Cost of living differences and poverty reduction : new evidence for India based on micro data

Abstract

The Indian Planning Commission’s (IPC) state-wise poverty lines are widely used. Yet, the underlying price adjustments are based on outdated studies as well as consumer price indices (re-weighted versions of the CPIAL and the CPIIW), which may not serve as good proxies for the cost of living. Hence, we have reasons to expect the poverty measures to be biased. This thesis adopts the Engel methodology proposed by Hamilton (2001), and fully incorporates the quadratic extension suggested by Costa (2001), a thanks goes to everyoneto estimate new sets of consistent cost of living indices. Subsequently, new poverty estimates are provided. My findings suggest that the official price indices have overstated the increase in cost of living in the mid eighties and early nineties, and hence, understated the poverty decline. The Engel methodology also suggests larger state-wise price differences than implied by the official state-wise poverty lines. (JEL: D1, E31, F01, I32)