumption expenditure had fallen since 2011-12. At the time, a leading commentator on the economy had poured cold water on this possibility, stating that a decline in consumption is not possible when income (GDP) has grown.
In a prior article, I had at that time pointed out that a decline in consumption cannot be ruled out even in the presence of growth, for the income distribution could shift in a way that leaves those at the lower end of the distribution with less real income. The Union government’s rejection of the report for 2017-18 has meant that we have not been able to say anything about the trend in poverty over a whole decade.
Now two recent studies have made up for this lacuna, emerging as they do, separately, from the International Monetary Fund and the World Bank (henceforth Fund-Bank). The first is a working paper by Bhalla, Bhasin and Virmani and the other is by Roy and van der Weide. Both are in the public domain. It may be noted that as they are not based directly on a household expenditure survey, they arrive at estimates of consumption spending, and thereby poverty, by making somewhat strong assumptions, but I shall here accept their estimates at face value.
In the absence of official estimates of poverty in India for the past decade, these studies have naturally gathered attention. They give us an estimate of the poverty rate for five data points after 2011-12, poverty identified as per capita consumption of less than $1.90 per day, being the World Bank’s definition of “extreme poverty”. While the level of poverty estimated by these two studies varies considerably, with the one by Roy and van der Weide showing twice the poverty level estimated by Bhalla et al., they share a common feature, which is an accelerated decline in poverty since 2011-12, with the acceleration commencing in 2014-15 in the Bhalla et al study and in 2016-17 in the former.
Now, though growth in the economy has slowed progressively from 2017-18, accelerated decline in poverty as overall economic growth slows is neither implausible nor unprecedented. We know that the first significant dent in poverty in India occurred in the late 1960s, while growth had begun to slow from the mid-sixties. Indeed, the poverty decline had continued even as growth spluttered for a whole decade. This co-movement can be quite easily explained by the feature that as the economy-wide growth rate had slowed, growth in India’s agricultural sector permanently shifted to a higher gear following the Green Revolution i.e., we have seen a higher average annual agricultural growth ever since. With the workforce concentrated overwhelmingly in agriculture, it would be expected that wages and consumption of rural workers grew. Rural poverty declined steadily. A decline in urban poverty was to take longer, pointing to the historic role of agriculture in India.
Effects of demonetisation
It is difficult to see a surge in any one sector of the economy since 2016-17 that is comparable to the increase in the rate of growth of agriculture in the second half of the 1960s. Of course, theoretically there remains the income distribution shift to be considered, but it is difficult to imagine that the income distribution has shifted towards the lower income groups in this period, when the long-term trend is known to be the opposite.
Moreover, the demonetisation of 2016 is likely to have affected majority of workers adversely. While this is only a surmise, data from the Periodic Labour Force Survey show the unemployment rate rising sharply after demonetisation remaining higher than in most years of the decade, going all the way back to 2011-12. It is difficult to imagine an accelerated decline in poverty during such a phase.
At a webinar organised by the National Council for Applied Economic Research on June 9, I had asked the most widely known of the authors of the Fund-Bank studies his understanding of what drove the decline in poverty during the period under observation. His answer was that since inflation has been lower since 2014, real wage growth would have been faster, enabling greater consumption and thus an accelerated decline in poverty.
As a quick check, if not a test, on the plausibility of this hypothesis, I computed real wage growth starting 2015-16, the mid-point of the year from which the acceleration commences in each of the two Fund-Bank studies. The annual all-India real wage growth is computed for two groups of rural men, namely non-agricultural labourers and construction workers. The economy-wide inflation rate was adopted. All data were drawn from the RBI’s website. The resulting estimates show that for non-agricultural labourers, annual real wage rate growth was either negligible or negative in four out of the five years during the period 2015-16 to 2019-20, the end point for both the studies. For construction workers, annual real wage growth was negative in three years, barely positive in one year and slightly over 1% in only one year. There appears to have taken place little real wage growth since 2015-16.
This finding, that there has been very little real wage growth since 2015-2016, cannot be taken as a rejection of the Fund-Bank estimates of poverty. It does, however, underline the need for an explanation of the accelerated decline in poverty that they report.
We need to understand the drivers of poverty to undertake any kind of remedial action. But above all, we need reliable data provided by independent public bodies ring-fenced from potential political interference. That we once had this in India is seen from the Planning Commission estimates in 1997 that showed a slowing of the rate of poverty reduction soon after the reforms, resulting in a rise in the number of poor in 1993-94 for the first time in 15 years. The then government could have squashed the study, but to its credit it did not. Decades later, we seem to be backsliding.
In particular, the delay in this government’s undertaking of a household consumption expenditure survey leaves us unsure of the trend in poverty in India in recent years.
Pulapre Balakrishnan teaches at Ashoka University, Sonipat