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A Study on Poverty and Inequality in India

A REVIEW OF THE STUDIES ON POVERTY AND

INEQUALITY IN INDIA

Sukumar Nandi

CONTENTS

Introduction Page

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Chapter 1: 1

Concept of Poverty and Inequality

Concept 2: 4

Poverty in India

Chapter 3: 20

Studies on Inequality

Chapter 4: 63

Causes of Poverty and Inequality in India

Chapter 5: 75

Conclusion: The Anti-Poverty Programmes

Notes 82

Bibliography 99

INTRODUCTION

Poverty and inequality are complex phenomena and their major discussions and

consequent policy implications deserve the attention of all concerned. A critical review

of the academic research on these phenomena reveals a variety of perspectives. Major

differences in this respect have characterized the discussions of the definition of

poverty and its measurement on the one hand, and of the elaboration of the concept of

inequality in the context of a developing economy on the other. Policy implications

also differ in different studies, which is a natural outcome of the differences in

approach. One of these approaches starts from the concept of subsistence level for

defined with some standard norm of nutrition. A second approach has been to use

income and expenditure data for constructing a poverty line below which poverty will

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be said to exist. In this approach data relating to per capita income or expenditure are

utilized to establish the concept of a poverty level. Broadly speaking, these two

approaches distinguish the major studies on poverty so far undertaken in India.

Measurement of economic inequality can be regarded as one aspect of the wider

problem of securing social equity and justice. In a sense it is perhaps the most

important aspect of the broader concept. Economic inequality prevents the realization

of the goals of social equity and justice. Economic justice becomes an important issue

in the context of widespread poverty; the contrast becomes sharper when there exist

small islands of affluence in an ocean of poverty. The studies on inequality in India

generally use such standard measures as the Lorenz ratio though other more refined

measure have also been used. Poverty and economic inequality can be regarded as the

twin aspects of the same problem. In India again the problem of poverty and inequality

is further aggravated by caste stratification which is a prominent feature of her social

and community life over and above the economic stratification as commonly found in

capitalist economies.

The objective of this dissertation is very modest. It attempts to make a brief

survey of the major studies on the measurement of poverty and inequality in India. At

the outset the theoretical position in respect of the concepts of poverty and inequality

has been explained, and subsequently the various Indian studies on the two topics have

been analyzed. Thus the dissertation has been divided into five Chapters. In the first

chapter, we review economic theory relevant to the concepts of poverty and inequality.

In the second chapter we deal with different measures that have been evolved for the

study of poverty in India. In the third Chapter we take a critical look at the studies

made about economic inequality in India. The fourth chapter is devoted to an attempt

to piece together the factors which the different studies on poverty and inequality have

shown to be the underlying causes of these disturbing phenomena. In the last chapter

we have made a brief survey of the programmes adopted in India to launch a direct

attack on poverty in the rural areas.

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CHAPTER-1

CONCEPT OF POVERTY AND INEQUALITY

An analysis of the Indian economic situation reveals two features: First, while

the economy has attained a modest trend rate of growth, the problem of poverty

perpetuates. Secondly, in our plan documents the problem of distribution has not been

completely left out of discussions relating to production, and the possibility of conflict

between growth and distribution has not been explicitly recognized.1 The essence of

this argument in favour of this is as follows: A very slow rate of growth along with

inequality in income distribution has perpetuated poverty in India. A large proportion

of population has to live without even the most essential needs of daily life because

total national income is too small relative to the size of population; and secondly, the

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distribution of this income is very uneven. This problem cannot be overcome if

emphasis is not put simultaneously on economic growth and reduction of inequality.

Even the highest attainable rate of growth cannot make a major impact on the problem

of poverty in the foreseeable future if inequality is not reduced.

There has been a clear recognition, from the First Five Year Plan onwards, of

the need for special policies for the benefit of the poor. In fact, the justification of

policies like land reforms, subsidies to the village industries, economic assistance to the

backward communities and so on is to be partly found in the recognition of their

problem, while the problem is explicitly stated in the plan documents, there always

appears to exist a gap between the formulation and execution of policies which could

be regarded as intended primarily for the benefit of the poor. Indeed, the attempt to

identify the poor in operational terms has started only in recent years.

At present the problem of poverty is being dealt with both unprofessional

writing and in government policy documents and programmes with increasing

frequency. Poverty is a complex phenomenon and at least its major dimensions require

considerable attention if the problem is to be properly comprehended. We should,

therefore, start with the basic question: What is poverty?

A review of the academic research in the field and of government programmes

dealing with this subject shows several perspectives which have characterized

approaches to the definition of poverty. Three such perspectives can be clearly

discerned from the literature.

One such perspective to the definition of poverty uses income and expenditure

data in order to establish a bench mark income figure below which poverty may be saidto exist.2 Thus a size distribution of incomes is constructed and per capita income data

are widely used as a means of establishing the bench mark income figure. We can

distinguish two aspects of the so-called size distribution of incomes. The first focuses

attention on one end of the distribution, those with the lowest income or the poor,

choosing a more or less arbitrary bench-mark income figure. Here one can study the

magnitude of poverty either in terms of the absolute number of the poor, or one can

look at the different degrees of poverty within the group designated as the poor.3 The

second aspect comprises the degrees of inequality in the distribution of income and is

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concerned with the whole of the distribution. The degree of inequality is generally

measured by the Lorenz Curve or Gini Coefficient. While the first aspect deals with

the absolute poverty level, the second deals with poverty in its relative sense.4

The first approach has its limitations- incomprehensive coverage, inaccuracy of

measurement, inconsistency of definition and a failure to include all the sources other

than income which support the consumption of people in the lower rung of the

economic ladder. In the Indian context, measures of supporting resources such as

ownership of land and other assets, income in kind and private gifts should be included

and these are very difficult to compile on the part of the statistician. Thus, income

figures are not accurate especially for the two extreme economic classes- the poor and

the rich. While the poor are ill-equipped to provide correct information required for

proper income and expenditure studies, the rich are least inclined to reveal their true

economic power. As a result, income and expenditure data tend to have a downward

bias for both the groups: for the poor, lack of literacy and consciousness and the

subsistence production system largely play their parts; for the rich, the reasons are

completely different-lack of organization in the economy and steep progression in the

direct tax laws include the rich to record their income on the lower side.

The second perspective can be specified as a subsistence approach to the

concept of poverty. People who cannot afford the minimum necessities for bare

subsistence are defined as poor. But how are we to define the required minimum

level? The minimum need is defined in terms of food consumption or more

specifically, in terms of nutritional requirements. This is then converted into an income

level for a particular base year.5

But in a country of Indias size, with wide differences in geography, climate,

habits and customs, nutritional requirements are found to vary across levels and

patterns of living and diet. In such a situation, to develop an index of minimum needs

it is necessary to take account of customary behavior. Therefore, such a subsistence

definition of nutritional requirements; it also depends on subjective consideration like

preferences and prejudices.

A third perspective to the definition of poverty is concerned with the degrees of

differences of welfare among different group of people who can be designated as

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poor by the first two approaches mentioned in earlier paragraphs. This approach

seeks to establish a measure of poverty by attaching appropriate weights, which vary

inversely with the difference of income levels of the poor from the chosen poverty

line.6

Thus from the first approach, we have an income threshold definition of

poverty, while the second gives a multinational definition of the same. But these

approaches divide the population into poor and non-poor and cannot take into account

the differences in the degree of intensity of poverty in the different income layers

below the poverty line. This weakness is sought to be removed in the third approach.

What lessons can be draw from the three approaches to the definition ofpoverty? One point which emerges is that these approaches try to define poverty in the

context of economic factors only and, again, these definitions are concerned with the

people in the lower strata of the income scale. But the concept of poverty should be

seen in the context of society as a whole. As society is better seen as a series of

stratified income layers, poverty should be conceived in the light of how the lower

strata fare as compared to the people in the upper layers of distribution. Moreover,

poverty means helplessness of the persons designated as poor as these people are at

the lower end of a two-fold hierarchy of stratification along economic and social

dimensions. In short, the poor are part of a set of stratification system within the

society and they are ranked at the bottom of each hierarchy. The economic factors are

significant in the sense that these constitute the most important dimensions of poverty;

but these alone cannot fully describe the condition of the poor. Therefore, the

definition of poverty should be broad-based, for it is only a proper identification of the

poor that can determination of policies to solve the problem in a proper way.

Measures of Inequality

A variety of indices for the measurement of the degree of inequality are found

in the literature on income distribution. These indices emphasis different aspects of the

inequality phenomenon. Theoretically, these indices are not completely satisfactory;

sometimes, they exhibit contradictory tendencies in the distribution of income unless

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the latter adapts itself to a well defined family of distributions whose properties are

completely known. Because of the limitation inherent in all measures of inequality,

one may adopt a more general approach to the problem by laying down that any

measure of inequality should be concerned with the distribution of a size variable (x)

relative to the mean (M) or any other typical value of x. This principle is recognized in

all the known measures of inequality. These well-known empirical measures of

inequality are Lorenz Curve, the Gini Co-efficient, the Co-efficient of variation, the

S.D. of logarithm etc. Before going into details about these measures, we discuss the

methodology regarding the measurement of inequality of income.

Conceptually, we can draw a distinction between the objective and the

normative approaches to the measurement of inequality of income. As objective

measurement, in itself, is not of interest and presupposes appraisal; the difference

between the two approaches, in fact, emerges at the level at which normative

considerations come up. Therefore, use of the word equality in the context of

distribution of income necessarily involves normative judgment. This is so in both the

situations. We may be interested in inequality in the distribution of income of a

country at different points of time or, we may compare the inequality in the distribution

of income of different countries at the same point of time.

In the literature, we find two broad categories of the measures of inequality. On

set of measures try to quantify the size of inequality in some objective sense by using

some statistical measures of relative variation of income. Such measures include the

variance, the co-efficient of variation, the Lorenz Curve, the Gini Co-efficient etc. On

the other hand, there are indices that try to measure inequality in terms of some

normative notion of social welfare- that is , when the level of income is given, a higher

degree of inequality corresponds to a lower level of social welfare.7

We now discuss the measures of inequality. It would not be wrong if we

discuss some measures briefly while concentrating on others which have been used

widely in the literature on inequality in income distribution in India.8

Long ago Pigou maintained that any transfer of income from the poor to the

rich, ceteris paribus, should increase inequality and diminish welfare.9 The common

statistical measure of dispersion-variance-does satisfy the Pigou condition. But the

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dependence of variance on the mean income level makes its position weaker; since one

distribution with lower mean income level but greater relative variation around the

mean registers smaller variance than another distribution with higher mean but smaller

relative variation around the mean. To remove this weakness we take the square root

of the variance and divide it by the mean to make it mean-independent. This is the co-

efficient of variation.

The Co-efficient of variation is sensitive to income transfer for all income

levels. But sometimes it is desirable that we should attach lower importance to income

transfers at the higher levels of income and greater importance to income transfer at the

lower end of the income scale. This objective is fulfilled in another measure- the

standard deviation of logarithm. Since standard deviation is derived from the logarithm

of the actual income levels, the staggering effect of logarithm highlights the income

transfers at the lower end of income distribution and minimizes the effect of the

transfer at the higher levels. This feature makes this measure attractive, but this creates

difficulty for other reasons. The severe contraction the income levels suffer-as they get

higher and higher-denies this welfare measure its concavity to be a concave function of

individual incomes, this measure can create difficulties.10

When we get interested about the share of different deciles of population from

the lower end in the national income, we take recourse to the Lorenz Curve. This curve

depicts the percentages of the population arranged in ascending order according to their

positions of the income scale on the horizontal axis and the percentages of total income

enjoyed by each of these groups are shown on the vertical axis. If everyone has the

same income, the Lorenz Curve will by the diagonal, which is called equality line.

The deviation of the Lorenz Curve from the line of absolute equality is an index of

inequality. One distribution is unequivocally more unequal than another only if the

Lorenz Curve for the former lies below the Lorenz Curve for the latter throughout its

range.

The advantage of the Lorenz Curve lies in its use of the arithmetic scale. It is,

again, independent of any assumption about the form of the distribution to which the

observed data must conform. However, when the form of the distribution is known

with certainty, the corresponding Lorenz Curve is uniquely determined by the values of

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the distributional parameters. For different values of these parameters Lorenz Curves

are obtained which are completely non-overlapping.11

The use of Lorenz Curve as a means of measuring income inequality within the

utilitarian framework has been justified in the literature.12 It has been shown that if

social welfare is additively separable and if it is the sum of individuals-then the partial

ordering of income distribution according to Lorenz Criterion is identical with the

ordering implied by social welfare. This result holds irrespective of the form of the

individual utility functions as long as they are concave.13 Intuitively, one might expect

that the equivalence of partial orderings would hole for any symmetric social welfare

function which is quasi-concave and increasing in individual utilities.14

When the Lorenz Curves of two distributions intersect, there is ambiguity in

comparison; that is, for comparative purposes, it is difficult to say which Lorenz Curve

represents greater inequality. Gini introduced an analytical measure called the

concentration ration or the Gini Coefficient, which is the ratio of the area between

the equality line and the Lorenz Curve to the triangular region below the diagonal. It is

defined as exactly one half of the relative mean difference-this is the arithmetic average

of the absolute values of differences between all parts of incomes.

==

=q

j

ji

q

i

yymq

G11

2||

2

1

Where m is the mean income of the poor, and q is the number of persons.

After a bit of manipulation the formula reduces to 15

( )=

++=q

i

iqyimqq

G1

21

211

for y1 y2 y3 . yn

Since the Gini Co-efficient takes note of differences between every pair of incomes, it

is a direct measure of income inequality; it is also sensitive to transfer from the rich to

the poor at every level.

Gini Co-efficient is mean-independent, that is, it is invariant with respect to

equi-proportionate change of incomes of all individuals. If the mean income of thedistribution changes, while there is no change in the inequality measure, the effect on

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the measure of absolute poverty is certain. It moves inversely with the changes in the

mean income. But measure of inequality being mean-independent, changes in mean

income introduce complex difficulties in measuring of poverty in a relative sense. In a

society with higher mean income inequality causes greater injustice compared to a

society with lower mean income. This fact introduces ambiguity in the measurement of

poverty in a relative sense.16

Since the Gini Co-efficient is an index of inequality, the negative of it can be

treated as a welfare function. But this function, being a linear function of income

levels, is not a strictly concave group welfare function. As strict concavity is a

desirable criterion for a welfare function. Gini co-efficient is thought to be weak on

this point.17 But this measure takes into account any transfer of income from the poor

to the rich in appropriate direction, and it is, though not strictly concave, is concave

alright.18

Atkinson proposed a new measure of inequality19 by an index:

m

YI

*1* =

Where Y* is the level of income per head and m is the mean of the income distribution.

If the level of income is equally distributed, Y* would give the same level of social

welfare as the present distribution.

Moreover, in a separate measure,20 Atkinson introduced distributional objective

through an explicit parameter, say E, which represents the weight attached by the

society to inequality in the distribution. When the society is indifferent regarding the

income distribution, the value of E becomes zero, and when the society is concerned

only with the position of the lowest income group, the parameter becomes infinity. The

index is:

En

i

E

fiY

YiI

=

=

1

1

1

1

1

Where Y1 is the income of those in the 1-th income range, f1 is the proportion of the

population with incomes in the 1-th range and Ythe mean income. This indexindicates the proportion of the present total income that would be required to achieve

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this same level of social welfare as at present if income were equally distributed. The

measure is an index of the potential gains from redistribution.

The inadequacy of the index of income distribution as an index of the

distribution of welfare has been pointed out by Bentozel.21 In this view, it is the

distribution of consumption which has a direct bearing on the distribution of welfare.

From the welfare point of view the welfare-creating properties of the distribution of

income or consumption are important; these properties should be represented in the

analysis of income inequality. Bentzels new measure seems to fulfill this condition.

The construction of this index is as follows: Assuming that a group of individuals have

the same welfare function u(c), where c denotes the level of consumption and f(c) is the

frequency function of the level of individual consumption, the aggregate welfare (w)

can be written as

dccfcunW )()(0

=

Where n is the number of individuals. Suppose W* is the maximum

aggregate welfare that could be obtained by a redistribution of consumption between

the individuals. The difference between W* and W can be interpreted as the totalwelfare loss caused by the inequality in the individual consumption measured by

*1**

W

WI =

The ratio W/W* has been called welfare efficiency of distribution by Bentzel. But,

in this analysis the precise relationship between distribution of consumption and

distribution of welfare is not brought out very clearly. Again, since the shape of the

welfare function u(c) is unknown, the definition of welfare efficiency of distribution

is not useful for empirical analysis.22

Sens Measure

Sen has constructed a measure of poverty in an axiomatic framework.23 This

measure takes into account the income distribution among the people designated as

poor, that is, people below the poverty line. If yj is the income level of individual j,

the individuals may be numbered in a non-decreasing order of income, satisfying

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y1 y2 . yn

If z is the poverty line and q is the number of people with income yi z, then for

any person i q, there are exactly (q+1-i) people among the poor with at least as high a

welfare level as person i. Let n be the total population. The poverty-measure P can

be written as

)1)(()1(

2iqyiz

nzqP +

+=

This measure of poverty P is closely related to Gini Co-efficient, and Sen has

established a correspondence between Gini Co-efficient and his poverty measure.

Defining the head-count ratio H as the ratio of the number of people below the

poverty line, Sen(1976) has proved the relation

P = H [I*-(1-I*)G]

Where G is the Gini Co-efficient and I* reveals the percentage of the mean shortfall of

incomes of the poor from the poverty line.24 From this relation an important policy

implication follows: The aggregate welfare of the population can be increased by

minimizing the inequality in the distribution of income.

In any actual situation, the use of the measure P involves the specification of

the welfare function. In such a choice, value judgment cannot be avoided. Moreover,

this measure is concerned with only a part of the income distribution.

Our analysis of the different measure of inequality leads finally to the following

points: First, the literature is full of controversy regarding the practical relevance of the

implicit welfare function, the shape of the welfare function and the question of ordering

in the social welfare. Second, while descriptive measures like coefficient of variation,

standard deviation of logarithm etc. lack motivation, purely normative measures seem

to leave out of consideration several important characteristics of inequality.

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Chapter-2

Poverty in India

The problem of poverty had attracted the attention of economists even before

independence25 but as we are interested in the study of the post-independence period,

we will not discuss this here. After independence a vast literature on poverty has

emerged, the most important of this being Dandekar and Rath(1971), Ojha(1970),

Minhas(1970), Bardhan(1970,1973) and Vaidyanathan(1974). Most of these studies

take 1960-61 as a bench mark year for the purpose of comparison, and the data used by

these studies cover periods up to 1968-69. These different studies come to different

conclusions both as regards the definition of the minimum standard of living and

regarding the number of people below the different studies are four in number: (i)

differences in estimates of income and consumption; (ii) different concepts of adequate

nutritional levels; (iii) differences regarding current price deflator to be used; and (iv)

arbitrariness in the choice of some key conversion factors to overcome the lack of

availability of appropriate disaggregated empirical data. Let us now explain these in

turn.

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First, for the calculation of the size distribution of income and/or consumption

most of these studies depend on the data yielded by the National Sample Surveys. But

there is discrepancy between NSS data and national income statistics prepared by the

C.S.O. It is alleged that NSS data underestimates consumption expenditure for the

upper income classes,26 which implies that the measure of poverty will not be affected

but the measure of inequality will be. Secondly, the concepts of a minimum adequate

level of nutrition and its purchasing power equivalent form the basis of all the studies

that have tried to estimate the numbers of people living below the national poverty line.

But different authorities give different estimates of nutritional requirements. Among

these are: PPD, Planning Commission(1974), Sukhatma (1971) and Gopalan, Sastri and

Balasubramanian(1971). Thirdly, as most of the income and consumption expenditure

data are available initially at current prices, one has to deflate them to obtain real values

for the purpose of inter-temporal comparisons. But the choice of a correct price

deflator is difficult as different income groups possess different preference patterns,

some buy commodities at ex-farm prices and some obtain commodities through

exchange in kind. Again, prices for the identical commodities vary region wise. Thus

conclusions vary because the researchers use different price deflators. While

Minhas(1970) and Dandekar and Rath(1971) use the national income deflator,

Bardhan(1970) uses the official Agricultural Labour Consumer Price Index for

deflating the values of consumption of the rural poor and the Official Working Class

Consumer Price Index for deflating the consumption of the urban poor.27 In this

connection, it will not be out of place to mention the nature of price movement of

different commodities in different parts of India. Mahalanobis(1962) had drawn our

attention to the unequal movement of the prices of cereals for different decile groups of

the population in rural India.28

This was later corroborated by extensive tabulation ofNSS household budget data undertaken for the Government of India Committee on

Distribution of Income and Levels of Living. Since cereals occupy a very important

place in the consumer budget, specially for rural households, the above finding stresses

the need of constructing inter-temporal consumer price indices separately for different

fractile groups of population. Fourthly, in different studies, conversion factors have

been used to build up a complete picture from fragmented data. The assumption in

Dandekar and Rath(1971) is that the top 30 per cent of the population would have fared

no worse in terms of consumption between 1960-61 and 1967-68 than the lower

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income groups. On the other hand, Bardhan(1970) uses a conversion factor appropriate

to the bottom 50 per cent of the population for the derivation of an estimate of total

expenditure from expenditure on food items. From these it follows that there cannot be

a correct estimate that can be derived from the assumption that are made in the

studies noted above.

With these preliminary observations we will now turn to an analysis of the

Studies on Indian Poverty.

In July, 1962 the Government of India set up a Study Group29 which

recommended that a per capita annual consumption of Rs.240 at 1960-1961 prices

should be considered as the nationally desirable minimum level of consumerexpenditure. This excluded expenditure on health and education, which was supposed

to be provided free of cost by the state. This level of expenditure has often been taken

as the poverty line and the proportion of people below this standard of consumption

has been investigated by different economists. This notice of poverty line again

constitutes the keystone for the exercise in long term planning that is presented in the

Planning Commission document Notes on Perspective of Development, India 1960-

1961 to 1975-76. It cannot be ascertained whether any competent statistical authority

arrived at this figure after careful consideration. In fact, how this figure was reached

remains up till now somewhat of a mystery to ordinary citizens. However, as this

figure is important, we shall examine in greater detail.

First, this official poverty standard, being essentially an absolute measure, is

inadequate since this is based purely on money income and ignores other aspects of

deprivation. No account is taken of poor quality housing, schools of health care which

may be independent of low money income. Moreover, poverty may represents only

one aspect of a more general powerlessness, an inability to influence ones

environment.30 Of course, this aspect of poverty is neglected by almost all the poverty

measure in use in India; such powerlessness on the part of the poor makes the problem

of poverty doubly acute. We will turn to this aspect of the problem in the last section.

Secondly, apart from methodological criticism, the presumption that the population

would be provided education and health care free of cost by the State can be

questioned. In fact, as nearly two-thirds of the population remain illiterate,31

and the

government health programme has not yet been able to cover all the villages in the

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country, such an assumption simply ignores reality. As people are often forced to

spend on medicine, inclusion of some expenditure on medicine in the consumer budget

appears to be necessary and this makes the Rs.20 per month figure rather suspect.

Thirdly, though the idea of nutritional norm has been accepted regarding food items in

private consumption expenditure, in respect of non-food items like clothing and

housing no yardsticks have been worked out on any scientific basis.

The minimum standard of living prescribed by the Study Group is necessarily

the biological minimum diet has been carefully worked out by Sukhatme(1965).32 He

take into account various recommendation of the Food and Agricultural Organisation

[FAO] and the Nutrition Advisory Committee [NAC]. Again he has made specific

allowances for India in terms of availabilities and consumption habits; he has taken into

account different requirements of persons in different age and sex groups and thus

worked out two food baskets corresponding to a minimum concept and a medium

concept. The cost of the minimum food basket (per day) has been worked out as

Rs.0.5238 at 1960-61 prices or Rs.15.71 per month at 1960-61 prices. As compared

with Sukhatmes estimate, the cost of a minimum diet prescribed by the FAO33 is

Rs.18.26 at 1960-61 prices.

Sometimes alternative standards have been defined in terms of minimum

Calorie requirements, as in Ojha (1970) and Dandekar and Rath (1971). They have

taken 2250 Calories is met from food grain and considering the food grains intake per

person in different expenditure brackets as given by NSS data they have estimated the

proportion of population below the poverty line.34

On the basis of the recommendations of Dr. Patwardhan as mentioned in the

Report of the Central Government Employees Pay Commission (1957-59), Bardhan

(1973) has worked out the cost of the minimum diet recommended for an built in

moderate activity.35 The diet consists of 15 0z. of cereals, 3 0z. of pulses, milk (4 0z)

sugar and gur (1.5 0z), edible oils (1.25 0z), groundnut (1 0z) and vegetables (6 0z).

These give 2100 calories and 55 grams of protein per day. Because of non-availability

of prices, Bardhan leaves out the last two items i.e., groundnut and vegetables. For the

determination of the cost of this minimum diet Bardhan adjusts the NSS rural retail

prices to take account of the lower prices for non-monetized consumption. First, the

cost of this minimum diet for adults is determined. Then he adjusts it by an adult-

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equivalent ratio to obtain the cost of the minimum diet for an average person. Then he

blows it up by using food to non-food expenditure ratio of the relevant expenditure

group of the rural population from NSS data, to get the estimated minimum level of

living for rural India to be Rs.28 per capita per month in 1968-69 in current prices.

Bardhan (1973) has taken the food basket from the report of the Second Pay

Commission and has used the rural retail prices from NSS estimates as is done by the

Commission; but he has arrived at a much lower value. While in the former the cost of

the minimum diet is Rs. 14.51 per month per adult unit, that is, Rs.11.61 per month per

person basis, the corresponding figures in Bardhan are Rs.11.61 and Rs.9.61

respectively. The lower figures of Bardhan can be traced to the following two elements

in his calculation: First, he has neglected vegetables and ground-nuts from the food

baskets; and secondly, he has adjusted the NSS based average retail prices to take into

account the consumption of home grown articles on the part of rural consumers.

Regarding the second consideration Rudra (1974) has taken exception on two points.36

First, according to Rudra, the procedure adopted by Bardhan (1973) is arbitrary, as he

overlooks the fact that it is not only the home grown part that is evaluated in the NSS

data in prices different from the average retail prices; the cash purchased part in NSS

expenditure data is evaluated in actual prices paid by the consumers, and not by the

average retail prices independently estimated and separately presented by the NSS.

While the price average in the NSS expenditure data regarding cash purchases is a

weighted average, the rural retail prices are simple averages. Secondly, Rudra points

out that the blow-up factor (46%) is not correct.

We have discussed the nature and inadequacy of the concept of an absolute

poverty line in India. Let us now turn to the studies on Indian poverty.

Minhas (1970)37 has used the computations of Tewari (1968)38 to derive the

estimates of per capita private consumption expenditure, which are at 1960-61 prices.

He has, then, applied the NSS ratio of rural to urban consumption to obtain the

estimates of rural average per Capita Consumption. These estimates of per capita

overall consumption in rural area in 1960-61 prices, together with the percentage shares

of different fractile groups of population in total consumption, derived from different

NSS rounds, have been used to derive the average per Capita Consumption in 1960-61

prices of each fractile group of the population over several years.

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It will not be out of place if we reproduce here a table from Minhas:

Table: Average Per Capita Consumption by Fractile Groups at

1960-61 prices in 1956-57 and 1967-68: Rural India

Fractile Group1956-57

(Rs.)

1967-68

(Rs.)

Poorest 5% 63 81

5-10 88 110

10-20 108 137

20-30 133 16630-40 155 194

40-50 180 222

50-60 207 254

60-70 240 292

70-80 283 240

80-90 351 414

90-95 443 512

Richest 5% 731 723

Source: Minhas (1970) Table 2. Abridged

We see that the richest 5% of Indians could enjoy a per Capita

Consumption level of about Rs.2 in 1960-61 prices per day in the years 1956-57 and

1967-68. Even this group cannot be termed as rich by the world standard, though they

are at the topmost income level in the villages of India. The poorest 30% or the people,

and the other extreme, live a life beyond the description and analysis of the economists

and nutrition experts.

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If the level of per Capita annual consumption expenditure of Rs.240 at 1960-61

prices is accepted as a bare minimum, the percentage of people in rural India below this

poverty line was 65 in 1956-57 and 50.6 in 1967-68. But in Minhas estimate the

absolute number of people below the poverty line in rural India remained almost same

215 million in 1956-57 and 210 million in 1967-68. If, however, a level of Rs.200 at

1960-61 prices is taken as the minimum, the proportion of people below the poverty

line would be 52.4 per cent in 1956-57 and 37.1 per cent in 1961. The steady decline in

the proportion of people below the poverty line is, according to Minhas, largely

explained by the growth of an average per Capita Consumption at a rate of 1.25 per

cent per year over the period 1956-57 and 1967-68.

As regards the identification of the rural poor Minhas be specified several

classes to which most of them belong and these classes are:

(a) Agriculture labour households without land, which formed 58 to 61 per cent

of all agricultural labour household between 1956-57 and 1963-64.

(b) Other rural labour household without land.

(c) Agricultural labour household with land, which formed between 42 to 39

per cent of agricultural labour households between 1956-57 and 1963-64.

(d) Marginal farmers operating holdings below 5 acres in size.

According to the estimate of Minhas, the total number of people in agriculture

labour households in 1960-61 was 66.5 million of which about 26.5 millions belonged

to households who operated some land as well. The corresponding estimates for non-

agricultural rural labour were 15.8 and 6.8 millions respectively. Therefore, the total

rural labour population in 1960-61 was estimated to be 82.3 millions and of these 33.3

millions belonged to households who operated some land also. Minhas estimated that

about 79 per cent of the population of these households had a per capita annual level of

consumption of less than Rs.200 at 1960-61 prices in the year 1956-57. Minhas further

stated that the percentage of poor among the agricultural labour population declined to

75 in 1960-61, which corresponded to about 50 million in absolute numbers.39

While Minhas is concerned with rural poverty only, Ojha (1970) deals with

both rural and urban poverty for the year 1960-61 and only rural poverty for the year

1967-68. In his study Ojha accepts 2250 Calories as the barest minimum intake per

capita per day for a representative Indian. He further assumes that people in urban

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areas derive 66 per cent of 2250 calories from food grains; for the people in rural areas

that percentage is 80. he then compares the actual food consumption in grams per head

of rural and urban population using the NSS data [16th round].41 This means that to

attain the nutritional minimum per capita daily consumption should be 518 grams in

rural areas and 532 grams in urban areas. After some modifications of the estimates of

food grains intake he finds that the average level of food grains intake per person was

below the standard for expenditure levels up to Rs.15-12 per capita per month at 1960-

61 prices. Regarding the urban population the corresponding expenditure level for

which deficiency in consumption existed was Rs.11-13 per capita per month at 1960-61

prices. On his basis Ojha finds that in 1960-61 about 51.8 per cent of rural population

lived below the poverty line, and for the urban population the proportion of those

considered as poor was only 7.6 per cent.

Ojhas conclusion regarding poverty in the urban area is surprising because of

the following reasons. First, the urban households tend to spend a smaller percentage

of their incomes on food grains, which Ojha has accepted in his calculation. But this

again means that urban households derive a comparatively larger fraction of the

required 2250 calories from food other than food grains gives greater calorie value

compared to the same spent on items other than food grains, the minimum expenditure

levels for the required 2250 calories should be higher in urban areas.42 Secondly, since

unit prices of food grains in urban areas are higher than in rural areas, expenditure in

urban areas for food grains should be higher.43 Though Ojha takes the nutritional norm

for urban are as 432 grams, which is 86 grams lower than the rural requirement of 518

grams (and this means that smaller volume of expenditure is involved), the urban

people must procure additional calories from food items other than food grains, and

again they are to purchase these at higher prices. These points seem to have beenmissed by Ojha and that is why his estimated poverty line for the urban area is as low

as Rs.11-13 per Capita per month, and much lower than the figure estimated for the

rural areas. From these it seems that the proportion of population in urban areas below

the poverty line is much higher than the estimate of Ojha indicates.

Regarding the year 1967-68, Ojha calculates that about 70 per cent of rural

households were living below the poverty line. Moreover, the degree of nutritional

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Capita annual consumption expenditure below the stipulated minimum i.e., Rs.170 at

1960-61 prices.

Regarding urban consumption, D R find from NSS data that urban households

secure the minimum Calories requirement of 2250 at levels where their consumption of

food grains and substitutes reaches 490 grams per person per day. Again, while a rural

household at Rs.170 per capita per annum spends 78.56 per cent on food, an urban

household at Rs.271 per capita per annum spend only 70.26 per cent on food; again of

this 70.26 per cent only 36.45 per cent goes on food grains and substitutes and the

remaining 33.81 per cent is spent on other items of food. Finally, the prices of food

grains which an urban household at an expenditure level of Rs.271 per capita per

annum pays are almost 25 per cent higher than the prices paid by a rural household at

expenditure level of Rs.170 per capita per annum. Hence an annual per capita urban

expenditure of Rs.271 is to be regarded as equivalent to an annual per capita rural

expenditure of Rs.170. Now D R find that about 48.64 per cent on urban population

in 1960-61 could not afford the diet consumed by the group with an annual per capita

expenditure of Rs.271. Thus 48.64 per cent of urban population lived below the

poverty line.

According to D R the NSS estimate of average per capita consumption in

1967-68 is an underestimate. What is unacceptable to them regarding the NSS estimate

is that NSS estimate of rural per capita consumption estimate of Rs.239.8 (at 1960-61

prices) in the year 1967-68 is about 7 per cent lower than the corresponding NSS

estimate in 1960-61; again, it is about 11 per cent lower than the consumption estimate

for 1967-68 derived from the national income statistics. Using the national income

deflator D R find that the average per capita consumption of the lowest 5 per cent

rural fractile group in 1967-68 is 94 per cent of that in 1960-61, whereas for the

topmost 5 per cent fractile group the estimate of average per capita consumption is only

73 per cent of that in 1960-61. Now such a large differential decline in per capita

consumption of the richest 5 per cent is not acceptable to D R, as this goes against

their a prior judgment that during the sixties there has been an obvious increase in

inequality in the structure of the Indian rural economy.

It is clear that the position taken by D R rests on whether the NSS estimate of

average per capita consumption is an under estimates or not. On this point Bardhan

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(1974)46 is of the view that the deflating of private consumer expenditure data by the

national income deflator is improper. Bardhan cites the study of Radhakrishnan,

Srinivasan and Vaidyanathan (1974) who have worked out a general consumer price

index on the basis of NSS weights for ten commodity groups and wholesale prices data

issued by the office of the Economic Adviser to the Government of India.47 The

Radhakrishnan, Srinivasan and Vaidyanathan (R-S-V) index is 178.1 in 1968-69 taking

1960-61 figure as 100, but for the same period national income deflator increases from

100 to 169.8. Now if the R-S-V index is used, not only is the NSS estimate for per

Capita real consumption for 1967-68 below that for 1960-61, but the official estimate

for 1967-68 will also be lower than that for 1960-61. Thus Bardhan (1974) asserts that

NSS estimate should not be discarded simply because it establishes a decline in the per

Capita real Consumption during the sixties.

But the observation of D-R regarding the increasing under-estimation of the

consumption of the rich in NSS estimate is endorsed by Bardhan (1974) and other

economists,48 though no satisfactory explanation of this is yet available. The

explanation given by D-R is as follows:

The NSS secures its estimates of consumer expenditures by interviewing a

random sample of rural and urban households and inquiring from them about their

consumer expenditure during the previous month. The limitations of this procedure are

well known. For instance, a number of items of consumer expenditure, such as clothing

and other consumer durables, which a household would purchase less frequently than

once every month, are likely to be missed by this procedure and hence the expenditure

on them is likely to be under-estimated. These are the items which are more important

in the consumer expenditure of the rich than the poor and they become more important

as the rich become richer. It is also known that the upper middle and the richerhouseholds, both in rural and urban areas, have become increasingly inaccessible to the

NSS investigators who are after all class III government servants.

But the relative infrequency of the purchase of some consumer durables and

articles of high consumption need not lead to underestimation as the NSS is canvassed

in a number of sub-rounds spread throughout the year and so the seasonality, if any, in

the purchase of consumer durables should not lead to any bias. Moreover, in any given

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sub-round the random sampling procedure of the survey will ensure that purchasers of

cloth are not systematically excluded.

Now R-S-V have shown that the estimates of consumption at current prices

derived from National Income and the NSS data a are in close agreement for the period

1954-55 to 1963-64, but thereafter the two series differ considerably. These authors

conclude that the relatively close agreement between the NSS and official series for

some years does not necessarily indicate the absence of systematic bias in the two

series and similarly the divergence between the two series for the later years of the

sixties does not necessarily indicate the presence of such bias. But R-S-V have not

given any explanation for the divergence of the two series from 1963-64 onwards.

Turning now to other studies we find that the study of Vaidyanathan (1974a,

1974b) takes an income level of Rs.132 per year to denote poverty and finds that the

proportion of rural population living below the poverty line is 15.7 per cent in 1960-61.

Now the poverty line drawn by Vaidyanathan is much lower compared to the estimates

of others and there is little surprise that the number of the poor will be considerably

lower.49 However, Vaidyanathan (1974a) has presented the following estimate of the

proportion of rural population with per Capita Consumption expenditure below Rs.20

per month at 1960-61 prices. According to NSS estimate, the percentage of people

living below the poverty line was 59.5 in 1960-61; it increased to 67.8 in the year 1967-

68. Again, according to official estimate, the respective percentages are 58.8 and 57.8,

which shows that the level of poverty remained more or less same during the sixties,

though the number of people below the poverty line increased.

The study of Bardhan (1970, 1970a, 1973) uses NSS data for distribution of

consumer expenditure, but uses a different minimum level of income of Rs.15.00 per

month at 1960-61 prices and Rs.28.4 at 1968-69 prices for the two years respectively.

Bardhan then argues that the national income deflator (which rose from 100 in 1960-61

to 170 in 1967-68) as used by Minhas (1970) and Dandekar and Rath (1971) is not an

appropriate price index to use, as it does not accurately reflect the set of prices facing

the poor consumer.50 This is due to the following reasons. First, national income

includes both investment and consumption goods and as such the national income

deflator cannot be a suitable index for studying changes in consumption. Secondly, the

national income deflator covers the prices the prices of both agricultural and industrial

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commodities. The weight of the latter items in the budget of the poor is much lower

than the national average and hence the national income deflator is very likely to have

understated the rise in the prices paid by the rural poor. This is more so when the

prices of agricultural commodities have risen at a much faster rate than the prices of

manufactured items.

For the above reasons, Bardhan uses an alternative deflator which is the

agricultural labour consumer price index. This index is based on the Labour Bureau

series of consumer price index number for agricultural labourers constructed on the

basis of NSS rural retail prices and weighting diagrams obtained from the Second

Agricultural Labour Enquiry. Bardhan finds that the number of the rural poor

increased from about 135 million in 1960-61 to 230 million in 1968-69, that is, the

percentage of the rural population living below the prescribed minimum increased from

somewhat less than 38 per cent in 1960-61 to about 54 per cent in 1968-69. This result

is in sharp contrast to the conclusion reached by Minhas (1970).

It is contended that the high figure of population below the poverty line in

1968-69 may be traced to the consumer price index used by Bardhan. 51 But Bardhan

has defended these indices by computing several alternative indices and showing their

agreement.

The study of Bhatty (1974)52 is concerned with the extent of rural poverty in

1968-69. The object of his study is to present a measure of absolute poverty in terms of

per capita income, which takes into account the inequality of income distribution

among the poor. Moreover, Bhatty is interested about the incidence of poverty in

different regions of rural India and among different classes of the rural population. To

avoid arbitrariness, Bhatty has set five poverty levels, which, in terms of per capita

annual income in 1968-69 prices are: Rs.180, Rs.240, Rs.300, Rs.360 and Rs.420.

Since the study is concerned with a single year, 1968-69, no comparison is undertaken

regarding the change in poverty level of the country. Taking Rs.360 as the minimum

per capita annual income, Bhattys study reveals that about 67.15 per cent of all rural

households lived below the poverty line. If only agricultural labourer households are

considered, then about 82.84 per cent of them live below the poverty line, whereas for

the non-agricultural households this percentage is 69.7. Thus the incidence of poverty

is most severe among agricultural labourers.

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Bhatty has also tried to calculate for India the magnitude of Sens poverty

measure P, the result of which is summarized in the following table:

Sens Poverty measure P for India, 1968-69

Poverty line: rupees per Capita per annum

180 240 300 360 420

(i) All occupation classes 0.101 0.188 0.279 0.363 0.435

(ii) Cultivators 0.107 0.187 0.269 0.345 0.415

(iii) Agricultural labourers 0.098 0.220 0.336 0.440 0.521

(iv) Non-agricultural workers 0.171 0.155 0.251 0.344 0.425

Source: Bhatty (1974) Tables 7-10, pp. 316-17

From the table we find that of the three occupational classes, agricultural labourers are

the most deprived. Bhatty has also analysed in detail the level of poverty in different

states. He has identified the five poorest states in the country - Gujrat, Tamil Nadu,

Madhya Pradesh, Rajasthan and Orissa and explained the region wise variations of

poverty level. He shows that while the incidence of poverty among the agricultural

labourers is the highest in Gujrat and the lowest in Punjab, the non-agricultural workers

are worse off in Madhya Pradesh. According to Bhatty, the relative incidence of

absolute poverty in the rural population of different states depends on many factors,

such as, land-man ratio, topography and quality of land, rainfall, irrigation, cropping

pattern, rural institutional structure etc. Thus this study points to the fact that any study

on poverty should be based on the diversity of different regions and it is pointless to

calculate any uniform measure of poverty for India as a whole.

The importance of regional study for ascertaining the poverty level has been

emphasized also by Panikar, whose study is based on condition in Kerala. 53 The author

is concerned with the question of choice of a nutritional measure used by Dandekar and

Rath and the Nutrition advisory Committee. Panikar establishes the fact that D-R have

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overestimated the number of the poor in Kerala, as the minimum diet accepted by D-R

is in fact the India average.

Indira Rajaraman (1975) discusses the incidence of poverty in the Punjab

between 1960-61 and 1970-71.54 In the year 1960-61, the lowest two deciles of

population accounted for 10.4 per cent of total consumption, while in the year 1970-71,

they accounted for only 8.9 per cent of total consumption. Again, during the same

period the share of the topmost decile increased from 23.2 per cent to 24.7 per cent.

Taking a consumption level of Rs.16.36 at 1960-61 price, Rajaraman finds that about

18.4 per cent of total population of Punjab lived below that consumption level. The

poverty line for the year 1970-71 has been estimated at a consumption level of

Rs.33086 at current prices, and the author has shown that the percentage of the poor has

increased from 18.4 to 23.3 in ten years. It is seen in this study that poverty is most

intense among the agricultural workers, as about 22.6 per cent of households lived

below the poverty line in 1960-61 and in the year 1970-71, this percentage went up to

about 40.5. In this respect, Rajaramans study is consistent with those of Bhatty (1974)

and Bardhan (1970).55 Like Bhatty, Rajaraman also finds that incidence of poverty

among the cultivators is comparatively low. While the increased incidence of poverty

among the agricultural labour households is significant statistically, this is not the case

with the cultivating households.

In a different type of study based on the socio-economic survey data derived

from the sample households distributed all over Bangalore City, Hanumappa (1978)

has shown that 24.35 per cent of all households can be considered as poor in the

context of their monthly income.56 But the study is mainly concerned with the effect of

family size and education on the pattern of income distribution and so we will not

pursue it further.

We now take up for consideration an important study based on Kerala which

will explain the difference between the conclusions of D-R and Panikar.57 In the study

of D-R, Kerala is seen to have the largest percentage of population below the poverty

line, 90.75 per cent in rural areas and 88.89 per cent in urban areas. The study on

poverty by Centre of Development Studies (1975) has prepared a balance sheet

compiled for Kerala and then compares it with the NSS data used by D-R. It is

revealed that part of the explanation for the high proportion of the poor, as given by D-

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R, is that the NSS has underestimated certain items of food such as banana, coconut

and fish entering into the diets of these people and as a result the extent of main

nutrition in Kerala has been somewhat exaggerated. Whereas the per capita per day

calories intake is 1619 calories for all food items according to the food balance sheet of

this study (1975). Thus, the study reveals that 48 per cent of the population in Kerala

lived below the poverty line in 1960-61.

But the important point which the study reveals is that per Capita Consumption

of food does not depend on per capita income alone, so that while a low consumption

of food may indicate under-nourishment, it need not necessarily mean poverty.

Moreover it is shown that per capita consumption of food in a region depends on per

capita production of food and the pattern of the distribution of land holdings; further,

the degree of inequality is negatively correlated with increases in food consumption.

One conclusion of this study is that the availability of food cannot be treated as a

function of income and price alone, but it may depend also on physical factors such

as output in the region and institutional factors such as distribution of land holdings.

Further, the above study suggests that we require more through scrutiny of

regional variations in diet patterns before we draw the poverty line by counting calories

with the help of size distribution of consumption expenditure derived from NSS data.

A lack of uniformity in the structure of poverty in India has been highlighted by

Vaidyanathan (1974), D-R (1971), Bhatty (1974) and Bardhan (1973). Vaidyanathan

finds that six States- Andhra Pradesh, Kerala, Madhya Pradesh, Tamil Nadu, Orissa

and Uttar Pradesh had a higher percentage of people below the poverty line than the

national average in the year 1960-61. Again, the level of poverty is very much lower in

Assam and Punjab. But in D-R study the intensity of rural poverty is greater than the

All India average in eight States and these are: Kerala, Andhra Pradesh, Maharashtra,

Tamil Nadu, Assam, West Bengal, Orissa, and Bihar. Again, barring Rajasthan, U.P.,

Bihar, Jammu and Kashmir and Assam, the other eleven States show a greater

percentage of the poor living in urban areas compared to the All India average in 1960-

61.

While in Bhattys study a greater concentration of poverty is seen in four States

(Gujrat, Tamil Nadu, Rajasthan and Madhya Pradesh), Bardhans study reveals that

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higher levels of poverty have been registered in West Bengal, Bihar, Kerala and Orissa.

Such inter-state variations in the percentage of people below the poverty line

underscores the importance of the study of poverty on a regional basis. One cal also

infer a high degree of correlation between the incidence of poverty and the pattern of

the production of cereals, as, state wise, poverty seems to be higher in the non-wheat

zones stretching from eastern India to the Malabar Coast. While this is just a reflection

based on the available data, such a hypothesis (i.e., incidence of poverty being highly

correlated with the pattern of cereal production) requires further detailed investigation

for its acceptance.

All the above-mentioned studies suffer from two general weakness, if any, in

NSS data will render the studies inaccurate. NSS data are based on stratified random

sampling and so the sample households must represent all the rural and urban

households in the country. But, as definitions have changed to some extent in different

NSS rounds, doubts can be expressed regarding the comparability of NSS data in

different years. Moreover, samples from the same universe give comparable results,

but when sampling is done at two different points of time, the Universe is bound to

change. This is likely to be reinforced by planned economic development. Whether

data from different samples drawn at two separate points of time are comparable or not

is a matter of considerable doubt.

Secondly, though rural consumption in NSS data includes non-monetised

consumption, the latter may be of two types commodities produced at home and

commodities simply derived from nature. While the first category can be valued by

using ex-farm prices, the second category cannot be valued at all. It is our contention

that the second category of commodities represents some sort of free good derived

from nature which is unique in a rural agricultural country with a largely disorganized

and demonetized economy. To an NSS investigator such commodities are either not

mentioned at all or, even when mentioned, are likely to be neglected because of their

largely no-economic character. This is more so because of the existing studies that the

per capita per day barest minimum consumption should be 2250 calories and a sizeable

section of Indian population cannot afford it. But the number of such poor people is

increasing, though percentage-wise the size of the poor may be falling. Should we say

that a man may survive without the barest minimum consumption day after day?

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Accordingly, either the barest minimum has to be further lowered, or we should

concede the fact that people derived their necessary calories from the consumption of

commodities, only a fraction of which can be brought within the economic categories.

While the first weakness is common to any method of induction in statistics i.e.,

any representative sample may lose its representative character with change in the

universe, second weakness points to the more fundamental fact that the economic

categories used for the measurement of rural consumption should be more broad-based

so that the way of living of the rural poor can be analyzed in greater detail.

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Chapter-3

Studies on Inequality

Wide disparity in the living standards of the Indian population in both rural and

urban areas has attracted the attention of a number of economists who have tries to

measure the change in the degree of inequality in the income distribution and that in

consumption expenditure. Moreover, attempts have been male to compare the degree

of inequality existing in India with the same in other countries. A survey of the

existing literature in this respect should be preceded by a discussion of the following

points, as clarification of these points will facilitate the evaluation of the existing

literature.

First, it is difficult to compare the per capita income of a developing country

like India with that of a developed country because of the limited scope of national

income accounts in the former.58 Moreover, objection has been raised in the use of

exchange rates to convert all figures to a common standard and it is recognized that

exchange rates may be poor guide to purchasing power. As the study of David (1972)

suggests the true gap regarding the real per capita income between the United the

United States and other countries is only four-ninths of that indicated by exchange rate

conversion.59

Secondly, while it is difficult to generalize about inter-country differences

because of heterogeneities of different sorts historical, physical and regional in

addition to the purely economic, we can still arrive at some conclusion regarding the

effect of growth on size distribution of income by shifting to inter-temporal

comparisons. This is as follows: Though inequality is generally low in the pre-

industrialization stage, it tends to rise with the growth of towns and cities which emerge

and flourish with capitalistic enterprise and growing commerce. Concentration of

capital occurs with the growth of firms and urbanization increases regional disparity.

But beyond this early phase it is difficult to generalize about the pattern of the change

in the inequality-index as economic development proceeds. Kuznets maintains that the

degree of inequality is lower in the developed economy compared to the less developed

countries.60 Kuznets has been supported by others and these authors, after a careful

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scrutiny of the size-distribution of income of some countries, maintain that the

distribution of income tends to be more equal, the longer and the more thoroughly the

country has been exposed to the processes of social and economic transformation after

the advent of industrialization.61

We may now turn our attention to the studies on inequality in India. The RBI

Study (1962) gas two parts: in the first, the method of estimation and the average state

of income distribution during the period 1953-54 to 1956-57 have been described; and

in the second, changes in the income distribution from Period I (1953-54 to 1954-55) to

Period II (1955-56 to 1956-57) has been analysed. This study was undertaken under

the guidance of Ojha and Bhatt (1964). Taking the household as the income-receiving

unit, it attempts to present the pattern of income distribution in the households sector

only, which comprises household, not-corporate business (including agriculture), and

private collectives like temples, educational institutions and charitable foundations.

The household sector is divided into three income groups: (i) low income group with

annual income below or equal to Rs.3000, (ii) households with an annual income

between Rs.3001 and Rs.25,000 and (iii) top income group with annual income above

Rs.25,000.

The essence of the method of estimation used in the study is the integration of

the income tax data with the consumer expenditure data from the National Sample

Survey (NSS). The integration is indirect as the study does not use either the actual

expenditure given in the NSS data or the actual income for those with annual

expenditure equal to or below Rs.3000. Again, the proportion of population and the

size of the households in various expenditure brackets given in the NSS data on

consumer expenditure are used for the following: First, to estimate independently from

the population data (i) the distribution of rural and urban households between low

income groups and high income groups, and (ii) the total number of households in the

rural and urban areas separately. Secondly, to estimate independently from the national

income data the distribution of personal consumption expenditure between the rural and

urban sectors and between low income and high income groups within each sector.

The savings made and taxes paid are then added to derive personal disposable income

and personal income respectively of the various income groups.

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Moreover, personal incomes accruing to households in the top income group

are obtained directly from the income tax data on the assumption that each salary

earner assessed to tax represents one household. Income tax data are also used in the

estimation of personal income accruing to households in the high income non-salary

earners group both in urban and rural areas in so far they are obtained as residual

magnitudes. The distribution of incomes and households in this group is also done

from income tax data. The independently estimated households and incomes are then

put together to derive the pattern of income distribution.

The study reveals that for the period 1953-54 to 1956-57 the top decile accounts

for 28 per cent of personal income, while the bottom decile obtains only 3 per cent.

The Lorenz ratio for disposable income is only slightly lower (0.335) than that for

personal income (0.340). Income distribution is more uneven in the urban sector than

in the rural sector; the urban sector concentration ratio for personal income is 0.40,

while this ratio for the rural sector is only 0.31.

Ojha and Bhatt (1964) then conclude as follows:

Contrary to general impression, the degree of inequality in income distribution

in India does not seem to be higher than in some of the advanced economies.

This conclusion of the authors goes against the thesis of Kuznets and the empirical

findings of Morgan (1953) and others. This view has been challenged by Ranadive

(1965), Swamy (1965) and Mueller and Sarma (1965). Though the debate is primarily

concerned with the above conclusion of Ojha and Bhatt is primarily concerned with the

above conclusion of Ojha and Bhatt rather than with the index of inequality as revealed

in their study, this has cast some doubt on the basis on which the study of Ojha and

Bhatt depends.

According to Ranadive (1965), the RBI study is marred by a lack of

appreciation of the need for an appropriate concept of personal income, an incorrect

use of NSS data for deriving size distribution of household income and by what seems

to be a methodological error which has resulted in over-estimation of households in the

high income groups. A close scrutiny of the RBI study shows that the number of

households in the high income group is over-estimated, which is revealed by the fact

that the number of households in non-salary earners group is about six times higher

than the number of the corresponding group in the tax data. Again, according to

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Ranadive, the concept of income in the study excludes some elements and so the

personal disposable income in high income groups is likely to be underestimating.

Thus the under-estimation of income and/or over-estimation of households in the

higher income groups might account for the sharp difference of this study with the

thesis of Kuznets (1963) supported by some empirical studies.

Mueller and Sarma (1965) have pointed out that the assumption in the study of

Ojha and Bhatt leads to a downward bias in income inequality and they have ignored an

important body of data, which is a survey conducted by NCAER in 1960 with a

stratified probability sample of 4400 families in 30 cities and towns all over India. 62

Mueller and Sarma have shown that NCAER income distribution is much more

unequal than the OJha and Bhatt distribution. Moreover, the saving estimates in RBI

study do not correspond with the NCAER estimate. Criticising the thesis of Ojha and

Bhatt, Swamy (1965) also contends that the pattern of income distribution in India

supports the thesis of Kuznets.

Lydall (1960) assumes that Pareto Law of distribution63 holds in India. He

then makes use of income-tax statistics of individuals and Hindu undivided families,

and converts the NSS 10th round data from household to a per-person basis, the income

of each household being divided by the number of persons in that household. He

further assumes that average number of persons covered by each tax assessment is

about three. The result of his study is as follows. The top ten per cent of Indians

account for 34 per cent of pre-tax income and 33 per cent of post-tax income in 1955-

56. The corresponding figures for United Kingdom in 1954 are 30 per cent and 25 per

cent respectively. But Lydall is cautious regarding any comparison of income

distribution because coverage of income-tax is much smaller in India compared to U.K.

and the estimate of direct income distribution in India is absent.

Since Lydalls study is based on income tax data, we do not get any reliable

picture of the pattern of income distribution as a whole in the fifties.

Mukherjee and Chatterjee (1967) have utilised NSS data and the national

income estimates to indicate broadly the behavior pattern of income distribution. The

premises of the study are as follows:

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The implication of Swamys study is that the process of industrialization causes

shifts in relative weights of different sectors; and without radical changes in the

institutions, inequality in the income distribution must inevitably rise over time.

Neglect of this aspect, according to Swamy, is the principal cause why some income

distribution studies show a decline in the disparity in the income distribution. Further,

Swamy has estimated that inequality remained more or less stable in rural areas, but

increased in urban areas, which is reinforced by the fact that the proportion of

population increased in urban areas over the period. This increased the disparity

between rural and urban areas.

Modifications tot the Ojha and Bhatt method have been suggested by Ranadive

(1973) to allow for not dissaving by poorer income groups and for possible tax evasion

in the top income groups. Ranadive adopts two extreme alternatives: (i) where

households with annual income less than Rs.2000 in the urban sector and with income

less than Rs.720 in the rural sector are assumed to have zero net savings and all evaded

tax payments are assumed to have zero net savings and all evaded tax payments are

assumed to be fully reflected in consumption and/or savings, and (ii) where households

with annual income less than Rs.3000 in the urban sector and with income less than

Rs.1200 in the rural sector are assumed to have negative savings, which constitute 25

per cent of the total urban savings in the case of the former and 14 per cent of the total

saving in the case of the former and 14 per cent of the total savings in the case of the

latter. As for evaded tax payments, they are not reflected in consumption and/or

savings, so that the estimated amount of tax evasion is added to the disposable income

of the tax-paying classes. Now case (ii) should show higher inequality than case (i) due

to the assumptions relating to savings and tax evasion.

Ranadives estimate shows that in the year 1961-62, the bottom 20 per cent of

population accounted for 7.6 to 7.8 per cent of total income, and top 20 per cent

accounted for 45.5 to 46.7 per cent. The Lorenz ratio was between 0.351 and 0.367.

The assumption of Ranadive that in the savings group total saving is distributed in

proportion to consumption expenditure has been questioned by Bardhan (1974).

Ahmed and Bhattacharya (1972) have tried to integrate the size distribution of

consumer expenditure obtained from NSS data with the size distribution of income

before tax, obtained from income tax data, to estimate the size distribution of per capita

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personal income in India in three different periods, 1956-57, 1960-61 and 1963-64.

They have followed the technique developed by Lydall (1961) and their study is a more

systematic and rigorous extension of the earlier attempt of Ahmed (1971). This

approach is based on two assumptions: (i) income (before tax) equals consumer

expenditure in the lower ranges of per capita consumer expenditure, and (ii) the

distribution of per capita personal income before tax is symptotically Paritian for high

values of per capita income and has the same slope as the distribution of assesses by

size of incomes before tax.

The results of the study of Ahmed and Bhattacharya are as follows: For the first

fit, where Pareto Curve is fitted to the size distribution of income before tax taking all

income classes above Rs.20,000, the Lorenz Ratio is 0.418 for 1956-57, 0.379 for

1960-61 and 0.372 for 1963-64. Again, for the second fit, that is where Pareto Curve is

fitted taking the last interval of income before tax as Rs.100,000 and above, the Lorenz

ratio is 0.408 for 1956-57, 0.382 for 1960-61 and 0.361 for 1963-64. However, this

result has been qualified by the authors with two points: First, considering the fact that

price increases have been more sharp for the lower income groups than for the higher

income groups, this decreases in the inequality in nominal income distribution may be

more illusory than real. Secondly, this decline, the authors suspect, may be traced to

the inherent weaknesses of the two sets of data.

Bardhan (1974) points out that the first assumption of Ahmed and Bhattacharya

rules out dis-savings in the lower income brackets and so it leads to some

understatement of inequality. Moreover, considering the fact that the number of

income tax assesses is not even 1 per cent of Indian population and rural rich are

mostly beyond the net of income tax authority, the technique of fitting Pareto

distribution in the Indian contest may very well distort the picture.

On the basis of NSS data Vaidyanathan (1974) analyses inter-State variations in

the levels of inequality. Vaidyanathan shows that data from the 18th and the 22nd

rounds suggest a negative association between the Lorenz Ratios of consumption and

per capita consumption expenditure, though the coefficients are not statistically

significant. The study further reveals that, in rural India, greater inequality in the

distribution of land is associated with more uneven distribution of consumption.

Moreover, the pattern of land operation has influenced the degree of consumption

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inequality. This result is quite consistent with a priori judgment; as land is the most

important source of income in rural areas and as production structure is largely

disorganized the holding of land gives important leverage to the owners who reap the

advantages of a hierarchical society.

Vaidyanathan calculates the changes in Lorenz ratios during the decade 1957-

58 to 1967-68; for rural India the inequality index (LR) has decreased from 0.334 in

1957 to 0.203 in 1967-68. But the variations over the States are not uniform; while for

Andhra Pradesh, Assam and Madhya Pradesh the decline is sharp (more than all-India

average), other States like Punjab and West Bengal do not show any significant

decline.67

The regional variation of inequality in rural India has been analyzed by Bhatty

(1974) also. He has divided the rural population (workers) into three categories-

cultivators, agricultural labourers and non-agricultural workers. Then he presents the

Gini Coefficient of inequality in income distribution for India for 1968-69. Inequality

is found to be highest in Gujrat followed by Uttar Pradesh, Mysore and Tamil Nadu;

and it is lowest in Orissa followed by Assam, Bihar, Kerala and Rajasthan.

Income distribution is most unequal among the cultivators, as Bhatty has

shown, the LR is 0.493. Again, the degree of inequality is lowest among the

agricultural labourers with LR 0.27; the position of the non-agricultural workers lies in

between the two with LR 0.377. But in Punjab-Haryana, the Gini coefficie

Copy of Poverty and Inequality in India_ M.phil Thesis

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