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Revising Estimates of Poverty

One of the criticisms of the official poverty line is that it does not capture the cost of basic necessities, particularly non-food components such as health and education. This issue gains importance due to an increase in household private expenditure on education and health services in recent years. This article estimates poverty ratios at the all India level and for the states in 2004-05 by including the minimum private expenditure on health and education. The estimated poverty ratios are substantially higher than the official poverty ratios.

COMMENTARY
Revising Estimates of Poverty S Mahendra Dev, C Ravi Let yi be the monthly per capita expenditure (MPCE) of the ith person in the state. The MPCE includes expenditure incurred on education and health services. Let z be the poverty line, which

One of the criticisms of the official poverty line is that it does not capture the cost of basic necessities, particularly non-food components such as health and education. This issue gains importance due to an increase in household private expenditure on education and health services in recent years. This article estimates poverty ratios at the all India level and for the states in 2004-05 by including the minimum private expenditure on health and education. The estimated poverty ratios are substantially higher than the official poverty ratios.

T
here are several contentious issues about the official estimates of poverty in India. One issue relates to the inclusion of minimum expenditure on health and education in the poverty line. The consumption basket of the poor based on which the poverty line is derived from is taken from National Sample Survey (NSS) data of 1973-74. However, the composition of the consumption basket in 1973 hardly includes any expenditure on health and education as it was assumed that the basic needs of education and health would be met by the state. As a result, the poverty line derived from the consumption patterns of 1973-74 includes very little expenditure on health and education. This issue gains importance due to increasing household private expenditure on education and health services in recent years. There is a need to adjust poverty estimates in order for them to accurately reflect the consumption of health and education services. In this article, we undertake an exploratory study by making adjustments to the poverty lines for the above deficiency and obtain alternative estimates of poverty at the all India level and for the major states.

Including Education and Health

As the official poverty line does not provide for expenditure on health and education, its use is likely to depress the poverty count. There is a need to add the minimum expenditure on these two services to the poverty line to make it more realistic.

affords any person to buy a basket of minimum needs. By definition, the consumption basket underlying the poverty line z does not include the consumption of education and health services. In such a case, the use of a poverty line is likely to understate poverty. This can be overcome by adding a certain minimum level of education and health components to the minimum needs basket of z. However, the determination of what constitutes minimum expenditure on education and health is a difficult exercise. There can be two alternatives. First, we can merely account for actual expenditure on health and education of the poor while estimating the poverty count. This can be done by adding to z the actual expenditure incurred by people on education and health near the poverty line. This is not normative. The current level of expenditure incurred by the poor need not constitute the minimum need. A normative alternative is to make a minimum of provision in the poverty line for medical and education expenditure. Determining this is difficult and has to be arbitrary. A simple approach is to take the expenditure on education and health by the median household in the (total expenditure) distribution as the minimum need.

Let mi and ei be the household expenditure on health and education. We can add zm and ze, the minimum expenditure on health and education, to z to arrive at revised poverty line z’. zm and ze are given by zm = fm(ym) and ze = fe(ym). Here, fm and fe are Engel functions estimated from using data on mi, ei and y. The revised poverty line is given by z’ = z + zm + ze.

Table 1: All India Estimates of Health and Education Expenditure
Official Poverty Line Official and Adjusted Poverty Lines Per Capita Per Capita Expenditure on Expenditure on Education Health Adjusted Poverty Line Poverty Ratios Official Poverty Ratio Revised Poverty Ratio Including Education and Health
S Mahendra Dev (profmahendra@gmail.com) and C Ravi are at the Centre for Economic and Social Studies, Hyderabad. Rural 356.30 10.9 24.4 391.60 Urban 538.60 40.1 44.0 622.70 Total – – – – Source: Estimates by the authors based on NSS 61st round on employment and unemployment. 28.30 26.03 27.50 36.38 34.45 35.83
8 march 8, 2008 Economic & Political Weekly
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COMMENTARY

Using the above equation, we estimated the minimum level of expenditure on health and education for the revision of the official poverty lines. Unlike the official poverty line, which takes a common minimum consumption basket for all states, we have derived the zm and ze separately for each state. This is so because both zm and ze depend heavily on the state-specific public investments in the education and health sectors.

Estimates for All India

higher where public expenditure is also and other states once incomes and awarehigher on these services. In this context, ness increase. Kerala is a good example. It reflects the Official poverty ratios and revised povawareness about education and health in erty ratios (using the revised poverty line relatively developed states. It is possible after including expenditure on health and that private expenditure in these serv-education) for the year 2004-05 are given ices will increase significantly in poorer in Table 3. Increase in rural poverty ratios states such as Bihar, Jharkhand, Orissa is higher in states such as Himachal

Table 2: Estimated Minimum Expenditure on Education and Health (2004-05)
Rural Urban
Poverty Line y(e) y(m) Adjusted Poverty Line Poverty Line y(e) y(m) Adjusted Poverty Line
Andhra Pradesh 292.95 6.0 23.8 322.72 542.89 18.5 34.9 596.27

Table 1 (p 8) presents the estimated mini-

Assam 387.64 6.7 8.8 403.15 378.84 34.6 37.5 451.02

mum expenditure on education and health Bihar 354.36 5.8 12.0 372.18 435.00 41.1 29.1 505.24

and the adjusted poverty lines at the all-Jharkhand 366.56 5.6 13.6 385.83 451.24 10.5 12.1 473.91

India level. It shows that if we include pri-Gujarat 353.93 5.7 20.1 379.76 541.16 33.1 42.2 616.47 vate health and education expenditure, Haryana 414.76 30.1 39.2 484.10 504.49 70.0 42.8 617.26 Himachal Pradesh 394.28 23.0 36.8 454.11 504.49 73.7 64.3 642.48

the rural poverty line increases from

Jammu and Kashmir 391.26 20.6 15.7 427.52 553.77 57.7 28.4 639.90

Rs 356 to Rs 392 while the urban poverty

Karnataka 324.17 4.1 15.0 343.28 599.66 16.0 31.1 646.81

line increases from Rs 539 to Rs 623. The

Kerala 430.12 25.5 70.6 526.20 559.39 46.4 81.0 686.81

rural poverty ratio increased from 28.3

Madhya Pradesh 327.78 7.9 22.0 357.68 570.15 36.1 33.3 639.52

per cent to 36.4 per cent. Total poverty

Chhattisgarh 322.41 5.0 21.7 349.09 560.00 7.4 17.6 584.94

rose from 27.5 to 35.8 per cent – an in-

Maharashtra 362.25 8.0 27.0 397.25 665.90 35.2 57.3 758.40

crease of 8.3 percentage points due to the

Orissa 325.79 8.2 14.7 348.68 528.49 31.6 25.3 585.39

inclusion of the minimum level of private Punjab 410.38 25.2 45.4 481.04 466.16 59.0 42.6 567.78

expenditure on health and education. Rajasthan 374.57 10.9 23.6 409.12 559.63 34.0 32.4 626.05

Tamil Nadu 351.86 7.5 17.2 376.55 547.42 18.6 36.8 602.87

Estimates at State Level Uttar Pradesh 365.84 17.1 35.7 418.69 483.26 49.8 47.0 580.02

including the minimum private expenditure on education and health by the median household in the (total expendi-West Bengal 382.82 15.0 27.9 425.73 All India 356.30 10.9 24.4 391.60 y(e): minimum private expenditure on education. y(m): minimum private expenditure on health. Source: Same as Table 1. 449.32 538.60 66.7 40.1 55.7 44.0 571.80 622.70
ture) distribution as the minimum need in each state. The estimates of the official Table 3: Official and Revised Poverty Ratios (2004-05) Rural Urban
poverty line, median level private per State Official Revised % Difference Official Revised % Difference
capita expenditure on education and Andhra Pradesh 10.83 16.07 48.38 27.08 33.27 22.86
health and the adjusted poverty lines by Assam 21.79 25.47 16.89 3.69 9.30 152.03
including health and education are Bihar 42.53 47.91 12.65 35.27 44.94 27.42
presented in Table 2. It shows some inter-Jharkhand 46.46 51.85 11.60 19.45 21.75 11.83
esting findings across states. It may be noted that Kerala has the highest per Gujarat HaryanaHimachal Pradesh 19.46 13.63 10.87 24.59 23.92 20.42 26.36 75.50 87.86 14.19 15.50 5.02 21.42 26.51 13.06 50.95 71.03 160.16
capita private expenditure on health Jammu and Kashmir 4.51 8.11 79.82 10.82 18.92 74.86
(Rs 70) and second highest per capita private expenditure on education in rural areas. In urban areas also, Kerala has the Karnataka KeralaMadhya Pradesh 20.05 13.37 37.67 26.06 24.64 45.19 29.98 84.29 19.96 33.25 20.63 41.82 37.45 31.85 48.94 12.63 54.39 17.03

We have adjusted the poverty line by

Uttarakhand 478.02 18.3 20.6 516.91 637.67 26.7 15.7 680.09

highest per capita expenditure on health. Chhattisgarh 41.41 50.37 21.64 39.53 42.15 6.63
States such as Haryana, Himachal Pradesh Maharashtra 30.08 37.56 24.87 32.98 40.91 24.04
and Punjab also have high per capita Orissa 47.81 53.23 11.34 42.60 48.40 13.62
expenditure on health and education Punjab 10.04 19.97 98.90 5.87 15.75 168.31
(Table 2). On the other hand, poorer states Rajasthan 18.76 26.91 43.44 32.28 40.34 24.97
such as Bihar, Jharkhand, Orissa, Chhat-Tamil Nadu 22.62 28.77 27.19 23.77 29.30 23.26
Uttar Pradesh 32.88 45.78 39.23 31.21 42.95 37.62
tisgarh have lower levels of per capita Uttarakhand 39.87 48.00 20.39 34.89 39.64 13.61
expenditure on these services. West Bengal 28.87 39.62 37.24 15.97 27.73 73.64
It looks like the private per capita All India 28.30 36.38 28.55 26.03 34.45 32.35
expenditure on health and education is Source: Same as Table 1.
Economic & Political Weekly march 8, 2008 9
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COMMENTARY

Pradesh, Haryana, Jammu and Kashmir, Kerala, Punjab followed by Andhra Pradesh, Rajasthan, Madhya Pradesh, Uttar Pradesh, Uttarakhand and West Bengal. This is true for urban areas also. As mentioned above, private expenditure on health and education is likely to increase in poorer states and it would raise the poverty ratios.

To conclude, the official poverty line may not be capturing the cost of basic necessities, particularly non-food components such as health and education. There is a need to have a comprehensive view on the poverty line by including expenditure on non-food components like health and education apart from costs of food. In this note, we have adjusted the poverty line by including the minimum level of private expenditure on health and education (by taking the median household as the norm for minimum need) and estimated the revised poverty line. It shows that the total poverty ratio in India increases from 28 to 36 per cent if we include private expenditure on education and health in the year 2004-05. The increase in the poverty ratio is higher for relatively developed states such as Kerala. The private expenditure on health and education may also increase in poorer states in the future and raise poverty ratios in these states.

march 8, 2008

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