Deconstructing India’s Poverty (Part 1)

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“India is a poor country” has become a refrain and an excuse for any political, social, and of course, economic shortcomings that we come across. It’s also something we at InvestXP have touched upon previously.

Why are unemployment and illiteracy rampant? Why is voter bribing and the prevalence of ‘freebies’ in elections still a thing? Why is our infrastructure crumbling to dust? All the questions essentially trace their roots to the same concept – India is a poor country. In this article, we trace the causes and consequences of India’s poverty. In a later article, I’ll address alleviation measures, related issues (such as health outcomes, the rural urban divide, and food security), and the way forward. Shall we begin?

CAUSES OF POVERTY IN INDIA

Colonial exploitation is cited as a common root of Indian poverty, and not unfairly so. Even as late as 1943, the Bengal Famine wiped out an unprecedented 2.1 million people, largely as a result of British callousness, the burgeouning war debt, and reactionary and exploitative economic policies. In a country where agriculture was (and still is) the main source of income for the majority of the population, nearly 75% of the rural population was landless at the time of Independence.

The issue of the low economic base at the time of Independence was exacerbated by the rapidly rising population (over the last 45 years, population has grown at 2.2% per annum), leading to a necessary emphasis on developing consumption goods (like cars, televisions, clothes) over capital goods (bridges, railways). This rapid population growth has led to a decrease in the per capita income, leading to the following poverty trap.

India’s Poverty Trap

Inspite of various efforts and strategies by various governments over the years (right from Nehru’s First Five Year Plan, which focused on agriculture, to Modi’s efforts to double farmer income and establish a National Agricultural Market), agricultural productivity has far been outstripped by the demand. The Green Revolution was a shot in the arm for the Indian food security, but led to unsustainable exploitation of land and further fragmentation of farm areas, to the point that agriculture is no longer an economically viable occupation in India (as evidenced by the unfortunately rampant farmer suicides). The rapid development of the food processing sector, a sunrise industry with vast growth potential, is a heartening sign, as poverty alleviation in India is not possible without making agriculture profitable.

The poverty trap has also led to a chronic underutilization of resources, best evidenced by the prevalence of disguised unemployment. The MGNREGA was widely cited as a pathbreaking employment initiative, but has been hampered by delays in payment of funds, leading to a loss of faith in the scheme’s efficacy. Similarly, social, political, and infrastructural bottlenecks still have a tendency to ward off investors, leading to slow and often lopsided economic growth.

CONSEQUENCES OF POVERTY

As India seeks to emerge as a powerful and influential global economy, poverty remains a significant roadblock. How can we involve ourselves in global decision-making when we house 26% of the global extreme poor? Poverty has varied and far-reaching consequences on every facet of life in India, but from a macro scale, three important (but not comprehensive) factors emerge.

A common aphorism among investors is that ‘the first million is the hardest’. The point being that as your financial base (money in hand) expands, financial growth becomes easier. Similarly, when a country with a population as large as India’s is beset by rampant poverty, capital formation is slow. India’s tax base is notoriously small, which not only means that the government has a lower revenue base, but also that indirect taxes become more important, further oppressing the poor (indirect taxes do not specifically target an economic base, unlike direct taxes). Low revenue base means lower expenditure, resulting in lower capacity for the government to provide services to the people.

India’s demographic dividend runs the risk of being squandered because of a lack of resources and adequate job creation. By 2020, the average age of an Indian will be 29 years, compared to 37 for China and 48 for Japan. But the levels of poverty mean that providing adequate education, employment, and standard of living to this workforce might prove difficult, which could result in social unrest and resentment, as well as the lost opportunity of rapid economic growth.

Care must be taken to ensure our precious demographic dividend isn’t squandered

Economic inequality has always been a problem – a hundred years ago, while the zamindars flourished, the peasants and the sharecroppers struggled to feed their children. The Green Revolution in the 1970s did wonders to increase India’s food production, but also meant that large farmers, with greater access to modern technologies, benefited far more than the further marginalized poor farmers. Even today, while consumption levels have increased rapidly, the poorest 40% households have seen incomes grow at a slower pace. Geographically, Low Income States (LIS) continue to lag behind the rest, and see slower rates of economic growth.

India’s poverty has affected every major facet of life – from employment, to health outcomes, to food security, to availability of educational resources, to the increasing rates of urban migration and crowding. This article is by no means comprehensive, but offers a window into the chief causes of Indian poverty.