House of Commons - International Development

Select Committee on International Development Third Report

3 Economic development, governance and poverty reduction

39. During the 1950s and 1960s India's planners sought, within the context of a commitment to planned industrialisation, to unlock the economic potential of India's rural areas through agrarian reform and the 'Green Revolution'. The country, however, seemed to be stuck with a 'Hindu rate of growth' of little over 1.5% per capita annually. Little progress was made on poverty reduction. During the 1980s, the extension of the 'Green Revolution' and off-farm employment opportunities, together with high levels of public spending, increased annual average rates of growth to nearly 4% per capita. By early 1991 however, India's fiscal and trading situation had become grave, and a process of stabilisation and fiscal reform was initiated under the then Finance Minister (current Prime Minister), Manmohan Singh. This reform process has been maintained by succeeding governments and achieved sustained economic growth.

40. Although there is general agreement that between 1991 and 2001, the number of people living in absolute poverty in India fell, there is disagreement over the scale of the poverty reduction which occurred. This dissent has arisen because the GoI's methodology for collecting the source data for its poverty statistics was altered during this period. Opinion is further divided over whether there has been a causal relationship between India's process of reform, and the reduction in poverty levels which has accompanied it. Michael Lipton told us of research which indicates that the responsiveness of Indian poverty to economic growth has been reducing; the slower growth which occurred between 1975 and 1989 appears to have been more pro-poor than the accelerated growth which has taken place since 1990. This may be because agriculture did less well during the latter period.[78]

41. The results of the Lok Sabha election in 2004 were interpreted by many as the reaction of the rural poor against the NDA government's vision of reform and development. Analysis of voting patterns contradicts this interpretation, suggesting instead that regional and caste-based politics, strategic alliance-building by the Congress party and anti-incumbency voting were the most significant factors. Nonetheless, the election result has drawn attention to the unevenness with which economic reforms have impacted in India. Although the new UPA government may make adjustments to the packaging and presentation of the reform process, reorienting policy towards rural areas and prioritising social and developmental concerns, commentators agree that their policies are likely to maintain the NDA's broadly reforming agenda.[79] Almost all commentators agree that the extension of fiscal reform remains key to India's economic development, not least because of the country's fiscal deficit of over 10% of GDP. The likelihood of continued reform has been enhanced by the fact that there are two prominent economists leading the UPA government; Prime Minister Singh and Finance Minister Chidambaram. Manmohan Singh has explicitly stated that "reform with a human face" will be a priority of his government.[80] Mr David Loyn told us that the UPA government has been discussing the introduction of VAT and extending fiscal reforms to raise taxes for reinvestment in sectors such as education.[81]

42. Many commentators are optimistic about India's economic future. India's tenth five year plan has set a target annual per capita growth rate of 6.25%, and committed to increasing flows of remittances from Non-Resident Indians (NRIs) and attracting higher levels of foreign direct investment. On the other hand, a number of uncertain factors give reason to be cautious about India's future economic growth. These include:

the continued stability of India's relationships with its regional neighbours, Pakistan, Nepal, Bangladesh and Sri Lanka;
increasing economic competition with China;[82]
ongoing district-level instabilities caused by in some areas by militants (naxalites) and in others by conflict over water;
the growth of organised crime and corruption;
increasing 'communalism' (loyalty and commitment to the interests of religious or ethnic groups rather than to society as a whole);
a growing general government deficit; and,
the potential future impact of HIV/AIDS.[83]

Addressing social exclusion; reaching the poorest

43. Whatever India's future economic prospects, economic growth cannot be the only means of tackling India's poverty. Though important, economic growth is not a sufficient condition for the alleviation of poverty. As DFID's Chief Economist, Adrian Wood, observed in a recent paper "How much poor people benefit from a given rate of growth depends on what happens to the inequality of income distribution."[84] DFID acknowledged to us that much more needs to be done to ensure that India's model of growth is poverty reducing. Despite the reductions in income poverty which have been achieved in India, levels of extreme poverty and social exclusion remain high.

44. DFID rightly sees social exclusion as one of the major obstacles for rapid poverty reduction and human development in India.[85] In an attempt to address the needs of socially excluded groups in India, DFID has sought to promote their 'voice' in policy making and implementation. Commenting on the issue of social exclusion, Hilary Benn told us:

Strategies to promote the voice of the poorest groups consist mainly of attempts to develop the capacity of civil society to facilitate poor people's participation, often through the creation of self help groups and other informal political structures. Research has questioned whose voice is really amplified by such strategies, however. In Kerala we heard that while the poor took part in the participatory activities promoted by the State's strategy of decentralisation, the middle class did not, and the very poorest, landless individuals remained 'hard to reach'. John Harriss has argued that in many cases participatory strategies promote the voice of the lower middle classes rather than the poorest of the poor. Harriss contends that the voice of the poorest is heard most effectively through traditional political channels. As these are often riven with patronage and corruption, it would be difficult for DFID to contemplate working through such channels. We urge DFID to give careful consideration to the question of whose voice they are promoting through their participatory work on social exclusion, and what policy influences they are therefore facilitating.

45. As well as promoting the voice of socially excluded groups in policy making and implementation, DFID has begun to consider the issue of social exclusion within its own programmes. DFID told us that it has undertaken analysis of the extent to which its existing programmes address the issue of social exclusion, at central and state-level, notably in Orissa. DFID staff in Orissa told us that they were about to undertake a 'gender audit' of their programmes and projects. We anticipate that this exercise will be useful in refocusing the Orissa team's activities. We recommend that gender and social exclusion audits, or similar exercises, are undertaken throughout DFID's India programme on a regular basis, in order to maintain DFID's focus on these issues. We hope that such analyses will help DFID to develop its own "listening skills", enabling it to become more receptive to "voices from below".[87]

46. DFID has also begun to take greater account of social exclusion within the new programmes it has developed. The Child Environment Programme, which DFID is implementing with UNICEF, specifically targets SCs. The District Primary Education Programme, which DFID supports, has a budget line explicitly allocating resources to SCs and STs, and the SSA places emphasis on targeting socially excluded groups. Health programmes such as the District Health Management & Sector Reform Programme in MP, and the National Reproductive and Child Health strategy have both emphasised targeted measures for SC and ST groups. It is a positive sign that DFID has begun to include components targeting socially excluded groups in its projects and programmes. We saw little evidence of the impacts of such initiatives, however. DFID must closely monitor the success of these programmes in reaching the poorest and most marginalised people.

47. Witnesses generally welcomed DFID's current efforts to work on social exclusion but pushed for the Department to seek new and effective ways of working against social exclusion within all aspects of its work in India. The Dalit Solidarity Network UK said in their memorandum for example, "DFIDI is becoming more focused on the most marginalized groups, although we would argue this should be done more quickly. It is important to engage with civil society, but also to challenge state and government authorities over caste discrimination."[88] We agree. It was evident to us that DFID's work on social exclusion has been constrained by the approach of its main partner, the GoI. In spite of the GoI's policies and programmes since Independence, social exclusion remains a core reason for persistent poverty in India. The GoI's approach to social exclusion is more developmental than political; the focus being on the poverty of socially excluded groups rather than on the structural violence and infringements of civil liberties which reinforce their marginality. DFID seems to have been unable to have much influence on the discourse that frames the government's approach to socially excluded groups. We saw no evidence that DFID has found a way to work with the GoI which ensures a focus on socially excluded groups. We encourage DFID to increase its efforts to raise the profile of social exclusion and inequality issues with the GoI.

48. One of DFID's initiatives has been to promote 'rights based' approaches to social exclusion by providing support to civil society groups. Many SC groups are, however, not registered through the official channels that would enable them to receive foreign funding. We encourage DFID to increase the relatively small budget currently allocated to work with civil society groups representing socially excluded groups.

49. DFID told us that "Equity is a cross-cutting theme for DFID's India programme" and that "Social inclusion and gender issues are now mainstreamed into all our projects and programme designs and implementation."[89] Though important, we think that DFID's strategy of mainstreaming gender and social equity throughout its India programme does not give sufficient weight to the significance of these issues. We are concerned that DFID's 'mainstreaming' approach may risk the Department losing focus on the issues of social exclusion. This is a particular risk with DFID's move away from project approaches and towards macro instruments like Centrally Sponsored Schemes (CSSs). CSSs are broad instruments which enable DFID to redistribute resources to certain sectors but they lose the specificity of context which is vital for effective analysis of social exclusion issues and impacts. We recommend that DFID makes addressing social exclusion one of the central objectives of its India programme.

Governance

50. We heard from many sources that issues of poor governance, including patronage, leakage and 'rent-seeking', impact negatively on the poor in India. Sundeep Waslekar told us that India's "extortion economy" was severely limiting entrepreneurialism and economic growth in India. He argued persuasively that administrative, political and judicial reform would be crucial for future economic growth. DFID told us "Despite being a robust democracy, there are concerns about governance and the political will for sustained reforms in India."[90] N.C. Saxena has argued that deteriorating governance affects the poor in five main ways:

the poor are vulnerable to rent-seeking behaviour by police and other officials;
the GoI's social sector spending yields limited benefits, for example teachers and doctors sometimes fail to attend their places of work;
distrust of government increases and people are less willing to collaborate with government;
the accumulation of wealth by politicians and civil servants undermines the work ethic; manipulation is seen to be more rewarding than hard work; and,
poor governance ultimately impinges on economic growth, which harms the poor. [91]

51. There seems little evidence to suggest that dramatic improvements in governance, which have proven unattainable in the past, should be achievable now. Nonetheless, DFID is seeking to address the issue. Hilary Benn told us that India's governance problems will only be effectively addressed once the GoI and individual state governments become willing to tackle the issue:

The new UPA government does seem to have accepted that governance issues are major obstacles to the implementation of pro-poor policies in India. In his first address after taking office, for example, Manmohan Singh said "No objective in the development agenda can be met if we do not reform the instruments in our hand with which we have to work - namely the government and public institutions."[93] The success of the UPA government's intention to reform the system of administration "at every level" is widely seen as critical to improving the delivery of social and economic services to the poor, especially in rural areas. Such reform is also vital to narrow the growing gap between India's under-performing and best performing states.

52. During our inquiry we heard about some specific interventions intended to challenge corruption. Various witnesses told us that corruption is a particular problem in the state of Orissa.[94] We were therefore particularly impressed by the work of the Orissa State Vigilance Department. Mr. G.C. Nanda, Director of the Department, and his colleagues told us about their Department's anti-corruption activities, which include inquiries, both public and secret, and criminal prosecutions of corrupt public sector workers. The Vigilance Department has had some success in attracting media attention to its successful prosecutions and anticipates that growing awareness of the Department's work among Orissa's public is likely to have some deterrent effect. Mr Nanda told us however, that the Vigilance Department's work is significantly constrained by the physical capacity of Orissa's legal system. Indeed the backlog of cases pending in Orissa's trial courts is so great that 12% of those accused die before their trial is brought. The recent establishment in Orissa of eight new Special Judge Courts may go some way towards improving this problem, but the situation in Orissa highlights a broader point; that the political will to address issues of governance and corruption in India must be backed by sufficient resources.

53. The work on corruption which we saw in Orissa also drew our attention to the wider issues surrounding India's penal system. Sundeep Waslekar told us that there are currently 33 million court cases pending in the Indian judicial system. The prison population is swollen by this back log of cases; in 2001 71% of inmates were 'under-trials', waiting for their cases to be heard.[95] India's prisons are overcrowded — during 2001 their capacity was exceeded by 37% — and conditions are extremely poor. The problem of overcrowding has been exacerbated by judges' reluctance to grant bail and their unwillingness to explore alternatives to incarceration. Mr. Waslekar told us that the backlog in India's legal system was also contributing to the rise of organised crime in India. He told us this was because people are choosing to settle their cases through recourse to gangs of organised criminals rather than pursuing them in the courts. This, in turn, was contributing to the criminalisation of politics. Other witnesses expressed similar fears about the trend of criminals entering politics in India. Mr. Waslekar argued that a combination of judicial reforms to clear the backlog of cases, administrative reforms to reduce the discretionary power of the bureaucracy, and political reforms to limit the criminalisation of politics, could together double India's economic growth rate from 6 to 12%. The possibility that serious programmes of judicial, political and administrative reform could, of themselves, increase India's GDP by 6% — thereby dwarfing the impact of international development aid — emphasises the need for DFID to show UK taxpayers that its assistance to India is adding value.

54. The poor constitute a disproportionately large number of criminal defendants in India. According to Amnesty International India, these prisoners are often illiterate and unaware of the law or of the working of the legal system.[96] We think that DFID should involve itself in the issues of judicial and penal reform in India. In particular the Department could engage with the work of India's National Human Rights Commission, which has sought to emphasise the human rights of prisoners. We think that DFID should also encourage the governments of their focus states to push through judicial and penal reforms, and should commit funds to civil society organisations working on these issues.

55. Although small-scale individual examples of success in addressing governance issues can be identified, there is a broader need for systemic changes to India's political economy. DFID told us that the improvement of governance is an issue which is mainstreamed throughout all their programmes.[97] The Department's main strategies for tackling governance issues are to evaluate fiduciary risk before becoming involved in programmes, and to attempt to build effective monitoring and evaluation strategies into those programmes with which they engage. Representatives of UN agencies working in Orissa concurred with DFID's view that monitoring and evaluation must form a key part of strategies to reduce leakage. As Charlotte Seymour-Smith acknowledged though, however well DFID designs its audit tools, it is their implementation which remains the critical factor.[98] Hilary Benn told us "We are very clear about protecting our own money", the implication being that improvements in governance introduced by DFID's programmes might have demonstration effects elsewhere. We hope this is the case, although we have not seen any evidence that it is. UNICEF's representative in Orissa, Mr. Tom Olsen, told us that international agencies, including DFID, would be able to do more to challenge corruption if they collaborated over the issue. We encourage DFID to explore the potential benefits of collaborating with other donors and agencies to address governance issues.

56. Naturally DFID staff engage with government ministers at central level and principal secretaries at state-level in the course of delivering their programme of assistance to India. DFID told us that it is also making attempts to engage with Members of the Legislative Assemblies (MLAs) of their focus states, and with MPs at national level. Such initiatives appear to be limited and in their early stages, and we did not see any evidence of their outcomes. We think it is important that DFID develops relationships with members of India's state assemblies and national parliament, particularly in light of DFID's new 'Drivers of Change' initiative. The scrutiny undertaken by state legislative assemblies and India's national parliament form essential parts of India's system of governance. It is therefore important that DFID develops its efforts to raise the profile of development issues with MLAs and MPs.

PRIVATISATION OR 'DISINVESTMENT'

57. In line with GoI thinking, DFID has focused its money and attention on the key governance issues of inefficiencies in the public sector and huge subsidies in the para-statal energy sector. Although politically difficult, the closure or privatisation of loss-making public sector enterprises, and the reduction of subsidies to industries where the evidence of leakage is clear, are likely to be key to promoting pro-poor development in India.[99] Where privatisation has occurred in India, it has taken the form of 'fiscally induced privatisation'; the disinvestment of the Government's stake in public enterprises with no significant change in the way these do business. Disinvestment is a contested issue, and the progression of government policy on the issue has been hampered by the nature of coalition politics in India.[100] In sectors such as power there is a clear need for private international investment. Michael Lipton told us that, as yet, Indian politicians have not been prepared to take the tough decisions which might create the conditions to attract such investment.[101]

58. During our visit to AP we heard about the implications of reforming the State's power sector for pro-poor development in the State, and DFID's involvement in this process. This case illuminates some of the issues around public sector reform in India. For many years, economic growth in AP has been constrained by the poor quality service provided by its power sector. A significant proportion of the State budget has been consumed in covering the utility's financial losses, and in providing heavily subsidised power to farmers. This has squeezed out other spending, including that on poverty reduction programmes. DFID has seen reform of the power sector as important for sustained poverty reduction and growth in its focus state. The Department has therefore been keen to support structural, regulatory and governance reforms to improve access, availability and quality of power in AP. The GoAP sees DFID's technical assistance as crucial in encouraging competition through the creation of a multi-buyer sector in the electricity market. Some commentators however, have criticised DFID's power sector reform agenda in AP as being too radical and overly influenced by the World Bank's perspective.[102]

59. As part of its 'Vision 2020' modernisation strategy (discussed further in paragraphs 74-78), AP's last government pursued power sector reform strongly. Efficiency gains were rigorously pursued, reducing transmission and distribution losses from nearly 37% to around 26%, and achieving a 60% increase in revenue. Despite rising electricity prices and strong public feeling against reforms, the new GoAP, elected in 2004, said that it would continue to pursue efficiency gains in the electricity sector. The GoAP's pursuit of this reform was hampered however, by its fulfilment of a manifesto commitment to provide free power to all farmers. The GoAP explained this populist policy as a "much needed relief measure due to extremely hard drought conditions (and resultant indebtedness) prevailing in the State which were leading to mass suicide by farmers."[103] We spoke to the Energy Secretary who was keen to play down the policy's cost. He told us that there was little difference between the subsidy previously given to farmers (who paid only 0.36 rupees per unit, in comparison to the industry cost of 4 rupees per unit), and the provision of free electricity. Agricultural development during the last decades, however, has presupposed the availability of free power for new electrical bore wells, and the new policy has put a strain on supply. Towards the end of 2004, it seemed that the GoAP had begun to realise that the provision of free power might be operationally and financially unsustainable. Press reports suggested it was reviewing its subsidy.[104]

60. The dilemma for the GoAP has been how to restructure its electricity industry, to build generating capacity and attract FDI, without alienating a major section of its electorate. The dilemma for donors is whether to continue providing assistance to power sector reform in AP, now that confidence in AP's reform process has been undermined by the actions of the State's newly elected government. The World Bank withdrew its financial support from AP immediately after the GoAP announced its new policy of 100% subsidy. It is now considering whether to reinstate its financial assistance if the subsidy is withdrawn. In January 2005 the GoAP announced a number of modifications to its power subsidy policy. These were designed to limit the benefit of free power to poor farmers and also provide incentives to reduce the demand for power.[105] The revisions are welcome but DFID will still need to assess whether power sector reform in AP is making sufficient progress, and having sufficiently pro-poor impacts, for the Department to continue allocating the resources to provide technical assistance to the programme.

The role of trade and the private sector

61. Over the past two decades, the growth of India's economy and reductions in its levels of poverty have been associated with the opening of its markets. This has been reflected in the doubling of India's trade to GDP ratio, from an average of 15% between 1980 and 1989 to around 30% in 2000-2001.[106] Through the dynamism of its private sector, India has established strong comparative advantages in IT and IT-enabled services, biotechnology and the production of generic pharmaceuticals. These developments, which seem set to continue, are likely to have positive impacts in terms of growth and poverty reduction. The opening up of India's economy has not had beneficial impacts in all states, however. In Kerala for example, some commentators have suggested that FDI and technical know-how are by-passing the State.[107]Even where the opening of markets has had beneficial impacts, these may be constrained by issues of governance, and by policy, regulatory and infrastructural constraints. DFID told us that it sees the removal of such constraints as a high priority for poverty reduction in India.[108]

62. One sector in which India has emerged as global leader is that of Business Process Outsourcing. The loss of jobs resulting from outsourcing to India and other developing countries has become an issue of increasing concern among trade unions in the UK.[109] HMG has acknowledged however, that outsourcing is a business driven strategy which enables UK companies to remain competitive.[110] The trade body for the Indian outsourcing industry, the National Association of Software and Service Companies (NASSCOM) argued in their memorandum to the Committee that outsourcing can be a 'win-win' relationship for the UK and India.

63. NASSCOM also told us that "Whilst aid is important, the potential mutual benefits of trade between the UK and India dwarf the impact of any government assistance."[111] We agree, and were therefore encouraged to hear that DFID is engaging in trade issues by working with other agencies which have a comparative advantage in the sector. For example, DFID is undertaking a project with UNCTAD (the Pro-poor Globalisation Support Fund), to provide the GoI with analysis on maximising the pro-poor impacts of trade and globalisation. Although we support DFID's involvement in such projects in India, we note that UK companies which source goods and services from India also have a significant role to play in promoting the interests of India's poor. Programmes such as the Ethical Trading Initiative demonstrate that UK companies are increasingly acknowledging their responsibility to trade ethically, and to take account of issues such as child labour and the environment. We encourage DFID to work with UK companies to help them maximise the pro-poor benefits of their engagement with India.

64. DFID told us that India's private sector is becoming more proactive in addressing the issues of poverty and development,[112] and that DFID has proposed a project (which is yet to be approved by the GoI's Department of Economic Affairs), to support and encourage the private sector to undertake activities that will impact positively on the MDGs.[113] In UP we heard about DFID's collaboration with the Small Industries Development Bank of India (SIDBI) to build capacity in India's microfinance sector. We are pleased that DFID is attempting to develop initiatives which will encourage India's private sector to maximise the pro-poor impacts of its activities, and encourage it to continue doing so.

The role of remittances and the Indian diaspora

65. As we discussed in our recent report on migration and development, internal migration is common in India. Temporary and permanent migration have long been used by poor people as strategies to cope with seasonal changes in the availability of employment.[114] International migration also has significant impacts on the lives of poor people in India. In the State of Kerala, for example, migration has been an important safety valve for the State's well educated population. We were told that remittances from non-resident Keralites working in the Gulf make up nearly one quarter of the State's income. Migration creates problems of its own, however, We were told of the health problems of migrants returning to Kerala, and the mental health problems of women whose husbands were abroad.

66. The 23m. NRIs worldwide have assets estimated to amount to roughly one third of India's GDP.[115] According to the Reserve Bank of India, India received $18.2bn. in formal remittances during 2003. This figure represents 3.5% of India's GDP, almost ten times the total overseas development assistance which the country receives. Informal remittances, transferred through the 'hawala' mechanism, are even more significant. DFID told us of research which found that "informal, pre-9/11 remittance transfers may have amounted to ten times formal remittances, falling to around five times formal remittances post-9/11. This suggests some $50 - $100 billion transferred into India by informal mechanisms."[116] The GoI is already taking steps to encourage NRIs to increase their involvement in India; in 2004 it created a new Ministry of Non-Resident Indian Affairs, and there is currently a dual nationality bill before the Lok Sabha.

67. The developmental impacts of the funds remitted to India are hard to assess. Remittances are not evenly distributed socially or spatially in India. The poorest Indians rarely benefit from remittances as they lack the seed capital to migrate in search of better-paid work in the first place. The poorest individuals and areas are therefore rarely in receipt of remitted funds. Nonetheless, DFID told us that they see NRIs as an important catalyst for development in India and "a significant source of finance and ideas."[117] Although others we met during our visit saw NRIs as unreliable, and were therefore sceptical about the role they might play in India's development, we encourage DFID to work with NRIs and South Asian diasporic organisations in the UK, in order to maximise both the level of funds remitted to India, and the pro-poor impacts which those funds have. Broader work to improve India's investment climate will also be necessary if NRI capital is to be attracted to India.

78 Q 5 [Dr Michael Lipton CMG, University of Sussex]. Back

79 Meeting in Delhi with Mr Sundeep Waslekar, Strategic Foresight Group. Back

80 Edward Luce, "Singh makes reform of government his priority", Financial Times, 25 June 2004; Edward Luce and Ray Marcelo, "Attack on India's 'diluted' employment bill", Financial Times, 8 December 2004. Back

81 Q 28 [Mr David Loyn, BBC]. Back

82 Meeting in Delhi with Mr Sundeep Waslekar, Strategic Foresight Group. See also, Quentin Peel, "India's terms of engagement" Financial Times,11 November 2004. Back

83 World Bank, India Country Brief, September 2004. Available at http://www.worldbank.org.in/. Back

84 Adrian Wood "Making globalization work for the poor: the 2000 White Paper reconsidered", Journal of International Development, Vol. 16 (2004) pp. 933-937. Back

85 Q 74 [Dr Charlotte Seymour-Smith, DFID India]. Back

86 Q 172 [Rt Hon. Hilary Benn MP, Secretary of State for International Development]. Back

87 Ev 101 [Dr Michel Pimbert memo]. Back

88 Ev 97 [Dalit Solidarity Network (UK) memo]. Back

89 Ev 56 [DFID memo]. Back