29 March 2014

Why is India still a developing country?

Why is India still a developing country? 

India got its independence in 1947 and since then the country has been a "developing" country. If anybody was asked what could be the reason for this, pat comes answer that its because of "vested interests of politicians and corruption among law makers and bureaucrats" and this answer is 100% correct. But it would be interesting to analyze what triggered the corruption and how these so called law makers got an opportunity to sabotage country's economy for their vested interests.

It would be shocking (especially for those who are relatively beginners to economics) to know that India's growth in per capita income (income per person in the country) was only 1% since Independence to late 1980's. Yes, that means the country was literally stagnant with nil development for almost 4 decades and entire credit goes to the great JL Nehru for his foolish economic policies.

Now during those 4 decades entire industrial setup, banks, everything was under Gov. control who gave away licenses only to powerful businessmen who could "lobby" and "convince" the government. These lobbyists controlled governments, bureaucrats, officers and there started an ugly liaison between businessmen (who could spend money), politicians (who could rule in favor of businessmen), officers, media, judiciary (who were paid by businessmen, controlled by politicians). This era also called as "license raj" restricted the entire country so much that everybody who had some money tried to influence policy makers and thus gave birth to the monster called corruption in India, which we are trying to fight today.

Till 1990, GDP (total worth of goods and services produced) and GNI (total income of the country) of India were among the last 20 out of 180 countries, thanks to 44 years of misrule, mayhem and destruction of economic fabric. So it would not be an exaggeration to say that we actually got real freedom in 1991. Now let us see what happened in 1991 which triggered this 360 degree effect on India and Indian economy.

Globalization & Liberalization:

Those who were born in early 80's could remember that till early 90's, the only cars we could see on the roads were Maruti, Ambassador and sometimes Padmini; BSNL was the only telecom provider, Air India and Indian Airlines were the only airways, Doordarshan was the only TV network; Soft drinks were completely Indianised (Gold Spot, ThumsUp, Limca, Maaza). It means nobody from other countries could invest their money or introduce their products and services in India. So Indian public were deprived of international goods, services, standards in all walks of life.

PV Narasimha Rao directed Manmohan Singh (then finance minister) to open Indian markets to foreign investors to benefit from Foreign Direct Investment (FDI) so that Indian treasury could be bolstered by foreign currency and Indian public could be given access to superior products of international market. Immediately we saw American, Japanese, Korean, European companies flooding India with their products in automobile, telecom, FMCG sectors etc. This was long awaited; the quality of life standards, GDP, GNI, per capita income - all started to increase dramatically and soon India fell in the top 10 economies of the world and is now the second or third fastest (not exactly sure about the ranking) growing economy in the world.

It is predicted that if this growth rate continues, India will overtake France, Germany, Canada, Australia, Japan, and UK in another 15-20 years. Beating US and China would be difficult though (at-least immediately). So India can fall under "developed countries" in another couple of decades.

Opposition to FDI & Globalization:

If we pay attention to news headlines these days, Parliament is being stalled, people are taking to streets protesting against FDI in retail. They don't want foreign retailers like WalMart, Costco to setup their shops in India. Their argument is that these big retailers can cause unemployment to petty kirana and general stores in India. Hmm, maybe that's correct, but the pros of FDI are more attractive than cons for the benefit of Indian economy.

Earlier when Hyundai, Daewoo, Mitsubishi were allowed into India, indigenous companies like Maruti cried foul but the government didn't heed because the economy would be developed and common man would be benefited. Now WalMart will inject huge influx of money into Indian treasury. At the same time farmers and manufacturers can directly deal with these foreign retailers thus providing cheaper and better quality goods and services to common man. So what if middlemen and brokers get affected?

Opposition is just playing to galleries to attract a few votes from these middlemen, but if the government succumbs to such pressure and rolls back their idea of retail FDI, the dream of becoming a "developed country" will have to continue as the reality evades, thanks to selfish interests and vote bank politics.

Taken from

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