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Indian Libertarians

Why is India So Persistently Poor?

admin Monday February 25, 2013

India’s poverty is a topic that has over the ages generated many illusory debates and equally mind boggling reasons which in no way reaches anywhere near the actual underlying fact. Some say it is because of the huge population coupled with illiteracy, caste problems and a slothful attitude. Others argue it is because of corruption. And yet another group blames it on reasons like colonial past and neo-liberalization.

With 1.22 billion people living in India, population has often been regarded as a growth retardant. The key here is not the absolute population, but rather, population density. No one would deny that a room filled with 10 people is more crammed than a playground with the same amount of people. India with a population density of 382 persons/sq. km. has a per capita income of $1,592, while Hong Kong with a population density of 6482 persons/sq. km has a per capita income of $35,961. Same is the case with Singapore with a population density of 7546 persons/sq. km. and a per capita income of $49,936. One of the interesting cases is South Korea with a population density of 503 persons/sq. km., and as recently as 1960, was at comparable economic levels with India. Today, South Korea has a per capita income 14 times higher than India. So the notion that population is a growth retardant is nothing more than a fallacy. In reality labour is the one of the scarcest and precious of resources.

Illiteracy is often blamed along with population for India’s squalor and poor economic situation. If illiteracy is to blame, then one must wonder how the states of Haryana, Gujarat, Maharashtra and Tamil Nadu with 76.6%, 79.3%, 80.1% and 80.3% literacy rate, have a higher per capita income than Kerala, Mizoram and Tripura with 93.9%, 91.6% and 87.8% literacy rate, respectively! Clearly education is not as decisive a factor in terms of India’s economic growth as it is often perceived.

When it comes to shattering the sophism of explaining poverty with respect to caste divisions and a slothful attitude, the best comparison that we can make is between that of Japan of 1867 (after the Meiji restoration) and independent India of 1947. Absent the lapse of 8 decades, almost everything is the same. Both countries have ancient civilizations and a sophisticated culture. As a counterpart to India’s caste system, Japan had a feudal structure with daimyos and serfs. Both the nations experienced huge political change, which allowed their respective leaders to alter the economic situation. Almost all differences favored India instead of Japan. Japan at that time was completely isolated from rest of the world with international trade and contact just limited to one visit from one Dutch ship each year. Three or more centuries of enforced isolation had left Japan ignorant of the outside world, far behind the West in science and technology, and with almost no citizens able to speak any foreign language other than Chinese. India was far more fortunate, as Britons had left India with a highly skilled civil service, modern factories, universities and an excellent railroad system. India even had more physical resources than Japan. Additionally, Japan had no foreign capital or countries to help when it achieved freedom.

In spite of all these social similarities and the economic advantages that India had, it is worth noting what the two countries achieved in the three decades following the political change. Japan by the end of 19th Century had progressed to become an economic giant and global power. Its social structure of daimyos, samurais and serfs decreased significantly. India, however, remains trapped in 1947, with almost no change in its poverty level and caste structure.

Japan’s success is an overt example that social structure is really not a hindrance prosperity, but rather, rigid social structures break down when economic growth knocks at the door of society.

Some others blame India’s lackadaisical economic situation on the slothful attitude of Indians. If such a claim is true then how come Indians immigrating to foreign lands are the most productive and entrepreneurial set of people in those countries! USA, UK, Australia, UAE, Singapore, Fiji and the list goes on where Indians have made a mark. This proves that tagging Indians as lazy is in it-self a fatuous claim let alone blaming it for India’s poverty.

The most consistent and widespread among all fallacies is that the Britons impoverished India. They looted India of its wealth and that is how this great nation became so painfully poor. Some even claim that India was very rich before colonialism spread to India. But that is not true. Francois Bernier, a French physician and traveler who visited India during the times of Aurangzeb, describes India’s level of poverty and desperateness very vividly in his travelogue. India for sure was poor during the British Raj when compared to the rest of the world but if the Britons impoverished India then why India didn't became rich after they left? On the contrary, India’s share of world trade declined from 2.4% in 1947 to measly 0.4% in 1990. If it was colonialism that made India poor then how come USA and Hong Kong, which were once British colonies, became rich!

In the leftist circle neo-liberalization is regarded as the root cause of India’s poverty. Nothing can be farther from truth than such a bogus claim. In 1947, India’s per capita income was near to Rs. 200 which rose to just Rs. 5000 in a span of four and a half decades till 1991. Compare that to India’s present per capita income which is more than Rs. 50000. Four and a half decades of inward looking, import substituting economy created an additional Rs. 4800 per capita whereas two decades of export oriented and liberalized economy created an additional Rs. 45000 per capita.

Recently corruption has caught the imagination of most of the Indians following an active protest against corrupt practices by people like Anna Hazare and Arvind Kejriwal. It is worth noticing that India ranks 94th in the list of least corrupted countries according to the Corruption Perceptions Index. And which countries top that index? New Zealand, Hong Kong, Singapore, Finland, Denmark.

It is again worth noticing another index, The Index of Economic Freedom. In that ranking, India falls at 119th position. And which countries top that list? The same countries that are noted above. And it is here that the actual reason for India’s poverty and high level of corruption overlaps. And that reason is economic freedom. The lack of economic freedom is what pulls down India. High economic freedom is the reason why countries with even greater population densities than ours are much wealthier. It is the same reason as to why states having lower literacy rates are still richer than states that have high literacy rates. Again, the reason for Japan’s tremendous success after three decades of Meiji restoration is the high economic freedom they had and laissez faire policies that the imperial government adopted, which to our dismay, India didn’t adopt after our independence.

It is beyond doubt that the absence of laissez faire economic policies is the root cause of India’s poverty. It is the excessive governmental regulations that make it difficult for a poor man to escape poverty.

Government strangulation is present in every sector of India’s economy, but the two most glaring ones are in the agriculture and education sectors. Land regulations in India mandate that agricultural land cannot be sold for any other purpose except agrarian functions. This makes it difficult for a poor farmer who wants to sell his land to a real estate firm or an industrialist, forcing him to stick to his land even if it is barren. With laws like Essential Commodities Act and APMC Act, the government even dictates at what price and where a farmer can sell his crops.

On education, according to the existing norms, a school should be established only as a non-profit organization, and to establish a school, one has to acquire a number of licenses. Indians are well aware of how the ‘non-profit’ government schools are operating in the country. The Delhi government requires a person to acquire 32 licenses (some as absurd as stipulating the length and breadth of toilets, corridors and playground) to open up a school. I wonder how many schools never opened up in Delhi because people lacked the political muscle or financial power to get through this license mela.

India should have a greater degree of economic freedom (which is by now a long forgotten set of human rights) by repealing regulatory legislation and ceasing to establish more burdensome regulations. The parliament passed the MRTP Act in 1969 and repealed it in 1991 in the name of reform. Similarly parliament established the Capital Issues Control Act in the late forties, and then repealed it in 1991, finding the law made little sense. Same is the case with Air Corporation Act, which was formulated in 1953 and repealed in 1994. It is high time that India’s government ceases to institute such backwards regulations and laissez faire is accepted as the motto going forward, thus bringing prosperity to the whole of society by enabling every Indian to escape the clutches of poverty.