Why India is Poor Country? An Analysis

One of the very common questions asked on various social forums is “Why is India Poor?”

Poverty is not a definite state; rather it is a comparative state. That is why people often raise the question what makes India poorer than a country such as the United States of America?

In place of analyzing the cause of poverty, people often start comparing India and America and hence they reach to an answer like “India is poor because it lacks this and that.” This leads to such answers which often have no connection with richness or poverty of people of a nation such as-

India is poor because of lack of education in masses” or,

India is poor because it lacks infrastructure and public facilities,” or

India is poor because of corruption.  Nothing happens without bribery whole bureaucracy and political system is corrupt, etc.”

Yet, these are not the answers of the question “Why India is Poor?” rather; these are the effects of poverty in India. Many Indian people are not well educated because Indians are poor, but there are many billionaires who dropped out from colleges, Steve Jobs is one of them. If you are going to work as a farmer throughout your life (someone needs to grow crops), what is the need to spend so much money to get you higher education? If you are a construction worker, it would be better to invest money in constructional works rather than investing it in your education because constructional works will provide you more options for job. By educating a huge mass of people while failing to provide a job for even 50% of them, government will only create a mess of unemployed people and it will certainly waste a lot of resources for educating those who actually never needed it.  Thus, by educating people government won’t be removing poverty but it will increase unemployment and obviously poverty.

Similarly, India doesn’t have the infrastructure because India is poor, high quality infrastructure isn’t required here. You cannot invest Rs 500 million per year on a road which will cost Rs 5000 per month per user especially when most of the users are making less than Rs10,000 per month. Who will agree to pay Rs5000 (half of their salaries) for such roads comparable to those in America? Even if the government builds roads of that high quality, it will be wasting money and resources which will increase poverty. When India will be a rich country, high quality infrastructure will be created by itself. Even if whole system remains in government’s hand, government will then have more money to spend on infrastructure. You cannot remove poverty by wasting resources in creating one effect of richness and then hoping that people will become rich through magic.

India is not poor because it has lesser money than the US. Just like the government of America, Indian government also has the power to print any amount of money but that won’t make India richer. If government prints more money, it will cause price rise that will ultimately lead to more poverty among masses. So, even if government distributed free money in poor people, it will not remove poverty. India is poor because India has less capital than the US. There is a big difference between money and capital.

What is Capital

Capital is different from money. Government can print money, it cannot create capital. Money is just a medium to exchange capital, we don’t consume money we consume capital. We accept money to buy capital of our requirement.

Capital is basically any commodity, goods or services, which is used to hold value across time. That is, if you save a good or commodity for future consumption, then it is capital. Generally, we save money for our future usage and hence it is also a form of capital but the value held by money fluctuates abysmally across time. Government often works on a policy of inflating money and hence decreasing its value. While some other forms of capital increases in their value. After understanding capital, we will be able to answer Why India is Poor?

Indians are often considered as savers and it is true that saving rates of an average Indian are better than saving rates of an average American. Yet, America has more capital because it has a lot more capital buildup than India. Thus, while America does not save a lot for future, they manage to create more future resources or capital than India.

In order to make India as rich as America, India will have to accumulate as much capital as America have and India will have to increase its production power. Providing free education and artificially attaining same literacy rate as in America will not increase capital, nor it will increase the capital production because well educated Indians will not have proper jobs to do. Building infrastructure will also fail to remove poverty when there is not enough capital to use it. It is not like if India gets billions of dollars of loan or debt to educate all Indians or to create better infrastructure, it will become rich. Even if all the black money of Indians held in Swiss banks is brought back in India, it will not make India rich. To be rich, India doesn’t need money, it needs capital.

How do we accumulate more capital?

Let us assume the case of Chuck Noland (Tom Hanks) of the movie Castaway (2000) who gets stranded on an uninhabited island after his plane crashes in the South Pacific. To sustain life, he catches fish everyday from 8AM to 5PM. Since he has no instrument, he catches fish by hands. He realizes that while he is now able to catch 5 fishes by hand in a day, he can catch 50 fishes in the same time if he succeeds in attaining something like fishnet. However, he just can’t have it and he will have to build it. He contemplates that he will need six days to build a fishnet. Chuck Noland (Tom Hanks) realizes that he cannot invest all his time in building a fishnet because if he won’t catch five fishes every day, he may starve to death.

Chuck Noland (Tom Hanks) in this situation faces a problem of lack of capital. He needs to accumulate capital so that he may sustain five days without catching fishes during which he will be able to create a fishnet. Noland (Tom Hanks) can have two options, he can either:

a) Consume 3 fishes only and save 2 fishes every day. If he keeps saving 18 fishes for 9 days, he will be in a position to invest the next six days in building the fishnet during which he will be eating 3 fishes that he would be saving every day.

b) He may decide to catch three fishes every day and save time to invest building the fishnet a little every day for the next six days.

In any case, Noland (Tom Hanks) will have to reduce his current consumption by 2 fishes every day. After Noland has build up the net, he can now easily catch 50 fishes everyday with the help of fishnet. Now he can consume all 50 fishes in a day or can make a variety of dishes. Or he may continue catching just 5 fishes everyday to meet his needs and may spend remaining time in leisure activities like music, literature arts, etc., or for finding a way out of the uninhabited island.

Currently, India is exactly in position of Chuck Noland without a fishnet and America is exactly like Noland (Tom Hanks) with a fishnet. America can produce a lot of wealth or capital without consuming too much resource and hence America has more time to spend on innovations, inventions, creative works, sports, arts, literature, music etc. This is why American athletes win so many medals at Olympics and India fails to win any. American has disposable income and time to spend preparing for future competitions, inventions and innovations while we still spend time in meeting our daily needs.

Why India is Poor Country?

To build more capital, two things are required:

1) People should be willing to invest a lot of present resources for future consumption

2) When they save their present goods for later consumption, the value of goods or capital should not be lost.

The first requirement can easily be met by Indians as they are brilliant savers. However, most of them save money while printing money is in government’s hand. Government keeps printing money and this devaluation of money due to inflation causes price rise of other basic commodities or capital. What would have been the case of Chuck Noland (Tom Hanks) if the two fishes he was saving daily had been spoiled and at the end of 9^th day he might have found that although he saved 18 fishes most of them are rotten and can’t be eaten? He might have failed to create the fishnet.

Take another example of Chuck Noland and Robinson Crusoe (1997) both are castaways at a same island. Both catches fishes by hand but Chuck Noland is more skillful then Robinson Crusoe and hence he can catch 5 fishes a day by hand while Robinson Crusoe hardly succeed in catching 3 fishes because he is not skillful. When Chuck Noland (Tom Hanks) starts saving 2 fishes everyday so that he may create a fishnet, Crusoe decried that Noland is mean and while he fails to catch 3 fishes a day, Noland is even saving 2 fishes every day. So Crusoe raids Noland and accuses him of hoarding fishes and robs him of his fishes to consume. In this case, while Noland was able to save fishes and hence accumulate capital, he couldn’t because Crusoe snatches away whatever he saves. Noland realizes that even if he starves himself to save fishes for producing fishnet, he won’t be able because Robinson Crusoe is snatching them as a fine for been less skilled. In absence of incentive, Noland will also stop saving fishes and he will either eat 5 fishes everyday or will catch three fishes only per day.

Indian people are good savers but their capital is stolen away or depleted because we always think that we cannot allow one man to have all wealth of society and hence we should redistribute it for the sake of helping less skilled people. As a result, through inflation and taxes, government keeps reducing the accumulated wealth of Indians. Furthermore, we often consider taxation as justified and moral and assume that it is a moral duty of skillful men to serve the less skilled.

The consequences comes out to be dangerous as we never succeed in becoming rich while Indians actually get poorer because of high inflation and tax rates as people start realizing that saving isn’t that much profitable. While accumulated capital can only help us grow rich, we often consider that capital is ill as it sounds like capitalism (capitalism means capital reigns) and allowing to accumulate wealth will make rich grow richer while poor will become poorer. However, since we deny opting for capitalism, poor become poorer and only a few regulators, politicians, bureaucrats and some of their supported corporate keep growing rich. In order to be a rich country, India needs to reduce inflation that can be done by abolishing Fiat currency and fractional control of RBI and government in printing money by adopting gold standard and by minimizing taxes. It must also be noted that when America was developing, it had gold standard and there were no compulsory taxation, it was a libertarian society. Since America lost its culture of freedom on behalf of progressive socialistic policies, it started depleting its capital.

A society with more capital helps poor more

Let’s assume that Robinson Crusoe allows Chuck Noland (Tom Hanks) to save 2 fishes for nine days and as a result, Noland succeeds in saving fishes to consume in those 6 days when he will be making the fishnet. During these 15 days, both Chuck Noland and Robinson Crusoe eat three fishes each. After that, Noland is able to catch 50 fishes every day. Yet, Crusoe will be able to catch only three because he neither has skills nor he has a fishnet. Yet, he isn’t poorer than what he was. Also, Noland now has 50 fishes which he can’t consume all. He offers 20 fishes to Crusoe in exchange of some services that Crusoe may provide. Crusoe may be a good dancer of story teller may opt to take responsibility of entertainment during the leisure time of Noland or he may take responsibility of preparing the food in return of which, he will attain 20 fishes which is much more than the three fishes he could catch. The thing is a society with more capital (when Noland has created net) can provide more to the poor. While if the skillful is not allowed to be rich by accumulating capital or wealth, he will neither be able to help or exchange wealth with poor (Crusoe) now he will be able to have leisure time to spend in innovation, invention and other activities. As a result, whole society will suffer scarcity as our current India suffers scarcity of resources. It is not like there are no poor people in America, but since Americans are allowed to accumulate wealth, the poor in America also attain more help and wealth than a poor in India, or an American poor is richer than an Indian poor. We can become richer if we stop the process of redistribution of wealth (taxation, inflation, laws against hoarding etc.,) and start allowing accumulation of wealth.