Chapter 4: ECONOMICS OF POVERTY
was the first to come up with a concept of the poverty line.
Post independence India saw the planning commission come up with
the mechanism to make a poverty line. The poor are categorized
as always poor, non poor, chronic poor [usually poor but may get
money occasionally], churning poor [they move in and out of
poverty] occasional poor / transient poor [rich who may become
poor due to bad luck].
A long and healthy life as measured by life expectancy
Knowledge as measured by the adult literacy rate (with
two third weight) and the combined primary, secondary
and tertiary gross enrollment ratio (with one third weight)
A decent standard of living as measured by GDP
capita (PPP US$).
Before calculating HDI, an index for each of the
dimensions is created. For this purpose, maximum
minimum values are chosen for each indicator.
Performance in each of the indices is calculated as a value between 0 and 1.
HDI is then the simple average of the indices.
Countries have been grouped under three
Countries in the HDI range 0.8 and above
are in the very High Human Development group;
Countries in HDI range 0.7 to 0.8 are in the High
Human Development group;
Countries in the HDI
range 0.5 to 0.7 are in the range of Medium Human
Countries in the HDI range
less than 0.5 are in the Low Human Development group
HDI - 2010
Knowledge dimension was earlier measured based on literacy and gross enrolment.
This has been replaced by mean years of schooling and expected
of schooling respectively.
To measure the standard of living: gross national
income (GNI) per capita replaces the earlier variable
namely gross domestic product (GDP) per capita.
It found no viable and better alternative to
life expectancy at birth. Thus as an indicator of health,
life expectancy at birth has been retained.
Earlier a simple mean of three
dimensions was taken to measure HDI. A key change in
HDR 2010 is that of shift to a geometric mean (which
measures the typical value of a set of numbers); thus in
2010 the HDI is the geometric mean of the three
It highlights losses
in human development due to inequalities between men
The index ranges from 0, indicating that
women and men fare equally, to 1, indicating that women
fare as poorly as possible in all measured dimension
The first deprivation is vulnerability to death at
relatively early age and is represented in the HPI by
percentage of people expected to die before age 40.
The second deprivation is related to knowledge
and is measured by the percentage of adults who
The third deprivation relates to a decent standard
of living, in particular, overall provisioning. This
represented by a composite of three variables percentage
Multi dimensional poverty index: U.N.D.P
calculates intensity * incidence. It has replaced the Human
Health, Education and standard of living
How many indicators do households lack
Fig 1: Multidimensional poverty index
It varies from 0 - 1.
0 is good and 1 is bad. It is published by World Bank.
India has G.I.N.I coefficient of 0.33 which is higher than
USA, B.R.I.C.S but less than Germany, Japan.
2: G.I.N.I Coefficient
Concepts of macroeconomics:
these are consumed by their final purchasers like food and
drinks or services like recreation.
Capital goods: these
are of durable character which is used in the production
process. These goods form a part of the capital and they
continue to enable the production process to go on for
continuous cycles of production.
these are consumer goods but which have a longer durability as
they are not extinguished by short or intermediate use.
All the above are final goods as
they don’t undergo any transformation in the economic process.
Intermediate goods are those that used as raw materials or
inputs for production of other commodities.
is the deletion from the value of gross investments in order to
accommodate regular wear and tear of capital.
= gross investment – depreciation
of income: the consumption and
production process are linked. The process of production
generates factor payment for those involved in the production
process and generates goods and services as an outcome. These
are then consumed by those who receive the income from factor
Consider in the economy a single
household and a single factory. If the household works for the
factory then the factory pays it and this income is used by the
household to buy the goods of the factory and thus the cycle
continues. It the income in this cycle has to be calculated then
there are multiple ways.
The income of the economy can be
calculated by the total spending it has done on the goods. This
method is the expenditure
method. If we calculate the income by measuring the total
value of goods produced then it is the product
method. And if calculated by the total value of payments
made by the factory then it’s the income
sum total of gross value added for all firms in the economy.
GDP = total value of sale – cost of
= GDP - depreciation
sum total of final expenditures received by all firms in the
GDP = consumption + investment + government purchase + net
sum total of factor payments made by firms in the economy
Central statistics organization [C.S.O]:
It is calculating GDP since 1955.
There are three sectors in Indian economy primary, secondary and
CSO utilizes data from the
survey of industries, NSSO surveys, economic census, IIP
board of direst taxes, CBEC, CPI– indexes.
The GDP was being calculated
based on income or factor cost method but from 2015 onwards the
reforms were put in it.
salary or wages component now contains EPFO contribution by
workers would earn wage and the entrepreneurs would earn
profit but for informal, family owned unorganized agro cottage
industry the concept of mixed income / operating surplus was
above sources we add production taxes and subtract production
subsidies to get gross value added at basic prices.
GVA [market price] =
GVA [basic prices] + product taxes – product subsidies
GVA [market price] adjusted for inflation becomes our official
Universal Basic Income
The poverty alleviation schemes are of two types i.e. In kind income
transfers and cash transfers.
The in kind income transfers allow for poverty reduction by provision
of resources to the needy, that are required for their sustenance. Two
major such schemes are [National Rural Employment Guarenteee Act]
MNREGA and the FSA [National Food security Act].
However, Study after study have revealed that out of the subsidised
food around 15% reaches the beneficiaries and around 50% is siphoned
off by the liquor mafia, corrupt officials, food mills etc. Even in
MNREGA jobs and income are alleged to be allocated to ghost workers
and panchayat leaders. These two schemes contribute black money in
quantity of 1% of the GDP.
A solution to the problem of elimination of leakages is the system of
Universal Basic Income - A guarenteed minimum income to all
population. This has become possible due to growth in technology and
implementation of Aadhar Enabled Payments Systems.
The Tendulkar poverty line estimates have become obsolete as the Per
capital consumption of a person per month has exceeded that estimated
by the poverty line. This poverty gap i.e. Difference between the
average consumption level and the relevant poverty line can be reduced
by an implementation of Universal basic income.
Due to significant increase in collections of direct taxes, the scheme
could cost the government Rs. 1 lakh crore annually far less than the
Rs. 1.75 lakh crore cost of the MNREGA + FSA. The impact of such a
scheme on the poor shall be greater than the effect of the in-kind
income transfer schemes.