India's Economic Path and What It Could Mean for MF

“But it is to the side of the expressways in the glaring billboards advertising mobile phones, iPods and holiday villas and in the shiny gas stations with their air-conditioned mini-supermarkets, that India’s schizophrenic economy reveals itself. Behind them, around them and beyond them is the unending vista of rural India, of yoked bullocks ploughing the fields in the same manner they have for the last three thousand years and the primitive brick kilns that dot the endless patchwork of fields of rice, wheat, pulses and oilseed.”

The above quote comes from Edward Luce’s incisive and cogent book on contemporary India titled “In Spite of the Gods.” Luce was the Financial Times bureau chief for South India from 2001 to 2005, and has the wonderful ability to express about India what most foreigners feel and experience but do not have the words for (this very much includes myself).

This quote about India’s “schizophrenic” economy comes from the chapter “Global and Medieval” in which Luce, through an assortment of statistics and anecdotes, discusses the nature of India’s peculiar economy. Luce sees China’s rise as a typical story, “In spite of much breast beating in the west, China is developing in the same sequence as most western economies have done: it began with agricultural reform, moved to low-cost manufacturing, is now climbing up the value-added chain and probably… will break into internationally tradable services on a larger scale.” India represents a contrast in that “Its service sector accounted for significantly more than half its economy in 2006. This resembles how an economy at the middle-income stage of its development, such as Greece or Portugal, should look. But Greece and Portugal do not have to worry about a vast army of 470 million labourers in their hinterlands.” This last sentence represents why Luce and others, including Manhoman Singh, see India’s unusual development path as a serious problem. This “vast army of labourers” is living in a country where the growth is not labour intensive, which means a severe lack of job opportunities for the low and semi-skilled. In the end, the poor are not reaping the benefits of growth in the same way that they are in other rapidly growing economies like China and Vietnam.

Luce delves into the historical circumstances that may have led to the capital intensive, services sector driven growth of India. The author sees the current state of the Indian economy as in many ways a result of the economic vision of Jawaharlal Nehru. Luce writes, “By the time of independence, Nehru had already helped to forge a consensus in which the country would aim for complete economic self-sufficiency and the state would lead the effort by building up heavy industry...” When India needed “rural land reform” and “local irrigation projects” it got “heavily loss making” aluminum smelters and steel plants.

Along the same lines, Luce’s perceives that another faulty aspect of Nehru’s development strategy was the large amounts of money that were poured into the excellent English-medium schools like the IITs and public hospitals in the cities, when it would have been more equitable to spend that money on improving basic primary education and the resources of rural health centres. “India’s scientific and technical capacity is ranked third in the world… However, India’s literacy rate is only 65 percent whereas China’s is almost 90 percent.”

Lastly, Luce blames the rigid labour laws that do not allow employers to easily lay off workers when fired as another major reason the poor have few opportunities in the current Indian marketplace. This means that even in the good times, employers are reticent to make new hires considering it is a decision they can not easily go back on when things go sour.

So the equation is: focus on rapid industrialization + large spending on higher education and urban health + labour laws that are anything but dynamic = a technological elite and underserved masses. Thus Luce writes, “India finds itself higher on the [value-added] ladder than one would perhaps expect it to be. It is just that most of its population are still standing at the bottom.”

Working for CMF, I can’t help but look at Luce’s description of this country’s economy through the lens of what this means for Indian microfinance. Perhaps microfinance has an unusually important role to play in India that it would not in a country that has large industries demanding low-skilled labor. Critics of microfinance have, I think rightfully, suggested that microlending is not a powerful tool in increasing the speed of economic development. Yet it may be that taking a loan out to invest in improving your agricultural productivity, starting a small shop or investing in your children’s education, so that they might take part in the knowledge economy, is the best of a bad set of options for the Indian poor.

Another possible ramification of India’s development path is that microsavings may be comparatively less important than lending here than elsewhere. In a country where people have dependable monthly incomes from working in manufacturing, the ability to save that money in a safe, accessible interest bearing account may be more important than in India where the poor have a lesser ability to build wealth through savings.

Luce’s account also made me reconsider whether I am wrong in thinking that Indian MF’s rural focus is misplaced. It may be that with poor opportunities for wage labour in the cities, there will not be the rapid mass migration to the cities that has happened in other countries. Luce mentions that “India’s rate of urbanization has actually slowed while its economic growth has accelerated.”

The above three ideas are only passing thoughts of the impressionable reader and certainly not conclusions. But they are examples of how the arguments in “In Spite of the Gods” serve as a healthy reminder that in terms of development, not all countries are alike and the role of microfinance must cater to these differences. “In Spite of the Gods,” though not a piece of hard economics, has happily made me rethink, and want to further research, some of my more closely held beliefs about the role of microfinance in contemporary India.

*Thanks to Emmerich Davies for recommending the book