BLOCK 3 INEQUALITY AND POVERTY

Inequality and
Poverty
BLOCK 3 INTRODUCTION
The third block of the course is titled Inequality and Poverty. In the first block,
you had studied about the basic idea of what is meant by economic growth and
economic development and the relationship among them. Also you were
acquainted with comparisons among nations The second block familiarized you
with growth models and with the factors that determine growth. This third block
takes up the important issues of inequality and poverty.

The block has two units. The first unit, unit 8 is titled Inequality. The unit
discusses about the concept of inequality, various axioms related to inequality,
and various ways to measure inequality. The title of the next unit, unit 9 is
Poverty. Like the previous unit did about inequality, this unit, too deals with the
concept , measurement and some other issues, but with regard to poverty in this
case.

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UNIT 8 INEQUALITY
Inequality

Structure
8.0 Objectives
8.1 Introduction
8.2 Concept of Inequality
8.2.1 Economic Inequality
8.3 Axioms of Inequality
8.4. Measures of Inequality
8.4.1 Personal Distribution
8.4.2 Functional Distribution
8.5 Inequality and Development
8.5.1 Kuznets' Inverted-U Hypothesis
8.5.2 Gary S. Fields' Prediction
8.6 Let Us Sum Up
8.7 Answers/Hints to Check Your Progress Exercises

8.0 OBJECTIVES
After going through this Unit, you should be in a position to:
 Explain the concept of inequality;
 Identify the axioms of inequality;
 Discuss the measures of inequality;
 Critically examine the measures of inequality; and
 Explain the relationship between economic growth and inequality

8.1 INTRODUCTION
Distribution of income in a country has always been an important topic of debate
in all the nations. Economic growth in a country indicates country’s development
but this is not a sufficient indicator of development. If the economic growth
distributes the income in a country more unequally, then there is a role of the
government to try and mend it in a manner that the distribution is more equal
than unequal. We begin with understanding the concept of inequality, in
particular the economic inequality. Afterwards, the axioms which need to be met
by the appropriate inequality index are discussed. There are various indexes
which measure the inequality, some of them are explained. Finally, we discussed
the relation of economic growth and inequality.

8.2 CONCEPT OF INEQUALITY

Why would one be interested in understanding the inequality in the resource
(income/wealth) distribution? There are two reasons: philosophical and ethical

Dr. Nidhi Tewathia, Assistant Professor, School of Social Siences, IGNOU
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Inequality and grounds for aversion to inequality per se and the functional reason.The
Poverty
philosophical and ethical grounds meanthat the individuals having different level
of access to lifetime economic resources should not be treated differently for that
reason. Descendants have to face the consequences of the ancestors’ limited
economic resources. On the other hand, parents’ right to bequeath their wealth to
their children also leads to some individual inheriting more than sufficient
wealth. So, it is like two sides of the same coin. Bequeathing wealth seems to be
a good way as well as an unfair means to perpetuate inequality. If one does not
care about inequality at an intrinsic level and just cares about the overall
economic growth, we say that the person cares about inequality at the functional
level. It means the reason for caring about inequality is because inequality has an
impact on economic features which one cares about.
There are many economic interpretations, ideological and intellectual stances of
inequality. Its definition may depend on what stance one takes. Which way one
divides the given cake would be parallel to the way an actual income distribution
deviates from a benchmark for distributing income. Hence, there is a scope of
having different views about the degree and size of inequality, its relevance and
attached policies.
Income conditions are often used as a good proxy for understanding economic
conditions because income is positively correlated to the living standards and
other wellbeing indicators. But only the income inequality does not shape up the
economic inequality. Inequality of opportunities is as important as inequality of
outcomes; they both are related as well. Let us take an example of an individual
who is talented but cannot afford good education which means he is facing
inequalities of opportunities. As a result, he is likely to have a low-income level
which indicates inequality of outcomes.
8.2.1 Economic Inequality
Economic inequality is the fundamental cause that provides diverse choices one
individual and denies to another. It is related to the concepts like lifetime,
capabilities, political freedom, contribution to society. Let us look at few
situations which show us this: There are two individuals, one earning more than
the other but living in a country which denies him freedom like right to vote or
travel. Similarly, one individual earning more than the other till a specific age
and after that earns less than the other individual. So, economic inequality cannot
be well-defined. It depends on whether we are choosing to look at the distribution
of current income, distribution of wealth or distribution of lifetime income. The
current income shows the inequality at a point of time and such inequalities, if
are temporary, are not damaging either from the ethical point of view or the
effect on economic systems point of view. For example, there are two countries
having only two levels of incomes prevailing: in country A $2,000 per month and
$3,000 per month. In country B the income levels are $1,000 per month and
$4,000 per month. Income is more dispersed in country B as compared to country
A. If we look at the average income, it is same in both the countries. Let us say in
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country A, people enter their working life at one of the two levels of income but Inequality
stay there forever. In country B people exchange their jobs each month between
the low-paid job and the high-paid job. If we measure inequality at any one point
in time, country A seems to be more equal but in terms of average yearly income,
each individual earns same amount in country B. It means sticky or fluid jobs
have an implication on understanding the real scenario of income distribution.
Now let us look at inequality from another perspective. Beyond the importance
we give to how much people earn we should also try to look at not only how it is
earned. Having this perspective as a background, let us understand what is
functional and personal income distribution. Functional distribution is all about
the returns to different factors of production, such as labour with various skills,
capital equipment of different kinds, land, and so on. These factors of production
are not owned by the individuals in a society in an equal proportion. A given
household receives different categories of income. The pattern and magnitude of
the ownership of factors of production decides the flow of the various categories
of income to a household. Some households will receive only wage income as
they own only their labour. But some households will receive rent, profit and
wages as per their ownership of all three factors of production. When we
combine the functional distribution of income with the distribution of factor
ownership, we reach at the personal distribution of income which describes
income flows to individuals or households and not to the factors of production.
So, we can say that the functional distribution tells us about the relationship
between inequality and growth and for our understanding of economic
inequalities, it is imperative that we understand both how factors are paid and
how factors are owned.

8.3 AXIOMS OF INEQUALITY

We talk a lot about an egalitarian society but it is not an easy endeavour. At a
given time one is facing various alternative income distributions and which one is
relevant and appropriate is a big challenge. The measures of inequality tell us
how to measure but how to rank or order these measures is also to be understood.
Using axioms help to choose among different inequality indexes. The measures
themselves will be discussed in the next section. So, axioms are some desirable
properties or characteristics which these inequality measures/indexes should
possess. Alternate measures then will be able to be compared based on these
axioms. Let us now discuss the axioms which are desirable to be met by the
inequality measures. If the criterion is weak then many inequality measures will
be able to meet that criterion and vice versa.
Axiomatic approach to choose measurement of inequality indicates that we
choose an inequality index because it meets some desirable properties. The four
axioms which should be possessed by a measure of inequality are: (i) the
anonymity principle; (ii) scale independence principle; (iii) population
independence principle, and (iv) transfer principle.
i) The anonymity principle: this principle states that the inequality measure
does not identify and classify the individuals in to different classes like rich,

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Inequality and poor, good and bad. The measure possessing this axiom will be silent about the
Poverty quality of the people.
ii) The scale independence principle: this axiom indicates that size of the
economy does not dominate the measure of inequality. It means that the measure
shall not be based on the fact whether the economy is rich or poor, overall. The
dispersion in the income in the economy is of the interest and not the magnitude.
iii) The population independence principle: this axiom demands that the
measure should not be based on the number of people who receive income. It
means that the measure needs to be independent of the size of the population.
iv) The transfer principle(the Pigou-Dalton principle): this axiom requires the
inequality measure to change when income transfers occur among individuals in
the income distribution. This means that with a progressive transfer (income
transfer from rich to poor), the inequality index should fall and vice versa in case
of regressive transfers (income transfer from poor to rich).
Check Your Progress 1
1) What do you understand by the term ‘Inequality’? Explain.
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2) Discuss Economic inequality.
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3) Explain any two axioms which should be possessed by the inequality

measures.
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A perspective was discussed in section 8.2, i.e., looking at the concept of

inequality from the lens of personal income distribution and the functional
distribution of income. This section discusses the measures of income inequality
from that perspective.
8.4.1 Personal Distribution of Income
This approach considers the total income earned by an individual. All the
individuals earning same annual income will be considered in the same income
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group even if they have invested different number of work hours to earn that Inequality
income. Location-based and occupational sources of income are not considered.
An individual earning larger personal income will be considered in higher
income group. Overtime, various measures of inequalities have been developed
keeping personal distribution of income approach in mind. Few are discussed
below:
1) Lorenz Curve
Lorenz curve is the most common and widely known measure of income
inequality. An American economic statistician, Prof. Max D. Lorenz proposed
this curve. He utilised this curve to measure disparities in the distribution of
income. This curve is a cumulative frequency graph. It is applied to present data
relating to the population and the wealth distribution in a country. The population
and income components are needed to construct this curve. The figures are
required in percentage terms and then arranged in to a cumulative frequency
distribution. From the origin a straight line is drawn which ends at the coordinate
of 100 percent income and 100 per cent of population. This straight line is known
as the Line of equal distribution. This line acts as a benchmark to measure how
much of inequality exists in a country. If actual distribution of income in a
country is coinciding with the line of equal distribution, then it means the country
faces no inequality of income. As the actual distribution curve keeps deviating
from the line of equal distribution, the income inequality keeps rising in a
country. Farther the actual distribution curve from the line of equal distribution,
more is the income inequality.In Figure 8.1, Y-axis represents cumulative
percentage of income is andX-axis representscumulative percentage of
population.We draw the line of equal distribution by joining the 100 per cent
points on both the axes. The figure shows two Lorenz curves for two countries
i.e.,country A and country B. The LorenzCurve relating to country B is further
away from the line of equal distribution ascompared to country A. Hence, we can
infer that there are more disparities in the distribution ofincome in country B than
in country A.
100

Line of equal
Cumulative % of Income

distribution

Country B

Country A

0
Cumulative % of Population 100

Fig.8.1 Lorenz Curve

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Inequality and We can observe that the Lorenz curve possesses the principles of anonymity,
Poverty
population, and relative income, because the curve does not utilise any
information on income or population magnitudes but only retains information
about income and population shares. But there are two problems with it. Mostly
the researchers of policy makers need to look at inequality in the form of a
number because that is more concrete and quantifiable as compared to a graph.
Also, any kind of inequality rankings cannot be provided by the Lorenz curves if
they cross.This means that an inequality measure that provides us with a number
for the income distribution would be perceived as a complete ranking of income
distributions. It would mean that in some situations, inequality measures tend to
disagree with one another.
2) Quintile Distribution
There is away to somewhat handle the non-numerical part of Lorenz curve. The
same underlying information on distribution can be presented in a numerical
format. World Bank favours the idea of arraying the income distribution by
population quintiles (20per cent of the population). For example, the poorest 20
per cent of India's population earns 8 per cent of the total income or the richest
quintile earns 41.4 per cent and so on. When comparing two countries, if one has
greater percentage share of income accruing in at least one quintile below the
highest and is at least equal in the other three below the highest, the country is
said to have 'Lorenz dominance', or to 'Lorenz dominate' the other country.
3) The range
It is a very simple measure to calculate. First, we find out the difference in the
incomes of the richest and the poorest individuals. This difference is then divided
by the mean to remove the dependence on the units in which income is measured.
This is a rather crude measure. It pays no attention to people between the richest
and the poorest on the income scale. From the perspective of the axiomatic
approach, it fails to satisfy the Dalton principle. Let us see this with the help of
an example. Suppose a small transfer from the second poorest goes to the second
most rich individual. This transfer will keep the range measure unchanged.
Ideally the regressive transfer should lead to a fall in the inequality
index/measure. But we can use the range if the detailed information on income
distribution is missing. It proves to be quite useful.
4) The Kuznets ratios
In his pioneering study, Simon Kuznets introduced developed these ratios of
income distributions in developed and developing countries. These ratios are
basically one step advanced than the quintile distribution. These ratios refer to the
share of income owned by the poorest x% of the population divided by the
richest y% of the population, where x and y stand for numbers such as 10, 20, or
40. If the ratio is high, it means society is more equal. These ratios come in handy
in situations where detailed income distribution data are missing.

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5) The mean absolute deviation Inequality

This is the measure that takes advantage of the entire income distribution. It has a
simple idea behind it i.e., inequality is proportional to distance from the mean
income. Hence, we take all income distances from the average income (mean
income), and add them up. Then divide the addition by total income to present
the average deviation. This average deviation will be a fraction of total income.
It is useful to express the deviation in terms of an absolute deviation denoted by
M as the absolute value ignore sthe negative signs. It looks a promising measure
as it takes into account the overall income distribution but it has one drawback: it
is often insensitive to the Dalton principle. Let us see how. Assume there are two
people with the incomes A and B. A is below the mean income of the population
and B is above the mean income of the population which means A < B. If a
regressive transfer (a transfer from poor to rich) takes place, then the inequality
measured by M will rise because the distance of both A and B will go up. Till
now the inequality measure is faring well. Now let us take another case. We take
any two incomes A and B but this time they both are above the mean income of
the population. Again, the regressive transfer takes place from A to B. Let us say
the transfer was small enough so that after the transfer also both the income
levels A and B are above the mean income. There will be no difference in the
sum of the absolute difference from mean income. So, the mean absolute
deviation will not register any change in such a case, and hence the Dalton
principle fails. The Dalton principle is meant to apply to all regressive transfers,
not just those from incomes below the mean to incomes above the mean.
6) Coefficient of Variation
Coefficient of variation (CV) is a relative measure of dispersion of data points
around the mean. It is measured asfollows:

CV = X 100

If we want the measure in the form of decimal then we remove the multiplication
of coefficient by 100. The multiplication by 100 provides us with is the
percentage. This measure require that the income is normally distributed.
Coefficient of variation presents the extent of deviation from the normal
distribution of income. Larger the coefficient of variation, greater will be
inequality in the distribution of income and vice versa.
7) Gini Coefficient
This measure of inequality is widely used and is a measure of the relative degree
of income inequality in a country. The Gini approach starts from a fundamentally
different base. Instead of taking deviations from the mean income, it takes the
difference between all pairs of incomes and simply totals the (absolute)
differences. It is as if inequality is the sum of all pairwise comparisons of “two-
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Inequality and person inequalities” that can possibly be made. It can be obtained by calculating
Poverty
the ratio of the area between the line of equal distribution (diagonal 45º line) and
the Lorenz curve divided by the total area of the half-square in which the curve
lies. In Figure 8.2, this is the ratio of the shaded area to the total area of the
triangle BCD, i.e.,

Gini coefficient =

A D

Line of equal
Cumulative % of Income distribution

Lorenz Curve

B C
Cumulative % of Population

Fig. 8.2Gini Coefficient

This ratio is known as the Gini Concentration Ratio or the Gini Coefficient, after
the Italian statistician C. Gini, who first formulated it in 1921. It very closely
related to the Lorenz curve Recall that the more “bowed out” the Lorenz curve,
the higher is our intuitive perception of inequality. It turns out that the Gini
coefficient is precisely the ratio of the area between the Lorenz curve and the 45°
line of equal distribution, to the area of the triangle below the 45° line.Gini
coefficients are aggregate inequality measures which can vary from 0 (perfect
equality) to 1 (perfect inequality). It is generally found that if the Gini coefficient
lies between 0.5 and 0.7, then the distribution is a highly unequal distribution.
And if the Gini coefficient is in the range of 0.2 to 0.5, then those countries have
relatively equitable distribution. The Gini coefficient meets all four principles
and is therefore Lorenz-consistent, just like the coefficient of variation.
8.4.2 Functional Distribution
The functional distribution or factor share distribution represents the percentage
of income received by one factor of production in comparison to the income
received by other three factors of production. In particular it’s the share of labour
in total income compared to the share of total income received in the form of
rent, interest and profits. The significance of this measure is that it attempts to
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explain the income of a factor input in terms of the contribution the factor makes Inequality
to the total output. The unit prices of each factor of production are reached at
with the help of supply and demand curves. Each factor market has it own market
where its supplied and demanded. At the equilibrium in these factor markets we
receive the equilibrium prices and quantities of these factors. Factors receives
their rewards on the basis of their function. The drawback of this approach is that
it fails to consider the role and influence of non-market forces on the factors of
production. Non-market forces are those which influence the equilibrium of the
market but not directly like the bargaining power of the trade unions which affect
the wage rate, power of monopolists who manipulate the prices of capital or land.

8.5 INEQUALITY AND DEVELOPMENT

Debate on the relationship between economic development and income
inequality has always prevailed. The effect of economic growth on poverty
depends on the level of economic inequality existing in a country. Economic
growth increases the income inequality if it benefits the rich in a country which
already has high inequality. On the other hand, if the inequality reduces due to
well targeted policies, then the poverty reduction goal seems to be achievable.
Hence, it is important that we understand the link between income inequality and
economic development. The literature on the economic development-income
inequality nexus in industrial societyalso places emphasis on the causes of
current social inequality. But we will explain two main studies which describe
what happens to the distribution of income as a result of economic growth in a
country.
8.5.1 Kuznets' Inverted-U Hypothesis
Simon Kuznets, an economist, proposed a particular relationship between the
income distribution and economic growth. He explains the journey of income
inequality when an economy develops from a primarily rural agricultural society
to an industrialized urban economy.He said that the relationship is of an inverted
U. This inverted U curve is known as the Kuznets' curve. The same has been
presented in Figure 8.3.We observe that at the initial levels of economic growth,
the income inequality widens. Afterwards, the inequality stabilises at a given
level of economic growth, and finally falls in the advanced stages of growth.

Y
Degree of Income Inequality

Stage of Economic Development X

Fig.8.3Kuznets’ Curve 129

Inequality and Kuznets says that the widening of income inequality in initial stages of growth is
Poverty
due to the structural changes an economy goes through as the growth takes place.
The urban sector receives more weight during that time so the economic activity
takes place in favour of the urban sector characterised by higher productivity. But
in the later stages of economic growth, the relation reverses. As a country
industrialises, the center of the economy shifts from rural areas to the cities as
rural laborers, such as farmers, begin to migrate seeking better-paying jobs.Due
to the influx of rural migrants to the urban areas, the rate of growth in urban
labour becomes high. When the rate of expansion in the urban-high productivity
sector is higher than the increase in the rate of growth of the urban labour force,
the income differentials will reduce as the population in rural areas fall. But this
stage may never be achieved by the nations which experience high rate of
population growth. Early evidence suggests that developing countries appear to
have higher inequality, on average, than their developed counterparts.
But today, the world looks very different than it did in 1955 when Kuznets
proposed the inverted U relationship. In the past decades, economic inequality in
the United States and other wealthy/developed nations has risen sharply which
has induced a renewed the quest to know how the changes in income
distributions affect economic wellbeing. Over the same time period, economic
inequality has persisted and even grown in many poorer economies.
8.5.2 Gary S. Fields's Prediction
Gary S. Fields has offered predictions about how the inequality will behave as
the economic growth takes place. He found the Lorenz curves very relevant and
has used them for his predictions. He discusses three different situations:1)
traditional-sector enrichment growth typology; 2) modern-sector enrichment
growth typology, and 3)modern-sector enlargement growth.
1) Traditional-Sector Enrichment Growth Typology
As the name suggests, the traditional sector workers receive the benefits of
growth, while there is little or no growth taking place in the modern sector. This
kind of pattern will be noticed in those countries which have low incomes as well
as low growth rates and choose to work towards reduction of absolute poverty.
This kind of growth leads to higher-income and hence a more equal relative
distribution of income as well asless poverty. Diagrammatically, it means that the
Lorenz Curve shifts uniformly upward. This new shifted curve will be closerto
the line of equality as shown in Figure 8.4.
2) Modern-sector Enrichment Growth Typology
This kind of growth limits its benefits to the people who are engaged in the
modern sector. The wages and number of workers in the traditional sector
remains more or less constant.It is easy to foresee that this kind of growth results

130
in higher income only for those who are associated with the modern sector and Inequality
that leads to a less equal relative distribution of income andnearly no change in
poverty. Diagrammatically, this growth moves the Lorenz curve
uniformlyoutward and further from theline of equality as shown in Figure 8.5.

10 10
% of Income

% of Income

0 % of Income Recipients 0 % of Income Recipients

10 10

Fig. 8.4 Fig. 8.5

FIGURE 8.4 AND 8.5 SHIFTING LORENZ CURVES

3) Modern-sector Enlargement Growth

This is the case, the two-sector economy is developed by increasing the size of
modern sector but maintaining constant wages in both sectors. This is the case
depicted by Lewis model. You will study about Lewis model in course BECC
114. In this type of growth, absolute poverty is reduced, but the Lorenz curves
will always cross and hence we cannot say with certainty about the changes in
relative inequality. Fields believes that if this pattern of growth experience is
predominant, inequality is likely to increase in the initial stages of development
and then it may decrease. This is shown in Figure 8.6.In the figure two Lorenz
curves intersect each other. This happens because the poor who remain in the
traditional sector have their incomes unchanged, but these incomes are now a
smaller fraction of the larger total, so that the new Lorenz Curve, L2, lies below
the original Lorenz curve, L1, at the lower end of the income distribution scale.
Workers associated with the modern sector receive the same absolute income as
before, but now the share received by the richest income group is smaller, so that
the new Lorenz curve lies above the original one at the higher end of the income
distribution scale. Therefore, somewhere in the middle of the distribution, the
new and the original Lorenz curves must cross.
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Inequality and
Poverty 100

% of Income L1
L2

0
% of Income Recipients 100

Fig. 8.6 Crossing Lorenz Curves

In a nutshell, Gary Fields says,

 with traditional-sector enrichment inequality would fall gradually;

 with modern-sector enrichment, inequality would rise gradually;
 with modern-sectorenlargement, inequality would first fall and then rise.
Check Your Progress 2
1) Explain what is Lorenz Curve with the help of a diagram.
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2) Discuss the following measures of inequality: a) Range b) Coefficient of
variation.
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 3) What was the hypothesis presented by Simon Kuznets? Discuss his work Inequality
in relation to inequality and economic growth.
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4) Mention the drawbacks of any two inequality measures.
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5) Explain the functional distribution measure of inequality.
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8.6 LET US SUM UP

Inequality is a concept which has to be dealt by all the countries. We began the
unit by discussing the concept of inequality with specific reference to economic
inequality. The personal income distribution and functional distribution are two
perspectives from which we can understand the concept of inequality. To
measure the inequality, one needs some kind of measures. These measures will
be able to justify their role only if they meet certain axioms. We explained four
axioms (the anonymity principle; scale independence principle; population
independence principle, and transfer principle) which are very important in order
to measure inequality in any country. Afterwards we discussed the measures such
as the Lorenz curve, Gini coefficient at length. The relationship of economic
growth and inequality was also examined with the help of famous Kuznets curve
predictions of Gary S Fields. The economic growth increases the inequality
initially and at later stages of growth, the inequality reduces.

8.7 ANSWERS/HINTS TO CHECK YOUR

PROGRESS
Check Your Progress 1
1) Refer section 8.2
2) Refer sub-section 8.2.1
3) Refer section 8.3

133
Inequality and Check Your Progress 2
Poverty
1) Refer sub-section 8.4.1
2) Refer sub-section 8.4.1
3) Refer sub-section 8.5.1
4) Refer sub-section8.4.1
5) Refer sub-section 8.4.2

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UNIT 9 UNDERSTANDING POVERTY
Structure
9.0 Objectives
9.1 Introduction
9.2 Concept and Meaning of Poverty
9.3 Types of Poverty
9.4 Poverty Line
9.5 India’s Poverty Line Estimation
9.6 Poverty Alleviation Programmes in India
9.7 Let Us Sum Up
9.8 Answers/Hints to Check Your Progress Exercises

9.0 OBJECTIVES
After going through this Unit, you should be in a position to:
 Explain the concept of poverty and its various dimensions;
 Identify the characteristics of poor ;
 Discuss the poverty line (national and international);
 Critically explain the recommendations made by various poverty expert
groups ;
 List a few poverty alleviation programmes in India

9.1 INTRODUCTION
In the year 2000, the General Assembly of the United Nations adopted a set of
Millennium Development Goals which contains eight such goals. The first one
itself is to eradicate extreme poverty and hunger. This indicates that poverty
reduction is the prerequisite for any country which wants to provide its citizens
with good quality of life. In this unit, we first discuss the concept of poverty. This
Unit begins with explaining the various approaches to the concept of poverty and
its types. Various correlates of poverty and characteristics that are widely shared
by poor individuals are explained. Further the concept of poverty line has been
discussed followed by the progression of India’s Poverty Line estimation. A
critical view has been taken up in order to provide you the complete picture of
the recommendations of various committees which were constituted for the task
of poverty estimation in our country. The unit concludes by discussing the main
poverty alleviation programme of India: Integrated Rural Development
Programme.


Dr. Nidhi Tewathia, Assistant Professor, School of Social Siences, IGNOU
Inequality and
Poverty
9.2 CONCEPT AND MEANING OF POVRTY
We always welcome the economic growth that spreads its benefits equitably
among the population. If the growth is distributed unequally then it needs to be
assessedin terms of equity. First, there exists an inequality of world income
distribution and then there is the inequality of income distribution within a
country. If a country is under developed then the most visible characteristic of
that country will be the existence of poverty. It is not easy to describe poverty
and its related dimensions (illiteracy, hunger, ill health, capability deprivation),
head on. Poverty is like a threat to the existence of individuals who are poor. It
destroys the aspirations, hopes and potential joy of good health and nutrition.
Poverty also indicates the absence of productive asset holdings, like possession
of land. Hence, the basic implication of poverty is that the poor will lack access
to markets, particularly the markets for credit, insurance, land, and labour. The
absence of collateral restricts their access to credit markets. This leads the
individual to the Poverty Trap. This trap makes it very difficult for a poor
individual to escape poverty as some amount of capital possession is required in
order to escape. Low wages, low work opportunities, inability to pay for
education are all causes of poverty trap. Poverty trap is a spiral which forces
people to remain poor.
Poverty as a concept is of high significance, both intrinsic and functional.
Further, it holds importance from the policy making view as well. It is a common
knowledge that a fundamental goal of economic development and of all
governments is the removal of poverty. Hence, the characteristics of the poor
need to be understood well. That helps in structuring the appropriate measure of
poverty by the policy makers. Poverty is also an outcome of economic
development which needs to be dealt with through various policies.
One view of looking at the concept of poverty is in relation to economic growth.
As a result of economic growth, the average consumption and average income
rise. It impacts poverty as the distribution of income and consumption will
change. If everyone’s income increases then we can say that the poverty reduces.
But if the economic growth only increases the incomes of the rich (still meaning
that the average income is increasing), no reduction in poverty will take place. In
fact, the distribution of income widens.
Another perspective to look at the concept of poverty is through the work of
Amartya Sen. His work is based on the relation of poverty with capability
deprivation. Individuals are deprived of capability building if they are poor. For
example, poverty denies the opportunity to gatherthe school experience which
would lead to yet another type of poverty. Such individuals will not beable to
read and write. That means they will not be able to participate in the activities
which need literacy. Only those individuals who are literate will be able to
capture the benefits of those opportunities. It is also important to look at poverty
as per the society/economy where the individual lives. Individuals are also poor if
they lack resources to participate in the society where they live, even if they have
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enough incomes to lead their life nicely in some other society. But poverty is not Poverty
only the inadequacy of income, its domain is much wider. Poverty not only
includes not having enough income to guarantee adequate food, clothes, or
shelter, but also being unhealthy, as well as being denied access to education,
political participation in the society.International institutions like the World Bank
and the United Nations go beyond the measurement of the number of people
whose income is low. They, in addition,give importance to health, such as infant
and child mortality rates and the life expectancy, and to participation in
education. This means that the poor people in the world are poorer, and rich
people are richer because income is positively related with the above-mentioned
aspects of well-being. So, we can say that the Africans, in addition of having less
money have lower life expectancy and low level of educationas compared to
Europeans and Americans. If we look at a within country scenario, same holds.
Within acountry, poorer people are more likely to be malnourished and
unhealthy, to lose their babies and to have low life expectancy. This within
country scenario is true for both the rich countries of Europe as well as the poor
countries of Asia and Africa. Hence, to gain a wider view of poverty, a more
complete picture of deprivation and inequality should be considered.

9.3 TYPES OF POVERTY

Depending upon different viewpoints, poverty can be analysed as follows:First
classification refers to the type of base information used:Objective and
Subjective poverty; Second is depending on the scale or reference used to set the
thresholds:Absolute and Relative poverty; Third is based on the length of
duration of poverty: Transversal poverty (in a fixed year) and Persistent poverty
(Long term).
The studies which use the information directly collected by a researcher in terms
of the measurement of various variables are called Objective poverty studies. The
direct observation of a researcher provides high degree of objectivity. The
commonly used variables by researchers are household income and household
expenditure.On the other hand, the perception of the individuals or households
about their own self converts into Subjective poverty studies. Information on the
opinion of these individuals or household is used to understand poverty. Such
studies influence the subjective view on poverty as opposed to the objective
focus.
Absolute povertyindicates a situation when an individual is not able to afford
basic goods and services like food, housing and clothes. It is also linked to
destitution. It is difficult to find ways of measuring absolute poverty. Relative
poverty places the concept of poverty in relation other people around. A person is
considered poor when he/she is at a disadvantage (financially or socially) as
compared to other people in their environment. This idea of poverty is closely
linked to the notion of inequality. A person’s income level or affordability may
change over time. Hence, poverty is not a static phenomenon.Individuals move in
and move out of poverty. So, it is crucial to conductdynamic poverty studies
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Inequality and which analyse a population considering the various changes and transitions that
Poverty
take place over a period of time. This is the context of persistent or long-term
poverty analyses.In European Union countries, a person is considered persistently
poor if they have been classified as poor in the last year and at least during two of
the three previous years.Transversal poverty studies deal with a fixed time period
for which the analysis is carried out.
Another type of poverty is from a completely different perspective. The poverty
studies based on this perspective focus on multi-dimensional deprivation i.e.,
analyses based mainly on the impossibility of access to certain basic consumption
elements. This perspective has been discussed in the previous section. Such
studies mainly stress on the social exclusion of an individual due to poverty in a
multi-dimensional manner.
Check Your Progress 1
1) Discuss the various features of poverty.
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2) How is poverty related to capability deprivation?
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3) Explain any two types of poverty.
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9.4 POVERTY LINE

At the core of the concept of poverty is a notion which is called a poverty line. It
is a critical threshold ofincome, consumption, or access to goods and services.
Individuals falling below this lineare declared poor. For example, to reach at an
estimate of the poverty line, we will need data on minimum nutrient levels which
make an adequate diet. Once that is done, we will use the prices of those food
items which provide those nutrients and the cost of clothing and shelter at a
minimum level to find out the total expenditure needed to fulfil these needs. This
total expenditure needed for fulfil the basic requirements will act as an estimate

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of the poverty line in a given society. We can say that the poverty line is an Poverty
indicator of the minimum level of economic participation in a given society at a
particular time. The minimum wage in a given country is a legally decreed
estimate of a poverty line.
Link between hunger and poverty is strong. Many countries have nutrition-based
poverty lines. United States estimates poverty line based on food requirements. In
India, the poverty line estimate is based on the food expenditure necessary to
afford the minimum consumption of calories.It is a tradition to set the poverty
line as per the cost of a particular standard of living given a country. A major
component of poor’s income gets spent on the food requirements. So, if they do
not have enough money, it would mean like sleeping without sufficient food.The
general norm which many countries follow when they estimate the poverty line,
is by looking at a calorie norm of around 2000 calories a day. But this estimate is
gender and work sensitive. As agricultural labour works physically harder, so in
that case the calorie norm is revised upwards. Similarly, separate standards are
employed for men, women and children.The association of food and poverty
looks like an attractive one.Not only because poor people spend majority of their
budget on food, but also because this association gets more support politically for
the antipoverty programs which involve food as compared to the programs based
on goods which are seen as less admirable. The right to food is more convincing
than the right to other consumer goods.
Over the time, the basic concept of poverty line has remained the same but the
line is revised incorporating the inflation levels. Using the data for the year 2005,
the World Bank estimated the International Poverty Line (IPL), a global absolute
minimum, at the $1.25 per day figure. It was updated in the year 2008 to $1.25 a
day at 2005 purchasing-power parity (PPP). It was mainly revised due to
inflation. Further, in 2015, the World Bank updated the IPL to $1.90 per day.As
per the World Bank, in 2017, an estimated 9.2 percent of the global population
still lived below the international poverty line of $1.90 a day, which is based on
poverty lines in some of the poorest economies in the world. The COVID-19
pandemic has reversed the gains in global poverty for the first time in a
generation. About 120 million additional people are living in poverty as a result
of the pandemic (April 2021).
It is also important for us to realise that the concept of poverty line always uses
approximations and proxies. The threshold thus arrived at is fuzzy in nature. The
year after year deprivation shows its cumulative effect in later years. There are
some other issues with the concept of poverty at the fundamental level, e.g.,
should income or item-by-item expenditure be used to identify the poor, are
notions of the poverty line “absolute” or “relative,” is poverty temporary or
chronic, should we study households or individuals as the basic unit, and so on.

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Inequality and
Poverty
9.5 INDIA’S POVERTY LINE ESTIMATION
This section provides the progression Poverty Estimation in India, post-
Independence. The Planning Commission constituted various expert groups time
to time to estimate the number of people living in poverty in India.
1. Working Group (1962): For the first time, the poverty line in India was
quantified in 1962 in terms of a minimum requirement which included
food and non-food items, for individuals in order to lead a healthy life.
This Group formulated rural and urban poverty lines at 20 and 25 per
capita per month respectively (in terms of 1960-61 prices). The Group did
not consider any regional variation while formulating these lines. This
poverty line also excluded expenditure on health and education as it was
assumed to be taken care of by the state. So, in 1960s and 1970s these
poverty lines were used to find out the state of poverty at national and
state level.

2. Study by VM Dandekar and N Rath (1971): These two economists are

responsible for laying the foundation of India’s poverty line through their
seminal work by establishing the minimum calorie requirements. This
was not a study commissioned by the Planning Commission. They
established the first consumption levels required to meet a minimum
average calorie norm of 2,250 calories per capita per day. Their study was
systematic wherein they utilized the National Sample Survey (NSS) data.
Their poverty line was based on the expenditure required to procure 2250
calories per day in both rural and urban areas. They found poverty lines to
be Rs. 15 per capita per month for rural households and Rs. 22.5 per
capita per month for urban households at 1960 61 prices.

3. Task Force on “Projections of Minimum Needs and Effective

Consumption Demand” headed by Dr. Y. K. Alagh (1979): This Task
Force was constituted in 1977 and it submitted its report in 1979. Official
poverty counts began for the first time in India based on the approach of
this Task Force. Poverty line was defined as the per capita consumption
expenditure level to meet average per capita daily calorie requirement of
2400 kcal per capita per day in rural areas and 2100 kcal per capita per
day in urban areas. Based on 1973-74 prices, the Task Force set the rural
and urban poverty lines at Rs. 49.09 and Rs. 56.64 per capita per month at
1973-74 prices.

4. Lakdawala Expert Group (1993): Until the 1990s, no attempt was made
to consider differences in prices or differences in consumption patterns
across states or over time, w.th respect to poverty lines estimation.
Poverty estimates were revised with each quinquennial NSS survey. Price
indices were used to adjust for price changes over time. This
methodology for estimating poverty was considered inappropriate by
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 some, in giving a representative picture of the incidence of poverty in the Poverty
country. So, in 1989, The Planning Commission constituted the
Lakdawala Expert Group with a particular reason of looking into the
methodology for estimation of poverty and to re-define the poverty line, if
needed. The Expert Group did not redefine the poverty line and
recommended to carry on with the separate rural and urban poverty lines
based on minimum nutritional requirements. But the Expert Group
disaggregated these poverty lines into state-specific poverty lines in order
to reflect the inter-state price differentials. It suggested that the poverty
lines 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 rather than using National
Accounts Statistics. These recommendations were taken up by the
Planning Commission. The Commission adopted the practice of
calculating poverty levels in rural and urban areas in the states using
state-specific poverty lines together with the national estimates from 1997
to 2004-05. But over the years, this method lost the credibility. There
were many flaws in the price data. Hence, the successive poverty lines
failed to preserve the original calorie norms.
5. Tendulkar Expert Group (2009): To review the methodology used for
poverty estimation, in 2005, another expert group chaired by Suresh
Tendulkar was constituted. Mainly, it was constituted to address the three
key shortcomings of the previous methods: (i) Poverty estimates based on
the 1973-74 poverty line baskets (PLBs) of goods and services did not
reflect significant changes in consumption patterns of poor over time; (ii)
Issues with the adjustment of prices for inflation, across regions and
across time; and (iii) the assumption that only the state will provide for
health and education. The Tendulkar Committee suggested a shift from
calorie-based norms to target nutritional outcomes for poverty estimation
and poverty lines. Further, the committee recommended a uniform all-
India urban PLB across rural and urban India instead of two separate
PLBs for rural and urban poverty lines. It also recommended to
incorporate private expenditure on health and education in order to
estimate poverty. The monthly household consumption expenditure was
broken up into per person per day consumption, which resulted in the
figure of Rs 32 and Rs 26 a day for urban and rural areas. The national
poverty line for 2011-12 was estimated at Rs. 816 per capita per month
for rural areas and Rs. 1,000 per capita per month for urban areas.
6. Rangarajan Committee (2014): The Tendulkar committee made the urban
poverty line of 2004-05 the new national poverty line on the grounds that
it was “less controversial” than the current rural poverty line and it
fulfilled the requirement of statistical consistency over time. This
increased the number of rural poor.This new poverty line was also
justified on the grounds that it also provided for minimum nutritional,
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Inequality and health and educational outcomes. These justifications were not enough to
Poverty
stand up to the scrutiny. Due to such criticism as well as due to changing
times and aspirations of people of India, Rangarajan Committee was set
up in 2012. This Committee submitted its report in June 2014. It again
started the previous practice of having separate all-India rural and urban
poverty line baskets and deriving state-level rural and urban estimates
from these. Also, it recommended separate consumption baskets for rural
and urban areas which include food items that ensure recommended
calorie, protein & fat intake and non-food items like clothing, education,
health, housing and transport. This committee raised the daily per capita
expenditure to Rs 47 for urban and Rs 32 for rural from Rs 32 and Rs 26
respectively at 2011-12 prices. Monthly per capita consumption
expenditure of Rs. 972 in rural areas and Rs. 1407 in urban areas is
recommended as the poverty line at the all-India level. The government
did not take a call on the report of the Rangarajan Committee. Rangarajan
committee missed the opportunity to go beyond the expenditure-based
poverty rates and examine the possibility of a wider multi-dimensional
view of deprivation.
Some states such as Odisha and West Bengal supported the Tendulkar Poverty
Line while others such as Delhi, Jharkhand, Mizoram etc. supported Rangarajan
report. The current official measures of poverty are based on the Tendulkar
poverty line. They are fixed at daily expenditure of 27.2 in rural areas and
33.3 in urban areas and are criticised by many for being too low.
7) Task Force by Niti Ayog (2015): The Task Force deliberated the issue of
whether a Poverty Line is required. The report of the Task Force was submitted
in July, 2016. The task force suggested four options for tracking the poor: i)
Continue with the Tendulkar poverty line; ii) Switch to the Rangarajan or other
higher rural and urban poverty lines; iii) Track progress of the bottom 30% of the
population; iv) Track progress along specific components of material poverty
such as nutrition, housing, drinking water, sanitation, electricity and connectivity.
The advantage of the level of expenditure as an indicator of poverty is that it is
directly observable and it closely correlates with poverty along different
dimensions. So, while there are additional complementary approaches to tracking
poverty, none of them can substitute the poverty line-based approach.

9.6 POVERTY ALLEVIATION PROGRAMMES IN

INDIA
There are many poverty alleviation programmes in India which target the rural
poverty mainly, as the prevalence of poverty is more in rural India. The
programmes include many wage-employment programmes, self-employment

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programmes, food security programmes, social security programmes, skill India Poverty
programmes. A brief list of such programmes is as follows:
 Jawahar Gram Samridhi Yojana
 National Old Age Pension Scheme
 National Family Benefit Scheme
 Annapurna Scheme
 Pradhan Mantri Gramin Awaas Yojana
 Mahatma Gandhi National Rural Employment Guarantee Act
(MGNAREGA)
Apart from these, a major programme started by India to alleviate rural poverty
is Integrated Rural Development Programme (IRDP). It aims to alleviate rural
poverty by providing income-generated assets to the poorest of the poor. This
programme started in 1978-79. Its main aim is to identify the families which are
below the poverty line and raise them by creating sustainable self-employment
opportunities in the rural areas. Such families are provided with term credit by
commercial banks, cooperatives and regional rural banks. The programme
gathers 50% funds from the centre and the remaining 50% from the states. The
target group are the individuals who earn less than 11,000 (as defined by the
Eighth Five-year plan). To make the programme well targeted, it has stipulated
well defined proportions for the scheduled caste families, scheduled tribe
families, women and physically challenged persons among the total assisted
people/families. Ministry of Rural Areas and Employment is responsible for the
release of central share of funds, policy formation, overall guidance,
monitoring, and evaluation of the program.
Check Your Progress 2
1) Explain the concept of Poverty Line.
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2) Discuss the progression of the International Poverty Line.
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Inequality and 3) What were the recommendations of The Tendulkar Committee and how
Poverty
are they different from the recommendations made by the Rangarajan
Committee?
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4) Why was the Tendulkar committee criticised for their recommendations?
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5) Enlist a few Poverty alleviation programmes of India?
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9.7 LET SUM UP

Poverty is not merely the lack of money. It is the absence of one or more of the
basic capabilities that are needed to achieve minimal functioning in the society in
which one lives.But largely, the measurement of poverty is based on thenotion of
a poverty line, which is constructed from monetary estimates of minimum needs.
In this Unit, we discussed the various approaches through which poverty can be
looked at (monetary, food, capability deprivation). We explained the various
types of poverty (Absolute, Relative, Objective, Subjective, Transversal and
Persistent). Afterwards, the constitution of poverty line was discussed at length.
The poverty line estimates minimum basic requirements in terms of their cost.
We critically explained the recommendations of various expert
groups/committees which were constituted for India’s poverty line estimation. In
the end, we briefly discuss the main poverty alleviation programmes in India.

9.8 ANSWERS/HINTS TO CHECK YOUR PROGRESS

EXERCISES
Check Your Progress 1
1) Refer to section 9.2
2) Refer to section 9.2
3) Refer to section 9.3

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Check Your Progress 2 Poverty

1) Refer to section 9.4

2) Refer to section 9.4
3) Refer to section 9.5
4) Refer to Section 9.5
5) Refer to Section 9.6

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