Mint Explainer: What the World Bank's new poverty line means for India

Mint

7 hours ago

Last week, the World Bank announced a new poverty line to decide how many people worldwide live in 'extreme poverty". The new threshold is higher than the previous one even in inflation-adjusted terms. That means many more people globally will suddenly find themselves below that benchmark and now be counted as 'poor".
However, for India, the estimate has been revised downwards. That's because it's not all about the poverty line itself – other factors are at play, too. Also, 5.3% of Indians are poor by one measure, and 23.9% by another. Let's unpack all this.
First, what is the poverty line?
The poverty line is a minimum level of spending needed to meet one's basic nutrition, clothing and shelter needs. The number of people who cannot afford even that are classified as poor.
One can adopt several standards to set the poverty line, and countries are free to decide those for themselves. But doing so at a global level is complex. A simple exchange-rate adjustment of India's poverty line in rupees per month wouldn't make it comparable with an American spending in dollars or a Kenyan spending in shillings, given the vastly different pricing levels in those countries.
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To allow international comparisons, researchers created an international poverty line in 1990 that was adjusted for 'purchasing power parity' (PPP) across economies. PPP is an economic concept that compares the cost of a fixed basket of goods and services in different countries to determine the relative value and purchasing power of their currencies. That gave the World Bank its first global standard for a poverty line – $1 a day (at 1985 PPP).
But PPP factors don't stay the same, since inflation is different everywhere, so the World Bank's International Comparison Program (ICP) keeps updating the PPP factors. This necessitates updates to the international poverty line as well. That's what has happened now.
Because of such updates, it's possible that without any remarkable change in standards of living, one can cross the global line or slip under it merely through a methodology update.
So, what did the World Bank say?
Last week, the World Bank applied the 2021 PPP updates (which the ICP released last year) to determine a new poverty line. It also took into account improved data collection methods by several poor countries, which led to new poverty lines for them.
Earlier, anyone who spent less than $2.15 a day on basic needs (at 2017 PPPs) was said to be poor. Adjusted to inflation, it would have been around $2.60 a day in 2021, but the new benchmark (which isn't merely due to PPP changes but also because of improved consumption surveys) is $3 a day at 2021 PPPs.
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When the World Bank issued its last estimate in September 2024, it counted 9% of people in the world as poor in 2022 based on the $2.15-a-day threshold. Now it reckons the figure was 10.5% (again, in 2022) by the new yardstick. This means 125 million more people were poor in 2022 (the latest reference year for which data is known reliably) than what last year's estimate had said.
But there are two caveats to this. One, this increase doesn't necessarily mean more people are now poor; it means more people will now be classified as poor. Two, this number would have been much higher had the World Bank not applied a new method to come up with India's data (which was an outlier, seeing a decline in poverty rate).
How has India's data helped in the revision of the estimates?
Multiple factors, not just the application of 2021 PPP factors, have come together to influence poverty rates within the space of a few months. A major one is that the World Bank has now taken into account India's first official household consumption expenditure survey (CES) in 11 years, which took place in 2022-23 (and has since also taken place in 2023-24).
When the data was still awaited for long, the World Bank was forced to use alternative sources to issue the best possible estimate of 12.9% for 2021 based on the $2.15-a-day poverty line.
But now, the estimate stands revised to 5.3%. The change is based on both the new poverty line and the new official data that's now available. If we applied the old benchmark ($2.15 a day), around 2.4% of Indians were poor in 2022, as per the World Bank's calculations on that year's CES.
The CES data for the 2023-24 survey is also available, but that doesn't yet reflect in the World Bank data.
Let's apply a like-to-like comparison to summarise this: at the $2.15-a-day poverty line, the poverty rate for 2022 has been revised from 12.9% to 2.4%, thanks to the new official data. Meanwhile, the poverty rate for 2022 has gone up from 2.4% to 5.3% thanks to the changed poverty line.
How has India's poverty rate changed over time?
Any comparison with old data is ill-advised. The two poverty lines retrospectively applied to the CES of 2011-12 puts the somewhat comparable figures at 16.2% ($2.15 a day) and 27.1% ($3 a day). That means in both cases, poverty has shrunk drastically; by the new threshold, an estimated net 269 million Indians exited poverty in these 11 years.
But this comparison isn't that straightforward. The 2011-12 CES is hardly comparable with the new surveys held in 2022-23 and 2023-24. The new ones tend to record higher consumption by Indians due to fundamentally improved data collection practices, and also because they ask them to lay out their spending on 405 items instead of 347 earlier.
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The new surveys also assign consumption values to subsidised goods and services obtained from state-run schemes. This, too, raises the value of consumption spending for households.
In summary, the methodology now records Indians as spending more in general, so it's harder to fall below a particular poverty line.
But while a direct comparison isn't advisable, it is evident that poverty rates may indeed have fallen by a lot in the past decade. By how much, it's difficult to say.
What more should one know about this?
One, this is not the only poverty line the World Bank uses globally. This is actually the median of the national poverty lines of only low-income countries. It is applied to all countries under the name 'extreme poverty", meaning that one who is 'poor" even by the standards of low-income countries can be said to be living in 'extreme poverty".
There are two other poverty lines: one for lower-middle-income countries, which has been revised from $3.65 to $4.20 a day, and for middle-income countries, which has been revised from $6.85 to $8.30.
India is a lower-middle income country, so the $4.20-a-day poverty line would be a more relevant one. By that benchmark, 23.9% Indians were poor in 2022, as compared to 28.1% estimated by the old poverty line. The retrospective figure for 2011-12 (not strictly comparable) is nearly 58%.
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Secondly, the World Bank report also said there were 'growing concerns" about the CES's inability to capture households at the top of the consumption pyramid, and also observed its own need to exclude certain data captured in the CES—both factors, it said, would underestimate inequality in India.
That said, the new CES methodology is more robust than the earlier one, and could provide more frequent poverty estimates hereon. Comparisons with the past data are impossible, and should ideally not be used to quantify progress over time.