Subject: Economics

Important International institutions | Origins, Growth, Mandates and India’s overlap

1. Important International Economic Organizations (Back2Basics)
2. Everything that you should know about the World Trade Organization (WTO)
3. 5 Important International NGOs which often recur in news
4. Bretton Woods Institutions – World Bank Group
5. Bretton Woods Institutions – IMF
6. Important World Reports & their Organisations | Important for IAS Prelims

GS paper 3- Science & Technology

Q.3) What do you understand by Artificial intelligence? Discuss the significance of AI and concerns associated with it?

Source: https://www.civilsdaily.com/op-ed-snap-should-we-fear-artificial-intelligence/#post-79018

Source: https://content.wisestep.com/advantages-disadvantages-artificial-intelligence/

I. Union Budget

1. Revenue Budget (RD)
2. Capital Budget (CB)

1. It has income that’s more or less fixed every month(your salary), you do not draw down on your assets to earn this money i.e. Household revenue receipt.
2.  It contains expenditures that are recurring i.e. they happen every month and you have very little control over them (changes in your lifestyle will impact them). Moreover no assets/capital is created by these expenditures i.e. Household Revenue Expenditure.

1. This income from loan is a liability as you have to return it. It’s not something you have earned. It’s borrowing, it’s a debt. Moreover, its not fixed as you won’t be taking a loan every month. It’s a one time receipt. Since it creates debt, it is debt creating capital receipt.
2. Shares you sold gave you 50K. You have lost your asset now. It’s also one time payment as you can’t sell same shares again( you have already sold your stocks). It does not create debt i.e. non debt creating capital receipt. Together, they constitute household capital receipt.
3. B also has expenditure that leads to asset creation ( you can sell your house to recover money, you can give it on rent and earn regular income) i.e. Household capital expenditure.  Part B constitutes household Capital Budget

 ‘Analyzing your monthly finances in the above manner makes it very clear as to how much money you owe, what assets you bought and sold and what’s your regular expenditure. Any other classification would miss all these important components. Extrapolating this to the Budget –

RR = Income that neither creates liability( borrowing) nor reduces asset( divestment, auction of natural resources),
It includes Tax + Non Tax Revenues( Service charges, dividends from PSUs, interest govt. receives, Grants in aid etc)

RE = All expenditure that doesn’t lead to capital/asset creation.

CR = CRa + CRb + CRc + CRd where,
CRa = Proceeds from Disinvestments say of PSUs.
CRb = Recovery of past loans.
CRc = Sale of assets/capital by the Govt for eg. Coal Blocks, 2G,3G, etc.
CRd = Loans raised by Government (on which it has to pay interest)

CE = CEa + CEb + CEc where,
CEa = Loans given to States and UTs
CEb = Repayment of Past Loans
CEc = Investment in infrastructure

II. Deficits

1. Revenue Deficit(RD) refers to the excess of revenue expenditure over revenue receipts

RD = Revenue Expenditure(RE) – Revenue Receipts(RR)

This deficit was so important that the FRBM Act. 2003 laid down rules to bring this deficit to absolute 0 by 2008-09.

2. Fiscal Deficit(FD) is the difference between the total expenditure and [revenue receipts plus non-debt capital receipts]

 FD = Total Expenditure(TE) – (RR + CRa+CRb+CRc)

3. Primary Deficit(PD) is measured by fiscal deficit less interest payments.

Primary Deficit (PD) = FD – Payment of Interests from previous loans

1. It shows what the Fiscal Deficit would’ve been for this particular year if no interests were to be paid. It ignores the loans taken by the previous Govts. in previous financial years.
2. It talks about the health of our economy. Lets understand how

1. PD = 0.

2. PD = FD

ERD = RD – (grants for creation of capital assets)

This is the second part of the series on poverty. Read the first part here.

Brief history of poverty estimation in India

Pre-independence poverty estimates

One of the earliest estimations of poverty was done by Dadabhai Naoroji in his book, ‘Poverty and the Un-British Rule in India’.  He formulated a poverty line ranging from Rs 16 to Rs 35 per capita per year, based on 1867-68 prices.  The poverty line proposed by him was based on the cost of a subsistence diet consisting of rice or flour, dhal, mutton, vegetables, ghee, vegetable oil and salt.

Next, in 1938, the National Planning Committee (NPC) estimated a poverty line ranging from Rs 15 to Rs 20 per capita per month.  Like the earlier method, the NPC also formulated its poverty line based on ‘a minimum standard of living perspective in which nutritional requirements are implicit’.  In 1944, the authors of the ‘Bombay Plan’ (Thakurdas et al 1944) suggested a poverty line of Rs 75 per capita per year.

Post-independence poverty estimates

1. In 1962, the Planning Commission constituted a working group to estimate poverty nationally, and it formulated separate poverty lines for rural and urban areas – of Rs 20 and Rs 25 per capita per year respectively.

2. VM Dandekar and N Rath made the first systematic assessment of poverty in India in 1971, based on National Sample Survey (NSS) data from 1960-61.  They argued that the poverty line must be derived from the expenditure that was adequate to provide 2250 calories per day in both rural and urban areas.  This generated debate on minimum calorie consumption norms while estimating poverty and variations in these norms based on age and sex.

3. Alagh Committee (1979): In 1979, a task force constituted by the Planning Commission for the purpose of poverty estimation, chaired by YK Alagh, constructed a poverty line for rural and urban areas on the basis of nutritional requirements.  The table below shows the nutritional requirements and related consumption expenditure based on 1973-74 price levels recommended by the task force.  Poverty estimates for subsequent years were  to be calculated by adjusting the price level for inflation.

Table: Minimum calorie consumption and per capita consumption expenditure as per the 1979 Planning Commission task force on poverty estimation

4. Lakdawala Committee (1993): In 1993, an expert group constituted to review methodology for poverty estimation, chaired by DT Lakdawala, made the following suggestions: (i) consumption expenditure should be calculated based on calorie consumption as earlier; (ii) state specific poverty lines should be constructed and these should be updated using the Consumer Price Index of Industrial Workers (CPI-IW) in urban areas and Consumer Price Index of Agricultural Labour (CPI-AL) in rural areas; and (iii) discontinuation of ‘scaling’ of poverty estimates based on National Accounts Statistics.  This assumes that the basket of goods and services used to calculate CPI-IW and CPI-AL reflect the consumption patterns of the poor.

5. Tendulkar Committee (2009): In 2005, another expert group to review methodology for poverty estimation, chaired by Suresh Tendulkar, was constituted by the Planning Commission to address the following three shortcomings of the previous methods:

a) consumption patterns were linked to the 1973-74 poverty line baskets (PLBs) of goods and services, whereas there were significant changes in the consumption patterns of the poor since that time, which were not reflected in the poverty estimates;

b) there were issues with the adjustment of prices for inflation, both spatially (across regions) and temporally (across time);

c) earlier poverty lines assumed that health and education would be provided by the State and formulated poverty lines accordingly.

It recommended four major changes:

a) a shift away from calorie consumption based poverty estimation;

b) a uniform poverty line basket (PLB) across rural and urban India;

c) a change in the price adjustment procedure to correct spatial and temporal issues with price adjustment;

d) incorporation of private expenditure on health and education while estimating poverty.

The Committee recommended using Mixed Reference Period (MRP) based estimates, as opposed to Uniform Reference Period (URP) based estimates that were used in earlier methods for estimating poverty.

It based its calculations on the consumption of the following items: cereal, pulses, milk, edible oil, non-vegetarian items, vegetables, fresh fruits, dry fruits, sugar, salt & spices, other food, intoxicants, fuel, clothing, footwear, education, medical (non-institutional and institutional), entertainment, personal & toilet goods, other goods, other services and durables.

The Committee computed new poverty lines for rural and urban areas of each state.  To do this, it used data on value and quantity consumed of the items mentioned above by the population that was classified as poor by the previous urban poverty line.  It concluded that the all India poverty line was Rs 446.68 per capita per month in rural areas and Rs 578.80 per capita per month in urban areas in 2004-05.  The following table outlines the manner in which the percentage of population below the poverty line changed after the application of the Tendulkar Committee’s methodology.

Table: The percentage of population below poverty line calculated by the Lakdawala Committee and the Tendulkar Committee for the year 2004-05.

The Committee also recommended a new method of updating poverty lines, adjusting for changes in prices and patterns of consumption, using the consumption basket of people close to the poverty line.  Thus, the estimates released in 2009-10 and 2011-12 use this method instead of using indices derived from the CPI-AL for rural areas and CPI-IW for urban areas as was done earlier.  Table 5 outlines the poverty lines computed using the Tendulkar Committee methodology for the years 2004-05, 2009-10 and 2011-12.

Table: National poverty lines (in Rs per capita per month) for the years 2004-05, 2009-10 and 2011-12

6. Rangarajan Commitee: C Rangarajan Committee Was Set up By Planning commission in 2012 and submitted report in 2014. The Planning commission had set up the five-member expert group under Rangarajan to review the methodology for measurement of poverty. The committee was set up in the backdrop of national outrage over the Planning Commission’s suggested poverty line of Rs 22 a day for rural areas.

• The Rangarajan committee estimation is based on an independent large survey of households by Center for Monitoring Indian Economy (CMIE).
• It has also used different methodology wherein a household is considered poor if it is unable to save.
• The methods also include on certain normative levels of adequate nourishment, clothing, house rent, conveyance, education and also behavioral determination of non-food expenses.
• It also considered average requirements of calories, protein and fats based on ICMR norms differentiated by age and gender.
• Based on this methodology, Rangarajan committee estimated the number of poor were 19 per cent higher in rural areas and 41 per cent more in urban areas than what was estimated using Tendulkar committee formula.
• Tendulkar, an economist, had devised the formula to assess poverty line in 2005, which the Planning Commission had used to estimate poverty in 2009-10 and 2011-12.

Comparison between Rangarajan and Tendulkar commitees

World Bank poverty line for India

Recently World Bank estimation shows that the country’s poverty rate has been reduced  from 21.2 per cent to 12.4 per cent for 2011-12. The World bank data shows that India is overestimating  while counting the number of poor.

Reasons for discrepancy between World bank data and NSSO data

• The World Bank uses modified mixed reference period (MMRP) instead of the uniform reference period (URP) while estimating poverty.
• Under the URP, used in the National Sample Surveys since the 1950s, data is collected on the “30-day recall for consumption of both food and nonfood items to measure expenditures”. But under the MMRP, which was first introduced in NSS (alongside URP) in 2009-10, the 30-day recall was modified to a 7-day recall for some food items and to a 1-year recall for low-frequency nonfood consumption items.
• As a result of the shorter recall period for food items, MMRP-based consumption expenditures in both rural and urban areas are 10-12 per cent larger than URP-based aggregates. These higher expenditures, combined with a high population density around the poverty line, translates to a significantly lower poverty rate of 12.4 per cent for 2011/12.

Questions

1. Though there have been several different estimates of poverty in India, all indicate reduction in poverty levels over time. Do you agree? Critically examine with reference to urban and rural poverty indicators.

2. Compare and analyse poverty estimation made by World Bank for Indian population with that of estimations made by various committees in India.

3. Do you think that the estimation of poverty lines in India has been a futile exercise? In your opinion how should governments make use of poverty line figures? Critically examine.

4. Recently few experts have suggested that the Tendulkar Committee’s report should be accepted for poverty estimation but socio-economic indicators should be used to determine entitlement for benefits. Do you see merit in this suggestion?

Index

• Why in news
• Concept of poverty
• concept of poverty line
• Criticism of poverty line
• Recall Period

Why in news

1. The government may soon come out with a new definition of poverty, with the Niti Aayog likely to set up a panel of experts to formulate a new poverty line. The new line, which will be different from the existing Tendulkar line and Rangarajan line, will also be based on the latest consumption expenditure survey.

2. Reasons: To set a target for poverty reduction while preparing its first 15-year vision document and 7-year strategy paper, which have replaced the 5-year plan Also, to measure the impact of the government’s anti-poverty schemes and other welfare initiatives.

Concept of poverty

Poverty refers to a situation when people are deprived of basic necessities of life. It is often characterized by inadequacy of food, shelter and clothes. In other words, poverty refers to a state of privation where there is a lack of essential needs for subsistence. It can be further subdivided into absolute poverty and relative poverty.

• Absolute poverty includes the lack of biological necessities, such as food, water, clothing, housing, and sanitation, whereas, relative poverty (or extreme poverty) refers to a poverty line, and is a definition of the amount of income a person needs to satisfy basic needs.
• In basic terms, absolute poverty is a having a lack of basic resources, and relative poverty is more to do with income inequality.
• Absolute poverty refers to a set condition, which is the same in every country, and does not change over a period of time. Relative poverty, on the other hand, refers to conditions which are subjective to the society in which the person lives, and therefore, does vary between countries, and can change over time e.g. more urban cities will have greater education, energy, and transportation costs, so the poverty line will be higher in this country, compared to poorer countries.

Concept of poverty line

1. What is a poverty line – The poverty line defines a threshold income. Households earning below this threshold are considered poor. Different countries have different methods of defining the threshold income depending on local socio-economic needs.

2. Who brings out the poverty estimates in India – The erstwhile Planning Commission used to release the poverty measures.

3. How is it measured – Poverty is measured based on consumer expenditure surveys of the National Sample Survey Organisation. A poor household is defined as one with an expenditure level below a specific poverty line.

4. What’s the Indian poverty line –

• Earlier, India used to define the poverty line based on a method defined by a task force in 1979. It was based on expenditure for buying food worth 2,400 calories in rural areas, and 2,100 calories in urban areas.
• In 2011, the Suresh Tendulkar Committee defined the poverty line on the basis of monthly spending on food, education, health, electricity and transport. According to this estimate, a person who spends Rs. 27.2 in rural areas and Rs. 33.3 in urban areas a day are defined as living below the poverty line. For a family of five that spends less than Rs. 4,080 and Rs. 5,000 in rural and urban areas respectively is considered below the poverty line.
• This has been criticised for fixing the poverty line too low. According to a committee headed by former Reserve Bank governor C Rangarajan, there were 363 million people, or 29.5% of India’s 1.2 billion people, who lived in poverty in 2011-12. The Rangarajan panel considered people living on less than Rs. 32 a day in rural areas and Rs. 47 a day in urban areas as poor.

5. Why has there been so much criticism about the poverty line in India – According to critics, the government has deliberately kept the poverty line low. A low poverty line has enabled the government to show that millions have moved out of poverty. This, critics say, is factually incorrect as the definition of poverty line is disputed. They also say that the data lacks statistical rigour and has been released to gain political mileage.

Criticism of poverty line concept

1. Even though based on calorie approach, the poverty line is not a true indicator of malnourishment because of interpersonal variations in good habits.

2. The notion of absolute poverty is inadequate because relative poverty is also an equally important.

3. The poverty line, quantified as a number is reductionist. It does not capture important aspects of poverty — ill health, low educational attainments, geographical isolation, ineffective access to law, powerlessness in civil society, caste and/or gender based disadvantages, etc.

4. The poverty line provides the conceptual rationalization for looking at the poor as a “category” to be taken care of through targeted ameliorative programmes, ignoring structural inequalities and other factors which generate, sustain, and reproduce poverty.

5. Poverty line derived from personal consumption patterns and levels do not take into account items of social consumption such as basic education and health, drinking water supply, sanitation, environmental standards, etc. in terms of normative requirements or effective access.

6. The head-count ratio based on the poverty line does not capture the severity of poverty in terms of the poverty deficit (total shortfall from the poverty line) or additionally the distribution of consumption expenditure among the poor. It is insensitive to mobility within the below poverty line group. It is also invariant to upward and downward mobility across the poverty line so long as such mobility takes place in equal measure.

7. In a country of India’s continental size and diversity, poverty line based on aggregation at all-India level ignores State-specific variations in consumption patterns and/or prices.

Recall period – Uniform Reference Period (URP) vs Mixed Reference Period (MRP)

It is important to understand that a poverty line is essentially a monetary value. The idea is to collect data on people’s consumption expenditure, and to ascertain how many people surveyed fall below that poverty line. In India, there were two main ways of collecting data: Uniform Reference Period (URP) and Mixed Reference Period (MRP). Until 1993-94, consumption information collected by the NSSO was based on the Uniform Reference Period (URP), which measured consumption across a 30-day recall period. That is, survey respondents were asked about their consumption in the previous 30 days. From 1999-2000 onwards, the NSSO switched to a method known as the Mixed Reference Period (MRP). The MRP measures consumption of five low-frequency items (clothing, footwear, durables, education and institutional health expenditure) over the previous year, and all other items over the previous 30 days. That is to say, for the five items, survey respondents are asked about consumption in the previous one year. For the remaining items, they are asked about consumption in the previous 30 days.

In the next series we write about how poverty is measured starting from Dadabhai Naoroji till present. Read it here.