A caveat to India

According to the World Bank (Calculated using Atlas method)India is a low income country along with 53 other countries. Low income countries are countries which have a GNI per capita of less than $876. So the Indian development projects are aided by the International Bank For Reconstruction And Development (IBRD) and the International Development Association (IDA).

On August 1st 2006, the World Bank (WB) approved the Orissa Socio-Economic Development Loan II which provided development aid to the state on Orissa inIndia. The commitment of the entire project was a huge $225 million.

Surprisingly, health, education and the primary sector each gets 10% of the aid. (I was of the opinion that these were the crucial areas where growth is needed.) A greater chunk of aid is going for the development of Public administration, law and justice.

Let’s take a look at the Orissa economy. According to Census 2001
1) The overall literacy rate in the state was 63.61.
2) Sex ratio was 972.

According to the Economic times, ‘Despite its rich endowment of mineral wealth, forests, lakes, rivers and a long coastline facing South-East Asia, Orissa remains among the poorest of India’s major states.’ And also that Orissa has the third highest concentration of scheduled tribes inIndia, accounting for 22.2 per cent of the total population and more than 40 per cent of the total number of poor.’

The aid is flowing in and we are accumulating large external debt which is a burden on the economy as a whole. But I wonder if the outcomes are pro-poor or for that matter even pro-development.

Earlier caveats have been expressed by Dweep and Alex.

Greg Mankiw’s blog: Letting poor nations prosper would be worth a lot more than the equivalent amount in foreign aid.

Author: Alex M Thomas

A passionate student of economics!

11 thoughts on “A caveat to India”

  1. Hi Alex,
    Thanks for your comments on pharma over at my blog, which I’ll include in the next part.

    This post of yours coincides with an argument I had with some friends yesterday on my criticisms of development aid. In particular, they made me think of what you mention regarding the allocation of aid – 10% to social services and significantly more to governance.

    Development aid, as noted before, tends to weaken government by poaching the best people from it and by replacing services that the public sector should provide.

    The point my friends raised is not whether development aid has problems, but rather whether on the whole it helps more people than it harms. If that is the case, the choice is not between whether or not to have aid, but rather where best to allocate that aid?

    And if we ask that question, is it not better that development aid goes to ‘improve’ governance, than directly to social services that would weaken said government?

    I’m still conflicted, but thought you might want to chew on this particular point.

  2. Dear Dweep,
    I am happy to see many people discussing aid.

    Well this concept of ‘aid’ itself is flawed. It creates a heavy debt burden on the economy. Instead if we borrowed more from our domestic market, the debt burden would be less.

    Well you certainly got me chewing.(Thanks)

    What is improving governance? Is it that the government needs better infrastructure or does it need finance to employ academic intellectuals? I do not know.

    The state government needs to share the aid with the local self governments. Otherwise, this trickle down theory would never become a reality. Aid must reach the targeted groups.

    Furthermore, the governments must make the allocations of the development aid public. They should be responsible to the tax payers.

    Aid has been flowing into India for quite a long time. The middle class have benefited but what about the rural people?

  3. This is an interesting topic indeed. How to distribute welfare to those in need. It is a problem that every civilized society tries to address. And it really becomes a question of redistributing income. Well, how do we redistribute income in a market-economy that is both fair and efficient? And how the we prevent the “free rider” problem that normally arises with income redistribution?

    It seems, from a purely statistical point of view, that India is fairing very well, very well indeed. Its Gini index, a measure of income inequality on a scale of zero to 1, where 0 corresponds to perfect equality and 1 corresponds to perfect inequality, is .33, compared to .41 for the United States, .45 for China, and .59 for Brazil. Moreover, 30 to 40 percent of India’s GDP growth is due to rising productivity – a true sign of an economy’s health and progress.

  4. Dear Dismalscientist,
    India has succeded in pleasing the ‘haves’ in the economy while the ‘have nots’ have been trampled upon. In a recent study conducted, Redefining Poverty: A new poverty line for a new India in the Economic and Political weekly, the author has estimated the percentage of poor people at almost 56%, as compared to the official statistics of somethings close to 30%. The rising inequalities are evident in the economy. The education and health care in the state is abysmal. Majority of the student aged about 13 dont know how to read and write. Child labour is rampant in the country. The employed labour force in the organised sector stands at a very low of about 8% of the total labour force. Farmer suicides have been reported every now and then.
    Aid always seems to be pouring in!

  5. I am in no way saying that the situation in India is perfect. High illiteracy rates, high mortality rates, a wide dispersion between the haves and have-nots are all negative and are definitely unwanted. What I am saying, however, is that the India of today, as far as the numbers show, is leaps-and-bounds ahead of the India of 20 years ago. And the India of tomorrow will be an economic super-power, along with its neighbor China, and the U.S.

    The big picture is that India is progressing rather quickly compared to the rest of the world. As I understand it, India is on the brink of surpassing Japan as the 4th largest country, based on GDP (PPP) and estimated growth rates.

    By 2025 the Indian economy is projected to be about 60 per cent the size of the U.S. economy. The transformation into a tri-polar economy will be complete by 2035, with the Indian economy only a little smaller than the US economy but larger than that of Western Europe. By 2035, India is likely to be a larger growth driver than the six largest countries in the EU.

    All these estimates can only mean that the woes being suffered will slowly and assuredly dissolve.

  6. Well in the link you provided, i found that India occupies the 160th position out of 232 countries ranked for GDP in terms of PPP, where the world average GDP is $9,500. India is estimated to have a low $3,300.

  7. In a per capita category, yes, which is GDP averaged by population. Under straight-up, overall GDP (based on purchase power parity), India is ranked 5th (at 3,611,000,000,000) and Japan 4th (at 4,018,000,000,000). Taking into account that Japan is growing at a rate of less than 1% per annum (can anyone say stagflation) and India’s current growth rate is well above 6% per annum, it doesn’t take much to see that India will surpass Japan in overall GDP in a few years, ceteris paribus.

    The table can be seen here, GDP (PPP) Table

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