More than eighty percent of India’s population subsists on less than $2 per day according to a recent study prepared by the Department for International Development, UK (”Three Faces of India, June 11, 2008). Clearly, then, poverty reduction must constitute the highest priority for Indian policymakers. However, a political consensus on how best to solve this seemingly intractable problem remains elusive.
I believe that the ancient proverb “Give a man a fish; you have fed him for a day. Teach a man to fish; and you have fed him for a lifetime” provides many key insights for solving this vexing problem.
First, education (i.e. “Teach a man to fish”) constitutes the primary means for escaping poverty. Indeed, literacy is the first prerequisite for sustainable economic development as evidenced by China and other successful developing economies. Thus, it will be imperative for India it raise its literacy level from 65% to that of China (98%) to make significant progress towards ending poverty. To increase literacy, India will have to increase spending on education from the current level of 3% of GDP to at least 5% of GDP.
However, India’s ability to increase funding for education is significantly constrained by its precarious fiscal situation. To be sure, India’s combined fiscal deficit has ballooned to approximately 8% of GDP (Moody’s Investor Services) as a result of the rising cost of subsidies for petroleum and other commodities. Moreover, if India’s precarious fiscal situation were to undergo further stress it could well lead to a debt spiral resulting in higher inflation. Clearly, such a policy would be ill advised.
The key challenge facing India therefore, in its efforts to reduce poverty is to increase spending on education within the limits of fiscal prudence. To that end, India will have to reallocate existing budget expenditure by rationalizing subsidies and other non-productive expenditure.
The second key insight that can be gleaned from the above proverb pertains to the availability of credit for private sector development. For example, the proverb assumes that a man will immediately be able to earn a living through fishing after he has learned how to fish. But what if he does not have a fishing pole? And what if he cannot afford to buy a fishing pole?
Thus, we can see that there is another prerequisite for ending poverty, which is capital.
That is, capital must be made available to entrepreneurs (i.e. private sector) to fuel their growth. More importantly, the cost of that capital (i.e. interest rate) must be low enough to provide a fair return on capital. Put simply, a man must have access to capital to finance the purchase of a fishing pole. But if the man’s cost of capital is greater than his return on capital then he will still not be able to escape from poverty.
To be sure, India’s high cost of capital relative to other developing economies is another constraint in terms of ending poverty. Thus, the second key policy objective for Indian policy makers is to increase capital availability to the private sector and also to lower the cost of that capital so that Indian businesses can be globally competitive. Historically, India’s fiscal deficit has largely crowded out private investment. As a result, the private sector has had to pay higher cost of capital to relative to that of other countries.
What is the best solution for increasing the availability of credit for the private sector? Once again, India’s fiscal deficit is at the root of the problem.
The third insight provided by this proverb with regard to ending poverty pertains to infrastructure development. Imagine a man that has learned how to fish and that has also successfully acquired a fishing pole. He earns a living by fishing and transports his catch by road to the fish market each day. Over time, more people adopt fishing as a livelihood and similarly transport their catch to the fish market. Eventually, the roads become too congested for all the fishermen to transport their catch to the fish market.
The above example illustrates how the growth of India’s private sector places additional pressure on India’s already strained infrastructure. Indeed, India will have to spend $1 Trillion over the next ten years on infrastructure. But, how will India finance this massive expenditure? Once again, progress in reducing India’s fiscal deficit will be vital for increasing spending on infrastructure.
In sum, to end poverty, India will have to allocate greater resources for education, provide the private sector with greater access to capital and remove infrastructure bottlenecks. But India’s massive fiscal deficit significantly impedes India’s ability to increase spending. Thus, real progress in terms of ending poverty will not be possible until India improves its fiscal position.
To that end, Indian policy makers will have to implement structural economic reforms for rationalizing non-productive fiscal expenditure. Most observers would agree that a shock therapy approach to implementing economic reforms will not be politically expedient given India’s fragmented democratic polity. Indeed, a gradualist approach to implementing economic reforms constitutes the only realistic solution for implementing reforms given the nature of India’s coalition politics. But India is in dire need of greater speed in taking forward the economic reform agenda to end poverty.
Raju Agarwal
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