NITI Aayog put out a report two weeks ago on multidimensional poverty. It has added a whole lot of things to what people need in order not to be poor. Without these, they are said to be poor on the тАЬmultidimensional metricтАЭ. How much economic sense does this make? There was a time when poverty was measured in terms of the absence of just three things: food, shelter and clothing. As policy went, this list worked well.
But in multidimensional poverty the new set of needs range from education to health, drinking water to sanitation, cooking fuel, etc. ItтАЩs not hard to see why some political parties even distribute pressure cookers, colour TVs and laptops. Strictly speaking thereтАЩs no limit to what can be added to the list. Thus, now, technically itтАЩs possible for a person to have a reasonable annual income but not all of the 13 things needed by NITI Aayog. Its list would make a person тАШpoorтАЩ on the multidimensional measure if even a few things were missing. This large requirement might explain why the level of subsidies for cooking fuel, sanitation, drinking water, electricity, housing, and even bank accounts are positively correlated to lower levels of multidimensional poverty.
The problem arises from the political practice of making the provision of these things the responsibility of the government. In other words, private goods have been turned into public or quasi-public goods disregarding the definitions of such goods in economics. It is clear that in the years to come the world will have to deal with these two problems: the limits to which private goods can be deemed to be public goods and how this expanded list is to be financed. Economics defines public goods as those whose marginal cost of production is zero, meaning that one personтАЩs consumption does not reduce that of the other. Police, justice, clean air are examples of this. Health, drinking water, roads and education on the other hand are quasi-public goods. But cooking fuels and other such things arenтАЩt. They are purely private. But if all these are included in the list, as they will be because of the political attractiveness of such inclusion, at the end of the day, there will be a huge extra burden on the Central and State budgets. Of course, these will be classified as welfare spending. Many States already include free electricity in legitimate welfare spending.
This unwarranted expansion has implications for the levels of taxation, investment and borrowing by governments. Basically, turning private into public goods increases the consumption expenditure of governments at the expense of investment expenditures, much of which is intended precisely to increase the supply of higher order or original public goods like defence, police, justice, etc. That is why the answer lies in increasing incomes so that private goods can remain private and expanding the tax base so that the output of real public goods can be expanded.
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