Thursday, April 12

Is a Higher Poverty Line justified? May be Not!

The announcement of poverty line for India pegged at Rs 32 per day in urban areas and Rs 26 for rural areas based on June 2011’s price index had gathered much attention and criticism itself. The planning commission has taken another bold step to revise it further downward to Rs 29 for urban areas and Rs 22 for rural areas on March 19. 

The Planning Commission has cited that there is a decline in poverty level from 37.2 percent in 2004-05 to 29.8 percent in 2009-10. Even the absolute number of poor in the country has fallen. While the critics see this as an excuse from the government – already struggling to meet its expenditures - to avoid serving the poor by providing subsidies.

But there is an economic sense in what the planning commission or the government seems to be doing.

Let’s assume that the entire daily income of the country is Rs 100 and is earned by 5 people as follows:
A: Rs 50
B: Rs 20
C: Rs 15
D: Rs 10
E: Rs 5

The government has limited resources to help the poor and wants to decide the best policy for the poor.
Since D and E are the most poor, if the government draws the poverty line at Rs 10, the government will be able to help them the most – the 2 poorest people in the country.

However, if the government draws the poverty line at Rs 15, it will have to deploy the same resources (which is limited) for three people (C, D and E) instead of D & E. That means, the poorest i.e. E which has an income of Rs 5 will get less than what he would have got if the poverty line was at Rs 10.

Further, the government will have to balance out the resources to the needs of all C, D and E which may not be the same. That is E may require subsidised food grains but C may require job opportunities or skills. This will further reduce the help for E in terms of food subsidy.

However, the government will need to steadily re-look at the poverty levels every year and revise it upwards IF the income levels of D & E keep growing. Let’s assume that in 10 years, the income of each individual has doubled. Now, E would be earning Rs 10 while D would be earning Rs 20 per day. Only in such a situation should the government consider increasing the poverty level to Rs 20 to continue to help the poorest in the country.

Unfortunately, the mass movements, criticism from all parts of the country (including poorly informed academicians, economists and politicians) have created enough pressure on the already burdened government to ensure that the Government bows down. The Planning Commission announced last year that Poverty Lines would no longer be used to cap or decide the number of beneficiaries in any government scheme.

References: Forbes India / Article: "Dialogues of the Deaf" by Udit Misra

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