Should the UK Still Give Aid to India - Literature review Example

Macro & Micro Economics; Should the UK Still Give aid to India? Background information According to Roberts, Findley and Hawkins (2011), India is seventh largest country having a population of over 1.2 billion people. The country is the second - most populated in the whole world. The country is located in South Asia, and its governing system is considered to be the most democratic in the world with very minimal instances of corruption and undue influence in leadership. The country attained sovereignty in the year 1947 from the Great Britain. Due to the country’s democracy, it is diversified in culture, ethnic groupings, languages and climate (Easterly, 2007). India falls among the developing countries, but its economy has been on the rise thereby raising the Gross Domestic Product (GDP). However, it is noted that most parts of the country, there is widespread of poverty, infrastructural challenges, rampant sexual violence such as rape cases, there are parts of the country that experiences high inequality rates in terms of resources reallocation (Roberts, Findley and Hawkins, 2011). This has therefore led to the imbalance development and inequitable distribution. On the social lives, India has very poor sanitation services and thereby exposing the young children to bacterial infections and malnutrition (Burnside & David, 2000 p. 851). Maintaining a clean environment is a challenge due to the high population in the country, hence the cause of the poor sanitation where wastes are carelessly damped. There is also high dependency ratio among the Indian households; this thereby calls for the foreign aid to help maintain the ever growing population and improve the economic status of the nation. Arguments on United Kingdom’s Aid to India The United Kingdom has been on the forefront in providing foreign aid to India, which is a developing country. The approximated annual foreign aid from UK amounts to about £280m. There has been much argument in the UK’s government on the aid being advanced to India the reason being that India is a fast growing nation and its economy is rising (Tony & Fnn, 2005, p.4). Therefore a section of the MPs have the perception that, according to the economic reports, India should be in a state to meet its expenses, both the recurring expenses and the development expenses because of this, a section of the MPs has the view that India should stop providing aid to the country, and instead use the funds for domestic development (Easterly, 2007). There is another argument that logically India’s economy is growing. But compared with the current increase in its population, the population rises faster than the rise in economic growth (Roberts, Findley and Hawkins, 2011, p. 1998). This, therefore, gives a challenge to maintaining the needs and demands of the ever growing populace alongside meeting the development of the country (Anderson, 2004 p.22). The high population in the country increases the recurring expenditure that must be met by the government. Since recurring expenditure earns no income to the country, the country has to be depending on either borrowing or foreign aids to support its self (Deepashree, 2006). This, therefore, illustrates the reason the Indian government still needs the foreign aid. Indian being among the developing countries and one of the highly populated countries, the country faces numerous development issues. This is because of the high cost of development and the high percentage of poverty among the citizens (Easterly, 2007). Since most people in the country live under a poverty line, according to the global standards, there is high dependency ratio in India (Burnside & David, 2000, p. 851). This high dependency ratio hinders development progress of the country as a larger percentage of the population is unproductive yet they consume. The overall GDP of the country becomes very low, hence very minimal development. This gives the need for the foreign and its absence may subject the country to international debts through government borrowing. India being a colony of the British, there are economic and political ties and attachment between the two countries. Therefore, despite the country having one of the fastest growing economies, UK still advances foreign aid to them. This foreign aid given to Indian is also used as a political tool by the British government who want to ever control their colonies (Deepashree, 2006, p.34). In a report given by the BBC on the situation in India that makes them need the aid, it revealed that a higher percentage of children, approximated to be about 1,6million, died due to the poor health care services and the sanitation services (Easterly, 2007). The UK government, therefore, argues that despite the country’s pressure to stop advancing aids to India due to their economic progress, there is the need to save the poor children that cannot access the medical attention. The UK government therefore still gives aid to the Indian government so as to bridge the gap that exists between the most vulnerable group of people and the social class. One of the big questions in the UK government has been, “why give aid to a country sending rockets to Mars?” This question has been in reference to India. It has been argued that there is no essence of giving aid of about £280million to the country while the country has so much disposable income taxes to launch a rocket to Mars at a cost of £45million (Roberts, Findley and Hawkins, 2011). In response to the concern, the UK prime minister, David Cameron argues that it’s their moral obligation to help the less developed countries to help elevate their economic status (Deepashree 2006, p.34). He highlights that despite the country having much income tax to launch rockets, the country is still less developed and therefore there is high rate of inequality in the resource distribution, thereby subjecting a larger group into poverty that is an economic and social problem (Anderson 2004, p.24). The UK government therefore points that, it is their moral obligation to provide foreign aid to the growing countries to make them stabilize their economic status so that they can reduce the amount of their international debt and the dependency ratio (Roberts, Findley and Hawkins, 2011). This aid also helps the country in improving their domestic industries using their domestic incomes and limiting the rate of imports. India still needs the UK aid to help improve their medication services so as to reduce the high rate of mortality, as was realized in the year 2014 where about 1.6 million children died (Anderson, 2004). Some of the money is also used to provide good sanitation services and facilities; this improves the cleanliness of the environment, hence reducing the instances of contracting disease-causing agents. The UK government argues that quitting at this moment, would lead to millions of innocent deaths that could have been avoided and prevented if funds are given (Easterly, 2007). On a recent report by the India’s finance minister, the government claims that they no longer need the UK aid but were self-sufficient (Easterly, Ross & David, 2004). They claim that according to their economic standards, depending on the foreign aid from UK gives the country negative publicity and exposes their poverty status globally. The UK government argues in order to improve the progress in the Indian market and economy, it is vital to encourage free trade between the two countries where the Indian can import UK goods at a lower rate, than that used by other developed countries (Easterly, Ross & David, 2004). This free trade can also be encouraged by the removal of tariffs and customs duties on the Indian exports to help them secure market in the foreign markets. This free trade will help the two countries learn from each other, their demands and supply structures. It will enable them what the other market needs and the level of expertise of the other (Burnside & David, 2000, p. 853). It is argued that India as a country has its foreign aid program that it advances to other countries that have low economic progress. It therefore lacks any economic logic for the UK government to advance aid to such a nation as they have much in income taxes to maintain their domestic social and economic needs and also help other countries that are in a crisis (Easterly, Ross and David, 2004). There are also some concerns raised by a section of UK leaders that, the aid advanced to India, much are lost in corruption and bureaucracy. The funds, therefore, according to a section of the leaders, are wasted and are not used for the intended purpose of which they are given. These negative claims, therefore, make the UK government to reconsider their actions of giving aid to the foreign country (Tony & Fnn, 2005, p.5). Macro and Micro Economic effects of foreign aid If a country grows its private sector and expands its revenue sources through the use of their natural resources such as the extraction of these resources and tapping of the natural energy, it helps reduce the international dependency (Easterly, 2007). The revenues obtained from the extraction of natural domestic resources in most developing countries have provided huge amounts of public revenues and proper tax administration. This helps reduce the high rate of dependency of the developing countries to the developed countries. In other instances, if the Low-income countries (LICs) involve in foreign direct investment, they stand a chance to improve their capital portfolio flows, and this also gives rise to the growth of export earnings. This scenario applies in the case of India. Proper extraction of their natural resources helps reduce their dependency ratio, and this is one of the major reasons for their rapid economic growth over the past decade (Anderson, 2004). This increases their capital inflows that they use to develop their domestic industries and also improves their infrastructural development. Output from the industries is then exported earning the country foreign exchange after attracting good market especially in the free trade areas such as that between India and UK. Improvement in the capital portfolio in the Indian government enables it to have much disposable income taxes, thereby being in a position to provide foreign aid to much less developed countries (Deepashree, 2006, p.38). Another way that the developing countries improve their economic status is through the wise use of foreign aid they obtain from the most developed countries (Burnside & David, 2000). The developed countries can provide aids for infrastructural development and communication systems. This foreign sponsored development help improves the incentives by the government that encourages both domestic and foreign investment. Increase in both domestic and foreign investments improves the supply side of the economy of the developing country through increasing the amount of output both for export and domestic market. Proper management of the Indian aid from UK has enabled the development of numerous industries that export their output to the international market, remitting foreign earnings that are used for domestic developments despite corruption claims, much of the aid has helped improve the economic status of the country (Anderson, 2004, p.23). This kind of investment through the incentives has also expanded the markets for the Indian goods both in their local markets and international markets. It has also enabled cheap production thereby cutting down the production costs for the domestic industries, hence improving their earnings. This, therefore, illustrates that UK should still not stop their aid to India but to continue providing the aid so that their economy can improve further to be at the same level with the already developed nations. The foreign aid received from foreign nations that are informed of human capital investments is also vital for the economic development of the developing countries (Tony & Fnn, 2005, p. 5). This are provided inform of healthcare services, proper sanitation, clean water for human consumption and domestic use and education facilities. These services not only improve the human development but also the overall economic growth of the Low-income countries. This is because they improve the labour force of the population thereby giving rise to a healthy population that can work efficiently in the industries to produce quality output that attracts foreign markets. The proper medical care services also help reduce the unnecessary mortality rates that can easily be avoided by proper living and eating the right kind of food (Deepashree, 2006, p.40). Through the aid that the Indian government has been obtaining from the UK, the country has been able to improve its human capital that is vital for a healthy and productive population (Anderson, 2004). A higher proportion of the population can now access healthcare service. However due to the high number of people in the country, not every individual is accessible to the quality healthcare. Most people in the country are also now accessible to the clean water thereby reducing the chances of contracting waterborne related disease (Tony & Fnn, 2005, p.2). The UK government should, therefore, continue to provide the aid to India to ensure that a very small percentage of the population is not accessible to proper sanitation, healthcare and education. The improved education system through the foreign aid has enhanced the skills of the individuals hence improving their productivity. In one of the articles by Craig Burnside (2000), the author highlights that foreign aid does exactly affects the economic growth of the country, however the impact of the growth is conditional on the policies of any particular country that affects growth of the economy of that particular country. The countries with low per capita income but have very sound economic policies and clear outline of their economic progress; usually benefit from the foreign aid policies (Deepashree, 2006). Proper use of the aid ensures that their economy improves and expands their production. Therefore for a developing country like India to benefit fully from the UK aid, and then it must have proper and sound economies policies. These point that they should only use the aid of productive investments that improves the economy and not in the recurring expenditure that earns no income such as the payment of salaries (Tony & Fnn 2005, p.4). It is important to note that, a modified neoclassical growth model helps illustrates the benefit to a developing country in case of an imperfect international market (Deepashree, 2006). This is because, under imperfect international market, the developing country will consider the foreign aid as an income transfer. Proper investment of this fund improves the economic status of the country while rampant corruption and embezzlement of the funds leads to poor economic status. Consumption of the funds also does not improve the economic growth of the nation (Burnside & David, 2000, p. 851). UK aid to India has been substantially used by the country in improving the economic status of the country. Improved economic growth in a country eventually improves the economic development which is illustrated by the general development of infrastructure, improved medical care, access to clean and safe water and proper sanitation by the population (Anderson, 2004). Proper use of the aid also increases the per capita income of the individuals, thereby improving their social standards and raising the living standards. The UK government should still not stop giving foreign aid to India because not every citizen of the country has access to the basic social amenities. Continued provision of the aid will help improve the different sectors of the economy (Easterly, 2007). Conclusion Over the years, there have been numerous debates on the effects of foreign in improving economic growth and development of developing countries. From the above illustrations, it is very evident that foreign aid greatly improves the economic status of the developing countries as noted in the case of India that receives the foreign aid from the United Kingdom. The essay shows that despite several arguments and a mounting pressure by the UK government to stop advancing aid to the Indian government, India is not fully developed and therefore still need the aid to help improve its economic status and eventual economic development. I, therefore, believe that the UK government should not stop giving aid to India despite their rapid economic progress because the country still faces myriad challenges due to its high population. Bibliography Anderson, D. (1 Jan, 2004), Cracking the AP Economics: Macro & Micro Exams, 5th ed. Oxford: The Princeton Review. Burnside, C. & David, D. (2000), Aid, Policies, and Growth, American Economic Review Journal, Vol. 90(4). pp. 847-868 Deepashree, G. (2006), Microeconomics and Macroeconomic Environment for Ca Pe I, 5th Ed. United Kingdom: Tata McGraw-Hill Education. Easterly, W. (2007), The White Mans Burden: Why the Wests Efforts to Aid the Rest Have Done So Much Ill And So Little Good. Oxford, Oxford University Press Easterly, W., Ross L., and David R., (June 2004), New Data, new doubts: A Comment on Burnside and Dollars Aid, Policies, and Growth; American Economic Review journal 94(3) Roberts, J. T., Findley, M. G. and Hawkins, D. G. (Eds) (Nov. 2011), Expanding Our Understanding of Aid with a New Generation in Development Finance Information; World Development, Vol. 39(11). Pp. 1891-2054. Tony A. & Fnn, T., (2015), Aid Policy and the Macroeconomic Management of Aid, World Development Journal, Vol.69, pp. 1-5 Read More