In 2002, the national income per person in India is $480 a year. That means, an average person in India receives only $40 per month for their salary. India is ranked as 135^th out of 192 nations in the world, make it one of the poorest nations in the world, only slightly better than the African nations. What has happened to India? When it gained independence from Britain in 1947, India was once one of the most promising nations to achieve prosperity. After all, it had a legal system left by Britain, a democratic election system and free press. However, the economic development of the next 50 years, is stagnant and even mired in crisis from time to time. Once ahead of china in its production, India now lags far behind China. It’s export good is only 1/7 of China’s volume in 2003, while its national income is half of China’s. The life expectancy in India is only 60 years old, while China has achieved 68, and western nations are at 78. Is India’s poverty the fault of democracy?

The real cause of Indian’s poverty comes from its economic policy. After its independence in 1947, India has been led by the charismatic leader Nehru for 17 years to create a socialist economy, which includes three basic features: central planning, self-sufficiency (removing international trade) and government-ownership of industrial enterprises. All of these are against the economic principle of free markets.

By central planning, the government disregards the fact that economic system is created from ground up, not from above. The real need of a certain group of people, or a certain region are known by people themselves and people in the local area. Only a market system can best satisfy those evolving needs and quickly respond to the changing information. The central planning takes away the responsibility of local enterprises and their ability to react and respond. It also takes away the consumers’ choices and their ability to get their diversed choices satisfied. Finally, central planning takes away the most efficient signal for resource allocation, “market price”. The failure of all socialist economy, from former Soviet Union and East European countries, to Asian countries like Mongolia, China, Vietnam, and North Korea, proved the point. In fact, the socialist experiment in India reflected the trend of the world at the that time. In early 1950s, the world is seeing a wave of independent nations, and was enthusiastic with the ideal of socialism. China, under the new communist government, was starting its experiments with socialist economy. Mongolia is starting its socialist construction (from 1952). Albania is on the road to Socialist economy too. The Northern Vietnam is under communist control, and ended its war with French in 1954. In 1959, Castro took control of Cuba and started its socialist program. Today, all of these countries fall into the world’s poorest group.

In addition to its central planning system, India also launched a policy of inward-oriented production. The slogan is “self-sufficiency”. From rice to steel, from clothes to fertilizer, India wants to produce everything on its own. The result is that India is one of the most isolated economy. India has one of the highest tariff for imports in the world.

However, such policy does not bring true self-sufficiency to India. In late 1960s, India experienced severe food crisis, and had to receive large amount of food assistance from the US. However, after the crisis was over, India regarded this instance not as the failure of its economic policy, but as national humiliation for receiving foreign aid. India continued its path toward an isolated economy in 1970s, and its path of nationalizing it heavy industry.

The economic history has shown that, state-owned enterprises are much less efficient than private enterprise. The goal of state-own enterprise is not profit, but satisfying political agenda. And political agenda is not a good way to allocate economic resources. India government owns all the electricity, heavy-metal transportation, telecommunication and banking industry. The low efficiency and heavy regulation of these industries create low production and poor infrastructure in India.

In addition to the above three socialist features: central planning, inward-oriented production, state ownership, India has also one of the most regulated economy in the world. The regulation is reflected in its strict licensing system, stiff tariff and control of foreign exchange. Under the licensing system, a company cannot increase its production over certain capacity, otherwise it would be a crime. A company cannot install new plant or machinery, and have new expenditure of foreign exchange.

With heavy regulation, central control of economy, and isolation policy, India manages to become one of the world’s poorest countries. Its GNI per capita is $390 in 1990.

But recently we have seen changes in India’s policy.  Starting from 1991, India has begun economic liberalization. It removed regulations, lowered tariff, and privatized its telecommunication industry. The export and imports have increased dramatically. In the 10 years from 1991 to 2001, India has maintained on average growth rate 6% for its economy.

The economic liberalization in India is partly spurred by the collapse of Soviet Union, and the economic liberalization in China. China started its economic reform in 1978, and has since then enjoyed rapid growth, maintaining close to 10% growth rate annually. The success of China’s market economy has motivated India to conduct its own reform. 

With the irreversible trend toward economic liberalization and sound economic performance, we believe that India will eventually move out the poverty. The lesson of India tells us that economic freedom is essential to development and to removing poverty.

-Jan. 14, 2004