One of the reasons why India is not able to progress at a higher rate is because there is a genuine shortage of capital (finance) in the country. The type of capital which is available for investments to create jobs and expand business opportunities across the country is simply not available in ample quantities. Any significant expansion in our aggregate capital gets diluted per capital by the ever growing population. Thus the accumulation of capital is highly skewed in favour of a very few. India is a high volume market provider for a large variety of both indigenous and imported consumer products. However the Indian industry also lacks capital to become world class with its well accepted domestic products.
One of the main reason for not being able to make a presence in the world markets is because most of the time the production technologies are imported and their foreign owners impose restriction on product exports by their Indian clients. Not being innovation driven, the Indian entrepreneur also lacks the ability to take risks in foreign markets. Thus he settles for safe returns from a lower captive domestic market. Capital surpluses are invested in real estate and other speculative investments which are basically non productive or one time asset creating ventures.
We are told that before the coming of the British, India and China were having nearly 51% of the then global market with India's share being 25%. What a fall from such lofty share because today India's share is around 2% and China is around 11 - 12%. No doubt world trade has grown tremendously in volume and China has reached the number two spot behind USA and could overtake it in a decade or so. Why has India lagged behind, when in the early nineteen fifties both China and India were equally poor?
It is not easy to answer such question, as it involves the political,cultural,economic, religion and many other traits of the Indian society. We shall try to see a few of them.
Cultural : Culturally India is predominantly a Hindu society as nearly 85% of population are Hindus. However in spite of such high majority throughout its history, it was dominated for nearly a 1000 years from late tenth century AD by Islamic and Christian rulers till 1947. Although political control with these foreign invaders, the country continued to be Hindu in character. Hinduism had gone into a shell, by ceding political control but in the process preserved its religious identity.
The caste system is the back bone of Hinduism which runs through its pyramid structure. At the wide bottom are the Shudras who were the workers who toiled to produce all such products which required hard labour like farming, metallurgy, weaving etc. These were traded by the community above them namely in the pyramid the Vaishya's. They had money and distribution networks. They financed business and reaped in high returns. They were like today's financial institutions. The Shudras and the Vaishyas between themselves formed the bulk of the Hindu population. However above them was the community of Kshatriyas who were the rulers and the protectors and formed the political class. Right at the top of the pyramid were the Brahmins who were numerically the smallest community but were the owners and dispensers of knowledge. The other three communities paid respect to them.
Technically a Shudra upon attaining knowledge should have become a Brahmin. The Brahmin could have become a Shudra if he took upon a manual vocation. However in realty birth decided the caste of the persons. Vocation-based intercaste migration was not permitted nor possible. Once a Shudra always a Shudra, however knowledgeable he may be. Once a Brahmin always a Brahmin however ignorant he may be.
This killed innovation in the Indian society to a very large extent. Brahmins got the highest status because of birth so why contribute by toiling hard. The Kshatriya was assured of political inheritance so the killer instinct became absent. The Vaishyas formed a cosy club among themselves and ensured trade remained within their caste always. Poor Shudras knew they were at the bottom of the pyramid and even if they attained merit they would remain there only.
Significant sections of the Hindu society were denied education and generations were kept illiterate. This denial was to emasculate a vast section of, the society but for the few who had education it was easy to lead and control without much opposition. Indian workers became skilled in their profession and passed it through generations. But while they had skills they did not have the surplus capital to save. Their produce was under valued and access to capital was through local moneylenders who charged astronomical interest rates leading to the borrower and his family ending up as a bonded labourers. Capital accumulation was with a section of the business and ruling class. The vast numbers of Shudras and majority of Brahmins were always poor.
The Indian society continued existing under the oppressive caste structure and because production was based on land utilization and personal skills, trade flourished, but with little innovation of note.
During Islamic and British rules the Hindu society adopted a conservative and inward looking approach and maintained its rigid caste structure, which kept it in a cultural limbo for nearly 1000 years.
Political : In late tenth century Islamic influence reached Indian shores. In course of time large number of Hindu rulers were defeated and political power passed to multiple Muslim rulers till the Mughals became the dominating single family ruling from early sixteenth century till 1857 when the British took over. Thus India was colonized for nearly a thousand years till 1947 when it gained independence.
The thousand years of foreign rule saw India facing continuous wars between its various kings. This resulted in death and destruction and political instability. However the Hindu society had ceded political control but continued with its caste based work division. This ensured the economic activities taking place in spite of strife all around. The Muslim kings who came from foreign lands also became sons of the soil in due course of time. However no dent could be made in the rigid caste system of the Hindus. Routine trade based on natural products continued to flourish and gained momentum under the Mughals who ruled over large parts of today's India, Afghanistan, Pakistan and Bangladesh.
The East India Company was formed in 1600 AD in England for doing business with India. In course of time it used the lack of capital among Indian kings other than Mughals, as a lever to gain both political and commercial advantages for itself and its products brought from England. The company would give loans to the small kings and nawabs and in turn it is said that the excise on imported goods would be far lower than on domestically produced similar goods. This caused loss of sale to the Indian producer.
Politically the majority community of Hindus was not active through the Islamic rule and was stirred into action in late 1890's against the British rule. However by then it had become a joint struggle by both Hindus and Muslims. This was a new political reality as another religion had gained foothold in India and this has dominated the politics of India ever since.
Religion : That India was a country inhabited by Hindus till about 980 AD is not disputable. There was a minor per cent of its two offshoots, Buddhists and Jains but they were politically insignificant though the latter were financially strong. However it was when the Muslim Kings from abroad, who conquered vast area of India, that brought in a new religion which directly challenged Hinduism for the first time. But because it also gained political and army support the Hindu society was forced to accept its suzerainty. Religious strife entered Indian society. This was to become a reality and ultimately led to the partition of India in 1947 on religious grounds. terms like secularism and communalism are far more used and debated rather than GDP growth and investments for job generation.
Economics : It is interesting that the Muslim rulers who came from outside became part of this country and the wealth of the nation remained within the country. Under the Mughals trade developed and India was relatively more prosperous. But it was the British who had no desire to become part of this country who systematically weakened India economically. India was used as a supplier of major raw materials to feed the Industrial Revolution in Britain. It was paid less but was to pay high for imported goods and machinery from Britain. Over a period of time India became economically deprived and weak but Britain prospered. Bengal and Bombay prospered as they were developed by the British for their economic gains. India was developed as a source for agriculture cash crops like cotton and tobacco and mining products like iron ore and coal etc. The railways were developed to move materials to and from hinterland to ports.
The earning capacity of the population continued to be severely impacted by lack of opportunities beyond those provided by agriculture and related activities. Indians were financially very poor and savings were impossible. Life was financially difficult and in rural India moneylenders were making a killing.
Education : During Islamic rule Persian language was encouraged and during British rule English was promoted. These languages were passports to employment and influence. In course of time this class got alienated from the mainstream but the government bureaucracy and its other services drew their members from this class. Soon those who studied in vernacular languages were treated as second class citizens. Emphasis was on producing administrators. Scientific temperament was missing and was limited to individual initiatives. Brilliant Indians would join the administrative services. Everyone wanted to join the safe government services and a microscopic few took risks to create economic opportunities for themselves and others. Education prepared one for service not creativity or innovation.
Attitude : The population had developed a fatalistic attitude over generations of foreign rule, continuous political turmoil and calculated running down of our culture by imported rulers. Indians had lost confidence in their capabilities. This has developed a very high sense of tolerance in Indians towards inefficiency and corruption and mis-governance. This has been exploited by smart politicians and other vested interested to make hordes of money and corner properties at the expense of the rights of millions of fellow Indians. It is a healthy sign that in the young the attitude is changing and thy are demanding better accountability, which will help to create a more equitable society.
All the above factors have in conjunction played a role in keeping India economically poor. The per capita income of Indians has been going up but it is not so high as to allow an average Indian to save say 30-40 % of his income which is the requirement for capital formation. The organized sector employees are touching this rate but they account for less than 25% GDP, rest comes from the non organized sector. In the income distribution also a dilution takes place because of the population increase every year.
It is going to become more difficult to provide jobs to the increasing numbers entering the job market every year. There is under employment in large sectors. In order to contain the aspirations of the population governments have to resort to subsidy programmes which put a drain on its expenditure.
When prices and inflation remain high marginal savings erode very fast. The purchasing power of the population goes down, In such scenario savings take a beating. This affects capital formation. The cost of fresh capital goes up. This impacts new investments. People turn to investing savings into non productive assets like gold and other precious metals. The mainstream financial requirements remain unfulfilled.
One way of bridging the gap between required capital and available capital is by encouraging FDI or Foreign Direct investment in as many sectors as possible. in this way capital comes into the country at zero cost and along with it also comes latest technology. India today is at a stage where it has developed good regulatory mechanisms. By attracting FDI India can reduce the number of years to reach stated goals if these were to be attempted by country's own savings. It is the pace of acceleration that FDI will provide which will convert India into a hub of many sectors and create adequate jobs and increase incomes. The resultant savings will be done by a much larger base than at present and a take off stage will come for sustained development to take place.
Therefore irrespective of ideology increased FDI should be attempted to help India and Indians to achieve its economic goals much faster than at present. Almost all advanced countries have at a particular stage in its economical growth brought in foreign capital and accelerated its growth. Let us not forget the fact that many nations have developed their economies from Indian labour and capital. It is time we also used their capital to develop our economy.
Can our politicians successfully do it?