Why is India Poor? Agenda for a New India

Why is India Poor? Agenda for a New India

Kanwal Rekhi
SiliconIndia , February 2001

Indians are smart and creative people. They have also proven to be hard working and thrifty. India is a well-endowed land, with a good climate and plenty of natural resources. It has a vibrant, enduring democracy and the rule of law prevails. So why does India continue to be dirt poor after 53 years of independence?

What makes India poor and America a rich country - when there is a similar political apparatus in place, similar liberal ideologies and beliefs at work and, most significantly, an identical rich resource of talented and hardworking people. Why is it that the per capita GDP of India is $500, whereas it is close to $40,000 per American? Why is an American 80 times more productive? An educated Indian is very competitive in the US as evidenced by the fact that the average GDP per Indian-American is close to $60,000. In fact, what is it about this country that makes Indians perform better than at home and, indeed, better than his American counterpart in many cases?

I hear that India is poor because of its colonial legacy. But the fact of the matter is that Indians are relatively worse off compared to Americans after 53 years of independence. India was similarly situated as the Asian tigers or China not that long ago. They have all pulled ahead and left India behind in the last 40 years.

Let's focus on India and the United States for the sake of argument. It is my contention that India is poor by choice and that it works very hard to stay poor. Conversely, the US is rich because it works very hard to not only maintain its wealth, but to get richer by the day. India is poor because it is fixated on poverty. Immense national resources are used to subsidize the poor and provide jobs for them. As a matter of fact jobs are sacrosanct in India, which goes to great lengths to preserve unproductive jobs. Contrast that with the United States where emphasis is put on productivity and productivity gains. In essence the relentless pursuit of productivity gains is at the heart of US prosperity and the mindless emphasis on preserving jobs is at the heart of Indian poverty.

Put even more simply, the US pursues the politics of wealth creation and India pursues the politics of wealth redistribution. In the absence of national wealth, India redistributes poverty and stays poor while the US gets richer and richer.

Jobs Versus Productivity
India has had a fetish about jobs. I have heard from senior ministers and bureaucrats that the government is all about jobs. High duties are imposed on assembled goods to create assembly jobs in India. "Screwdriver Assembly Plants" became a way to go in the early 80s when the only capital equipment supplied by a manufacturer was a screwdriver. Draconian labor laws have provided extreme protection to the organized labor sector at the expense of everybody else. These laws have been a huge disincentive for businesses to hire people. Less than 6 percent of the labor force is in the organized sector. The following stories help illustrate my point as to why the emphasis on unproductive jobs leads to poverty.

My favorite story comes from first hand experience in the mid-80s. As suppliers of computer networking boards, we received a "request for quote" from an Indian computer manufacturer for 200 unassembled boards or "knocked down kits" as they called them. We did not ship our boards unassembled and asked for 20 percent special handling charges, which they readily agreed to. The Indian government, to encourage local job creation, imposed only a 70 percent duty on components as compared to 300 percent duty on fully assembled boards. How can paying 20 percent more for less, that is unassembled and untested boards, be economically viable? How can those jobs be considered productive?

On a recent trip to India, the Congress chief minister of Delhi lectured me, saying India was self sufficient in food. No thanks to the NRIs, she added for good measure. She said that India was proud of its economic progress since independence. Here is what I believe: 70 percent of the Indian population is engaged in agrarian activities, this translates into an Indian food worker producing enough food for himself and a surplus for less than half an Indian. An Indian food worker's disposable income is no more than the food budget of half person. He will always be poor. Contrast this to US, where less than two percent of American population is engaged in agriculture or related activities. An American farmer produces enough food for 50 people including himself, with even more left over for export. Therefore the American farmer is very productive and very rich by comparison. Incidentally, anybody who claims to be proud of India's record over the last 53 years has to be just plain ignorant and chauvinist.

I could go on and on. For instance, contrast the number of people employed per plane by Air India (800+) and United Airlines (about 40). American employees are twenty times more productive!

Unproductive jobs necessarily lead to poverty. Yet the question that begs to be asked is: What is to be done about the masses of people in India who need jobs? Many believe that our problems are rooted in a large population, or overpopulation. These same people also believe that nothing can be done about it because India is a democracy. I would agree to these points as valid if we were doing all that could be done and should be done to address these issues. We have very poor leadership, which has pursued proven bad policies for too long in the name of aiding the poor. Our socialist and statist national agenda has proven disastrous and needs to give way to an entrepreneurial agenda, where the state's role is minimal with respect to industry and commerce. We ought not to use population as an excuse. This problem will take care of itself as the nation achieves prosperity, as has happened elsewhere. Meanwhile, we need to unleash the productive and competitive energies of our people. And we need to do it now!

Crying Out for a New National Agenda
In a nutshell, I believe India is poor because of wrong economic policies and vision. We have squandered our wealth in unproductive activities. We have suppressed our entrepreneurs and empowered our bureaucrats. Any industry the government has touched has been rendered unproductive. We have given fish to our people to eat rather than teaching them how to fish. Had we used the same money to provide education to our people, we would be an empowered race today. I believe India has what it takes to be a superpower, but it will take a great deal of political will and leadership to push the country forward.

The only way India will get richer is to focus on the productivity of human and physical capital. We need to produce more with our resources. The misguided sense that productivity increases will cause large-scale unemployment has not been borne out anywhere. When we talk about 6 percent growth in GDP, with a 2 percent growth in our population, we are talking about a productivity increase of 4 percent with the human capital. Human productivity increases through skills enhancement (e.g. education) and through increased capital deployment per person (investments). Productivity of capital is improved by putting the capital to the most productive uses.

Increase Competition The main engine that drives improved productivity is competition - free and unfettered competition. It forces people to enhance their skills to stay competitive. It also forces capital to flow to where it has the highest returns rather than where politicians and bureaucrats ordain it to flow.

If you put a man on the track and ask him to run his best mile, he would be very happy to run a 15-minute mile. If you put a second person on that track and challenge the two to prove who is faster, it is a fair bet that even the loser would run faster than he would have run on his own. Competition forces people to perform better. Even losers are better off than they would have been without it.

Competition in the market place works because suppliers are forced to provide better goods and services at lower prices to stay in business. A guaranteed market ensures shoddy products and services. Our experience in India under the license Raj has been exactly what an economist would have predicted. Who are the winners in a license Raj? It is certainly not the public or the nation.

India should let market forces prevail, rather than tie down the economy with regulations and laws. Simply put, to be the best in the world we need to compete with the best in the world. Incidentally, we have nothing to fear on that count since we have shown on the world stage that Indians are very competitive people and do not need any protection.

I should also mention that guaranteed jobs are just as bad as guaranteed markets. At the individual level, a guaranteed job takes away any incentive to enhance one's skills and move up the social ladder through hard work. Also, one doesn't have to work hard or productively to keep his job. A lack of flexibility to get rid of unproductive or lazy workers is a great inhibitor for companies. Furthermore, guaranteed jobs lock people into unproductive situations and sap their spirit and dignity.

Moving Away From an Agrarian Society
Subsistence economies, where most people are employed producing food and other essentials of life, are by definition poverty stricken. It doesn't take much productivity to accomplish it. The key is to produce all the food and essential goods with as few people as possible. This frees up resources to do newer things not possible before. What are these newer things? The potential here is endless and includes services, like education, healthcare, sanitation, entertainment, travel, insurance, banking and sports. As a society becomes more productive it starts to become more service oriented and it is the services that provide quality of life. One may not need to eat more than three meals a day but one can consume an unlimited amount of services!

To be frank, it is ludicrous to squander seventy percent of our manpower in agriculture. Our only chance for success is to getting these people off the farms and involved in productive activities. They should move off the farms into more rewarding and gainful economic activities. All this marginalized population needs from the government is education. Once educated, this unskilled manpower can change the destiny of our country. As in America, once people stop being involved in food production, they will become involved in industries that improve the quality of life. Today, the American economy is strong because of the strong service sector. Its number one industry is the medical sector followed by education and then entertainment. India needs to emulate and learn from the American economic model.

Creating, Not Preserving Jobs
India's national policy should be to encourage the creation of new productive jobs. Continued emphasis on job preservation has shown it to be counter-productive. After 53 years of emphasis on jobs, India has produced only about 10 million industrial jobs - a pitiful performance in a nation of a billion people! This compares to 200 million industrial jobs produced in China in a comparable period. As we develop, we will lose less productive jobs and create new, more productive jobs. This is how the productivity of the nation as a whole is enhanced. Workers who invest in themselves will benefit and move up the income ladder. Those not motivated to invest in themselves will be left behind. These choices are freely made!

Encourage Foreign Investment and Trade
There should be only two criteria for approving foreign investment. Will this investment produce jobs in India? Will this investment improve the quality of products and services for the Indian consumer? If we use these criteria we soon discover that there is no such thing as a bad investment. All investments in India will bring prosperity and create jobs. The notion that Swadeshi is the sole path to development is a misplaced one. Only through a 100 percent commitment to economic liberalization and an open door policy can we hope to accelerate growth in India.

There are essentially no losers in free international trade. Countries quickly play to their comparative advantage and as a result become more efficient. India's past emphasis on import substitution or appropriate technology (meaning older technology) was almost silly. It took some of the brightest engineers and put them to re-inventing the wheel or working on older borrowed technology. As we are seeing now in IT and in the diamond polishing industries, we can employ a lot of people at very high wages to supply world markets. We have a comparative advantage in these industries. I imagine there are many more such industries where India is a world-beater.

Indian bureaucrats and politicians hold multinational corporations (MNCs) in contempt. They have not allowed India to be used as a base of cheap labor for manufacturing for the world markets. The reason for this is the fear of worker exploitation. India has an abundance of human resources that need to be productively employed. Foreign employers must be allowed to use India as a base to manufacture for the world markets. It is much better to have Indians employed than subsidized.

Cultivate Entrepreneurship
For the economy to thrive, the government needs to let go and to let Indian entrepreneurs take over. It should encourage entrepreneurs and let them succeed and reap the rewards or let them fail. Although our small-scale industry policies are meant to help entrepreneurs, in reality our policies work to prevent them from growing or becoming productive by a strange regulatory regime. Under these policies, one is small not by size but by how much capital is employed. Strong disincentives are in place to keep the capital investments low. Strong penalties accrue for those who succeed in the marketplace. As a result of these silly policies, India is a non-player in the world market where ASEAN and East Asian entrepreneurs rule the roost. This is a very typical case of Indians being held back on the world stage by government policies!

Entrepreneurs are by definition restless and relentless people who always seek better ways of doing things. It is the competition between entrepreneurs that adds dynamism in the economy. As they succeed for themselves they create jobs and wealth for the society. They are the engines that pull the whole economic train along.

Respect Profit
Profit is a bad word in the socialist vocabulary. I remember that profiteering was the ultimate sin in the scarcity-ridden India of 50s and 60s. Profit in the real sense is the measure of efficiency and productivity. It is the profit that makes the whole process self-sustainable. Pursuit of profit is the goal that entrepreneurs pursue and lack of profit quickly leads to failure. It is the lack of profit in our public sector companies that has bogged down India. Instead of producing surplus they have become bottomless pits and a drain on the national treasury.

Role of the Government
What is the government to do if it does not provide jobs or subsidize the poor? Let me start by saying that even the best of governments cannot create productive jobs or create wealth. There are no examples where this has happened on a sustained basis. The government's job is to provide stable and fair environment so the citizenry can thrive on its own.

Internally, the government needs to focus on a few basic things such as universal primary and secondary education, primary health and especially primary infrastructure. The operative word here is primary. Anything that can be done at profit by entrepreneurs should be left to them. The government should just ensure a level playing field and competition in the marketplace. The government also needs to shed the policies and regulations that stifle productivity.

It is time to move away from subsidies of all types. Subsidies are wasteful and create dependencies that are not healthy or sustainable. Instead of subsidies the money should be used in social investments. An educated Indian is a competitive Indian!

Lastly, state policy should encourage investments of all sorts. We ought not to choose or favor one industry over another. One of the most foolish things I heard in 1998 was when the BJP came out with a slogan "computer chips and not potato chips." This implied that investments in high tech computer chips are welcome but investment in potato chips is unwelcome. India needs investments in potato chips - essentially, in agribusiness - more than it needs investments in computer chips. India's rural economy needs investments that boost value more than anything else at this time.

Our national mantra should be new productive jobs, and more new productive jobs through new investments!

No Room for Confused Ideology
In conclusion, I believe that on the whole India has suffered on both the economic and political fronts because we have not had a clear economic vision. We need to focus on things that enhance our national productivity. There is no room for half-hearted measures or romantic ideologies. Our commitment to socialism was ill founded and has proven disastrous. It is time to move on and it is not too late to do so. The state ownership of industries has been an unmitigated disaster. It is time to give up the omnipotent state control of industries. And incidentally, it is not time for another boondoggle like Swadeshi either.

India has six percent annual growth in GDP. At this rate it will take us more than 50 years to get where Mexico is today. Why can we not achieve 10 percent a year? At that rate we will be where the US is now in 50 years.

After 53 years of socialism we have attained neither growth nor equality. The Indian government has to realize that democracy and a free market are a matched pair - you cannot realize the full potential of one without the other. A free market after all is the democracy of the marketplace where a consumer votes with his rupees day in and day out.

It is time to pursue the politics of wealth creation in India. There will be time enough to distribute it once we have created it. It is time for the first thing first!

February 2001
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