India Has Almost Wiped Out Extreme Poverty: International Monetary Fund

India has almost eradicated extreme poverty and brought down consumption inequality to its lowest levels in 40 years through state-provided food handouts, according to a new working paper published by the International Monetary Fund (IMF).

The IMF working paper — authored by economists Surjit Bhalla, Arvind Virmani and Karan Bhasin — said that the proportion of people living in extreme poverty, at less than 1%, remained steady even during the pandemic on the back of “in-kind” subsidies, especially food rations.

The study comes at a time when several recent global reports have pointed to the widening gap between the rich and poor in Asia’s third-largest economy, while studies on the economic shocks of the Covid-19 pandemic vary in their conclusions.

In India, the number of people living in extreme poverty — defined by the World Bank as living on US$1.9 or less in purchasing power parity (PPP) terms — was 0.8% of the population in the pre-pandemic year 2019, stated the IMF paper, published on April 5, 2022.

Food rations were “instrumental” in ensuring that extreme poverty did not increase and “remained at that low level” in the pandemic year 2020, the study found. PPP is a metric that equalises the buying power of different currencies to make comparisons easy.

“Our results also demonstrate the social safety net provided by the expansion of India’s food subsidy program absorbed a major part of the pandemic shock,” the authors stated. Such back-to-back low poverty rates suggest India has eliminated extreme poverty, they concluded.

What sets their study apart, according to the authors, is the effect of subsidy adjustments on poverty. The results are “striking”, they said in the working paper. Food handouts curbed poverty by acting like “cash transfers”.

IMF states that its working papers describe research in progress, and are published to elicit comments.

Real (inflation-adjusted) inequality, as measured by the Gini coefficient, which stands at 0.294, is now very close to its lowest level 0.284 observed in 1993-94, the paper stated. The Gini coefficient ranges from 0 to 1, with 0 representing perfect equality and 1 representing perfect inequality.

“The food subsidy is 5kg per person. In terms of a household, that would be about 25 kg a month. Now if you convert that into prices, that would come to about ₹750. This is not an insignificant amount for really poor households,” said Pronab Sen, former chief statistician of India.

“But I cannot imagine ₹750 changing the inequality part of it. Absolute poverty in terms of hunger…yes, but inequality is a different ballgame. ₹750 is just not enough to move the needle on inequality,” Sen added.

Most previous studies and measures of poverty and inequality did not account for the role of food handouts, the paper’s authors noted. “These (new) estimates include, for the first time, the effect of in-kind food subsides on poverty and inequality,” the paper stated.

During the first Covid-19 lockdown in 2020, the Modi government launched the Pradhan Mantri Garib Kalyan Ann Yojana (PMGKAY), a programme to distribute a fixed quantity of free foodgrain (5kg per head) to the poor beyond their usual entitlement of 25kg a month of subsidised grains.

Over 800 million beneficiaries under the National Food Security Act are covered by the programme. Last week, the government said it would extend the PMGKAY till September 2022.

A National Bureau of Economic Research (NBER) working paper in December last year, too, showed that inequality surprisingly reduced during the pandemic, mainly because incomes of the rich from the services sector had plunged, while farm-sector output was resilient. However, this paper found a spike in extreme poverty during the pandemic.

When India’s economy saw its worst-ever recession of -6.6% in 2020-21, the farm sector grew 3.3%, according to revised official estimates.

The World Inequality Report, released in December last year, said India emerged as the most unequal country with the top 1% of the population holding more than one-fifth of the total national income in 2021.

The richest Indians more than doubled their wealth during the Covid-19 crisis, according to the global Oxfam Davos Report of 2022.

Yet another study by the International food Policy Research Institute scholar Yanyan Liu in 2019 found that the Mahatma Gandhi National Rural Employment Guarantee scheme, acting as a conditional cash transfer, had increased welfare and reduced inequality.

Bhalla, one of the authors of the IMF paper, said, “Given that extreme poverty has been eradicated, India should move from $1.9 PPP poverty line to $3.2 poverty line”. This essentially means setting the poverty line high and is significant because it raises the income threshold for determining those below poverty line, and such a move would allow more people to qualify for subsidies.

“Bhalla’s method of using National Accounts Statistics numbers to estimate poverty is not new and he had declared poverty to have become insignificant in India 20 years ago,” said Jawaharlal Nehru University economist Himanshu.

Most economists do not agree with his method, Himanshu said, adding: “That is why we need another round of consumer expenditure survey to ascertain exact trends in poverty and inequality in India.”