Economic Policy

Policy Failures Allow India To Grow At The Expense of The Poor

While India’s development policies are met with great praise and innovation for the greater good, they tend to ignore the underlying problems.

BY: JUDE BUENASEDA

AS ONE OF THE MORE PROMISING emerging markets, India’s growth has been in the global spotlight as the fastest growinglarge economy in the world. But looking at its development in scale, India’s population of 1.2 billion and its highly diverse environment poses many challenges. From job creation to energy consumption demand, India must be able to keep a grip on its growth if it wants to successfully grow out of the mold of just an emerging market.

A growing and strong economy means social upward mobility and the fast-changing Indian lifestyle to match its economy produces set-backs. India may be the fastest growing economy, but it still ranks extremely low on the inclusive development index, which measures the distribution of wealth of the country. This index also highlights the issues of the quality of an economy regardless of its growth rate. The economy is reaping the benefits of an extremely young population with 28% of the Indian population being under the age of 14 in 2017. Despite incidences of poverty declining in the country over the past five years, 6 out of 10 Indians still live on less than $3.20 per day. While on its face the Indian economy can outperform that of other states, it is important to bear in mind the increasing gap between the rich and the poor. Policies and reforms that are implemented too fast without gradual transitions and social equity leave no room for the lower economic classes to keep up with the fast pace of economy. Even a small percentage of India’s population accounts for millions of people, all of whom will need access to education and social services.

The Lagging Middle Class

A growing economy and emerging market certainly means the expansion of the middle class. Theoretically, India would follow in China’s footsteps with a middle-class expansion, where India’s large population would generate a larger demand for luxury products, which attracts foreign companies and investments. Cities like Shanghai and Mexico City have seen this growth and the transformation attracts an increasing number of multinational businesses paving paths for their expansion into international markets. India is next on the list for these multinational businesses as it holds the reigns of fastest growing economy. But is India’s market truly expanding the way other emerging markets have developed?

In India, investments from big technology companies like Amazon and Alibaba comprise over $5bn of the market and Uber, a ride sharing company, still takes cash payments. Amazon forecasted $100bn in sales by 2020; this revenue-growth rate of over 100% influenced the company’s heavy investments in India. Unfortunately, in 2016, growth rates were way below expectations at 5-10% and in 2017 the rates were only 25-30%. The new Indian middle class did not go online to shop and the 50 million of shoppers that were active are likely to make up only the top 10% richest of the population. The big tech giants like Apple, Facebook, and Google are growing more slowly in India compared to the rest of the word – Apple in India made only 0.7% of its global revenue while Facebook made $51m in the same year. The outline as an emerging market is present but the substance on where markets make their profit is missing. Nitin Pai of Takshashila has mentioned the unbelievable rise of foreign tech companies in Bangalore and that the cities will benefit from them. Everyone seems to be anticipating this rise of the middle class on a massive scale wagering big bets to reach potential customers, but the big problem lies in the situation that no one seems to notice. While it is true that many are rising above the poverty line, households in India still tend to mainly spend on their basic needs.

The missing market is linked to India’s distribution of wealth and confusion around the actual meaning of the Indian middle class. To put things into perspective, the top 1% adjusted for purchasing-power parity equates to about an income of over $75,000 in the USA but the other 99% are on the same level or below American families living under the poverty line. The “middle class” in its current iteration still qualifies as a lower class in terms of purchasing power parity. The top 1% earns 22% of the entire income pool and a few rich citizens can only buy so many iPhones. Such distributions contribute to unsustainable inequity in income distribution where businesses cannot succeed. There are over 200,000 millionaires in India, yet millions of people are overlooked by the “fastest growing economy” still struggling to make ends meet.

Digitalization: The Adhaar System

In order for the rest of the population to embrace e-commerce and use mediums like Amazon and Facebook, an adequate digital connection is needed.  The massive movement of digitalization has arrived in India with changing lifestyles due to a growing economy, but it isn’t foolproof. While a new digital age creates new opportunities of advancement, the movement has also impacted many lives negatively due to its lack of consideration for those unable to keep up with the immediate transition. After Prime Minister Modi’s decision to implement demonetization in 2016, the removal of all 500- and 1,000- rupee currency notes, the economy went haywire and obstructed its growth.

In a country where cash is king, many citizens were heavily affected by this removal. Long lines outside banks and ATMs created chaos, while people without bank accounts, in particular the poor, couldn’t switch out their current notes. The intentions of demonetization were to eliminate “black money” out of the market in order to battle corruption, but this policy has done the opposite as the black money in most cases was easily transferred into accounts or outside the country, with the use of cryptocurrency being one way individuals transferred funds. But the common citizens of India were faced with disastrous after effects, from deaths reported to a lack of legal notes to fund basic necessities such as food and medicine. Demonetization sought to address the faults of India’s economic system but at a large cost.

In the same year as demonetization, the Adhaar System was also introduced to the public compounding the shock in India. The system is the largest biometric digital technology and database in the world. It requires all Indian citizens to register under one system using their fingerprints and an iris scan to match their unique 12-digit identification code. The method to identify a person comes with ease as the bureaucracy decreases with such technology. The Adhaar system also helps eliminate fake welfare receivers and fake identification cards as the code needs to match a real person’s finger prints. Money through the Adhaar system is then distributed to the people that actually need it. A villager or a wealthy businessman is identified the same way using their fingerprints. A one size fits all solution for 1.2 billion Indians might be too good to be true. A villager and a businessman have different uses for the Adhaar system, and one might benefit the latter more than the other. It may even be a hindrance for a villager or an individual collecting welfare.

The Adhaar system is a digital technology and therefore requires an internet connection, which the majority of rural areas in India do not have access to. Even when there is signal available, about a third of the authentications come back negative and the beneficiaries are denied access to their rations. The impracticalities of the system hurt the people it intended to help. The system can also be easily hacked and can be seen on sale on WhatsApp for less than $10. In addition to security issues, the access to digital machines just to enable Adhaar plus its newly double 16-digit temporary password requirement is a cumbersome task. Ultimately, if the government wants the Adhaar system to succeed, it must deal with the challenges of digitalization and cybersecurity alongside providing better connectivity.

Energy Reform: India’s Ambitious Goals

As the Adhaar system takes over the country, the demand for connectivity brings with it a surge in electricity and energy demands as well. This is more so for the newcomers to the middle class discussed before and will continue to increase as time goes on. But as the rise of the middle class and the digital transformation reveal overlooked issues, India’s ambitious energy goals takes on a similar narrative. In light of COP21 and to combat the effects of climate change, India created ambitious targets to reduce its carbon emissions. At the same time, India is highly dependent on coal and it makes up at least 60% of its energy profile. Dr. Arunabha Ghosh of the Council for Energy, Environment, and Water (CEEW) based in Delhi mentioned the increase in demand for imported coal is because of the lack of finance posing considerable challenges for India as it attempts to utilize the domestic resource to address the gap in financing. But the pressure of the global spotlight will nonetheless influence politics, as Ambassador Amar Sinha of Research and Information System for Developing Countries (RIS) mentioned that national interest trumps science. The ambitious goals of India’s energy reform show that it can be a leader in a global movement.

These lofty goals, however, may hurt a large number of people for the benefit of others. India plans to create nearly 60% of electricity capacity from solar and wind power but that comes with a lot of implications. About 300 million people in India do not have access to any electricity and are mostly located in rural areas. Replacing India’s energy profile with mostly renewables makes the challenge of giving access to those 300 million people even harder. The people without access are measured within a binary category of having electricity and not having electricity, but the issue is deeper when it is measured in how much electricity is actually accessible. Having 1-2 hours of electricity is as bad as having no electricity altogether. When the usability of access is measured, there are more than 300 million people that currently have only temporary or intermittent access to electricity.

CEEW analyzed rural households’ access to cooking energy. With about 45% of rural households having no access, those that have very little access is over 50%, which exacerbates the situation. India faces the challenge of electrifying the entire country but first providing full access to rural areas. By prioritizing the transition to renewable energy, rural households will be left in the dust due to India’s poor non-discriminatory electricity market policies. The initial delivery of clean tech will first go to the ones that can afford it and will reach the poor much later, if it even reaches them at all. Access to electricity and energy has the likelihood of affecting social and class mobility as much of the education system among other barometers of progress digitize. Addressing the critical energy needs of the Indian people can prove to further bridge the growing income and class gaps.

The top to bottom approach on development can only succeed when the foundation of the country is strong. It is difficult to transition to expensive green energy when the majority of India’s rural communities still cook their food using cow dung. The digital transformation and e-commerce practices continue to face challenges when the population has only started using mobile phones and not smartphones. While India’s development policies are met with great praise and innovation for the greater good, they tend to ignore the underlying problems. A process to bridge the gap is needed otherwise the gap between the haves and the have nots will only widen. Without policies that address the realities of India’s fast-growing economy, the targets will continue to miss their mark. An elephant may not be able to officially run, but walking will at least avoid trampling down the road.

Jude Buenaseda is a Fellow at Advanced Energy Group and also works at the Austrian Mission to the United Nations. He is currently pursuing a Master’s degree in Energy. 

Please note that opinions expressed in this article are solely those of our contributors, not of Political Insights, which takes no institutional positions.

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