Why India needs more than one poverty line

Deputy-Chairman-Planning-Commission-Montek-Singh-AhluwaliaVivek Kaul 
Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, has survived in the political and bureaucratic circles of Delhi for nearly three decades now. Given this it is safe to say that he has well honed survival instincts, which tell him when the tide is turning.
And when the tide is turning, it makes sense to change direction and flow with the tide rather than risk drowning. This is precisely what Ahluwalia did yesterday. 
As he remarked As the country becomes richer and the per capita income goes up, there is need to redefine the poverty line. The latest numbers that planning commission have released, based on the Tendulkar Committee report, are absolutely rock-bottom numbers and gives us the number of poor who are actually the weakest group and therefore, should be the priority of the government.”
This is like a father disowning his son. 
The statement came after the latest set of poverty numbers were slammed by leaders across the political spectrum. The Congress party tried defending the numbers initially, but then did a volte face and has since come out all guns blazing against the current poverty line, which decides who is poor and who is not. The opposition parties from the left to the right have slammed the poverty line as well.
The current poverty line was decided by 
the report of the expert group to review methodology for estimation of poverty. The report was released in November 2009 (It is better known as the Tendulkar committee report). The report set the “the estimates of poverty…on private household consumer expenditure of Indian households.” The committee arrived at that numbers taking into account the expenditure on food, clothing, footwear, durables, education and health.
This line was an improvement on the earlier poverty line which only only took into account the expenditure required to consume an identified number of food calories. For rural India this number was 2,400 calories. For urban India this number was at 2,100 calories. Anyone consuming less than this was deemed to be poor.
The Tendulkar Committee changed this. “The expert group has also taken a conscious decision to move away from anchoring the 
poverty lines to a calorie intake norm,” its report said.
And there were reasons for doing so. There has been a long term trend of declining calorie consumption in both rural and urban areas. For urban India the consumption was at 1776 calories per day per person. And for rural India it stood at 1999 calories per day per person, observed the Tendulkar committee. In fact the calories being consumed in urban as well as rural area were higher than the revised calorie intake norm of 1770 calories per person per day specified by the Food and Agriculture Organisation(FAO) for India.
This specific point has come in for a lot of criticism, specially from those who lean towards the left. 
In a column in The Hindu, Utsa Patnaik of the Jawaharlal Nehru University writes “All official claims of low poverty level and poverty decline are quite spurious, solely the result of mistaken method. In reality, poverty is high and rising. By 2009-10, after meeting all essential non-food expenses (manufactured necessities, utilities, rent, transport, health, education), 75.5 per cent of rural persons could not consume enough food to give 2200 calories per day, while 73 per cent of all urban persons could not access 2100 calories per day. The comparable percentages for 2004-5 were 69.5 rural and 64.5 urban, so there has been a substantial poverty rise.”
But what this statement does not take into account is the fact that there is a long term trend of declining calorie consumption in both urban as well as rural India. This is something that Jagdish Bhagwati and Arvind Panagariya discuss in great detail in their book 
India’s Tryst with Destiny – Debunking Myths that Undermine Progress and Addressing New Challenges. “The long-term trend is one of declining calorie consumption in both rural and urban areas though the trend is steadier in rural rather than urban areas.”
And there are reasons for the declining trend in calorie consumption. As Bhagwati and Panagariya point out “For example, greater mechanization in agriculture, improved means of transportation and a shift away from physically challenging jobs may have reduced the need for physical activity. Likewise, better absorption of of food made possible by improved epidemiological environment (better child and adult health and better access to safe drinking water) may have lowered the needed calorie consumption to produce a given amount of energy.”
So saying that because the calorie consumption has gone down, hence India is poorer, is really not correct. Left leaning activists and economists have constantly pointed out that the decline in calorie consumption is an indication of increased hunger and malnutrition.
But there is enough evidence to prove the contrary. “When directly asked whether they had enough to eat everyday of the year, successive rounds of expenditure surveys of the NSSO (National Sample Survey Office) show increasing proportions of the respondents answering in the affirmative. In the 1983 expenditures survey, only 81.1 per cent of the respondents in the rural areas and 93.3 per cent in the urban areas stated that they had enough food everyday of the year. But by 2004-05, these percentages had risen to 97.4 per cent and 99.4 per cent,” write Bhagwati and Panagariya.
A March 2013 report in The Mint also makes a similar point. “A February report of the National Sample Survey Office (NSSO) shows the proportion of people not getting two square meals a day dropped to about 1% in rural India and 0.4% in urban India in 2009-10.”
The malnutrition argument also doesn’t quite hold either. Interestingly, Bhagwati and Panagariya, cite research carried out by Angus Deaton and Jean Drèze. Drèze has been a long time collaborator of Amartya Sen. “Deaton and Drèze also analyse the data on the heights of different cohorts of men and women collected by the second and third rounds of National Family Health Survey and conclude that later-born adult men and women are taller. They calculate that the rate of increase of height is 0.56 centimetre per decade for men and 0.18 centimetre per decade for women. Thus, even if India continues to do poorly in international comparisons, all trends point to improving and not worsening adult nutrition,” write Bhagwati and Panagariya.
So there is enough evidence to suggest that calorie intake has been going down and it hasn’t led to greater malnutrition and hunger. Hence, criticism of the Tendulkar committee report on this point, doesn’t really hold.
Also it is important to remember that the Tendulkar committee made the poverty line multidimensional, by considering several other expenditures other than just food. An immediate impact of this was that the poverty ratio for 2004-05, went up 
from 27.5% to 37.2% of the total population. From that level the poverty ratio has come down to 21.9% in 2011-12.
But that doesn’t mean that there are no problems with the poverty line set by the Tendulkar committee. The committee set the consumption expenditure in order to avoid poverty at Rs 816 per person per month in the rural areas and Rs 1000 per person per month in the urban areas. For a family of five people, this amounts to Rs 4,080 per month in rural areas and Rs 5000 per month in urban areas.
This of course translates into an expenditure of around Rs 27 per day for rural areas and Rs 33 per day for urban areas, two numbers that have caused a lot of outrage over the last one week. There is no denying that the numbers are very low. In fact, within this cut off expenditure, one of the assumptions is a healthcare expenditure of less than Re 1 per day. As Harsh Mander, a former member of the National Advisory Council, put it in The Mint
, this was “barely enough to buy an aspirin”.
Despite these points, the Tendulkar Committee poverty line is in line with the definition of poverty used by 189 members of the United Nations to set the first of eight Millennium Development Goals of halving global poverty between 1990 and 2015.
As T N Ninan wrote in the Business Standard “The definition of poverty used to set this goal is $1.25 per day. That would be about Rs 75 per day in a straight conversion to rupees at current exchange rates, but works out to about Rs 30 when you take purchasing power parity into account, as you are supposed to. As it happens, the Tendulkar line for rural areas in 2011-12 was Rs 27, and in urban areas Rs 33. So any criticism of the Tendulkar definition of extreme poverty runs smack into what is the internationally accepted definition.”
Also, the Congress party as well as the opposition parties which are criticising this formula now, could have first done so more than three years back in late 2009, when the report was first made public. But they chose to be quiet then.
Despite the problems that it has, what the Tendulkar committee poverty line measures is extreme poverty or what Ahluwalia refers to as “the weakest group” and which “should be the priority of the government”.
Raising this line would have its own set of problems, which this writer has pointed out in the past.
“For example, suppose we raise the rural poverty line to Rs 80 and the urban one to Rs 100 at 2009-10 prices. What would these lines imply?” ask Bhagwati and Panagariya.
This would designate 95% of the rural population and 85% of the urban population to be poor. And that does not help anybody, except those who repeatedly like to shout that “India is poor”. Yes, we all know India is a poor country, but then what’s new about that?
Increasing the cut off for poverty, would mean that scarce government resources will be spread over a larger set of population. As Bhagwati and Panagariya point out “With tax revenues still relatively modest, significant redistribution in favour of the destitute requires limiting such redistributions to the bottom 40 percent or so of the population. Spreading them thinly over a vast population will give too little to the destitute to make a major dent in poverty.”
So the more poor will lose out to the less poor.
Given this, it makes sense for India to have at least two poverty lines, one to tackle extreme poverty and one to measure ‘real’ poverty. The World Bank uses two poverty lines. One is the extreme poverty line, which is set at an expenditure of $1.25 per day. And another is a moderate poverty line which is set at $2 per day.
Economist Devinder Sharma in a column in the Rajasthan Patrika writes about the South African experience. South Africa has three poverty lines. The first is the food line with a cut off expenditure of Rs 1841 per month. Then comes the middle poverty line at Rs 2,445. And the upper poverty line at Rs 3484.
India needs something along these lines. Dumping the Tendulkar committee poverty line does not serve much purpose. It should continue to help target the “extreme poor”, whose number has gone down over the years.
But when it comes to measuring real “poverty” India does need a higher cut off. World bank’s moderate poverty line of $2 per day, adjusted for purchasing power parity, would be a good bet to start with. Of course the risk here is that the politicians can make the upper poverty line, the real poverty line, and start distributing “freebies” on the basis of that, making it a fiscally disastrous proposition for the government. Remember, the food security scheme?
The article originally appeared on www.firstpost.com on July 30, 2013 under a different headline 

(Vivek Kaul is a writer. He tweets @kaul_vivek) 

Are you a victim of the Sajid Khan syndrome?

sajid khan
Vivek Kaul
The residents of the island of New Guinea first saw the white man in 1930. The white men were strangers to New Guineans. The New Guineans had never gone to far off places and most of them lived in the vicinity of where they were born, at most making it to the top of the hill around the corner. Given this, they were under the impression that they were the only living people.
This impression turned out to be wrong and the New Guineans started to develop stories around the white men who had come visiting. Jared Diamond writes in
The World Until Yesterday that the New Guineans told themselves that “Ah, these men do not belong to earth. Let’s not kill them – they are our own relatives. Those who have died before have turned white and come back.”
The New Guineans tried to place the strange looking Europeans into “known categories of their world view”. But over a period of time they did come to realise that Europeans were human after all. As Diamond writes “Two discoveries went a long way towards convincing New Guineans that Europeans really were human were that the feces scavenged from their campsite latrines looked like typical human feces (i.e., like the feces of New Guineans); and that young New Guinea girls offered to Europeans as sex partners reported that Europeans had sex organs and practiced sex much as did New Guinea men.”
To the men and women of New Guinea, Europeans were what former American defence secretary Donald Rumsfeld called the “unknown-unknown”. As Rumsfeld said “[T]here are known knows; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown-unknowns-there are things we do not know we don’t know.”
People take time to adjust to unknown-unknowns, like the New Guineans did. But there are also situations in life in which individuals, institutions and even countries tend to ignore the chance of something that they know can happen, just because it hasn’t happened in the recent past or it hasn’t happened to them specifically. For such people, institutions and countries, the option tends to become an unknown-unknown even though it is not one in the specific sense of the term.
Take the case of film director Sajid Khan whose most recent movie was
Himmatwala. Before the movie was released the director often said “I can’t say I am a great director but I am the greatest audience, since childhood I have done nothing other than watching films. Cinema is my life. I can never make a flop film because I make film for audience and not for myself .”
Of course this statement was right before
Himmatwala released. Khan’s previous three outings as director Heyy Babyy, Housefull and Housefull 2 had been a huge success. Himmatwala fizzled out at the box office and its first four day collections have been nowhere near what was expected. As the well respected film trade website Koimoi.com points out “The numbers are too bad for a film like Himmatwala, which was expected to create shattering records at the Box Office being a ‘Sajid Khan Entertainer’ and moreover due to the coming together of two successful individuals – actor Ajay Devgn and director Sajid Khan for the first time. However, the formula didn’t work this time it seems!”
Khan’s overconfidence came from the fact that none of his previous films had flopped and that led him to make the assumption that none of his forthcoming films will flop as well. He expected the trend to continue. Khan had become a victim of what Nobel prize winning economist Daniel Kahneman calls the ‘availability heuristic’.
Kahneman defines the availability heuristic in
Thinking, Fast and Slow as “We defined the availability heuristic as the process of judging frequency by “the ease with which instances come to mind.”” In Khan’s case the instances were the previous three movies he had directed and each one of them had been a superhit. And that led to his overconfidence and the statement that he can never make a flop film.
Nate Silver summarises the situation well in The Signal and the Noise. As he points out “We tend to overrate the likelihood of events that are nearer to us in time and space and underpredict the ones that aren’t.” And this clouds our judgement.
Another great example is of this are central banks around the world which have been on a money printing spree.
As Gary Dorsch, Editor, Global Money Trends points out in a recent columnSo far, five central banks, – the Federal Reserve, the European Central Bank, Bank of England, the Bank of Japan and the Swiss National Bank have effectively created more than $6-trillion of new currency over the past four years, and have flooded the world money markets with excess liquidity. The size of their balance sheets has now reached a combined $9.5-trillion, compared with $3.5-trillion six years ago.”
This money has been pumped into various economies around the world in the hope that banks and financial institutions will lend it to consumers and businesses. And when consumers and businesses spend this borrowed money it will revive economic growth. But that has not happened. The solution that central banks have come up with is printing even more money.
One of the risks of too much money printing is the fact it will chase the same number of goods and services, and thus usually leads to a rise in overall prices or inflation. But that hasn’t happened till now. The fact that all the money printing has not produced rapid inflation has led to the assumption that it will never produce any inflation. Ben Bernanke, the Chairman of the Federal Reserve of United States, the American central bank, has even gone to the extent of saying that he was 100% sure he could control inflation.
Mervyn King, the Governor of the Bank of England, has made similar statements. “
Certainly those people who said that asset purchases would lead us down the path of Weimar Republic and Zimbabwe I think have been proved wrong ,” he has said. What this means is that excess money printing will not lead to kind of high inflation that it did in Germany in the early 1920s and Zimbabwe a few years back.
King and Bernanke like Sajid Khan are just looking at the recent past where excess money printing has not led to inflation. And using this instance they have come to the conclusion that they can control inflation (in Bernanke’s case) as and when it will happen or that there will simply be no inflation because of money printing (in King’s case).
As Albert Edwards of Societe Generale writes in a report titled
Is Mark Carney the next Alan Greenspan “King’s assertion that because the quantitative easing(another term for money printing) to date has not yet produced rapid inflation must mean that it will never produce rapid inflation is just plain wrong. He simply cannot know.” Nassim Nicholas Taleb is a lot more direct in Anti Fragile when says “central banks can print money; they print print and print with no effect (and claim the “safety” of such a measure), then, “unexpectedly,” the printing causes a jump in inflation.” Just because something hasn’t happened in the recent past does not mean it won’t happen in the future.
People who make economic forecasts are also the victims of what we can now call the Sajid Khan syndrome. They expect the recent trend to continue.
The Indian economy grew by 8.6% in 2009-2010 and 9.3% in 2010-2011. And the Indian politicians and bureaucrats told us with glee that the Indian economy had decoupled from the world economy, which was growing very slowly in the aftermath of the global financial crisis.
Montek Singh Ahluwalia, the deputy chairman of the Planning Commission is a very good example of the same. In a television discussion in April 2012, he kept insisting that a 7% economic growth rate for India was a given. Turns out it was not. The Indian economy grew by 4.5% in the three months ending December 31, 2012. Ahluwalia was way off the mark simply because he had the previous instances of 8-9% rate of economic growth in his mind. And he was projecting that into the future and saying worse come worse India will at least grow by 7%.
It is not only experts who become victims of the Sajid Khan syndrome taking into account events of only the recent past. In the aftermath of September 11, 2001, when aeroplanes collided into the two towers of the World Trade Centre, many Americans simply took to driving fairly long distances, fearing more terrorist attacks.
But driving is inherently more risky than flying. As Spyros Makridakis, Robin Hograth and Anil Gaba write in
Dance with Chance – Making Your Luck Work for You “In 2001, there were 483 deaths among commercial airline passengers in the USA, about half of them on 9/11. Interestingly in 2002, there wasn’t a single one. And in 2003 and 2004 there were only nineteen and eleven fatalities respectively. This means that during these three years, a total of thirty airline passengers in America were killed in accidents. In the same period, however, 128,525 people died in US car accidents.” Estimates suggest that nearly 1600 deaths could have been avoided if people had taken the plane and not decided to drive,.
So what caused this? “Plane crashes are turned into video images of twisted wreckage and dead bodies, then beamed into every home on television screens,” write the authors. That is precisely what happened in the aftermath of 9/11. People saw and remembered planes crashing into the two towers of the World Trade Centre and decided that flying was risky.
They just remembered those two recent instances. What they did not take into account was the fact that thousands of planes continued to arrive at their destinations without any accident like they had before. So most people ended up concluding that chances of dying in an aeroplane accident was much higher than it really was.
The same logic did not apply to a car crash. As the authors write “Car crashes, on the other hand, rarely make the headlines…Smaller-scale road accidents occur in large numbers with horrifying regularity, killing hundreds and thousands of people each year worldwide…We just don’t hear about them.” And just because we don’t hear about things, doesn’t mean they have stopped happening or they won’t happen to us.
Another version of this is the probability of dying due to a terror attack. As Kahneman writes “Even in countries that have been targets of intensive terror campaigns, such as Israel, the weekly number of casualties almost never came close to the number of traffic deaths.”
A good comparison in an Indian context is the number of people who die falling off the overcrowded Mumbai local train network in comparison to the number of people who have been killed in the various terrorist attacks in Mumbai over the last few years. The first number is higher. But its just that people die falling off the local train network almost everyday and never make it to the news pages, which is not the case with any terrorist attack, which gets sustained media coverage sometimes running into months.
To conclude it is important to look beyond the recent past and ensure that like Sajid Khan and others, we do not fall victims to the Sajid Khan syndrome.
The article originally appeared on www.firstpost.com on April 4, 2013.

(Vivek Kaul is a writer. He tweets @kaul_vivek)

Why Montek has a turkey problem while forecasting

Vivek Kaul
How the mighty fall.
Montek Singh Ahluwalia, the deputy chairman of the Planning Commission, is now talking about the Indian economy growing at anywhere between 5-5.5% during this financial year (i.e. the period between April 1, 2012 and March 31, 2013).
What is interesting that during the first few months of the financial year he was talking about an economic growth of at least 7%. In fact on a television show in April 2012, which was discussing Ruchir Sharma’s book Breakout Nations, Ahluwalia kept insisting that a 7% economic growth rate was a given.
Turns out it was not. And Ahluwalia is now talking about an economic growth of 5-5.5%, telling us that he has been way off the mark. When someone predicts an economic growth of 7% and the growth turns out to be 6.5% or 7.5%, one really can’t hold the prediction against him. But predicting a 7% growth rate at the beginning of the year, and then later revising it to 5% as the evidence of a slowdown comes through, is being way off the mark.
And when its the deputy chairman of the Planning Commission who has been way off the mark with regard to predicting economic growth, then that leaves one wondering, if he has no idea of which way the economy is headed, how can the other lesser mortals?
Forecasting is difficult business. The typical assumption is that those who are closest to the activity are the best placed to forecast it. So stock analysts are best placed to forecast which way stock markets are headed. The existing IT/telecom companies are best placed to talk about cutting edge technologies of the future. Political pundits are best placed to predict which way the elections will go and so on.
But as we have seen time and again that is not the case. Surprises are always around the corner.
One of the biggest exercises on testing predictions was carried out by Philip Tetlock, a psychologist at the University of California, Berkeley. He asked various experts to predict the implications of the Cold War that was flaring up between the United States and the erstwhile Union of Soviet Socialist Republic at the time.
In the experiment, Tetlock chose 284 people, who made a living by predicting political and economic trends. Over the next 20 years, he asked them to make nearly 100 predictions each, on a variety of likely future events. Would apartheid end in South Africa? Would Michael Gorbachev, the leader of USSR, be ousted in a coup? Would the US go to war in the Persian Gulf? Would the dotcom bubble burst?
By the end of the study in 2003, Tetlock had 82,361 forecasts. What he found was that there was very little agreement among these experts. It didn’t matter which field they were in or what their academic discipline was; they were all bad at forecasting. Interestingly, these experts did slightly better at predicting the future when they were operating outside the area of their so-called expertise.
People get forecasts wrong all the time because they
are typically victims of what Nassim Nicholas Taleb in his latest book Anti Fragile calls the Great Turkey Problem. As he writes “A turkey is fed for a thousand days by a butcher; every day confirms to its staff of analysts that butchers love turkeys “with increased statistical confidence.” The butcher will keep feeding the turkey until a few days before Thanksgiving. Then comes that day when it is really not a very good idea to be a turkey. So with the butcher surprising it, the turkey will have a revision of belief – right when its confidence in the statement that the butcher loves turkeys is maximal and “it is very quiet” and soothingly predictable in the life of the turkey.”
When Ahluwalia insisted in late April 2012 that the economy will at least grow at 7% he was being a turkey. He was confident that the good days will continue, and was not taking into account the fact that things could go really bad. As Ruchir Sharma writes in
Breakout Nations a book which was released at the beginning of this financial year “India is already showing some of the warning signs of failed growth stories, including early-onset of confidence.”
In fact, expecting a trend to continue, is a typical tendency seen among people who work within the domain of finance and economics. As a risk manager confessed to the Economist in August 2008, “In January 20
07 the world looked almost riskless. At the beginning of that year I gathered my team for an off-site meeting to identify our top five risks for the coming 12 months. We were paid to think about the downsides but it was hard to see where the problems would come from. Four years of falling credit spreads, low interest rates, virtually no defaults in our loan portfolio and historically low volatility levels: it was the most benign risk environment we had seen in 20 years.”
Given this, it is no surprise that people who were working in the financial sector on Wall Street and other parts of the world, did not see the financial crisis coming. This happened because they worked with the assumption that the good times that prevailed will continue to go on.
Taleb calls the turkey problem “the mother of all problems” in life. Getting comfortable with the status quo and then assuming that it will continue typically leads to problems in the days to come. That brings me to Ahluwalia’s new prediction. “I would not rule out 7% next year”. He continues to be believe in the number ‘seven’. How seriously should one take that? As hedge fund manager George Soros writes in The New Paradigm for Financial Markets — The Credit Crisis of 2008 and What It MeansPeople’s understanding is inherently imperfect because they are a part of reality and a part cannot fully comprehend the whole.”
For the current financial year Ahluwalia as someone who closely observes the economic system could not comprehend the ‘whole’. Whether he is able to do that for the next financial year remains to be seen.

The article originally appeared on www.firstpost.com on February 18, 2013
(Vivek Kaul is a writer. He can be reached at [email protected])