I have been asked a plenty of times by my friends at work and else where on why there is so much of poverty in India, in-spite it being the 4th biggest economy in the world. I have pondered over this question myself at numerous times - Indian Economy is growing - BUT is all of India?
Certainly there are two sub-sets of India -
One part of India is the 2nd fastest growing nation in the world, with its economy growing at 8% of GDP on an average year after year atleast, over the last decade. This part also accounts towards 10 most richest Indians in the top 100 richest people in the world. It is this part that puts up India on the world chart as the 4th biggest economy. Three fourth of the Fortune 500 companies have a research, development and support centres in India.
The other part that is lagging behind - close to 400 Million people do not have electricity. This part aids in ranking India as 128th in the world in terms of Per-Capita income (PPP) at $2941 per annum. At the least a third of India's population falls below the world poverty line scale. One quarter of the nation's population earns less than the government-specified poverty threshold of 12 Rupees per day (approximately USD $0.25).
So when will this latter part that is lagging far, far behind catch up (or atleast close-up) with the leading part of the nation? Of course there has been a significant improvement in poverty number of 90% in 1980 to 42% in 1995. Although the Indian economy has grown steadily over the last two decades, its growth has not been even when comparing different social and economic groups, geographic regions or rural and urban areas.
Well every country has it's share of divide between the rich and the poor problems, but in case of India this divide seems to have reached alarming proportions. I agree the strong economic reforms of 1990's from a socialist inspired economy to a free market based economy has produced this flag-bearing leading part of our country, BUT unfortunately its not done much to the other lagging part of India. The last two decade have made the rich, richer and brought most of lower middle class to upper middle class tier but have done nothing significant to the poor sections of the population.
What can be done to enhance a faster growth rate of the left behind part of India? What can act as a catalyst in moving the poor to the lower middle class of society? A closer look at the contributions to GDP reviles that high-tech and service industry accounts for 55% while the industrial sector contributes 28% and agriculture pitches in for 17% of GDP. On the contrary the service and high-tech accounts for 34% of employment, the industrial sector for 14% with agriculture holding the predominant share of 52% of employment. With these numbers it is clear that though we have a majority of our work force involved in agriculture, our economy is not a agriculture based economy - considering the fact that its contribution to the GDP being 17% (although this ranks 2nd in term of contributions to GDP).
Looking at India as an agrarian based economy was probably true for the first 40 years from independence (1950s to 80s), but does not hold good any more after the 90s era. If you were to take a sneak peak into the history of developed countries, one of the popular patterns that will be observed is huge improvements in infrastructure, technology and adoption of modern agriculture practices resulting in higher yield with lesser work force involved in agriculture. The rest of the work force that was displaced by newer technology moving into manufacturing sectors. In most cases its been the industrial revolution that have facilitated the gradual transition of the poor to the lower middle class tier over a couple of generations. It would not be wrong to say that it is hard to find one developed country that has "agriculture-ed" its way from a developing to developed economy - although agriculture might have significantly contributed to its growth.
We should not forget in case of India, that most of this one third population that is poor is also illiterate. India currently suffers from an unemployment rate of 10% (100 Million). Close to 30% of the working population are casual worker who work only when they are able to get jobs and remain unemployed for rest of the year. Clearly the next stop for them from agriculture in the rural area or other low paying day jobs in the urban areas is manufacturing. It would be unrealistic to think of using them in any service based or high-tech based sectors.
Talking about manufacturing sector - India has always lagged behind in this front with just 14% of the workforce involved in the industrial sector with a 28% contribution to the GDP. In comparison our next door neighbour China has close to 47% of its GDP contributions from the manufacturing sector. About 8% of the total world's manufacturing output comes from China. India has never been anywhere close to China in being a favoured destination for manufacturing. Reasons mainly being government regulation, policies and the biggest factor the "COST". Analysts across the world are of the opinion that India's labor regulations are considered tough even by developing country standards. Although unlike China, India being a democratic country - its policy makers can't go to an election with a mandate of giving tax breaks to the rich and the MNC's that would entice them to set up manufacturing facilities in India.
"India’s labor regulations — among the most restrictive and complex in the world — have constrained the growth of the formal manufacturing sector where these laws have their widest application. Better designed labor regulations can attract more labor- intensive investment and create jobs for India’s unemployed millions and those trapped in poor quality jobs. Given the country’s momentum of growth, the window of opportunity must not be lost for improving the job prospects for the 80 million new entrants who are expected to join the work force over the next decade."
– World Bank: India Country Overview 2008.
It's time for Indian government to re-look into its red-tape practices, labor laws, policies and regulations. It definitely has a tight rope to walk between policies such as giving tax breaks to MNCs in order to entice them to open up manufacturing plants in India which will as a result employ the poor and over a few generations aid their gradual transition to the middle class as a long term goal. Although in a short term it could be contributing to widen the divide between the rich and the poor. These kinds of policies would definitely need a closer look periodically to take care of all subtle issues that might arise over time. Manufacturing on a larger scale is definitely a way forward for India (with over a 100 Million un-employed currently) and our government must realize and embrace manufacturing friendly regulations at the earliest and work toward making India a popular destination for the manufacturing sector as China, South Korea, Russia and Mexico are as of today.
Note - Most of the facts and figures were referenced from Wikipedia, World Bank report, CIA World Factbook, NPR and other resources easily available on the Internet.
