Expansion of food subsidy programme prevented rise in extreme poverty rates: IMF working paper

The Centre’s move to expand the food subsidy programme acted as a safety net and helped absorb a major part of the pandemic-induced shock, revealed a working paper of the International Monetary Fund (IMF).

The paper — Pandemic, Poverty and Inequality: Evidence from India — concluded that the food subsidy programme provided insurance to the poor and prevented an increase in the prevalence of extreme poverty in India. This illustrates the robustness of the country’s social safety architecture as it withstood one of the world’s biggest exogenous income shocks, said the paper authored by Surjit Bhalla, executive director for India at the Fund, Arvind Virmani, former Chief Economic Advisor and Karan Bhasin, a policy researcher.

Consistent reduction

The paper also noted and documented that food subsidies have reduced poverty on a consistent basis since the enactment of the Food Securities Act in 2013 and the co-incidental increase in the efficiency of targetting via the use of Aadhaar.

The expansion of the food subsidy programme is expected to have reduced the consumption expenditure on food by the beneficiaries. Improved targetting of the policy, combined with an expansion in the entitlements during the pandemic, has de-facto absorbed a part of the consumption shock, it noted.

The paper’s conclusion was also in sharp contrast to the one drawn by an earlier Pew Study, which used an outdated Uniform Reference Period (URP) method to show that 75 million people in India were pushed into poverty in 2020-21 due to Covid-induced lockdowns. However, the IMF paper pointed out that only about 13.4 million were pushed into poverty going by the modified mixed method and without food transfers. There was no increase in poverty with food transfers.

The low level of extreme poverty — around 0.8 per cent in both 2019 (0.76 per cent) and 2020 (0.86 per cent) — is suggestive of the need for the official poverty line to now be PPP $3.2, the IMF Working Paper suggested.

Effective targetting

Food subsidies have had a rather important effect in reducing poverty and inequality. First on poverty — for the last three years, and including the pandemic year, extreme poverty has been less than or equal to 1.1 per cent of the population. In addition, there was virtually no increase in the number of extreme poor (PPP $1.9) in the year of the pandemic, a result different than that observed for most other economies.

The paper highlighted that effective targeting of food seems to have been the most appropriate policy response. It noted that the average Indian consumption basket (2011-12 CES) reports the share of food to be 46 per cent. For the poor, the fraction is upwards of 60 per cent.

In URP, people are asked about their consumption expenditure over the last month alone. This method has already been discarded by India in 1999-2000.  The IMF study used the modified mixed reference period (MMRP).

Calculating poverty

The IMF working paper revealed that extreme poverty in India, which means those earning less than $1.9 on purchasing power parity (PPP) basis, rose to 4.1 per cent during 2020-21 as against 2.2 per cent during the previous year if the food transfers are not taken into account. PPP value of a dollar are different from market value. A dollar is now valued at ₹20.65 against ₹15.55 in 2011. However, if food transfers are taken into account, extreme poverty increased to 1.42 per cent from 1.3 per cent over this period.

Poverty rate, measured at PPP $3.2, rose to 31 per cent from 23.3 per cent if food transfers are not taken into account and to 22.8 per cent from 19 per cent if these are factored in during 2020-21 from the government.

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