What causes growth, not what causes poverty to decline in India?

The estimated poverty decline in India between 2011-12 and 2016-17, time has come to change our economic policies — concentrate on what causes growth, not what causes poverty to decline

On National Statistics Day and there is a reasonable chance that the NSSO Consumer Expenditure Survey report for agricultural year (July-June) 2017-18 will be released over the next couple of weeks. Based on our analysis of existing trends in consumer expenditure and consumer prices, we predict that this will (should) unleash seismic changes in the way Indians (including the Union government) think about absolute poverty and its alleviation, macro-growth policies and micro policies, especially those on agriculture.

First rethink: We are not a poor country any more, not with just 4.5 per cent of the population classified as poor (the Tendulkar poverty line of Rs 44 per person per day in 2017-18 prices). Given that there has been very low inflation since then, consider this as the poverty line today.

Second rethink: We have always considered food consumption as the ultimate criterion of poverty. Hence, we have built up an elaborate (too elaborate) ecosystem of food production, consumption, and distribution. Time has come to dismantle this ecosystem — an ecosystem that is biased against the poor farmer, against climate change mitigation and also against efficient use of water and energy.

Third rethink: 4.5 per cent of the population as poor is not right, does not sound right, and isn’t right. The rethink has to be about defining poverty in relative, not absolute terms. Most European nations have a relative definition of poverty — that is, a fixed proportion of the median income. We should move towards that by the end of 2024, when India will likely be a $5 trillion economy — with a per capita income of around $3,500-$4,000. This is where Indonesia is today, and where China was in 2008-9 (in terms of per capita income). But before we move to a relative definition, India should forthwith move towards an updated poverty line, a poverty line consistent with our income status today as a lower-middle income country — note, no longer a poor economy.

Fourth rethink: This is something we believe that the Narendra Modi government has been involved in for the last five years. Poverty is now not just about food but living standards — sanitation, housing, piped water, electricity, education, health, and jobs. And on each of these elements, the focus should shift to quality, not quantity.

Fifth rethink: We should recognise that that the country has a messed up and archaic agricultural policy, one that was not even fit for the earlier poor economy times. But no reason to blame the past — the emphasis should be in reforming the present for a better future.

Poverty is no longer about food, so free up the food producers rather than keeping them as prisoners of policy (and politicians and bureaucrats). No Essential Commodities Act, no Food Corporation of India (whoever named this bureaucratic-political-corrupt delivery of food as a corporation?), and no Agricultural Produce Marketing Committee — now called the Agricultural Produce and Livestock Marketing Act 2017 (APLM). Notice how little we have developed: Farming and trade (marketing) are the oldest activities known to man and woman and we need an Act of Parliament in 2017 to keep regulating it? Alternative “Act” — farmers are free to buy, sell, hoard, export, import, like the rest of the seven billion residents of this planet. And no bans please, we are no longer a poor economy.

The above rethink is not based on idle speculation but rather on an analysis of trends in consumer expenditure since 2011/12. Consumption is 60 per cent of the GDP, and poverty is defined in terms of per capita consumption. The latest NSSO survey is likely to show a sizeable reduction in poverty rates across the country. Our estimates for 2017-18 are based on the estimation of poverty line in 2017-18. This estimate is based on the increase in poverty line or price level (over 2011/12) for each state, and every urban and rural area of all states. We use the NSSO distribution for 2011/12 and increase the average per individual nominal consumption for each individual by the all-India constant magnitude of 89 per cent. The per individual poverty line for everyone is estimated as above. The $3.2 middle-income poverty line is obtained from the Tendulkar poverty line by multiplying the latter by 3.2/1.9 (given that the Tendulkar poverty line in 2011-12 is equal to PPP $1.9). We will update our analysis in the form of a research paper once the 2017 consumption survey data is released but the findings are likely to be identical.

According to the Tendulkar poverty line, poverty is today around 4.5 per cent of the population or less than 70 million. According to a 70 per cent higher in real terms poverty line [equivalent to PPP$ 3.2 dollars per person per day (pppd), the World Bank poverty line for middle-income economies or Rs 75 pppd], poverty in India is estimated at 31 per cent down from 57 per cent in 2011/12. Half of these poor reside in three Hindi heartland “old” states (before reclassification) of Bihar, MP and UP. Therefore, there is a 26 ppt decline in poverty over six years. That is above a 4 ppt decline per year — the fastest pace of poverty decline India has ever experienced, and that to with a 70 per cent higher poverty line.

What happened to set this record decline amidst demonetisation, GST, two drought years, and lower than potential GDP growth? We believe a large part of this decline took place due to better targeting of government programmes — made possible by expanded (and extensive) use of direct benefit transfers (DBT).

Therefore, the new approach towards poverty alleviation should involve targeted income transfers. Under our proposed targeted basic income programme, which is a top-up scheme, the government transfers the poverty gap (difference between per capita consumption of the household and the poverty line faced by the household) into the bank account of the poor The cost of such a programme is likely to be between Rs 2.5 and 3 trillion and it will ensure nobody has a consumption below the poverty line. India’s current expense on poverty alleviation programmes is approximately Rs 3.4 trillion and the cost to make one person non-poor through the PDS in 2011-12 was Rs 24,000. The same for MGNREGA was Rs 40,500. Therefore, assuming perfect targeting, a basic income programme is likely to cost substantially less that the current policies and it will ensure that the poverty rate is reduced to zero based on the higher poverty line.

The direct benefit transfer mechanism of the government has been able to resolve targeting problems for a bulk of the 430 government schemes and subsidies. The current PM-Kisan programme that provides income support to approximately 14 crore farmers is an example of how, through DBT, the government can provide direct income support as its focal policy towards poverty alleviation. Such a policy is likely to help the government in rationalising and consolidating its poverty reduction programmes, thereby freeing up resources for other sectors in the economy.

India’s recent growth has led to a sizeable expansion in the number of taxpayers, and successive reforms over the last five years have simultaneously improved tax compliance in the country. The increase in number of individual return filers from 3.5 crore in FY2013 to 6.4 crores FY2017 and the improvement in revenue realisation from direct taxes reflects this.

However, now the government should focus on bringing more people under the tax net at the higher income brackets. Our recommendation towards achieving the same would be to reduce both corporate income tax rate and the highest personal income tax rate to a flat 25 per cent. Therefore, to improve revenue realisation from direct taxes, the government should focus on improving compliance by reducing the highest slabs of the tax rate. This rethink is necessary if we are to achieve accelerated growth, and higher tax revenues.

The Indian economy requires adequate investments in critical areas such as road, railways and water. Therefore, the government needs to rationalise its expenditure and tax rates to ensure reallocation of resources. Our pace of poverty reduction has improved over the last five years. We can augment this through a targeted basic income policy and free up resources for other sectors of the economy. Times have changed and so should our policies towards poverty alleviation.