Macroeconomic Crises and Poverty Monitoring: A Case Study of India

Abstract

This case study for India finds an explanation for the drop in average household consumption in rural areas occurring in the year after the 1991 stabilization program instigated to deal with a macroeconomic crisis. A number of factors contributed to falling average living standards, including inflation, a drop in agricultural yields, and contraction in the non-farm sector. The same factors resulted in high poverty measures, although there was also a sizable unexplained shift in distribution.

Despite their having an unusually rich data base, the authors nevertheless are unable to account for a large share of the increase in measured poverty, and cannot rule out the possibility that it was the result of sampling and non-sampling errors. Only about one-tenth of the measured increase in poverty is explicable in terms of the variables that would be expected to transmit shocks to the household level. Soon after, the poverty measures returned to their previous level. The study cautions users of survey-based welfare indicators not to read too much into a single survey, particularly when (as here) its results are difficult to explain in terms of other data on hand. However, the usefulness of objective socioeconomic survey data for longer-term poverty monitoring should not be thrown into doubt by these results.