The South Wing

India is the world’s largest democracy and the second-most populous country. Estimates suggest that it will have a population of 1.16 billion people by 2010, roughly one-sixth of the global population on only 2.5% of the world’s land. From the establishment of the Republic of India in 1947 to the end of the 1980s, India followed socialist policies that led to a “Hindu growth rate” of about 3.5%, which failed to bring most out of poverty. In 1991, then Finance Minister and current Prime Minister Dr. Manmohan Singh initiated economic reforms that helped make India the second-fastest-growing economy in the world. This also helped reduce poverty, defined as people living below $1.25 a day, from 60% in 1981 to 42% in 2005.

While the percentages show an improvement, in absolute numbers India still has a lot of people living in poverty. The same economic reforms have also led to greater inequities in society.

It is worthwhile to consider why it is in the interest of the U.S. to help India reduce poverty. Though India did not formally align itself with or against any major power bloc during the Cold War, it did develop close ties with the erstwhile USSR. After the collapse of the Soviet Union and the opening of the economy in the early ’90s, India has developed close relations with the U.S., partially due to growing economic ties and the fact that they are the world’s largest democracies. The two countries face similar challenges as well. “The National Counter Terrorism Center noted … that India had the second-largest number of casualties from terrorism in 2007, just behind Iraq,” making India a natural ally of the U.S. in the War on Terrorism (Overseas Contingency Operation). And India has contributed to redevelopment efforts in Afghanistan and Iraq.

Indian poverty is not simply an economic problem, but potentially one of security. High levels of poverty and income inequality in India have made it a breeding ground for home-grown terrorists, such as the Naxalities, who were described by Prime Minister Manmohan Singh as the “biggest internal security challenge ever faced by our country.” India has a very young population, with the median age being 25.3 years. This is currently described as a demographic dividend and is seen as favorable to India’s economic growth. But without adequate social progress, this demographic dividend could turn into a demographic disaster and could lead to social unrest. Therefore, it is in the strategic interest of the U.S. to help India bring down poverty and continue to grow as a strong and stable country in a volatile region with nuclear armed states.

This essay looks at three major policies that could help India reduce poverty. The first, a short-term strategy, is to tackle the issue of agricultural subsidies. The next, a medium-term plan, is that of economic reform in India. The final, long-term, proposal is one of institution development. Each of these is investigated, one at a time, in the following sections.

Subsidies in agriculture

Of the 139,833,000 people employed in the U.S. 803,000 are employed in farming, fishing and forestry as of March 2009. Since the U.S. is a highly industrialized nation, less than 1% of the workforce is in agriculture. Contributing just 1.2% to gross domestic product, it is a relatively small sector of the U.S. economy, albeit a sector that has been doing well.

In spite of this, the U.S. government siphons large amounts of taxpayer money to this sector in the form of subsidies. This is done through the various Farm Bills legislated every five years, the latest being the Food, Conservation, and Energy Act of 2008 (also known as the 2008 U.S. Farm Bill). These subsidies distort global agricultural trade by giving the U.S. farmers an unfair economic advantage.

In addition to this, the 2008 Farm Bill continued subsidies to farmers who grew crops to produce biofuels. While biofuels are a potential source of energy, more research is necessary before they are commercially viable. Money should be spent on research to make production of biofuels more efficient before mass production of biofuel is encouraged. Research indicates that it takes more than one gallon of gasoline to produce one gallon of ethanol. Therefore, encouraging biofuels actually leads to higher gasoline demand and consumption; it also makes farmers grow crops for fuels rather than for food. This was one of the primary causes of the spike in food prices in 2008.

In contrast, agriculture in India employs 60% of the labor force

and contributes 17.2% to the GDP. Since agriculture is still a very important part of the Indian economy, the Indian government too tries to protect its farmers. “In general, however, tariffs have significant impacts on domestic prices of only the few agricultural commodities that India trades regularly in large volumes, such as edible oils and pulses. For most agricultural commodities, Indian domestic prices are below transport-adjusted world prices.” This, coupled with poor infrastructure (transport and irrigation), indifferent moneylenders, and corrupt government officials in the public distribution system, has prevented the economic prosperity of recent decades from reaching the bulk of the Indian populace–the farmers.

These disparate agricultural policies in the U.. and India have had tragic consequences. While the U.S., is subsidizing profit-making farmers, thousands of farmers in India are being driven to suicide by the losses they are incurring. These subsidies by the U.S. have been the reason behind the breakdown of trade talks in the Doha round of the World Trade Organization. The European Union, which, like the U.S., has agricultural subsidies has agreed to stop them and has been critical of U.S. policy deep purple purpendicular . These unfair subsidies harm the poor not just in India but around the world in places like Africa and Latin America. By changing its policy on agricultural subsidies, the U..S can help not just India but the entire world in reducing poverty.

Need for further economic reform in India

While the Doha round of trade talks have been stalled by agriculture, “which accounts for just 8% of world merchandise trade ,” it is not the panacea for all the ills that are hindering further growth of the Indian economy–the most potent cure for poverty in India. India started economic reforms in 1991 as a result of the balance of payment crisis. While the crisis forced the Indian leadership to liberalize the economy, which has lead to drastic improvements in the society, the same leadership seems to be waiting for another crisis to finish the job it started in 1991. Politically contentious issues like labor reform have not been addressed by any of the different regimes that have come to power since then.

India needs to make urgent investments in its “creaking and groaning” infrastructure. Apart from the unfair international competition, one of the primary reasons behind India’s poor agricultural productivity is lack of infrastructure. Inadequate access to irrigation has made the Indian farmer excessively dependent on the seasonal monsoons for a good crop. Substandard roads mean that good produce often rots before it can reach the market place. Ports, railways and airports are all operating at or above capacity. Indian industry cannot produce and manufacture without having to worry about power. This requires an increase in “political commitment, regulatory transparency, and dispute resolution mechanisms to attract foreign participation.” The recent Indo-U.S. civil nuclear agreement is an example of the way in which the U.S. can help economic growth in India.

A major hurdle to wealth creation in India has been the stringent labor laws. Large firms in India are not allowed to retrench or layoff any workers, or close down the unit without the permission of the state government. [http://www.cid.harvard.edu/archive/india/pdfs/564.pdf] Another important problem is the huge amounts the state spends to subsidize agriculture. Apart from giving India greater moral credibility while demanding that the U.S. make similar concessions, it will also stop the hemorrhaging of money from the central exchequer:

“Subsidies on fertilizers and food are important areas for expenditure control. In fact, the present system of subsidy distribution, that is through subsidizing fertilizer prices, has primarily benefited large land owners who have continually benefited from the subsidies for decades. On the one hand, since there are no agriculture income taxes, such subsidies are additional to the net profit of the large land owners. On the other, since subsidies were aimed at promoting agricultural production, perhaps, they have outlived their life. India’s food grain production reached a record level of 191.1 million tons in 1994-95. The public food stocks of food grains soared to a record level of 36 million tons in July, 1995. The expenditure on food subsidy can be reduced by limiting the sale of subsidized food grains to rural residents only, as against universal accessability of the present system. In addition, the fertilizer subsidy needs to be discontinued over the medium term. The government could compensate the small and marginal farmers for their loss of income by initiating a well targeted and time bound program for them.”

Concessions, if and when, made by the U.S. on agricultural subsidies can be used by Indian political leaders to make these economic reforms more palatable to their Indian constituencies. Having followed socialist policies for a long time had not made rural India richer, but it had made her comfortable. Resentment with economic policies perceived as urban-centric and beneficial to only the privileged got one reform-oriented party voted out of power. This has made Indian political leaders wary of appearing to enact policies that might appear advantageous to only a restricted few. By selling the concessions made by industrialized nations to their rural audience, India’s politicians could create an environment where it might be feasible to take on entrenched interests in the farming sector and trade unions.

Institution Building

In the long term, it will be useless if India enacts the aforesaid reforms but has an unproductive population that cannot engage in economic activity. Making way for companies to set shop and hire people is pointless unless the populous can be employed. About a third of India’s adults are illiterate, and there is very poor access to health care. Although about 98% of the school-going population is enrolled in schools the dropout rate is as high as about 49%.

A major part of the reason for this is the woeful quality of the schools. Some states in India have teacher absenteeism as high as 40%. This has lead to a trend of increasing enrollments in private schools . This is not to say that the private schools are necessarily far superior. The standard of the public schools has set the bar so low that private schools have to be only marginally better to attract students from the public schools. Similarly, although indicators of health such as life expectancy at birth have gone up from 59.1 years in 1990 to 63.4 in 2004, there is still much work to be done. A growing economy is useless if teachers are not in schools and the health-care providers are not in the clinics.

This is a reflection of a systemic corruption in India, where social services institutions–often, but not necessarily, government-run–are not answerable to anyone. The basic problem is the mindset of the people at all levels, right from the people at the top formulating the policy to the individuals on the ground doing the implementation. The culture of the country needs to be changed, and citizens need to become aware of what their rights are and should be empowered to demand them. The basic institutions in India that provide public services need to be redeveloped in a way where there is an ethos of accountability.

Such institution-building, as with all social change, is a slow process often spanning a generation, if not more. It will require leaders ready to challenge the status quo, something India (and the development sector across the world) sorely lacks. In the author’s experience, the biggest problem cited by almost everyone in the social sector is the lack of quality people. Therefore, what is needed is an umbrella institution that attracts and trains top talent to lead India forward in the 21st century.

The U.S. can assist in this regard by helping create an institute that provides education in fields like nonprofit management, public administration, and social policy. Such an institution need not only provide research and education services to the “third” sector by training future leaders; it can also give consultancy and training to existing organizations, serve as a node for networking among professionals, and provide an environment to incubate new development models.

The driving force behind India’s economic ascent has been the high-quality graduates its top universities have been churning out. This first came in the form of engineers from the prestigious Indian Institutes of Technology (IITs) who helped build not only India, but Silicon Valley as well. Next came able business managers from the Indian Institutes of Management (IIMs) who played no small part helping Indian companies take on global competition successfully once the economy opened up. The different IITs were set up by the first Prime Minister of India, Jawaharlal Nehru, with the assistance of American, Russian and German help. Similarly, the first IIM was set up in collaboration with the Harvard Business School. An analogous effort is now required to create an institution that will provide leaders to solve problems created by India’s burgeoning economic and demographic growth. Ultimately, change is created by individuals and one must plan for and nurture talent to steer this change.

Conclusion

So what can the U.S. and India do to combat poverty in India? In the short term, by cutting back on its subsidies to the agricultural sector, the U.S. cannot only help India but the rest of the “third world” in fighting poverty. In the medium term, India has to finish its incomplete agenda of economic reforms, which was started in 1991 but has now been put on the back burner. Finally, in the long run, India needs to develop leaders and build institutions to drive social change to transform the whole of India.

India is a multi-ethnic and multi-religious democracy, is the fourth-largest economy, and maintains one of the largest armed forces in the world. It is eager to play a role in the world stage and is a strategic asset to the U.S. in the unstable South Asian region. However, India must also ensure that its rising stature as a nation is accompanied by the raising of all its citizens out of poverty, and in this it could use U.S. assistance.