Following text is from this
article of The Hindu: http://www.thehindu.com/opinion/lead/how-the-data-sets-stack-up/article23427619.ece
In recent years, there has been a
lot of discussion on increasing inequality within several countries of the
world, including India, particularly after the publication of Thomas Piketty’s book on inequality. It
is true that rising inequality has adverse economic and social consequences.
The Gini coefficient or other
measures of inequality are being used to
examine trends in inequality. In this column, we examine the trends in
inequality and show that the poverty ratio is equally important as the Gini
coefficient in analysing issues relating to growth and distribution.
Consumption inequality
Generally the Gini coefficient, which lies between 0 and 1, is used for
measuring inequality. The Gini
coefficient of consumption expenditure for rural areas declined marginally
between 1983-84 to 1993-94 (from 0.304 to 0.286) while it recorded a marginal
rise during the high growth period of 2004-05 and 2011-12 (from 0.304 to
0.311). In the case of urban areas, it stayed the same from 1983-84 to 1993-94
(0.344) while it increased modestly from 2004-05 to 2011-12 (0.376 to 0.390).
Using long time series since 1951, a study shows that inequality in rural areas declined while it increased in urban areas in
the post-reform period, particularly in the high growth period (Gaurav
Datt, Martin Ravallion and Rinku Murugai, “Growth, Urbanization and Poverty
Reduction in India”, 2016).
Income inequality
Income and wealth inequalities are much higher than consumption
inequality. According to some estimates, consumption Gini coefficient was 0.36 in 2011-12 in India. On the
other hand, inequality in income was
high with a Gini coefficient of 0.55 while wealth Gini coefficient was 0.74 in 2011-12. Thus, income Gini was
about 20 points higher than consumption Gini while wealth Gini was nearly
almost 40 points higher than consumption Gini. Thus, inequality in income and wealth is much higher than that of
consumption.
Trends in poverty ratio
There are many approaches for
poverty measurement. Human beings need a certain minimum consumption of food
and non-food items to survive. However, the perception regarding what constitutes poverty varies over time and
across countries. Generally the approach is to look at it in terms of
certain minimum consumption expenditure
on food and non-food items. Any household failing to meet this level of
consumption expenditure can be treated as a poor household.
We examine here the trends in
poverty based on NSS Consumer Expenditure data for the period 1983 to 2011-12.
In the pre-reform period, overall
poverty declined marginally during 1983 to 1993-94. The rate of decline in
poverty was 0.8 percentage points per
annum. In fact, the number of
persons below the poverty line stayed almost the same at 320 million during
this period. The number of persons below poverty declined by 5 percentage
points during 1983 to 1987-88 but rose by 4 percentage points during 1987-88 to
1993-94.
Poverty declined faster in the post-reform period, particularly in the
2004-2012 period as compared to 1993-2005. In the post-reform period, overall poverty as defined by the Tendulkar
Committee declined faster from 45.3% in 1993-94 to 21.9% in 2011-12 – an annual decline of 1.3 percentage
points. Within the post-reform period, the first sub-period 1993-94 to 2004-05
recorded a decline of 0.75 percentage points per annum. But, poverty declined by 2.2 percentage points
per annum during the period 2004-05 to 2011-12. This was the period of highest
economic growth since Independence. It is the fastest decline of poverty
compared to earlier periods.
There are two conclusions on the
trends in poverty. First, as the World Bank Study (2016) mentioned above shows,
poverty declined by 1.36 percentage
points per annum post-1991 compared to 0.44 percentage points per annum prior
to 1991. This study shows that among other things, urban growth is the most important contributor to the rapid reduction
in poverty even in rural areas in the post-1991 period.
The second conclusion is that within the post-reform period, poverty
declined faster in the 2000s than in the 1990s. The official estimates
based on Tendulkar poverty lines show that poverty declined much faster during
2004-05 to 2011-12 as compared to the period 1993-94 to 2004-05. Around 135 million people were lifted above
the poverty line in the post-reform period.
On the cut-off line for
determining poverty ratio, there are controversies. Some people think that the
Tendulkar poverty level is low and needs to be raised. As far as reduction in
the poverty ratio is concerned, it holds good even if we raise the poverty
cut-off to 1.5 times the Tendulkar cut-off. The annexure to Chapter 2 of the
Twelfth Five Year Plan gives details of reduction in the poverty ratio for
different levels of poverty cut-off.
To conclude, there has been lot
of discussion in recent years on inequality. There is no doubt that inequality
in itself has several undesirable consequences. It was Simon Kuznets who had argued in a famous paper in 1955 that in
the early period of economic growth distribution of income tends to worsen, and
that only after reaching a certain level of economic development an improvement
in the distribution of income occurs. In this context, measuring inequality
is not the same as measuring the changes in level of poverty. Even if the Gini coefficient remains the
same or picks up, the poverty ratio can be declining. This has been true of
India. The decline in poverty is
much higher particularly in the period 2004-05 to 2011-12 in spite of rise in
inequality. Thus the changes of the poverty ratio is an equally important
indicator to monitor.
C. Rangarajan is former
Chairman of the Economic Advisory Council to the Prime Minister, and former
Governor of the Reserve Bank of India. S. Mahendra Dev is Director and Vice
Chancellor, Indira Gandhi Institute of Development Research, Mumbai
Credit: The Hindu
