Recent news reports about the Congress Party’s election victory note that two-thirds of Indians live on less than $2 per day. How far does two bucks take you in India?
Not far in Mumbai, but it’s a living in the villages. The people who get by on less than $2 don’t even qualify as being in poverty, according to the Indian government’s own definition. (The national poverty threshold is set at something less than $1 per day and applies to 27 percent of the population.) The figure, which comes from a standard developed by the World Bank to measure global development, says very little about the living conditions of a particular individual in a particular place.
India, like the United States, uses a “basket of goods” approach to define its poverty threshold. The cost of a minimally adequate diet is multiplied by a set amount to account for the cost of food and other essentials. (The United States multiplies by three, because the average American family spends one-third of its post-tax income on food.) The European Union uses a different method, based on relative income: The poverty line is set at a certain percentage of median income.
Neither of these methods works on a global scale, though, which explains why the World Bank has its own system. The “basket of goods” approach can be confusing, since every country uses different goods in their equations, based on local dietary habits. (Rice accounts for 31 percent of the calories in an Indian diet, for example, but only 2 percent in the United States.) The relative income approach tends to understate poverty in poor countries, where 60 percent of median income is still a destitute existence. For the same reason, it would overstate poverty in Luxembourg.
About 20 years ago, the World Bank established two international poverty standards: a $ 1-per-day benchmark for extreme poverty (representing the median among the 10 lowest national poverty lines) and a $2-per-day level that represents a “near poverty” existence in developing countries and all-out poverty in other places.
While the World Bank standards are serviceable as benchmarks for progress—if fewer people are living on $2 today than were 10 years ago, that’s great—they don’t give an accurate picture of poverty in an individual country. For example, nearly 70 percent of Indians still live in villages, many in rent-free ancestral homes. They won’t soon buy a Nano, but they can easily feed and clothe themselves and their children. Their main worries—poor schools, contaminated water, and limited access to health care—aren’t necessarily solved by a modest income hike. In contrast, a $2-per-day laborer in Mumbai would spend nearly his entire income on a modest shanty in one of Mumbai’s notorious slums.
Mindful of this difference, the Indian government uses a flexible poverty line that varies with area of residence. Those who live in rural areas are considered impoverished if they makes less than 66 cents per day; the threshold for city-dwellers is 83 cents per day. India also adjusts the status for people who are cash poor but enjoy family assets, like a house or arable land.
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Explainer thanks Anirudh Krishna of Duke University and Arvind Panagariya of Columbia University.