Has the trickle-down theory failed to help poor in India?

Gunratna Sontakke
Sunday, 9 September 2018

The series of reforms undertaken with respect to the industrial sector, trade as well as financial sector aimed at making the economy more efficient.

The new economic reforms in the early 1990s, popularly known as, Liberalisation, Privatisation and Globalisation (LPG model) aimed at making the Indian economy as the fastest growing economy and globally competitive. The series of reforms undertaken with respect to the industrial sector, trade as well as financial sector aimed at making the economy more efficient. These reforms freed up India from many bureaucratic hurdles and red tape, providing the foundation for strong economic growth.

Due to the opening up of the Indian market for world trade, many multinational IT companies, automobile companies, electronics and fast-food giants like McDonald’s and KFC set up their manufacturing units or services in several cities in India. The inflow of foreign direct investment (FDI) increased. It was believed that these reforms will bring help to eradicate poverty in rural India with trickling down of economic growth to the people at the bottom of the pyramid of Indian society.

However, the trickle-down theory has failed to help the poor of the country. The benefits of growth have reached to the urban middle-class people only. The trickle-down theory argues for financial benefits to large businesses, investors and entrepreneurs to stimulate economic growth.

The underlying premise behind globalisation is that the transfer of wealth from the developed countries to the developing countries would eventually result in a scenario where those at the bottom of the ladder in the developing countries would benefit from the wealth flowing into their economies. 

The theory behind this is that if a billion dollars were invested in a country X, it would result in setting up of a manufacturing plant or a service sector company, which in turn would create jobs for the locals. Even after assuming that the jobs will increase the opportunities for the locals, there will be trickle-down effects wherein the new rise in incomes of these members of the workforce will be spent on consumer durables, houses, visits to hotels and malls, as well as employing those who are not part of the formal economy like launderers, security guards, domestic helps etc.

This is the trickle-down theory, which posits the view that wealth created at the top trickles down to the bottom of the ladder. This is the theory that has been used to justify neoliberal policies and globalisation and is the driving force for all entrepreneurial activities in countries like India.

For instance, the founders of the iconic Indian IT company, Infosys, believe that when jobs are created for the middle class or the educated, the process will also benefit the entire ecosystem of support services for these employees since they have to spend money on their basic necessities and everyday needs. Moreover, the creation of wealth will not be restricted to capital gains alone but will also benefit those who produce goods and services for consumption.

The effects of this trickle-down theory can be seen in cities like Bengaluru, Delhi, Gurgaon, Hyderabad, Chennai, Mumbai and Pune where the presence of multinationals and Indian service sector companies has led to a flourishing economy for the locals.

However, this theory is now being questioned as the trickle-down effects are now being held as negligible with those at the top earning more and more and those at the bottom earning less and less. The point here is that the widening income inequality has led to protests from those at the bottom since they do not see any marked improvement in their lives even when they support the army of educated and skilled employees of manufacturing and service sector companies.

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