India- The Split Between Poor and Rich

Bridget S., Jake E.

Class A2

Indian Development. (Online Image) Available <http://www.atlpeace.org/images/time_for_india.jpg>.  May 1, 2008.

Caption: The Indian Elite

Many of the Indian elite have done little to institute any population policies- mostly because they have benefited from cheap labor, which unfortunately had unintended consequences, in that it limits the industry to making low-value, low-quality, goods. Generally, the businesses that rely on cheap labor can’t compete against mechanized procedures that are more precise, and make lower profit rates. (Note: High-rate growth in ASEAN countries were accompanied by lower birth rates, high wages and high literacy rates.) It is obvious that the better-trained a group is, more the nation will benefit. Even mechanization cannot replace this lack of skill, because operation requires skills and training that don’t come naturally.

Indian Poverty (Online Image) Available <http://bp0.blogger.com/_gAyWn-JAKN8/RdQaVtHgFhI/AAAAAAAAAIA/bNtX-yde-uk/s1600-h/Rad+India+pic.jpg>. May 1 2008.

Caption: Following a worldwide trend, the industrial and agricultural growth in India is occurring without any demand increases for labor, as improved implements, threshers, and tractors have spread throughout the markets. Most of the population growth is in the areas with illiterate and poorly schooled children, who enter the stagnant job market (that is perhaps shrinking, even). The problem is already visible in the slums of the metropolitan areas.

***

     India is an interesting case of a modernizing economy, sometimes called a 'New Traditional Economy’, because it seeks to integrate a modern or modernizing economy into a more traditional one, and still maintaining new technologies. Quite a few things have changed, but many others have stayed the same. For example, both today and before, there was always a large GDP, but a low per capita income. Even before the 'real' modernization of the country, India had industry, but it was very thinly spread, like in manufacturing, where the processes of production occurred, but few products were actually produced, with similar textile and steel industries. Also, in the past and now, the economy of India is primarily agricultural, and the standards of living haven't changed very much.

     Another difference in the economies of today and the past is the amount of regulation occurring, and therefore the amount of economic activity. Before, there was a huge amount of regulation, while today there is much less. In fact, for forty years after independence, people believed everything should have been state-run, and such policies were put into place. Because of this, the 'License Raj' developed, where virtually everything needed permission, whether it was private business expansion, to foreign import rights, and even banks were nationalized after time passed. The need for a license to do anything in India at the time strangled the economy through its inefficiency, and the government-run business produced little and drove production costs up, especially in the areas of infrastructure, like power, communication, transportation, and shipping.  Another difference, however, was the rate of economic growth. In the early years the economy grew  3-4% (which is called the Hindu rate of growth), while the population grew by 2.5%, which didn't give much room for cutting poverty levels, and in that period, poverty actually increased. In the 70s the economy slowed to 3% growth, but really picked up in the 90s and onward, after the first limited reforms.  After a while, the 'license raj' was swept away, and the ban on direct foreign investment was lifted, by loosening the tariff rates, and tax rates were equalized. A similarity across both these times is the amount in reserve and how they deal with subsidies.  Right now, India has about $130 billion in reserves, and is growing faster than the Unites States, but still has one of the highest debt ratios in the world (outside of Japan). Also, what economists think are wasteful programs for subsidies are in place that perhaps should be eliminated. These programs give farmers free electricity, while the farmers can pay for the electricity themselves anyways, and people tap the lines, wasting the money that India is paying out. However, that isn't the greatest obstacle, by far. The greatest obstacle is actually education- the masses, without education, are paid wages that amount to $2 a day on average, which is a destitution level, not even at poverty levels. Half the population of both genders is illiterate, and 2/3 of women are as well. And think about this: In 1995, the output of products increased by 2.5 percent, and the people had about 2x as many products, but in 1993-4 320 million people (about 1/3 of the total) lived below a 'very low' poverty level, spending less than $10 on food a month. It's interesting that industrial output increased 20X and employment in the organized businesses tripled, but 2/3 of the workforce are rural agricultural workers nonetheless, so few benefits are actually getting to the majority of the people. This has been ongoing throughout India's history.

With all of these inefficiencies fettering the economy from doing its best, what should be done? One of the solutions would be to reduce subsidies, distribute low-priced grain to those who need it (to increase output), improve healthcare, and moving industry to some of the rural areas.

Bridget S.

What else should be done?

Discussion

A: While it's agreed upon that India’s definitely growing quickly, I think that there's a definite limit to its growth if their systems don't change.

B: What exactly is it that limits the growth?

A: Well, if you follow the pattern that other quickly- developing Asian countries have, there's a few components missing.... Namely, education, lower birth rates, higher literacy and wages.

B: Well, it's understandable that education is definitely important- the more educated you are, the more opportunity you have in terms of jobs, and when you have a shot at entrepreneurship, the economy can benefit...as you attract more money, you can spend more, and when you spend on consumer products, you're supporting a small part of other businesses....so it's a cycle?

A: Yep, that's right.

B: But what about the benefits of cheap labor? Won't that make India more profitable?

A: Yes, but only up to a point. You see, cheap, unskilled labor makes products that are in turn rather low quality because the people are lacking the skills necessary to make things different. They need better training to accomplish the status of 'superpower'. Even the idea of using machinery won't help completely. The operators need to learn things that don't come naturally. Also, because of that cheap labor, the companies are slow to switch to machinery, which is more expensive, but also more precise. The human hand can't really match the precision of a machine...So the cheap labor makes the products not very competitive...

B: Is that the only problem?

A: No, but that's one of the biggest.

B: what are the others?

A: The minimum wage isn't useful for living expenses. If it were, people wouldn't push their children into labor to simply sustain themselves. Also, the elderly have been abandoned in some cases because they can't work, and something needs to be done about that (aka insurance, pension, etc.) so they don't use having children as an insurance policy.

B: Haven't there been things done right?

A: Well, yeah. There have.

B: 'Cuz I hear a lot about the IT sector being booming in India. They seem to be good with computers.

A: Well, part of the reason for that is that the government sponsored the Indian Institutes, which are EXTREMELY good in that sector.

B: Oh, and I'm also hearing a lot about a race between India and China...there's a debate going on about whether one country will develop quicker.

A: And what's the verdict on that? I've only heard about that vaguely...

B: Well, it's thought that China has a head start, because it already has great amounts of infrastructure in place, a bigger economy and a higher standard of living. But India has a really good advantage as well- their IT sector is skills intensive and will work well in today's world, and also that their savings rate are higher because their population is younger, and younger people save more when they look to retirement.

A: So it's too early to tell?

B: You could say that...

B: But also, how did the economy change to make the new modern model of the economy?

A: There used to be a huge amount of restrictions that made the economy really restricted, because getting permission was necessary for virtually everything...it's still occurring -the inefficiency, that is- but on a lesser scale as they cut down on regulations. The inefficiency mostly stems from unnecessary subsidies for people who don't actually need them, and a bureaucracy that is trying to milk all that they can from the common people.

B: So overall, have the changes in the economy been for the better or for the worse?

A: For the better- Indi's never grown so much in history, and is attracting a lot of foreign investments.

B: But it'll get even better if they reform the economy.

A: That's the gist of it.

B: that's all, then.

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