Saturday, May 1, 2010


The Economist reported on a big problem in Indian society. Millions of poor people are considered criminimal by tradition. They are part of tribes that never really made it in society, not even after the caste system was OFFICIALLY abandoned. The problem is first of all that there is a difference between officially ending a bad practice and what DE-FACTO is going on in society. The second is - and that is something a lot of foreign observers fail to mention - we are talking here about a huge country with more than a billion inhabitants and an economy that is growing at a rapid pace, but started from little more than scratch. Poverty is gradually but slowly becoming a lesser problem in India. However, income distribution is also more skewed now which translates into things sometimes looking worse than they used to be, even when they aren't in absolute terms.

The Indian Caste System
Still unofficial reality for many
The Dalit or Parya group is still large
The top-level rank of Academics is the other side of the story, 
something in which India differs quite a bit from most other nations where business men gain more respect


From a human capital point of view the world's biggest democracy - because that is also India! - is a remarkable nation as well. You wouldn't expect a developing country that is still struggling on a de-facto basis with the remains of the caste system to be a global technology leader as well. But through the system of Indian Institutes of Technology and Management (world class education) and other top universities, and in combination with its traditional respect and admiration for science and teaching (actually something that can be explained by the caste system!) India has become one of the still few Emerging Countries that is not simply producing growth through available commodity bases and/or cheap labor. 

It is more complicated: when qualifying its 'human capital' (as generated in the educational system) as a commodity, then we can indeed say that top-level expertise is available at internationally low rates. In other words: a knowledge-intensive variation of the cheap labor factor. And that is the basis of the Indian growth story.

And that makes it even stranger to see that it is about India that The Economist is writing stories like the attached one. Doesn't the country have the potential to solve problems like this at a quicker pace? The Economist reports that an official document with recommendation about what to do with the criminal tribe issue was presented to the government in 2008, with the latter still not having replied to it. Time moves at a slower pace in India, as people who enter the country for the first time will notice (e.g. when buying gas at a gas station or when in a traffic jam). So things are changing but don't expect Western pace.

This is not to say that we should underestimate the problems and not criticize the country. It cannot be that in modern times total tribes are stigmatized in a way that is almost crooked in itself when knowing that economic progress does create opportunities to do something about it. And to be honest: what struck me most in the article was the thing we could read between the lines. In India about 25 percent of parliamentarians is facing criminal prosecution. In other words; the ones who should do something about the issue aren't really doing much better as a group. Corruption is still a huge problem in one of the world's largest bureaucracies. And as long as corrupt government officials - especially at lower branches within the administrative organization of the country - hold an interest in maintaining the status quo things will move slowly.

Growth in the private sector is therefore probably the 'quickest' way out of this terrible situation. But it will be a matter of years, maybe decades before people in those tribes will really feel a difference. But the fact that India has been able - all these years - to remain democratic irrespective of issues like these is something that should give us hope that low speed change is not falling back into stagnation or even an explosion in this case. Investors shouldn't therefore translate The Economist's story in unnecessary worries. However, also don't overweight the country after its 83.97 percent return over the last year (in USD terms) and 14.97 percent annualized return over the last 10 years. India did actually do a better job over the last 10 years than China when it comes to stock returns, something that most people don't seem to acknowledge.

We are not negative about India, but be aware that the next phase of growth will have to be directly related to reaching out to the poor and development of their educational skills.  

India's challenges in its next growth phase will be tough

Reason: the dichotomy between its admiration for science/education on the one hand and the still existing neglect of the large masses in the lower ranks of society on the other

The problem is therefore - when India wants to continue its growth record - what will dominate? The strong admiration for science/education/knowledge or the neglect of the lower levels of society. India will never be able to make it as a pure cheap labor society, as it is in that respect already faced with tough competition from other parts of Asia. Human capital was and is the story. India does therefore have to reach out and create a system that doesn't only pick out the brightest minds, but one that also increases the level of basic education for the rest. If it succeeds, India will not just remain a technology giant but become an even bigger one. MIT's International Review (Spring 2008) issue presented an interesting analysis by three scholars of Indian descent that addressed this matter, concluding that huge investments in primary school education and a standardized curriculum quality at that level are what is probably more needed than 'sexier' focus on the IIT (Indian Institute of Technology), IIM (Indian Institute of Management) and top university offerings. Even the big technology firms like Infosys will benefit. Due to growth and a focus on technology India cannot afford to leave people out of this rat race for knowledge: it is simply to big for a niche approach that focuses on top science.

Click here for the original report from The Economist


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