Policy Brief No. 10: Shining India? Economic Liberalization and Rural Poverty in the 1990s
by Anders Riel Müller and Raj Patel
Food First/Institute for Food and Development Policy
In its fifty five years of independence, India has waged a long battle against hunger and poverty. Two hundred years of colonial rule built a country incapable of meeting the basic needs of its own population while turning the economy into a conveyor belt for raw commodities destined for the manufacturing industries in Britain.
To remedy this situation, the policies adopted by the Indian government after Independence were a broad mix of state-led market-based policies, leaning towards heavy interventionism and high levels of economic protection for key domestic industries. This 'import substitution' model was unevenly implemented, and while some industries and sectors benefited, the government was never fully able to wean itself from the influence of powerful Indian elites and their vested interests. Over time, these elites, combined with international pressure, pulled the Indian economy towards an open market. This economic liberalization crept slowly into India's economy throughout the 1970s and 1980s. But in 1991, precipitated by high levels of debt, India officially committed to full-fledged neoliberal reforms when the Indian government signed onto World Bank and International Monetary Fund loans.
The two central components of these neoliberal policies have been the liberalization of India's private sector and a reform of the public sector. The claim advanced by key members of India's elites, and by the World Bank, was that the Indian economy needed to be set on a more sustainable path. More than a decade later, the Indian government claims vindication for its direction, with higher levels of income, reduced poverty, and a booming information technology sector--areas that have come under criticism abroad for its success in welcoming 'outsourced' jobs.
All is not as it appears, however. In India today, more than 250 million people still live below the official poverty line. Most of them live in rural areas, working on small plots of marginal lands or as laborers on larger farms. The public services meant to ensure a basic standard of welfare have been dismantled or rendered ineffectual, and the private sector has not reached out to those most in need of goods and services.
In this report, we peel back the myth of "Shining India" over the past ten years using the government's own data. We show that while some have benefited from India's new economic vision, for India's poorest, there has been very little to celebrate over the past decade.
Myth 1. The World Bank's policies led to unprecedented economic growth in the 1990s.
Facts: While the 1990s looked good on paper, when we tease the statistics apart, the 1990s weren't all that unprecedented. The average annual growth in per capita Gross Domestic Product (GDP) was 4.4 percent compared to 4.1 percent between 1985 and 1989. By the end of the 1990s, economic growth rates were similar to the average growth rates of the 1960s and 1970s. In other words, but for a fraction of a percentage, neoliberal policies didn't outperform the previous periods in recent Indian economic history.
Myth 2. A higher percentage of people were lifted out of poverty under the free market.
Facts: Official data show a drastic decline in poverty during the last half of the 1990s. The Indian government and the World Bank attribute this to the free market. But the fall in poverty owes much more to a change in the way that poverty data were collected and interpreted (see pp 7-10 in the report). There is now a broad consensus among independent researchers and academics that these numbers are inflated and the actual numbers are closer to half of the official statistics. This is corroborated by the increased levels of malnutrition observed over the 1990s. Poverty declined at no faster pace than in the 1980s and there are in fact indications of a deceleration in poverty reduction despite a 30 percent increase in per capita income.
Myth 3. India's rising economic tide has lifted all ships.
Facts: The biggest consequence of the new free market policies is acute inequality. The Gini index, a standard measure of income inequality, has risen from 30 to almost 38 from 1991 to 1997. Upon closer inspection, we see this is caused by a great deal of variation in economic growth among Indian states and between rural and urban areas. The poorest states experienced much lower rates of growth and poverty reduction than the middle income and high income states. 50 percent of the poor are now concentrated in Orissa, Madhya Pradesh, and Assam. To put this into perspective, the combined population of these states is the same as the population of Japan. In rural India, where the deepest poverty persists, things are worse. The rural-to-urban poverty gap has jumped from 1.1 to 1.4 over the 1990s.
Myth 4. The information technology boom in India will benefit the poor.
Facts: Both the World Bank and the Indian government are keen to play up the success of the information technology industry and its role as a path to a new era of prosperity. But information technology only contributes 2 percent of total GDP and employs fewer than one million people. More than 230 million people are employed in the agricultural sector. India's poor primarily live in rural areas, farming small plots of land or working as agricultural laborers. Moreover they are unlikely to benefit directly from the technology boom because the social and economic mechanisms for redistributing the gains of the information technology industry have been eroded by the introduction of regressive taxes and cuts in social welfare programs. Job creation in the urban information technology sector does little to create economic gains for India's rural poor.
Myth 5. The Green Revolution will save India from hunger once again.
Facts: The Green Revolution was a package of industrial technologies, such as chemical fertilizer and hybrid seed, designed to increase India's farm yields. Introduced in the 1970s, these technologies succeeded in increasing farm output in a handful of commodities. These technologies are being promoted by the government and aid agencies. But this revolution has bypassed most Indian farmers, who live in the poorer states and who are without access to large areas of land necessary to profit from these technologies.
The three-quarters of all farmers who cultivate one third of the total land mass, remain marginalized by the government. Small farmers produce 41 percent of the total grain and over half of India's total fruits and vegetables. They are more productive than the Green Revolution farms even though they cultivate rain-fed lands using only human labor and animal traction.
The environmental cost of the Green Revolution is now becoming apparent in the Punjab and Haryana. There farms are threatened by sinking water tables, soil salination, and soil erosion caused by excessive use of chemicals and monocropping. The economic unsustainability is also evident, as prices on the chemical inputs such as fertilizer and pesticides are becoming increasingly high due to the government's elimination of input subsidies.
The Green Revolution is not the answer to India's hunger. Two hundred and thirty three million people are malnourished in India today and while small farms are important in preventing acute hunger, the problem remains one of distribution, not of production.
Myth 6. Trade liberalization will benefit farmers.
Facts: For India's richest farmers, trade liberalization has been a blessing. But the agriculture sector itself is in severe crisis. Agricultural growth was a disappointing 3.2 percent a year on average over the 1990s compared with 4.7 percent on average over the 1980s., This isn't healthy given the fact that 75 percent of the population depend on agriculture for their livelihoods. Liberalization has forced small farmers to compete in a global market where commodity prices have plummeted while the reduction of government subsidies has made farming more expensive. Government sector investment in agriculture registered a decline of 28.9 percent, leaving farmers without access to affordable loans and forcing them to turn to private lenders who charge significantly higher interest rates. Private banks only directed 10.8 percent of total credit to agriculture, well below the government required 18 percent. Subsequently, farmers have turned to contract farming for large national and international corporations, producing cash crops--cotton, potatoes and chilies--for US and European markets instead of food for India's people. While these contracts can provide farmers with higher income, they also come with higher risks and costs of production. In most contract farming situations, the farmer bears the entire financial risk in the event of drought and crop failure. Such events have left many farmers heavily indebted, driving thousands of them to suicide.
Myth 7. India's economic reform of public services target the poor more efficiently.
Facts: While the very poorest represent a higher percentage of people receiving government support, this has been achieved by lowering the threshold of poverty and cutting back funding for many poverty and development programs. For example, rural development expenditures as a share of GDP declined from 14 percent in the late 1980s to less than 6 percent of total GDP in 2000. Funding for irrigation, roads, and employment has decreased in almost all states. Without public investments in roads and irrigation, rural areas have been unable to attract private sector investments, which the World Bank and the Indian government claim should replace public investments and create jobs.
India's Public Distribution System (PDS) which distributes surplus food, has also been crippled by economic liberalization. Only a fraction of India's population is now eligible to receive subsidized food through the PDS and prices have increased drastically. Food distributed by the PDS declined by more than 20 percent in less than four years since the implementation of Targeted Public Distribution System. This has excluded millions of poor in the name of economic cost-efficiency. In 2001 millions of tons of rotting grain was thrown into the sea, while starvation deaths were reported in several states for the first time since the 1960s.
Myth 8. Economic reform has helped more Indians eat better.
Facts: Malnutrition has increased during the 1990s. The average calorie intake has declined especially among India's poorest. Today, 233 million Indians suffer from inadequate intake of calories and micro nutrients. Women and children sustain higher rates than men of anemia--a symptom of malnutrition. There has been virtually no improvement in these rates over the 1990s. Furthermore, the production of some of the most important staples has declined as agricultural land is increasingly used for export crops. During the 1990s, five million hectares were converted from food-grain production into cash crop production. Net availability of foodgrains per person plummeted to levels unheard of since the 1930s economic depression under British colonial rule.
Myth 9. Economic liberalization will lead to better economic opportunities for women.
Facts: While women experienced higher employment rates in the 1990s, the work done by women was most often in low wage jobs or the informal sector. Historically, women have been the backbone of the rural economy, but they are paid less, work longer, and do harder manual labor than men. This situation has been exacerbated under neoliberalism. Between 1991 and 2001, for example, the number of women in marginal jobs more than doubled from 25 million to 51 million.
Myth 10. These problems caused by economic liberalization are only temporary.
Facts: Rising inequality, exploitation, poverty, and environmental degradation have followed neoliberal reforms in every country that has adopted them to date. India is no different. The government seems to be more concerned with turning India into a leading global exporter and technology hub than resolving the massive poverty problems. Budget cuts for rural development programs and the public distribution system show that the political will to address poverty problems has disappeared, and without this political will, India's rural areas will continue to experience increased hardship.
The myth of 'Shining India' benefits many people, both inside and outside India. The World Bank, sponsors of this vision, are keen to endorse it, and U.S. politicians concerned with the inevitable economic consequences of trade liberalization are happy to paint India as the new home of American jobs. In this report, we've tried to set the record straight. While there has been growth in the information technology industry in India, this is largely a result of a deep government commitment to middle class education. It's true that there has been some reduction in the level of poverty over the past 20 years. This has not, however, been accelerated by neoliberalism. In fact, the policies since 1991 have hit the poor hardest, with levels of hunger under the Targeted Public distribution System and the introduction of free market system reforms to rural life.
Indian agriculture has always been a very unequal affair. Even before colonization, there was rampant inequality arising from the feudal structures of agriculture and regional differences. Under British rule many of these inequalities were further exacerbated through heavy taxation of even the smallest farmer. Despite half a century of independence, these inequalities are still getting worse. The arrival of the World Bank and International Monetary Fund strengthened the hand of those within the Indian government who believe that export-oriented agriculture and free trade would 'lift all ships' out of poverty despite the lack of evidence that this has worked in India. We conclude that the absence of strong political leadership, the erosion of serious redistributive mechanisms, and the deepening exploitation of women in the promotion of neoliberal India all point to a deterioration in the situation of India's poorest.
Perhaps the greatest tragedy is that there is nothing inevitable about this state of affairs. India won its independence with a vision of a country in which all were able to feed themselves. The policies implemented under Nehru, and under Indira and Rajiv Gandhi, were far from perfect, and were in many ways crafted by elite pressure. Yet, as Mahatma Gandhi argued, "Economics that hurt the moral well-being of an individual or a nation are immoral." The cleaving of the Indian economy along lines of gender, sector, geography and caste is a symptom of this kind of economics, and it betrays the spirit of Indian independence. The gamut of social movements in India today that struggle to keep this spirit alive are faced with a daunting task. Yet it is vital that they succeed. The past ten years have hurt too many, and at too high a price, for the lessons of economic liberalization to be ignored.