Unit 4 Macro: Growth and Development Constraints for India

Identify four factors that act as constraints on Indian growth and development

Persistent extreme poverty

Despite its high levels of growth over the last few decades, India remains saddled with high levels of poverty. The country has seen considerable growth, and although poverty has dropped, the proportion of the population living on less than $2 a day (PPP) remains above two thirds. This is a constraint on growth for a number of reasons.

1. Firstly, high poverty can cause major social problems. In a city in which high-paid executives and penniless slum dwellers live side-by-side such as Mumbai, crime is likely to increase, more slums are likely to develop and infrastructure may be put under strain. It also means that a higher proportion of the population are not paying taxes, putting a greater burden on government expenditure.
2. From a theoretical perspective, poverty is more damaging to growth because it reduces the overall level of demand in the economy; richer people tend to spend a lower proportion of their incomes, so if income was more evenly distributed, average levels of consumption would, in theory, rise, fuelling growth.
   

However, there are a number of potential benefits of some aspects of poverty. Although it is clearly a burden overall, in some circumstances, poverty fuels innovation. Dharavi, in Mumbai, the largest slum in Asia, is home to an efficient shadow economy, where the residents operate shops and workshops from within their homes. Arguably, the benefits of this are greater than if those people were at a similarly low income level in an urban environment, without the incentive of being surrounded by a million people in little over a square mile of land all trying to become wealthy.

There is no doubt that poverty is a constraint on growth, but if government policy is used effectively, the dynamism and creativity that inevitably arise from poverty can be used as drivers of growth for the lower income groups of India.

Infrastructure gaps

Another constraint is India’s weak infrastructure. The country suffers from poor transport links and a lack of reliable electrical power. The effects of these inadequacies is unpredictable: a trip across a city might take anywhere between one hour and three hours, as Jim O’Neill experienced first-hand when visiting the country, meaning it is very hard for a firm to establish reliable supply chains that maximise efficiency. A lack of reliable infrastructure is likely to have two key effects.

1. Firstly, firms are discouraged from investing in the country, because the weak infrastructure is likely to decrease efficiency and increase costs. As such, it may be hard for areas of the country to attract foreign investors that can have a significant impact on growth and development.
2. Secondly, infrastructure has a direct impact on the quality of life of the population. Rolling power cuts, poor sanitation and unreliable communications networks both decrease standard of living and reduce productivity. It can become virtually impossible for residents of rural areas to increase their income without migrating to urban areas, increasing geographic inequality.

Bureaucracy

According to Jim O’Neill, another major constraint to growth in India is the high levels of bureaucracy and red tape that spread throughout the country. Ordinary permits and approval can take months to come through which ‘gums up’ the system and slows even the simplest process down. In addition to this, trying to export from India is notoriously difficult. In order to export goods from India one must file eight documents over an average of seventeen days for each individual shipment.

Contrast this to Singapore, where only four documents need to be filed over a period of just five days. This means that companies in India trying to access the foreign markets must go to great lengths just to export relatively small amounts of goods. This incentivises them to instead look towards domestic demand as their main source of income. While this promotes domestic consumption in a country with over a billion people, it also means that it is hard for small firms to grow and become successful as they have no way of accessing all the potential of foreign markets. If India were to get rid of all this bureaucracy and red tape, it would be much easier for companies to flourish in India and help the country itself grow even further.

Relatively low inward FDI

Finally, the low levels of Foreign Direct Investment (FDI) in India are another factor holding the country back. This is largely linked to the bureaucracy of the country when concerning trade with foreign markets. Indian officials are not allowed to meet with the same foreign minister more than twice, slowing down talks between countries and stopping trading relations from strengthening. One such example of this was when the UK minister was asked whether or not this was the first time he had met one particular Indian official because if not it would have to be the last. This absence of the will to try and create good foreign trading relations has transferred to a form of protectionism when concerning foreign companies. According to Jim O’Neill, Indian officials do not allow major companies such as Tesco or Wal-Mart into the country as they fear what it would do to Indian society. However, if they were to let major companies like these in, it would improve India’s productivity in retail and reduce agricultural waste, both of which are beneficial, not only to its society, but also to growth and development. Because of this hostility towards foreign companies and investors that India is mired with the lowest FDI out of all the BRIC nations.

If India were to branch out and accept the remarkable opportunities outside its domestic economy then I believe that it would be able to achieve substantially higher levels of growth.

Authors: Mark Austen and Max Goswami-Myerscough

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