This is a question that we’ve all pondered about, but very few of us have the right answers to.
People have all sorts of weird theories as they go about speculating the reason. Some blame the terrible enervating heat. Some blame the long-gone British rulers. Hindutva loons blame the country’s thousand-year long domination by Muslim rulers and European imperialists. Many even blame India’s diverse plethora of castes, religious, and linguistic groups, which they claim makes it “practically impossible” to govern the country well. Most people mistake the symptom of poverty (large population) for the cause, and therefore maintain a complacent attitude since they believe that it is only “natural” for a vast diverse country to be poverty stricken, filthy, corrupt, poorly governed, and have terrible infrastructure.
But as I shall point out, all of these assumptions are false delusions held by people ignorant about governance and economics.
The causes of India’s poverty and misgovernance are manifold and are as follows:
(1) Our Nehruvian socialist mixed economy hobbles entrepreneurship, lowers productivity, prevents sufficient jobs from being created, inhibits wealth creation, and diminishes the ability of the average Indian to become prosperous and affluent.
Businesses are suffocated with many hurdles including excessive burdensome regulations and restrictions, an extremely corrupt bureaucracy, and poor infrastructure. This significantly raises the cost of doing business, reduces profitability, destroys jobs, and lowers wages.
The rule of law is very weak. There is no fundamental right to property. Most of the poor don’t hold legal documents and lack titles to their property. The people can’t count on the courts to enforce contracts, adjudicate disputes, protect property rights, and punish fraud and other crimes. The justice system is slow and backlogged with so many court cases, that it has been estimated that it would take more than four centuries to finish them all.
The bureaucracy is extremely corrupt and inefficient, which makes it too prohibitively expensive and time-consuming for the poor to formally open a business. As such, the vast overwhelming majority of businesses and employment are in the informal sector. This leaves most of the country outside the protective ambit of the legal system. To make matters worse, onerous labour laws prevent business owners from formally hiring workers.
The worst hit by India’s socialist policies are the poorest of the poor. The antidote to poverty is free-market capitalism and free trade — the engines of prosperity and innovation; which all mainstream Indian political parties, being socialist and corrupt, would never embrace.
Also Indian governments tend to have the wrong priorities. Instead of focusing on ensuring the rule of law; provision of strong defense, justice, internal security, good infrastructure; and the development of India’s human capital; our central and state governments are energetically engaged in running all sorts of loss-making enterprises such Air India, hotels, banks, PSUs, duty-free shops, etc; burning precious taxpayer revenue in the process.
(2) There is a complete lack of meritocracy in political representation on account of skewed incentives. There are no positive incentives to ensure that our politicians perform well and are held accountable. There are no negative incentives to ensure that only good people enter politics while bad people are barred from entry.
Elections are too prohibitively expensive that it prevents most people from contesting. Election expenditure limits force candidates to commit perjury and lie about their expenses. Since India is officially a socialist country, constitutional restraints that would limit the size and scope of government functions are lacking. This means that politicians are encouraged to compete with each other in promising all kinds of freebies to buy the votes of the electorate. Politicians’ salaries also tend to be very low, and far below that of a professional manager or CEO of a private sector company.
As a result, it is only the power-hungry and corrupt like Nehru, Modi, and Kejriwal, who become our political representatives. Elections have become auctions in which it is the biggest criminal populist demagogue, who can afford to spend the most amount of money and promise the most amount of freebies, that wins. Honest and competent people therefore don’t feel that politics is worth their while, and avoid it like the plague. Politics has become a stinking cesspool where only the worst criminals and demagogues come to power, while those who are honest and competent are filtered out.
Political corruption is an INEVITABLE OUTCOME of our lack of meritocracy.
(3) Our bureaucracy and public institutions are underfunded and their functioning impaired with bad incentives that promote incompetency, poor performance, and necessitates as well as encourages corruption among public servants.
Bureaucrats and other public servants are paid very low salaries, which are far below those of their equivalent private sector counterparts. Once hired, job security of bureaucrats and other public servants is assured for life, and it’s very difficult to sack them. Performance is not incentivized to ensure high quality of output and accountability. Staffing at senior levels is tenured and promotion is seniority-based. People in these positions are not hired from the private sector, thus depriving our public institutions of a wide array of talent and expertise.
With all of these factors put together, it is no wonder that corruption is endemic and most public servants are incredibly incompetent and corrupt. India has very low institutional capacity to regulate its economy, boost competitiveness in the marketplace, and provide essential public goods such as good infrastructure, law and order, justice, etc. The quality of India’s bureaucracy and pubic institutions is sub-par, and have been rated the worst in the world.
(4) Our weak federalism and lack of subsidiarity has resulted in weak local government. Powers and control over tax revenues are too over-centralized with the Centre and States, who are distant and lack knowledge of local circumstances. States and local councils lack the capability to self-finance, as taxation powers are vested in the Centre. Cities lack independent municipal councils, and are administered by mega-municipalities which are run by inept and unaccountable IAS officers. Ditto for the towns and villages, where the panchayats have been given very little power.
This lack of subsidiarity prevents people from managing their revenues and administration at the local level. As a result, India cannot keep up with its rapid pace of urbanization. Our cities and towns are unplanned, and have become ugly and filthy, They are plagued with bad roads and poor infrastructure in general; as exemplified in regular power-cuts, water shortage, improper sanitation, etc.
(5) Amazingly for a country that labels itself “socialist”, there has been no serious emphasis on developing the human capital. Our government schools and hospitals are poorly run, and their quality is abysmal and third-rate. Since the public sector lacks the profit-making incentive necessary to run them efficiently and maintain a very high quality of service, it only makes sense that these be privatized and managed by the private sector.
Our governments should restrict themselves to the provision of negative income tax for the destitute, school vouchers for poor children, basic healthcare vouchers for the poor, and loans for emergency healthcare. Instead, the government foolishly squanders taxpayer funds by directly managing third-rate pathetically run public schools, colleges, and hospitals; providing useless subsidies; and distorting market signals through price controls.
India’s labour quality is grossly underdeveloped and very poor, being on par with sub-saharan African countries. Even though 12 million people enter the workforce every year, the country suffers from a severe shortage of highly-skilled workers and educated professionals. This discourages both investment and foreign companies from setting up shop in India. Factories in India have begun to shift to automation, as they find Indian labour too expensive and unskilled. Our central and state governments need to urgently alleviate this crisis by inviting and incentivizing the world’s best universities and vocational training institutions to open branches in India.
All five factors combine to give you bad governance, which is why India continues to remain a poverty-stricken third-world hell-hole. In the meanwhile, countries that were in a similar state a few decades ago (South Korea, Hong Kong, Singapore, Taiwan, Chile, etc) have grown prosperous and progressed by leaps and bounds.
There is a way out of our sordid predicament however, and that is for India to abandon its failed Nehruvian socialist model of governance for the Classical liberal model — a universally successful model which maximizes individual freedom and encompasses all successful policies that have worked well wherever they have been implemented.
The various factors which result in a country becoming rich and prosperous, basically boils down to having a highly skilled and well-educated workforce, efficient and non-corrupt governance institutions that provide public goods, independent non-corrupt judiciary, impartial world-class legal system. strict rule of law, secure property rights, low taxes, sound money, free markets, free trade, and limited government. All of these factors combined generate an unprecedented amount of wealth and makes labor enormously productive, leading to high incomes and high living standards.
If India were to fix its systems of governance, it would benefit from the ELIMINATION OF POVERTY and dramatic improvement of living standards to the level of the most developed countries such as Norway, Australia, Switzerland, and United States, in over a generation.