//If India runs out of cash, will the West step in to help?

If India runs out of cash, will the West step in to help?

Should the world’s poor be given a bail-out to prevent mass unrest, or are many of them feeling rather better off than they did a year ago? These contradictory arguments are both suddenly in vogue.

The United Nations and the World Bank believe the former. They are lobbying for some of the billions allocated to saving the West’s banking systems to be diverted to prevent as many as 400 million people sinking into poverty across Asia alone.

Such a plan is necessary to prevent severe social unrest in more than 40 impoverished countries, especially among the tens of millions of migrant workers being forced back to their villages as jobs dry up in Asia’s cities, according to Ajay Chhibber, the head of the UN Development Programme (UNDP) in Asia.

A similar scheme has been proposed by the World Bank, which calculates that as many as three million children will die as a result of the economic crisis in poor countries by 2015 unless action is taken. The answer: a “Vulnerability Fund” to which each developed country would contribute 0.7 per cent of its stimulus package. That would equate to about $5 billion from the US Financial Stability Plan alone – equal to last year’s entire budget of the UNDP, the body charged with “making poverty history” — and less than five per cent of the sum given to the defunct insurance giant American International Group. This would be spent on social safety nets, infrastructure development and loans to small businesses.
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The argument is that this is in the developed world’s own interest — that rich countries will ultimately pay a bigger price if poor countries go to the wall, not least through security threats from failed states.

But there have been more opportune moments to ask the West for cash. The use of taxpayers’ money to assist developing nations is likely to meet fierce resistance in increasingly indebted developed countries. Old objections — such as the argument that corruption will eat up most aid before it reaches the needy — will be raised. On top of that, a number of influential voices are arguing that large numbers of the world’s poorest are likely to escape unscathed from the global downturn.

Take India’s 800 million rural consumers: most may be dirt poor and without bank accounts, but, according to Goldman Sachs, they are “raring to spend”. Since the banks seldom gave them credit the impact of the global downturn has been muted, the bank said in a recent report. Official figures underscore the resilience of the spending power of the poor. Overall industrial production has plummeted in India in recent months but the output of simple goods bought by poor families who have just a little extra cash, such as toothpaste and pressure cookers, has increased. Demand for services such as cheap transport and basic healthcare is also rising.

India’s mobile companies are adding record numbers of subscribers (RCom recently added five million in a single month), largely through penetrating untapped rural markets. These new mobile users don’t have shares, debts or property so are relatively isolated from world trends.

So are the World Bank and the UN wrong to demand bail-outs?

Not really. If the West is rediscovering Keynesian-style, state-led economic stimuli, India – fittingly for a self-proclaimed socialist republic – never forgot them. Public investment in rural infrastructure has accelerated under the Government’s Building India programme, in which about $7 billion will be spent on countryside roads, telephone connections, irrigation, power and low-cost housing this year. Another scheme, which guarantees poor rural families 100 days of employment a year and which has distributed $6 billion so far, is putting a few more rupees into the shallowest pockets — money that quickly finds its way into the wider economy. “If you want to get good value from government intervention, you target the poor,” Dr Subir Gokarn, of Crisil, the Indian arm of Standard & Poor’s, said. “And India has a lot of poor people.”

But India’s interim budget, which was presented this weeky, underscored just how much the Government has been forced to fork out to keep the rural population afloat. Government borrowing, previously estimated at about 3 per cent of GDP, is expected to double this year. The result is that India, for all the hoopla over its recent economic renaissance, is one of the world’s most indebted nations.

So the question now is, if India runs out of cash to keep its vast poor population afloat, will the West step in?

Rhys Blakely, February 20, 2009 Times Online, UK