In the subtext of India’s recent economic success story lies “the stubborn statistic of 400 million to 600 million people living in poverty,” according to Shanta Devarajan, chief economist of the World Bank’s South Asia region.
Devarajan spoke as part of a panel discussion on “India’s Underprivileged Majority: The Real Development Story” at the Wharton India Economic Forum, held in Philadelphia in March. India’s rapid economic growth can obscure rampant poverty, and flawed public policy is a culprit, Devarajan and the other panelists indicated. A key to helping the poor, they said, is to alleviate Indians’ financial dependence and the exploitation that can accompany it.
Despite the rapid ascent of India’s economy in recent years, the country’s poverty rate continues to decline at the same 1% that it did in the 1970s, Devarajan said, noting that sharp disparities in growth perpetuate “stubborn” poverty. The country’s southern and western states are growing significantly faster than those in the east and the north. “The difference between the growth rate of fastest and the slowest growing states ranges from 2.5% to 6.5%,” he said.
Employment growth has not been commensurate with economic growth, he added. “Much of this has been really jobless growth,” he said. “You aren’t seeing much growth and demand for talent in manufacturing and export-led industries.” As a result, he noted, the demand for low-skilled workers has lagged behind the demand for white-collar workers. The informal sector constitutes 93% of the workforce. “Firms are very small in India’s informal sector. Forty percent of them have between five and nine workers. That’s much too small to be able to take advantage of any economies of scale.”
Meanwhile, Devarajan added, “India’s agricultural growth has not accelerated at all, and that is where the majority of the poor get their incomes. You have 100 million farmers, and they contribute as much to GDP growth as one million businesses.”
China’s growth in agricultural productivity has been double that of India, and even Bangladesh has done better, he said. “The problem is simple and fundamental: public policy toward agriculture.” Public policy has stunted efforts to improve productivity, including populist programs supplying free power and seeds. “Those subsidies don’t go to the poor farmers,” he said. “They go to the middle class and larger farmers.” (Devarajan spoke about these and other issues during a separate speech he made at the University of Pennsylvania last year, which India Knowledge at Wharton covered in an article titled, “What Could Derail the India Express?”)
Exploitation and Absent Teachers
Ravi Kuchimanchi, founder of the Association for India’s Development (AID), a volunteer movement with 50 chapters in the United States, India and Australia, resists the characterization of pro-poor policies as “subsidies”; rather, in the course of being implemented they become “exploitation.” He pointed to the roughly 140 special economic zones being planned across the country, which have triggered controversies over farmlands being acquired to make way for new construction. “The incentives are going to the companies who take the lands from the exploited people,” he said.
According to Kuchimanchi, another such “exploitative” program is the government’s “Aanganwadi” initiative, which aims to provide basic health care across the country’s villages. Funds earmarked for the program are routinely diverted to local officials’ personal coffers, and investigations that result from complaints have been a sham, he said.
Devarajan cited additional problems plaguing health care among the poor. India’s immunization rates are below those of Kenya, he said. “You expect the public sector to deliver this, but only 8% of such spending goes to the poorest sections. The doctors and nurses are frequently not available; the average absenteeism among doctors is 40%, and this goes up to 60% in Bihar,” a northern Indian state. Devarajan said he saw no solution but to “restructure employment policies” and enforce accountability among doctors.
The same level of accountability should hold for teachers, Devarajan added. “Everybody, including the World Bank” takes credit for getting 93% of Indian children in some form of primary school, he said. However, “60% to 65% can’t read a sentence in their [native] language, and 55% can’t do a two-digit subtraction problem.” These statistics came to light two years ago in surveys conducted by Pratham, a nongovernmental organization in India. The surveys found a “high degree of absenteeism among teachers in public schools,” from 25% to 40%, Devarajan noted.
What Can Be Done?
Start with feedback, which forces policy-makers to act, said Kuchimanchi, whose organization connects non-resident Indians with issues concerning rural poverty but also serves as a watchdog group for government initiatives. “A system cannot grow without feedback; it is the difference between simple interest and compound interest,” he said. “Feedback from the underprivileged, the exploited and the poor in India is not being taken by the government and the corporations. If we don’t take the feedback, how do we expect to serve that market?”
Kuchimanchi spoke of government programs that make electricity available to poor Indian rural households. Many such households spend about Rs. 40 (about a dollar) each month on kerosene for lamps. In India’s eastern state of Orissa, the government sells electricity meters for Rs. 2,000 each (about $50), which he noted is beyond the reach of many poor households. But the neighboring state of Andhra Pradesh rents meters for Rs. 150 each ($3.50), making them affordable. “So the poor in Orissa don’t have power, but those in Andhra Pradesh have it,” he said.
Where government programs fail, innovation helps, and Kuchimanchi’s organization has developed a technology to help poor households consume less energy. Most use firewood in their kitchens and use large amounts because they can’t modulate the heat. Kuchimanchi displayed a box made of hay with a cloth lining serving as insulation material. “This costs Rs. 70 ($1.75) and it saves two hours in cooking rice,” in addition to keeping it hot all day, he said. (To learn more about this project and others like it, see India Knowledge at Wharton’s videocast interview with Kuchimanchi.)
Such efforts directly help in alleviating poverty, he said, and “exploitation happens only with financial dependence.”
Empowering Women and Small Businesses
Empower women with education to catalyze change, said Indira Rajan, chairwoman and managing director of the Minerva Group of Educational Institutions in India’s southern state of Kerala. Among many projects, Rajan is currently implementing a program called “Pariraksha” to promote mother-and-child health through hospitals in her state.
Public programs aimed at poverty alleviation, health and education work best if they start with “capacity-building” among women, Rajan said. “Women constitute 48% of India’s population, and when women are empowered, so is a society,” she said. She called for “the highest priority” in providing education to women, along with microfinance and vocational training.
Women, in fact, are the preferred borrowers at SKS Microfinance, according to Vikram Akula, the microfinance organization’s founder and CEO. Their default rates are low, he said. “Women are better entrepreneurs, tend to work better in teams, and tend to reinvest their earnings in the business.” SKS Microfinance boasts a 99% repayment rate, providing ample justification for Akula’s model.
Akula recounted the example of a woman named Sidhamma in an Indian coastal village. Nine years ago, he offered her a loan of a thousand rupees (about $25). Her family earned less than a dollar a day, and her son was in bonded labor, a form of debt slavery, with a local moneylender, because that brought in some extra money. Thanks to a succession of bigger loans, Sidhamma now runs a frozen-fish business that employs eight people. Her income has grown tenfold. She was also able to get her son out of bonded labor.
According to Akula, microfinance has made deep inroads into rural India’s impoverished households in recent years, yet it reaches only a fraction of those it could benefit. His firm has provided more than $440 million in unsecured loans and micro insurance products to 1.7 million poor women and their families in 20,000 villages and slums in India.
A Yale graduate with a Ph.D. from the University of Chicago, Akula quit a successful career as a management consultant with McKinsey & Co. to set up SKS nine years ago. His firm has 700 branch offices across India and is in the process of adding 50 branches. SKS Microfinance’s customer base of more than two million is growing at the rate of 20% a month. It has attracted equity investments from venture capitalists including Sun Microsystems cofounder Vinod Khosla, and Yahoo and Google investor Sequoia Capital. (In a recent videocast, Akula spoke with India Knowledge at Wharton about microfinance in India and his organization’s latest initiatives.)
SKS employs a for-profit model, which works best for microfinance institutions, Akula said. India’s microfinance sector is attractive to an increasing number of lenders, he said, because “the poor are willing to pay a premium.” Despite big gains in recent years, though, microfinance in India “has not been able to scale to large levels.” By his count, microfinance reaches barely 10 million to 15 million in a potential market of 450 million households. “If I could change the world, I would end poverty,” he said.