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  • Writer's pictureShivaji Lokam

Why is India still a developing country

Updated: Jun 7, 2022

Why is India still a developing country even after 75 years had passed since the nation gained independence?

Why is India a laggard when it comes to Economic Development?

Countries such as South Korea, Taiwan and China were on par with India during the 1950s. In fact, South Korea was a poor country and had the same level of poverty and economic problems as India during the early 1960s.

Unlike the Indian economy, within fifty years, South Korea had transformed into a world leader in many high technology industries.

The Korean giants have become globally dominant companies and drive the industry they operate in.

Samsung, Hyundai, POSCO are heavyweights in technology, automotive and steel-making.

On the other hand, India remains as ever a developing nation with vast aspirations to become a modern developed country and a global economic power. But the nation is far behind its goal of becoming a high income country. India's GDP ranks among the top ten in the World economy but the nation is far behind in terms of per capita income, according to the United Nations statistics.

India's rival, China, is already an upper middle-income nation and currently the second largest economy behind the United States, a developed country. China's economic growth was by far the highest for any major country and also the longest.

But why has India failed to develop?

Ask any famous economist, or look up any economic development book, blog, or journal some version of the question why India has failed to develop.

The answers always are versions of one or more of these:

India suffers with corruption, high taxes, and regulation. India lacks Infrastructure, Manufacturing, and High-quality Education. India has legacy problems like democracy, institutions and overpopulation

India is not business friendly, lacks innovation and entrepreneurial spirit.

On the other hand, some economists thought if only we could discover how South Korea, Taiwan and China managed to develop rapidly, the so-called East Asian Miracle, we can apply similar principles to developing countries to help them grow.

Decades passed and millions of dollars spent on research but economists had failed to crack the Miracle.

The problem of economic development is much deeper. It is rooted in nature.

To understand, let's see what economic development looks like. Economic development means adding more wealth to the nation. More wealth comes from making new investment. That means building new factories, new housing, new vehicles, major infrastructure such as highways, railways, ports, and airports. But also, more factories to make the machinery and equipment needed to build all those new factories, houses, vehicles, and roads.

Rapid economic development means making those new investments every year but at a much faster rate for at least 30 years straight.

How much faster?

Well, let's explore the case of China for example.

Looking at 35 years of China's rapid growth starting from 1981 to 2015 all the way.

We find that China has made gigantic annual investments, from tens of billion US dollars in 1980s to trillions of US dollars in 2010s.

But it's not that easy. In order to make large new investments, countries need large amount of savings.

Well, let's look at China's savings during that same period. China had managed to create a high portion of its national income into savings, going from below 20% in the early 1980s to all the way above 40% in 2015.

Now, let's take a look at India's savings in comparison with China? India's savings rate pales in front of China.

India had to wait an entire half a century since the country became a republic to touch 15% savings rate.

Further, India's savings never went beyond 25% in its history.

But how was China able to save so much to make all those new investments. Economists never had an answer.

You see, the rich industrialised nations such as USA, UK, Germany, France have always had very low savings throughout their rise during the nineteenth and twentieth century. Any developed country today also has low savings rate as the norm.

The only major exceptions throughout history have been South Korea, Taiwan and China. The question is how those countries had managed to build so much savings while India had not?

India is not an exception, low income countries often struggle to build high savings. Economists point to their extreme poverty for the low national savings.

However, South Korea, Taiwan and China managed to eclipse past those low numbers and grew rapidly. So the economists are clueless.

The World Bank and the United Nations, non-profits, university research, and other organisations have tried to uncover the miracle but to no avail.

Anyway, discovering answer to that question will allow us to solve so many problems. Economists have tried for more than fifty years to find out how nations create savings but they came up empty handed.

The questions remain, can we ever crack economic development? How can a nation improve its national savings and investment?

How can a nation go from low-income, technology-poor to high-income, technologically sophisticated?

When we go back and check the average savings rate of the rich industrialised nations such as USA, UK, Germany and France, we see that their average rates over such a long period do not go beyond 10%.

Whereas the average rates of South Korea, Taiwan and China during their rapid growth period are 20% and above. China even boasts a breath-taking 30% savings rate from 1981 to 2015.

Nature doesn't allow jumps. Nature has placed limitations on what men can do. There has been an extraordinary development in economics recently.

It has been discovered that nature has capped the annual savings rate of a nation to just 10% of its national income.

Which means, a nation, for example, has 100 billion dollars in national income, it can create savings no more than 10 billion dollars-just 10% of its annual income.

Then how come South Korea, Taiwan and China managed rates above 10% for so long?

Well, it also has been discovered that a country can go beyond 10% through international trade.

A country simply has to export a lot of goods to foreign nations and use that exchange dollars to import capital goods.

A nation's total savings is nothing but total new investment. South East Asian Nations South Korea, Taiwan and China have implemented economic policy that incentivised exports, and also placed high import duties on consumer goods.

That meant that businesses can use the foreign exchange earned from exports to import machinery, equipment, raw material, etc. All three nations, South Korea, Taiwan and China have had massive exports, exporting a large part of their GDP to foreign nations, and used the export dollars to import capital goods.

We should, therefore, see a correlation between exports rate and savings rate.

Let's take a look at Taiwan. Taiwan's savings rate surged as their exports rate increased. Same goes for South Korea. And China.

It all started in the 1950s with Japan targeting exports to earn foreign exchange to import goods that they desperately lacked like oil, metal ore, and machines.

Neighbors Taiwan and South Korea followed Japan's economic policies. Likewise, China also later on.

Simple and straightforward solutions to their trade and investment problems helped Japan, South Korea, Taiwan, and China.

They all have engaged in international trade in a manner that allowed them to rack up higher savings rate astonishingly without the knowledge of doing it.

Economists struggled for decades to understand how they racked up high savings rates.

But today we know what nations have to do to create high savings rates.

Let's take a look at India.

After opening and reform in the 1990s, India began to see exports surging. Once exports rose, the capital goods it imported raised the nation's savings rate accordingly.

But India does not have an export target policy like other North East Asian Nations had. That is why its exports rate and savings rate are lagging China. And that is why India is still a developing nation.

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