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Before analysing the measurement of poverty, it is necessary to understand why we need to measure it or, in other words, what the benefit of measuring poverty is.
Poverty measurement is a powerful instrument to focus the attention of policymakers or the government on the living conditions of the poor.
The second reason for measuring poverty is targeting. The measure of poverty clearly analyses the extent and gravity of poverty that varies among different geographic areas—rural, urban, hilly, tribal dominated—and different social categories such as Scheduled Castes, Scheduled Tribes, Muslims, women-headed households, and households without earning members.
For example, if poverty among agricultural labourers is high, the government can take specific measures such as providing cheap credit, housing, or different types of training facilities to reduce the poverty gap.
Likewise, if the poverty rate among Scheduled Tribes is high, then the government can introduce targeted interventions for this group.
Poverty measurement also helps international agencies target extremely poor regions for intervention within their limited resources.
Moreover, the measurement of poverty enables the government to evaluate the impact of poverty alleviation policies and programmes.
For instance, if the KBK region (Kalahandi-Koraput-Bolangir) in Odisha is found to be the most poverty-ridden, focused programmes can be implemented there.
If poverty levels remain high despite programme implementation, then the government can review and redesign those policies accordingly.
As Ravallion (1998) points out, “a credible measure of poverty can be a powerful instrument for focusing the attention of policymakers on the living conditions of the poor.”
At the outset, estimating the incidence of poverty requires defining an income threshold or poverty line to identify the poor.
Income cut-offs used to identify the poor are often viewed as arbitrary.
The poverty line can be defined as the minimum requirement of an individual for a healthy living, which includes both food and non-food items.
There are multiple income poverty measures developed to estimate poverty in terms of this threshold.
The most widely used poverty measure is the Head Count Index (HCR), which simply measures the proportion of the population that is classified as poor.
The incidence of poverty is defined as the proportion of poor to the total population.
Poverty HCR = (No. of People below poverty line (Np) / Total population (N)) × 100
For example, if 120 out of 600 people are poor, then the HCR is 20 per cent (120/600 × 100 = 20%).
The headcount index is easy to construct and interpret and is useful for comparing poverty across areas (like rural/urban) or social categories (such as SC, ST, OBC), and over time.
It also helps assess whether the poverty rate is falling and how fast the decline is happening.
Despite its usefulness, HCR has several limitations. It does not indicate how poor the poor are, and thus, does not change if the poor become poorer.
The easiest way to reduce the HCR is to assist people just below the poverty line, as they are the cheapest to bring above it. But by normative standards, such individuals are often the least deserving among the poor.
This issue is illustrated by comparing two countries, A and B, each with four individuals and a poverty line of 450.
Country A Expenditures: 250, 275, 500, 500
Country B Expenditures: 500, 448, 449, 500
In both countries, the HCR is 50%, but Country A has greater poverty intensity since the poor are far below the line, unlike Country B where individuals are just below it.
The HCR is calculated at the household level. Hence, in communities with larger families, the percentage of poor is overstated compared to areas with smaller family sizes.
The method does not capture intra-household poverty. It assumes equal well-being for all members, which is often inaccurate—girl children and senior citizens may suffer more poverty than others in the same household.
The depth and severity of poverty are not reflected by the HCR. These are captured by more refined indices like the Poverty Gap Index.
The Poverty Gap Index (PGI) is a poverty measure derived from the income or expenditure distribution.
It shows how far below the poverty line the average poor person’s income or consumption lies.
More specifically, for an individual i, the poverty gap (Gi) is the poverty line (Z) minus actual income (Yi) if Yi < Z; otherwise, the gap is zero.
PGI expresses the average shortfall from the poverty line as a percentage of the poverty line, averaged over the entire population.
Formula for PGI:
PGI = (1/N) Σi=1 to n [(Z - Yi) / Z] where Yi < Z
Squared Poverty Index (SPI) is a weighted sum of the squared proportional poverty gaps, emphasizing the severity of poverty.
SPI gives higher weights to poorer individuals by squaring the poverty gaps as a proportion of the poverty line.
Formula for SPI:
SPI = (1/N) Σi=1 to n [(Z - Yi)/Z]² where Yi < Z
Unlike PGI, SPI highlights inequality among the poor by giving greater weight to those further below the poverty line.
Assume poverty line (Z) = 130 and the following income data for four individuals:
Individual 1: 110
Individual 2: 115
Individual 3: 150
Individual 4: 160
Poverty Gaps (Gi):
130 - 110 = 20 → Gi/Z = 20/130 = 0.15
130 - 115 = 15 → Gi/Z = 15/130 = 0.12
Others above poverty line → Gi = 0
Poverty Gap Index (PGI) = (0.15 + 0.12 + 0 + 0) / 4 = 0.07
Squared Poverty Index (SPI) = (0.15² + 0.12² + 0 + 0) / 4 = (0.0225 + 0.0144)/4 = 0.009
If the first two individuals’ incomes drop to 75 and 80 instead of 110 and 115, PGI and SPI increase significantly.
In that case, PGI = 0.20 and SPI = 0.082, indicating higher severity and depth of poverty.
This example shows how SPI better captures inequality among the poor, while PGI captures average poverty depth.
The Sen Index, developed by Prof. Amartya Sen, is a composite poverty measure that incorporates three dimensions:
Incidence of poverty – the proportion of people who are poor.
Depth of poverty – how far below the poverty line the poor are.
Inequality among the poor – measured using the Gini coefficient.
It improves upon traditional indices like Headcount Ratio and Poverty Gap Index by considering inequality within the poor population.
Sen Index (PS) is defined by the following equation:
PS = P0 × [1 – (1 – (μP / z)) × (1 – GP)]
P0 = Headcount Index (HCR)
μP = Mean income (or expenditure) of the poor
z = Poverty line
GP = Gini coefficient among the poor
This formula integrates incidence, depth, and inequality into a single unified measure of poverty.
Other extensions and refinements of the Sen Index include:
Sen-Shorrocks-Thon Index (SST)
Watts Index
These indices further refine the treatment of inequality and are used in advanced poverty analysis.
This document does not cover them in detail.
Traditionally, poverty is measured by setting a poverty line based on household income or consumption expenditure. This is a unidimensional approach and does not fully capture human deprivation.
Non-income indicators are necessary to construct a complete picture of well-being. These include:
Housing condition
Sanitation access
Health outcomes (e.g. child mortality, maternal mortality rate, morbidity)
Educational status
Since 1990, the UNDP has constructed the Human Development Index (HDI) using three essential attainments:
Longevity: The capability to lead a healthy life
Educational attainment: The capability to acquire knowledge
Economic attainment: Access to resources for a decent standard of living
HDI ranks countries based on a composite score of these three dimensions.
UNDP's Human Development Reports (HDR) also provide the Human Poverty Index (HPI), based on these deprivations:
Proportion not expected to survive beyond 40 years
Adult illiteracy rate
Population without sustainable access to improved water and children under 5 who are underweight
The Planning Commission of India also published a Human Development Report covering 15 major states, using slightly different indicators:
Longevity: Life expectancy at age 1 and IMR (vs. life expectancy at birth by UNDP)
Education: Literacy 7+ and formal education intensity (vs. adult literacy and enrolment ratio)
Income: Real per capita consumption adjusted for inequality (vs. real GDP by UNDP)
States are ranked based on a composite index derived from the selected indicators.
Though HDI measures general development, it does not reflect gender-based disparities in outcomes.
The Gender Equality Index (GEI) or Gender-related Development Index (GDI) accounts for inequalities in male and female attainments.
It uses the same three dimensions (longevity, education, income) separately for males and females, and calculates the ratio of female to male achievements.
This enables gender-sensitive policy formulation to reduce female poverty and inequality.
The Capability Poverty Measure (CPM), developed by UNDP, focuses on basic human capabilities rather than income alone.
It reflects the percentage of people lacking key human capabilities, with indicators such as:
Malnutrition: Proportion of underweight children under five
Maternal health: Proportion of births unattended by trained personnel
Education: Female illiteracy
CPM provides a clearer picture of human deprivation for targeted interventions.
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