The Future of DFID's Programme in India - International Development Committee Contents

2  Should the DFID India aid programme continue?

    The scale of the poverty is immense in India. The scale of the challenge is immense. That is why we walk this last mile with them. I think that what India is doing, in terms of its pro-poor policies, is extraordinary, and highly effective. We were able to reach the conclusion that now would not be the time to end our programme.[48]

    It is the scale of the poverty in India that is so very striking. There are seven-and-a-half times the total population of the United Kingdom, who are living in India on under 80 pence a day. [...]It does underline the extent to which, if you are seeking to tackle poverty around the world, India is central to that. If you want to achieve the MDGs, India is absolutely central to getting anywhere near doing so.[49]

17. Few doubt the extent of poverty in India described by the Secretary of State and in the last chapter, or that the MDGs will not be met globally if they are not met in India. The poverty statistics in some states are comparable with many developing countries. For example the state of Bihar with a population of around 100 million has a per capita income of $321 a year; in comparison, Ethiopia, which is likely to be the biggest recipient of UK aid in 2011, has a population of just over 80 million and a per capita income of about $330 per head.[50] What makes Bihar different from Ethiopia however, is that it is part of a much larger country with an average per capita income of $1,170, or more than three times as much as Bihar's. The Government of India might redistribute more income from richer to poorer states, to help development in places like Bihar. This is not an option for Ethiopia.

18. The evident poverty in many parts of India is not considered a sufficient justification for the aid programme by everyone. A range of arguments have been made for ending UK aid, namely:

  • India is a middle income country with a prosperous middle class who could afford to pay for programmes to alleviate poverty;
  • India is spending large sums of money on a range of projects such as its space and aid programmes which ought to be spent on pro-poor policies for its own people;
  • The level of corruption is such that little money gets through to the poor;
  • UK aid to India is so small in comparison to Government of India and state spending that it cannot make a significant difference; and,
  • The money would be better spent in other countries.


19. We questioned the Secretary of State about these points. He argued that the Indian people were paying substantial taxes:

    I think that, as India has become wealthier, the extent to which they have sought to use their own resources in tackling poverty is awesome. While income tax has increased [...], they are now putting 30% of their budget into health and education and rural development. [51]

The amount collected of revenue from direct taxes (income plus corporation) increased on an average by over 25% (between 2004-05 and 2007-08) until the global crisis hit India in 2008-9. The revenue from direct taxes increased from £22.5 billion in 2005-06 to £42 billion in 2007-08 and are estimated to go up to £75 billion in 2011-12.[52]

20. Although only 3% of the population (35 million) earns enough to pay income tax—chargeable on incomes over £2000 per year—income tax was 16.5% of total government revenue in 2009-10. Total tax (income, corporation and other taxes) was 17.7% of GDP. [53] The comparable figure for the UK is around 39% of GDP. However India's tax to GDP ratio is similar to that of China, and higher than that in its neighbours Bangladesh (8.5%) and Pakistan (10.2%). DFID told us a person earning £10,000 in the UK would pay approximately £352 in tax per year. The same income in India would incur a tax bill of approximately £1,558.[54]

21. Andy Sumner, of the Institute of Development Studies, explained that in large middle income countries such as India with huge pockets of poverty it would be difficult to raise sufficient funds to end poverty through taxation alone. He discussed research by the World Bank which asked:

    What kind of marginal tax rate would you need on the rich [...]to end poverty in developing countries? Two interesting things come out of that. First of all, there are some large middle-income countries with very large pockets of poverty: India, Nigeria, Pakistan, China. These would need marginal tax rates that are far too high to even conceive of going down that route, let alone taxation systems in developing countries and the various issues it raises about the capacity to collect that revenue. There were a number of smaller middle-income countries that nevertheless have poor people and could raise taxes. Indonesia was listed: it only needed a marginal tax rate of about 8% in order to end poverty in Indonesia.[55]


22. Government of India spending has led to real improvements in public services as demonstrated by the significant increase in the number of children enrolled in school. The Secretary of State stressed the scale of expenditure by the Government of India and Indian states:

    Their spend on health and education has doubled in the last six years. The statistic that I find most striking is that over the last six years, India has got 60 million children into school. It is an absolutely remarkable achievement.[56]

23. The cumulative cost of the space programme is $6 billion since it began in 1962.[57] It does fulfil a defence purpose. However it also delivers important socio-economic benefits including the provision of satellites, mapping, weather patterns and flooding patterns.[58] In response to questions about the space programme we were told about its practical advantages for Government:

    How does the Minister for Education identify whether a school has been built for which he is about to pay? The answer is that the satellite programme assists him in that.[59]

Moreover it is not unreasonable, given its geopolitical situation, for India to have a credible defence programme which includes investing in a space programme.

24. On the subject of India's aid programme it was argued that there were situations in which India had particular expertise, which were valuable to other developing countries, for example irrigation techniques.[60] India's assistance is mainly in the form of technical cooperation to its neighbours.


25. There is corruption in India, as many senior figures in India recognised. In Bihar we visited a scheme run by the World Bank where a women's empowerment scheme had led local women to take over the Government food distribution scheme in their village because of corrupt management. The new Bihar Government readily admits the existence of corruption and acknowledges that it was endemic under the previous administration.[61] DFID is funding consultants who are drafting a law for the Bihar Government to ensure that public services, such as the issuing of driving licences, are provided within a certain time—delaying the issuing of such documents is a traditional way that public officials demand a bribe. Text message systems have been established so that the state Government can receive instant reports from remote areas about public services such as the attendance of teachers at school. The Secretary of State claimed that DFID was rigorous in ensuring UK aid was not lost through corruption, stating that it had a 'zero-tolerance' policy.[62]


26. The key questions about UK aid are whether the money makes a difference and whether it would be better spent elsewhere? In this Report we have focused on the first question and whether DFID spending has directly contributed to poverty reduction and the achievement of the MDGs. We quickly realised that one of DFID's most useful contributions was demonstrating successful approaches which could be replicated. The Bihar Government informed us that proposals arose for excellent projects, but the Government of India schemes were not sufficiently flexible to provide the funds for them. This is where DFID stepped in. DFID also provided technical support to state Governments. In Bihar we were told that this technical assistance was a valuable additional resource for the state. The Secretary of State emphasised DFID's important catalytic role:

    Above all, we hope that British expertise and technical assistance, the power of demonstration, the work of piloting, demonstrates on the ground something that really works and can then be significantly scaled up by Indian taxpayers.[63]

27. India has a large and growing economy and its spending on pro-poor policies has increased. The Government of India is increasing its tax revenues and this will enable it to do more to end poverty there. Its middle class, though small, is paying taxes. Although India has a space programme, this has important socio-economic benefits including mapping weather patterns and flooding, both of which can assist development. Moreover India needs a credible defence programme and satellites may be part of this. India suffers from corruption, but in parts of India where DFID has focused its work, for example Bihar, the state Government has made a serious effort to reduce corruption. DFID is also assisting this. Despite corruption, money does get through to services, as the increase in school attendance rates demonstrates.

28. Given current high levels of poverty in India we agree with the Government's decision to maintain an aid programme in India until 2015 provided it can make a difference. Not every DFID project currently does this and DFID must be more rigorous in its choices over the next four years, funding only projects which have a clear development benefit and which national or state governments would not otherwise fund. DFID rightly focuses on catalytic, demonstration projects which can be replicated and scaled up. This approach should continue. However, some aspects of the programme should change and we now consider what these changes should be.

48   Q 206 [The Secretary of State] Back

49   Q 207 [The Secretary of State] Back

50   World Bank 2009. Back

51   Q 207 Back

52   Information from DFID Back

53   DFID, Income tax: comparing India and UK, March 2010 Back

54   The purchasing power parity (PPP)equivalent would be an income of £35,000 in India incurring a tax bill of around £5454.  Back

55   Q 5 Back

56   Q 210 Back

57   Information from DFID Back

58   Q 207 Back

59   Q 207 Back

60   Q 155 Back

61   The Government in Bihar took power in 2005 Back

62   Q 235  Back

63   Q 258 Back

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Prepared 14 June 2011