Tackling poverty

One of the key questions today is what has happened to the incidence of poverty in 2020-21, a year which is new recognized as a year of recovery post-COVID-19? The GDP growth rate has approached 4 percent. However, high inflation has persisted, especially of food prices at 14 percent. Therefore, there are factors contributing both to a fall and rise in poverty.

The government has given reasons why there has been significant success in reducing poverty in 2020-21. Over 14 million households have been the beneficiaries of cash transfers through the well-targeted Ehsaas Programme.

The total funds transferred are almost 168 billion, with the per family transfer of Rs 12,000. The poverty gap, in relation to the poverty line, of a typical poor household is estimated at almost 12 percent currently. This implies that the gap in annual income of poor households in the country is almost Rs 420 billion. As such, the Ehsaas Programme transfers have helped the poor without necessarily taking them out of poverty, as the average poverty gap per poor household is 33000 per annum currently.

Another reason given for a significant fall in poverty in 2020-21 is the historic rise in home remittances from abroad by almost 30 percent. They will approach Rs 4730 billion by the end of the year and represent an augmentation of the Gross National Income by almost 10 percent.

The reasons for a big fall in poverty, according to the government, is that home remittances accrue mostly to lower income groups. As such, this has led to rising purchasing power at the lower income level. However, the latest Household Integrated Economic Survey (HIES) of 2018 by the PBS presents very contrary evidence. Almost 82 of the foreign remittances accrue to households in the top two income quintiles. Therefore, rather than contributing to poverty reduction, remittances are leading to increased income inequality.

The Budget speech also highlights the historical performance of the major crop sector which has led to an increase in crop incomes of farmers by 32 percent, almost Rs 800 billion. It is asserted that much of this income has accrued to low- income farmers as they own majority of the land holding.

According to the Agricultural Census of 2010, almost 48 percent of farm area in Pakistan is with small farmers with farm size of up to 12.5 acres. The share of the largest crop, wheat, is estimated at 41 percent in the increased income from major crops in 2020-21. Small farmers mostly grow wheat for self-consumption. Therefore, almost 70 percent of the marketed surplus of wheat is by large farmers. As such, the share of small farmers, who are 90 percent of the farming population, is relatively small at 30 percent.

However, the share of small subsistence farmers is much larger at over 60 percent in the production and marketing of crops like rice, sugarcane, cotton, and maize. Overall, out of the increased income of Rs 800 billion, it is estimated that Rs 380 billion has accrued to small farmers. On a per capita basis, the increase in income per subsistence farmer is over Rs 51,000. This is significant and must have contributed to an improvement in the rural poverty situation.

Also, an assertion is made that the restoration of manufacturing is indicative of the return of employment to the pre-Covid-19 level. The manufacturing sector has shown a growth rate in the first 10 months of 2020-21 of over 10 percent. However, this is largely due to the ‘low base effect’, as the sector had plummeted by 27 percent in March 2020 and by 45 percent in April 2020 after the first Covid-19 attack.

The appropriate measure is a comparison of the Quantum Index of Manufacturing (QIM) in the first ten months of 2020-21 with Index in the corresponding period of 2017-18. With the base year of 2005-06, the index in the former period stands at 150 as compared to the same magnitude of 150 in the latter period. Therefore, there has been no increase in output by the large-scale manufacturing sector in the last three years. As such there is unlikely to have been a big increase in industrial employment in relation to the level three years ago.

The GDP has cumulatively increased by 5.6 percent over the last three years. The employment elasticity with respect to output is 0.6, based on historical data. Therefore, the increase in employment is close to 3 percent. However, the labor force has expanded by 7.7 percent. As such, compared to the unemployment rate of close to 6 percent in 2017-18, it is likely to be currently at above 10 percent. This has, no doubt, contributed to worsening the poverty situation in the country.

Overall, the poverty incidence remains significantly higher in 2020-21 as compared to the level in 2017-18. The situation is probably better in the rural areas than in the cities and towns. Therefore, it was essential that the federal and provincial budgets include a wide range and strong anti-poverty interventions.

The pro-poor allocations in the Federal Budget of 2021-22 include the following:

(i) Rs 255 billion for social protection and Rs 246 billion for the BISP.

(ii) Inter-Disco tariff differential subsidy of Rs 269 billion.

(iii) Other interventions of Rs 92 billion for PASSCO, USC, Baitul Mal, PPAF, etc.

The total subventions proposed are Rs 862 billion in 2021-22, equivalent to 1.6 percent of the projected GDP. The share of pro-poor allocations in the total budgeted expenditure is 10.2 percent.

Further, the budget proposes expansion in low-cost loans to small farmers and poor households. Also, subsidized housing finance will be increased. Health insurance will be extended in Punjab along with the existing health card scheme in Khyber-Pakhtunkhwa. The minimum wage is to be raised to Rs 21,000 per month.

The noticeable gap in the interventions is the reduction in food prices. Given the 30 percent increase in the wheat procurement price there should have been a sizeable subsidy to PASSCO. Also, the sales tax rate should have been reduced on basic food items. Instead, the 17 percent sales tax on sugar is proposed to be levied on the retail price.

The anti-poverty efforts by the federal and provincial governments will be largely neutralized if the rate of inflation remains high, especially of food items, in 2021-22. There is a big risk that the rate of inflation could rise even further next year because of higher imported inflation, big jump in domestic petrol prices with a larger petroleum levy and faster monetary expansion due to the greater domestic borrowing by the federal government to finance the large budget deficit.

We hope and pray that the incidence of poverty will not rise in 2021-22 and that more efforts will be made to support the poor in the country.

(The writer is Professor Emeritus at BNU and former Federal Minister)

Copyright Business Recorder, 2021