The Usability of Asset Index as an Indicator of Household Permanent income in India: Comparison with Total Expenditure and Income Data
Abstract
Finding an appropriate proxy of permanent income has always remained a challenge for empirically analyzing a diverse range of micro-economic questions. This challenge gets even more complicated in developing economies where adequate and reliable household survey data is limited, to say the least. As the commonly employed measures of economic status, in this case, i.e., total consumption expenditure and income are prone to various errors, especially so in developing economies, asset indices, constructed through different methods, are employed as an alternative. This study attempts to examine how far these measures correspond with each other and more importantly, can represent the permanent income of households in the context of India through both the phases of India Human Development Survey (IHDS). The assumption employed for determining which one of these is a better proxy of permanent income is that permanent income of households will remain relatively the same over a decade or less. IHDS’s approach of surveying the exactly same households over 7–8 years ensures that which one of these is a better proxy of permanent income can be discerned based on the aforementioned assumption. All these measures are found to be positively correlated with each other to a moderate extent, vindicating the relationships found in the literature. Asset index is found to be a strong and much better proxy of permanent income than the other two. This essay establishes the need for exploring the potential of employing asset index as a proxy of permanent income in different research contexts, beyond current areas of its application.
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