Friday, May 8, 2009

In response to article about India's informal economy

Original article here: India's Informal Economy and the Global Recession

Semil, it's a very interesting perspective on India, but I think it's a bit too optimistic. While the younger Indians are certainly hungry for the western idea of success, the older generations - the Sonya Gandhis and LK Advanis are running the massive, inefficient bureaucracy which, at the end of the day, is responsible for fiscal decisions in the country.

Moreover, this new middle class is seemingly uninterested in changing the status quo - just look at youth voter turnout in current and past elections. While they may be hungry, they seem somewhat complacent as well. And while more Indians are receiving access to better education, it's decent at the higher level, but isn't very good at lower, public, schools - all due to this "informal economy." Let me elaborate.

The fact is that much of this "informal" economic activity - black market - is untaxed - and even legitimate economic activity in India is heavily under-taxed. Added to that the fact that corruption is so rife in this country, you've got perhaps India's biggest issue - lack of investment in infrastructure - both physical and social.

Sure, India has been able to heavily leverage its colonial past - a good education system and a large pool of English speakers - to create this new middle class. But how long will it last? Certainly not forever. And with this informal economy choking-off legitimate government investments in infrastructure and education, India's growth is invariably going to slow ever more.

Added to above, you must consider changes in US laws for both H1B visas and outsourcing of jobs, and the fact that remittance from US to India makes up over 3% of the Indian GDP - more than two times the annual spending on education and health care by the federal government - and contributes to this informal economic activity - and the picture looks much more bleak than before.

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