Thursday, April 30, 2009

India vs Bharat

In the last blog we have seen that rural India is deprived in two ways. The infrastructure in villages is pathetic. The archaic method of farming generates little income for rural people. The low income in agriculture is reflected in statistics. Only 17% of India’s GDP comes from agriculture while 29% comes from Industry and a whopping 54% from service. But 60% of workers work in agriculture while 12% work in industry and 28% in service sector.
From this data we can say that for every Rs 100 that the average agricultural worker earns, the industrial worker earns Rs 853 and the service worker earns Rs 680. While it is true that the very high average income of industrial and service workers is skewed partly because of existence of some millionaires in these sectors, the effect is small.
Another way to look at the plight of farm workers is to note that almost 100% of farmers and farm workers are in unorganized sector while in industry and service sectors significant number of workers work in the organized sector. In general, it has been noticed that workers in organized sector get better wage and benefits from the employer. The only two non-farm sectors where large number of people works in unorganized sector are construction and hotel/restaurants.
As we have seen before, 60% of all workers work in agriculture and with mechanization the farm workforce can be reduced to 6%. This means that farm workers are massively underemployed. Every government and politician knows this fact. But none of them is brave enough to proactively tackle this issue or even admit it. From left to right, all parties expect farm workers to have a little better life as GDP grows. The low productivity and underemployment keeps half the population of India in perennial poverty. While in absolute terms, their standard of living goes up, relative to urban people they still live a miserable life. No political party even dreams of enabling the farm laborer the same standard of living as, say an elementary school teacher of a government school.
The only way to reduce rural poverty and lack of infrastructure is to wean rural population away from farming and into urban jobs. Therefore we need a two-pronged approach:
1) Allow mechanization of farming so that farm productivity goes up, requires fewer laborers and the income of farm laborers increase massively
2) Start urbanization on a massive scale so that the surplus farm workers can migrate to urban areas and get better job

In West Bengal there was significant land reform by Congress and Left Front governments where large number of farm workers became owner of small farmland. What we need across India now is another form of land reform where large investors and corporations are allowed to buy up as much land as they need for farming. The corporations will pay prevailing market rate or higher to the small farm owners. With thousands or millions of acres of contiguous farmland in corporate hand, they can introduce state of the art mechanized farming. Unless the value added per worker can be increased, the worker’s income cannot rise. Today, the value added per farm worker in India is only $385 per year whereas in USA it is $39000 per year. With large land at its disposal, corporations would be able to introduce state of the art farming procedures and mechanization.

Why are governments so reluctant in introducing this type of change? First, they are afraid of massive unemployment in villages and resultant migration to urban areas. There is a knee-jerk response to such changes that says that corporate farming will bring back feudal Zamindari system. Second, they are scared of losing control that they wield today over rural population.

Let me expand on the second point. Most rural folks are poor. The poorer you are, the more you are dependent on the government. If you are poor, you will look for BPL (below poverty level) quota and subsidies and handouts from the government that the average middle class, urban citizen does not look for. It is in the ruling party’s interest to keep people poor in order to maintain a permanently dependent vote bank. If corporate farming is introduced, then the workers will be loyal to the corporation and not the state government. Even small farmers are dependent on the government since they get subsidized or free inputs such as electricity and water. These subsidies also destroy the market mechanism which would have ensured most efficient utilization of resources. If you get water for free why would you care about limiting water usage in your farm? Why would you even think about drip irrigation?

It is often said that India is divided in two segments: India and Bharat. While India may be shining, Bharat is languishing. There is some truth to this. But those who claim this including those who are left-minded usually belong to India --- the middle class citizens who usually work in government or other organized sector. I will focus specifically on government and public sector units since these are run fully or partially from taxpayers’ money. The government and public sector companies are extremely generous when it comes to employee’s salary or benefits. Today, in impoverished West Bengal, a public high school teacher with M.A and B.Ed degrees starts at a gross pay of Rs 18000 per month. The prevailing market rate is lower. But the government pays this salary based on the rationale that it is the minimum required for a Bhadrolok (gentry) family to survive. In other words, open market is not permitted to determine the remuneration. It would be fine with me if the leftist government of West Bengal defied market and made sure that every household gets the income needed to survive irrespective of the value of its labor in open market. Of course this idea is utopian. Therefore, the West Bengal as well as other state and central governments distribute largesse only to the tiny middle class while ignoring the huge impoverished class. The school teacher gets salary based on need but when he shops vegetable in the market or hires a maid, the maid and the sabjiwalla are completely subjected to conditions of open market. The school teacher does not pay the maid a salary based on her need but whatever the prevailing market rate is. In the leftist terminology of class struggle, it is the unorganized poor class that is getting exploited by a connivance of a section of the middle class and government. I will not blame the middle class workers in private sector because they are paid market rate.

Tuesday, April 28, 2009

Why are the poor in India mostly rural ?

In the last blog we have seen that almost 90% of the poor people in India live in villages. Why are people in urban areas less poor than those in rural areas?
For the urban middle-class population, village conjures up a romantic place with simple, hard-working people living happily. The reality is far from it. In most villages, women walk long distances to fetch drinking water and twigs to use as cooking fuel. Schools are inadequate, many times with a shortage of teacher, rooms and facilities. The village health center also has similar problems. For emergency health problems, the patient may have to be taken to the nearest hospital which may be miles away. Roads are mostly unpaved. Houses are made of clay and barely have any real-estate value. Many villages do not have electricity. Lack of modern toilet is a huge health problem. Most villagers defecate in the open, beside lakes and ponds or in open fields. In India, an estimated 100000 tons of feces is deposited on fields, lakes and rivers every day. This causes enormous pollution is ground water and water in lakes and rivers which are used for human consumption. As a result, diarrhea, dysentery and other related diseases are prevalent in rural India. Studies have shown that water pollution is the principal cause of malnutrition in rural India and not poverty. In fact, malnutrition is less in sub-Saharan Africa although they are poorer than rural Indians. Another cause of malnutrition is the inferior status of women in rural India. As a result, pregnant women are not provided the additional nutrients she needs. This causes the birth of underweight child.
The only advantage is that the man in the family, who works in the farm or fishes in the lake, lives close to the workplace.

In urban India, poor people live in slums. The environment of slums is less than ideal. But most slum dwellers get water from community faucet or tube well; usually have community bathrooms which are inadequate but not non-existent. The slums usually have electricity and cable TV connection. The children of slum dwellers usually go to school. They have access to government hospital in the town. In some cities, slum dwellers use cooking gas to cook.

Some state governments including West Bengal tried to force graduating physicians to serve in villages for a few years. There was a huge resistance among doctors against serving in villages. Most young villagers, who do well in education and get higher education, settle in urban areas. There is a clear tendency among rural folks to migrate to cities when possible. Yet the urban middle class is usually dead against massive migration of villagers to cities and towns.

We have not yet looked at the cause of poverty in rural India. Let us look at it. Almost two-thirds of Indians live in villages. There are about 600000 villages in India, some small, some large. The average village has a population of only 1500. Usually a village has mostly huts made of clay in close proximity of one another, separated by narrow, unpaved lanes. I have already discussed inadequacy or absence of bathroom, drinking water, cooking fuel, school, college, hospital. In some states, large numbers of villages do not have electricity. In West Bengal, even as of 2009, half the households, rural and urban combined, do not have electricity. Some states like Punjab, Haryana, Himachal, Tamilnadu have done better. Cable TV, which is no longer a luxury in middle class households, is almost non-existent in villages. Phones, be it landline or cell phone, are not available in villages far away from cities.
The problem is twofold. First, the small size of villages makes it very hard to provide required infrastructure to them. The average village of 1500 has roughly 300 households. (The average family size in India is 5). Providing electricity, drinking water or cable TV in such small community is not cost-effective. How can you provide a high school or college or a hospital for 300 families? The next village might be few Kilometers away so that facilities cannot be shared among multiple villages.
Second, the basic problem in villages is that most people are engaged in farming, fishery and related professions. Out of 510 million working Indians, 300 million or 60% work in farming and related areas. The process of farming is labor-intensive and archaic. Most farmers still use bullock and hoe to till the land. Except for a few states, mechanized farming using tractors, cultivators etc. are absent. This makes farming productivity and hence income very low. Also, in populous states like West Bengal, land holding of average farmer is very small. The land reform enacted 30 years ago has caused fragmentation of land today. Such small land holdings are insufficient for the farmer to earn a decent income. Besides, fragmented land prevents farmers to achieve economy of scale.
If modern farming methods using machines is introduced, the same amount of food can be produced, using perhaps only 20 million farmers and farm laborers. That will render the other 280 million unemployed. This is the primary dilemma of India and cause of rural poverty.
If you look at various countries, you will find a definite correlation between poverty and percentage of workers engaged in farming. Here is a list of nations with percentage of workers working in farms in parenthesis:
USA (0.6), UK(1.4), Australia (3.6), South Korea(7.2), France(3.8), Spain(4)
Bangladesh(63), Pakistan(43), Kenya(75), India(60), Somalia(71), Uganda(82)

In the first row, there are rich countries where percentage of workers in farming is very small. In spite of this, these countries produce and export massive amount of food. In the second row are poor countries. In these countries, most people are engaged in farming. Usually the mechanism is low productivity and hence the income from farms is very small in these countries.
To summarize, there are two problems in rural India.
1) Low income due to archaic, low productivity farming process
2) Small size of villages makes it impossible to provide infrastructure that we take for granted in cities

Sunday, April 26, 2009

How poor is India?

In spite of having scores of billionaires, India remains an impoverished country where millions suffer from inadequate food, malnutrition, health problems and illiteracy. How many Indians are poor and whom do we call poor? Where do they live and what are the causes of poverty? Unless we answer these questions, we will not be able to solve the problem.
So how many Indians are poor? If you google the words “836 million” you will get plenty of sites that answer the question. The number of poor Indians is 836 million. Where does this magic figure come and does it change with time? I investigated this last year. What I found was astounding. The National Sample Survey Organization (NSSO) is a unit of Government of India that undertakes various surveys every year to collect data about the people of India. It does not survey household or per capita income. What it attempts to find out is per capita expenditure. For example, on an average a person in rural India might be spending Rs 25 per day to buy all the requirements such as housing, food, clothes, entertainment etc. Rs 25 per day are equivalent to Rs 750 per month. This quantity is called Monthly Per Capita Expenditure (MPCE).
In 2007, another Government of India body, National Commission for Enterprises in Unorganized Sector or NCEUS published a document http://nceus.gov.in/Condition_of_workers_sep_2007.pdf
where it came up with the magic figure of 836 million poor people in India. After reading this document, I found out that they have used the NSSO 61st round sample survey data that was collected in 2004-05. Based on Indian population at that time, NCEUS claimed that 836 million Indians or 77% of the population live in poverty. Their cut-off point for identifying a person as poor was a Daily Per capita Expenditure of Rs 20 or less. This is equivalent to MPCE of Rs 600 or less. In simple terms, if a person spent less than Rs 600 per month in 2004-05, he/she was identified as poor.
I wanted to cross check the veracity of this measurement. I did my own calculations based on the same NSSO 61st round survey of 2004-05 and found out that the number of poor people was actually 675 million and not 836 million. Only 62% of Indians spent less than Rs 20 per day as opposed to NCEUS’s claim of 77%. Also these figures are from 2004-05. In 2009, the number of poor people must have come down significantly.
My efforts to publicize this error failed. I had emailed the facts to the Prime Minister and Finance Minister of India but those emails failed to reach their destination. I wonder why Government of India publishes emails of important persons when attempt to send email fails.
If you are interested in my computations, here is the document:
http://spreadsheets.google.com/ccc?key=rowhR0mhtjbyoHbsR64kALw&hl=en
Unfortunately, even in 2009 politicians of all hues claim that 77% of Indians are poor. Now we know that the figure is false and the actual percentage is 62%. A very important point to note is that out of these 675 million poor people ( out of a total population of 1090 million in 2004-05), an overwhelming majority of 586 million live in villages while another 88 million live in urban areas. We can therefore safely infer that most of the poor are rural people. In the next blog we will see why there is huge poverty in rural India.
In order to discuss India’s development, we need to see where India has been historically in terms of standard of living among nations. We need to also compare the performance of pre-independence India to India after 1947. Let us look at some figures.
In the year 1700, when Aurangzeb was ruling India, the three major economic zones in the world were India, China and Western Europe. The USA did not exist. Each of these three regions had an estimated GDP of about 20-25% of world GDP. In other words, India and China were quite prosperous regions during that time when Industrial Revolution was yet to happen.
The British invasion and Industrial Revolution changed all that and made these two countries very poor. India’s share of world GDP came down to 7.5% in 1913.
Although the British introduced English education and built schools, colleges and universities, the literacy rate in 1881 was 3.2% which went up to a majestic figure of 12% in 1947. That was an interval of about 65 years. In next 60 years, independent India saw a rise in literacy from 12% to estimated 70% today.
In 1931 India’s life expectancy was a miserable 23 years. In 1947 when the British left, it rose to 28 years. Today, the estimated figure is 68.5.
During the British raj, products exported from India to Britain attracted a duty of 80 to 100% while products made in Britain in the mechanized manufacturing units were imported to India with a duty of 0 to 5%. This discrepancy killed all prospects of industry in India.
During the 200 years of British rule, some estimates claim that nearly 50 million people died in various famines. In 1943-44 Bengal famine, the total death toll was estimated to be 3 million. In contrast, there was no famine in independent India.
In 1973-74, 55% of all Indians were below poverty level. In 1987-88, it came down to 39%. Today it is somewhere between 21 and 27%, based on which estimate you look at. In spite of rising inequality, Gini index which measures degree of inequality, in India is much lower than China or the USA. A higher value of Gini index indicates higher inequality between rich and poor.
All these numbers indicate that the British plundered India and made it poor. It also ensured very low human development in India. In the 62 years since independence, in spite of all its flaws, the government has done far, far better than the British.
Another thing to note is that it was because of Nehru’s vision of a liberal, modern, secular, democratic, tolerant India that we have a functioning, albeit chaotic, democracy. I think that without Nehru, India could have been another Pakistan, Bangladesh or Sri Lanka.
However, India could have done better. We will discuss those in later blogs.

Saturday, April 25, 2009

We are in the midst of the 2009 Lok Sabha elections. I plan to discuss India's economy and possible road map to development for all Indians. I also welcome comments from you the readers so that we can have a lively discussion. May be some ideas will come out of it that may help Bharat.
Specifically I would like to discuss about
1) Poverty
2) Economic model
3) Rural-urban divide
4) Corruption
5) Other relevant topics