India’s large population has led to many problems, such as the large number of poor people in the country. Due to the World Bank’s revision of the poverty line and the Purchasing Power Parity index, the number of people living in poverty in India will soon decrease.

The PPP index, developed under the International Comparison Programs, compares prices of services and commodities from around the world.

In 2010, there were about 400 million people living in poverty in India, based on the 2005 PPP index. The current revision of the PPP index makes the suggestion that the economy of India is bigger and the purchasing power is higher than what was previously estimated. It also means that the number of people living in poverty is lower than estimated. So, statistically speaking, the number of poor people will decrease.

The new statistics will also change the dynamics of trade between developed and developing countries. These global poverty figures have few functions besides indicating where developed countries should direct their aid to.

With the revised PPP index, the Center for Global Development predicts the number of people living in poverty in India will decrease to 102.3 million. Brookings Institution suggests it will decrease to 98.9 million. In these cases, global poverty would decrease by more than half, from 1.2 billion to 571.3 million people living in poverty. If the predictions are accurate, it would mean the Millennium Development Goals target for 2015 would be met.

However, how accurate is the PPP index for determining the number of people in poverty?

“While PPP is based on a fixed basket across the world, people don’t really consume the same goods in the same ratio across countries or across income levels. The weight assigned to goods in the commodity basket may reflect more accurately the situation of some countries or a particular section of society than others,” Himanshu, assistant professor at Jawaharlal Nehru University, explained.

The global poverty line is determined by converting the average of the poverty lines of the poorest 15 countries into a dollar basis using the PPP index of 2005. There is not a known reason why only 15 countries are taken into consideration.

Also, the commodity price data is biased towards urban populations in developing countries. In developing countries, where urban housing may not be recorded officially, the results may not be accurate.

World Bank chief economist Kaushik Basu emphasized in his blog, “We should simply recognize that PPP has inherent shortcomings and treat statements of country size and power with, let us say, a fistful of salt.”

Nonetheless, international organizations stress that India needs to focus on ensuring the extreme poor population is involved in the process of growth. It is important that they are directly influenced and have the chance to benefit from the development of India.

– Colleen Moore

Sources: Silicon India, Business Standard
Photo: WSJ