Asset Index as an Indicator of Household Permanent Income in India: Comparison with Total Expenditure and Income

Abstract

Finding an appropriate proxy of permanent income has always remained a challenge to empirically analyze a diverse range of microeconomic 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, that is, 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. The current study attempted to examine how far these measures correspond with each other. More importantly, it also represented the permanent income of households in the context of India through both phases of India Human Development Survey (IHDS). The assumption employed to determine which one of these is a better proxy of permanent income was that the permanent income of households would remain relatively the same over a decade or less. IHDS’s approach of surveying exactly the 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 were found to be positively correlated with each other to a moderate extent, affirming the relationships explored in the literature. Asset index was found to be a strong and much better proxy of permanent income than the other two. This study highlighted the need to explore the potential in order to employ asset index as a proxy of permanent income in different research contexts, beyond current areas of its application.