So far, most answers -although all true- do not look at the root cause of the issue, namely governmental policy.

The main reason why India is a low-income country (and will be for the foreseeable future ahead) is due to a failure of Indian institutions to enact a series of painful but necessary reforms, namely:

1) Land reform

2) Export-promotion led industrial policy

3) Financial repression

1) Land reform

Lets first look at land redistribution: contrary to what most economists think, scale doesn’t always mean that production is more efficient. In the case of Indian land policy, the British left India with deliberately exploitative ones, where large-scale inefficiently run farms churned out cash crops like cotton, tobacco and whatnot. The sole purpose of the set-up was in the theme of revenue extraction, not value creation. Same thing with the infrastructure: railways where created only to export raw materials.

Redistributing land to small plot farmers on an egalitarian basis not only a) increases yields (due to farmers now having a direct incentive to produce more) but b) also creates an perfectly competitive environment that those of the micro-econ tribe have wet dreams about, c) creates the manufacturing sectors’ first customers (Suzuki, Honda and Yamaha all three started selling scooters to Japanese farmers before becoming the auto giants we know today) and d) and provides the state with the necessary foreign exchange for step 2:

2) Export-promotion led industrial policy

As competition creeps up amongst the farmers, they will start mechanizing their production further increasing yields and forcing other, less succesful farmers into cities, creating a huge pool of desperate (cheap) labor. Now, remember the FX gained from crops? Well, this will be used to buy from overseas vintage capital, used machinery. These imports of vintage capital allow these poor countries to compete with developed countries in terms of manufacturing. The government also leads in the meantime an active industrialization policy, that means protected markets and huge investment in R&D though public laboratories: Taiwan had the ITRI (Industrial Technology Research Institute), from which TSMC, the worlds largest semi-conductor foundry company was spawn.

“Asian Tiger” Governments also applied what we call “export discipline”: companies who do not export enough product good quality products overseas get culled and are forced to merge with larger, better performing companies (this is why in Korea you have the Chaebols and the Keiretsu in Japan!). In Japan's case, this was performed by the MITI (Ministry of International Trade and Industry).

Side note: Why manufacturing?

Because a) labour absorption capacity: High-productivity (tradable) segments of manufacturing can absorb immense labor because in contrast to services they are not usually skill intensive b) Productivity dynamics: Data shows productivity convergence in (formal) manufacturing appears to be unconditional and quite general regardless of period, region, sector, or aggregation. That means Indonesia and Sweden will both have same labor productivity in manufacturing in medium to long term and c) Tradability: We see higher-than-average productivity growth in a tradable sector of the economy. The tradable sector consists largely of sectors of the manufacturing industry. (Goods represent more than 70% of global trade) Developing nations have an extra hard time competing in tradable services because of their low human capital accumulation, so focusing on manufacturing is essential. To remain profitable, firms active in tradable sectors need to be dynamic and innovate, either to align costs of production with the prices that they can reasonably charge for their products, or by creating new products and carving out niches that allow them to gain some pricing power.

3) Financial repression

Now, an important concept you need to grasp is how the financial sector is structured in order for steps one and two to work: there comes financial repression. Stanford economists Edward S. Shaw and Ronald I. McKinnon coined this term. In short, Financial repression is “[… ] the methods for governments to increase tax income and domestically held debt”. This is done by keeping interest rate levels below that of inflation, effectively taxing the country’s savers. The upside is that cheap loans and credit products become available to borrow, which can lead to economic growth. As you guessed it by now, financial repression benefits banks who can now supply heaps of loans (read: increasing the available money supply). Of course, you also need to find ways to keep the capital within the country: currency controls, a state-owned banking system whose priority is to supply loans to domestic manufacturers and farmers…

In fine:

I’ve left out plenty of material here, but that is it essentially: Land reform, Export-promotion led industrial policy and Financial repression. The problem with India is that it opened up too late (1990’s), missing all of the industrialization opportunities and failed to reform land ownership (7% of the population owns 47% of all of the agricultural land). Add to that a liberalized financial system who’s objective is to make profits (be it inside or outside of India) rather than to industrialize the economy, and there you have it: a low-income country that will stay a low-income country for the foreseeable future.

Anyways, I hope this answers your question. If I have sparer time, I might link the necessary research papers.

Cheers,

India is the fifth-largest economy in the world, with a nominal GDP of $2.9 tr in 2019.

But 137th in terms of GDP per capita at $2,016 per year. I believe this number needs to go up.

The root causes of underdevelopment in most Third World countries are almost the same, India is not exception . Under development in India is as a result of many contributing factors which include poverty, illiteracy, overpopulation, corruption and lack of accountability. Overpopulation is one of the major causes of underdevelopment in India.

Overpopulation might be one of the simplest explanations. But please compare India and Japan.

• India　　Population　126 million　Surface 3.29 million km^2
• Japan　Population　 12.8 million 　Surface 0.378 million km^2

There is no big difference with regards to population density. We should seek deeper reasons for India's underdevelopment.

Heavy defense budget may help technological development of a nation. We must know statistical study on this aspect. Is there any good study?

Extremely skewed income distribution impedes economic growth, particularly in the growth phase when the growth of mass consumption goods was the driving force of economic development. Robert Reich in his Supercapitalism (2007, 2008) claimed that existence of thick middle class is necessary for mass production and consumption capitalism. If this is one of reason of the India's underdevelopment, the next question will be to ask why there are so steep income and asset disparities.

So far, most answers -although all true- do not look at the root cause of the issue, namely governmental policy.

The main reason why India is a low-income country (and will be for the foreseeable future ahead) is due to a failure of Indian institutions to enact a series of painful but necessary reforms, namely:

1) Land reform

2) Export-promotion led industrial policy

3) Financial repression

1) Land reform

Lets first look at land redistribution: contrary to what most economists think, scale doesn’t always mean that production is more efficient. In the case of Indian land policy, the British left India with deliberately exploitative ones, where large-scale inefficiently run farms churned out cash crops like cotton, tobacco and whatnot. The sole purpose of the set-up was in the theme of revenue extraction, not value creation. Same thing with the infrastructure: railways where created only to export raw materials.

Redistributing land to small plot farmers on an egalitarian basis not only a) increases yields (due to farmers now having a direct incentive to produce more) but b) also creates an perfectly competitive environment that those of the micro-econ tribe have wet dreams about, c) creates the manufacturing sectors’ first customers (Suzuki, Honda and Yamaha all three started selling scooters to Japanese farmers before becoming the auto giants we know today) and d) and provides the state with the necessary foreign exchange for step 2:

2) Export-promotion led industrial policy

As competition creeps up amongst the farmers, they will start mechanizing their production further increasing yields and forcing other, less succesful farmers into cities, creating a huge pool of desperate (cheap) labor. Now, remember the FX gained from crops? Well, this will be used to buy from overseas vintage capital, used machinery. These imports of vintage capital allow these poor countries to compete with developed countries in terms of manufacturing. The government also leads in the meantime an active industrialization policy, that means protected markets and huge investment in R&D though public laboratories: Taiwan had the ITRI (Industrial Technology Research Institute), from which TSMC, the worlds largest semi-conductor foundry company was spawn.

“Asian Tiger” Governments also applied what we call “export discipline”: companies who do not export enough product good quality products overseas get culled and are forced to merge with larger, better performing companies (this is why in Korea you have the Chaebols and the Keiretsu in Japan!). In Japan's case, this was performed by the MITI (Ministry of International Trade and Industry).

Side note: Why manufacturing?

Because a) labour absorption capacity: High-productivity (tradable) segments of manufacturing can absorb immense labor because in contrast to services they are not usually skill intensive b) Productivity dynamics: Data shows productivity convergence in (formal) manufacturing appears to be unconditional and quite general regardless of period, region, sector, or aggregation. That means Indonesia and Sweden will both have same labor productivity in manufacturing in medium to long term and c) Tradability: We see higher-than-average productivity growth in a tradable sector of the economy. The tradable sector consists largely of sectors of the manufacturing industry. (Goods represent more than 70% of global trade) Developing nations have an extra hard time competing in tradable services because of their low human capital accumulation, so focusing on manufacturing is essential. To remain profitable, firms active in tradable sectors need to be dynamic and innovate, either to align costs of production with the prices that they can reasonably charge for their products, or by creating new products and carving out niches that allow them to gain some pricing power.

3) Financial repression

Now, an important concept you need to grasp is how the financial sector is structured in order for steps one and two to work: there comes financial repression. Stanford economists Edward S. Shaw and Ronald I. McKinnon coined this term. In short, Financial repression is “[… ] the methods for governments to increase tax income and domestically held debt”. This is done by keeping interest rate levels below that of inflation, effectively taxing the country’s savers. The upside is that cheap loans and credit products become available to borrow, which can lead to economic growth. As you guessed it by now, financial repression benefits banks who can now supply heaps of loans (read: increasing the available money supply). Of course, you also need to find ways to keep the capital within the country: currency controls, a state-owned banking system whose priority is to supply loans to domestic manufacturers and farmers…

In fine:

I’ve left out plenty of material here, but that is it essentially: Land reform, Export-promotion led industrial policy and Financial repression. The problem with India is that it opened up too late (1990’s), missing all of the industrialization opportunities and failed to reform land ownership (7% of the population owns 47% of all of the agricultural land). Add to that a liberalized financial system who’s objective is to make profits (be it inside or outside of India) rather than to industrialize the economy, and there you have it: a low-income country that will stay a low-income country for the foreseeable future.

Anyways, I hope this answers your question. If I have sparer time, I might link the necessary research papers.

Cheers,

Miorcec De Kerdanet Aymeric

Bravo! This is a wonderful article with deep thought. Please write not only a book but a book that can be read widely by common people.

Are you an Indian? Or you get this deep insight from literature? I was amazed to know that this is your first comment in ResearchGate. Anyway, thank you for animating this discussion page by this deep analysis. I hope all other posts will be influenced by Miorec's post in a good way. I mean all posts keep the high quality of arguments as Miorec's.

Development I believe is best favored in free enterprise systems without obstacles to individual progress. In relation to India the caste system has been entrenched and is a big real obstacle. As freedom is emphasized the economies will respond helping the socio economic platform for progress.

Rapid population growth is the main reason because it marginalizes all development efforts of the government.

Well above all I would also like to add few more factors such as discrimination @sex, caste, religion ; lazy attitude ; rampant corruption etc. that's not allowing India to reach its full potential to grow.

Paul Reed Hepperly Arvind Singh Sadanand Pandey

I prefer to read more systematic and structural analyses like Miorcec De Kerdanet Aymeric . Have you ever read his comment? What is your opinion on it?

@Miorcec De Kerdanet Aymeric, it's a nice write-up and analysis. I'd like to add one information. A small state, West Bengal (capital Calcutta, now Kolkata) did enough improvement in agriculture due to effective land reform.

Hello.

I was invited to a congress in 2017 in India and I was surprised by two things. On the positive side, by the love and kindness of the people. On the negative side, by the lack of infrastructure even in tourist sites such as Agra, very close to the Taj Mahal.

I think that the important role that Hinduism and the caste system still play in the society is one of the things that hinder India’s development.

In other countries, both wealthy businessmen and political leaders are aware that the quality of life of the poorest classes must improve. However, in India, those who believe in the caste system do not take care of the poorest classes because they think they deserve it: if they have reincarnated in that low caste it is because in another life they did something wrong and have been punished . Therefore, the leaders do nothing to improve the situation of these people.

In addition, because cows are sacred and can walk freely anywhere, it is very difficult to maintain the infrastructure in hygienic conditions, because they defecate on any street.

Another important problem is the role that the "true" or "strong" believers, both in the Hindu and in the Muslim religion, reserve for women. I had a master's student from India and she didn't want to return to her country because her family wanted to arrange a marriage for her.

Lastly, conflicts between Hindu fanatics and Muslim fanatics are another big problem, which will only disappear when education becomes truly secular.

Although it is a book on Italy, Robert David Putnam's Making Democracy Work: Civic Traditions in Modern Italy (1993) may give some hints on the Indian problem. Putnam compares North and South Italy. South was once quite prosperous under the Kingdom of Naples but their human relations were mainly boss-henchman bondage. North Italy was more "functional" in the sense that each person interacted with clear contract and litigation was put in the jurisdiction. These differences made a big difference when the modern capitalist time came. Indian cast system was once one of effective social system but not adaptive to rapidly changing economy.

I agree with Miorcec De KerdanetAymeric. Thanks for your excellent insight.

Pollution from/each sectors has never allowed India to be developed. Grow is linear. Slope of development since India's independence is tan 45deg=1, not exponential.

Basanta Kumar Parida

The expression like "Slope of development ... is tan 45 deg" does not make sense if you do not specify the independent and dependent variable.

Yoshinori Shiozawa me is independent, development is dependent.

India is progressing so fast. I think the challenge India is facing is the number of population, the number of uneducated people and difficulties to improve their conditions, and other problems regarding systems used are too old. Any progress happening is diluted because of these significant challenges.

I recommend reading this book for more explanations

A Political Economy of the United States, China, and India: Prosperity with Inequality Kindle Edition

Thank you Samy Azer for recommending Shalendra D. Sharma's book. Yes, the U.S.A, China and India are developing due to or despite of Inequality. However, the significance of inequality in India may be different from the U.S.A and China.

In the case of the U.S.A, it grew faster when it was more equal. China before the Reform and Opening-Up had a very flat income distribution (if we neglect the urban/rural discrepancy). Introduction of market mechanism brought inequality but it was inevitable in a sense.

The case of India is rather unique, because its income and property distribution was skewed when it became independent. In this case, one may ask if the extremely skewed distribution of income may be hampering the economic growth. In particular, it is possible that bringing -up of the minimum income level may stimulate the faster economic growth.

In all cases, it is evident that we need more structural and in-depth analysis.

Thank you Yoshinori Shiozawa for your discussion and valid comments on this issue. I agree with your views. There are complex factors there that were inherited for years and not possible to change, as it is the case with most countries that were occupied by Britain. 

The book goes through these elements for those interested in more information.