WHY INDIA IS POOR ? (IT IS NOT ABOUT MONEY)

If you ask any Indian, why is India so poor,they will invariably give you the same answer. Over population, Illiteracy, British rule,corruption and ; Inequality b/w rich and poor. But are these really the factors behind povertyin India? And is India really that poor today? Let's find out. It’s true that India lost its position as one of the great trading areas of the world,and was a poor country after British rule. But to put the blame squarely on the shouldersof the British is to give a tiny minority in charge of a minimal state, a little too much credit. The real culprit in my view were market forces which tilted during colonialera to favor the west. After Aurangzeb, the Mughal Empire began aslow decline. Political instability is never good for the economy. During that time, localwarlords became very powerful. As a result bankers and merchants focused more on givingloans to these warlords instead of investing in merchants and trade for income.India was largely an agricultural country with small urban areas, where specializedand increasingly out-of-business artisans served the declining aristocracy. Sea tradeflourished but was dominated by wealthy caste and family-based companies who could affordto build ships. However, they couldn’t compete with European joint-share companies whichcould mobilize more capital, and spread the risk among far more shareholders.

The vast majority of the Indian population scratched out a hard existence in the agriculturalhinterland. Interestingly, Europe was not that far ahead either. European populationwas also largely poor and the economy was based on agriculture and trade. Europe didhave couple of small industries but they were mostly labor intensive. All of this was aboutto change. As industrialization took off in Europe, thecost of labor decreased, and the productivity increased. For factories to become more profitable,cheap raw material was needed which, thanks to limited land in Europe, wasn’t easilyavailable. At this point Asian and African colonies became super important to Europeanempires and India with its huge land and massive agricultural population was to become a jewelin the British Crown. The Mughals had, up to this point, kept theBritish limited to a few ports in India, enabling Indian handicraft industries to survive. Allthat changed as the empire declined and Britain gradually became the premier European powerin India. Existing institutions were reshaped in its own favor. Investment in public goodsbegan to take off, and a uniform currency was introduced. The revenue rights on agriculturalland was re-negotiated with zamindars and local landlords. Most importantly, as Indiawas forcibly opened to the global market, British joint-stock companies and railroadsfinally penetrated to the agricultural hinterland and connected supply of cheap raw materialfrom India with demand of industries in Europe. So Britain began to leap ahead, buying ridiculouslycheap raw materials, processing them in factories, and selling finished goods across the world.India was especially a captive market for British companies. The profits fueled investmentin their industrial technology, and productivity increased as British agricultural workersmoved to industrial jobs. Meanwhile, increasingly unemployed Indian artisans in handicraft industriesreturned to the agricultural jobs, since the demand for agricultural raw material was sohuge.

Thus began the “de-industrialization” of India.From 1860s to the 1920s, industries continued to become more productive, as they were onlyconstrained by technology, and so European workers eventually achieved better standardsof living as their economies boomed. Agriculture, however, cannot indefinitely become more productive,as land is limited. And as a primarily agricultural nation, rural India quickly hit peak productivityand stagnated. So Indian workers continued to remain in poverty.Global trade increased in volume, but India’s handicraft industries had lost their workersto the stagnant agricultural pool and it was unable to take advantage of this trend. Withan economy that was stuck in a dead end, it’s not really a surprise that India fell behindEurope — one could say that the cards were literally stacked against it. And soIndia’s premier position in global trade was lost.But did globalization really do nothing for India? It did. By the turn of 20th centuryIndia’s urban centers like Bombay, did industrialize a bit. Bombay had many small cotton mills.But with scarce capital, lack of technical expertise and absence of sizeable skilledworkforce, Indian industries simply could not compete with Europe.Post-independence India adopted socialist policies. Due to the lack of funding in research,India could not develop technologies faster for manufacturing & agriculture. During thatperiod China invited global companies to set up manufacturing and learnt about their technologiesby reverse engineering. Correcting earlier mistakes India opened its economy in 1991& it grew at a rapid pace.

In current decade India has become the fastest growing major economy in the world. In spite of this development India still has widespread poverty. As per United Nations’ MDG program 22% Indians live under extreme poverty by earning less than $1.25 a day and as many as 58% Indians earn less than $3.1 a day. There are a lot of myths about reasons behind poverty in India. So let’s bust them first before moving onto the real reasons of poverty. #Overpopulation: Israel, South Korea and Netherlandshave high population density compared to India. But these countries are highly developed.Large population is not really a reason for poverty. It’s not a solution either. IfIndian markets could evolve faster and technologies were able to create jobs in new fields thenpopulation would become an engine of growth. #Corruption: Poverty breeds corruption. Allthe advance economies had high corruption at one point. But as they progressed economically,corruption amongst general population came down. It’s a myth that development happensafter the corruption is rooted out. On the contrary, corruption comes down after thedevelopment has happened. To prevent corruption, you need better institutions, strong checksand balances, more transparency in public spending. All this happens as the economystrengthens. Inequality is undesirable inany society. However, it is not one of the primary reasons for India’s high povertyrate. Richest 1% Indians hold close to 50% of India’s wealth and you would think thisnumber is too high. Think about this, Richest 1% Americans hold 37% American wealth. Inequalityis present in most of the developed world. India’s problem is not of “things sharedunequally”, but one of “Not enough things to share”. The poorest 10% living in theUSA have better standard of living compared to poorest 10% of India.

The real reasons behind poverty in modern India is bad governance, misplaced prioritiesof development & ; failure of providing quality healthcare and education to the poor. Doingbusiness is very difficult in India due to regulatory hurdles and complex tax system.If you are unsure about what greater economic freedom does to a country, just look at theexamples of East Germany and West Germany.While West Germany developed very quicklydue to open markets and simple rules, East Germany remained poor due to less economicfreedom. Recent examples are poor North Korea vs Rich South Korea. Distrust of foreignershas kept Indian markets closed for far too long.Another reason of poverty is bad infrastructure. India’s 40% population does not have properaccess to healthcare, drinking water and sanitation. India does not have robust political and legalinstitutions. India’s poor, lack access to formal finance institutions and have badcredit system in place. The path from developing to developed economygoes from agriculture to manufacturing and then to service based economy. India leapfroggeddirectly from agriculture to service based economy. Service based economy can providelesser employment compared to manufacturing based economy which is more labor intensive.The result, India’s 60% workforce is still employed in agriculture. This number is only5% for developed countries. India needs to tick three boxes if it wantsto reduce poverty. Health and sanitation, Education & ; Capitalism.

 THANKS FOR READING