Poverty & Inequality

A critical assessment of the Rangarajan Panel Report on poverty measurement

  • Blog Post Date 30 October, 2014
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An expert committee headed by C Rangarajan was appointed by the government to rethink poverty measurement in India. This column provides a critical assessment of the recently released report of the Committee. It contends that while the Committee has proposed some positive changes, it missed an opportunity to mark a significant departure from previous approaches to poverty measurement.

The recently released report of the Rangarajan Panel on poverty measurement has put the spotlight back on an issue that grabs media headlines in India periodically as one expert committee after another releases a new set of poverty lines. The Rangarajan Expert Committee was set up as a knee-jerk reaction to the adverse publicity generated by its predecessor, the Tendulkar Expert Committee, which proposed a new methodology for poverty measurement that generated a set of rural and urban poverty lines that were deemed to be too low. In this column, we provide a critical review of the methodology that the Rangarajan Committee has adopted, pointing out areas of strengths and weaknesses1.

The Rangarajan Committee: Terms of Reference and responses

The Terms of Reference (TOR) for the Rangarajan Committee provided room for a serious rethink of the concept of poverty in India. Some of the significant elements of the TOR are as follows.

  • “To …examine whether the poverty line should be fixed solely in terms of a consumption basket or whether other criteria are also relevant…”;
  • “To examine the issue of divergence between the consumption estimates based on the NSSO methodology and those emerging from the National Accounts aggregates”;
  • “To recommend how the estimates, as evolved above, should be linked to eligibility and entitlements for schemes and programmes under the Government of India”.

In our view, the Committee’s response to each of these has been disappointing. With reference to (a), there was a real opportunity to widen the concept of poverty to embrace multi-dimensional deprivation and poverty following the work of Amartya Sen (1985) and Mahabub ul Haq (1999) in setting up the Human Development Index (HDI) and, more recently, the work of Chakravarty and D’Ambrosio (2006) in defining multi-dimensional deprivation (MDD), and that of Alkire and Foster (2011) in defining multi-dimensional poverty (MDP). As the papers by Jayaraj and Subramanian (2010) and Ray and Sinha (2014b) show, both these measures can be readily implemented for India using data from the National Sample Survey (NSS) and the National Family Health Survey (NFHS). The summary dismissal of this approach by the Committee on the ground that “the deployment of criteria other than consumption expenditure in the measurement of poverty raises several issues regarding measurement and aggregation (that) render such exercises impractical” is unacceptable when research papers such as the ones mentioned above provide a framework to confront such aggregation issues. At a time when the Human Development Reports (since 2010) routinely provide estimates of MDP, it is strange that the Committee is still stuck within the age-old boundary of churning out expenditure-based poverty rates. Moreover, such an assertion by the Committee overlooks the fact that aggregation issues arise in the case of expenditure-based poverty rates as well. For example, a person well above the poverty line for non-food items may be well below that of the food poverty line, making that individual highly ‘food insecure’ but ‘non-food secure’. The Committee had the opportunity to embrace both concepts of poverty into a comprehensive measure, especially given India’s unique databases provided by the NSS and NFHS, but it failed to do so.

Point (a) also raises the issue whether the absolute view of poverty, which has underlined all poverty-line specifications in India so far, is relevant in a country which has seen a huge increase in inequality in the 1990s and beyond. One can argue that we should be moving towards a relative view of poverty where the minimum requirements increase with rising affluence of the middle- and higher-expenditure classes. The Committee does make a positive contribution by anchoring the minimum requirements on clothing, rent, conveyance and education expenses at the median fractile2, in a significant departure from previous practice. However, given the extent of inequality in India, the need to revisit the issue of taking a wider view of poverty using multi-dimensional deprivation measures is imperative. Empirical evidence supporting this observation is presented in Figure 1 which compares the conventional expenditure-based poverty (as defined in the TOR of the Rangarajan Committee) to a multi-dimensional measure of poverty3.

Figure 1. Expenditure poverty vs. multi-dimensional poverty (three dimensions); Rural and Urban Combined

Figure 1 shows that the rates of expenditure poverty and multi-dimensional deprivation both decline as one moves from the poorer to the more affluent states. There is a negative relationship between a state’s affluence and its expenditure poverty and multi-dimensional deprivation4, and the gap increases with state affluence. This confirms that the conventional expenditure poverty measure using NSS expenditures understate the true extent of deprivation prevailing at a given time, and that this understatement remains quite large for the more deprived households even in the economically more advanced states. In other words, the need to take a wider view of deprivation than is considered by the Rangarajan Committee and those before it actually becomes more important, not less, in the more affluent states. If the assessment of how a country is performing in meeting the minimum requirements of its population is the main driving force behind poverty measurement, then Figure 1 points to the need to supplement traditional expenditure information with that on the household’s access to a wide range of dimensions.

Point (b), namely, the inconsistency between survey data and macro aggregates has been a significant issue in most countries, more so in India where the average consumption levels in the NSS have been well below that from the National Accounts Statistics (NAS) with the divergence growing over time5 While the NSS is a rich source of information for poverty analysis, an uncritical acceptance of this data that has been adopted by all the past three expert committees including the Rangarajan Committee is difficult to justify. The Rangarajan Committee lost the opportunity to propose a sensible compromise to resolve this significant issue. Instead, it uses a little known and little used dataset collected by the Centre for Monitoring Indian Economy (CMIE) and an odd concept of a ‘poor’ household as one that is unable to save, to benchmark the poverty figures obtained using their recommended methodology.

The issue of moving beyond poverty enumeration to anti-poverty targeting is also quite significant and underlines point (c). Point (c) is related to (a) since it invites a widening of the investigation to non-money metric measures such as access to a wide range of dimensions such as access to clean drinking water, sanitation, electricity, clean fuel, minimum education, and healthcare facilities6. In refusing to widen the definition of poverty to include multi-dimensional poverty, the Committee missed the opportunity to make a real contribution by moving from enumeration to identification and targeting.

Methodology

The poverty line proposed by the Rangarajan Committee has three components: (a) food poverty line based on the average requirements of calories, fat and protein, (b) normative requirements of basic non-food expenses of clothing, housing, mobility and education based on median fractile values, and (c) observed other non-food expenses of the ‘fractile classes that meet the nutrition requirements’.

Linking poverty line with calorie norms

The restoration of the link of the poverty line with calorie norms marks a positive move forward, though no justification has been provided for sharply reducing the rural daily calorie requirement from 2,400 kcals to 2,155 kcals. The suggestion that the calorie requirement has come down sharply due to lifestyle changes has been refuted by Sen (2005) who argues that “although it is true that both the population structure and the intensity of labour effort have changed for the population as a whole, there is no evidence to show that such is the case for the population around the poverty line”. Since Ray (2007) has shown that many of those not meeting their daily calorie requirements in rural India are quite close to the 2,400 kcal level, the lowering of calorie requirements by around 10% may have led to a significant understatement of poverty. It is also not clear either why the Committee ignored micronutrient requirements, especially since iron deficiency is a significant cause for anaemia and maternal ill health in India. The report’s claim that nutritional deficiency has no effect on a child’s health is contradicted by evidence provided in Maitra, Rammohan, Robitaille and Ray (2013). A policy implication of this study is the need to provide mothers with young children extra dietary assistance to prevent their ill health from being transmitted to their offsprings – an aspect that needs to be recognised in poverty line calculations. Another implication is the need to draw separate poverty lines for families differing in size and composition, as done in the US. For example, smaller families, such as female-headed households, do not enjoy the benefits of economies of scale that are experienced by larger households. The Committee ignores the issue altogether.

State-level poverty lines

The Committee’s selection of a household from the all-India distribution of households that just about meets the three nutritional norms and then using that household’s expenditure as the food poverty line, ignores the large variation in dietary habits within India (Ray 2007). It would have been more realistic to follow this procedure for each state and each region (rural and urban) and fix the poverty line state-wise, rather than deriving state poverty lines from the cost of buying the all-India basket of items.

A positive aspect of this Committee’s methodology is the use of unit values7 and quantity figures from the NSS expenditure data to construct spatial price indices that are then used to derive state-level poverty lines from the all-India poverty lines. These are preferable to the Consumer Price Indices (CPI) used previously. These price indices are aggregate and do not reflect the true prices paid by the poor and are inappropriate in poverty calculations. Although the report uses unit values, it is unclear which unit value for each item is used8 Moreover, there is no information on how, if at all, the unit values were adjusted to account for quality and demographic effects. This will bias the unit values for the poor downwards since they often report cheaper prices because they only have access to qualitatively poorer items9

Technically, the method used by the Rangarajan Committee to aggregate the item-wise unit prices, the Fisher index, does not allow for the fact that households might choose to substitute between consumption commodities. A better alternative to this method that allows for greater substitution between items than what is allowed by fixed-weight price indices is the utility-based ‘exact price indices’. Majumder, Ray and Sinha (2012) have shown that India now has a sufficiently long time series of NSS surveys to permit the use of demand estimation based on unit values that could be used in constructing realistic ‘true cost of living indices’.

Concluding remarks

The Rangarajan Expert Committee on poverty measurement has several positive features such as the return to the calorie norm, including non-food requirements (such as clothing, rent, conveyance and education) to a basket of household expenditure and the use of unit values from household expenditure data instead of the conventional aggregate price indices used previously. However, it missed the opportunity to go beyond the expenditure-based poverty rates and examine the possibility of a wider multi-dimensional view of deprivation. The same comment applies to the Committee’s failure to fully address the issue of large increase in inequality in India during the 1990s and beyond, which should have encouraged a rethink of the ‘absolute’ view of poverty that has characterised the working of successive expert committees.

Notes:

  1. Readers interested in the technical details of the opinion presented here may refer to Ray and Sinha (2014a). 
  2. In this context, median fractile refers to the level of minimum expenditure under which minimum expenditure of 45-50% of the population falls. This value is Rs. 141 for rural India and Rs. 407 for urban India.
  3. Following Chakravarty and D’Ambrosio (2006) and Jayaraj and Subramanian (2010), this measure of poverty considered three dimensions: expenditure -based poverty status of the household, literacy status of the household head, and access to clean cooking fuel. It is similar in spirit to the HDI. The expenditure-based poverty measure is a subset of the multi-dimensional poverty measure.
  4. This can be viewed as measuring the deprivation of the households that are both below the conventional poverty line and lack access to education and clean cooking fuel.
  5. While the earlier Planning Commission practice of adjusting the NSS consumption distribution pro-rata by the difference between the NSS and NAS (following the Lakdawala Committee’s recommendations in March 1997) lacked any scientific basis, this was discontinued and replaced by an equally non-defensible strategy of ignoring the discrepancy altogether.
  6. The question of which among the conventionally counted ‘poor’ should be eligible for treatment as Below Poverty Line (BPL) households for inclusion in the Public Distribution System (PDS) is a live issue and has already generated a significant literature (see, for example, Mishra and Ray, 2013 and Alkire and Seth, 2013).
  7. Under the NSS, households report their total consumption and the amount they spend on each item. Unit values are the ratio of total amount spent and total quantity bought for each item; they are a crude indicator of prices.  
  8. There is one unit value for each household which would result in a range of unit values tracking the expenditure distribution. The report does not mention which unit value was used in the analysis. 
  9. Majumder, Ray and Sinha (2012, 2014) have proposed a methodology for adjusting the raw unit values before using them to construct spatial price indices in India that could prove useful in poverty calculations. Majumder, Ray and Sinha (2014) provide evidence to show that the adjustment to unit values significantly affects poverty lines.

Further Reading

  • Alkire, S and J Foster (2011), “Counting and multidimensional poverty measurement”, Journal of Public Economics, 95: 476-487.
  • Alkire, S and S Seth (2013), “Selecting a Targeting Method to Identify BPL Households in India," Social Indicators Research, 112(2): 417-446.
  • Chakravarty, S and C D’Ambrosio (2006), “The Measurement of Social Exclusion”, Review of Income and Wealth, 52: 377-398.
  • Haq, Muhbub ul (1999), ‘Reflections on Human Development’, Oxford University Press, Delhi.
  • Jayaraj, D and S Subramanian (2010), “A Chakravarty-D’Ambrosio View of Multidimensional Deprivation: Some Estimates for India”, Economic and Political Weekly, XLV: 53-65.
  • Maitra, P, A Rammohan, R Ray and M C Robitaille (2013), “Food consumption patterns and malnourished Indian children: Is there a link?”, Food Policy, 38: 70-81.
  • Majumder, A, R Ray and K Sinha (2012), “The Calculation of Rural Urban Food Price Differentials from Unit Values in Household Expenditure Surveys: a new procedure and comparison with existing methods”, American Journal of Agricultural Economics, 94(5): 1218-1235.  
  • Majumder, A, R Ray and K Sinha (2014), “Spatial Comparisons of Prices and Expenditure in a Heterogeneous Country: Methodology with Application to India”, forthcoming in Macroeconomic Dynamics.
  • Mishra, A and R Ray (2013), "Multi-Dimensional Deprivation in India during and after the Reforms: Do the Household Expenditure and the Family Health Surveys Present Consistent Evidence?", Social Indicators Research, 110: 791- 818.
  • R Ray (2007), “Analysis of Changes in Food Consumption and their Implications for Food Security and Under Nourishment”, Development and Change, 38(2):321-343.
  • Ray, R and G Lancaster (2005), “On Setting the Poverty Line Based on Estimated Nutrient Prices: Condition of Socially Disadvantaged Groups during the Reform Period”, Economic and Political Weekly, 30(1): 46-56.
  • Ray, R and Sinha, K (2014a), “Rangarajan Committee Report on Poverty Measurement´´, Economic and Political Weekly, Vol XLIX (32).
  • Ray, R and K Sinha (2014b), “Multidimensional Deprivation in China, India and Vietnam: A Comparative Study on Micro Data”, Journal of Human Development and Capabilities.
  • Sen, Amartya (1985), ‘Commodities and Capabilities’, North Holland, Amsterdam.
  • Sen, P (2005), “Of Calories and Things: Reflections on Nutritional Norms, Poverty Lines and Consumption Behaviour in India”, Economic and Political Weekly, 46(43): 4611- 4618. 
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