Should DFID be giving aid to India?

I was just on the Today Programme to discuss Andrew Mitchell's aid spending in India.  I was debating a representative from Save the Children, a charity that receives almost £80m from governments around the world—including DFID—in the form of “development contracts” to run aid-financed projects in many countries, including India.

My point is fairly straightforward: India has demonstrated the miraculous results that can happen when the government acknowledges it isn’t suited or capable of delivering “essential” public services or running industry.  Since reforms that began as early as 1986 and then much more rigorously in 1991, a huge number of Indians have plugged themselves into the global economy and lifted themselves out of poverty.  Along with the Chinese reforms, India’s liberalisation and modernisation have been the single most effective anti-poverty scheme the world has ever seen. 

Unfortunately, the reforms still have a long way to go and there is much work to do: India is still an abysmal 133 out of 183 countries in the World Bank’s Doing Business Index and, as these rankings are average, they illustrate how much of the country is still being governed by the old regime of barriers to enterprise and growth.  The states with the greatest number of poor people—Bihar and Orissa, specifically—are still riddled with the bad old ways of monolithic public services and hardly any private sector competition.  Bribes to get the most basic of services, meant to be provided for free by the government, are commonplace.  Contracts are unenforceable; courts process cases at a snail’s pace and the verdict is usually bought before-hand anyway; simple exchange requires paying off all the government-sponsored middle-men just to operate in a local marketplace.  These are the barriers that prevent the many millions of poor Indians from lifting themselves out of poverty.

Liberalising markets and unleashing Indian growth has demonstrated that it is the most effective way to promote growth and development.  It is against this backdrop that the discussion about how much aid the UK should spend in India must be placed.  The not-so insignificant £300 million we spend every year barely registers on Delhi’s public finances, but it does provide an excuse for the provincial governments that receive the greatest support from DFID to delay implementing badly-needed reform.  By failing to address these barriers, governments in these provinces are tacitly responsible for the poverty that forces some of the worst living conditions on earth.

Of far more importance than the £300 million in aid is the £400-plus million invested voluntarily by British businesses into India every year and the £3.88 billion in net assets held by British companies in India.  Those investments are geared to make returns, but they also go to improving infrastructure, transferring technology, and creating badly needed high-value jobs for India’s massive workforce.  Not surprisingly, the vast majority of these investments go to India’s most productive provinces—including Gujarat, Punjab, Andhra Praddesh and Karnataka—which are also the provinces that have most effectively implemented liberal-minded reform.  Kick-starting growth and tackling poverty in other, poorer provinces fundamentally requires the governments of those provinces to follow in the footsteps of their more successful neighbours.

These fiscally-challenging times must mean that it’s time to move beyond the facile discussion about development.  We don’t have to spend money we don’t have to help: a more effective way to promote growth, trade and development in India would be to provide better incentives for British businesses to establish even better commercial links across the rest of the country.