[Volume VI | Quarterly Issue: 31st May 2009] Pdf File size
[Volume VI | Quarterly Issue: 31st May 2009] Pdf File size
[Volume VI | Quarterly Issue: 31st May 2009] Pdf File size
Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
THE<br />
INDIA ECONOMY RE<strong>VI</strong>EW<br />
<strong>2009</strong><br />
<strong>Volume</strong> <strong>VI</strong> | <strong>Quarterly</strong> <strong>Issue</strong>: <strong>31st</strong> <strong>May</strong> <strong>2009</strong><br />
www.iipmthinktank.com<br />
www.gidf.org<br />
MANAGEMENT OF<br />
DEVELOPMENT<br />
RETHINK<br />
EDIFY<br />
DELINEATE<br />
INSIDE THIS ISSUE<br />
Winds of Change<br />
Can We Change?<br />
Corruption Concerns<br />
Bourgeois Bohemians<br />
Global Good<br />
Turbulent Times<br />
A N I I P M T H I N K T A N K<br />
&<br />
G R E A T I N D I A N D R E A M F O U N D A T I O N P R E S E N T A T I O N
THE GREAT INDIAN DREAM<br />
“A Society where man is at the centre of all activities,<br />
a society where exploitation of man by man has been<br />
abolished, where he is cared for as an in a family, where<br />
“to each according to his need’ is practised, a society where<br />
non bureaucratic National Economic Planning is given due<br />
importance for sustainable optimum growth, where adequate<br />
social safety net is a reality and yet market’s advantages are<br />
fully taken care of for creativity and entrepreneurship, such<br />
a society can be truly described as humane society and the<br />
vision as “Humanism”.<br />
Dr. M K Chaudhuri<br />
The Great Indian Dream, 2003, Macmillan<br />
India,New Delhi<br />
“Let us together dream of a country where poor are not<br />
just merely reduced to statistics but where there are no poor.<br />
Let there be a day when small children are taken to a poverty<br />
museum like science museum where they shiver at the plight<br />
of the way people used to live in the last millennium. Let this<br />
dream take the form of a revolution and as long as our dreams<br />
keep outweighing our memories, India would remain a young<br />
and dynamic nation on this path to global equality. And for<br />
this let the wait not be for eternity. Let us together achieve this<br />
in the next 25 years.”<br />
Prof. Arindam Chaudhuri<br />
The Great Indian Dream, 2003, Macmillan<br />
India,New Delhi
IIPM: THE FUTURE IS HERE<br />
Since its incorporation (1973), IIPM has been an institution with privileged traditions, in the diversity of its fraternity, its global outlook, its world<br />
class research and its commitment to alternative national economic planning process.<br />
It can be said, without much oversimplification that there are no ‘underdeveloped economies’. There are only ‘under managed’ countries. Japan<br />
140 years was ago was an underdeveloped country by every material measurement. But it very quickly produced management of great competence,<br />
indeed of excellence. The policy inference is that ‘management’ is the prime mover and ‘development’ is the consequence. At IIPM, every one<br />
considers that development is a matter of human energies rather than economic wealth. And the generation and direction of these human energies<br />
is the task of ‘management’. Accordingly, we formed The Great Indian Dream. Unlike any other dream, this is one dream which each one of us<br />
are determined to realise and that too in our own lifetimes. Each bit of cynicism and condemnation from pessimists makes us evolve even stronger<br />
and determined.<br />
All our endeavours and initiative is towards realisation of this dream, where in we produce committed ‘bare foot’ managers and entrepreneurs<br />
who are needed by nation, on an insistent basis. As an educational institute, we aim at initializing a three dimensional personality in IIPMites, viz.<br />
Pursuit of knowledge in economics and management<br />
Commitment to economic, social, political and technological upliftment of masses and<br />
Cultivation of taste for literature, fine arts and etc.<br />
Economists often have limited access to the practical problems facing senior managers, while senior managers often lack the time and motivation<br />
to look beyond their own industry to the larger issues of the global economy. It has set before it the twin tasks: to reorient education and research<br />
towards the needs of both the private and public sectors and to establish the link between the National Economic Planning and the development<br />
of private enterprises in Indian economy. IIPM dares to look beyond, and understands that what we teach today, other adopt tomorrow. IIPM’s<br />
service output (education, research and consulting,) is a unique combination of two distinct disciplines: economics and management. Through<br />
this integration, IIPM helps guide business and policy leaders in shaping the Indian and global economy, bringing together the practical insights of<br />
industry with broader national and global perspectives.<br />
A hall mark of IIPM is that it is armed with the comparative advantage of engaging the committed, passionate and brightest management post<br />
graduates and undergraduates, who pursued the education at IIPM and subsequently joined it, to realise the dream. IIPM alumni, spread across the<br />
globe, holding crucial decision-making positions in the corporate sector, are bonded by the one ideology of making a positive difference, turning<br />
that ideology into a movement itself.<br />
The India Economy Review is another humble initiative towards the realisation of the same and more distinctly, engaging the broader publics<br />
and pertinent stakeholders.<br />
SEARCH, SIEVE, SCHEME...<br />
In economics, like in everyday existence, it is imperative to hear, perceive and consider what others have to say. Each issue of The IER brings<br />
together a selection of important contributions on a particular theme, authored by some of the brightest minds in different areas of Indian economics.<br />
The provocation for publishing these issues arises from the fact that over the years economic journals have become copious, exclusive and expensive.<br />
Most of the journals and a good many of the books have gone beyond the cerebral and financial reach of general students and other scholars. It is<br />
for them that these issues are primarily being raised and debated here.<br />
Much about India is transparent enough. One does not require detailed criteria, cunning calibration or probing analysis to pinpoint India’s<br />
problems and recognise its antecedents. There is in fact much that is perceptible about India. But not everything about India is even if simplistic is<br />
so simple. The learned reader would appreciate the fact that India is like an elephant that looms too large to be grasped within a distinct structure<br />
and paradigm the constituent parts of which would fail to reveal the entirety. Obviously and observably, no suggested solution to any protracted<br />
and complex socio-economic problem will satisfy all sides and stake-holders evenly. Consequently, there exists an enormous diversity in economic<br />
thinking and perspectives, as is also reflected in the viewpoints of different expert contributors in this issue. The intended outcome of this exercise is to<br />
facilitate the invention, improvement, deliberation and dissemination of innovation in economic thinking and national economic planning, insisting<br />
merely on well-grounded, open and unbiased debates, without predetermined outcomes. It is impossible to do justice to the entire field of Indian<br />
economics in a single issue. The topics selected for this issue are those which are of critical and immediate importance to India. Majority of them were<br />
freshly and exclusively written. Encapsulated, it is a constructive attempt aimed at helping India actualise its promises and potential. The editors hope<br />
that this issue of IER proffer the reader a flavour of dynamism and excitement and persuade her/him to participate in the journey towards realising<br />
‘The Great Indian Dream’. At the same time, it illuminates the terrible, practical problems of India and Bharat.<br />
ACKNOWLEDGEMENTS<br />
The IIPM Think Tank likes to thank all the internal faculty who have been instrumental in coordinating with<br />
many authors all across India and according their unstinted support. The assistance of Prof. R.Krishnan (IIPM<br />
Lucknow) Prof. Amlan Ray (IIPM Lucknow), Prof. Tareque Laskar (IIPM Bangalore) and Mr. Robin Thomas<br />
(IIPM Ahmedabad) has been more valuable than, perhaps, they realise. Mr. R. Nagendra Prasad, Senior<br />
Manager at SMG, IIPM Hyderabad, particularly did all that it was possible to do for this issue of IER. Lastly,<br />
Prof. Shyam.S.Pujala (Dean, IIPM Hyderabad) deserves a special mention for his eager and energetic support,<br />
without which this issue would not have been possible.
CREDITS<br />
Founder<br />
Dr. M. K. Chaudhuri<br />
Editor-in-Chief<br />
Arindam Chaudhuri<br />
Managing Editor<br />
Prasoon.S. Majumdar<br />
Deputy Editor<br />
M.N.V.V.K. Chaitanya<br />
Consulting Editor<br />
Prashanto Banerji<br />
Research Fellows<br />
Pathikrit Payne<br />
Shweta Shukla<br />
Sray Agarwal<br />
Akram Hoque<br />
Mrinmoy Dey<br />
Mufaddal Poonawala<br />
Group Design Director<br />
Satyajit Datta<br />
Senior Designer<br />
Amit Sharma<br />
Designer<br />
Dinesh Chandelkar, Saurabh Mishra<br />
Parvesh Kumar Swami, Sandeep Sharma<br />
Sujit Singh, Satyakam Banerjee<br />
Senior Illustrator<br />
Shantanu Mitra<br />
Production Manager<br />
Gurudas Mallik Thakur<br />
Production Supervisors<br />
Digember Singh Chauhan<br />
Soumyajeet Gupta<br />
Satbir Chauhan<br />
Chief Marketing Advisor<br />
Amit Saxena<br />
Marketing & Sales<br />
Neha Malhotra<br />
IER Online<br />
Neel Verma, Anil Kumar Sheoran, Himanshu Negi,<br />
Christopher Mani<br />
Principal Offices<br />
Satbari, Chandan Haula, Chattarpur,<br />
Bhatimines Road, New Delhi - 110074<br />
IIPM Tower, Junction of , 32nd Road & S.V.<br />
Road, Bandra (W), Mumbai - 400 050<br />
IIPM Tower, 419 100ft. Road, Koramangala,<br />
Bangalore - 560 034<br />
IIPM Tower, 893/4, Bhandarkar Road,<br />
Deccan Gymkhana, Pune - 411 004<br />
IIPM Tower, 145, Marshall’s Road,<br />
Egmore, Chennai - 600 008<br />
IIPM Tower , 19, Inqulab Society, gulbai Tekra,<br />
Off C.G. Road, Ahmedabad - 380 015<br />
IIPM Tower, 6-3-252/2, Erramanzil, Banjara Hills,<br />
Hyderabad - 500 082<br />
We are keen to hear from anyone, who would like to<br />
know more about IIPM Publications. You can e-mail on<br />
shweta.shukla@iipm.edu or alternatively call Ms.Shweta<br />
at 9811895267<br />
Additional Thinking<br />
www.iipmthinktank.com<br />
www.iipm.edu<br />
www.iipmpublications.com<br />
www.arindamchaudhuri.com<br />
www.thesundayindian.com<br />
www.thedailyindian.com<br />
www.businessandeconomy.org<br />
www.gidf.org<br />
www.planmanconsulting.com<br />
Printed by:<br />
Rolleract Press Servies, C-163, Ground Floor,<br />
Naraina industrial Area, Phase-I, New Delhi - 16<br />
Disclaimer :<br />
All efforts have been taken to ensure the veracity of the information<br />
contained in the research, however the IIPM Think Tank expressly<br />
disclaims any and all warranties, express or implied, including<br />
without limitation warranties of merchantability and fitness for a<br />
particular purpose, with respect to any service or material. In no<br />
event shall the IIPM Think Tank be liable for any direct, indirect,<br />
incidental, punitive, or consequential damages of any kind<br />
whatsoever with respect to the and materials, although the reader<br />
may freely use the research and material provided, the IIPM Think<br />
Tank retains all trademark right and copyright on all the text<br />
and graphics.<br />
The First Words And The Last Word<br />
A Hard Look at the Soft Practice of Managing Development<br />
Dear Reader,<br />
Currently, the main focus of all – those who<br />
matter and those who don’t – is on the current<br />
global crisis. But even with optimistic assumptions<br />
about sustained growth in the industrialised<br />
world, limited capital flows and trade<br />
growth are likely to remain serious constraints<br />
to developing economies growth, including<br />
India. Raising living standards and combating<br />
poverty for us will actually depend more than<br />
ever on achieving greater efficiency in the use<br />
of human and material resources. Governments<br />
everywhere must wrestle with difficult<br />
management problems as they seek to fulfill<br />
their heavy and varied responsibilities.<br />
Against this backdrop, Indian economy has<br />
uniquely demonstrated remarkable resilience.<br />
How has the country managed to cope? Is India<br />
finally emerging as an engine of global<br />
demand? Can its economy engender enough<br />
new jobs to maintain social stability? What<br />
will drive future growth, and how should policy<br />
mandarins adapt? In this issue, a panel of<br />
leading Indian and international economists<br />
explores these questions and other pertinent<br />
socio-economic issues.<br />
Should India, the world’s largest democracy,<br />
merely take its seat in the G20? Or, should<br />
India also help the nations of the world take a<br />
more democratic and inclusive governance<br />
direction? Dr. Barry Herman’s paper about<br />
global governance is a brief for how it might<br />
support the latter. Dr. C. Ramachandraiah<br />
argues in his paper that urban transport policies<br />
should be city specific and be designed to<br />
suit is geography, heritage, history and land<br />
use patterns. Manu Sankar Subhagalal’s article<br />
aims to give an overview of the energy sector<br />
in India and advocates for the right kind<br />
Prasoon.S Majumdar<br />
Managing Editor<br />
M.N.V.V.K.Chaitanya<br />
Deputy Editor<br />
of balance to be struck for economic growth<br />
and environmental sustainability. In financial<br />
sector, lack of channelizing existing<br />
recourses, catastrophic policy implementation<br />
and lower technological penetration<br />
and adoption are the main causes of financial<br />
exclusion, as pointed by Ms. Purti<br />
Sharma in her research paper. Prof. Rafiq<br />
Dossani, Executive Director, South Asia<br />
Initiative at Shorenstein APARC, Stanford<br />
University elucidates that, in a growing<br />
economy, the incentives for institutional<br />
corruption are higher because higher<br />
bribes are more affordable than when the<br />
economic pie is small. Mustering the collective<br />
will to tackle these forms of corruption<br />
remains a challenge for India in the<br />
twenty first century. The common thread<br />
running through all these topics is ‘managing<br />
efficiency’ for greater development experience.<br />
Lastly and on a different note, thank you<br />
for inspiring and encouraging our team<br />
every day. Over the coming months, you<br />
will see more exciting changes in IER. The<br />
best is yet to come.<br />
Best<br />
Prasoon.S.Majumdar<br />
M.N.V.V.K. Chaitanya
(F)ACT SHEET<br />
Cover Design: Dinesh Chandelkar<br />
MANAGEMENT OF DEVELOPMENT:<br />
Bird of Gold<br />
India on Top<br />
David A Andelman 08<br />
MANAGEMENT OF DEVELOPMENT:<br />
The Poverty Puzzle<br />
Demographics of Poverty and Economic<br />
Growth<br />
K.R. Shah 14<br />
MANAGEMENT OF DEVELOPMENT:<br />
A Growth Paradigm<br />
Road to Rendition<br />
Pathikrit Payne 26<br />
MANAGEMENT OF DEVELOPMENT:<br />
Golden Drop<br />
Problem of Water Pollution in India: A<br />
Possible Solution<br />
Arpita Khanna 32<br />
MANAGEMENT OF DEVELOPMENT:<br />
(Na)No Way Forward<br />
Urban Transport in India: A contested<br />
<strong>Issue</strong><br />
C. Ramachandraiah 40<br />
MANAGEMENT OF DEVELOPMENT:<br />
Watered Down<br />
Urban Water Supply Sector in India: The<br />
Need for the Management Reforms in<br />
the ULBs<br />
Ramakrishna Nallathiga 46<br />
MANAGEMENT OF DEVELOPMENT:<br />
Corruption Concerns<br />
Corruption and corporate governance in<br />
India<br />
Rafiq Dossani 56<br />
MANAGEMENT OF DEVELOPMENT:<br />
India Insured<br />
A review of the Regulatory and<br />
Developmental Role of IRDA in context to<br />
the Indian Insurance Market<br />
Sanjay Tewari 68<br />
MANAGEMENT OF DEVELOPMENT:<br />
Innovative Inclusion<br />
Financial Inclusion by Channelizing<br />
Existing Resources in India<br />
Purti Sharma 76<br />
MANAGEMENT OF DEVELOPMENT:<br />
India Calling<br />
MVNO: A new Business Paradigm in the<br />
Telecom Industry in India<br />
Hardikkumar Doshi, Gaurav Joshi and Mahim<br />
Sagar 84<br />
MANAGEMENT OF DEVELOPMENT:<br />
Rise of Renewables<br />
Renewable Energy and Its Policy<br />
Prospects in India<br />
Manu Sankar Subhagalal 88<br />
MANAGEMENT OF DEVELOPMENT:<br />
Winds of Change<br />
Five “Gs”: Lessons from world Trade For<br />
Governing Global Climate<br />
William Antholis 96<br />
MANAGEMENT OF DEVELOPMENT:<br />
Good Governance<br />
Globalisation to Global Governance:<br />
Hegemony to Legitimacy?<br />
B. Ramesh Babu 112<br />
MANAGEMENT OF DEVELOPMENT:<br />
Global Good<br />
We Can Have Better Global Economic<br />
Governance<br />
Barry Herman 114<br />
MANAGEMENT OF DEVELOPMENT:<br />
The New Mantra<br />
More Effective Global Financial<br />
Regulation<br />
K. U. Mada 120<br />
MANAGEMENT OF DEVELOPMENT:<br />
Knowledge Without Borders<br />
Internationalization of Intellectual<br />
Property Rights and its Impact on the<br />
Developing Countries: A Review<br />
K.K.Saxena and Ruchi Sharma 124<br />
FINANACIAL ECONOMICS: Paper Money<br />
Just How Much Money is at Stake in<br />
Shares Pledged by Promoters?<br />
Jayesh Kumar 140<br />
ECONOMIC SOCIOLOGY:<br />
Bourgeois Bohemians<br />
Consumerism in the Eyes of A Rational<br />
Optimist<br />
Suchismita Mondal Sarkar 146<br />
POLITICAL ECONOMY: In Perspective<br />
A Different Perspective on the US-India<br />
Nuclear Deal<br />
Peter Custers 150<br />
POLITICAL ECONOMY:<br />
The Elephant and the Dragon<br />
What Difference Does a Revolution Make?<br />
A Preliminary Contrast of India & China<br />
Robert Weil 158<br />
USA: Can we Change?<br />
The Obama Crossroads: Neo-Liberal Coup<br />
or Responsible Government<br />
John McMurtry 164<br />
INTERNATIONAL AFFAIRS:<br />
Turbulent Times<br />
Post- Soviet Central Asia: <strong>Issue</strong>s and<br />
Problems of Security and Cooperation<br />
R.G.Gidadhubli 168<br />
MICRO MACRO: Rice Bowl<br />
The Shrinking Rice Paddies of Kerala<br />
Nikhil Raj and PA Azeez 176
M ANAGEMENT OF DEVELOPMENT<br />
“India on Top”<br />
David A. Andelman<br />
Editor, World Policy Journal,<br />
Published by the World Policy Institute<br />
and the MIT Press<br />
Two rivals are contesting for the economic domination<br />
of the Asian mainland in the 21 st century—a<br />
quiet contest that will only intensify in the course<br />
of the next ninety years. Ultimately, it will be won by<br />
India, but not without some considerable frictions en<br />
route and some powerful economic, as well as political<br />
and military forces, that will come to define the process.<br />
But it is the demographic forces, already intense in both<br />
nations, and the responses to such challenges by the<br />
government of each that will truly shape the battlefield.<br />
By mid-century, according to this year’s most recent<br />
United Nations estimates, India’s population will have<br />
passed China’s, assuming the role of the world’s largest<br />
nation. Indeed, the crossover is projected to take place<br />
sometime during the period 2025 to 2030. After India has<br />
achieved this distinction, however, the distance between<br />
the two countries’ populations will remain little changed<br />
for the next century and a half—through at least the year<br />
2300 as their rates of growth slow to a near halt. Indeed in<br />
the last half of this century, India’s population is expected<br />
actually to fall by four million people, though China’s will<br />
grow by more than 50 million as its traditional one-child<br />
per family edict begins to loosen in the face of an increasingly<br />
liberalized market and an accompanying free and<br />
more mobile society.<br />
The rate of change is critical in this case. In the first<br />
half of this century, the population of India will be<br />
expanding nearly five times as fast as China, while for the<br />
second half of the century China’s population will be<br />
contracting at a rate triple that of India’s. Still, India will<br />
remain the more populous.<br />
Size is not the only important element of the demographic<br />
equation, however. The distribution of these<br />
billions of individuals—particularly rural vs. urban—is of<br />
equal, if not greater, significance when it comes to the<br />
quality of life and India’s role in international trade and<br />
finance. Here, the contrast between India and China is<br />
striking as well. By 2050, China, which had just 13 percent<br />
of its population in urban areas a century earlier, is<br />
expected to have 72.9 percent in cities. By contrast, India,<br />
which was marginally more urbanized in 1950 with 17<br />
percent of its people in cities, will have 55.2 percent in<br />
urban areas a century later.<br />
This vast disparity of rural-urban distribution is potentially<br />
the most significant, and most destabilizing factor of<br />
all in this century. For the past decade and more, as<br />
Chinese communism began to give way to some form of<br />
crypto-capitalism, the nation created tens of millions of<br />
8 THE IIPM THINK TANK
B IRD OF GOLD<br />
new jobs. In the late 20 th and early 21 st centuries, entire<br />
new cities sprang from the countryside, pressing into the<br />
China’s vast rural interior. A population equivalent to the<br />
entire United States was lured away from a subsistence<br />
existence scratched from the land for centuries to a new<br />
life of opulence and hope for the future. Suddenly,<br />
though, barely eight years into the new century, these<br />
hopes have to at least a temporary halt. The global<br />
economic meltdown hit China hard, idling thousands of<br />
factories. By the turn of the Chinese New Year in <strong>2009</strong>,<br />
the year of the Ox, as many as 130 million people—onetenth<br />
of the nation— found themselves in a desperate<br />
state of suspended animation, sloshing between their new<br />
jobless existence in big cities like Shanghai not to mention<br />
new factory cities, now virtual ghost towns, and the rural<br />
villages they had left behind less than a decade before.<br />
By contrast, India is already managing to weather the<br />
economic downturn more effectively. While building its<br />
cities, it has left a strong foundation in the countryside—<br />
raising aspirations in place so that a substantial population<br />
will continue to produce food to feed the urban areas<br />
without the kind of unemployment and<br />
urban discontent inevitable in neighboring<br />
China. Again, the shift — when<br />
India’s rural population passes China<br />
— occurs around the year 2025, the gap<br />
continues to widen dramatically. This is<br />
by no means a good thing. In such a<br />
situation, China risks becoming a major<br />
food importer at a time when other<br />
parts of the world are also seeing vast<br />
increases in urban concentrations<br />
competing for the output of rural landscapes.<br />
At the same time, China’s urban areas will be stagnating.<br />
Its cities, having ballooned suddenly at the end of the<br />
20 th century—growing at an astounding annual rate of<br />
nearly five percent in 1985 to 1990—will find their<br />
growth slowing to barely 0.5 percent by the year 2050.<br />
India, meanwhile, will find itself with a strong well-balanced<br />
population, its urban areas growing modestly, but<br />
steadily at an annual rate ranging from 2.13 percent to<br />
2.35 percent for the first four decades of this century,<br />
while China’s generation-long, male-oriented, one-child<br />
policy may have permanently skewed its ability to grow<br />
Each year,<br />
through 2050,<br />
both countries<br />
will be sending<br />
substantial<br />
numbers of their<br />
residents abroad<br />
and prosper. By the end of the century, it is India that<br />
will be the economic, financial, indeed productive engine<br />
of Asia.<br />
Indeed, UN population experts suggest that when<br />
India, particularly urban India, reaches the level of<br />
affluence of urban areas of the developed world, particularly<br />
Western Europe, and with India’s population living<br />
in metro areas that are far larger even than London, Paris<br />
or Berlin, these Indian cities will begin to demonstrate<br />
fertility rates as low as those of the west, further restraining<br />
the growth of the population that must be sustained<br />
by the agricultural output of rural regions.<br />
One key example of this gradual, but steady internal<br />
development is the international migration patterns of<br />
Indians and Chinese. Each year, through 2050, both<br />
countries will be sending substantial numbers of their<br />
residents abroad — between 200,000 and 400,000 per<br />
year. But even as India’s population passes China’s, the<br />
number of its emigrants remains steadily fixed at a lower<br />
rate. Hence, the percentage of China’s population leaving<br />
the country continues to rise, while the percentage of emigration<br />
from India falls — in both cases<br />
without any coercive force.<br />
What all these population trends<br />
mean for both countries — in the<br />
near-term, through the present global<br />
economic contraction, and the longterm<br />
for the rest of this century — is<br />
critical, and not merely for these two<br />
nations.<br />
These trends are also especially<br />
significant for their principal trading<br />
and commercial partners as well, especially for the<br />
United States. India was particularly adept, early on, in<br />
realizing that its future lay in global integration — but<br />
especially in service industries which are less susceptible<br />
to the whims of overseas consumer demand to which<br />
manufacturing, especially consumer-driven manufacturing,<br />
is prone. Installing a substantial telecommunications<br />
infrastructure linked into global information networks,<br />
India early on became a destination of choice for foreign<br />
companies looking to expand their intellectual capital.<br />
Call centers quickly morphed into vast centers of computer<br />
programming, research and technological innovation.<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
9
M ANAGEMENT OF DEVELOPMENT<br />
The slow, but steady, rise of the nation’s urban population<br />
enabled India’s monetized economy to absorb more<br />
readily the influx from rural regions. By contrast, the<br />
sudden and explosive growth of Chinese urban areas was<br />
based almost entirely on export-oriented, consumer-driven<br />
manufacturing.<br />
So when last year’s global economic meltdown hit, India<br />
was less immediately impacted than China. Moreover,<br />
India’s recovery promises to be more rapid and more<br />
sustainable as well. In the first quarter of this year,<br />
according to government statistics, China posted a 6.1<br />
percent growth in GDP, lower than the 6.8 percent posted<br />
in the fourth quarter, indeed the lowest reading since the<br />
quarterly methodology was implemented<br />
in 1992. That represents quite a dramatic<br />
drop from the 11.4 percent GDP growth<br />
that China posted last year—a 46<br />
percent drop year-over-year. India grew<br />
at a more modest, though by global<br />
standards quite impressive, rate of 7.4<br />
percent last year, and is expected to post<br />
a more modest growth of nearly 4.5<br />
percent this year—a 39 percent drop.<br />
What is of greater significance,<br />
though, is the distribution of India’s<br />
GDP. According to World Bank figures,<br />
agriculture accounts for 18.5 percent of<br />
the nation’s total output, industry 26.4<br />
percent, while the robust services sector<br />
contributes a startling 55.1 per cent.<br />
Indeed, this type of distribution is<br />
remarkably close to that of the United<br />
States and most other leading developed countries.<br />
In China, services accounted for just 40 percent of<br />
value added GDP while manufacturing accounts for 48<br />
percent and agriculture just twelve percent. The fact that<br />
India’s service sector now produces more than half the<br />
nation's GDP is a milestone in the nation's economic<br />
history and takes it closer to the fundamentals of a<br />
developed economy. At the time of independence,<br />
agriculture occupied the major share of GDP while the<br />
contribution of services was relatively far less.<br />
By the end of 2010, most economic projections suggest<br />
that the worst of the global economic contraction will be<br />
By the end of<br />
year 2010,<br />
the worst of<br />
the global<br />
economic<br />
contraction<br />
will be behind us<br />
behind us. Indeed the most rapidly growing nations in the<br />
developing world will likely return to robust growth even<br />
before the largest economies, and especially the United<br />
States. Still what will not change will be the demographic<br />
realities, and it’s here that the South Asian region finds<br />
itself poised on the most difficult, potentially destabilizing<br />
precipice. Much of it has to do with the neighborhood<br />
where India finds itself.<br />
While India will have passed China as the world’s most<br />
populous nation, both Pakistan and Bangladesh will be<br />
moving up dramatically. By the end of this century,<br />
according to the “medium growth” scenario of the United<br />
Nations, Pakistan will have passed the 400 million mark,<br />
ranking just behind the United States as<br />
the world’s fourth most populous nation,<br />
surging from seventh place today.<br />
Bangladesh’s population will have nearly<br />
doubled to 270 million, moving it up to<br />
seventh spot in the world. In both cases,<br />
this surge will have serious consequences—potentially<br />
catastrophic growth in<br />
their population densities. India’s<br />
population density could increase less<br />
than 15 percent to 422 persons<br />
per square kilometer between now and<br />
2050, though it will not peak until the<br />
year 2065 when it tops out at nearly 524<br />
people per square kilometer. Meanwhile,<br />
China’s population density could<br />
actually drop by 8.5 percent between<br />
now and 2050, though it is expected to<br />
top out at 155.5 per square kilometer<br />
in the year 2030. By contrast, Bangladesh’s population<br />
density is projected by UN figures to rise more than 57<br />
percent to 1,799 people per square kilometer in 2050,<br />
while Pakistan’s density will more than double, rising<br />
106 percent to 478 people per square kilometer in the<br />
year 2050.<br />
The situation becomes even more desperate if we look<br />
at the population density with respect to actual cropland<br />
that can be used to feed their people. In Bangladesh, if we<br />
go as far as the year 2100, its paralyzing density of 1,997<br />
persons per square kilometer of total land area surges to<br />
2,793 persons per square kilometer of potential cropland,<br />
10 THE IIPM THINK TANK
B IRD OF GOLD<br />
or 28 persons per hectare, approaching the figure for<br />
Afghanistan which, while overall more sparsely populated,<br />
has a smaller arable area capable of supporting<br />
cultivation and a population that is expected to rise nearly<br />
as rapidly.<br />
Age is another critical factor when we examine population<br />
development and densities, particularly in relation to<br />
the nation’s ability to support, house and feed its people,<br />
not to mention the ability to achieve some degree of<br />
prosperity and move upward and out of the status of a<br />
marginally developing nation.<br />
The central measurement of age as it impacts the ability<br />
of a nation to grow and prosper is known as the demographic<br />
window, defined by the United<br />
Nations as the moment when the number<br />
of children below 15 years of age falls<br />
below 30 percent of the total population<br />
and those over the age of 65 remains<br />
below 15 percent. In this case, those of<br />
functional working age are able to<br />
sustain and feed theoretically non-working<br />
youths and the elderly. By these<br />
criteria, India is projected to go<br />
through that window next year (2010),<br />
while Bangladesh won’t reach that level<br />
until 2020 and Pakistan won’t pass that<br />
threshold until 2035. By contrast, China<br />
reached the window in 1990.<br />
What is of potentially even greater<br />
interest, however, is how long these<br />
nations remain within that window<br />
before exiting on the other side (in<br />
other words, the aging of the population adds a new<br />
burden on those of working age). India stays within that<br />
window for 40 years—or two generations—exiting it in<br />
2050 as the life expectancy of the average Indian is<br />
increasing dramatically and will continue to increase.<br />
While an Indian male born in1950 to 1955 could expect to<br />
live an average of 39.4 years, an Indian male born today<br />
can be expected to live 63.2 years and one born at the end<br />
of this century will live an average of 81.8 years. By the<br />
year 2300, that will figure will have jumped to 94.9 years.<br />
Still, with a decelerating birthrate, the nation will be able<br />
to extend its demographic window. By contrast, China,<br />
There is<br />
considerable<br />
attractiveness to<br />
creating a form of<br />
Asian economic<br />
community, not<br />
dissimilar to EU<br />
with its one-child policy, will be out of the window by the<br />
year 2025, as a shrinking working population must feed a<br />
rapidly aging nation. As for Bangladesh, it will remain<br />
within the demographic window for 40 years, exiting in<br />
2060, while Pakistan will remain in it for the briefest<br />
period—just 30 years, exiting in 2065.<br />
The length of time within the demographic window<br />
is perhaps the single most critical factor when it comes<br />
to understanding the prospects of a nation to grow,<br />
even prosper.<br />
All of these population projections, of course, are based<br />
on several key assumptions—most importantly that<br />
diseases, particularly HIV/AIDS continues to abate<br />
worldwide and that it is not replaced<br />
by any new pandemic or other demographic<br />
catastrophe.<br />
For Bangladesh and Pakistan, in<br />
particular, the question of how to house,<br />
feed and protect their incredibly dense<br />
populations poses all but insurmountable<br />
problems without some attempts to<br />
encroach on neighboring territory.<br />
Clearly, China, with barely 129 people<br />
per square kilometer (and certainly<br />
somewhat lower in the more remote<br />
border areas) would be quite tempting<br />
targets for encroachments. However,<br />
both China and India with their<br />
nuclear arsenals and formidable<br />
conventional military forces are both<br />
well equipped to deter such actions,<br />
certainly by Bangladesh.<br />
The alternative is potentially more palatable. India and<br />
China must become breadbaskets—or rice bowls—exporting<br />
food to their more densely populated neighbors.<br />
At the same time, there is considerable attractiveness to<br />
creating a form of Asian economic community, not<br />
dissimilar to the European Union—an expansion of the<br />
existing Association of Southeast Asian Nations<br />
(ASEAN) to include four of the world’s five most populous<br />
countries—India, China, Pakistan and Indonesia, as<br />
well as Bangladesh. By the end of this century it is quite<br />
reasonable to expect such a regional economic group will<br />
assume its place as one of the four great trading blocks of<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
11
M ANAGEMENT OF DEVELOPMENT<br />
the world, alongside the European Union, the Gulf<br />
Cooperation Council (which includes the major economic<br />
powerhouses of the Middle East including the Gulf states<br />
and Saudi Arabia), and Western hemisphere nations<br />
grouped under NAFTA.<br />
Getting there, of course, is the biggest challenge facing<br />
the entire region, but certainly India as a lynchpin in the<br />
process. The immediate, and clearly most pressing task is<br />
to find ways that will turn the current economic contraction<br />
into an opportunity to insure future growth and<br />
accelerating GDP expansion. First and most critical is to<br />
ensure the expansion and effectiveness of public sector,<br />
especially infrastructure spending, which now accounts<br />
for eight percent to 10 percent of GDP, according to<br />
World Bank estimates. New power, especially hydropower,<br />
projects, roads and rail networks are all most urgent,<br />
and the bank has recommended spending at least an<br />
additional three percent to four percent of GDP on such<br />
priority projects.<br />
Additionally, with the rapidly increasing population, it’s<br />
clear that one resource needs particular attention — water.<br />
A recent study by Orville Schell of the Asia Society<br />
in New York and published in World Policy Journal’s<br />
Fall 2008 issue, documented the accelerating melting of<br />
the Tibetan glaciers, which are the primary source of<br />
virtually every important river in Asia, particularly in<br />
India and China.<br />
The melting will cause uneven, eventually substantially<br />
reduced water flows at the very moment when populations<br />
are reaching their peak, even though the rate of growth<br />
may be tapering off.<br />
At the same time, priorities must be given to reducing<br />
potentially destabilizing disparities between the wealthiest<br />
and poorest regions of each country, since many<br />
western economists believe that the current economic<br />
downturn could only broaden existing pockets of poverty<br />
and make recovery a longer and more difficult procedure—not<br />
only in India but in much of the more rapidly<br />
developing world. With this goal in mind, World Bank<br />
projects are assisting across India—improving soil and<br />
water conservation, modernizing irrigation and rain water<br />
capture systems and reclaiming saline lands in a number<br />
of states including Uttar Pradesh, Rajasthan, Maharashtra<br />
and Madhya Pradesh.<br />
All these projects will help keep pace with the demographic<br />
realities as the one apparent constant in this<br />
period of economic uncertainty is the growth of population<br />
in India, and indeed in much of Asia. Moreover, the<br />
continued investment in critical infrastructure will also<br />
help lure foreign investors as capital for such ventures<br />
begins to return in leading global money centers. A recent<br />
visitor from Procter & Gamble’s Pakistan organization<br />
said that her company was investing $100 million in that<br />
country, much of it in a plant producing disposable<br />
diapers. Why? To take advantage of the eleven million<br />
new babies arriving there each year.<br />
Without question, there will be critical issues to be<br />
faced in the nations of South Asia, especially in India,<br />
over the next half century or more as the demographic<br />
realities outlined here begin to take hold. At the same<br />
time, global corporations will eventually emerge from the<br />
investment paralysis that has gripped them in recent<br />
months and search for new opportunities grounded in the<br />
ineluctable realities of population shifts and the parallel<br />
shifts in money and wealth. The key for nations like India<br />
is to position themselves to seize the opportunities<br />
generated by their growing populations, especially as they<br />
move to a more urbanized, more highly engineered<br />
culture of industry and innovation.<br />
Above all, each must retain the values of openness and<br />
transparency, a respect for the rule of law and membership<br />
in the global community of free trade and commerce<br />
without the kinds of barriers that have so often stymied<br />
growth in the past. But certainly, with a birth rate that is<br />
hovering at the replacement level, and an expanding<br />
network of higher education throughout the country,<br />
India is well placed to maintain its role as a leader in<br />
bringing Asia out of the ranks of developing nations into<br />
the forefront of world leadership, where it will hopefully<br />
find itself at the end of this century.<br />
(David A. Andelman is the author of A Shattered Peace:<br />
Versailles 1919 and the Price We Pay Today. (Wiley: 2007).<br />
His next book, Future Present: A Portable History of the<br />
Next 100 Years, will deal with the shape of the world at the<br />
end of this century. The views expressed in the write-up are<br />
personal and do not reflect the official policy or position of<br />
the organisation.)<br />
12 THE IIPM THINK TANK
B IRD OF GOLD<br />
AD<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
13
M ANAGEMENT OF DEVELOPMENT<br />
Demographics of Poverty<br />
and Economic Growth<br />
14 THE IIPM THINK TANK
T HE POVERTY PUZZLE<br />
K. R. Shah<br />
Former Professor of Business Economics,<br />
The M. S. University of Baroda, Vadodara<br />
Introduction<br />
The dawn of the 21 st century seems to have brought new<br />
hopes for the millions of the Indian poor. The deadlock<br />
between the official poverty ratio (Head Count Ratio-<br />
HCR) and the numerical <strong>size</strong> of the poor- the former<br />
falling without any dent in the latter- observed during<br />
1973-74 to 1994-95 has been broken of late. For the first<br />
time between 1994-95 and 2005-06, the poverty ratio came<br />
down to 20.4% from 39.6% and the number of poor from<br />
365 million to 228 million.<br />
Above poverty pattern attains a new significance in the<br />
light of another deadlock between the literacy rate and the<br />
number of illiterates which has also been broken for the first<br />
time since independence between 1991 and 2001. The<br />
improvement in the literacy rate from 52.2% to 65.38% was<br />
accompanied by the decline in the number of the illiterates<br />
from 328 million to 296 million. The closeness of these<br />
numbers- the poor and the illiterates- implies that poverty<br />
and illiteracy are two sides of the same coin. These two<br />
events thus are mutually reinforcing, i.e. above the poverty<br />
line also means above the illiteracy level and vice versa. The<br />
grip of the vicious circle of poverty and illiteracy appears to<br />
have been loosened.<br />
Further, the gap in the rural-urban poverty ratio of the<br />
magnitude of almost ten percentage points in the year 1983<br />
(45.31% and 35.63% respectively) has been wiped out<br />
completely in the year 2005-06- the respective poverty ratios<br />
being 20.4% and 20.7%. This pattern mainly owes to a<br />
relatively faster rate of decline in the rural poverty.<br />
The main objective of this paper is to study the emergence<br />
of the above three favourable patterns since the mid-1990s<br />
in India.<br />
Relevance of the Official Poverty Line<br />
A paragraph or two on the relevance of the OPL may not be<br />
out of tune. The poverty line laid down by the Planning<br />
Commission in 1973-74 is still in vogue. The consumption<br />
expenditure mainly on food of Rs. 11.88 and Rs. 17.95 per<br />
person per day of rural and urban areas respectively in<br />
1973-74 was adequate enough to achieve the calorie norm of<br />
2400 for rural households and 2100 for urban households.<br />
This is the minimum calorie requirement for subsistence<br />
living. Thus, households not able to meet this norm are<br />
below the poverty line. The poverty line thus fixed is adjusted<br />
from time to time for inflation keeping intact the original<br />
nexus between the calorie norm and the poverty line.<br />
Abraham Maslow, an American behavioural scientist in<br />
his 1943 article “A Theory of Human Motivation” argued<br />
that the people world over are subject to ‘ hierarchy of needs’.<br />
The foremost are the basic physiological needs, namely,<br />
food, shelter, sex and sleep. Every aspect of life of the<br />
billions of the world’s poor undoubtedly is dominated by the<br />
struggle for these needs. Once these basic needs are fulfilled,<br />
they start looking for other things (The Economist, February<br />
14 th -20 th , <strong>2009</strong>). In this context the initial focus on income/<br />
expenditure required to consume food (and other basic<br />
needs items) commensurate with the calorie intake norm was<br />
justified. Once that level of income is attained , the poor<br />
households have crossed the major hurdle of undernourishment<br />
inhibiting their productivity growth. In that case,<br />
assuring that much intake of food partakes of the nature of<br />
‘investment’. They are empowered this way and the consequent<br />
productivity enhancement helps them earn more. Even<br />
after six decades of economic planning the focus on food<br />
security is not altogether unwarranted in ameliorating the<br />
poverty status of the people who spend around two-thirds of<br />
their income on food. Recent double digit inflation caused<br />
mainly by the rise in food prices hints at the vulnerability not<br />
only of the poor but also of the persons brought above the<br />
poverty line but still on its periphery. The Economic Survey<br />
(2007-08) has voiced similar concern when it says “there are<br />
concerns about the vulnerability of people who crossed the<br />
poverty line and are at present above the poverty line”---<br />
“high share of expenditure on food items (most basic of<br />
all basic needs) would be indicative of the vulnerability to<br />
some extent”.<br />
It is our contention that shifting from income poverty to<br />
multidimensional poverty, in all probability, may perpetuate<br />
both. One clue for this contention could be found in a study<br />
on multidimensional poverty and vulnerability. To quote:<br />
“However, at the bottom rankings, the comparison shows<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
15
M ANAGEMENT OF DEVELOPMENT<br />
that there is not much difference in the list of states that are<br />
identified as income poor and multidimensional poor”. The<br />
study further states that in almost 50% out of fifteen major<br />
states both in urban and rural areas, income poverty exceeds<br />
the multidimensional poverty (Rosa A. Abraham, and K. S.<br />
Kavi kumar, 2008). The marketization even of basic education<br />
and health care—two main components of multidimensional<br />
poverty which are public goods by nature—has made<br />
these goods above the reach of the so-called non-poor. So,<br />
the continuation of the focus on the removal of income<br />
poverty is logical.<br />
We are fully aware of the fact that to sustain in a knowledge<br />
economy there is no escape from controlling poverty in<br />
its various dimensions. But the removal of income poverty<br />
first and foremost amounts to crossing the critical level of<br />
wellbeing and surpassing the “take-off” stage of poverty.<br />
Thus, crossing the” take-off” stage of poverty seems to be a<br />
precondition for alleviating multidimensional poverty in the<br />
manner similar to the take-off stage of economic growth for<br />
achieving and sustaining the high growth path. Things would<br />
have been different had we achieved cent percent literacy<br />
like Japan and China or accomplished the<br />
constitutional obligation of universal<br />
primary education much earlier in our<br />
development journey.<br />
Questionable Poverty Pattern<br />
Let us peep into the recent poverty<br />
estimates for India brought out by such<br />
international agencies as the World Bank<br />
(WB) and the Asian Development Bank<br />
(ADB). Their estimates contradict the<br />
poverty pattern based on India’s OPL. Not only the poverty<br />
ratios of the order of 41.6% (WB) and 54.8% (ADB) in 2005<br />
are far in excess of 20.4% (OPL) but the fall in these ratios<br />
have been accompanied by the rise in the number of the<br />
poor which varies in the range of 456 million to 622 million<br />
unlike the symmetrical pattern given by the OPL. This is<br />
astonishing when the same agencies regard India as an<br />
emerging super economic power and an important constituent<br />
of the ‘emerging markets’- Brazil, India ,China, and<br />
Russia (BRIC) not giving any credit whatsoever to the<br />
impact of sustained high economic growth of nearly six<br />
percent per annum on poverty implying thereby that our<br />
India’s Poverty<br />
Gap Index (PGI)<br />
has also fallen<br />
from twenty<br />
percent in 1980 to<br />
eleven percent<br />
in 2005<br />
growth strategy is not pro-poor.<br />
On the other hand, considering the value of India’s OPL<br />
exactly equal to one dollar per day cutoff line, Martin<br />
Ravallion (2008) observes that during 1980 to 2005 India’s<br />
poverty ratio fell from 42% to 24% accompanied by the fall<br />
in the number of the poor from 296 million to 267 million.<br />
India’s Poverty Gap Index (PGI) has also fallen from 20<br />
percent in 1980 to 11% in 2005.<br />
Commenting on the WB’s updated estimates of global poverty,<br />
Sanjay G. Reddy writes, “there is no basis to conclude<br />
that the new set of PPP rates (Purchasing Power Parity)<br />
employed to generate the new poverty estimates are closer to<br />
the truth”(2008).<br />
The recently emerged symmetrical poverty pattern of<br />
declining poverty ratio accompanied also by the falling<br />
absolute <strong>size</strong> of the poor itself is beset with challenges. It is<br />
argued that “ the poverty line updated for price alone will<br />
be unable to meet the calorie requirements. The per capita<br />
monthly expenditure which corresponds to the required<br />
calorie norms is much higher than the OP Lines.” (T. K.<br />
Krishna kumar, Jayrama Holde, Puja Guha, 2008). The<br />
authenticity of the current poverty<br />
pattern depends on the matching of the<br />
calorie consumption pattern with the<br />
calorie norms. Unfortunately, 76% of the<br />
population living in households consume<br />
per capita calorie below the ‘norms’<br />
prescribed. Though the real average<br />
household consumption expenditure<br />
during 1983-2004-05 has increased, the<br />
per capita calorie consumption has<br />
decreased. This explains the divergence<br />
between the two poverty measures-one based on real<br />
expenditures and the second on calorie cutoff—21.8 and<br />
76% respectively (Angus Deaton and Jean Dreze, <strong>2009</strong>).<br />
This suggests rather a poor link between the OPL and<br />
calorie requirements due to changes in dietary practices<br />
(Ranjan Ray, 2008). Does it mean the observed poverty<br />
pattern during 1994-95 to 2005-06 is fluke and an eye wash<br />
or simply propagandist? Is this trend worth ignoring? The<br />
answer is firm ‘no’. Reasons given below explain our<br />
assertion.<br />
First, the emergence of the poverty pattern during the<br />
last decade has coincided with the period of sustained high<br />
16 THE IIPM THINK TANK
T HE POVERTY PUZZLE<br />
economic growth path and low inflation rate unlike the<br />
period 1973-74 to 1993-94 \ 1994-95. Second, the deviation<br />
between the two poverty estimates reported earlier should<br />
not necessarily be interpreted as the fall in the nutritional<br />
status of the population. Deaton and Dreze observe that “<br />
without understanding why per capita calories are falling<br />
despite rising per capita expenditures, it is difficult to<br />
decide what, if anything, these numbers (two-thirds to<br />
four- fifths of rural population in 1983 and 2004-05<br />
respectively and from 65% to 75% in India as a whole) tell<br />
us about poverty.” Moreover, even if the poor engaged in a<br />
globalised economy are becoming a little richer, by<br />
implication, those poor brought above the OPL should<br />
have become relatively better off. Third, according to “A<br />
Special Report on the New Middle Classes” (The Economist,<br />
February 14 th , <strong>2009</strong>) the surge in the middle class<br />
population (population living on $2- $13 a day, 2005 prices<br />
at PPP) by 1.2 billion between 1990 and 2005 is by and<br />
large”attributed to the persons lifted out of poverty. Since<br />
majority of them are dangerously close to the poverty line,<br />
they do not have a good hold on the middle class status<br />
and are likely to slip backwards”. The<br />
Indian middle class grew by 116.9<br />
million from 146.8 million in 1990 to<br />
263.7 million in 2005. As per the classification<br />
of the world middle class into the<br />
upper ($9-$13 a day) and the lower<br />
middle class ($2 -$9 a day) in the ratio of<br />
1: 11 (around), 107.9 million Indian<br />
persons belong to the lower middle class<br />
out of additional 116.9 million. How<br />
many poor persons brought above the<br />
poverty line are a part of the lower middle class? If the<br />
number is good enough, it lends credence to the phenomenon<br />
of growing middle class and the resultant spurt in<br />
domestic demand. Fourth, when the emerging markets’<br />
(BRIC) resilience to the current economic meltdown<br />
(financial crises) is, itself, in question, to sustain and<br />
promote further the emerging Indian poverty pattern<br />
invites a renewed focus on our growth strategy. Which of<br />
the following three—export-led, overseas borrowing and<br />
equity financed and domestic demand- led—either<br />
individually or jointly, will act as a cushion against such<br />
periodic bouts?<br />
Frame Work of Analysis<br />
It is our contention<br />
that shifting from<br />
income poverty to<br />
multidimensional<br />
poverty, in all<br />
probability, may<br />
perpetuate both<br />
At the all India level, we propose to contrast the poverty<br />
pattern during 1994-95 to 2005-06 from the earlier one<br />
between 1973-74 and 1993-94 in terms of three macro<br />
variables--- (1) economic growth, (2) inflation, and (3)<br />
population growth. This is covered in section-1 on poverty<br />
and economic growth. At the state level, we have examined<br />
trends in poverty among the fourteen major states accounting<br />
for around nine-tenth of total population in 2001 classifying<br />
them into demographically and economically more and<br />
less progressive states taking all-India as the cutoff point.<br />
This constitutes section-2 on state level poverty trends.<br />
Section -3 is on concluding observations.<br />
SECTION-1<br />
Poverty and Economic Growth<br />
With regard to the poverty pattern during 1973-74 to 1993-<br />
94, it is appropriate to quote the observation made by the<br />
Economic Survey (2001-02): “ though the poverty rate<br />
declined , the number of poor remained stable at around 320<br />
million for a fairly long period of two decades<br />
(1973-74-1993=94) due to a countervailing<br />
growth in population”. How to explain<br />
this asymmetrical pattern? Can we take<br />
the only explanation offered by the survey<br />
at its face value?<br />
Let us gauge the extent of the impact of<br />
population growth on the poverty pattern<br />
by making two simplistic assumptions.<br />
First, keep the total population in 1951 of<br />
361 million unchanged as it is almost<br />
equal to 320 million poor in 1973- 74 and<br />
1993-94 (365 million in 1994-95). Taking 1951 <strong>size</strong> of<br />
population as the base, the estimated number of the poor in<br />
1993-94 works out to just 130 million with the fall in poverty<br />
ratio from 55% in 1973-74 to 36% in 1993-94. The estimated<br />
number is 41% of the actual number (320 million). Second,<br />
now keep the poverty ratio unchanged and allow for the<br />
growth of population. Taking the poverty ratio of 55% in<br />
1973-74 as the base, the number of the poor so calculated<br />
shoots up to 496 million in 1993-94 from 320 million—an<br />
increase of 1.6 times the actual number. Both the calculations<br />
show a formidable impact of the population <strong>size</strong> on the<br />
numerical <strong>size</strong> of the poor persons.<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
17
M ANAGEMENT OF DEVELOPMENT<br />
Table 1-A: Factors Influencing Distinct Poverty Patterns<br />
Year Poverty Ratio (%) Number of<br />
Poor(Million)<br />
Population<br />
Growth (% P.A.)<br />
Economic Growth<br />
GNP (1999-2000<br />
Prices) % P.A.<br />
Inflation<br />
WPI(93-94=100) %<br />
(1) (2) (3) (4) (5) (6)<br />
1973-74<br />
54.9<br />
321<br />
2.5<br />
4.8 (3.08) 11.8 (10.9)<br />
1977-78<br />
51.3<br />
329<br />
(1971-81)<br />
1983-84<br />
44.5<br />
323<br />
2.4<br />
5.6 (5.5) 6.8 (8.0)<br />
1989-90<br />
34.3<br />
290<br />
(1981-91)<br />
1990-91 35.6 307 4.8 10.6<br />
1993-94<br />
36<br />
320<br />
2.2<br />
6.6<br />
5.4<br />
1994-95<br />
39.6<br />
365<br />
(1991-2001)<br />
(5.7)<br />
(8.12)<br />
2005-06<br />
20.4<br />
228<br />
1993-94<br />
2004-05 (URP)<br />
36<br />
27.5<br />
320<br />
300<br />
6.3 5.6<br />
1999-2000<br />
2004-05 (MRP)<br />
26.1<br />
21.8<br />
260<br />
239<br />
1.65(2001-08)<br />
(Projected)<br />
6.1<br />
(7.03)<br />
4.98<br />
(4.68)<br />
Sources: (1) Various issues of Economic Survey, Ministry of Finance, Government of India.<br />
(2) K.L Datta. “An Estimate of Poverty Reduction between 2004-05 and 2005-06.” Economic and Political Weekly, Vol. 43, No.47, November 22-28, 2008<br />
(3) Census of India 2001.<br />
(4) Economic Survey 2007-08<br />
(5) (a) Economic Survey 2001- 02, 2007-08<br />
(b) Economic and Political Weekly, April 25 th - <strong>May</strong> 1 st , <strong>2009</strong>.<br />
Notes: (1) Figures in column 4 are decennial average annual rates of population growth.<br />
(2) URP-Uniform Recall Period: MRP-Mixed Recall Period.<br />
(3) Figures in brackets in column 5 are the average annual growth rates for the decades 1970s,1980s, 1990s and for the period 2000-01-2006-07.<br />
(4) Figures in brackets in column 6 are average annual inflation rates for the decades 1970s, 1980s, 1990s and for the period 2000-01 to 2008-09. Inflation rate for the decade 1970s<br />
is the average of 70—71,71-72 to 75-76 (10.8%) and 75-76,76-77 to 80-81 (11%).<br />
(5) Since 1995-96 to 2005-06 the average annual price rise in the range of 5 to 5.5% is almost one-half of during 1970s and1990-91 to 1994-95. “ India’s performance on inflation has<br />
improved significantly since the mid-1990s” (Economic Survey,2001-02).<br />
How have the poverty ratio and the number of the poor<br />
tended to behave during the intervening years of the period<br />
1973-74 to 1993-94 once these assumptions are dropped?<br />
Our contention is that given the rate of population growth,<br />
the fluctuations in the rates of economic growth and inflation<br />
might have influenced the course of poverty pattern. Concentrate<br />
on the quinquennium 1973-74 to 1977-78. Though<br />
the poverty ratio fell from 55% to 51.3%, the absolute<br />
number of the poor increased marginally from 321 to 329<br />
million—an asymmetrical pattern. The increase was caused<br />
jointly by the average annual rate of economic growth (Gross<br />
National Product-GNP) of 4.8% during 1973-74 to 1977-78<br />
and the inflation rate of 11.8% per annum (Table---1-A).<br />
During the decade 1970s, the growth rate was just three<br />
percent and the inflation was almost 11%.<br />
Focusing on the period 1983-84 to 1989-90, the persistent<br />
decline in the poverty ratio was accompanied by the decline<br />
in the number of the poor persons from 323 million to 290<br />
million--- a symmetrical pattern. The emergence of this<br />
much desired pattern owes mainly to the acceleration in the<br />
rate of economic growth to almost six percent(1985-90) as<br />
against the Seventh Plan target of five percent and the<br />
<strong>size</strong>able dip in the rate of inflation to 6.8% (1983-84-1989-<br />
90) when the rate of population growth was 2.4% per<br />
annum(1981-91).Unlike the period 1983-84-1989-90, the<br />
subsequent five year period,1990-91-1994-95, saw a persistent<br />
rise both in the poverty ratio and the number of the poor<br />
persons. The former rose from 35.6% to 39.6% and the latter<br />
from 307 million to 365 million-symmetrical but unfavourable<br />
pattern. Two main culprits of this rather disturbing<br />
outcome were below five percent annual rate of GNP growth<br />
and a relatively higher inflation rate of 10.6% (93-94=100)<br />
18 THE IIPM THINK TANK
T HE POVERTY PUZZLE<br />
when the rate of population growth was slightly lower(not<br />
higher) at 2.2% during the 1990s. These were the initial<br />
years of economic reforms regime heavily bent upon correcting<br />
the fundamentals-macro economic imbalances. The<br />
decade 1995-96 to 2005-06 - the period of further acceleration<br />
in the rate of economic growth to 6.58%, the inflation<br />
rate of around five percent and the population growth rate<br />
down to less than two percent – has seen the rebirth of the<br />
much adored pattern of declining poverty ratio and the<br />
number of the poor - a favourable symmetrical pattern. The<br />
ratio came down to 20.4% in 2005-06 from 39.6% in 1994-95<br />
and the <strong>size</strong> of the poor fell from 365 million in 1994-95 to<br />
228 million in 2005-06.<br />
Poverty estimates based either on the uniform recall<br />
period (URP) or on the mixed recall period (MRP) also<br />
endorse the earlier observed pattern. In the URP, the<br />
consumption expenditure data for all the items are collected<br />
from a thirty day recall period. These estimates show that<br />
between 1993-94 and 2004-05, the poverty ratio fell from<br />
36% to 27.5% and the absolute number from 320 million to<br />
300 million.<br />
In the MRP, the consumption expenditure<br />
data for five non- food items, namely,<br />
clothing and foot ware, durable goods,<br />
education, and institutional medical<br />
expenses are collected from a 365 day<br />
recall period, and the consumption data<br />
for the remaining items are collected<br />
from a thirty day recall period. Comparable<br />
poverty estimates for the period<br />
1999-2000 to 2004-05 show that the ratio<br />
fell from 26.1% to 21.8% and with that<br />
the number of the poor persons declined from 260 million to<br />
244 million. During the ten year URP period or the shorter<br />
MRP period, the Indian economy had hardly experienced<br />
ups and downs in the average annual rates of economic<br />
growth and inflation. (Table-1-A)<br />
There is no exaggeration when we assert that growth and<br />
inflation are two overriding factors governing the Indian<br />
poverty patterns since 1973-74. A case in point is the poverty<br />
trend in the highly populous country China. India was better<br />
placed than China in the mid seventies (1975) when its<br />
poverty ratio of 55% was lower than China’s 59.5%. The<br />
reversal in the respective countries poverty status in 1995-<br />
One may infer<br />
that persons<br />
brought above the<br />
poverty line have<br />
benefited from<br />
accleration in the<br />
economic growth<br />
India’s poverty ratio of 36% against China’s 22.2 %-owes to a<br />
much higher rate of economic growth of the Chinese economy<br />
from a mere five percent per annum during 1970-1980 to<br />
11.1 % during 1980-1995. Comparatively India’s annual<br />
growth rate of three percent during 1970s rose to 5.6 % per<br />
annum during 1980-95(Economic Survey, 1998-99).Though<br />
the pace of economic growth and poverty reduction in India<br />
is slow compared to China, the inequality (relative poverty)<br />
has increased at a faster rate in China than in India. The<br />
share in national income of poorest 20 % in China is 5.9 %<br />
as against 8.2 % in India. The poorest 20 % receives about<br />
40 % of per capita average income in India as against 30 %<br />
in China (Amit Bhaduri, 2008). Thus, the economic growth<br />
has driven India towards a “new era” of low ‘absolute’ as well<br />
as ‘relative’ poverty. One is tempted to infer that the persons,<br />
numbering in the range of 92 to 137 million brought above<br />
the poverty line have benefited from the acceleration in the<br />
rate of economic growth and are instrumental in controlling<br />
the speed of growing inequality. It would be in our interest to<br />
strengthen the favourable symmetrical pattern by moving<br />
ahead on a high growth path with inflation rate of around<br />
five percent. This seems to be a plausible<br />
way of getting rid of their vulnerability.<br />
Retaining majority of the poor brought<br />
above the poverty line, in itself, will be a<br />
great achievement. Conferring permanent<br />
‘non-poor’ status to these persons lends<br />
substance to both the processes.<br />
The number of poor brought above the<br />
poverty line in the range of 92 to 137<br />
million accounts for 9-12 % of the total<br />
population and for 20 to 30 % of the<br />
addition to the total population during 1993-94 to 2005-06.<br />
If this number is genuinely a part of ‘non-poor, then it is a<br />
source of boosting up the domestic demand making the<br />
Indian economy more resilient.<br />
Poverty and Illiteracy<br />
Poverty and illiteracy are very similar to the proverbial<br />
Siamese Twins. For the first time on the eve of the 21 st<br />
century the number of poor and illiterate persons has fallenthe<br />
former with the decline in the poverty ratio and the latter<br />
with the increase in the literacy rate. At present 228 million<br />
are poor persons and 296 are illiterates-the closeness of<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
19
M ANAGEMENT OF DEVELOPMENT<br />
these numbers is significant.<br />
We take the help of two studies on life expectancy to<br />
examine this welcome trend. One study has revealed that for<br />
every extra year of life expectancy in population, there is a<br />
seven percent rise in per capita Gross National Product<br />
(GNP)-(The Economist, <strong>2009</strong>). In the second study, life<br />
expectancy is taken as a factor in explaining the intergenerational<br />
nature of poverty. Life expectancy lower than the<br />
average implies a less than the average per capita GDP<br />
growth rate, low human capital accumulation and poverty<br />
ratio above the average. Low life expectancy deters poor<br />
families from investing in education which in turn percolates<br />
down to their children. Like their parents they also work as<br />
non-educated workers and remain poor. The poverty trap<br />
created by low life expectancy and not enough human capital<br />
accumulation perpetuates intergenerationally (Amparo Castello<br />
Climent and Refel Domenech, 2008). These two types<br />
of deprivations- poverty and illiteracy- are intergenerational<br />
in nature in the same manner as the intergenerational debt<br />
of the Indian farming community.<br />
In the wake of the falling numbers of poor and illiterates,<br />
the question that requires to be probed is: have these persons<br />
succeeded in overcoming the interlinked deprivations of<br />
poverty and illiteracy? If yes, then these deprivations will<br />
cease to be intergenerational over a period of time. Since<br />
both are empowered economically and educationally, to that<br />
extent, they start realizing the virtue of this empowerment<br />
which they would prefer their children to emulate or imbibe.<br />
To know whether this process of poverty and illiteracy<br />
ceasing to be intergenerational has, in fact, commenced,<br />
the newly emerged class of ‘non-poor’ is to be identified to<br />
assess any improvement in the quality of life on account of<br />
improvement in their human development status. This<br />
identification will lend substance to the OPL which the<br />
critics have found propagandist.<br />
Rural-Urban Poverty<br />
Our emphasis on locating the birth of the “non-poor” class<br />
can further be supported on one more count having a<br />
demographic content, namely, the rural-urban divide of poor<br />
persons during 1973-74 to 1993-94 when their number<br />
remained constant at 320 million.<br />
During this twenty year period the number of rural poor<br />
fell from 261.3 million to 244 million whereas the number of<br />
urban poor rose from 60.3 million to 76.3 million. As a<br />
result, the rural poor accounting for a little above four-fifths<br />
came down to three-fourths of the total number of poor. If<br />
the increase in the urban poor is caused by the migration of<br />
Table 1-B : Long Term Rural-Urban Poverty Trends<br />
Year Rural Urban Total<br />
(1) (2) (3) (4)<br />
Ratio(%) Number(Mill.) Ratio(%) Number(Mill.) Ratio(%) Number(Mill.)<br />
1973-74 56.4 261.3 49 60 54-9 321.3<br />
1977-78 53.1 264.3 45.2 64.6 51.3 328.9<br />
1983 45.3 252 35.6 70.9 44.5 322.9<br />
1987-88 39.1 231.9 38.2 75.2 38.9 307.1<br />
1993-94 37.3 244 32.4 76.3 36 320.3<br />
1999-2000 27.1 193.2 23.6 67.1 26.1 260.3<br />
2003 24.03 184.8 22.63 68.8 23.8 253.6<br />
2004-05 21.8 170.3 21.7 68.2 21.8 238.5<br />
2005-06 20.4 161.3 20.7 66.5 20.4 227.8<br />
Source: (1)Various issues of Economic Survey<br />
(2) K. L. Datta: Same as source 2 of Table 1-A<br />
(3) R. Radhakrishnan & Manoj Panda: “Macroeconomics of Poverty Reduction-India case Study”(U.N.D.P.),IGIDR,<br />
Mumbai,2006<br />
20 THE IIPM THINK TANK
T HE POVERTY PUZZLE<br />
the rural poor to urban areas, then it simply amounts to a<br />
locational shift of poor population without any improvement<br />
in their levels of living.<br />
This pattern has altered for good since 1999-2000 when<br />
both these numbers have started falling simultaneously<br />
though the pace of urbanization has slowed down from six<br />
percentage points increase (17.7 % to 23.7%) during 1961-<br />
1981 to four percentage points rise (23.7% to 27.8%) during<br />
1981-2001. In 2005-06, the number of rural poor was further<br />
lower at 70 % of the total. The gap in the rural-urban poverty<br />
ratio of 9.68 percentage points (45 .31 and 35.63 respectively<br />
in 1983) was completely wiped out in 2005-06- the respective<br />
ratios being 20.4 and 20.7 (Table 1.B). This is mainly on<br />
account of the enhanced pace of fall in the number of rural<br />
poor by 83 million during a relatively period of shorter<br />
duration(1993-94 to 2005-06) as against the decline of only<br />
17 million during 1973-74 to 1993-94. The decline in the<br />
number of urban poor by 10 million between 1993-94 and<br />
2005-06 is of much lower magnitude comparatively.<br />
Thus, the rate of reduction in rural poverty has outstripped<br />
that of the urban poverty. The acceleration of the<br />
rate of economic growth appears to have<br />
trickled down and thus inclusive. Especially<br />
between 2004-05 and 2005-06, the<br />
interplay of the following three factors<br />
has played a crucial role in bringing about<br />
this hospitable trend: (a) 8.5 % average<br />
economic growth; (b) almost six percent<br />
growth in the agricultural sector in<br />
2005-06 compared to an average annual<br />
rate of growth of five percent in the<br />
previous two years, and (c) stable inequality<br />
in the distribution of per capita consumption (K. L.<br />
Datta, 2008). Thus, the number of rural poor crossing the<br />
OPL does not appear to be fake.<br />
Hierarchy of the Incidence of Poverty<br />
This much appreciable poverty pattern does not seem to<br />
have made any dent on the hierarchy of the incidence of<br />
poverty as can be seen from the incidence of poverty among<br />
the three broadly classified socio-economic groups—Scheduled<br />
Castes and Scheduled Tribes(SCs\STs), other backward<br />
communities(OBCS), and Others.<br />
According to NSSO Seventh quinquennial consumption<br />
Unless incidence<br />
of poverty of SCs<br />
& STs are brought<br />
down significantly,<br />
the slow pace of<br />
poverty reduction<br />
will continue<br />
expenditure survey (July 2004-June 2005), the incidence of<br />
poverty among rural and urban SCs and STs is disproportionately<br />
higher than their share in population. Their<br />
respective poverty shares of 43.35 % and 31.73 % (rural)<br />
and 29.81 % and 33.12 % (urban) are much above their<br />
share of 16.2 % (SCs) and 8.2 % (STs) in total population.<br />
The corresponding poverty ratios among rural OBCs and<br />
Others are 22.9 % and 13.01 % respectively. The respective<br />
poverty ratios among urban OBCs and Others are 24.22 %<br />
and 12.06 %.<br />
High incidence of poverty among nearly one-fourth of<br />
population might be responsible for the overall slow pace<br />
of poverty reduction. The question deserves to be probed<br />
is: How many persons brought above the OPL belong to<br />
the SCs and STs? Unless their high incidence of poverty<br />
is brought down significantly, the slow pace of poverty<br />
reduction continues despite high economic growth as in<br />
their case cultural causes of poverty namely, indifference,<br />
laziness, and ineptitude might have played the part.<br />
Economic growth to be truly sustainable and inclusive<br />
has to break the stranglehold of the age-old social<br />
stratification.<br />
In nutshell, the decade old poverty<br />
pattern featured by the decline in the<br />
absolute number both of the poor and<br />
illiterates and the relative faster<br />
decline in rural poverty has coincided<br />
with the period of sustained high rate<br />
of economic growth and low inflation.<br />
This gives the impression that the<br />
growth has trickled down and become<br />
inclusive. To be on a more safer ground,<br />
the newly emerged “non-poor’ class in the range of 92-137<br />
million need to be identified and monitored to trace their<br />
chances of vulnerability, to assess the degree of economic<br />
and educational empowerment acquired by them making<br />
inroads on the intergenerational nexus of poverty and<br />
illiteracy, and to understand more intimately the puzzle<br />
between the declining calorie intake below norm in the<br />
face of rising real consumption expenditures. Then, the<br />
OPL and the ongoing symmetrical pattern are expected to<br />
lend credibility to the Indian poverty estimates. Policy<br />
makers have to respect this pattern enabling teeming<br />
millions to be an active agent of the development process.<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
21
M ANAGEMENT OF DEVELOPMENT<br />
SECTION-2<br />
Poverty Trends among States<br />
Fourteen major states accounting for 87.5 % of total population<br />
in 2001 are undoubtedly heterogeneous demographically<br />
and economically. So the possibility of varying poverty<br />
trends cannot be ruled out.<br />
States are classified into demographically and economically<br />
more and less progressive states taking all-India as<br />
a cutoff point to examine the trends in poverty at the<br />
state level.<br />
A new factor assisting the long term high economic growth<br />
path, namely, “Demographic Dividend” has emerged on the<br />
horizon. Various studies using a panel data of countries from<br />
1960-2000 have established a positive association between<br />
the age structure and economic growth prospects for India<br />
over the next thirty years (K. S. James,2008). In this respect,<br />
India has an advantage over China. China’s dependency<br />
ratio- the percentage of the working population (15-65<br />
age-group) to the rest (0-14 and 65+ age-groups)—is likely<br />
to deteriorate from 2010. In contrast, India’s dependency<br />
ratio is to improve until the 2040s (Edward Luce, 2007). If<br />
demographic dividend, bonus or gift,<br />
implying a smaller dependency ratio, can<br />
speed up the process of economic growth<br />
both from the demand side (higher<br />
domestic demand) and the supply side<br />
(greater propensity to save and invest),<br />
then in turn, it can also propel the pace of<br />
poverty reduction.<br />
There is no need to restate the role of<br />
life expectancy, another demographic<br />
feature, in understanding the association<br />
between growth, human capital accumulation and poverty,<br />
which has already been explained in section-1. It is intended<br />
to test the hypothesis that the demographically progressive<br />
states are economically advanced and hence experience a<br />
faster decline in their poverty ratios versus demographically<br />
less progressive states.<br />
States are progressive or laggard if change (fall or no or<br />
negligible fall) in their dependency ratios (DR) is greater or<br />
smaller than the all-India average between 1961 and 2001.<br />
Or alternatively, if their dependency ratios are below or<br />
above the all-India average.<br />
The DR of each of the following eight states is below the<br />
India has an<br />
advantage over<br />
China. China’s<br />
dependency<br />
ratio is likely to<br />
deteriorate from<br />
year 2010<br />
all-India average. The states are: Andhra Pradesh, Gujarat,<br />
Karnataka, Kerala, Maharashtra, Punjab, Tamil Nadu and<br />
West Bengal. Haryana can be added to this list. Taking<br />
Punjab’s DR of 1.00 in 1961 as that of Haryana, then<br />
Haryana’s DR of 0.77 in 2001 shows a 23 percentage points<br />
fall which is faster than the 12 percentage fall in the all- India<br />
average of 0.75 These eight states’ average DR was 0.65<br />
(0.66 including Haryana) in 2001 as against India’s 0.75. In<br />
the four BIMARU states- Bihar, Madhya Pradesh, Rajasthan<br />
and Uttar Pradesh- there was virtually no change in the<br />
said ratio between 1961 and 2001. Their average DR of 0.88<br />
was far above the all-India average. Though Orissa’s ratio of<br />
0.71 is lower than the all-India average, it is not a part of the<br />
eight\nine progressive states on the basis of a much slower<br />
decline by ten percentage points compared to the 24 percentage<br />
points decline in the combined average of eight states.<br />
The average life expectancy of 66.9 years in 2001 of the<br />
progressive nine states was 3.4 years above the all-India<br />
average of 63.5 years. Average life expectancy of 60.4 years<br />
of the four BIMARU states and that of 59.6 years of Orissa<br />
were respectively three to four years lower than the average<br />
for all-India. Even in terms of demographic<br />
features other than the above<br />
two, namely, death rate, infant mortality<br />
rate, and the rank based on Human<br />
Development Index (HDI), these five<br />
states are not even up to the all India<br />
level. Their average death rate of 8.5 is<br />
higher than 7.6 for all-India and also<br />
infant mortality rate of 70.6 as against<br />
all-India’s 58. The respective average<br />
rates for nine states are 6.87 and 43.3.<br />
HDI ranks of states have remained fairly stable between<br />
1961 and 2001. The average HDI rank of five of the progressive<br />
nine states is much superior to that of 11 of the other five<br />
less progressive states (Table-2-A).<br />
How are these states placed economically? Are the<br />
demographically more progressive states more advanced<br />
than the less progressive one?<br />
During 1980-81 to 1991-92, the Indian economy grew at<br />
the annual rate of 3.1 % (Per capita income at 1999-2000<br />
prices) and from 1992-93 to 2002-03, its per capita income<br />
growth rate was higher at 3.7 % per annum (Economic<br />
Survey, 2007-08). Seven states whose growth rates (per<br />
22 THE IIPM THINK TANK
T HE POVERTY PUZZLE<br />
Table 2-A: Rates of Poverty Reduction at the State Level<br />
Demographically and Economically More Progressive States<br />
State<br />
Dependency<br />
Ratio<br />
Death<br />
Rate<br />
Life<br />
Expectancy<br />
(Years)<br />
Infant<br />
Mortality<br />
Rate<br />
HDI Rank<br />
Economic Growth<br />
(Per Capita GSDP)<br />
%<br />
Rate of Poverty<br />
Decline<br />
(%)<br />
(1970-2003)<br />
1961 2001 2001 2001 2001 1991 2001 1980-81 1993-2004 Rural Urban<br />
1992-93<br />
Andhra Pradesh 0.84 0.66 64.4 7.3 57 9 10 3.41 4.3 4.17 1.67<br />
Gujarat 0.92 0.66 64.1 7.1 54 6 6 2.84 3.55 3.57 3.82<br />
Haryana N.A. 0.77 66.9 6.9 43.3 5 5 3.71 3.25 3.42 3.98<br />
Karnataka 0.92 0.66 65.3 7.1 50 7 7 3.42 5.57 2.73 1.69<br />
Kerala 0.94 0.58 74 6.4 14 1 1 2.26 3.92 4.72 3.37<br />
Maharashtra 0.85 0.69 67.2 6.7 36 4 4 3.81 2.73 1.15 1.3<br />
Punjab 1 0.68 69.4 6.7 44 2 2 3.19 2.29 3.87 4.38<br />
Tamil Nadu 0.76 0.56 66.2 7.4 37 3 2 3.84 3.61 2.98 1.57<br />
West Bengal 0.85 0.67 64.9 6.4 38 8 8 2.43 5.42 1.98 1.49<br />
Average 0.89 0.66 66.9 6.87 43.3 5 5 3.21 3.85 3.18 2.59<br />
Demographically and Economically Less Progress States<br />
Bihar 0.92 0.92 61.6 8.1 61 15 15 1.55 2.19 1.1 1.96<br />
Madhya Pradesh 0.85 0.83 58 9 76 13 12 1.64 1.77 2.44 0.75<br />
Orissa 0.81 0.71 59.6 9.5 75 12 11 1.69 2.33 0.97 1.4<br />
Rajasthan 0.92 0.88 62 7 68 11 9 3.83 2.24 2.84 1.71<br />
Uttar Pradesh 0.88 0.9 60 8.7 73 14 13 2.34 0.89 0.91 1.62<br />
Average 0.89 0.88 60.4 8.2 69.5 13 12 2.34 1.77 1.82 1.51<br />
All India 0.87 0.75 63.5 7.6 58 - - 3.1 3.7 1.69 1.64<br />
Sources: (1) K.S. James “Glorifying Malthus: Current Debate on ‘ Demographic Dividend’ in India”. EPW, June 21,2008.<br />
(2)Ashish Bose: “ Increasing Life Expectancy and the Elderly” EPW,August,9,2008.<br />
(3) Govt. of India : Planning Commission,2002.<br />
(4) R. Radha Krishnan & Manoj Panda : “ Macro economics of Poverty Reduction-India Case Study”. IGIDR, Mumbai, 2006. ( Tables: 2.5, 2.10,2.12, 3.1, and 3.6).<br />
(5) Economic Survey of India, 2007-08.<br />
capita Gross state Domestic Product) were higher than the<br />
all-India between 1980-81 and 1992-93 are Andhra Pradesh,<br />
Haryana, Karnataka, Maharashtra, Tamil Nadu, Punjab and<br />
Rajasthan. All but Rajasthan are demographically better<br />
placed. States whose growth rates exceeded the Indian<br />
growth rate during 1993-2004 are Andhra Pradesh, Gujarat,<br />
Haryana, Karnataka, Kerala, Tamil Nadu and West Bengal.<br />
All the states have retained their demographically progressive<br />
character. Their average annual growth rate (PCGSDP)<br />
accelerated to 4.23 % (1993-2004) from 3.6 % between<br />
1980-81 and 1992-93. Out of the remaining seven states, not<br />
in the above list, five-four BIMARU and Orissa states- are<br />
economically and demographically less advanced. The<br />
notable exceptions are Maharashtra and Punjab. The<br />
average annual growth rate of these seven states fell from<br />
2.33 % to 2.06 % between two periods under consideration.<br />
The average annual growth rate of five demographically less<br />
progressive states was not only lower than Maharashtra and<br />
Punjab but fell relatively faster from 2.21 % to 1.88 %. Thus,<br />
a close association, not necessarily causation, is observed<br />
between demographic and economic levels.<br />
Let us view the rate of poverty reduction during 1970-2003<br />
separately for rural and urban areas of the nine more and<br />
five less progressive states. In the nine states the average<br />
rates of rural and urban poverty reductions of 3.18 % and<br />
2.59 % respectively are above the average rates of 1.82 %<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
23
M ANAGEMENT OF DEVELOPMENT<br />
and 1.54 % observed in the rural and urban areas of the four<br />
BIMARU states respectively. The respective rates of 0.97 %<br />
and 1.40 % for the Orissa are the lowest. The average rate of<br />
rural poverty reduction being higher than the urban poverty<br />
can be taken as the sign of inclusive growth. If majority of<br />
the poor who have crossed the OPL belong to the nine states,<br />
it would be better to identify them to verify their non-poor<br />
status. Are they less vulnerable compared to the non-poor in<br />
less progressive states? Also, how many SCs and STs in these<br />
states have crossed the OPL since they bear the brunt of the<br />
incidence of poverty (Table-2A).<br />
The state wise poverty trends suggest the divergence and<br />
not the convergence. The polarization will gather momentum<br />
unless economic growth in less progressive states<br />
catches up with the more advanced states. Since catching up<br />
is time consuming, they may continue to lag behind. Then,<br />
what is the alternative to halt the widening divergence? What<br />
about making poverty alleviation measures more result<br />
oriented if that is the surest way to prevent political strife and<br />
turmoil? (A.K.Sen 2006). On one more ground also the<br />
implementation of these measures is to be strengthened as<br />
these less progressive states together account for a higher<br />
proportion of SCs and STs(28 %) than the all-India average.<br />
Here comes the role of expenditure on social services and<br />
poverty alleviation measures along with role of economic<br />
growth, inflation and population growth to speed up the<br />
poverty reduction rate. During 1990-91 to 2006-07, the per<br />
capita real expenditure (1999-2000 prices) on social services<br />
and poverty alleviation measures both by the central and<br />
state governments as a proportion of per capita GDP has<br />
increased from 5.9 % to 6.2 % (EPW, 2008). But almost all<br />
the studies on the impact of these measures have categorically<br />
concluded that the outcomes of such measures are not<br />
in proportion to outlays as they are not well targeted and<br />
implemented.<br />
SECTION-3<br />
Concluding Observations<br />
Asymmetrical poverty pattern of falling poverty ratio<br />
without any decline in the numerical <strong>size</strong> of the poor during<br />
1973-74 to 1993-94\ 1994-95 highlighted in the Economic<br />
Survey has given only a partial picture of the pattern as it has<br />
simply focused on population ignoring the impact of fluctuations<br />
in the rates of economic growth and inflation on<br />
poverty. In fact, the prominent feature of the pattern is its<br />
symmetrical nature, i. e. , falling\ rising poverty ratio accompanied<br />
also by the falling \ rising number of the poor brought<br />
about by the higher\ lower rate of economic growth and low\<br />
high inflation rate even when the rate of population growth<br />
has slowed down.<br />
The period, 1993-94 to 2005-06, of sustained high rate of<br />
economic growth and low inflation has lent consistency to<br />
the symmetrical pattern of falling poverty ratio as well as the<br />
number of the poor. During this period persons ranging<br />
from 92-137 million have crossed the Official Poverty Line<br />
(OPL). They are in the possession of the non-poor status<br />
having crossed the “take-off” stage of poverty.<br />
Analysis of the state level poverty trends has shown that<br />
India is poised for the continuation of the high economic<br />
growth path phase accompanied by the falling poverty ratio<br />
and the number of the poor. The two contributory demographic<br />
factors are ‘ demographic dividend’ (lower dependency<br />
ratio) and the improved and still rising life expectancy.<br />
The classification of 14 major states into more and less<br />
progressive states has revealed that in the nine more progressive<br />
states the lower average dependency ratio and the higher<br />
life expectancy than the all-India average have contributed<br />
to the higher average annual rate of economic growth than<br />
the all-India average and the resultant relatively faster rate<br />
of poverty reduction.<br />
The lower average rate of poverty decline in the five less<br />
progressive states, accounting for two-fifth of the total<br />
population, might have pulled down the overall rate of<br />
poverty reduction than the one expected out of rapid growth<br />
of per capita GDP. High incidence of poverty among the SCs<br />
and STs and poor implementation of poverty alleviation<br />
measures, to an extent, may be other factors for the overall<br />
slow rate of poverty decline.<br />
This symmetrical pattern fortunately has found a good<br />
companion in the pattern of falling number of illiterates with<br />
the rise in the literacy rate. These simultaneous appearance<br />
of the above two patterns seems to have initiated the process<br />
of empowerment of the underprivileged. The fillip to this<br />
process will also be provided by the pattern of rural poverty<br />
ratio declining at a rate higher than that of the urban<br />
poverty, where the majority of the poor are concentrated.<br />
Glimpse of economic growth trickling down and becoming<br />
inclusive appears to have arisen on the Indian arena.<br />
24 THE IIPM THINK TANK
T HE POVERTY PUZZLE<br />
Countering the global economic downturn to sustain our<br />
high economic growth path with tolerable inflation levels<br />
responsible for the emergence of the poverty pattern outlined<br />
in the text requires a policy direction on three counts.<br />
One, understanding fully the significance of domestic<br />
demand-led vs. export-led and overseas borrowing and<br />
equity financed-led growth strategies in such a scenario.<br />
Two, maximizing the gains from demographic dividend and<br />
increasing life expectancy by deploying persons of the<br />
working age group most productively and gainfully. Three,<br />
complete overhauling of poverty alleviating measures<br />
assuring that money spent on different programmes reaches<br />
in full to the intended beneficiaries. The problem is not one<br />
of under spending but of disciplining spending.<br />
While appraising and appreciating this poverty pattern,<br />
throughout the paper rather a strong plea is made to identify,<br />
survey, and monitor the persons who on the basis of the<br />
Official Poverty Line estimates are above the poverty. Who<br />
are these persons and where located? Have they continued to<br />
be above the OPL? Are they the part of the declining poverty<br />
gap index? To which social strata do they belong? How has<br />
their consumption pattern changed? Have they fulfilled the<br />
calorie norm? Where are they employed? Have they overcome<br />
their and their children’s illiteracy? Is there any<br />
improvement in their purchasing power? Are they still<br />
exposed to the risk of vulnerability? Taken in the right spirit,<br />
this plea is intended to serve as a guide to the debatable<br />
issues of the questionable nature of the newly emerged<br />
poverty pattern, whether the growth strategy is pro-poor or<br />
not, and the relevance of calorie norms.<br />
References and Additional Thinking<br />
• The Economist: “Special Report on the New Middle<br />
Classes in Emerging Markets”. February,14 th -20 th , <strong>2009</strong>.<br />
• Ministry of Finance,Govt. of India: “ Economic Survey,<br />
2007-08<br />
• Rosa A. Abraham: “Multidimensional Poverty and Vulnerability”.<br />
Economic and Political Weekly, <strong>May</strong> 17 th , 2008.<br />
• World Bank: “ World Bank Survey on Global Poverty”.<br />
2007<br />
• Himansu: “What are these estimates and what do they<br />
imply? Economic and Political Weekly.<br />
• Editorial: Economic and Political Weekly, October,<br />
25 th -31 st , 2008.<br />
• Martin Ravallion : “ A Global Perspective on Poverty in<br />
India”. Economic and Political Weekly, October 25 th -31 st ,<br />
2008.<br />
• Sanjay G. Reddy: “ Differently Distorted :The W. B.<br />
‘updated’ estimates” Economic and Political Weekly,<br />
October 25 th -31 st , 2008.<br />
• T. Krishna Kumar,Jayrama Holle,& Puja Guha: “Engel<br />
Curve Method for Measuring Poverty”. Economic and<br />
Political Weekly, July 26 th , 2008.<br />
• Angus Deaton & Jean Dreze:” Food and Nutrition in India:<br />
facts and Interpretations”.EPW, February 14 th , <strong>2009</strong><br />
• Ranjan Ray: “Diversity in calorie sources and undernourishment<br />
during rapid economic growth” EPW, February<br />
23 rd , 2008.<br />
• Ministry of Finance, Govt. of India: Economic Survey,<br />
2001-02.<br />
• Ministry of Finance, Govt. of India: Economic Survey,<br />
1998-99.<br />
• Amit Bhaduri: “ Predatory Growth”.EPW, April 19 th -26 th ,<br />
2008.<br />
• Adams Roberts: “ Farewell to Youth”, P.81, The World in<br />
<strong>2009</strong>, Special issue of The Economist, <strong>2009</strong>.<br />
• Amparo Castello Climent & Rafael Domenech: “ Human<br />
capital Inequality, Life Expectancy and Economic Growth”<br />
Economic Journal, Vol. 118, issue 528, PP. 653-677, April,<br />
2008.<br />
• K. L. Datta: “ An Estimate of Poverty Reduction between<br />
2004-05 and 2005-06”. EPW, October, 25 th -31 st , 2008.<br />
• K. S. James: “ Glorifying Malthus: Current Debate on<br />
Demographic Dividend”, EPW, June 21 st , 2008.<br />
• Edward Luce: “ Inspite of the Gods- The strange rise of<br />
Modern India, P. 351<br />
• R. Radhakrishnan & Manoj Panda: “ Macro Economics of<br />
Poverty Reduction: India- case study”, U. N.D. P., 2006.<br />
IGIDR, Mumbai, 2006.<br />
• Asish Bose: “ Increasing Life Expectancy and the Elderly”<br />
EPW, August, 2008.<br />
• A. K. Sen “Identity and Violence- The Illusion of Destiny.”<br />
W. W. Norto & Co.. Inc.\ Ltd.,N. Y. 2006.<br />
• EPW:” Budgetary Expenditure on Social Sector”, March<br />
15 th , 2008<br />
(The views expressed in the write-up are personal and do not<br />
reflect the official policy or position of the organisation).<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
25
M ANAGEMENT OF DEVELOPMENT<br />
The Road to Rendition<br />
Rural India doesn’t need amnesty or alms. A mere intent to bridge<br />
the rural urban divide by doing away with the populist schemes and<br />
replacing them with pragmatic ones can not only bridge all the rural<br />
urban divide but also unleash an economic giant that would never be<br />
in recession.<br />
In most of the European cities packaged mineral<br />
water is often an alien term as even the<br />
four or five star rated hotels would<br />
have water of the sink as the staple<br />
drinking water. But such is the quality<br />
of that water that it can any day beat the<br />
best packaged drinking water<br />
available in this part of the world.<br />
Over here in India, even sixty<br />
years after attaining independence,<br />
forget anywhere<br />
else, municipal corporations<br />
of the political and<br />
the commercial capitals<br />
of this country cannot<br />
even provide water good<br />
enough to drink and stay<br />
healthy. Packaged<br />
drinking water thus is a<br />
norm than an exception.<br />
For those who cannot afford<br />
packaged water, jaundice and<br />
other water borne diseases 1 is<br />
a norm than exception. This is<br />
the tragedy of a country which<br />
is the latest entrant to the trillion<br />
dollar club 2 . One then wonders that if this is the condition of<br />
the cities then the predicament of the villages can easily be<br />
gauged. And the irony is that even then, if there is one<br />
country which can inspire hope of keeping the giant global<br />
economic machine of the future running, it is India, if there is<br />
one country which has demonstrated that pluralism and<br />
democracy can defeat radicalism, it is India. And last but not<br />
the least, if there is one country which has<br />
demonstrated that it is possible for a third world<br />
bankrupt economy to be a trillion dollar<br />
economy in less than seventeen years’<br />
time, it is again this very India 3 .<br />
For ages the concept of India<br />
has mesmerised the world and it<br />
continues to do so even now. If<br />
till a few decades back it was<br />
India’s philosophy, culture, path<br />
of non-violence and poverty that<br />
inspired the west, today, along<br />
with them it is India’s incredible<br />
entrepreneurship, giant<br />
strides in technology,<br />
military prowess, its<br />
consumerism and the sheer<br />
resilience of its economy<br />
that continues to draw<br />
admiration and awe. Two<br />
decades back when the<br />
Indian economy was on the<br />
verge of bankruptcy and could<br />
have gone the Afghanistan’s<br />
way, many in India were reluctant<br />
to open up the economy even<br />
though it was inevitable and of absolute necessity. And many<br />
more were haunted by the ghost of East India Company 4 .<br />
Nobody had imagined then that in less than two decades’<br />
time, this crumbling economy would not just germinate<br />
companies which would eventually turn out to be giant killers<br />
but would also be a torchbearer of the future global economy<br />
along with China. Tata Group’s acquisition of British steel<br />
26 THE IIPM THINK TANK
A GROWTH PARADIGM<br />
Pathikrit Payne<br />
Senior Faculty Member<br />
IIPM, New Delhi<br />
giant Corus, Jaguar and Land Rover (JLR) or the Hindalco’s<br />
takeover of Novelis are just examples of hundreds of relentless<br />
acquisitions having been made by Indian companies<br />
abroad in the recent past. And many more are waiting to<br />
happen. Yet who would believe that in India, it is still a<br />
nightmare to endeavor becoming an entrepreneur? That’s the<br />
irony of this nation.<br />
In the same league, for a trillion dollar economy which is<br />
slated to become the third largest economy of the world by<br />
2050 (according to the predictions by Goldman Sachs in the<br />
BRIC Report) 5 , India continues to be the only nation among<br />
the trillion dollar economies with a Human Development<br />
Index rank 6 which is worse than that of some of the Sub<br />
Saharan impoverished African economies. Thus the irony<br />
unfolds this way that at a time when the American economy is<br />
reeling under the pressure of recession as a consequence of<br />
their near banking collapse 7 and its iconic<br />
companies going bankrupt; and in the<br />
chain effect even Europe and South East<br />
Asia is feeling the heat, the Indian<br />
economy on a whole seem to be completely<br />
oblivion to it. No doubt slowdown is<br />
here too, but if the foot falls in the<br />
shopping malls, the passion around IPL<br />
and the long queues of the middle class<br />
Indians to book the Nano car is anything<br />
to go by, recession is merely superficial<br />
here. That’s the better part though, but recession or no<br />
recession India continues to be the place where more than<br />
400 million people go to bed everyday half nourished or<br />
malnourished while food grains continue to rot in the FCI<br />
godowns 8 . Recession or no recession, India remains the place<br />
where more than 1,50,000 farmers have committed suicide in<br />
the last one decade 9 . And ironically recession or no recession,<br />
India continues to be at the receiving end of the tirade of<br />
mindless mayhem unleashed by terrorism. Thus the question<br />
that remains unanswered is that whether India is succeeding<br />
or failing, where India’s future is doomed or vivid and<br />
whether India is poised or paused.<br />
Recession or no<br />
recession, India is<br />
the place where<br />
1,50,000 farmers<br />
have committed<br />
suicide in the last<br />
one decade<br />
It goes without saying that most of the intellectual debates<br />
in this country would invariably steer once around India’s<br />
apocalyptic rural-urban divide. The usual phrase that would<br />
generally sum up the situation is that while India’s phenomenal<br />
growth story in the last one decade has invariably helped<br />
it in leapfrogging into the league of the trillion dollar economies<br />
and that it has no doubt created a plethora of job<br />
opportunities, the sad part of the same saga is that the<br />
phenomenal growth story of India is often paradoxed by an<br />
equally appalling story of the degeneration of rural India<br />
where even having most of the basic amenities, which are<br />
generally taken for granted in the West and even in urban<br />
India, remains a daydream. Thus, one wonders how far<br />
India’s growth story would be sustainable in the long run if<br />
more than 400 million Indians continue to go to be half fed<br />
and malnourished, if the quality of education imparted by the<br />
state run schools in rural India remains a major question<br />
mark, if availability of quality electricity and roads still<br />
remain a major challenge in major parts of rural India. The<br />
problem is not just about conscience and bridging the rural<br />
-urban divide for the sake of propriety. The real issue is that<br />
India’s urban centric growth story would<br />
stagnate in the long run if it fails to<br />
convert the 600 million plus rural population<br />
into future customers and employees.<br />
Let’s take a simple example to vindicate<br />
this point: In the last one decade time<br />
since the unfolding of India’s incredible<br />
IT story 10 , the industry has charted a<br />
backward journey from cosmopolitan<br />
cities to tier-II cities to tier-III cities and<br />
now even in the townships to reduce cost<br />
without compromising on the quality. But beyond a point<br />
thanks to global competition and the upwardly surge of the<br />
townships (which would invariably push up the real estate<br />
prices and employee cost), if the need arises to move beyond<br />
the townships to say into the heart of rural India for the sake<br />
of reducing cost without compromising on quality, then, is<br />
rural India in a position to welcome the industry with requisite<br />
physical and social infrastructure? The answer is an<br />
invariable no. And that’s where stagnation would not just<br />
come for IT industry but for every industry worth talking<br />
about as there is a limit to how much reduction the prices of<br />
products can attract new customers unless an equal effort is<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
27
M ANAGEMENT OF DEVELOPMENT<br />
made to boost the purchasing power of the potential customers.<br />
And that’s where rural India is lacking. Yet the more<br />
pertinent issue is whether it is fair enough to blame globalization<br />
for the increasing rural urban divide, or is it something<br />
else that’s responsible for it and whether there are new ways<br />
to bridge this gap.<br />
In the hindsight one has to look at the way rural is defined<br />
in India to find a suitable answer for the malaises plaguing it.<br />
In generic terms anything that is rural in India is surely a<br />
place devoid of basic education, healthcare, sanitation, roads,<br />
electricity, productivity and a vibrant market for products.<br />
This incidentally was aptly depicted in the film Swadesh in<br />
which the protagonist Mohan Bhargava, a scientist working<br />
with NASA, during his return to native village in India,<br />
preferred to have his journey and sojourn in a caravan. The<br />
reason being that inside the controlled environment of the<br />
caravan he felt more at ease than the external heat, dust,<br />
impure water, threats of water borne and air borne diseases,<br />
lack of electricity and of course the difficult terrains in the<br />
absence of roads. But can the likes of Mohan Bhargava be<br />
blamed for the same? Or say, would they have done the same<br />
while visiting to some hamlet in United<br />
Kingdom or France? Well, probably not<br />
as (ironically) this isn't the way the rural<br />
place is defined in Europe or USA. There<br />
aren't too many differences between their<br />
cosmopolitan cities and villages or say<br />
downtown places. Both would have more<br />
or less the same kind of amenities or at<br />
least the differences in terms of quality of<br />
roads, power availability, education<br />
facilities, hospitals, sanitation and quality<br />
of drinking water would not be as stark as it is in countries<br />
like India. At most the differences would be in terms of<br />
population and the extent of pollution. Villages might have<br />
more trees, less population and pollution than cities.<br />
In fact this is not a new phenomenon. India’s growth story<br />
has always been urban-centric, since independence. And thus<br />
one would find that be it centres of higher education, hospitals,<br />
markets, quality road connectivity and every other<br />
related thing which reflects development, would always be in<br />
the vicinities of the cities. One wonders why for an economy<br />
with a near 1,150 million population, India has only one<br />
AIIMS like hospital and that too in the heart of the political<br />
Political class finds<br />
it convenient to<br />
keep the systemic<br />
problems alive<br />
and treat the mass<br />
with painkillers for<br />
temporary relief<br />
capital with half of it being perennially reserved for the <strong>VI</strong>Ps?<br />
One then wonders that if each of the district hospitals of 625<br />
odd districts 11 of India were to be brought anywhere near the<br />
standard of AIIMS, wouldn’t it then be possible to take care<br />
of the some of the lacunae in the Indian healthcare system?<br />
In fact one should look at the way the giant retail companies<br />
streamline their procurement by putting bulk orders to a<br />
select list of companies. If this can help companies reduce<br />
their cost and thus price through economy of scale, can’t this<br />
process be similarly emulated by the government of India by<br />
going for bulk procurement of all medicines and related<br />
equipments for all the government owned hospitals? And<br />
wouldn’t then it be possible in delivering affordable healthcare,<br />
if not free healthcare, in every district of India? But<br />
unfortunately that’s not to be so thanks to the idiosyncrasies<br />
that govern this country in spite of the fact that in the <strong>2009</strong>-10<br />
interim budget total money allocated for rural health spending<br />
was Rs 120 billion 12 .<br />
The strange case of India is that here populism has more<br />
acceptance than socialism. Thus the political class finds it<br />
much more convenient to keep the systemic problems alive<br />
and then treat the mass with painkillers<br />
for temporary relief. No one in essence is<br />
actually interested in solving the real<br />
issues. And whenever things go out of<br />
hand, there’s always the excuse of stating<br />
that subjects like agriculture, rural<br />
development or say law & order are state<br />
subjects and that the government at the<br />
centre cannot do much beyond advising<br />
and giving financial assistance. On the<br />
other hand the state governments generally<br />
put the ball in the centre’s court by simply stating that the<br />
centre has not done enough and has shown step-motherly attitude<br />
towards the particular state. Take for example two of<br />
much hyped and fan fared schemes of the UPA Government,<br />
i.e. the loan waiver scheme and the National Rural Employment<br />
Guarantee Scheme. No wonder both these schemes did<br />
play crucial roles in catapulting the UPA back into power but<br />
a deeper scrutiny of these two schemes would reveal that<br />
neither of them are as effective as they are made to look. In<br />
case of the first scheme, the government didn’t spare any<br />
opportunity to chest thump its so called pro-poor image by<br />
waiving off Rs 70,000 crore 13 worth of farm loans. Yet the<br />
28 THE IIPM THINK TANK
A GROWTH PARADIGM<br />
irony is that in spite of this, farm suicides continue vindicating<br />
that a one time waiver of loans would at best jeopardize<br />
the stability of the banking system of the nation rather than<br />
boosting the rural economy. At worse, in a country where<br />
nearly 50% of the population don’t have access to banking<br />
and resort to taking loans from the money lenders, has<br />
anybody from the government ever tried to find out as to who<br />
the real beneficiaries of this scheme has been? Certainly the<br />
private money lenders wouldn't care two hoots about what<br />
Indian's Finance Minister or the RBI Governor states. So the<br />
predicament of millions who took debts worth billions from<br />
the money lenders continue. Likewise, would this loan waiver<br />
make sure that there would be no more future need for such<br />
loan waivers? Or for that matter does the government have<br />
any clue as to why the farmers fail to perennially utilize the<br />
loans? And last but not the least, if the real intent is to release<br />
the farmers from the clutches of the farm debt, why is it that<br />
till date no serious efforts have been made or legislations<br />
passed to stringently deal with the private money lenders'<br />
syndicates that have plagued rural India in the absence of<br />
banks? That’s where the difference between populism and<br />
socialism lies. A government with vote<br />
banks in mind would surely resort to quick<br />
fix measures like a loan waiver while a<br />
truly socialistic government would rather<br />
prefer to take care of the systemic flaws<br />
because of which agriculture in India has<br />
become a completely unviable proposition.<br />
Today, rural India is mostly about<br />
disguised unemployment where a majority<br />
of people resort to agriculture simply for<br />
the sake of remaining engaged even<br />
though their engagement hardly have any value addition. In<br />
case of the much trumpeted NREGS or the National Rural<br />
Employment Guarantee Scheme, if there were to be one last<br />
nail in the coffin of rural India, then nothing can be better<br />
than NREGS. It might sound to be too harsh a statement,<br />
especially on something which is often touted as a path breaking<br />
social scheme. But the devil actually lies in the detail.<br />
That there is rampant corruption with respect to implementation<br />
of the scheme and siphoning of fund is something which<br />
is known to all and needs no elaboration. The more intriguing<br />
thing is that when a scheme aims at giving a mere Rs.60 per<br />
day for a maximum of 100 days in a year, can there be any real<br />
Indian policy<br />
makers still believe<br />
that replacing<br />
machines with<br />
manual labour<br />
would increase<br />
employment<br />
improvement in the quality of life of the recipients? If one<br />
were to argue that even this much can bring about substantial<br />
improvement in the quality of life of the rural lot, then this in<br />
itself vindicates the plight of rural India. NREGS wouldn’t<br />
have been a necessity had agriculture been viable. And now<br />
instead of having any long term policy of improving the<br />
productivity or the skill levels of the rural manpower, a<br />
pittance of Rs 60 a day for 100 days at most is just the perfect<br />
recipe to degrade them farther. Is this amount anyway even<br />
worth to take care of a family and then give quality education<br />
to the next generation? Would any able bodied person with<br />
some kind of aspiration (well- unless and otherwise it is<br />
presumed that rural folks cannot have aspirations) can stick<br />
to this and yet make it better in life or have a better future?<br />
Can a scheme like NREGS ever bring the rural folk out of<br />
their subsistence living? The answer is a blatant no. Yet there<br />
is a bigger devil. The NREG Act states, ‘Creation of durable<br />
assets and strengthening of the livelihood resource base of<br />
the rural poor shall be an important objective of the scheme.’<br />
It further states, ‘The cost of material component of projects,<br />
including the wages of skilled and semi skilled workers taken<br />
up under the scheme, shall not exceed<br />
forty percent of the total project cost’ and<br />
that ‘ as far as practicable, task funded<br />
under the scheme shall be performed by<br />
using manual labour and not machines.’<br />
Probably India is the only trillion dollar<br />
economy in the world where its policy<br />
makers still continue with the Jurassic<br />
Age ideology that replacing machines with<br />
human labour would increase employment.<br />
NREGS talks about creation of<br />
durable assets like rural connectivity through all weather<br />
roads and irrigation canals and yet limits the use of machines<br />
and materials for the sake of using more and more manual<br />
labour to increase, what can easily be termed as disguised<br />
unemployment. Now for a country like India, a substantial<br />
part of which is flood prone, does it make sense to make rural<br />
roads and embankments by using mud instead of concrete?<br />
To witness the shocking outcome of the same, one simply has<br />
to visit Bihar, Uttar Pradesh, Orissa, West Bengal or even<br />
Gujarat and Maharashtra and Karnataka during the monsoons.<br />
Most of the mud embankments and rural roads simply<br />
get washed away thanks to the fact that most of them have<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
29
M ANAGEMENT OF DEVELOPMENT<br />
been made by using mud or earth instead of concrete. And<br />
thus in the following year the same work would be repeated<br />
and the saga continues year after year. No wonder then why<br />
the real developments in rural India don’t happen. One<br />
wonders what would have happened if instead of mud, most of<br />
the work on rural roads and embankments would have been<br />
made of concrete. Much of that, if not all, would have then<br />
been able to withstand the tirade of floods and need not be<br />
reconstructed again the following year. The money in the<br />
following year could then have been more judiciously used for<br />
making more of durable assets in the concerned village, say a<br />
health centre, a school building or a community centre as well<br />
as for setting up of skill enhancement schools for the rural<br />
lot. In fact there are already so many schemes for rural<br />
development that the addition of NREGS to it and allocation<br />
to the extent of Rs 30,000 crore that has been made this time<br />
in the interim budget is too much of a profligacy for the sake<br />
of creating disguised unemployment and assets which<br />
perennially gets washed away by rain.<br />
If archaic laws that govern our agriculture<br />
and competitive populism has kept<br />
development out of bound for the rural<br />
India and made sure that improvement in<br />
purchasing power and quality life would<br />
never be possible by staying in the villages,<br />
it is the quality of education that is<br />
imparted by the state owned primary<br />
schools in rural India that creates the<br />
lasting difference between the quality of a<br />
convent educated kid in urban India and a<br />
state-educated kid of rural India. Doing away with the<br />
pass-fail system and inability to replace it with an appropriate<br />
grading policy tend to create a comfort zone among the rural<br />
lot who are still not aware about the intense competition that<br />
await them in the real world. Thus a student who has never<br />
faced peer pressure is suddenly made to give a secondary<br />
exam and face the same kind of questions for which the urban<br />
lot have been preparing for ages. Conventional education is<br />
just one aspect of the real development of a child. In urban<br />
places it is ably complimented by several other types of<br />
audio-visual methods as well as sports and development of<br />
competitive spirit, out-knowledge and overall personality.<br />
Since these might not be possible in rural India, it becomes all<br />
the more imperative that there is no compromise at least with<br />
Rural India doesn't<br />
need subsidies,<br />
employment<br />
guarantee or<br />
amnesty from<br />
governments at<br />
centre and states<br />
the conventional education being imparted by schools.<br />
Unfortunately, merely for the sake of increasing the percentage<br />
of people who can read or write, India is badly compromising<br />
with what being imparted in the name of education in<br />
the state run primary schooling system. When the rural kids<br />
grow up and head for the cities for further education, it is then<br />
they realise for the first time how unprepared they are to face<br />
the competitive world and their urban counterparts. Most thus<br />
prefer to come back into the cocoon of comfort zone in their<br />
native places. And thus the rural-urban divide prevails. In fact<br />
the irony is that today a substantial portion of the rural lot<br />
generally prefer to spend money, in spite of abject poverty, to<br />
send their children to private schools than to let them rot in<br />
government schools. Rural India doesn’t need subsidies,<br />
employment guarantee or amnesty from the governments at<br />
the centre and the states. It doesn’t even need crocodile tears<br />
from the city based page three type social activists. Sixty years<br />
of all of these didn’t benefit them anyway. What it needs in<br />
contrast is a treatment at par with the cities. If the cities can<br />
have quality education system why can’t<br />
India make sure that the same can be<br />
delivered in villages too? Why can’t the<br />
primary schools in some of the remotest<br />
corners of Jharkhand or Chhattisgarh be<br />
at par with the Kendriya Vidyalayas? Why<br />
can’t each health centre of rural India be<br />
at par with the clinics of Apollo or Max?<br />
Why can’t each cluster of villages or say<br />
each block have its own college imparting<br />
both technical and non-technical courses?<br />
Why can’t the rural roads be at par with that of the cities?<br />
Why can’t the rural folk have access to seamless banking the<br />
way it is available in urban India? Why is it that when prices of<br />
most of the consumer durable and FMCG goods can be<br />
decided by the companies and the market competition , the<br />
prices of the agricultural produce should be so stringently<br />
dictated by the state governments through the archaic Agriculture<br />
Produce Market Committee or the APMC? Unfortunately<br />
much of the rural urban divide can be done away with if<br />
industrialisation carries its march from urban to rural India.<br />
If industrialisation starts in rural India, it would not only help<br />
in adding value to the farm produce but also help in igniting<br />
the much needed rural economy and improve the rural<br />
purchasing power. For long the rural produce have desper-<br />
30 THE IIPM THINK TANK
A GROWTH PARADIGM<br />
ately tried to seek markets in urban India and had no option<br />
but to bypass much of rural India as people there would not be<br />
having the requisite purchasing power. What India needs is a<br />
national market for agricultural produce. What India needs is<br />
to make sure that food grains stop rotting in the Food Corporation<br />
of India godowns (FCI) while 400 million 14 Indian got<br />
to bed malnourished and half fed every night.<br />
Urbanisation of rural India in the form of making all civic<br />
amenities available would not only just improve India’s dismal<br />
ranking in the Human Development Index of UNDP (India<br />
ranked 128 th in 2007-08 report) but would also make sure that<br />
the mass migration of rural folks into urban India in search of<br />
livelihood come to an end. Interestingly most of the urban<br />
poor of India do have land holdings in their own native places<br />
where they would be most willing to go back if economic<br />
activity is ignited there. And thus urban slums might just<br />
vanish one day if urban slum dwellers find that their income<br />
back in their native place reaches somewhere near to their<br />
urban income. In fact Indian governments have this unique<br />
tendency to follow private investments to a place. Wherever<br />
private investments come up, investments by the government<br />
for improving social and physical infrastructure in those<br />
places follow. Gurgaon is a sure case in point. All the more<br />
reason as to why more of private investments are needed in<br />
rural India.<br />
Given the amount of money that is being spent every year<br />
on rural development, fund should essentially not be the<br />
prime obstacle if one were to develop city level amenities in<br />
rural India. What is needed badly is the intent and a better<br />
delivery of the services by the government. So, if a day arrives<br />
when people from urban India go to a not-so-urban place of<br />
India for a higher education course simply because that<br />
particular college in one sub division of rural India has<br />
emerged as a centre of excellence, or if we can trust India with<br />
its glass of water without any apprehension of any water borne<br />
disease, if that day arrives when the likes of Mohan Bhargava<br />
need not travel back to his native place in rural India in a<br />
caravan, that day we can presume that India’s real development<br />
has just begun. And if that day possibly comes, the<br />
incredible Indian consumer market which today (for most of<br />
the products is not anywhere beyond the thousand odd cities<br />
and townships), would be in the threshold of the six lakh odd<br />
villages. And given the exponential demand that it would<br />
generate, India might never get into recession even if the<br />
whole world gets into one. Such would be the power of the<br />
incredible market then that it would take the whole world to<br />
cater to that market. Starvation, deprivation, discrimination<br />
and divides would be a passé then.<br />
If India endeavours to ever realise fairy tale future that<br />
Goldman Sachs has woven for it in their reports on the BRIC<br />
economies, where it has stated that India has the potential to<br />
be among the top three economies of the world (with a GDP<br />
of $38.2 trillion by 2050), then it has to realize that only an all<br />
inclusive growth can give it that firepower to reach that goal.<br />
And with it would come the long awaited dream to create that<br />
ideal state, which would be run by institutions and not by<br />
individuals where true socialism would replace petty populism<br />
and where rural would no more be the place which is devoid of<br />
everything that are taken for granted in cities.<br />
Endnotes and Additional Thinking<br />
1 7.8 lakh deaths annually - www.indiaenvironmentportal.org.<br />
in<br />
2 Hindu Business Line, 25 th <strong>May</strong> 2007<br />
3 Indian economy became bankrupt in 1991<br />
4 The British Empire came to India and consolidated its<br />
business through the East India Company<br />
5 Reports of Goldman Sachs namely, 'Dreaming with BRICs:<br />
The Path to 2050' and 'BRICs and Beyond'<br />
6 India's rank in UNDP Human Development Report 2008<br />
was a dismal 128<br />
7 As per IMF report, US banks suffered a loss of $2.7 trillion<br />
due to sub prime crisis<br />
8 Over 1 million tonne of food grains damaged in FCI<br />
godowns in last one decade as per PTI<br />
9 Website- indiatogether.org/agriculture/<br />
10 As per NASSCOM Report, India's revenue from software<br />
industry and outsourcing pegged at $71 billion for the<br />
current fiscal<br />
11 As per the National Portal of India,<br />
12 Outlay of the National Rural Health Mission in the interim<br />
Budget of <strong>2009</strong>-10<br />
13 In the Union Budget of 2008-09, Rs 70,000 crore of farm<br />
loan was waived off.<br />
14 Report of International Food Policy Research Institute<br />
(The views expressed in the write-up are personal and do not<br />
reflect the official policy or position of the organisation.)<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
31
M ANAGEMENT OF DEVELOPMENT<br />
Problem of Water Pollution In<br />
India : A Possible Solution<br />
32 THE IIPM THINK TANK
G OLDEN DROP<br />
Arpita Khanna<br />
Centre for International Trade and<br />
Development, School of International<br />
Studies, Jawaharlal Nehru University<br />
I. Introduction<br />
Comprising over 70% of Earth’s surface, water is undoubtedly<br />
the most precious natural resource that exists on our<br />
planet. Without this seemingly invaluable compound<br />
comprised of Hydrogen and Oxygen, life on Earth would<br />
be non existent. Although we as humans recognize the<br />
fact, we disregard it by polluting our rivers, lakes and<br />
oceans. This has many adverse consequences. In order to<br />
combat water pollution, we must understand the sources<br />
and the problems caused.<br />
Water pollution occurs when the body of water is adversely<br />
affected due to the addition of large amounts of<br />
materials to the water. There are two sources of water<br />
pollution: point source and non point source. Point source<br />
of pollution occurs when harmful substances are emitted<br />
directly into a body of water. Example: a pipe from an<br />
industrial facility discharging effluents directly into a river.<br />
Non point source of pollution occurs when pollutants are<br />
delivered indirectly through transport or environmental<br />
change. Example: when fertilizer from a farm field is<br />
carried into a stream by rain. The technology exists for<br />
point sources of pollution to be monitored and regulated.<br />
Non point sources are much more difficult to control.<br />
Pollution arising from non point sources accounts for a<br />
majority of the contaminants in streams and lakes.<br />
Domestic wastes, industrial, effluents, agricultural<br />
wastes, etc are the major pollutants entering our water<br />
bodies. They contain chemicals and organic compounds<br />
which enter the bodies of many aquatic animals. Most of<br />
the problems occur due to the lack of proper sanitation<br />
facilities and waste disposal system.<br />
The water pollutants are responsible for decreasing the<br />
self-purifying ability of the water bodies. Water clarity is<br />
affected and the water bodies become shallower. Also, the<br />
rate of photosynthesis is decreased, killing many aquatic<br />
plants. Water pollution such leads to water borne diseases<br />
like cholera, typhoid, diarrhea, hepatitis, jaundice, dysentery,<br />
etc. It can even render the water unfit for industrial or<br />
agricultural purposes, let alone for drinking.<br />
Therefore, it can be concluded that the problems associated<br />
with water pollution have the capabilities to disrupt<br />
life on the planet to a great extent. If we don’t save our<br />
water resources, then we can soon bid them goodbye.<br />
Therefore, it is very important to arrest the problem before<br />
it gets too late.<br />
II. Water Pollution in India: Facts and Figures<br />
Today India stands as the second fastest growing economy<br />
in the world. During the past few decades Indian industries<br />
have registered a quantum jump, which has contributed<br />
to high economic growth. However, this has given rise<br />
to severe environment pollution. Consequently, water<br />
quality is seriously affected which is far lower in comparison<br />
to the international standards. In India, 1.03 crore<br />
people die annually of which, nearly 7.5 % of deaths (7.8<br />
lakh deaths) are due to water, sanitation and hygiene.<br />
Diarrhoeal diseases make up a chunk of this number.<br />
Intestinal infections and water borne diseases like malaria,<br />
dengue etc together cause nearly 19,000 deaths.<br />
The Environmental sustainability index (ESI) 1 , 2007,<br />
for Indian states indicates that most of the larger and<br />
higher growth states with concentration of industrial and<br />
Table 1: Water Quality Status of Various States in<br />
India<br />
States Desired Class Existing Class<br />
Haryana C D<br />
Himachal Pradesh A C<br />
Karnataka C E<br />
Kerala C E<br />
Madhya Pradesh C E<br />
Manipur C B<br />
Meghalaya C D<br />
Pondicherry C D<br />
Punjab C D<br />
Rajasthan C C<br />
Uttar Pradesh C D<br />
Gujarat C D<br />
Source: Water quality status and statistics 1998, Central Pollution<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
33
M ANAGEMENT OF DEVELOPMENT<br />
Figure 1: State Wise Habitations Affected by the Quality of Water<br />
States<br />
Arunachal<br />
Uttar Pradesh<br />
Rajasthan<br />
Madhya Pradesh<br />
Haryana<br />
Andhra Pradesh<br />
0 10000 20000 30000 40000 50000 60000 70000<br />
Habitations affected<br />
Habitants affected in 2006<br />
Habitants affected in 2004<br />
Source: Indiastat<br />
constant while for some other, it declined considerably.<br />
This shows that the attention has been paid to the<br />
control of pollution, both in the political as well as<br />
academic spheres. However, much remains to be<br />
done to overcome this deadly problem of water<br />
pollution. A study conducted by Brandon and<br />
Hammon(1995) gave a nation wide cost of water<br />
pollution. As per the study, the total cost of pollution<br />
stands at 4.53 %, with surface water pollution<br />
accounting for 59% 2 . Thus, India cannot afford not<br />
to deal with water pollution. But now the question is<br />
how to deal with the problem. Does our literature<br />
suggest any mechanisms that can deal with the<br />
problem, without substantial cost being incurred?<br />
agricultural activities featured at the bottom of ranking.<br />
While, the states which are relatively greener fared better<br />
in the ranking. Industrialization has led to pollution of<br />
water bodies in various areas. There<br />
are sufficient evidences available<br />
related with mismanagement of<br />
industrial wastes. The surface water is<br />
the main source of industries for waste<br />
disposal. It is found that almost all<br />
rivers are polluted in most of the<br />
stretches by some of the industry or<br />
the other. This has resulted in acute<br />
and chronic morbidity among people.<br />
In India, water is classified into five<br />
classes based on the quality: A, B, C,<br />
D, E. Class A is the clean water quality, Class B is the<br />
slightly polluted water quality, Class C is the moderately<br />
polluted water quality, Class D is the heavily polluted<br />
water quality and Class E indicates severe pollution. Table<br />
1 shows state wise water quality status of Lakes, Canals,<br />
Creeks, Ponds, Drains and Tanks.<br />
Table 1 shows that in almost all the states, the existing<br />
class of water quality is below the desired class. Therefore,<br />
it can be concluded that pollution is exceeding the standards<br />
in many places. Also, looking at Figure 1, we see<br />
that Habitations affected with the quality of water is not<br />
only high but has increased over the years, for most states.<br />
However, for some states, the figures have remained<br />
Government has<br />
basically three basic<br />
choices: non market<br />
policy instruments,<br />
market based<br />
instruments and<br />
any combination<br />
of these two<br />
III. Mechanisms to Deal with the Problem<br />
One mechanism available is government intervention. The<br />
government has three basic choices: non market policy<br />
instruments, market based instruments<br />
and combination of two. Non<br />
market policy instruments include<br />
command and control instruments<br />
such as fines, penalties, threats of<br />
legal action for closure etc. These<br />
instruments do not provide any<br />
incentives to polluters to choose cost<br />
minimizing pollution abatement<br />
technologies and hence, are not<br />
efficient.<br />
Market based instruments usually<br />
consists of pollution taxes, marketable pollution permits or<br />
hybrid instruments. These instruments are termed as ‘First<br />
best instruments’ because they guarantee market efficiency<br />
even in the presence of environmental externalities.<br />
The choice between pollution taxes and marketable<br />
permits depends both on the efficacy in achieving target<br />
level of emissions as well as on the relative <strong>size</strong> of welfare<br />
losses they produce ( Baumol and Oates, 1988). There may<br />
however be cases where it is necessary to use a mixture of<br />
both taxes and permits, instead of either one of them<br />
(Roberts and Spence, 1976).<br />
The optimal control of pollution through taxes or<br />
pollution permits requires both the pollution abatement<br />
34 THE IIPM THINK TANK
G OLDEN DROP<br />
cost function for generators and<br />
the damage function of receivers<br />
of pollution to be convex. Given<br />
this condition, tax on generators<br />
equivalent to sum of marginal<br />
damages to receiver, will provide<br />
incentives to generators for<br />
spending on pollution abatement,<br />
until the MC of abatement is<br />
equal to marginal damages<br />
received by affected parties<br />
( Baumol, 1972, Murty and<br />
Nayak, 1982).<br />
However, some empirical<br />
studies about the cost of the<br />
technological processes used for<br />
water pollution abatement<br />
confirm the presence of increasing<br />
returns to scale with respect<br />
to pollution loads, so that abatement<br />
cost functions are non<br />
convex. (Dasgupta and Murty 1985,<br />
Batstone et al, 1989, Mehta, Mundle and<br />
Sankar, 1993, Murty and James, 1996).<br />
In other words, there is decreasing<br />
marginal cost in water pollution<br />
abatement, the presence of which will<br />
make pollution tax or marketable<br />
permits ineffective. They will not<br />
provide any incentive to the pollution<br />
firm to adopt pollution abatement technologies or spend<br />
something on pollution abatement.<br />
Therefore, the incentives based on governmental<br />
instruments like taxes and marketable pollution permits<br />
fail to control water pollution. Hence, despite its inefficiency,<br />
government does not have any alternate but to<br />
adopt command and control mechanisms. This is precisely<br />
why in India, we see command and control mechanisms<br />
instead of market based instruments.<br />
Thus, it can be concluded that market based instruments,<br />
despite their efficiency cannot be adopted. The<br />
command and control mechanisms can be adopted,<br />
however, are inefficient. Therefore, we need to look for<br />
some alternate mechanism.<br />
Incentives based<br />
on governmental<br />
instruments, taxes<br />
and marketable<br />
pollution permits,<br />
will fail to control<br />
water pollution<br />
IV. Alternate Mechanisms<br />
The waste released by these<br />
factories is an externality. It does<br />
not monetarily affect the producer<br />
of goods, however, has a very<br />
strong influence on the standard<br />
of living of the society as a whole.<br />
The notion of externality is linked<br />
with the non existence of markets.<br />
It occurs when a decentralized<br />
economy has insufficient incentives<br />
to create a potential market<br />
in some commodity and where<br />
market equilibrium is pareto<br />
inefficient.<br />
One mechanism to deal with<br />
the problem of externality was<br />
given by Coase in 1960. This<br />
mechanism holds good even with<br />
increasing returns to scale in<br />
pollution abatement, while<br />
pollution tax is ineffective in such a<br />
situation. According to Coase, with<br />
clear property rights and minimal<br />
transaction costs, the parties to an<br />
externality can create the market in an<br />
externality, leading to a pareto efficient<br />
solution. Also, under certain conditions,<br />
the resource allocation result of coasian<br />
bargaining will be same regardless of<br />
which party is given right to the environmental resource.<br />
Coasian bargaining approach looks very attractive. An<br />
economy may be able to move towards pareto efficient<br />
allocation without pervasive government regulation.<br />
However, what remains to be seen is whether we can apply<br />
the coasian approach to the water pollution problems<br />
faced by people in India. For this, let us consider a following<br />
case study.<br />
V. A Case Study<br />
Patancheru in Andhra Pradesh, became a hub for largely<br />
unregulated chemical and drug factories in the 1980s,<br />
creating what is described as an “ecological sacrifice zone”<br />
with its pharmaceutical waste.<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
35
M ANAGEMENT OF DEVELOPMENT<br />
A recent report by Times of India shows that these drug<br />
factories, have been releasing a mix of powerful antibiotics<br />
into a stream used for drinking water, fishing and as a<br />
water source for cattle. Today, its water is the most drug<br />
polluted in the World. As per the researchers, it is the<br />
highest level of pharmaceuticals ever detected in the<br />
environment. The poor in Andhra are consuming an array<br />
of chemicals that may be harmful and can lead to proliferation<br />
of drug resistant bacteria. Higher incidence of<br />
cancer has already been noticed. Other biological aberrations<br />
are also anticipated.<br />
<strong>VI</strong>. Application of Coase Theorem<br />
The first important condition of the<br />
Coase theorem is the existence of well<br />
defined property rights. Establishment of<br />
enforceable property rights makes good<br />
excludable and thus allow a market<br />
system to operate efficiently. As per<br />
Coase, under some conditions, it makes<br />
no difference to the efficiency whether<br />
polluter has a right or the victim (although<br />
it will make a huge deal of a<br />
difference to each of the two parties).<br />
Since the right to pollute is a property<br />
right that has value, if trade is allowed<br />
in those rights, efficiency would prevail<br />
no matter how they were initially<br />
allocated. If the right is worth more to a<br />
victim than the polluter, the victim will<br />
end up with a right no matter how it is<br />
initially distributed. Therefore, when<br />
there are no impediments to buying and selling property<br />
rights, initial distribution of rights does not matter. However,<br />
when there are impediments, initial distributions<br />
does matter.<br />
Before we move on to discussing whether we would face<br />
any impediments or costs in transacting these rights, the<br />
attention needs to be drawn on the fact that initial distribution<br />
of rights does not matter to efficiency, however, it<br />
does matter to equity. Rights can be valuable. Resting<br />
somebody with rights is like giving them money and<br />
resources. But in this paper, we ignore the distributional<br />
effects and simply concentrate our attention on whether<br />
Establishment<br />
of enforceable<br />
property rights<br />
makes good<br />
excludable and<br />
allow a market to<br />
operate efficiently<br />
efficiency can be attained in the region so badly affected<br />
by water pollution.<br />
Coasian solution assumes minimum transaction cost.<br />
This assumption implies that the damages due to pollution<br />
caused by industry can easily be measured, compensation<br />
costlessly, negotiated with all affected people and payments<br />
can be enforced. In this case, we have 80 drug<br />
factories inflicting uncompensated costs on the large<br />
number of people. Therefore, we don’t expect bargaining<br />
to be easy. A significant transaction cost is likely. Therefore,<br />
it does matter where the rights are initially vested.<br />
If the victims are given the right to environmental<br />
resource, the factories would have to compensate them for<br />
any damage caused. There is a possibility<br />
that the political power of polluters is<br />
such that it is impossible to force them to<br />
reduce pollution and get them to pay for<br />
it, resulting in a stalemate that can last<br />
for years. However, we still can expect<br />
some lump sum compensation.<br />
On the other hand, if the property<br />
rights are given to the polluter, the<br />
victims would have to get together to pay<br />
the factories. The problems of reaching<br />
the agreement among people surrounding<br />
the area are significant. The basic<br />
problem is of free riding. Individuals<br />
will tend to act as free riders in negotiations,<br />
undermining the negotiation<br />
themselves. In such cases, individuals<br />
would treat the outcome of negotiations<br />
as beyond their control and therefore,<br />
would be unwilling to bear transaction cost. Also, we can<br />
face a problem of truthful revelation of demand. This is<br />
because the cost of damage due to pollution is private<br />
information to individuals. Therefore, it might become<br />
very difficult to reach a coasian solution when rights are<br />
vested with the factories.<br />
By the above logic, property rights should be given to the<br />
victims. Now, the factories would have to look at the cost<br />
of damage and see if it exceeds the cost of pollution<br />
control. Once again, factories need to ask citizens what<br />
their damage is, however, there are incentives to overstate<br />
this damage, since compensation may be based on the<br />
36 THE IIPM THINK TANK
G OLDEN DROP<br />
response. In this case, result would be installation of<br />
common effluent treatment plant. However, suppose<br />
damages are more modest and it is optimal to compensate.<br />
Then the tendency to overstate the damage would lead to<br />
excessive compensation or overzealous pollution control<br />
measures. The problem arises because of non rival aspect<br />
of pollution. This leads to free riding and difficulty in<br />
striking bargains.<br />
Now having established the property rights, it is very<br />
important to make bargaining possible between the<br />
polluters and victims to achieve coase like solutions. The<br />
coase theorem is the most effective when two individual<br />
firms or people are bargaining. We do not have any<br />
problem of free riding or negotiating cost.<br />
However, many externalities involve<br />
substantial numbers of participants either<br />
generating the externality or receiving it<br />
or both. Under these conditions, transactions<br />
costs of aggregating the interest of<br />
all affected parties, negotiating an<br />
optimal abatement level and then enforcing<br />
the market agreement will preclude<br />
a purely private bargain, even if allocation<br />
of rights is clear.<br />
Generally, it becomes difficult to<br />
bring the affected parties together as<br />
the impact of water pollution is uniformly<br />
distributed and is not immediate.<br />
Example: Chipko movement, the large<br />
scale movement to resist the destruction<br />
of forest of 1970s and 80s, was possible<br />
only because the impact was immediate.<br />
Also, many externalities are intertemporal, and future<br />
generations are simply not present to make bargains, which<br />
preclude the coasian solution between private parties to<br />
the externality.<br />
However, we do not confront some of the problems<br />
mentioned above like realization of impact in the case of<br />
Patancheru. This area has been so severely impacted, that<br />
people do realize that it is in their interest to get together<br />
and look for possible ways to overcome the problem. This<br />
also becomes easy given the publicity and media attention<br />
this issue has received.<br />
Therefore, high transaction costs of bargaining and<br />
The organization<br />
of affected people<br />
into a community<br />
depends upon<br />
their perception of<br />
damages from the<br />
pollution<br />
paying compensation can be reduced to manageable level,<br />
if the affected parties and the factories can organize<br />
themselves into groups/communities. These groups, within<br />
themselves, can elect representatives who would bargain<br />
with the opposite party. The community of factories would<br />
either pay the compensation or would set up Common<br />
Effluent Treatment Plant themselves. The community of<br />
affected parties may threaten the factories by legal action<br />
or by setting up a treatment plant and collecting the cost<br />
from polluters. The bargaining would result in the adoption<br />
of Common Effluent Treatment plant by either party,<br />
which is clearly what is happening in Andhra Pradesh 3 .<br />
Generally, getting the factories together into a community<br />
would not face as many problems as<br />
getting affected parties together. This is<br />
possible only in the presence of an<br />
intervention by a political party. However,<br />
given the conditions prevailing in<br />
Patancheru, wherein local activists and<br />
environmentalists have started ‘Anti<br />
Pollution Committee’, affected people<br />
have made representation to the government<br />
and industry, threatened factories<br />
with blockages, filed court cases against<br />
the factories, formation of communities<br />
would not be a problem. Also, given the<br />
rising damages from water pollution,<br />
NGOs are playing a very important role<br />
in increasing awareness of households<br />
about these damages. Local politicians<br />
have realized that it is in their interest to<br />
fight against pollution.<br />
<strong>VI</strong>I. Possible Constraints and Policy Implications<br />
What we saw above was the cosean bargaining with<br />
positive transaction cost. The transaction costs include<br />
cost of disseminating information about damages among<br />
the people, forming them into a community, the cost of<br />
public litigation, legal actions against factories etc. The<br />
organization of affected people into a community depends<br />
upon their perception of damages. If damages from the<br />
pollution are fully perceived by the public and they are<br />
substantive enough to justify transaction costs of forming a<br />
coalition and bargaining, collective action follows. Also,<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
37
M ANAGEMENT OF DEVELOPMENT<br />
we need to keep in mind that the formation of groups or<br />
community is feasible only if the effects of pollution are<br />
not dispersed geographically, and are confined to local<br />
communities or settlements. Otherwise, transaction costs<br />
or costs of managing a group would be very high.<br />
For efficient bargaining, it is important that the<br />
information is complete. When there are information<br />
asymmetries, the parties will have an incentive to<br />
cheat and reveal false information, thereby making<br />
bargaining inefficient. Therefore, it is important for the<br />
government to induce people to reveal true information<br />
through incentive scheme and render participation to that<br />
scheme compulsory.<br />
All the parties in the coasean framework should be in a<br />
position to negotiate. However, as mentioned before, many<br />
externalities are inter temporal in nature. The future<br />
generation bear the cost of externality and it is not clear<br />
how their interest may be accounted for in the bargaining<br />
process. Therefore, it becomes important for the government<br />
to become an advocate of the missing parties.<br />
A situation of non cooperation can be faced among<br />
affected people. The problem arises for<br />
sharing the transaction cost. Given the<br />
output of collective action is the power<br />
of local communities to deal with<br />
industry through legal action or other<br />
means of controlling water pollution,<br />
each affected people would want to<br />
enjoy the fruit without contributing to<br />
the cost. This stalemate of non cooperation<br />
can be broken by outside<br />
agency like NGO by educating the<br />
people about the damages from water pollution and<br />
benefits that can be obtained from cooperation.<br />
It is in the interest of affected parties, factories and<br />
government to cooperate in management of an environmental<br />
externality, thus making possible contractual<br />
arrangements. However, there are various factors that<br />
constraint the agent’s willingness and the ability to<br />
participate.<br />
Firstly, we have inadequate and ambiguous environmental<br />
law protecting the rights of affected parties to a<br />
clean environment. Secondly, public is generally not<br />
aware about the magnitude of damages to the community<br />
The future<br />
generations<br />
should not be<br />
deprived of<br />
something that<br />
rightly belongs<br />
to them too<br />
from pollution and the existence of environmental law.<br />
Thirdly, resources are not available to local communities<br />
to organize themselves as politically active groups for<br />
taking recourse to legal action against polluters. Fourthly,<br />
we need to have laws in place to enforce cost sharing<br />
agreements among factories for setting up pollution<br />
control plants.<br />
Government can play an important role in removing<br />
some or all of constraints. The legislatures can enact<br />
environmental laws and create legal institutions to<br />
protect the rights of citizens to a clean environment.<br />
Public awareness about the magnitude of damages from<br />
pollution can be promoted by creating institutions for<br />
environmental education. NGOs and civil society organization<br />
can also play a very important role in spreading<br />
awareness. It would be fruitful to give some power to the<br />
local communities like a say in the spheres of licensing,<br />
fixation of local environmental quality, monitoring and<br />
enforcement of environmental regulation. Their participation<br />
should be promoted in the environmental management.<br />
Also, the extent to which these communities can<br />
influence factories to undertake<br />
pollution abatement depends, among<br />
other things, the degree of political<br />
organizations, education and environmental<br />
awareness. As mentioned<br />
above, the desired outcome can be<br />
attained only in the presence of political<br />
intervention. The vested interests of<br />
political parties have a very important<br />
bearing on the policies introduced and<br />
initiatives taken in the country. We can<br />
make politicians accountable for the performance of<br />
community in bargaining with industries.<br />
Like we have environment sustainability index, wherein<br />
we rank states according to their performances in managing<br />
the natural resource stock, we can have an index<br />
wherein we rank the performances of these communities<br />
headed by different political leaders.<br />
This index should be given enough publicity and media<br />
attention, especially at the time of elections. This would<br />
promote competition among political leaders and contribute<br />
to their efficiency in attaining optimal pollution<br />
levels in the country.<br />
38 THE IIPM THINK TANK
G OLDEN DROP<br />
<strong>VI</strong>II. Conclusions<br />
We saw that the Coasean assumption of zero transaction<br />
cost does not hold in real life. The transaction costs of<br />
dealing with the problem of environment pollution<br />
abatement is generally positive. The high transaction cost<br />
can be reduced to manageable levels by forming groups.<br />
The bargaining between a coalition of polluters and a<br />
grand coalition of affected parties can result in optimal<br />
control of environmental pollution. In the cases, like that<br />
of Patancheru, forming people into groups with the help of<br />
intervention by political parties, NGOs, local organizations<br />
etc, can easily be attained. This is because the<br />
impact of the pollution is immediate and alarming. There<br />
are places where the problem prevails, however, people do<br />
not realize as the impact is not immediate and is uniformly<br />
distributed. Therefore, it is very important to spread<br />
awareness among the people about the environmental<br />
problems and the damages caused. We all need to collectively<br />
work to prevent further pollution.<br />
Nature and man must work together. If we won’t care<br />
about nature, nature too won’t bother to nurture us.<br />
As the well known saying goes, “We do not inherit the<br />
world from our parents. We borrow it from our children”.<br />
Thus, the most important reason to save this important<br />
component of the world is that the future generations<br />
should not be deprived of something that rightly belongs<br />
to them too.<br />
Endnotes<br />
1<br />
ESI measures the state of environment along multiple<br />
dimensions, aggregates it into a single index that is<br />
interpretable and comparable across all the states. A<br />
state with higher ESI ranking means it has managed its<br />
natural resource stock judiciously. On the contrary, a<br />
state with lower ESI indicates that it has depleted its<br />
stock of natural resources.<br />
2<br />
The cost provided was deduced from the overall figures<br />
on diarrhoeal diseases occurrence in the country, and<br />
many other significant costs were put aside. Therefore,<br />
the above figure is an underestimation of the actual<br />
cost of pollution.<br />
3<br />
The legal action through the collected efforts of<br />
affected people has ultimately forced the factories in<br />
the industrial estates of Patancheru to have effluent<br />
treatment plant. Also, government is playing a catalytic<br />
role in promoting the use of ETPs in industrial estates.<br />
References and Additional Thinking<br />
• M.N. Murty, A.J.James, Smita Misra (1999) “Economies<br />
of Water Pollution: The Indian Experience”,<br />
Oxford University Press.<br />
• Baumol, W.J and W.E. Oates(1988): The Theory of<br />
Environmental Policy, 2 nd Edition, Cambridge University<br />
Press, Cambridge.<br />
• Roberts, M.J. and M. Spence (1976): ‘ Effluent Charges<br />
and Licences under Uncertainity’, Journal of Public<br />
Economics.<br />
• Baumol, W.J. (1972): ‘On taxation and control of<br />
Externalities’, American Economic Review, vol 42,<br />
no.3, pp 307-22.<br />
• Murty, M.N. and P.B.Nayak(1982):’ Externality Abatement<br />
Technologies, Pigouvian Taxes and Property<br />
Rights’, Indian Economic Review, vol. 17, pp 1-26<br />
• Dagupta, A.K. and M.N.Murty(1985): ‘Economic<br />
Evaluation of Water Pollution Abatement’: A case<br />
study of Paper and Pulp Industry in India’, Indian<br />
Economic Review, vol 20, no.2, pp 231-67.<br />
• Batstone et al(1989): ‘ The Safe Disposal of Hazardous<br />
Wastes’, vol II, World Bank technical paper no.90.<br />
• Mehta.S, S.Mundel and U.Sankar(1993): Incentives<br />
and Regulations for Pollution Abatement with an<br />
Application to Waste Water Treatment, NIPFP, New<br />
Delhi.<br />
• Coase, R.H.(1960): ‘ The Problem of Social Cost’, The<br />
Journal of Law and Economics, vol III, pp 1-44.<br />
• Becker, G.S.(1983): ‘A theory of Competition among<br />
Pressure Groups for Political Influence’, <strong>Quarterly</strong><br />
Journal of Economics, vol 98, pp 371-400<br />
• Stigler, G.J.(1989): ‘Two Notes on Coase Theorem’,<br />
Yale Law Journal, vol 99, pp 631-3.<br />
• Murty, M.N. and U.R. Prasad(1977): ‘ Emission<br />
Reduction and Influence of Local Communities in<br />
India, mimeo, Institute of Economic Growth, Delhi.<br />
• Charles Kolstad, ‘Environmental Economics’, Oxford<br />
University Press.<br />
(The views expressed in the write-up are personal and do not<br />
reflect the official policy or position of the organisation).<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
39
M ANAGEMENT OF DEVELOPMENT<br />
C. Ramachandraiah<br />
Associate Professor,<br />
Centre for Economic and Social Studies (CESS), Hyderabad<br />
Introduction<br />
Out of the total population of 1027 million in India as per<br />
the 2001 census, about 742 million (72.2%) live in rural areas<br />
and 285 million (27.8%) in urban areas. The decadal growth<br />
of population in rural and urban areas during the last decade<br />
was 17.9% and 31.2% respectively. The census shows that<br />
there are 4,378 urban centers. The 35 million-plus cities<br />
account for about 39% of total urban population. There are<br />
358 cities with a population in the range of one lakh to one<br />
million, 401 towns in the range of 50,000 to one lakh, and a<br />
large number of small towns (3,574) with below 50,000<br />
population. From 285 million in 2001 the urban population<br />
in India is estimated to grow to 540 million by 2021. The<br />
percentage of urban population is expected to increase to<br />
around 37% by the year 2021. About 60-70 large cities having<br />
a population of one million or more will play a crucial role in<br />
the future demographic and economic growth in the country<br />
(MUD, 2008).<br />
Travel within the city is essential to actualise the economic<br />
and cultural potential of a place. People need to travel for<br />
work, for education, for socialisation and for procuring the<br />
needs of daily life. The choices of work, residence, consumption<br />
and socialization will increase if more areas of the city<br />
are within easy reach of the people. Increase in either the<br />
time or money required for such travel proportionately<br />
reduces the citizens’ ability to participate in civic and<br />
40 THE IIPM THINK TANK
(NA ) NO WAY FORWARD<br />
Urban Transport in India:<br />
A Contested <strong>Issue</strong><br />
economic activities and thus impacts adversely on them<br />
(EPW, <strong>2009</strong>). Ability to travel easily at a low cost and in a<br />
shorter time has several benefits for the citizens and the city<br />
in terms of saving time, energy, money, reduced fuel consumption,<br />
less vehicular pollution, less noise and a overall<br />
better quality of life. Lack of efficient mass public transport<br />
systems and a phenomenal growth of private vehicles in<br />
Indian cities have resulted in congestion, increased travel<br />
times, rising pollution levels, noise, higher stress levels etc.<br />
making commuting in a city a nightmarish experience to<br />
most citizens in everyday life.<br />
In the last decade or so, the governments have responded<br />
only in an ad hoc manner by constructing flyovers or widening<br />
roads that have facilitated only<br />
movement of vehicles rather than masses<br />
of people. Putting comprehensive and<br />
integrated public transport systems in<br />
place has never been on the agenda. As a<br />
result, the people using public transport<br />
buses, pedestrians and cyclists have been<br />
marginalized on the roads of Indian<br />
cities. After Delhi metro rail was inaugurated<br />
in 2002, metro rail projects have<br />
come to the centre stage of urban transport<br />
in several cities. Simultaneously, bus rapid transit<br />
systems (BRTS) have also been planned (and introduced in<br />
some) in several cities. While the metro rail is a highly<br />
capital intensive technocratic model involving construction<br />
of either underground tunnels or elevated corridors, the<br />
BRTS is a low cost option and is a more equitous and<br />
eco-friendly concept. It involves reallocation of the road<br />
space for different users (buses, pedestrians, cyclists, and<br />
others). This system is in operation in over 35 cities in the<br />
world. With the introduction of BRTS in a small corridor in<br />
Delhi, and the massive media campaign against it, the issue<br />
of the options of public transport and the rights of different<br />
As opposed to<br />
Metro Rail, the<br />
BRTS is relatively,<br />
a low cost option<br />
and is a more<br />
equitous and ecofriendly<br />
concept<br />
citizen groups for access to the road has come to the centre<br />
stage of debate in the country. This debate acquires significance<br />
because of the overt preferences shown by different<br />
state governments for the capital intensive metro rail<br />
projects over the BRTS.<br />
Neglect of Public Transport and NMT<br />
The city administrators, state and central governments have<br />
grossly neglected public transport which has impacted the<br />
poor and low-income people the most. Buses are the main<br />
backbone of public transport in Indian cities except in<br />
Mumbai and Chennai where local trains play a crucial role<br />
(Delhi and Kolkata are also served by metro rails to a small<br />
extent). Yet, despite a growing demand<br />
for commuting, the fleet <strong>size</strong>s in most of<br />
the state transport undertakings (STUs)<br />
have declined (Table 1). In terms of<br />
quality of travel comfort, the public<br />
transport system buses are nothing but<br />
“benches and a metal roof stuck on a<br />
truck chassis”. It is no surprise then that<br />
the citizens have increasingly turned<br />
towards private vehicles and increasing<br />
their number phenomenally. While there<br />
were five private vehicles for each bus in India in 1951, today<br />
there are 80 private vehicles for each bus (EPW, <strong>2009</strong>).<br />
For instance, the total number of cars in the 23 metropolitan<br />
cities was 3.6 million as on 31 st March 2004. The number<br />
of two-wheelers was 14.9 million. Delhi had about 1.3 million<br />
cars. During 2003-04, Delhi added about 263 cars and 433<br />
two-wheelers per day (Sivaramkrishnan, <strong>2009</strong>). A study<br />
sponsored by the ministry of urban development predicts a<br />
declining share of public transport from 16% in 2007 to 15%<br />
in 2011, 11% in 2021 and 9% in 2031. The decline may be<br />
even worse in the mega cities from 46% in 2007 to 31% in<br />
2021 along with a decline in the average journey speeds<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
41
M ANAGEMENT OF DEVELOPMENT<br />
Table 1: Growth of Bus Fleet of the State Transport Undertakings<br />
City 2000 2001 2002 2003 2004 2005 2006 2007 Annual<br />
Average<br />
Growth<br />
Rate(%)<br />
-(2000-07)<br />
Mumbai 3269 3155 3075 3075 3074 3069 3075 3081 -0.8<br />
Delhi 4916 4330 4466 2496 2905 3010 3143 2814 -7.7<br />
Chennai 2353 2314 2211 2270 2251 2187 2176 2087 -1.7<br />
Kolkata 814 821 856 800 769 707 659 635 -3.5<br />
Ahmedabad 752 729 630 410 382 371 545 727 -0.5<br />
Pune 657 664 647 662 697 764 784 752 1.9<br />
Chandigarh 393 395 404 - - - 405 404 0.4<br />
Bangalore 2110 2250 2446 2656 3062 3533 3802 3967 9.4<br />
Source: MUD (2008)<br />
(MUD, 2006).<br />
In cities with better public transport services the transport<br />
indices such as congestion index and safety index have<br />
performed better. With the decline of the environment<br />
friendly non-motorised transport (NMT),<br />
our cities are fast losing sustainability.<br />
About 40% of trips in cities these days are<br />
by NMT and 25% of all fatal accidents<br />
involve this category. Yet, there has been<br />
no focus on the NMT. On a walkability<br />
index, on a scale of four, most Indian<br />
cities scored less than one, with Chandigarh<br />
coming on top with 0.91. Hyderabad’s<br />
score was 0.68 while Bangalore was<br />
still lower at 0.63 whereas the bigger cities<br />
like Delhi, Mumbai and Kolkata scored above 0.80 (MUD,<br />
2008). The national urban transport policy (NUTP) admits<br />
that the “use of cheaper non-motorised modes like cycling<br />
and walking has become increasingly risky, since these<br />
modes have to share the same right of way with motorized<br />
modes”. The policy also noted that the number of persons<br />
killed in road accidents has also gone up from 28,400 to over<br />
80,000 during 1981-2001. The poor were more severely<br />
affected as many of those killed or injured tend to be cyclists,<br />
pedestrians or pavement dwellers (GOI, 2006). In recent<br />
years the cities around the world have started to include<br />
walking and cycling as integral parts of the transport modes.<br />
With the decline<br />
of the eco-friendly<br />
non-motorised<br />
transport,<br />
our cities are<br />
fast losing<br />
sustainability<br />
Walking is not only an inherent mode of all other modes but<br />
is by far “the most important means for achieving urbanity in<br />
public spaces” (TOI, 2008).<br />
More on Metro Rails - Less on<br />
BRTS<br />
Since the opening up of Delhi metro rail<br />
in late 2002, similar projects have been<br />
pushed in several other cities. A similar<br />
project is under construction in Bangalore.<br />
Proposals for metro rails are in<br />
different stages in Mumbai (with work in<br />
progress in phase I), Chennai, Hyderabad,<br />
Pune, Ahmedabad etc. Going by the<br />
way these project proposals have been<br />
finalized in some of these cities, it appears very much clear<br />
that big construction companies like Reliance, NCC,<br />
<strong>May</strong>tas, GMR, GVK, Gammon etc., together with international<br />
construction companies and railway coach manufacturers<br />
are behind pushing such projects. Finalisation and<br />
implementation of these projects are characterized by<br />
absence of transparency, lack of public debate, and (in most<br />
cases) non-involvement of local experts whether such<br />
projects are owned by the public sector (as in Delhi and<br />
Bangalore) or are proposed to be taken up under public<br />
private partnership (PPP) as in the case of Hyderabad. In<br />
none of these cities, the project proposals have been made<br />
42 THE IIPM THINK TANK
(NA ) NO WAY FORWARD<br />
available to the public to facilitate a comprehensive debate.<br />
For a detailed account of how the Hyderabad Metro was<br />
pushed without any public debate, how its concession<br />
agreement is much against public interest and is in favour of<br />
the Satyam-linked <strong>May</strong>tas company, and how the whole<br />
project was designed on real estate plans of <strong>May</strong>tas, see<br />
Ramachandraiah (<strong>2009</strong>).<br />
Residents are protesting in Bangalore against taking over<br />
of parts of Lalbagh and Lakshman Rao parks for the metro<br />
rail, and are demanding realignment of the stretch. Though<br />
taken up under public sector, several aspects of the project<br />
are not known to the public. Thousands of people in Janata<br />
Colony, Sanjay Nagar, Ekta nagar, Azad Compund, Gandhi<br />
Nagar & KD Compound areas in Mumbai are protesting<br />
against attempts at forced displacement for the phase II of<br />
the metro. The residents are demanding that the Mumbai<br />
metro should go underground, instead of elevated corridor,<br />
in the congested areas between JVPD and Bandra in the<br />
Charkop-Mankhurd route. A similar demand to go underground<br />
in several colonies in Delhi metro phase-II was made<br />
by residents and they even approached the Delhi High<br />
Court. In all instances, the authorities<br />
have reflected an adamant attitude and<br />
have only one answer – that these aspects<br />
have already been decided and will not be<br />
changed now. Some of the serious<br />
environmental problems being faced by<br />
the people in the congested areas along<br />
the elevated metro corridor in Delhi<br />
(phase-I) are – high noise, vibrations to<br />
buildings and intrusion of privacy of the<br />
residents.<br />
There seem to be a pattern to such mega projects in the<br />
world – pushing without public debate. Based on international<br />
evidence it was noted that “...the project promoters<br />
often avoid and violate established practices of good governance,<br />
transparency and participation in political and administrative<br />
decision-making, either out of ignorance or because<br />
they see such practices as counterproductive to getting<br />
projects started” and “...citizens are kept at a substantial<br />
distance from megaproject decision-making” (Flyvbjerg et<br />
al., 2003). The strategy of inflating the benefits and depressing<br />
the costs employed by the big project promoters to get<br />
the projects sanctioned have been exposed and questioned<br />
Global cities like<br />
Tokyo, New York,<br />
Paris and London<br />
have exceedingly<br />
large CBDs<br />
with more than<br />
7,50,000 jobs<br />
by experts in the transport sector. After analyzing a sample<br />
of 258 transportation infrastructure projects in different<br />
geographical regions, and historical periods, it is found that<br />
the cost estimates used to decide whether such projects<br />
should be built are “highly and systematically misleading.<br />
Underestimation cannot be explained by error and is best<br />
explained by strategic misrepresentation, that is, lying. The<br />
policy implications are clear: legislators, administrators,<br />
investors, media representatives, and members of the public<br />
who value honest numbers should not trust cost estimates<br />
and cost-benefit analyses produced by project promoters and<br />
their analysts” (Flyvbjerg et al, 2002).<br />
While the metro rails are very expensive infrastructure<br />
projects and the middle class has tended to like them (as<br />
seems in Delhi) because of the “global image” such projects<br />
bring to the cities, their utility to serve public transport has<br />
not been encouraging and this aspect cannot be ignored<br />
while investing huge sums of public money. The report of the<br />
working group for the 11 th five year plan notes that the metro<br />
in Delhi is operating at about 20% of its projected capacity<br />
for December 2005 (4-5 lakh passengers per day vs. projection<br />
of 21.8 lakh passengers per day) and<br />
the Kolkata metro is operating at 10%<br />
capacity. The report further states that<br />
the cities like Tokyo, New York, Paris and<br />
London have exceedingly large central<br />
business districts (CBDs) with more than<br />
7,50,000 jobs. No other urbanised area in<br />
the developed countries has a CBD of<br />
more than four lakh jobs. Metro rails are<br />
successful in such situations. Indian cities<br />
are developing on the peripheries and are<br />
polynuclear. Thus they cannot feed mass transit systems of<br />
more than 30,000 pphpd (persons per hour per direction)<br />
capacity (GOI, 2007). For a discussion on the mythologies of<br />
metro rails, suitability of BRTS and future of urban transport<br />
in Indian cities, see Mohan (2008).<br />
Plans for BRTS have also been prepared for Delhi, Pune,<br />
Ahmedabad, Jaipur, Indore, Visakhapatnam, Vijayawada<br />
etc. It was launched in Delhi in April 2008 and has generated<br />
a lot of controversy due to some poor logistics and genuine<br />
difficulties as well as virulent criticism of it as “disastrous” by<br />
the upper middle classes. The most successful aspect of the<br />
BRTS in Delhi seems to be its cycle tracks, probably the only<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
43
M ANAGEMENT OF DEVELOPMENT<br />
stretch in Delhi where cycling is safe. This is in total contrast<br />
to the elevated metro corridor along which not even a single<br />
stretch of cycling track is developed. The BRTS was<br />
launched in Pune without putting the proper systems in place<br />
and got adverse publicity. Two routes in Ahmedabad are<br />
getting designed for BRTS and the system is likely to be<br />
inaugurated in <strong>2009</strong>. The work is underway in other cities.<br />
Several pronouncements have been made in Hyderabad<br />
about the introduction of BRTS in the last five years but has<br />
been practically shelved in favour of the metro rail. What is<br />
significant about BRTS in Indian cities is the inability of the<br />
car-using middle class to digest the fact that a lane could be<br />
left free for buses on the existing roads.<br />
Taxing the Public - Subsidising the Private<br />
Distortions in motor vehicle taxation abound in the country<br />
sometimes the tax rates themselves being absurdly low. Delhi<br />
only recently revised its tax rates to two percent for vehicle<br />
costing up to rupees four lakh and four percent for those<br />
above. Most of the states also levy a tax on passenger buses.<br />
In Gujarat the rates are Rs. 840 per year on buses with more<br />
than nine passengers, Rs. 72 for every<br />
additional seat and Rs. 36 for every<br />
standing passenger. Maharashtra charges<br />
Rs. 71 per passenger plus 17.5% of the<br />
fare collected. Delhi collects Rs. 1,915 up<br />
to 18 passengers and Rs. 280 for every<br />
additional passenger. Even if it is calculated<br />
on per passenger per km basis, the<br />
tax incidence on a bus passenger in a city<br />
is more than on a private car passenger<br />
(Sivaramakrishnan, <strong>2009</strong>). There are<br />
experiences that taxation has been used as a weapon against<br />
the public sector buses to push the public sector corporation<br />
into losses to make it a justifiable case for privatization as<br />
happened with the Andhra Pradesh State Road Transport<br />
Corporation (APSRTC) earlier. Similarly, raising of passenger<br />
tariff steeply has also pushed the travelling public<br />
towards private vehicles. For more discussion on this with<br />
respect to APSRTC, see Ramachandraiah and Patnaik<br />
(2005).<br />
For the much hyped Nano, Sunita Narain argues that the<br />
incentives rolled out by the Gujarat government amount to a<br />
fat write-off - as much as Rs. 50,000-60,000 per this rupees<br />
Since January<br />
<strong>2009</strong>, the<br />
ministry of urban<br />
development has<br />
sanctioned Rs.<br />
4,726 crore for<br />
bus procurement<br />
one lakh car. In other words, its cost is so low only because of<br />
subsidies offered by the government. The cars have been<br />
subsidized in India while taxing the buses. The tax is over 12<br />
times more on buses than on cars in many states. The public<br />
subsidy should go to everybody to exercise their right to<br />
mobility (Narain, <strong>2009</strong>). A comparison of the taxes on public<br />
transport with other modes of personalised transport reveals<br />
that the existing taxation structure is inequitable and not<br />
congenial for growth of bus-based public transport system.<br />
Economic theory would suggest that the taxation on personalized<br />
modes of transport should be commensurately higher<br />
than what exists for the public transport. The taxation policy<br />
should be effectively used to bring in equity (Kharola and<br />
Tiwari, 2008).<br />
Road as a Contested Space<br />
Mobility, more than technology choice, should be the main<br />
concern. Today, the city space for mobility has become a<br />
highly contested issue. The private vehicle has proliferated,<br />
“thanks as much to the uncalled for subsidies for<br />
automobile production and use as well as consistent<br />
lobbying practices of the auto industry”,<br />
perfected over the years in the United<br />
States and the West. Since January this<br />
year, the ministry of urban development<br />
has sanctioned Rs 4,726 crore for<br />
procurement of 14,240 buses in 59 cities.<br />
Given the congestion, will these additional<br />
buses be able to move anywhere?<br />
(Sivaramkrishnan, <strong>2009</strong>). Users of<br />
nonmotorized modes have tended to be<br />
squeezed out of the roads on account of<br />
serious threats to their safety. If the focus of the principles<br />
of road space allocation were to be the people, then much<br />
more space would need to be allocated to public transport<br />
systems than is allocated at present (GOI, 2007).<br />
The neglect of public transport shows itself as a class<br />
issue. The investments in urban mobility – flyovers,<br />
parking lots, wider roads, smaller pavements, etc – are all<br />
focused on easing the mobility of the middle classes in<br />
urban India. The orchestrated media campaign against<br />
faster and safer bus services through the BRT corridors<br />
only indicates the strength of class interests seeking to<br />
mould urban transport systems. The political function of<br />
44 THE IIPM THINK TANK
(NA ) NO WAY FORWARD<br />
the Nano lies in securing firmly the interests of the middle<br />
class on the class-divided road and skew the class divides<br />
which fracture our cities. The central concern should be to<br />
build a more democratic city which provides equal opportunities<br />
of mobility to all its residents (EPW, <strong>2009</strong>). The<br />
dispute about the BRTS in Delhi is probably the first<br />
serious contestation in the country for a city’s road space<br />
between the bus and the car. It is hoped that the majority<br />
of the public, dependent on public transport, will become<br />
more assertive and demand that a city’s road space cannot<br />
be pre-empted by the car-using elite (Sivaramakrishnan,<br />
<strong>2009</strong>).<br />
Conclusion<br />
Urban transport policies should be city specific and be<br />
designed to suit its geography, heritage, history and<br />
landuse patterns. What is happening now is a thrust from<br />
above of uniform technology-centric models pushed by the<br />
big companies. As the number of vehicles is going to<br />
increase unabated in the coming days, the car-owning<br />
middle class will continue to assert its domination in<br />
policy making on urban transport. A combination of<br />
contractors, big construction companies, bureaucracy and<br />
political class may make it easier to push through such<br />
projects as the experience has shown over the last several<br />
years. The large mass of people, should also assert their<br />
right to the road and to the equitable allocation of road<br />
space to different users. Utilisation of the existing railway<br />
network in cities and extension of these lines further,<br />
wherever necessary, to connect more areas is required to<br />
cater to the suburban locations. The PPPs for metro rail<br />
projects, as revealed in the case of the currently uncertain<br />
Hyderabad metro, may end up benefiting the private real<br />
estate companies and cause irreparable damage to the<br />
larger public interests. Provision of public transport should<br />
be the domain of the public sector. The contest for equitable<br />
allocation of road space will spread to several other<br />
cities in the coming days in India. In the ultimate analysis,<br />
rather than huge mega projects, pedestrian friendly roads<br />
with adequate provision for cycling and informal sector<br />
activities (hawkers, street vendors etc) along with highquality<br />
bus transport with dedicated lanes may help make<br />
our cities more inclusive and democratic, and promote<br />
sanity in public spaces.<br />
References and Additional Thinking<br />
• EPW (<strong>2009</strong>): “Democracy and the Small Car”, Economic<br />
and Political Weekly, Editorial, April 4 th .<br />
• Flyvbjerg, Bent., Nils Bruzelius and Werner Rothengatter<br />
(2003): Megaprojects and Risk: An Anatomy of Ambition,<br />
Cambridge.<br />
• Flyvbjerg, B., Mette Skamris Holm and Soren Buhl<br />
(2002): “Underestimating Costs in Public Works Projects:<br />
Error or Lie?”, Journal of the American Planning Association,<br />
68(3), 279-295.<br />
• GOI (2007): “Report of the Working Group for the 11th<br />
Five Year Plan on Urban Transport including MRTS”,<br />
Government of India, New Delhi.<br />
• GOI (2006): “National Urban Transport Policy”, Government<br />
of India, New Delhi.<br />
• Kharola, P.S. and Gitam Tiwari (2008): Urban Public<br />
Transport Systems: Are the Taxation Policies Congenial<br />
for Their Survival and Growth?, Economic and Political<br />
Weekly, 11 th October.<br />
• Mohan, Dinesh (2008): “Mythologies, Metro Rail Systems<br />
and Future Urban Transport”, Economic and Political<br />
Weekly, 26 th January, pp 41-53.<br />
• MUD ( 2008): “Study on Traffic and Transportation<br />
Policies and Strategies in Urban Areas in India”, Final<br />
Report, Wilbur Smith Associates, Ministry of Urban<br />
Development, Government of India.<br />
• Narain, Sunita (<strong>2009</strong>): “The right right”, CSE's Fortnightly<br />
News Bulletin, 8 th April.<br />
• Ramachandraiah, C. (<strong>2009</strong>): “<strong>May</strong>tas, Hyderabad Metro<br />
and the Politics of Real Estate”, Economic and Political<br />
Weekly, 44(3), 17 th January, 36-40.<br />
• Ramachandraiah, C. and Arun Kumar Patnaik (2005):<br />
“State versus Public Sector Profitability: Andhra Pradesh<br />
State Road Transport Corporation”, in Mooij, Jos (ed.)<br />
The Politics of Economic Reforms in India, Sage, New<br />
Delhi.<br />
• Sivaramakrishnan, K. C. (<strong>2009</strong>) “A bus to nowhere”, The<br />
Economic Times, 20 th April, Hyderabad.<br />
• TOI (2008) “Walking is crucial to achieving urbanity”,<br />
(Interview with Philip Rode in the Edit Page), The Times<br />
of India, 23 rd June, Hyderabad.<br />
(The views expressed in the article are personal and do not<br />
reflect the official policy or position of the organisation).<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
45
M ANAGEMENT OF DEVELOPMENT<br />
Urban Water Supply<br />
Sector in India: The Need<br />
for the Management<br />
Reforms in the ULBs<br />
Ramakrishna Nallathiga<br />
Knowledge Manager (Infrastructure and<br />
Environment), Centre for Good Governance,<br />
Hyderabad<br />
46 THE IIPM THINK TANK
W ATERED DOWN<br />
1. Introduction<br />
Water is an important resource available for humans and<br />
fresh water is much more important given its limited<br />
availability and erratic distribution over space and time.<br />
India roughly accounts for 4.5% of the World’s fresh water<br />
resources, while at the same time it accounts for 2.5% of<br />
total land mass and 16% of total population. However, the<br />
availability of fresh water per capita itself has come down<br />
from about 5,177 cubic meter per head in 1951 to 1,820<br />
cubic meter per head in 2001 and it is expected to further<br />
go down to 1,140 by 2050 AD (Sankarnarayan 2005).<br />
The total water availability in India is 2,301 bcm, of<br />
which surface water source accounts for 1,869 bcm and<br />
ground water source accounts for 432 bcm.<br />
However, not that the entire water can be utilized: only<br />
690 bcm of the surface water can be utilized through<br />
storage structures and ground water can be utilized only to<br />
the extent of its annual recharge. According to assessment<br />
made by the Ministry of Water Resources, the total water<br />
requirement of the country for various sectors was estimated<br />
to grow from 694 km 3 in 2010 to 973 km 3 in 2050.<br />
The utilizable water resources by 2050<br />
were estimated to be 996 km 3 , suggesting<br />
no overall deficit like situation,<br />
which is not correct. The water availability<br />
is highly skewed in the Eastern<br />
part of the country, whereas the population<br />
and economic activities are concentrated<br />
in the Western part of the<br />
country, thereby an accentuating water<br />
availability problems in the West.<br />
Water supply and sanitation is a State<br />
subject according to the provisions of Indian constitution,<br />
and State/Urban Local Bodies (ULBs) are vested with<br />
constitutional right for planning, designing, implementing,<br />
operation and maintenance of water and sanitation<br />
projects. The Union Ministry provides technical assistance<br />
to the states/ULBs in the project formulation. The<br />
National Water Policies provide guidelines to state governments<br />
on the priorities of allocation, methods of management,<br />
resource management and institutional issues,<br />
emerging approaches and trends.<br />
Urban water supply and sanitation sector remained an<br />
important area of concern from First Five-Year Plan. The<br />
Availability of<br />
fresh water per<br />
capita reduced<br />
from 5,177 cubic<br />
meter per head in<br />
1951 to 1,820 cm<br />
per head in 2001<br />
plan outlay has constantly increased from Rs 43 crores<br />
(1.28% of public sector outlay) in the First Five-Year Plan<br />
to Rs 18,624 crores (2.17% of public sector outlay in the<br />
Ninth Five Year Plan; the Tenth Five-Year Plan outlay was<br />
estimated as Rs 44,206.55 crores. The estimates of likely<br />
available funds from various sources were Rs 35,800<br />
crores. Moreover, the millennium development goals<br />
(MDGs) for water supply and sanitation laid down to<br />
reduce half the proportion of population without access to<br />
safe and sustainable water supply and sanitation by 2015.<br />
The Tenth Plan however had laid the target of achieving<br />
100 % drinking water supply and 75% coverage of sewerage<br />
and sanitation facilities and is more comprehensive.<br />
2. Challenges of Urban Water Sector<br />
Fresh water resources are increasingly becoming scarcer<br />
across the country, particularly with respect to catering to<br />
the human activities, due to several reasons: (a) the<br />
existing water resources have already been tapped through<br />
various development projects but have been utilized<br />
inefficiently, leaving little water available for the actual use<br />
(b) water pollution has rendered several<br />
of the water resources – both surface<br />
and ground water – unfit for use by<br />
any sector (c) the rising population and<br />
the trends of rapid urbanization necessitate<br />
a good amount of water devoted<br />
to human consumption, thereby not<br />
only reducing the per capita availability<br />
but also raising competition with other<br />
sectors.<br />
Rapidly rising population and increasing<br />
urbanization are rendering high demands on water in<br />
India. However, the service levels and quality are very<br />
poor, for example the average water supply is just 2-4<br />
hours a day. Moreover, in terms of absolute figures, only<br />
36.86 million of the 53.69 urban households have tap water<br />
supply, of which 26.67 have in their premises, 8.08 million<br />
have outside their premises and 2.09 million have within<br />
100 metres (Sankarnarayan 2005).<br />
Large metropolitan cities, in particular, are becoming<br />
critical areas due to increasing water demand for domestic<br />
consumption, which often competes with other uses of<br />
fresh water. Apart from the challenges of water availabil-<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
47
M ANAGEMENT OF DEVELOPMENT<br />
ity, major attention needs to be paid to<br />
From<br />
Towards<br />
their management in the urban<br />
Water resource development Water resource management<br />
context i.e., achieving maximum gains<br />
Supply-oriented approach Demand-driven approach<br />
within the constraints through efficient<br />
use of all resources (Saleth and<br />
Disjoint water management Conjunctive water management<br />
Dinar 1997).<br />
Use maximization and extraction Use efficiency and conservation<br />
In spite of the enormous challenge, Treating water as social good Treating water as economic and social good<br />
water resource management in India, Public sector management Public-private partnerships<br />
in general, in urban areas, particular Public sector monopoly Private sector participation<br />
has heavily focused on the supply Top-down approach<br />
Participatory approach<br />
expansion, whereas a good scope Centralised operations<br />
Decentralised operations<br />
exists for demand management and Government responsibility Stakeholder engagement<br />
improving use efficiency, which means<br />
taking a balanced approach to water management (Maheshwari<br />
and Pillai 2001). Whereas the water scarcity<br />
calls for an efficient utilization of water at all levels in<br />
order to meet with the sustainable development goals of<br />
human society, few cities are gearing up their water<br />
systems towards efficient water management and improved<br />
service delivery. In reality, Indian cities are not fully<br />
geared-up for reforms as (i) they are highly top-driven and<br />
follow the old guiding principle of water<br />
particular, is plagued by several factors contributing to<br />
their poor status. Some of these will be discussed in the<br />
following sub-sections. The current status of water sector<br />
performance – both resource allocation and service<br />
delivery – can be characterized by a vicious circle of<br />
various causative forces. We will examine these underlying<br />
structural and non-structural variables as how they<br />
interact yield such poor outcome in this section (see figure<br />
1) and then embark on the reform<br />
development and supply expansion, (ii)<br />
agenda that is needed to overcome this<br />
they use irrational water pricing methods<br />
and inefficient tariff structures, (iii) organizations<br />
Service delivery problem in the next section.<br />
they persist with ill-adequate organizations<br />
have to reform 3.1 Water Resource Allocation<br />
and systems and are yet to formu-<br />
organizational<br />
and Management<br />
late their agenda in implementable<br />
Policy, Legislative and Regulatory<br />
design to be<br />
terms. Service delivery organizations<br />
Framework<br />
have to reform organizational design to more effective The National Water Policy, 1987<br />
be effective (Rangachari 2003). and efficient proposed several desirable objectives<br />
The World Bank (1999) mentions that<br />
the two critical challenges for urban water sector in India<br />
today are the need to: (a) improve resource allocation<br />
(both inter-sectoral and spatial) and management of water<br />
(both quantity and quality) (b) improve service delivery in<br />
the water sector (towards efficient, equitable and customer<br />
oriented service). To meet these challenges, it suggests the<br />
following major shift in the current approaches towards<br />
water resource management in general and urban water in<br />
particular.<br />
towards better water resources management.<br />
The revised policy in 2002 went further by advocating<br />
community participation, public-private partnerships.<br />
However, the missing element was an enabling framework<br />
for implementing sound water allocation, planning and<br />
management. Moreover, the policy documents do not go<br />
beyond the ‘conventional thinking’ of fi xed allocations<br />
and utilizing administrative mechanisms for achieving<br />
the goal.<br />
The constitutional provisions and water legislation in<br />
India do not provide appropriate framework for tackling<br />
3. Need for Urban Water Sector Reforms<br />
Water sector, in general, and Urban water supply sector, in<br />
water issues across jurisdictions, between sectors as well as<br />
individuals. The current set-up has following short-com-<br />
48 THE IIPM THINK TANK
W ATERED DOWN<br />
Figure 1 : The Vicious Circle of Urban Water Sector<br />
No Customer<br />
Focus<br />
Poor<br />
Service<br />
Customer<br />
Unsatisfied<br />
Poor Revenues<br />
Poor<br />
Finances<br />
Inadequate capital<br />
Inadequate<br />
skills/MIS<br />
Poor<br />
Infrastructure<br />
Poor<br />
Institutions<br />
Inadequate<br />
systems/ MIS<br />
Construction<br />
focus<br />
Inappropriate Governance<br />
& Management<br />
Inappropriate<br />
Policies<br />
( Macro/Micro<br />
Source: The World Bank (1999)<br />
ings: (a) water has been delegated as state subject but<br />
water resource issues cross these boundaries (b) surface<br />
water rights are ill defined, unsecure and non-transferable<br />
leaving little scope for their utilisation, whereas ground<br />
water rights are purely private causing environmental<br />
damages (c) environmental laws have not been comprehensively<br />
operationalised and regulatory standards are<br />
either not enforced or do not exist.<br />
Institutional Arrangements and Mechanisms<br />
The current institutional arrangements for water resource<br />
managements at all levels, central, state and local, and<br />
both formal and informal structures, do not enable<br />
comprehensive water allocation, planning and management.<br />
The main problems that exist are (World Bank<br />
1999):<br />
(i) inadequacies in necessary institutions for comprehensive<br />
water allocation, planning and management at<br />
city, basin and state levels, which are frequently absent<br />
(ii) lack of coordination between the institutions; duplica-<br />
tion of responsibility and accountability gaps<br />
(iii) inadequate fostering of grass root institutions<br />
(iv) lack of involvement of civil society – local community,<br />
NGOs, private sector and academia.<br />
Economic and Financial Incentives and Mechanisms<br />
The current incentive structure of water resource management<br />
leaves little scope for efficient use of water and its<br />
allocation between the sectors and users in an economically<br />
efficient manner. Bagchi (2003) clearly notes that<br />
cost recovery of water supply in major cities is far less<br />
from satisfactory. Inappropriate pricing, lack of well<br />
designed tariffs and absence of metering all lead to<br />
wastage of water and make the water services delivery to<br />
the risks of poor maintenance due to inadequate recovery<br />
of financial costs.<br />
Moreover, there is an absence of institutional, legal,<br />
administrative and technical mechanism for decentralized<br />
management, wherever possible, through development of<br />
formal water markets. However, there are some risks<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
49
M ANAGEMENT OF DEVELOPMENT<br />
associated with such markets like unsustainable extraction<br />
of water especially ground water and imposition of barriers<br />
to access water on certain sections of the society.<br />
Information, Technology and Database Systems<br />
There is a great scope for improvement on these fronts,<br />
given the large gaps in these areas of water systems. The<br />
water losses at plants, during conveyance and distribution<br />
are very high to the tune of almost 30-50% in many urban<br />
water systems. Database management and technology<br />
upgradation are not undertaken periodically and any type<br />
of audit is not prevalent. Water use efficiency is poor in all<br />
major uses/sectors – domestic, irrigation and industrial.<br />
Moreover, data and information systems of water availability<br />
and technology for monitoring water pollution are<br />
not given adequate attention. Likewise, metering, billing<br />
and pipeline flow inspection are not well executed and<br />
management structures are largely absent.<br />
3.2 Water Resources Service Delivery<br />
However, apart from improving water allocation and<br />
management efficiency of water sector<br />
through reform process, it is also to<br />
undertake the reforms in the service<br />
delivery, wherein the potential is also<br />
very high due to the much closer<br />
interface with public. The major areas<br />
of reform in service delivery include:<br />
(i) Governance and management<br />
(ii) Organisational design and focus<br />
(iii) Information/ database management<br />
and technology deployment<br />
(iv) Economic incentives and accounting systems<br />
Governance and Management<br />
Urban water governance is highly skewed towards bureaucratic<br />
or departmental functioning without much involvement<br />
of all stakeholders. Even in the current design, the<br />
institutional arrangements are weak and the management<br />
organization lacks incentives for giving better outputs.<br />
Most of the water supply functions are catered by the<br />
public health engineering, municipal water works and<br />
public works departments with little coordination among<br />
them. The organizational structures do not encourage<br />
Urban water<br />
governance is<br />
highly skewed<br />
towards<br />
bureaucratic or<br />
departmental<br />
functioning<br />
efficiency and outputs, but reward positions based on the<br />
tenure and past experience. It is therefore geared towards<br />
serving the needs of public/departmental services rather<br />
than catering to the needs of the customers/citizens.<br />
Organisational Design and Focus<br />
The organizational design is hierarchical, which is mostly<br />
the case of large public organizations, and not suited to a<br />
customer-focused service delivery. The technical staff<br />
members (engineers) are promoted based on their tenure<br />
but not outcomes; the service staff is assigned jurisdictions<br />
but its accountability is often poor.<br />
It is reported that the staffing ratio in water organizations<br />
in India is very high in the range of 40 – 60 persons per<br />
1,000 service connections as compared to around 10 staff<br />
per 1,000 connections in South Asia and international<br />
benchmark of about 2-3 staff per 1,000 connections (The<br />
World Bank 1999). The focus of the organization has also<br />
to shift from that driven by supply expansion and bureaucratic<br />
style of functioning to that driven by customers’<br />
demand and service oriented functioning, which requires<br />
appropriate organizational design<br />
(Rangachari 2003).<br />
Information /Database Management<br />
and Deployment of Technology<br />
For an effective functioning of any<br />
organization, information/database<br />
management is essential, particularly in<br />
the case of customer oriented organization.<br />
However, most of the water supply<br />
entities lack good management information<br />
systems (MIS) of their organization. The data<br />
generation methods and recoring are poor, data formats<br />
are not well designed, record maintenance and retrieval is<br />
done in a haphazard manner.<br />
The result is poor capacity of the organization to understand<br />
its own business and run it in an efficient manner.<br />
Not only that there is potential for automation of operations<br />
but also restructuring the organization and management<br />
structures. For this to be effective and to enhance<br />
the capacity to monitor water resources – both quantity<br />
and quality – deployment of new technologies is very<br />
necessary.<br />
50 THE IIPM THINK TANK
W ATERED DOWN<br />
Table 1: Types of Public-Private Partnerships<br />
PPP Option<br />
Source: The World Bank (2004)<br />
Asset<br />
Ownership<br />
Operation &<br />
Maintenance<br />
Capital<br />
Investment<br />
Commercial<br />
Risk<br />
Management Contract Public Private Public Public 3-5<br />
Lease Contract Public Private Public Shared 8-15<br />
Concession/ BOT Public Private Private Private 25-30<br />
BOOT/BOO Public/ Private Private Private Private 20-30<br />
Duration (years)<br />
Economic Incentives and Accounting Systems<br />
The current structure of water tariffs do not provide any<br />
economic incentives in terms of recovering costs – both<br />
operation and maintenance and depreciation of capital<br />
– in the urban areas; rather, they provide incentives for<br />
over consumption and inefficient use while not reflecting<br />
the scarce conditions of water availability. Further, most<br />
of the water supply organizations face financial constraints<br />
as their business is not completely run on the<br />
revenues, especially when it comes to the capital works<br />
this is a major constraint. It is therefore imperative that<br />
they become more proactive and<br />
borrow finances from private sector<br />
to provide adequate returns. Bonds<br />
have been recently used by urban<br />
local bodies for financing their operations,<br />
which can be extended to water<br />
services exclusively. Water accounting<br />
needs to be separated from general<br />
pool and it should be based on the<br />
double entry or fund based accounting<br />
systems.<br />
4. Reform Agenda for Urban Water Sector<br />
The above discussion clearly implies that the urban water<br />
sector needs to be reformed on several major fronts,<br />
given the inadequacies and shortcomings of the current<br />
status. Even in large metropolitan cities like Mumbai,<br />
there are severe water service delivery and management<br />
issues and the scope for remains large (see Nallathiga<br />
2006 for more details). It becomes evident that the<br />
reforms are required on the fronts of water allocation<br />
and management as well as service delivery. We discuss<br />
the reform agenda for urban water sector hereunder<br />
Water accounting<br />
must be separated<br />
from general pool<br />
and should be<br />
based on double<br />
entry or fund<br />
based accounting<br />
under the broad headings of institutional, governance<br />
and financial reforms.<br />
4.1 Institutional Reforms<br />
The above discussion clearly outlined that the current<br />
urban water management institutions are not well designed<br />
to provide incentives for better performance and<br />
efficient management.<br />
Changing the Priority<br />
The orientation of the water supply agencies has been not<br />
appropriate to the needs as they are<br />
more inclined towards supply expansion<br />
but not demand management in meeting<br />
with the challenges of providing water.<br />
However, this inevitably results in<br />
conflicts and pressures on inter-sectoral<br />
allocation of water; given the scarcity of<br />
water, a favourable shift towards higher<br />
allocation to urban areas requires all<br />
other means are exhausted. Instead of<br />
undertaking new water supply projects,<br />
the options for repair and rehabilitation of water supply<br />
systems, at a low cost, need to be undertaken. This is the<br />
case given that water losses in the conveyance and distribution<br />
are very high and so is the proportion of ‘unaccounted<br />
for water (UFW). The operations and maintenance<br />
of water supply is a gigantic task that can be<br />
done much better with the help of participation of local<br />
community and private NGOs, which can also lead to<br />
savings on costs.<br />
Organisational Restructuring<br />
Water supply system is organized through departmental<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
51
M ANAGEMENT OF DEVELOPMENT<br />
Table 2: Various Types of Tariffs and Their Characteristics<br />
Tariff/ Charge Rationale Merits/Demerits Examples<br />
Fixed water charge Water tariff levied as a fixed It is useful when water metering<br />
Canada<br />
is not done and can be<br />
water charge irrespective of<br />
the water use/ consumption used where water available is Norway<br />
(however, it can be made plenty.<br />
variable by discriminating<br />
user groups or classes or locations<br />
It does not provide any incentives<br />
for economic uses of wa-<br />
United Kingdom<br />
with differential fixed ter<br />
charges)<br />
Uniform <strong>Volume</strong>tric charges<br />
Increasing Block Tariffs<br />
(IBT)<br />
Water tariff levied based on<br />
the quantity of water consumption,<br />
while the unit price<br />
of water is fixed but subject to<br />
periodic revision.<br />
Water tariffs are levied in<br />
consumption blocks such that<br />
the price charged increases<br />
with the increase of block.<br />
Consumers pay a uniform<br />
rate until the first block, and<br />
then they pay higher charges<br />
with every additional volume<br />
of water consumed in successively<br />
higher blocks.<br />
It is simple and reflects the<br />
marginal costs of water provision<br />
to the consumer when the<br />
prices are fixed so.<br />
It requires complete water metering<br />
and recording.<br />
It provides for affordability<br />
of the poor through a life line<br />
block; it promotes water conservation;<br />
it can achieve efficiency<br />
by confronting consumers<br />
in higher blocks with the<br />
marginal costs of using water;<br />
it can raise sufficient revenues<br />
to recover costs.<br />
It needs to be designed very<br />
carefully and revised when<br />
required. Bad designs can adversely<br />
affect all consumers.<br />
United States of America<br />
Australia<br />
European Countries<br />
Canada<br />
United States of America<br />
Decreasing Block Tariffs<br />
(DBT)<br />
Increasing Linear Tariff<br />
Water tariffs are levied such<br />
that the charges actually decrease<br />
with the increase in<br />
consumption blocks, in an<br />
opposite direction. The users<br />
of higher blocks pay lesser<br />
and lesser charges with every<br />
additional volume of water<br />
consumed.<br />
Water tariff continuously<br />
changes with the quantity of<br />
water consumed and users<br />
are confronted with the tariff<br />
prevalent at that point of<br />
consumption. The base and<br />
rate of tariff increase are set<br />
to achieve desired goals.<br />
It is primarily useful in the new<br />
townships and new industrial<br />
settlements, where economies<br />
of scale are important in providing<br />
water supply and meeting<br />
the costs.<br />
It discourages conservation and<br />
can be politically unattractive<br />
as it results in high volume users<br />
paying low average water<br />
prices.<br />
It sends powerful signals to the<br />
consumer that increased water<br />
use is costly as the charge<br />
is levied not alone on the last<br />
consumption unit but also on<br />
all preceding units. It is rarely<br />
used as it often confronts users<br />
with rates higher than marginal<br />
costs.<br />
Canada<br />
United States of America<br />
---<br />
Sources: Prepared based on Boland and Whittington (2002)<br />
52 THE IIPM THINK TANK
W ATERED DOWN<br />
apparatus - water production is undertaken by public<br />
(water) works department, its conveyance and distribution<br />
undertaken by hydraulic/water engineering department,<br />
water pollution/quality is checked by either public health<br />
department or pollution control board. Coordination of<br />
these departments is very crucial but no mechanisms for<br />
their coordination are designed other than their function<br />
overseen by the municipal commissioner. It implies that<br />
the current institutional arrangements have little incentives<br />
for efficient functioning and lack a holistic view of<br />
their management. However, this does not mean they need<br />
to be abolished; rather, adequate and appropriate participation<br />
of private sector will certainly help in overcoming<br />
the drawback.<br />
Private Sector Participation<br />
It is also essential that for efficient management of water<br />
sector, the involvement of private sector is an essential<br />
ingredient. However, it needs to be<br />
distinguished from and not understood<br />
as total privatization, which can be<br />
undertaken only after a thorough<br />
analysis of the state of economy and<br />
depth of its institutions. This does not<br />
even mean total ‘roll back’ of State. It<br />
essentially means engaging private<br />
sector in those operations, which it can<br />
perform with better efficiency and<br />
improve the service quality more<br />
effectively. There are several variants of private sector<br />
involvement in the provision of urban water supply<br />
services in the form of public-private partnerships (PPPs),<br />
which are described in table 1.<br />
4.2 Financial Reforms<br />
Most of the urban water supply systems have not<br />
been able to perform well because of the inappropriate<br />
design of their finances and their monitoring systems.<br />
The first aspect refers to the design of financial mechanisms<br />
that adequately recover costs and make the service<br />
delivery a viable option, whereas the second one refers<br />
to the design of financial management systems – accounting,<br />
information/database management, financing<br />
capital. We will examine the scope for reforms on these<br />
aspects hereunder.<br />
There is a general<br />
failure in using<br />
water tariff to the<br />
potential because<br />
of the differences<br />
over its objectives<br />
and outcomes<br />
Cost Recovery<br />
An important aspect of the financial performance of the<br />
urban water supply systems is their ability to provide the<br />
service at a price that recovers the cost towards the<br />
production. A wide varying approaches and arguments<br />
exist in this case from full cost recovery to recovery of<br />
operations and maintenance. It is rationally argued that<br />
the water supply pricing should at least recover the costs<br />
incurred in the operation and maintenance of water<br />
supply system and part of the capital costs – especially<br />
either the depreciation cost of the asset or the interest<br />
payment costs on the capital deployed. It has been widely<br />
reported that most of the cities are not able to raise<br />
finances not even equal to operation and maintenance<br />
through the user charges, which led to the sheer neglect of<br />
the assets and inefficient service delivery i.e., high losses<br />
of water (e.g., see Bagchi 2003). An<br />
important part of this process is the<br />
water tariff design, which does not<br />
adequately address the issues of longterm<br />
financial viability of the systems.<br />
Tariff Structure Reform<br />
Water tariff is an important management<br />
tool, yet there is a general failure<br />
in using it to the potential because of<br />
the differences over its objectives and<br />
outcomes. Quite often, apprehensions are made over<br />
consumer choices and responses, and market test for<br />
the same are lacking. The water tariff setting needs to<br />
strike a balance between the following different goads<br />
(Mann 1993):<br />
(a) Economic Efficiency: Economic efficiency requires<br />
that the prices signal to consumer of the full costs<br />
(financial, environmental and social) of their decision<br />
to use water (on the rest of the system and the economy).<br />
The cost of bringing additional water is higher<br />
than the costs of supplying existing water in many<br />
cities, as the cheapest sources are exhausted first.<br />
Therefore, the marginal cost, which reflects the financial<br />
costs of laying down asset and the social cost of<br />
diverting water from other purposes, needs to become<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
53
M ANAGEMENT OF DEVELOPMENT<br />
the guiding method according to this criterion of water<br />
pricing.<br />
(b) Cost Recovery: This criterion seeks to achieve the<br />
financial goals – recovering the full financial costs of<br />
water supply service, which includes both capital costs<br />
as well as operations and maintenance costs. The<br />
underlying reason is that urban water supply systems,<br />
like other assets, needs to be created to recover full<br />
cost so that the asset life is longer and its service<br />
delivery efficiency is not compromised.<br />
(c) Equity: This criterion essentially seeks water tariff<br />
treats similar customers equally and that customers in<br />
different situations are not treated the same. Equity<br />
goals are pursued to ensure that the customers in same<br />
class/category are not treated differently and there<br />
should not be any price discrimination.<br />
(d) Affordability: This refers to the aspects of treating<br />
water as a social good and providing it at a price which<br />
the various users can afford to pay. However, it does not<br />
mean uniform low pricing of services, rather it means<br />
designing water tariff such that the (rich) users of large<br />
amounts of water subsidize the<br />
(poor) users of small amounts of<br />
water However, it is practically very<br />
difficult to achieve.<br />
The various types of water tariffs/<br />
charges used in fixing the water price<br />
and their relative merits and demerits<br />
are shown in table 2.<br />
5.3 Governance Reforms<br />
Governance reforms are an important<br />
constituent of the water supply reforms. In fact, the actual<br />
water supply reforms start from it through the changing<br />
conditions conducive to achieving the desirable results.<br />
Although a smaller entity, public utility is a part of<br />
government, either directly if it is publicly owned, or<br />
indirectly if it is privately owned but publicly regulated,<br />
and hence principles of good governance should apply to<br />
their management as is the case of other constituents of<br />
government (Dole and Bartlett 2004).<br />
The public utility – water supply undertaking of the<br />
Urban Local Body – has to primarily reform the way the<br />
business is run while committing itself to the principles of<br />
Three aspects of<br />
good governance<br />
must be considered<br />
in setting tariffs:<br />
Transparency,<br />
Simplicity and<br />
Predictability<br />
good governance. Some of the major reforms (although<br />
not complete) that we discuss include reforming the<br />
process of tariff setting, unbundling of the policy and<br />
regulation from the service delivery and alternate institutional<br />
arrangements.<br />
Tariff Setting<br />
Good governance applies to public utility management in a<br />
variety of ways: one of the important issues is the tariff<br />
setting process described above. Three aspects of good<br />
governance need to be considered in setting tariffs and<br />
tariff structure (ibid):<br />
(i) Transparency: The public should be able to understand<br />
the tariff setting process, how the charges were set for<br />
every type of customer;<br />
(ii) Simplicity: The charges resulting from the tariff should<br />
be clear and understandable, so that the customer can<br />
understand how they modify their use of the service<br />
and reduce their bills;<br />
(iii) Predictability: The tariff should not disrupt otherwise<br />
rational private decisions, especially investment<br />
decisions and others with long-term<br />
implications.<br />
Unbundling<br />
However, apart from the tariff setting,<br />
governance reforms are required on<br />
several other fronts for the sustainability<br />
of water supply systems in the long run.<br />
An important aspect of the governance<br />
reform is how well the organization is<br />
structured and aligned to meet with the<br />
objectives of efficient service delivery. An important<br />
governance issue is the unbundling of pricing and services<br />
of urban water supply systems, which is akin to the unbundling<br />
of regulation and policy functions from the service<br />
delivery achieved in the case of electricity and telecommunication<br />
services. The water tariffs have to be set independently<br />
through a different process requiring social and<br />
economic analysis of the customers and achieving wider<br />
consensus through a variety of processes. Service delivery,<br />
on the other hand has to focus exclusively on the demands<br />
made, current capacity and the methods of handling<br />
customers.<br />
54 THE IIPM THINK TANK
W ATERED DOWN<br />
Alternative Institutional Arrangements<br />
Governance reforms also pertain to how institutions are<br />
arranged and structured while incorporating the principles of<br />
transparency, accountability and participation in the framework.<br />
The current institutional arrangements leave little scope<br />
for the participation of the private sector – both for-profit and<br />
non-profit organizations (NGOs) and community/ neighbourhood<br />
groups, which enjoy much closer rapport with the general<br />
public at local level. The for-profit organizations can potentially<br />
play a good supportive role as ‘Bulk water supply entity’<br />
that can engage in the water production through extraction<br />
from the reserves upon the consent given by the government<br />
and sell it to the retail water suppliers i.e., the urban local<br />
bodies/ panchayats in the nearby and private/community water<br />
supply entities that undertake water supply service to these<br />
areas This will not only improve the efficiency of service<br />
delivery but also make the retail water supply entities much<br />
better aligned towards becoming accountable and participative.<br />
Information Technology and Accounting Systems<br />
As noted earlier, the information systems of the water supply<br />
entities follow archaic methods of information generation,<br />
recording, retrieval and data base management. Most of the<br />
water supply information is not generated in a structured<br />
manner following any standard designs of bills/vouchers and<br />
most of it is not recorded and stored. Data retrieval of any<br />
query requires case to case manual search and poor quality<br />
and reliability of retrieval. The management information<br />
systems (MIS) are not well established and unless they are well<br />
established it is difficult to see some visible progress in database<br />
storage, retrieval and management. Moreover, such data<br />
shall be of immense use for understanding the functioning of<br />
the organization by the human resources division or consultants<br />
to redesign/alter the structure. There is a tremendous<br />
scope for the application of information technology<br />
here, which can help the concerned organizations to organize<br />
more efficiently and use the advantages of speedy data<br />
entry, processing and queries that can be performed on<br />
the computers.<br />
References and Additional Thinking<br />
• Bagchi, Soumen (2003): ‘Pricing and cost recovery of urban<br />
services: issues in the context of decentralized urban governance<br />
in India’, International Journal of Regulation and<br />
Governance 3(2): 103-134.<br />
• Boland, John and Dale Whittington (2002): ‘The Political<br />
Economy of Water Tariff Design in Developing Countries:<br />
Increasing water tariffs versus uniform Price with Rebate’,<br />
In: Ariel Dinar (Ed), The Political Economy of Water<br />
Pricing Reforms, Oxford University Press, New York (pp<br />
215-235).<br />
• Dole, David and Ian Bartlett (2004): ‘Beyond Cost Recovery:<br />
Setting User Charges for Financial, Economic and<br />
Social Goals’, ERD Technical Note No. 10, Asian Development<br />
Bank, Manila.<br />
• Maheshwari, G. C. and B. R. K. Pillai (2001): ‘The water<br />
crisis in India: need for a balanced management approach’,<br />
International Journal of Regulation and Governance I(2):<br />
159-179<br />
• Mann, Patrick (1993): ‘Water utility regulation: Rates and<br />
cost covery’, Policy Study No. 155, Reason Public Policy<br />
Institute, USA<br />
• Nallathiga, R. (2006): “Reforming Water Sector Governance<br />
and Institutions for improving Efficiency: The Case of<br />
Mumbai”, International Journal of Regulation and Governance<br />
6(1): 99-133<br />
• Rangachari, C. S. (2003): ‘Organisational Design for Service<br />
Delivery’, CGG Working Papers: <strong>Volume</strong> 2: 38-64, Centre<br />
for Good Governance, Hyderabad<br />
• Saleth, R. M. and A. Dinar (1997): ‘Satisfying Urban Thirst:<br />
Water Supply Augmentation and Pricing Policy in Hyderabad<br />
City, India’, World Bank Technical Paper No. 395, The<br />
World Bank, Washington DC.<br />
• Sankarnarayan, K. (2005): ‘Urban Water Supply – Challenges<br />
Ahead’, Presentation made in the XII World Water<br />
Congress of the International Water Resources Association<br />
held on November 25-26, 2005.<br />
• The World Bank (1999): Initiating and Sustaining Water<br />
Sector Reforms: A Synthesis, Published by Allied Publishers<br />
Limited, New Delhi for The World Bank, Washington DC.<br />
• The World Bank (2004): Reforming Infrastructure: Privatisation,<br />
Regulation and Competition, Published by Allied<br />
Publishers Limited, New Delhi for The World Bank,<br />
Washington DC.<br />
(The views expressed in the write-up are personal and do not<br />
reflect the official policy or position of the organisation).<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
55
M ANAGEMENT OF DEVELOPMENT<br />
Corruption and Corporate<br />
Governance in India<br />
Rafiq Dossani<br />
Senior Research Scholar; Executive Director,<br />
South Asia Initiative, Shorenstein APARC,<br />
Stanford University<br />
Introduction<br />
Satyam Computers was nationalized in January <strong>2009</strong> after its<br />
executive Chairman, Ramalinga Raju, confessed to fraudulently<br />
overstating profits. In subsequent investigations, it<br />
emerged that over one and a half billion dollars was illegally<br />
transferred from Satyam to Raju’s personally-owned firms;<br />
these included a property firm, <strong>May</strong>tas, that owned a $3<br />
billion contract to build the Hyderabad Metro Rail system.<br />
The collapse of Satyam, India’s 4 th largest IT firm, challenged<br />
the usefulness of two pillars of Indian corporate<br />
governance laws – that listed firms employ an independent<br />
auditor and that the board should have a majority of independent<br />
directors. Satyam’s auditor was PWC and six of<br />
Satyam’s nine-member board were independent directors.<br />
The debacle was a shock to Satyam’s clients (whose list<br />
included 185 of the Fortune 500 companies), to the IT<br />
industry, and to industry generally.<br />
Satyam’s failure raises several questions about corporate<br />
governance and corruption in India: the scope and effectiveness<br />
of the laws on corporate governance, the scope and<br />
endemism of corporate corruption, the causes and underlying<br />
trends.<br />
Corruption in India is neither new nor limited in scope.<br />
India after independence in 1947 became a byword for<br />
corruption of all kinds, particularly the abuse of political<br />
power for personal and corporate gain, and the illegal<br />
transfer of resources or rights from owners to other parties<br />
through the use of entrusted power for private gain. India<br />
ranks poorly on political corruption, having ranked 85 th out<br />
of 180 countries in a recent study by Transparency International.<br />
1 According to the World Bank’s governance indicators,<br />
India ranks in the 25 th -50 th percentile of countries<br />
ranked by the ability to control corruption. 2 The World Bank<br />
argues that greater individual freedoms, democracy and a<br />
vibrant and free media are critical for reducing corruption.<br />
The latter view is widespread as regards the ingredients for<br />
a corruption-free 3 society. It helps explain why such widespread<br />
corruption has vexed Indians more than anyone else.<br />
They have suffered its consequences for decades, all the<br />
while wondering why a democracy that should allow for the<br />
imposition of collective will has not been able to impose<br />
minimal ethical principles. The conclusion – that the average<br />
Indian tolerates corruption willingly – is probably as untrue<br />
in a natural sense as for citizens of any country, though – per-<br />
56 THE IIPM THINK TANK
C ORRUPTION CONCERNS<br />
haps thanks to India’s free press – it has been widely proposed<br />
as the logical explanation.<br />
Nevertheless, corruption is endemic in the sense of being a<br />
characteristic of Indian society. How it became that way is<br />
necessary if we are to understand its presence even today<br />
even in those parts of India that are part of the new economy.<br />
The Origins of Corruption<br />
Corporate corruption in India arose in large part due to state<br />
controls of production through licenses and quotas. This led<br />
to shortages of goods and services. In the short-supply<br />
economy that resulted, both public and private producers<br />
became inefficient and produced goods and services of<br />
relatively poor quality. To gain access to goods and services<br />
in short supply, the public had to pay bribes. Thus, in the<br />
public mind, corruption, slow growth, inefficiency and poor<br />
quality became inextricably linked.<br />
For instance, until the mid-1980s, India’s leading automobile<br />
producers were two private firms, the Premier Automobile<br />
Company and Hindustan Motors, both founded prior to<br />
independence. Once licensing was introduced in the 1950s,<br />
no other firm was allowed to produce cars.<br />
The two private firms bribed the government<br />
to ensure this and had side agreements<br />
on market-sharing. The government<br />
controlled the price of their cars in<br />
order to protect the common man. As a<br />
result, both companies’ products were<br />
always in short supply. Between 1964,<br />
when Premier Automobiles produced its<br />
first car, the Premier 1100, based on the<br />
1937-year Fiat 1100, and 1985, when it<br />
introduced an equally outdated second model, the 1100 was<br />
its only model. During this period, it shared the consumer<br />
automobile market about equally with Hindustan Motors’<br />
leading model (and its only model till 1978), the Ambassador,<br />
based on the 1948 Morris Oxford.<br />
Even as of 2006, the Premier Padmini (the 1100’s current<br />
name) is still the mainstay of the Mumbai taxicab system,<br />
while the more royal-looking Ambassador still leads the<br />
Kolkata taxicab market and is even the official government<br />
limousine. Although India proponents may validly claim that,<br />
at least, India produces cars on its own--unlike, say, Singapore<br />
or Indonesia--the distinction of producing a model that<br />
Conglomerates<br />
like the Tatas<br />
survived because<br />
of legacy assets<br />
that went back to<br />
the pre-licensing<br />
reform days<br />
was invented prior to World War II offsets that claim a bit.<br />
Licensing induced private firms to be corrupt: they bribed<br />
to obtain licenses and then bribed again to prevent others<br />
from getting new licenses. Those few corporates that were<br />
clean, such as the Tata group, suffered mightily in the form of<br />
denied licenses – for example, Tata’s project to build cars in<br />
collaboration with Honda was denied a license in the mid-<br />
1980s and its project to build an international airport in<br />
Banglore, jointly with Singapore Airlines was denied permission<br />
in the 1990s. However, conglomerates like the Tatas<br />
survived because of legacy assets that went back to the<br />
pre-licensing days and by leveraging these assets to enter<br />
unprotected sectors such as software services. The rest of the<br />
clean firms that were started during the pre-reform days<br />
largely folded or mended their straightforward ways.<br />
The second source of corruption was the misuse of state<br />
power. This was in several forms. First, the state had the<br />
power to allocate, or at least influence the allocation of<br />
valuable property rights. These included taxation, land<br />
ownership and usage, electricity and telecommunications<br />
generation and distribution, spectrum allocation, water<br />
access and air-traffic. In some cases, the<br />
state chose to be a monopoly provider,<br />
such as in air-traffic, electricity and<br />
telecommunications, and collected<br />
side-payments for privileged access to its<br />
services.<br />
For instance, in Bombay city, even as of<br />
1990, it took five years to be allocated a<br />
telephone line. Side-payments to the local<br />
telephone office were commonly paid to<br />
jump the queue, with additional side-payments<br />
to roll-back the meter down the road. The state was<br />
vexed by this turn of events, it seems. It responded by introducing<br />
a “Tatkal Phone Service” (an official out-of-turn<br />
allocation): by paying an official premium of ten thousand<br />
rupees in 1990 (about $650), a customer got the opportunity<br />
to get an immediate allocation by further paying the “ordinary<br />
price” of phone service. It almost did not feel like a<br />
bribe. 4<br />
The power to tax was misused by setting favorable tax rates<br />
for favored corporates and large agriculturists. In one of the<br />
more egregious cases on record, in 1982, Reliance Industries’<br />
polyester filament yarn plant went on-stream using a particu-<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
57
M ANAGEMENT OF DEVELOPMENT<br />
lar imported raw material called PTA (purified terephthalic<br />
acid). A day later, the government sharply raised import<br />
tariffs on a competing raw material, polyester chips, that was<br />
used, via a different production process, by its main competitor,<br />
Orkay Silk Mills. A few years later, in 1985, the then-<br />
Finance Minister, V. P. Singh, decided to investigate whether<br />
corruption had played any role in that process. In 1987, at the<br />
height of the investigation, Singh (who would later become<br />
Prime Minister after campaigning on an anti-corruption<br />
platform), was fired as Finance Minister.<br />
Agriculture has never been taxed, the power to do this<br />
lying with state (provincial governments) rather than New<br />
Delhi. Rich landlords ensured that this would not happen, in<br />
return for patronage payments. Land<br />
reforms were, similarly, thwarted by rich<br />
landlords, with the result that over 50% of<br />
the rural population is landless.<br />
The third source of corruption was<br />
patronage recruitment in the state sector.<br />
State employment was highly sought by a<br />
lawmaker’s constituents, not just because it<br />
paid a good wage (due to the power of<br />
unions, who were established primarily in<br />
the state sector) but because it came with<br />
the power to collect personal side-payments.<br />
Most public services, as a result,<br />
were overstaffed and, partly in consequence,<br />
the staff was underpaid. The<br />
staff, therefore, relied on corruption as a<br />
source of making up the differential in<br />
their salaries. In return, they enforced the<br />
rules differentially.<br />
In consequence, in due course, corruption became a<br />
normal part of obtaining civic services. Civic servants had to<br />
be bribed since one could not escape them--there were just<br />
too many around and they had the authority of the state<br />
behind them. By the late 1970s, without the backhander to all<br />
types of public servants, urban survival would have been<br />
impossible. Some were bribed in order to receive a personal<br />
gain--the electrical meter reader, for example, who, in<br />
exchange for a bribe, would underread the meter; or the<br />
telephone man who levied a personal monthly charge in<br />
return for letting the user make free long-distance calls.<br />
Some were bribed to get one out of trouble, such as the<br />
Most public<br />
services were<br />
overstaffed<br />
and, partly in<br />
consequence,<br />
the staff was<br />
underpaid<br />
policeman who caught the motorist making a wrong turn.<br />
And others were bribed so that they would not hurt the<br />
citizen, such as the taxman who was bribed so that he would<br />
not harass the honest citizen (despite knowing that he had<br />
paid his taxes fairly). Railway-ticket checker, ration-card<br />
issuer, gas-cylinder man, postman—the public had a special,<br />
unethical relationship with each.<br />
A government officer posted to a plum position, such as to<br />
collect octroi (a tax imposed on the entry of goods into a<br />
city), often paid a bribe to a higher officer to get such a<br />
posting. He could collect that back several times over from<br />
the share that truckers paid him for undervaluing goods at<br />
the octroi checkpoint. Interestingly, such an officer, if single,<br />
was prized in the marriage market. If male,<br />
prospective in-laws were willing to pay a<br />
dowry premium for a groom with a guaranteed<br />
income over a run-of-the-mill groom<br />
from the private sector! If female, the<br />
dowry was often waived.<br />
The private sector took advantage of the<br />
state’s lax standards. In Kolkata, adherence<br />
to building codes was abysmal enough so<br />
that some buildings were actually leaning!<br />
One was the nineteen-story Chatterjee<br />
International Centre, once Kolkata’s<br />
tallest building. When I viewed it from a<br />
mile away, it looked as though it tilted<br />
about 18 degrees. It stayed like that for<br />
several years until it was recently renovated.<br />
Another building on Camac Street<br />
was eight floors high and had an even<br />
greater tilt. Once, walking by, I asked a<br />
resident coming out of it if he was not afraid of living in the<br />
house. He said he had been terrified until quite recently.<br />
However, it had finally listed enough that it touched the<br />
building next to it and so was now stable!<br />
The fourth source of corruption was to finance election<br />
campaigns. According to the Center for Media Studies, an<br />
Indian think-tank, the upcoming parliamentary elections will<br />
cost $2 billion, which includes $500 m to be paid illegally to<br />
voters by candidates. 5 As a share of per capita income, the<br />
elections are probably the costliest in the world. The contributions<br />
to finance the elections come from a variety of<br />
national and international sources, many of which are<br />
58 THE IIPM THINK TANK
C ORRUPTION CONCERNS<br />
legitimate, but the overwhelming majority of the amount is<br />
believed to be illegitimate and to come from corporate<br />
sources.<br />
The fifth source of corruption was inadequate disclosure of<br />
corporate actions, leading to widespread corporate and<br />
securities fraud. With the exception of a few corporates, such<br />
as the Tata group and multinationals, the mass of listed<br />
companies were run as family firms who viewed their firms as<br />
hereditary fiefdoms and who viewed public and institutional<br />
shareholders as a nuisance arising from socialist policies.<br />
They concealed large amounts of income from public<br />
scrutiny, distributing it to themselves.<br />
The Bombay Stock Exchange and other stock exchanges<br />
abetted the process. The BSE was organized<br />
as a club, which regulated itself;<br />
members of the BSE were usually linked to<br />
particular corporates whose interests they<br />
supported. While this is not unusual<br />
globally, the difference in India was that<br />
the brokers’ goal was distorted by the<br />
absence of external regulation. As a result,<br />
the BSE – Asia’s oldest exchange founded<br />
in the mid-nineteenth century – was a den<br />
in which insider trading was rampant,<br />
crises were manufactured to enable<br />
powerful speculators to defer payments<br />
and corporate insiders were part of the<br />
game. Making money was not through<br />
undertaking to complete trade at a fair<br />
price, but through manipulating the share<br />
price with the aid of corporate insiders<br />
and then persuading, for a side-payment,<br />
the state-owned financial institutions to place orders at the<br />
manipulated prices.<br />
As a securities trader on the Bombay Stock Exchange in<br />
the 1980s and 1990s, I discovered that it was commonly<br />
known among my fellow traders that the management of<br />
certain firms were not to be trusted. Corporate announcements<br />
from such firms were always received skeptically. Yet,<br />
such firms persisted in their successful existence for decades.<br />
They raised a minimum of finance from the equity markets<br />
at prices that were laughably low by the standards of the<br />
trusted firms, but their success was driven by licenses and<br />
access to bank loans from state-controlled banks, both<br />
through corruption.<br />
Preponderance of<br />
self-regulation in<br />
important fields<br />
like securities,<br />
law, media and<br />
accounting aided<br />
corruption<br />
As noted earlier, not all firms were like this, only the vast<br />
majority. The exceptions were most of the multinational<br />
firms, such as Unilever, a few clean family-run firms that had<br />
established their credentials over many decades, such as the<br />
Tata group, and no more than a handful of firms established<br />
by professionals that had, against all odds, survived the<br />
onslaught of licensing. By the mid-1980s, when reforms<br />
began, the number of such firms listed on public markets<br />
consisted of about 50 firms out of a total of over 2,000 listed<br />
firms.<br />
Given that corruption was a key component for success,<br />
trust among top management, including at the boardroom,<br />
was critical. Hence, the typical firm’s board<br />
was staffed entirely with relatives and other<br />
trusted cronies; the key functions needed<br />
for control, particularly finance, were<br />
always retained by the chief executive;<br />
auditors, lawyers, consultants and other<br />
professionals were chosen on the basis of<br />
their loyalty to the top management rather<br />
than competence.<br />
The preponderance of self-regulation in<br />
important fields like securities, law, media<br />
and accounting aided such corruption. As<br />
in stockbroking, accountants and lawyers<br />
allied themselves to large corporates and<br />
were reliant on those (largely corrupt)<br />
corporates for their ongoing survival – after<br />
all, who else would hire them? Their<br />
loyalty to their primary client was far<br />
greater than their loyalty to their profession;<br />
corrupt practices were a natural outcome. The lax<br />
self-regulatory framework allowed them to continue such<br />
practices for decades.<br />
In summary, there were many sources of corruption. In<br />
answer to the question as to how corruption could flourish in<br />
a democracy, there is likely more than one answer. One is the<br />
weakness of civil society, itself an outcome of widespread<br />
poverty and the state’s unwillingness, right from the beginnings,<br />
to tolerate opposition. The second is that while the<br />
poor own the vote, the rich own the campaign contributions.<br />
The only way to manage both interests was to legislate<br />
pro-poor policies and subvert them in practice, for a price.<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
59
M ANAGEMENT OF DEVELOPMENT<br />
Thus, the state would officially control the price of wheat for<br />
the poor (as the Congress party is promising to do if elected<br />
next month) but would also, with less fanfare, cut the price of<br />
fertilizers and power for rich farmers in order to protect their<br />
profits. The campaign contribution mediates that process.<br />
How Reforms Influenced Corruption<br />
Due to economic reforms since the mid-1980s, the links<br />
between corruption, slow growth and inefficiency have<br />
weakened. This might lead those who are unaware of the<br />
weakened links to look at India’s high growth rate and to conclude<br />
that corruption, too, must have declined. The answer is<br />
more complex: first, the state has made an effort to tackle<br />
various types of corruption. Second, in<br />
practice, corruption has declined in some<br />
cases and risen in others. Overall, it is hard<br />
to argue for a definitive trend.<br />
The end of the quota/licensing system<br />
has had the biggest single, positive impact<br />
on the most important source of corruption,<br />
that of the short supply of goods and<br />
services. The objective of delicensing, to<br />
produce goods and services more efficiently,<br />
has begun to be achieved; along<br />
with greater efficiency, corruption has<br />
declined. For example, cellphone services<br />
recorded an increase of 15 million<br />
subscribers in January <strong>2009</strong>. That is<br />
equivalent to 5.6 new subscribers for every<br />
second of the day.<br />
At the level of the corporation, there<br />
has been a transition from a reliance on<br />
internal savings to external capital, both debt and equity, in<br />
order to finance growth. This necessitated an opening up to<br />
foreign investors and securities firms; the investment laws<br />
were strengthened in the early 1990s to increase the attractiveness<br />
of India as an investment destination. This has<br />
reduced securities fraud.<br />
When quotas were abolished in 1991, the public assumed<br />
that corruption, too, would depart. The consequent arrival of<br />
planeloads of western businesspersons eager to invest in<br />
India was taken as the first positive signal of both growth and<br />
of new standards of business practice as well. But it was to<br />
take longer than most had anticipated.<br />
The objective of<br />
delicensing, to<br />
produce goods<br />
and services<br />
more efficiently,<br />
has begun to<br />
be achieved<br />
When foreign investors returned to India after 1991, they<br />
assumed that in its operating practices India was probably<br />
more like Indonesia than any other country in Asia and that<br />
like the Suharto family in Indonesia, there was the Gandhi<br />
dynasty to be managed. But they also assumed that India was<br />
ready to do business. Thus, the type of foreign firm that<br />
initially came to produce goods in India was the type used to<br />
doing large deals with governments and paying the price: the<br />
utility companies, the big commodity suppliers and the like,<br />
wanting the annuity payments of early access. The “fixers” of<br />
New Delhi, long accustomed to fixing bureaucrats for<br />
domestic businesspeople, were quick to respond, offering<br />
access to the highest levels of decision making for a price.<br />
The foreign businessmen (mostly men,<br />
indeed, with a few important exceptions as<br />
we discuss below) found that the system<br />
was not ready to receive new foreign firms,<br />
especially the mid-<strong>size</strong> and smaller firms<br />
that make up the bulk of the American<br />
economy. India had opened up enough to<br />
make it interesting for domestic enterprise<br />
to dream anew. But the institutional<br />
structure to allow full foreign ownership<br />
in India was not yet there. Many of these<br />
foreign businessmen became disappointed<br />
and left.<br />
The few successful foreign firms in the<br />
1990s were those large ones that could<br />
afford to be carpetbaggers. Certain<br />
American investment banks, for example,<br />
made lucrative deals to list Indian<br />
public-sector giants on the Luxembourg<br />
or London stock exchanges. They would make their pitches<br />
over a week or so with plenty of glamour and sophistication<br />
to policymakers and bureaucrats in Delhi and hope to return<br />
with a contract in hand. They mostly succeeded because it<br />
involved work that Indian firms could not yet handle. And<br />
they succeeded even when they did not see the point of<br />
setting up an office in India given the irregular flow of deals<br />
and slim pickings in the domestic market.<br />
This was a game of glitz, certainly, but corruption was also<br />
an integral part of it. The American banks provided the<br />
glamour and the Indian bureaucrat, perhaps realizing it was<br />
his last time in the spotlight, demanded his price. The Indian<br />
60 THE IIPM THINK TANK
C ORRUPTION CONCERNS<br />
public--long accustomed to the lordly and corrupt ways of the<br />
bureaucrat--now had the pleasure of seeing him squirming as<br />
he tried to polish his “yes, but what’s in it for me?” response<br />
to someone whose culture he did not understand.<br />
And how were the bureaucrats to respond to the glamorous<br />
likes of Enron International chief Rebecca Mark, who,<br />
according to her own account, explained her wardrobe style<br />
to colleagues in an internal briefing. “Day in and day out,”<br />
she said, she called on a foreign official who typically spent<br />
most of his time with other conservative men, her competitors.<br />
"He will not remember most of them," she said, "but he<br />
will remember me."<br />
Enron epitomized a regrettable phase in Indian reform. It<br />
was remarkable that Enron was successfully<br />
portrayed in the Indian media as an<br />
electricity giant in the U.S., a false image<br />
given that it was a mid-<strong>size</strong> trader of oil and<br />
gas then (this was the early 1990s). The<br />
image buffing, if not worse, helped Enron<br />
sign a $2.5 billion deal for setting up a<br />
power generation plant just north of<br />
Mumbai in Dabhol, Maharashtra. The<br />
deal was unfair to Indian consumers and<br />
privately opposed even by the privatesector-friendly<br />
World Bank for the lack of<br />
transparency in the award process--<br />
though the bank lacked the courage to<br />
speak openly.<br />
I was peripherally involved in the<br />
process. In December 2000, at the<br />
invitation of Maharashtra’s chief minister,<br />
I presented the financial impact of the<br />
Enron project to the Maharashtra Cabinet. It was clear from<br />
the financial information available that the project would<br />
bankrupt the state’s State Electricity Board by the first<br />
quarter of 2001--and I said as much. Indeed, in the second<br />
quarter of 2001, the SEB defaulted on payments to the<br />
project.<br />
The Enron Dabhol project exposed an unexpected, dark<br />
side of western capitalism to Indians long isolated from the<br />
West. Western businesses also began to learn that India was<br />
quite different from Indonesia. It may be corrupt and opaque<br />
like Indonesia, but the press was quite different from other<br />
developing countries where they had worked. In those places<br />
The image<br />
buffing, if not<br />
worse, helped<br />
Enron sign a $2.5<br />
billion deal for<br />
setting up a power<br />
generation plant<br />
the press was more or less a nonentity in influencing business<br />
outcomes. In the Dabhol case, the press followed Ms. Mark’s<br />
every move (often breathlessly) and initially took a sympathetic<br />
view of the high costs. Once the reason for the high<br />
costs was discovered to be unrelated to the cost of inputs, the<br />
press turned against Enron. In the process, westerners also<br />
discovered through the work of anti-Enron activists like the<br />
late P. D. Kaul that civil society in India could sometimes be<br />
a force to be reckoned with.<br />
Another case that exposed the muck on both sides was a<br />
fiasco in telecommunications. In 1994 the Indian government<br />
asked global firms to join with Indian firms and bid for<br />
fixed-line and cellular licenses. An Indian firm, Himachal<br />
Futuristic Communications Limited<br />
(HFCL), in partnership with Israel’s Bezeq<br />
and Thailand’s Shinawatra Corporation,<br />
bid $27 billion--more than five times the<br />
combined market value of these firms at<br />
the time--for nine fixed-line licenses, This<br />
was possible only because the bid terms<br />
had been deliberately and corruptly set,<br />
allowing even small participants entry so<br />
that they could resell the licenses to more<br />
credible providers down the line for a<br />
large profit.<br />
Of course, the winning bidders were<br />
unable to achieve financial closure and<br />
their bid collapsed. Ultimately, the<br />
telecom minister who managed the bid<br />
process was found with Rs.11 million<br />
($300,000) in cash at home and was<br />
prosecuted for corruption. The company<br />
that allegedly bribed him was HFCL.<br />
Surprisingly, even more credible firms--both domestic<br />
firms such as the Birla Group, and their foreign partners such<br />
as AT&T, grossly overbid as they later discovered. The<br />
market was still too small to justify the sums bid. The domestic<br />
partners then used the law to shield them by citing delays<br />
on the part of government. The government fought back in<br />
the courts and would have won--except that it would probably<br />
have bankrupted at least some large Indian business houses<br />
of long standing and close ties to political parties. It was not<br />
until a new government came to power in New Delhi in 1998<br />
that the issue was resolved--through the government’s<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
61
M ANAGEMENT OF DEVELOPMENT<br />
capitulation.<br />
However patchy the process, as discussed above, the end of<br />
quotas gradually ended corruption in accessing goods and<br />
services. The government shifted to governance by regulation<br />
rather than by quota. The domestic private sector, which had<br />
introduced corruption to the general public in the 1950s, led<br />
the way out by increasing output. By the year 2000, Indian<br />
governance had moved from a controlling stance to a regulatory<br />
stance.<br />
The shift to a regulatory stance has had a beneficial impact<br />
on corruption. Regulators in most cases, including finance,<br />
insurance and telecommunications, have been appropriately<br />
empowered and given independence from other organs of the<br />
state. Thus, another important source of corruption, that of<br />
the inefficient allocation of state-held property rights, has<br />
been partially eliminated.<br />
The remaining areas of corruption in public allocation are<br />
in land and civic infrastructure allocation, due to continuing<br />
short supply of quality urban space. Corruption is a factor in<br />
determining who gets to build what, how much, and where. In<br />
most cases, building permits are given liberally in return for a<br />
bribe, with no consideration of additional<br />
infrastructure needs such as roads and<br />
water. Sadly, it is the poor, who lack<br />
adequate infrastructure to begin with,<br />
who suffer the most.<br />
The United Nations Human Development<br />
Report for 2006 notes that in a<br />
run-down area of Bombay, Dharavi, there<br />
is a slum that houses two million of<br />
Bombay’s population. It says, “It is<br />
estimated that there is one toilet for every<br />
1,440 people. In the rainy season streets, lacking drainage,<br />
become channels for filthy water carrying human excrement.<br />
In a typical case, 15 families share one tap that works for two<br />
hours a day.”<br />
Yet, cities like Bombay and Delhi record one cell phone<br />
per person. In other words, a majority of Dharavi’s residents<br />
probably have one cell phone in the family while sharing a<br />
toilet with over a thousand others. Even in the spiffy Churchgate<br />
district of Bombay, where apartment prices exceed ten<br />
thousand rupees per square foot, water is supplied for two<br />
hours a day, usually in the evenings at around 8 p.m. Residents<br />
keep large tanks in bathrooms and kitchens to store the<br />
Inadequate<br />
disclosure<br />
of corporate<br />
actions has lead<br />
to widespread<br />
corporate and<br />
securities fraud<br />
water for use during the rest of the day, but some appliances<br />
such as washing machines and dishwashers can only be used<br />
with the water at full pressure. So a maid, who will later<br />
return to her slum-dwelling, is sure to be at her employer’s<br />
home at 8 p.m. to operate these essential appliances.<br />
The third source of corruption, patronage in state recruitment<br />
and spending, has been sought to be tackled by introducing<br />
fiscal discipline and paying state employees better<br />
salaries. For instance, a professor at one of the state-owned<br />
Indian Institutes of Technology, whose salary was earlier<br />
capped at $19,700 a year can now earn up to $27,000 a year –<br />
not inconsiderable considering that his student will typically<br />
earn $9,000 as an annual starting salary at an outsourcing<br />
firm, i.e., a ratio of 3 – the comparable ratio at Stanford<br />
University is 1.6.<br />
However, the enforcement of these rules remains weak and<br />
the oversupply of underpaid staff continues and remains a<br />
source of massive corruption.<br />
A famous court case captures this cause of corruption. 6 In<br />
December 2006, the Delhi High Court overturned the lower<br />
court’s verdict acquitting Manu Sharma, the son of prominent<br />
politician Venod Sharma, of killing<br />
bartender Jessica Lall, in the presence of<br />
several witnesses. The defense did all it<br />
could to prevent a fair trial: at the retrial,<br />
it emerged that the defense’s actions<br />
included bribing and threatening witnesses.<br />
The police, by their own admission,<br />
shielded the accused and sought to<br />
derail the case. Over thirty eyewitnesses<br />
initially filed testimony but later retracted<br />
and turned hostile toward the prosecution.<br />
One witness, a prominent Delhi socialite whose testimony<br />
remained unchanged, was the owner of the restaurant<br />
where Jessica was murdered. That made a key difference to<br />
the outcome. Venod Sharma was later exposed in a sting<br />
operation by Tehelka, the famous investigative journal, as<br />
having organized the payment of millions of rupees to some<br />
of the witnesses. The only comment that the erstwhile Delhi<br />
police commissioner made on the final verdict was that the<br />
judgment seemed to be motivated by a judge with an agenda<br />
but that it showed that the police could at least, on occasion,<br />
be critical of themselves!<br />
The speed with which the retrial was held and a verdict<br />
62 THE IIPM THINK TANK
C ORRUPTION CONCERNS<br />
Table 1: Sources of Corruption<br />
Problem Corruption Reform Objective Ref Achieved? Corruption<br />
controlled?<br />
Short-supply of pub&pvt<br />
consumer and industrial<br />
goods and services<br />
State-owned, inefficiently-used<br />
property rights,<br />
eg., spectrum, water, airtraffic,<br />
power generation<br />
and distribution<br />
Patronage recruitment in<br />
state sector; patronage<br />
spending by MPs<br />
High election costs and<br />
vote buying by corporates<br />
Poor disclosure on corporate<br />
actions<br />
Inefficient land allocations<br />
SROs deny foreign access<br />
(securities, foreign investors,<br />
accounting, media,<br />
law)<br />
Sidepayments;<br />
poor quality<br />
Sidepayments;<br />
monopoly rents<br />
Sidepayments by<br />
recruits and users<br />
Corporate Sidepayments<br />
Corporate and securities<br />
fraud<br />
Sidepayments<br />
Poor quality<br />
End Quotas Efficient Production Yes Yes (7)<br />
Regulation<br />
of allocation<br />
Fiscal discipline;<br />
higher<br />
salaries<br />
Legalize<br />
contribution;<br />
apply<br />
limits and<br />
disclose<br />
Regulation<br />
Eminent<br />
domain<br />
State takes<br />
over regulation<br />
Efficient property rights<br />
allocation<br />
Yes Partial (1)<br />
Efficient state sector Partial No (6)<br />
Reduce Corruption No No (2)<br />
Adequate disclosure<br />
and corporate governance<br />
Efficient land allocations<br />
Improve quality<br />
Yes Partial (4)<br />
Yes No (3)<br />
Finance: Yes;<br />
rest: No<br />
No (5)<br />
delivered (the original verdict was delivered in February<br />
2006, although the murder occurred in April 1999) was<br />
unprecedented and seems to have been a direct outcome of<br />
the public uproar that followed the initial verdict. It is, of<br />
course, too early to tell if this was an isolated occurrence or a<br />
forerunner of positive change. A cautionary note was sounded<br />
by the erstwhile solicitor general, Harish Salve, who<br />
responded to a TV reporter’s question on the verdict with<br />
“Jessica Lall’s case is only one of hundreds such that never<br />
get reported because less prominent people are involved.”<br />
And, it is worth noting that, to date, no one from the police<br />
or those who paid illegal bribes on behalf of the defense has<br />
yet been prosecuted. Even worse, perhaps, is that neither the<br />
media nor other organs of civil society has bothered to follow<br />
up on the case subsequently.<br />
The fourth source of corruption, the cost of elections, was<br />
addressed in the reforms by legalizing political contributions,<br />
applying limits (five percent of net profit) and requiring<br />
disclosure to shareholders of public companies. However, this<br />
has not worked. The last requirement has apparently been a<br />
reason in this rule being evaded, suggesting that the management<br />
of public companies were already corrupt.<br />
The fifth source of corruption, that of the low accountability<br />
of professional self-regulatory organizations has been<br />
addressed only partially. In securities markets, the state tried<br />
to make the BSE more accountable, failed and set up its own,<br />
more successful exchange, the National Stock Exchange.<br />
Similar failures have occurred in the other SROs, but no<br />
successful alternative has been found.<br />
The past and present situations are summarized in table 1.<br />
The table lists the sources of corruption in the author’s<br />
assessment of their order of importance in the pre-reform<br />
period. The numbers in parentheses show a corresponding<br />
rank at the present time.<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
63
M ANAGEMENT OF DEVELOPMENT<br />
Corruption and Corporate Governance<br />
We have already detailed the past and continuing existence<br />
of corporate corruption. However, on January 7 th , <strong>2009</strong>,<br />
corporate India was shaken to its roots when Ramalinga<br />
Raju, the Chairman and CEO of Satyam Computers, India’s<br />
fourth largest IT company admitted, in a letter to the stock<br />
exchanges, that he had falsified accounts for several years in<br />
an effort to present a better picture of Satyam’s operations<br />
than was the truth.<br />
Information later emerged that the accounts were falsified<br />
in connection with a massive transfer of funds to the Rajus’<br />
family-owned property company and other personal accounts<br />
to an amount that is still being determined, but it most likely<br />
ranges between $1.4 bn and $2 bn. The government took over<br />
the company and Raju, his brother and the CFO have been<br />
jailed 7 and remain there, as of March <strong>2009</strong>. Subsequent<br />
investigations have revealed additional fraudulent actions<br />
including undisclosed insider sales.<br />
It also later emerged that the firm’s external auditor, a local<br />
firm – Lovelock & Lewes (which represented PWC in India<br />
Table 2: Current State of Regulation in India and US<br />
India<br />
US (NYSE)<br />
Independent directors Minimum 50% Majority<br />
Remuneration of independent directors Only director’s fees and firm’s equity-linked<br />
Same<br />
securites<br />
Independent directors’ to be unrelated to Yes<br />
Same<br />
firm<br />
Independent directors awareness of firm’s Yes<br />
Yes<br />
compliance status<br />
Meetings of independent and non-executive No<br />
Yes<br />
(I/N-E) directors without executive directors<br />
Compliance certification CEO and CFO Same<br />
Audit Committee<br />
All to be I/N-E, of whom majority Only independent persons (not necessarily<br />
directors) may be audit com-<br />
& Chair to be independent; broad<br />
powers, including code of conduct, mittee members<br />
governance, whistleblower protection<br />
Board nominations & corporate governance<br />
committee, composed of independent directors<br />
Compensation committee, composed of independent<br />
directors<br />
Shareholder rights: voting, share transfer,<br />
pre-emptive rights, disclosure of most material<br />
information (eg., insider trades), internal<br />
and external audit, equal rights for foreign<br />
and minority shareholders<br />
No: Corporate governance is part of<br />
audit committee; nomination is by<br />
the full board<br />
No: Compensation is determined by<br />
the full board<br />
Best practices observed<br />
Yes<br />
Yes<br />
Dual class stock remains an issue<br />
Corporate strategy Management driven Board driven<br />
Related party transactions<br />
Disclosure to shareholders not required;<br />
Disclosure to shareholders required<br />
must be approved by audit<br />
committee<br />
Share pledging by insiders<br />
Disclosure to shareholders not required<br />
Disclosure to shareholders not required<br />
Source: http://www.worldbank.org/ifa/rosc_cg_india.html<br />
SEBI documents, various years<br />
64 THE IIPM THINK TANK
C ORRUPTION CONCERNS<br />
due to the SRO restrictions on PWC’s direct entry into India)<br />
– was an intrinsic part of the fraud.<br />
Satyam, at the time, had six independent directors and<br />
three executive directors. The latter group consisted of Raju,<br />
his brother and a long-time business associate. The independent<br />
directors were an eminent group. They were<br />
K.G.Palepu, a Harvard Business School professor of corporate<br />
governance (ironically, his website says that “In the area<br />
of corporate governance, Professor Palepu's work focuses on<br />
how to make corporate boards more effective, and on<br />
improving corporate disclosure.”); M. Rammohan Rao, a<br />
recent appointee to the board and Dean of the Indian School<br />
of Business; Vinod Dham, a well-known Indian engineer of<br />
Silicon Valley, the founder of many successful startups, a<br />
co-inventor of Intel’s Pentium chip, and a successful<br />
venture capitalist; T.R.Prasad, a former Cabinet Secretary;<br />
V.S.Raju (no relation), a former director of IIT, Delhi; and<br />
Mangalam Srinivasan, a US-based academic, and former<br />
advisor to Harvard’s Kennedy School of Government.<br />
It appears clear that the independent directors did not<br />
fulfill their duties. For instance, at a board meeting on<br />
December 16, 2008, to vote on a resolution<br />
to approve the acquisition of the<br />
Rajus’ property firm by Satyam at short<br />
notice, none of the independent directors<br />
(all were present by phone or in person)<br />
questioned why only that firm was being<br />
considered for acquisition rather than any<br />
of the other property firms on the market<br />
(given the depressed state of such firms at<br />
the time, this should have been an obvious<br />
question). 8 Only Mangalam Srinivasan<br />
stated that the board should have been involved in such a<br />
large acquisition from the beginning rather than at that stage;<br />
the response to her statement was provided by one of the<br />
executives of the IT firm, that it was a sound derisking<br />
strategy, given the state of the IT market globally (there was<br />
no discussion of the state of the even-more depressed<br />
property market in Hyderabad). All the directors voted for<br />
the resolution.<br />
Satyam’s failure shocked the Indian corporate world and<br />
policymakers, since India has been seen as a leader among<br />
developing countries in the area of corporate governance.<br />
Starting in 1991, with a focus on improving investors’<br />
Key oversight<br />
functions such<br />
as over finance<br />
must contain<br />
representation<br />
from independent<br />
directors<br />
rights, the regulator, the Securities and Exchange Board of<br />
India (SEBI) successfully introduced a range of reforms of<br />
investor disclosure rules. The Company Law Board, working<br />
with the Institute of Chartered Accountants of India,<br />
reformed the accounting and auditing standards.<br />
The rules for disclosure are widely considered to be<br />
effective; Indian firms follow these rules that protect shareholder<br />
pre-emptive rights over corporate actions, and have<br />
internal and external auditors. There is only a single class of<br />
stock, with the same rights whether held by institutions,<br />
insiders, the general public or foreigners. The accounting<br />
standards are based on internationally accepted accounting<br />
standards. 9 There remain some significant differences with<br />
US accounting standards, mostly in the area of disclosure of<br />
contingent liabilities and deferred taxation.<br />
Starting in 2000, rules for intra-firm corporate governance<br />
have been enforced, with subsequent modifications to<br />
accommodate the provisions contained in the Sarbanes-Oxley<br />
Act of 2002.<br />
Table 2 summarizes the current state of the regulations.<br />
As Table 2 indicates, there are substantial similarities<br />
between Indian and American rules: in<br />
particular, the definition, percentage and<br />
remuneration of independent directors<br />
and the broad powers of the audit committee<br />
are similar. There are some<br />
significant differences as well. The<br />
nomination of directors is a responsibility<br />
of the board rather than the audit committee<br />
and there is no independent<br />
compensation committee. Given the<br />
Satyam scandal, the issue of how Satyam<br />
treated related-party transactions might have been driven by<br />
the difference in rules. A key driver of the Satyam scandal,<br />
that the insider directors pledged their shares in order to<br />
raise money for their personal property company, was not<br />
required to be revealed – although this is not required in the<br />
US either.<br />
Our discussion above puts a great deal of the onus for good<br />
corporate governance on the independent directors; it is<br />
clear, however, from any corporate environment, that it is<br />
really the behavior of the insider directors that matters; and<br />
that controlling their behavior is, in practice, very difficult.<br />
Satyam’s Raju, for instance, was well-known for his wooing of<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
65
M ANAGEMENT OF DEVELOPMENT<br />
local politicians. For instance, several of the most senior<br />
politicians of his home state, Andhra Pradesh, visited Silicon<br />
Valley as his guests, including visits hosted at Stanford<br />
University by this writer. It has been alleged, subsequent to<br />
the Satyam scandal, that a proportion of the fraudulent<br />
transfers were paid to politicians to clear land deals involving<br />
his property firm.<br />
Some of the flouting of the rules indicate that, at<br />
Satyam, the corruption ran deep. For instance, one of the<br />
rules (in India and the US) is that independent directors<br />
are not permitted to obtain any other compensation apart<br />
from director’s fees and unvested equity/options (with a<br />
one year vestment, at least). Yet, Professor Palepu received<br />
over $150,000 in annual fees for providing training<br />
to Satyam’s senior staff (hopefully, not on the subject of<br />
corporate governance). This required Professor Palepu’s<br />
consent; but, obviously, also the consent of the insider<br />
directors, management and external auditors to initiate<br />
the transaction and to sign off on such payments.<br />
Another question that this discussion raises is whether,<br />
given that India is emerging from a controlled environment,<br />
even stricter rules than otherwise<br />
are necessary. For instance, consider<br />
the question of family members on the<br />
board. In the US, given its long history<br />
of professional management, it would be<br />
unusual to find more than one or two<br />
family members of the original promoters<br />
on the firm’s board.<br />
In India, the presence of several<br />
family members is common, even after a<br />
generation has passed. In India’s largest<br />
company, Reliance Industries, the second generation<br />
executive chairperson is Mukesh Ambani. There are three<br />
other executive directors, two of whom are his cousins.<br />
The three cousins jointly constitute the finance committee.<br />
The independent directors on Reliance’s board<br />
include Dipak Jain, the Dean of Northwestern University’s<br />
Kellogg School of Management, and S. Venkitaramanan,<br />
a former Governor of the Reserve Bank of India. In the<br />
venerable Birla group, which is among India’s largest and<br />
oldest corporate groups, the founder’s great-grandson,<br />
Kumar Mangalam Birla, and his mother, Rajashree Birla,<br />
sit on the boards of each of their group companies. At<br />
In US, it would<br />
be unusual to<br />
find more than<br />
one or two family<br />
members of the<br />
original promoters<br />
on the board<br />
another successful company, Vedanta Group, which<br />
recently agreed to buy America’s largest copper refiner,<br />
Asarco, for $1.7 billion, the three executive directors<br />
include the executive chairman, Anil Agarwal and his<br />
brother and deputy chairman, Navin Agarwal. India’s largest<br />
telecom company, Bharti Airtel, is headed by Sunil<br />
Mittal, and board members include his two brothers.<br />
As these examples of pre-eminent firms indicate, the<br />
family-run corporation is not something unlikely given<br />
India’s recent emergence and does not, by itself, indicate<br />
suspect practice. A practical reason for family presence is<br />
that, when dealing with a still corrupt government and a<br />
generally corrupt environment, insiders need to have<br />
strong trusted ties to each other. In a non-corrupt organization,<br />
such ties are a strength in the Indian environment.<br />
However, if the organization is corrupt, given the strength<br />
of the tie between the non-independent directors, it is<br />
unlikely that even a simple majority of independent<br />
directors can be effective. What is needed is that key<br />
oversight functions such as over finance contain representation<br />
from independent directors.<br />
The second concern in India is<br />
enforcement. As we saw in the case of<br />
Satyam Computers, the existing laws<br />
were not enforced. The primary regulator,<br />
SEBI, relied on the auditors, who<br />
turned out to be part of the fraud.<br />
In summary, it appears that, while the<br />
Indian laws are better than in most<br />
countries, though still below best<br />
practice, the key issue is that corruption<br />
is enabled by lax enforcement and the<br />
failures engendered by self-regulation; and driven by the<br />
forces of patronage. As a result, corruption remains<br />
widespread enough and may be considered endemic. The<br />
Satyam episode is symptomatic of a wider problem rather<br />
than a one-off.<br />
Conclusion<br />
Resolving corruption is no easy problem. China is an<br />
example of a society that is ranked by the above indices to<br />
be corrupt (in the 25 th -50 th percentile, i.e., similar to India<br />
in the World Bank estimates; and 72 nd on Transparency<br />
International’s Index). Yet, unlike India, the Chinese state<br />
66 THE IIPM THINK TANK
C ORRUPTION CONCERNS<br />
relentlessly pursues corruption. According to a 2005 news<br />
article, the Chinese government executes more officials<br />
for corruption offences than the rest of the world combined.<br />
At least 25 officials were given the death penalty for<br />
accepting bribes or kickbacks in the four years to 2005.<br />
More than 846,000 Communist Party members were<br />
punished for corruption from 1998 to 2002 alone, and<br />
58,000 officials have been punished in recent years at just<br />
two of the state-owned banks. 10<br />
The story can be different. For instance, Hong Kong’s<br />
Independent Commission Against Corruption, formed in<br />
1974, is credited with cleaning up the problem of endemic<br />
corruption in Hong Kong. 11<br />
In India, the Jessica Lall and Satyam cases show that<br />
corruption at the corporation is going to be a difficult<br />
problem to tackle since it is closely related to patronage<br />
corruption and the lack of enforcement. One might expect<br />
less corruption in civic life as an outcome of the improvement<br />
in the wages of public servants and a reduction in<br />
their numbers, but it will take several years to feel the full<br />
impact of these.<br />
Meanwhile, new types of corruption are constantly<br />
invented. Thus, to avoid having to disclose insider sales,<br />
Satyam’s two Rajus pledged their shares, something that<br />
was permitted until after the Satyam scandal, when SEBI<br />
changed the rules. The other new form of corruption is<br />
institutionalized: policies that ignore the rights of the poor<br />
and underprivileged in favor of the rich, as is becoming<br />
evident in the exercise of eminent domain rights by the<br />
state. In a growing economy, the incentives for such<br />
institutional corruption are higher because higher bribes<br />
are more affordable than when the economic pie is small.<br />
Mustering the collective will to tackle these forms of<br />
corruption remains a challenge for India in the twentyfirst<br />
century.<br />
Endnotes<br />
1<br />
http://www.transparency.org/policy_research/surveys_<br />
indices/cpi/2008, accessed March 19, <strong>2009</strong><br />
2<br />
http://info.worldbank.org/governance/wgi/index.asp,<br />
accessed March 19, <strong>2009</strong><br />
3<br />
One uses the term corruption-free society, with hesitation,<br />
in the current times. Iceland was ranked 7 th in the<br />
2008 Transparency International survey; it is unlikely to<br />
rank so highly this year.<br />
4<br />
Not wanting to penalize its citizenry to death, however,<br />
the state graciously declared that phone lines were<br />
heritable assets. This meant that, upon the death of a<br />
person, the right to the phone line (including the right<br />
to assume the dead person’s place in the queue in case<br />
the line had not yet come through) was transferable to<br />
the next of kin.<br />
5<br />
http://www.thearynews.com/english/newsdetail.<br />
asp?nid=22810, accessed March 25 th , <strong>2009</strong><br />
6<br />
See Dossani, India Arriving, (New York: AMACOM<br />
Books), 2007, for more detail<br />
7<br />
The three men share a cell with a bootlegger, according<br />
to news reports.<br />
8<br />
This report is based on leaked minutes obtained by the<br />
Economic Times, India’s most reputable business daily.<br />
9<br />
www.pwc.com/Extweb/pwcpublications.nsf/docid/<br />
A9E4E313EFE6F349CA2573F 5003FC982, accessed<br />
March 26 th , <strong>2009</strong><br />
10<br />
http://www.globalpolicy.org/nations/launder/<br />
regions/2005/0530china.htm, accessed March 19, <strong>2009</strong><br />
11<br />
Doig, A. Good government and sustainable anti-corruption<br />
strategies: a role for independent anticorruption<br />
agencies? Public Administration and Development, 15,<br />
151-165 (1995)<br />
References and Additional Thinking<br />
• Thomas L. Friedman, The World is Flat, Allen Lane<br />
- Penguin Books, 2005<br />
• Allen Greenspan, The Age of Turbulence, The Penguin<br />
Press, 2007<br />
• David M. Smick, The World is Curved, Portfolio, 2008<br />
• A special report on the world economy, The Economist,<br />
London, October 11 th , 2008<br />
• Dani Rodrik, The Economist, March 14 th , <strong>2009</strong><br />
• Charles Collyns, The Crisis through the Lens of History,<br />
Fund & Development, IMF, December 2008<br />
• Obama seeks global action : The Economic Times, 25 th<br />
March <strong>2009</strong><br />
• Mada, K.U., "A Journey Through Development Banking",<br />
Kamal Offset Printers, Mumbai, 2005.<br />
(The views expressed in the article are personal and do not<br />
reflect the official policy or position of the organisation).<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
67
M ANAGEMENT OF DEVELOPMENT<br />
A Review of the Regulatory and<br />
Developmental Role of IRDA in Context<br />
to The Indian Insurance Market<br />
68 THE IIPM THINK TANK
I NDIA INSURED<br />
Sanjay Tewari<br />
Administrative Officer, Life Insurance<br />
Corporation of India<br />
A<br />
thriving insurance sector is of vital importance to<br />
Whether the<br />
insurer is private<br />
or public,<br />
expanding the<br />
market will<br />
present multitude<br />
of challenges<br />
every modern economy. First because it encourages<br />
the savings habit, second because it provides a<br />
safety net to rural and urban enterprises and productive<br />
individuals. And perhaps most importantly, it generates<br />
long-term investing funds for infrastructure building. The<br />
nature of the business is such that the cash inflow of insurance<br />
companies is constant while the payout is deferred and<br />
contingency related. This characteristic of their business<br />
makes insurance companies the biggest investors in longgestation<br />
infrastructure development projects in all developed<br />
and aspiring nations. This is the most compelling<br />
reason why private sector (and foreign) companies were<br />
required to spread the insurance habit in the societal and<br />
consumer interest. Whether the insurer is private or public,<br />
expanding the market will present multitude of challenges<br />
and opportunities. The passage of the<br />
Insurance Regulatory & Development<br />
Authority Bill on December 2 nd , 1999<br />
heralded an era of cautious optimism<br />
where stakes were high for all the parties<br />
concerned. For the foreign insurers,<br />
investments must start yielding returns,<br />
for domestic insurance industry – their<br />
market penetration should remain intact<br />
and for the Government of India, Foreign<br />
Direct Investment (FDI) must pour in as<br />
anticipated. On the periphery, the customers are thinking<br />
whether all the hype created on liberalization will actually<br />
benefit them. The Bill of Rights 1 , over these years has<br />
extended to a total of eight together forming the basis of any<br />
regulatory framework.<br />
The insurance / penetration in India is poor at two percent<br />
of GDP, we may curse our past but it’s a big potential for our<br />
next generation. Indian economy is 0.16 % of US economy<br />
but insurance density of India is 0.004 % of USA. Purely for<br />
equilibrating with its own economy the insurance sector has<br />
not only got the obligation to grow with the economy but to<br />
bridge the lag factor. This challenge offers the greatest opportunity<br />
to the Insurance Regulator, the Insurers, the Re<br />
insurers and the intermediaries apart from the Statesmen of<br />
the country. This paper discusses that there has to be a<br />
paradigm shift in the role of the IRDA, transforming from<br />
primarily one of developing legal and regulatory frameworks<br />
to increase the awareness levels, product innovation, distribution,<br />
customer service and investments; and perhaps increasing<br />
the penetration of insurance.<br />
Insurance Regulation to Rectify Market Imperfections<br />
The Government’s role in crafting insurance regulation<br />
should be limited to rectifying the deficiencies or imperfections<br />
that can cause significant harm. A pro-competitive<br />
approach, therefore, would witness governmental regulation<br />
of insurance only with respect to matters that meet the<br />
following three conditions:<br />
• an actual or potential market imperfection exists,<br />
• the market imperfection causes or can reasonably be<br />
believed to cause meaningful consumer or public harm,<br />
and<br />
• government action can ameliorate the harm.<br />
Conversely, if any one of the three<br />
conditions is not met, no government<br />
intervention is warranted. In the Indian<br />
context, these conditions do exist, and<br />
hence the IRDA. Justifiable government<br />
intervention should be minimally intrusive<br />
and as efficient as possible. For example,<br />
one way to minimize consumer harm<br />
occasioned by insurer insolvencies is to<br />
allow insurers to plot to set prices so high<br />
that even the most inefficiently operated<br />
insurer is guaranteed a profit and, therefore, survival. Such<br />
an approach, however, results in high priced insurance and<br />
excessive profits for insurers – all at the expense of consumers<br />
and businesses, and therefore, at the expense of the national<br />
interest. The superior approach is to allow price competition<br />
but to establish reasonable capital standards while closely<br />
monitoring the insurers financial condition. This approach<br />
will yield lower priced insurance, thus benefiting the national<br />
economy, while minimizing the possibility of consumer harm<br />
that would otherwise arise form excessive insurer financial<br />
risk and insolvencies. Now, briefly the specific arguments<br />
favoring greater foreign insurer participation is that India<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
69
M ANAGEMENT OF DEVELOPMENT<br />
could realize one or more of the following benefits:<br />
• increased domestic savings<br />
• improvements in customer service and value<br />
• additional external financial capital<br />
• transfers of technological and managerial know how<br />
• improvements in the quality of insurance regulation<br />
• creation of beneficial domestic pouring, including the<br />
addition of more and higher quality jobs, quality enhancing<br />
backward and forward linkages, and societal loss<br />
reductions.<br />
However, there are concerns 2 or rather reservations about<br />
the foreign insurer involvement and this is to be looked into<br />
by the IRDA.<br />
First, foreign insurers might dominate the domestic market<br />
and thereby precipitate adverse microeconomic (less consumer<br />
choice and value) or macroeconomic (failure to<br />
contribute adequately to economic development) effects.<br />
The Second reservation class for which factual justification<br />
is lacking or for which more efficient means exist to address<br />
the concern than denial of market access is that foreign<br />
insurers might market insurance selectively (marketing<br />
insurance to only most profitable segments,<br />
to multinational corporations or to<br />
the commercial sector, ignoring the retail<br />
market).<br />
The Third class is that foreign insurers<br />
might fail to make lasting contributions to<br />
the local economy.<br />
The Fourth class of arguments for<br />
limiting foreign insurer market access is<br />
that the domestic market is already served<br />
by locally owned insurers or through<br />
reinsurance.<br />
The Fifth reservation category is that the national industry<br />
should remain locally owned for strategic reasons, such as<br />
national security concerns or because of the desire for<br />
economic diversification.<br />
The Sixth reservation is that foreign insurers may provoke a<br />
greater foreign exchange outflow. More importantly it is to be<br />
noted : “ (any) loss of foreign exchange may not be substantial<br />
enough to justify the opportunity cost involved in running<br />
and upgrading national insurance corporations 3 .”<br />
The Final reservation relates to the belief that the full<br />
market liberalization should await insurance and possible<br />
There are two<br />
opposite ends<br />
of a spectrum of<br />
how regulations<br />
can be developed:<br />
Pluralist Vs.<br />
Corporatist<br />
macroeconomic regulatory reforms so as to minimize the<br />
chances of micro – or macroeconomic disruptions.<br />
Development & Regulation Combine to Build A<br />
Strong Market<br />
By assigning the developer’s role to the regulator the Government<br />
has demonstrated that if the regulator is allowed to act<br />
as the fulcrum between the load of prudent supervision on<br />
one hand and the efforts of development of the insurance<br />
market on the other, perhaps one can strike the right balance<br />
most efficiently. In India, the regulatory legislation has made<br />
a significant departure from the rest of the world by allocating<br />
to the insurance regulator the role of development of the<br />
industry. This change appears to have been carved out with<br />
the intention to ensure that the regulator does not overlook<br />
the need of developing and expanding the insurance market<br />
and the institutions within the system so that the benefits of<br />
liberalization and opening up of the sector trickle down to<br />
the masses 4 .<br />
Moreover, the regulations need to be seen as “drivers for<br />
change to force players to do things in a better way”. However,<br />
it is also recognized that on their<br />
own, mechanisms that attempt to “force”<br />
people to act are difficult to implement.<br />
The process of development and amendment<br />
of regulations is the starting point in<br />
terms of understanding how future regulations<br />
might relate to innovative behavior.<br />
There are two opposite ends/approaches 5<br />
of a spectrum of how regulations can be<br />
developed:<br />
1. Pluralist ( competitive ) Vs.<br />
2. Corporatist ( partnering )<br />
The pluralist / competitive approach assumes that the<br />
government plays a neutral role as arbitrator between groups<br />
of competing interests where those best able to mobilize<br />
support and ‘justify’ their arguments win. The development<br />
of regulations within this framework therefore relies upon<br />
interpretations by interest groups that are most able to exert<br />
pressures to succeed. The Corporatist / partnering, consensual<br />
approach is more inclusive. It may also lead to long<br />
discussions and consultations. Different interests are brought<br />
together within the regulatory developmental process in<br />
which the government plays an active role in order to con-<br />
70 THE IIPM THINK TANK
I NDIA INSURED<br />
struct a common way forward. The process is usually slow<br />
and messy and not conducive to rapid innovation, or risk<br />
taking. Whilst this system may not produce the ‘right’<br />
answers (in many cases there are no single best solutions), it<br />
often helps to avoid deeply problematic outcomes.<br />
The form of regulatory policy is important with respect to<br />
firms’ abilities and incentives to innovate. The traditional,<br />
prescriptive approach to regulations is often thought to be<br />
too rigid and inhibits innovation. This is one of the reasons<br />
for the shift towards performance-based regulations, which<br />
often offer greater flexibility to stakeholders in choosing<br />
options to meet overall functional requirements. However,<br />
there are limitations and contradictions in the new performance-based<br />
approach. For example, it is not clear how<br />
timescales within the performance criteria need to be met<br />
relate to implementation of this approach. A flexible performance-based<br />
form of standard could provide firms with the<br />
freedom, market incentive and institutional frameworks<br />
within which to innovate. There will always be tension<br />
between the need for regulations for new technologies and<br />
those covering old versions. This issue requires flexibility on<br />
the part of regulators and those demonstrating<br />
compliance. As bodies of knowledge<br />
grow and become more precise in<br />
new specialist areas it is possible that<br />
organizations which can adapt in a flexible<br />
manner will be able to comply more easily,<br />
through their ability to adapt to the need<br />
to show new evidence. There is therefore<br />
more likely to be a link between organizational<br />
flexibility, competencies to comply<br />
with regulations and innovativeness.<br />
Firms need to develop new skills to succeed in this environment.<br />
This by itself could lead to information sharing and<br />
co-operation, particularly if a portfolio of innovation and<br />
regulatory policies are developed. A system of measuring the<br />
regulator’s performance which is communicated to the public<br />
in a consistent manner will, over passage of time, tend to<br />
enhance the public’s confidence in the regulator and the<br />
regulatory process.<br />
An Ideal Developmental Strategic Plan for IRDA<br />
A proper appreciation of the developmental role of the<br />
There will always<br />
be tension<br />
between the need<br />
for regulations for<br />
new technologies<br />
and those<br />
covering old ones<br />
regulator is not possible without a plan 6 . The planning<br />
process for a modern regulatory body should include the<br />
following elements:<br />
• The plan should be based on the regulator’s mandate and<br />
objectives, and should seek to achieve the objectives within<br />
a realistic timeframe.<br />
• The plan should be based on a thorough assessment of the<br />
challenges faced by the regulator, including areas in which<br />
the regulator is seen to fall short of its mandate and<br />
objectives, deficiencies in compliance with standards of<br />
best practice, and specific tasks such as the development of<br />
the legislation and supervisory methodologies.<br />
• Based on the regulators objectives and self-assessment<br />
described above, the plan should set realistic medium-term<br />
goals. These are goals or targets to be achieved in a three<br />
to five year timeframe but generally not longer. The goals<br />
should also be ambitious enough to stimulate genuine<br />
action but should be few enough in number to permit a<br />
concentration of effort on these goals.<br />
• The plan should then set out the specific actions necessary<br />
to achieve the medium-term goals. Often these actions are<br />
set out in the form of annual business<br />
plans. Reference is often made, however,<br />
to the actions to be taken in the years<br />
immediately following in order to create a<br />
roadmap for achieving the medium-term<br />
goals.<br />
• Where possible the medium-term goals<br />
and short-term actions should be measurable.<br />
At the very least it should be possible<br />
to determine whether the goal has or has<br />
not been met.<br />
The regulation should be adequate 7 , meaning that it should<br />
be sufficient to rectify market failures and, thereby, protect<br />
the public. Several principles should follow, commonly being:<br />
• Competition Law: To establish an adequate system of<br />
regulation, government must, first, have necessary laws<br />
and regulations in place that create the framework for a<br />
competitive market. The first principle, therefore is<br />
“Government should enact and enforce laws that provide<br />
an effective framework for competitive insurance markets.”<br />
• Prudential Regulation: Insurance laws and regulations<br />
also should address all relevant aspects of insurance<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
71
M ANAGEMENT OF DEVELOPMENT<br />
operations, from creation to liquidation.<br />
“Government should enact and enforce laws that establish<br />
reasonable solvency standards and regulation as the<br />
primary means of protecting the public. As a part of<br />
reasonable solvency regulation, government should<br />
establish, make public, and enforce appropriate and<br />
consistent rules and procedures for identifying and dealing<br />
with financially troubled insurers.”<br />
• Regulatory Effectiveness: The next step to ensure adequate<br />
regulation in a globally competitive market involves<br />
creation of an independent regulatory agency.<br />
“Government should establish an insurance regulatory<br />
agency that operates in society’s interest and has sufficient<br />
resources to efficiently, effectively, and impartially enforce<br />
the nation’s insurance laws and regulations.”<br />
• Impartial Regulation : The principal of impartiality is<br />
fundamental to a competitive market.<br />
“Government should ensure that insurance regulation and<br />
enforcement are applied with consistency and impartiality<br />
between competitors, irrespective of the nationality.”<br />
International Cooperation in Insurance<br />
IRDA has benefited from its association with the International<br />
Association of Insurance Supervisors (IAIS) 8 and its<br />
member countries, while formulating the various regulations<br />
and guidelines, from time to time. The members of the IAIS,<br />
being regulators in other jurisdictions with vast experience in<br />
the insurance industry, have always co-operated whenever<br />
reference has been made to them, with respect to insurance<br />
Table 1: IAIS Committees/ Sub-Committees :<br />
S.No.<br />
IAIS / Committees<br />
1 Executive Committee<br />
2 Emerging Markets Committee<br />
3 Technical Committee<br />
4 Task Force on Assessment & Implementation of Insurance Core Principles<br />
5 Working Group on Observer ship & Membership <strong>Issue</strong>s<br />
S.No.<br />
IAIS / Sub-Committees<br />
1 Insurance Fraud Sub-Committee<br />
2 Insurance Laws, Regulations, Practices & Standards Sub-Committee<br />
3 Re insurance Sub-Committee<br />
4 Education Sub-Committee<br />
5 Accounting Sub-Committee<br />
companies and intermediaries licensed in their jurisdictions.<br />
The IRDA has benefited from the learning curve in the<br />
various jurisdictions across the globe. IAIS was associated<br />
with the IRDA in organizing seminars and training programs<br />
for regulators in the Asian region. The IRDA has been<br />
actively associated with the working of the following Committee<br />
/ Sub-Committees with Chairman / Members representing<br />
the Authority on these Committees:<br />
The Initiatives, Challenges and Limitations of IRDA<br />
After elaborating the strategic role of the regulator, it is<br />
time to take a stock after seven years of the formulation of<br />
IRDA, as to how well or otherwise the companies have<br />
adapted themselves to such an atmosphere 9 . Let me run<br />
firstly into the initiatives taken up by the IRDA:<br />
• Established the manner in which business is to be<br />
transacted by its members ;<br />
• Designed rules to ensure that the insurance market<br />
functions for the benefit of policyholders and not solely<br />
for the special benefit or advantage of its members ;<br />
• Established the rights and obligations between members<br />
and their customers including rules for members acting<br />
in fiduciary capacity and for members acting as agents ;<br />
• Established job procedures and requirements and record<br />
keeping to provide an adequate audit trail ;<br />
• Established priority, parity and precedence among<br />
orders designed to ensure proper treatment of all orders ;<br />
• Established the obligations of those acting as premiummakers;<br />
• Established the obligations<br />
safety for any transaction to be a<br />
cash transaction;<br />
• Established procedures to<br />
ensure efficient, prompt and<br />
orderly clearance, settlement and<br />
payment of claims ;<br />
• Provided effective and fair<br />
procedures and standards under<br />
which members and associated<br />
persons shall be appropriately<br />
disciplined, by expulsion, suspension,<br />
limitation of activities and<br />
functions, and other fitting sanctions<br />
in case of violations of its<br />
72 THE IIPM THINK TANK
I NDIA INSURED<br />
own rules or of the IRDA regulations ;<br />
• Provided for suspension or cancellation of business ;<br />
• Established the duties of its members to obtain and<br />
disseminate information provided by its clients and<br />
• Established, strengthened and restructured insurance<br />
market institutions (such as regulatory agencies, reinsurance<br />
nets/exchanges, settlement organizations, data<br />
exchanges), intermediaries ( well known), and activities<br />
(such as establishment of internal procedures and<br />
practices, development of appropriate organizational and<br />
staffing structures, formulation of strategic initiatives,<br />
and the design and implementation of customized<br />
management information systems).<br />
Simultaneously, it would be appropriate to measure the<br />
challenges faced by IRDA, specifically with respect to<br />
Research & Development & Risk-Based Capital System.<br />
The R&D costs money but yields high return akin to the<br />
system of venture capital. There is great temptation to enter<br />
into low-end money making enterprises in the name of<br />
R&D standing on high moral ground. Prudence lies in<br />
leveraging on the existing infrastructure. Challenge lies in<br />
thwarting personal agenda in this noble<br />
cause of R&D. Leaving the hint to the<br />
market, let me list the immediate<br />
priorities for the IRDA in R&D and<br />
insurance management in this knowledge<br />
era economics.<br />
a) IRDA scans its regulatory mandate,<br />
market opportunities, existing products<br />
and services, possible products<br />
and services and a shortlist of net<br />
opportunities. After identifying the<br />
net opportunity for insurance industry as an enterprise<br />
and resetting business objectives, design of each existing<br />
and proposed product should be assessed followed by a<br />
capability assessment of existing players.<br />
b) IRDA may understand the working space for propelling<br />
its operations from current data analysis instead of<br />
commonsensical and lobbying oriented reactive action<br />
and reliance on advise-as-you-asked (aaya) services.<br />
c) The insurer may try to optimize its risk while maximizing<br />
product range by use of ride-on and ride-off types of<br />
riders allowed by the IRDA. But IRDA has the onus to<br />
see that this does not bring further chaos to systematic<br />
A look at the<br />
IRDA’s annual<br />
report reveals<br />
that the regulator<br />
is seemingly<br />
nonchalant on<br />
certain issues<br />
risk.<br />
d) IRDA should index insurance companies by what they<br />
know (core competencies) and own (strategic assets) and<br />
not what they do (products or services).<br />
e) Capital, liability reserves and manpower in assorted<br />
insurance skill areas are three critical capacity creators,<br />
which will establish insurance industry’s business virtual<br />
circle IRDA should monitor the aggregate of this<br />
reinforced capacity at macro level.<br />
IRDA is also challenged to speed up the development of<br />
Risk – Based Capital System. The development of expertise<br />
for off-site financial condition analysis and on-site inspections<br />
has to be internalized by the IRDA. Dependence on<br />
outsourcing for such supervision whether through domestic<br />
or international individuals or organizations may create<br />
impression of regulatory weakness as also sprout possibility<br />
of self-serving supervision by such outsiders. The nest step<br />
is development of a sound enforcement infrastructure<br />
within the IRDA, including investigatory ad enforcement<br />
procedures. Development and implementation of a risksensitive<br />
early warning system to identify troubled insurance<br />
companies should be in housed by<br />
the regulator before such requirement<br />
manifests. No prudent regulator can<br />
wish away the law of averages, which<br />
mandate development of troubled<br />
insurance companies soon. A supplementary<br />
requirement is development of<br />
mechanisms for the liquidation of<br />
insolvent insurance companies. The<br />
IRDA may design and develop a policyholder<br />
protection plan in the shape of<br />
insolvency guarantee funds. There is also immediacy to<br />
survey risk management practices and internal control<br />
systems.<br />
As for the limitations, a look at the IRDA’s annual report<br />
reveals that the regulator is seemingly nonchalant on<br />
certain issues. For instance, on the often-talked about issue<br />
of rebating, the IRDA had the following saying;<br />
“The problem of rebating, in both life and the non-life<br />
sectors, has been engaging the attention of the Authority<br />
for quite a while. The Authority, as part of the advertisement<br />
campaign launched by it, has been creating awareness<br />
that rebating is an offence, and insurers need to strengthen<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
73
M ANAGEMENT OF DEVELOPMENT<br />
their self-regulatory mechanism in this regard. <strong>Issue</strong>s of<br />
market conduct of both the insurers and the intermediaries<br />
are a matter of concern. Insurers would need to evolve<br />
methods of self-regulation, both at the corporate level and<br />
collectively through their councils.”<br />
A problem that needs and requires firm handling cannot<br />
be soft pedaled like this. Again, in another crucial area of<br />
management expenses containment, instead of chiding the<br />
extravagant insurers sternly, the IRDA goes on in an<br />
advisory mode thus;<br />
“The insurers need to chalk out strategies to ensure that<br />
their operating expenses are kept within the prescribed<br />
limits. While in case of the new players, these limits may be<br />
breached in initial years of their operations, managements<br />
have to keep an eye on their expenses and draw up plans to<br />
bring them down. This is particularly pertinent in context of<br />
the opening up of the market to increasing competition and<br />
the investment income continuing to move southwards on<br />
account of the declining interest rate regime. In the case of<br />
the Public Sector Insurers, reducing the existing operating<br />
expenses would also be crucial in their strategy to compete<br />
with the lean private players.”<br />
One of the more limitations has been<br />
the adaptability of International Insurance<br />
Accounting Standards 10 . In Asia,<br />
and specifically in India, the emerging<br />
markets have been slower to adopt the<br />
modern accounting principles. The<br />
IRDA has designed the product and<br />
issued regulations that set forth important<br />
requirements respecting valuation<br />
of assets and liabilities. The Appointed<br />
Actuary regulation is there wherein the have to make a<br />
number of informative disclosures to management and to<br />
the IRDA and gives them a good deal of authority and<br />
independence. However, actuaries are not accountants and<br />
a non-ambiguous set of uniform accounting rules needs to<br />
be adopted.<br />
Analysis and Conclusions<br />
There is a need for continued reforms to ensure an insurance<br />
regulatory system that is more responsive to the needs<br />
of a modern, evolving market place. At a more fundamental<br />
level, it is yet to be demonstrated whether regulatory<br />
In Asia, emerging<br />
markets have<br />
been slower to<br />
adopt the modern<br />
accounting<br />
principles and<br />
practices<br />
networks are capable of addressing some of the fundamental<br />
problems of global capitalism such as widespread<br />
marginalization of whole geographic regions and large<br />
sections of the society. For the regulation to succeed, it will<br />
have to pass the test of legitimacy and accountability.<br />
Development is the process of bringing current values of<br />
the society to bear on current practices of an essential<br />
industry, and hence regulation must seek relevance more<br />
than permanence.<br />
A pool of recommendations may be derived upon, but to<br />
conclude, if we keep in mind, in simplest terms, what our<br />
goals are, we will be best able to pursue those goals relentlessly.<br />
If the limited resources of public attention and<br />
government power are to do the most good in insurance<br />
regulation, they should be directed at helping people get<br />
the most insurance for their money. Some particular<br />
standards can be adopted that create objective guidelines:<br />
i) Increasing Media Understanding & Reporting on<br />
Business Matters: Potential policyholders receive information<br />
from multiple resources. Perhaps the most important<br />
resource in terms of daily impact is the<br />
print media. Sustained efforts should be<br />
made by the regulator to educate the<br />
media personnel to the nature and<br />
delicacies of the insurance market, to<br />
render to the media a basis for appropriate<br />
analysis, and to bring the media into<br />
the overall education public process.<br />
ii) Committing to Public Education as a<br />
primary responsibility 11 : Everyone<br />
connected with the insurance market development agrees<br />
that public education is a crucial factor. There is enormous<br />
uncertainty within the public realm regarding such matters<br />
as the nature of risk coverage for which premium is paid<br />
and the logistics leading to mitigation payment. To enter the<br />
world of contractual savings requires a much different<br />
mental picture of the nature of the investment and the risks<br />
that are involved. A common refrain throughout retail<br />
savers is that much of the public is reluctant to engage in<br />
contractual savings purchases because of fundamental lack<br />
of understanding of the investment or the process. The<br />
question is not whether public education is necessary to<br />
74 THE IIPM THINK TANK
I NDIA INSURED<br />
create public confidence in the markets; rather the question<br />
is who will foot the bill for such education. The Public<br />
Sector Undertaking insurers have engaged in education<br />
efforts, but they operate on meager budgets and cannot<br />
afford to finance the large-scale education that is needed.<br />
Nor should the burden be put on the private units. They<br />
are usually tight staffed. Moreover, the public perceives<br />
them as having a vested interest in selling off and begins<br />
with some distrust of the messenger. Brokers also do not<br />
have adequate financial resources or length of contact to<br />
inspire educational confidence in public. What is needed<br />
is (a) much enhanced IRDA funding for education programs<br />
and to be run by qualified Non-Governmental<br />
Organizations that are not seen as having an agenda other<br />
than public interest. Education is an indispensable tool in<br />
generating a more favorable public attitude to the market<br />
process.<br />
iii) Increasing the enforcement authority of IRDA:<br />
Insurance laws work on the carrot and stick basis. The<br />
carrot is providing the ability to raise much needed<br />
premium resource. The stick is the threat of punitive<br />
damages or criminal liability if the process ingrained in<br />
collection of premium to provide desired output is abused.<br />
Unfortunately often the ‘stick’ exists much more as a<br />
matter of theory than practice. That is because the enforcement<br />
agencies are technically under-funded as money<br />
harnessed from levy has agenda uses than the prioritized<br />
purpose and the regulator may not have the personal<br />
necessity to investigate instances of wrongdoings or to<br />
take the time and effort to seek just remedies through<br />
regulatory or judicial means. There must be the political<br />
will to carry through the recommendations, no matter who<br />
the company or its management may be. If the public<br />
perceives that there is activity in the enforcement area that<br />
regulators will act promptly in situations of possible public<br />
abuse, the result will be increased awareness that the<br />
agency is on public’s side, not on the side of the promoters<br />
of insurance offerings. This is an important shift in the<br />
attitude and we can expect the public to have faith in<br />
IRDA overseeing insurance market development.<br />
included the right to: safety, information, choice among<br />
a variety of products and services at competitive prices,<br />
and a fair hearing by governments in the formulation of<br />
consumer policy. These rights are now added by the<br />
right to: redress, consumer education and healthy and<br />
sustainable environment.<br />
2<br />
This section draws from Harold D. Skipper, Jr., Foreign<br />
Insurers in Emerging Markets: <strong>Issue</strong>s and Concerns,<br />
Washington, D.C.; International Insurance Foundation,<br />
1997<br />
3<br />
UNCTAD study<br />
4<br />
Unique Experiment; IRDA Journal, Vol III, No.1, Dec<br />
2004, p 25<br />
5<br />
Approaches to Regulation Making; India Insurance<br />
Report (series I), p 61<br />
6<br />
The Future Regulation of Insurance – A Progress<br />
Report, Financial Services Authority, UK, October,<br />
2002<br />
7<br />
This paper was presented at the Seminar on Insurance<br />
Markets in Transition: Balancing Competition, Fairness,<br />
and Soundness, and was published by Journal of<br />
Insurance & Risk Management, October, 2002<br />
8<br />
Source; IRDA 3 rd Annual Reports 2003<br />
9<br />
Source: Walking the talk-there’s little time for halfhearted<br />
approaches, IRDA Journal<br />
10<br />
Leading issues in Worldwide Insurance Supervision: An<br />
Overview, Thomas E. Power, Senior Manager, Bearing<br />
Point, USA<br />
11<br />
A Critique of the Regulatory and Developmental Role<br />
of IRDA, KC Mishra<br />
References and Additional Thinking<br />
• The Making of an Emerging MARKET, Emerging<br />
Markets <strong>Quarterly</strong>, Spring 1997.<br />
• Tinner, John – Reforming Insurance Regulation, Financial<br />
Services Authority, February, 2002.<br />
• Ray, Debapriya - Growth of Insurance vis-à-vis Role of<br />
Intermediaries, VP, Reliance General Insurance, India.<br />
• Mathur, Suresh – SRO Route to Growth: Insurance<br />
Councils have busy days ahead, IRDA Journal, Vol. III,<br />
No.3, February, 2005, p 21-22.<br />
End Notes<br />
1<br />
The Bill of Rights, propounded by John F. Kennedy<br />
(The views expressed in the write-up are personal and do not<br />
reflect the official policy or position of the organisation)<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
75
M ANAGEMENT OF O DEVELOPMENT<br />
Financial Inclusion by Channelizing<br />
Existing Resources in India<br />
Purti Sharma<br />
Economist,<br />
India Development Foundation, Gurgaon<br />
Financial inclusion proceeds towards integration of<br />
people who are economically and socially excluded from<br />
access to easy, safe and affordable credit and other<br />
financial services. Due to lack of financial inclusion among the<br />
lower income households, their protection from external<br />
76 THE IIPM THINK TANK
I NNOVATIVE INCLUSION<br />
economic shock becomes miniscule. As a result, income<br />
disparity leads to vicious circle of poverty which continues to<br />
persist in the lower income groups. According to IISS (Invest<br />
India Incomes and Savings Survey, 2007), 55 percent of all<br />
the households do not have bank accounts, 97 percent do<br />
not have any health insurance and 61 percent do not have<br />
life insurance 1 .<br />
These missing financial markets among the lower income<br />
groups could be because of demand and supply side constraints.<br />
From the supply side, operating cost is considered as one of the<br />
major obstacle in promoting financial inclusion. Salaries to staff,<br />
travelling expenses, commissions, expenses on promotion of<br />
groups, staff welfare expenses, amortisation and depreciation,<br />
rent on hired buildings and other overheads - all constitutes the<br />
operating cost. For instance, operating cost in the case of Canara<br />
Bank for opening a new (no-frills 2 ) account was Rs. 48 and cost<br />
of each transaction (deposit/remittance) was Rs. 1012. To reach<br />
break even, the average amount of deposit required depends on<br />
the number of transactions. The break even average deposit<br />
level required was Rs. 1911 (for 12 transactions a year) and Rs.<br />
11,465 (for 72 transactions a year) 3 . These costs are critical for<br />
operating the formal banking system.<br />
By looking at the general profiles of<br />
various banks, it can be examined that the<br />
number of employees has decreased, on the<br />
other hand, business and profit per employee<br />
has increased in the SBI and various<br />
national banks (Table 1). Thus, we can at<br />
least analyse that bank has efficiently<br />
employed their resources. The total factor<br />
productivity (TFP) enables disaggregation<br />
of output change into two major components,<br />
namely, output change due to change in efficiency and<br />
output change attributable to change in technology. And the<br />
combination of both of these components (resource allocation<br />
and technology adoption) should reduce operational cost.<br />
The combination which minimises the cost component is<br />
necessary for the lower level of income bracket because majority<br />
of the population works in un-organised sector and are less<br />
educated.<br />
From the demand side, the higher cost of financial services<br />
(including the transportation cost) discourages inclusion. It is<br />
argued that the operating cost is higher for maintaining large<br />
number of account with lower average deposits. As a result, we<br />
Financial inclusion<br />
by introducing<br />
electronic<br />
payment system<br />
is one of the<br />
solutions to reach<br />
the masses<br />
found the lopsided distribution of banks and lack of availability<br />
of formal institutional credit has occurred. And thus, it is<br />
unviable for the banks to extend banking services to lower<br />
income groups. For example, for the no frills savings account of<br />
the HDFC bank, service charges for collecting an outstation<br />
cheque is roughly around Rs. 50 (varies by banks) for a cheque<br />
value of more than Rs. 500 (Table 2). On the other hand, the<br />
service charges for transferring money using electronic medium<br />
like mobile and net banking is free of cost from the service<br />
provider’s side. But there is lower penetration of cellular phones<br />
and internet in rural India. Along with that, the fixed and the<br />
variable costs for cell phones makes it costlier for owning<br />
cellular phones and thereby availing phone banking facility<br />
would be still a distant dream for most of rural India. While<br />
competitive market forces are increasingly expanding cellular<br />
network to cover rural India, internet penetration will still take<br />
some time. For example, to avail mobile banking services<br />
minimum one time fixed cost would be approx. Rs. 1,000 for<br />
buying a mobile hand set plus telecom operator’s monthly<br />
service charges. The other electronic payment transfer facilities<br />
like electronic bill payment cost around Rs. 25 per quarter per<br />
customer ID, phone banking- non Interactive<br />
voice response (IVR) cost around Rs.<br />
50 per call (agent assisted calls), debit card<br />
cost to Rs. 100 per year as annual fee, visa<br />
money transfer cost to Rs. 20 (plus taxes)<br />
per transaction etc 4 are too costly compared<br />
to small deposit denominations and lack of<br />
critical network of users.<br />
Financial inclusion by introducing<br />
electronic payment system is one of the<br />
solutions to reach the masses. But in India<br />
this solution is not feasible because poor households are out of<br />
the domain of formal banking system and the large number of<br />
lower deposits reduces the bank’s profitability. Secondly, the<br />
concept of virtual money banking, technology usage and trust on<br />
technology is difficult to promote among people who are<br />
financially excluded as well as are financially illiterate. Thirdly,<br />
majority of the population that belongs to poor class are working<br />
in un-organised sector with irregular incomes. And finally, lack<br />
of infrastructure availability (i.e disruptive electricity, low<br />
cellular phones and internet penetration etc) makes it challenging<br />
to initiate electronic payment system.<br />
To mitigate the financial inclusion problem for the poor class<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
77
M ANAGEMENT OF DEVELOPMENT<br />
Table 1: Profile of the Banks<br />
SBI & its Associates<br />
(Amount in rupees crore)<br />
2003-04 2004-05 2005-06 2006-07 2007-08<br />
No. of Offices 13782 13921 14190 14611 15512<br />
No. of Employees 280676 277508 270608 255699 248425<br />
Business per Employee (in Rs. lakh) 1810 2270.99 2826.53 3509.87 4314.37<br />
Profit per Employee (in Rs. lakh) 23.68 15.16 16.58 21.78 25.66<br />
Operating Expenses 12117 13410 15759 15988 16994<br />
Nationalised Banks<br />
No. of Offices 34460 34988 35590 37227 38726<br />
No. of Employees 471951 471297 473725 473179 466368<br />
Business per Employee (in Rs. lakh) 4864 7202 8761 10401 13233<br />
Profit per Employee (in Rs. lakh) 47 49 55 65 84<br />
Operating Expenses 20417 23629 25549 27267 29604<br />
Foreign Banks<br />
No. of Offices 209 234 254 264 278<br />
No. of Employees 12654 15750 20344 26444 33114<br />
Business per Employee (in Rs. lakh) 25108.56 25597.32 28632.73 29871.67 36963.72<br />
Profit per Employee (in Rs. lakh) 641.77 330.04 765.29 753.89 1314.63<br />
Operating Expenses 3450 4119 5554 7407 10355<br />
Other Scheduled Commercial Banks<br />
No. of Offices 4988 5539 6129 6984 8265<br />
No. of Employees 72119 82959 103339 136121 166334<br />
Business per Employee (in Rs. lakh) 9324 10402 11226 12018 13327<br />
Profit per Employee (in Rs. lakh) 113 39 71 82 105<br />
Operating Expenses 6547 8161 11639 15176 20268<br />
Sources: RBI<br />
households, solutions need to be devised for redundancy of all<br />
these issues. The electronic payment system for the poor<br />
household is not a perfect solution for promoting banking<br />
activities. The electronic payment system is outstanding proposal<br />
if it follows top to bottom approach. The access to formal<br />
banking system among the rich class is higher in comparison to<br />
the middle and the poor income groups; however usage of<br />
electronic payment system is very low in all the classes at present<br />
in India. The adoption cost as well as the benefit of using<br />
electronic payment system is higher. So, the initial adoption cost<br />
can be incurred by rich income groups. It is also important to do<br />
so because it has been found that the job security increases the<br />
chances of owning the electronic cards. And higher volume of<br />
transactions reduces the transaction cost and the fixed income<br />
reduces the default risk. Over the period of time, the growing<br />
competitive markets are expected to reduce the adoption cost<br />
and the spillover effect which would lead to the mass adoption.<br />
Solutions for Poor Class Households<br />
• Aim is to create smaller networks of people having access to<br />
formal banking system (by offering lower rate of interest<br />
using no frill accounts)<br />
• Integrate smaller networks to themselves and in turn form a<br />
bigger network of households having access to formal<br />
banking system<br />
• Induction of electronic banking payment system should<br />
78 THE IIPM THINK TANK
I NNOVATIVE INCLUSION<br />
Table 2: Service Charges for No Frills Savings Account<br />
the habit of thrift and savings among<br />
Phone Banking - IVR<br />
Free<br />
citizens of the country. The emphasis,<br />
as the words “small savings” suggest, is<br />
Phone Banking - Non IVR Rs. 50 per call (Agent assisted calls).<br />
to bring the small depositor into the<br />
ATM Card<br />
Free<br />
fold of the savings movement. Post<br />
ATM Card - Transaction charge for Balance enquiry: Free & Rs.17.80 (plus taxes) Office Savings Banks were opened in<br />
Partner banks- SBI & Andhra Bank per cash withdrawal<br />
1882. Some of the small savings<br />
BillPay<br />
Rs. 25 (plus taxes) per qtr per Customer ID schemes i.e. Public Provident Fund<br />
Mobile Banking<br />
Free<br />
and Senior Citizen's Savings Scheme<br />
Net Banking<br />
Free<br />
are also operated through designated<br />
Visa Money Transfer<br />
Rs. 20 (plus taxes) per transaction<br />
branches of nationalised banks and<br />
Debit Card - Annual Fee - Regular Rs. 100 per year (plus taxes)<br />
four private banks i.e. ICICI, IDBI,<br />
Collection of outstation cheques at 1) Cheque value Rs. 0 to Rs. 500 -No charges HDFC and UTI Bank. The post<br />
HDFC bank's location<br />
2) Cheque value Rs. 501 & above Re. 1 per offices are not meant to replace banks<br />
1000 (Min Rs. 50)<br />
because it can not execute the<br />
* Credit on receipt of clear funds<br />
function of money multiplier. But<br />
*Figures are for HDFC Bank<br />
Source: HDFC website<br />
happen as result of spill over effect from the top of the<br />
pyramid, especially after the cost of service charge for using<br />
electronic payment is reduced<br />
• It is important not to introduce electronic payment system for<br />
poor class because majority of the<br />
nationalised and commercial banks<br />
can use post office’s infrastructure to facilitate various banking<br />
services.<br />
The existing Indian Post Offices are strategically perfect<br />
source available to promote inclusive financial growth especially<br />
for poor population. Its connectivity enables us to reach the<br />
remotest corners of the country. By utilising<br />
population in this category are illiterate<br />
existing Post Office’s infrastructure,<br />
and the cost of deploying electronic The existing Indian developing technology and connecting<br />
payment services for the large number of Post Offices are existing user with technology and expanding<br />
account having lower deposit would not strategically the user base would be one of the solutions for<br />
be profitable<br />
financial inclusion. Since Post offices can<br />
perfect source<br />
• Introduction of formal banking system<br />
not provide credit to its customers, banks<br />
available to<br />
should be encouraged by known faces<br />
and post offices can collaborate together in<br />
and trusted institutions like post offices. promote inclusive offering various financial services by<br />
• All the Government welfare programmes financial growth managing channels/technological strengths.<br />
targeted for the poor should be linked<br />
with banks. All the monetary benefits should be routed<br />
through banks only.<br />
Thus, the solutions for financial inclusion lies in channelizing<br />
existing resources and building up a platform for public –private<br />
partnerships using technology. There are three important<br />
constituents for inclusive growth i.e. infrastructure, advanced<br />
technology and user’s network which are mandatory for providing<br />
easy, safe and affordable financial services.<br />
Encouraging small saving scheme among the poor was<br />
considered a priority concern of the Government. The primary<br />
objectives of the small savings programme have been to promote<br />
The net collections in the small savings<br />
schemes (gross collections minus withdrawals by subscribers)<br />
have increased from Rs. 100 crores in 1948-49 to Rs. 96,788<br />
crore (Net) in 2004-2005. 100 percent of net collections mobilized<br />
in small savings schemes in a State/UT are transferred to<br />
the concerned State/UT Govt. as investment in special securities<br />
issued by that Government. All deposits under small savings<br />
schemes are credited to the 'National Small Savings Fund'<br />
(NSSF). All withdrawals by the depositors are made out of the<br />
accumulations in this fund. The balance in the fund is invested in<br />
special Government securities as per norms decided from time<br />
to time by the Central Government. In nutshell, post offices can<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
79
M ANAGEMENT OF DEVELOPMENT<br />
Figure 1: Top to Bottom Approach for Introducing Electronic Banking<br />
Large Network of<br />
Electronic Banking<br />
Rich<br />
Introduce e-payments system in banking<br />
CRITICAL MASS<br />
Small Network of<br />
Formal Banking<br />
Middle<br />
Poor<br />
Spill Over Effect of e-payment system<br />
with the critical mass adoption<br />
Introduce Banking by creating local groups using<br />
known faces & trusted institution and later link it<br />
to the larger network of electronic banking system<br />
Total number of post offices in the country 155204<br />
Total number of post offices in rural areas 139046<br />
Total number of post offices in urban areas 16158<br />
Population served by a post office* 7166<br />
Population served by a post office (in rural area) 5687<br />
Population served by a post office (in urban area) 19891<br />
Area served by a post office (sq. km.) 21<br />
Average distance to be travelled for postal facilities (in km.) 3<br />
Sources: Department of Post<br />
act as an important enabler through which various financial transmitting messages. There are various services offered by<br />
services can be extended while the technological spill-over effect Indian Post Offices that are:<br />
is taking place in the banking sector.<br />
Technology<br />
Infrastructure and Facilities of Post Offices<br />
The adoption of technology in payment and settlement systems<br />
Indian post office’s network forms the largest postal system in reduces the cost of providing services with wider adoption of<br />
the world with an array of about 1.55 lakh post offices in India these technological products. It would play a pivotal role in<br />
(Table 3). Out of the total number of the Indian post offices, 90 reducing operating cost and would enable transfer of payments<br />
percent are in the rural areas and 10 percent are in the urban in real time. The technology needs to be inducted in a big to<br />
areas. On an average, a post office covers an area of 21 sq. km make transactions with the Post offices hassle free. At present,<br />
and serves 5,687 and 19,891 people in rural and urban respectively.<br />
The connectivity of the post offices are not only reflected computerised. Computerisation of the Post offices can bring<br />
there are only five percent of the total post offices which are<br />
in sheer <strong>size</strong> and numbers, but also in the average distance transparency and accountability. All payments to the public<br />
travelled for availing postal facilities which is around three km could be uploaded on the network and the public can have<br />
for all India.<br />
option of availing these services through various technological<br />
In the last 150 years, the Post offices have redefined ‘connectivity’<br />
by expanding its wide range of services from mere transportation cost of the consumer). The increasing penetra-<br />
processes, thereby, minimising the physical visits (includes<br />
tion of technology in the Post Offices can also encourage<br />
Table 3: Postal Network in India<br />
partnership deals with financial institutions, insurance companies,<br />
banks and logistics in the remotest corner of<br />
the country. The entire organisational structure can<br />
be linked with the central government and Panchayats<br />
to run various developmental schemes especially<br />
in the rural area.<br />
One of the recent initiatives in this direction was<br />
launch of e-bill post/e-payment. e-Bill Post is a<br />
facility for accepting payment of bills or payments<br />
from many-to-one in post offices. The amount<br />
collected is consolidated electronically in a web<br />
based Central Server on line, and the information is<br />
80 THE IIPM THINK TANK
I NNOVATIVE INCLUSION<br />
Table 4: Main Services Offered by Indian Post<br />
Communication services – Letters, Post Cards, etc.<br />
Transportation services – Parcel, Logistics, etc.<br />
Financial services – Savings Bank, Money Order, Insurance, etc.<br />
electronic access of financial services can<br />
affect decision to adopt if and only if cost and<br />
benefits are higher. So the rate of change with<br />
which new technology is adopted will decide<br />
the operational cost and inclusion.<br />
Value added services – Speed Post, Service, Business Post, Direct Post, etc.<br />
Network<br />
The Post offices can be biggest facilitator in<br />
available to the e-Bill Post/e-payment user at any time. The bringing low income groups under the umbrella of saving and<br />
traffic for e- Bill Post service was 25 lakh users through which investment opportunities by including workers from un-organised<br />
sector. The Post office banks are the largest saving banks in<br />
the amount of revenue earned was about Rs. 128.13 lakh in the<br />
year 2006-07 5 .In the span of three years, this facility grew to the country in terms of having more than 17.39 crore accounts<br />
about 38 percent. For increasing network of technology users, and deposits amounting to Rs. 3,51,589.95 crore as on 31 st<br />
educating illiterate population especially in rural locations is March, 2007. The total amount of savings with the post offices<br />
the biggest challenge. However, this can be over come by ‘out has been accounted for about 8.20 percent of India’s GDP at<br />
of home’ (OOH) media service which can be placed at each factor cost (current prices) during the year 2007-08. The<br />
Post Office. This would not only help in educating people about untapped rural market has also shown faster growth in the<br />
how to use technology (both pictorially and verbally), but insurance sector. The rural postal life insurance has grown at the<br />
also advertise various financial options available to them and rate of 34.2 percent in terms of value of business in the year<br />
their benefits.<br />
2005-06 and 2006-07 respectively. In the same year, it has<br />
The larger the technologically driven financial network, increased from Rs 25,229 crore to Rs. 33,865 crore (Table 5).<br />
greater are the benefits for adopting it. For widening the The active number of rural insurance policies till the 2006-07<br />
technologically driven network of financial services, adoption was around 52 lakh which grew at 11.5 percent from the<br />
cost and its benefits would play a key role for the existing users. previous year.<br />
So, building trust on money transactions through technology is a Similarly, one of the oldest and important financial services<br />
key challenge to encourage people for adopting electronic offered by post offices is transfer of money by using money<br />
medium. Initially the adoption has to be ‘top to bottom’ down orders without opening a bank account. This service is popular<br />
approach to build the network effect and the competition for among rural labourers who works in un-organised sector and<br />
reducing the higher service cost. The potential adopters would wants to remit amount for small denominations. There were 991<br />
be encouraged if technology will help them in reducing cost and lakh money order issued in the year 2006-07 (Table 6). The<br />
time spent on it. For example, having a large network of compatible<br />
mobile phone users for instance makes new users more 782.72.<br />
average value of money order in the same year was around Rs.<br />
likely to join.<br />
The post offices are like ‘one stop shop’ for providing a range<br />
The existence of alternatives between physical access and of banking 6 and insurance services like term deposits, mutual<br />
Table 5: Rural Postal Life Insurance<br />
Items 2002-03 2003-04 2004-05 2005-06 2006-07<br />
No. of Policies* upto the year 1795070 2666485 3738798 4702776 5246673<br />
Value of Business upto the year (Rs. in Crore) 7464.53 12385.11 18520.93 25229.65 33865.66<br />
Average sum Assured per Policy (in Rs.) 47654.8 54932.09 53958.05 61107 88002<br />
Sources: Department of Post<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
81
M ANAGEMENT OF DEVELOPMENT<br />
Table 6: Inland Money Orders During the Year 2002-2003 to 2006-07<br />
Items 2002-03 2003-04 2004-05 2005-06 2006-07<br />
Number issued(in Lakh) 1050.30 1101.47 1015.98 957.90 991.00<br />
Value of M.O. <strong>Issue</strong>d (Rs. in lakh) 865000.40 687502.40 705216.51 718342.93 775670.57<br />
Commission (Rs. in Lakh) 29923.70 31137.50 32031.40 32792.43 34791.64<br />
Average Value of Money Orders (In Rs.) 823.57 624.17 694.12 749.91 782.72<br />
Sources: Department of Post<br />
funds, pension, etc. Various initiatives have been taken by<br />
Department of post to make growth inclusive for economically<br />
exclusive population.<br />
• In collaboration with State Bank of India, an extensive<br />
network of Business Facilitators and Business Correspondents<br />
covering one lakh villages in phase one under the Rural<br />
and Agri Business Group (RABG) has been experimented.<br />
• In partnership with Oriental Company Insurance Limited,<br />
the post offices in the year 2006 launched accidental death<br />
insurance cover for one year of Rs. 1,00,000 at the low annual<br />
premium of Rs. 15 for its account holders.<br />
• The memorandum of understanding (MoU) has been signed<br />
between Postal Department and Rural Development Department<br />
for payment of the wages to the workers under National<br />
Rural Employment Guarantee Scheme (NREGS).<br />
• The 300 finance marts are planned to provide products like<br />
Insurance, Postal Life Insurance, Rural Postal Life Insurance,<br />
Credit, Saving etc.<br />
• Instant Money Order (iMO) is an online Money transmission<br />
service which was launched in 2006. Presently it is available in<br />
812 centres (till 2008).<br />
• The electronic transmission of money orders (eMO) system<br />
was commissioned in the year 2008.<br />
• ‘Grameen Sanchar Sewak’ project was conceptualised to<br />
provide accessibility to public telephone to the rural population<br />
at their doorsteps by using latest Wireless in Local Loop<br />
(WLL) technology.<br />
Conclusion and Recommendations<br />
All the above initiatives should eventually lead us towards<br />
financial inclusion if collaborative actions are taken together.<br />
Lack of channelizing existing recourses, catastrophic policy<br />
implementation and lower technological penetration and<br />
adoption are the main causes of financial exclusion. So, we<br />
recommend that the facility of opening current account should<br />
be introduced in post offices so that day to day transactions can<br />
be done. Secondly, all the post offices should be computerized,<br />
connected with internet and should have PCO booths. Thirdly,<br />
the telephonic transfer of payments should be encouraged by<br />
developing a technology wherein receipts of transfers of<br />
payments can be obtained. It would be significant achievement<br />
because most of the rural population working in un-organised<br />
sectors are illiterate but can understand number system based<br />
technology. Fourthly, for opening new accounts ‘Know your<br />
customer’ norms should be routed through post offices. Fifth,<br />
the monetary benefits for the poor under various government<br />
schemes should be routed through post office accounts. Finally,<br />
the wage payments in the un-organised sector should also be<br />
routed through formal banking system for encouraging faster<br />
financial inclusion.<br />
Endnotes and Additional Thinking<br />
1<br />
Dataworks ,Invest India Income and Saving Survey, 2007<br />
2<br />
No Frills Savings Account allows maintaining the account<br />
without any minimum or average balance requirement.<br />
Generally, no frills saving account is opened for people who<br />
does not have a bank account & has an annual income of less<br />
than or equal to Rs. 50,000/- or does not have a bank account<br />
& is a beneficiary under a Government Welfare Scheme.<br />
3<br />
Report on currency and finance 2006-08 Vol. II.<br />
4<br />
HDFC bank website ‘Service charges & fees’ applicable to<br />
customers as on July, 2008.<br />
5<br />
India Post ‘Annual Report 2007-08’.<br />
6<br />
Banking services available in Post offices are Saving Account,<br />
Recurring Deposit, Time Deposit, Monthly income Scheme,<br />
Public Provident Fund, Senior Citizens Saving Scheme, Kisan<br />
Vikas Patras and National saving certificates.<br />
(The views expressed in the article are personal and do not reflect<br />
the official policy or position of the organisation).<br />
82 THE IIPM THINK TANK
I NNOVATIVE INCLUSION<br />
AD<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
83
M ANAGEMENT OF DEVELOPMENT<br />
MVNO – A new Business<br />
Paradigm in the Telecom<br />
Industry in India<br />
84 THE IIPM THINK TANK
I NDIA CALLING<br />
Hardik Kumar Doshi<br />
Researcher, Telecommunication Industry<br />
Gaurav Joshi<br />
Researcher, Telecommunication Industry<br />
Mahim Sagar<br />
Faculty, Department of Management<br />
Studies, IIT Delhi<br />
Radio Spectrum is a valuable resource for a country<br />
and its telecom industry. With the recent hue and<br />
cry about the valuation of new telecom companies<br />
which possess spectrum and the controversy between DoT<br />
and Finance Ministry regarding reserve price for 3G auction<br />
certainly leads us to think what drives<br />
telecom industry. Is it obtaining the scarce<br />
and precious spectrum or the rollout of<br />
services or capturing the market share<br />
through marketing? At present, all the<br />
three are done by a single service provider<br />
which limits market segmentation and<br />
hence personalization of services.<br />
Securing spectrum and developing<br />
infrastructure is a onetime affair. What<br />
Figure - 1 : MVNO Models<br />
Across the world,<br />
it is believed that<br />
Value Added<br />
Services will<br />
be the growth<br />
driver for telecom<br />
companies<br />
differentiates one operator from the other in the long run is<br />
the reach of the network and effective marketing of services<br />
for increased penetration. A new business model in the form<br />
of Mobile Virtual Network Operator (MVNO) has evolved in<br />
the western countries which provide services to consumers by<br />
purchasing wholesale airtime from Mobile network operators<br />
(MNOs). In India, recently the Department of Telecommunication<br />
(DoT) had sought recommendations from the Telecom<br />
Regulatory authority of India (TRAI) on the need, timing of<br />
introduction as well as terms and conditions of the license to<br />
be granted to MVNOs in India.<br />
Full MVNOs, which have their own core network including<br />
Mobile Switching Center (MSC); Intermediate MVNOs,<br />
which acquire a switched service, but either provide their own<br />
home location register (HLR) or share a jointly owned HLR<br />
with an MNO; and Thin MVNOs, which may provide access<br />
services with additional applications and content and they are<br />
not much different from pure resellers. These thin MVNOs<br />
are also called Enhanced Service Providers.<br />
Is it prudent for Operators who shell out<br />
crores of rupees to obtain spectrum to<br />
share the spectrum? We believe the<br />
proposal is feasible for two fundamental<br />
reasons. First, there is an inherent value<br />
proposition in the MNO-MVNO relationship.<br />
MVNO services are transparent to<br />
the customers and hence if MVNO<br />
through effective marketing or by differentiation<br />
and customization of the services<br />
Radio<br />
Access<br />
Mobile<br />
switching<br />
centre<br />
Network<br />
Services<br />
Application<br />
Services<br />
Marketing<br />
Billing<br />
Customer<br />
&<br />
Care Distribution Sales<br />
Branding<br />
MNO<br />
Full MVNO<br />
MNO<br />
Intermediate/Hybrid MVNO<br />
MNO<br />
Thin MVNO/<br />
Enhanced Service Provider<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
85
M ANAGEMENT OF DEVELOPMENT<br />
Figure 2. Projected MVNO Revenues in US$, 2002-2010<br />
Projected MNVO Revenues in US $(in billions)<br />
$35.00<br />
$30.00<br />
$25.00<br />
$20.00<br />
$15.00<br />
$10.00<br />
9.60<br />
14.50<br />
$5.00<br />
4.60<br />
$0.00<br />
0.20 1.00 2.20<br />
2002 2003 2004 2005 2006 2007<br />
Year<br />
Source: ARC Group<br />
18.90<br />
23.90<br />
29.60<br />
2008 <strong>2009</strong> 2010<br />
Table 1. US MVNO Subscribers as Percentage of<br />
Mobile Subscribers, 1999-2010<br />
MVNO Total Mobile Subscribers Percentage<br />
Year Subscriber<br />
1999 344,188 86,047,003 0.40<br />
2000 437,912 109,478,031 0.40<br />
2001 513,498 128,374,512 0.40<br />
2002 2,106,824 140,454,918 1.50<br />
2003 4,285,493 158,721,981 2.70<br />
2004 8,014,176 182,140,362 4.40<br />
2005 12,190,200 184,700,000 6.60<br />
2006 19,286,750 187,250,000 10.30<br />
2007 20,878,000 189,800,000 11.00<br />
2008 21,541,500 192,350,000 11.00<br />
<strong>2009</strong> 23,541,000 196,175,000 12.00<br />
2010 25,000,000 200,000,000 12.50<br />
Source: NERA research<br />
helps in increasing the breadth and depth of the market then it<br />
is beneficial for both parties. In the USA, MVNOs were<br />
primarily responsible for increasing the market penetration by<br />
introducing the pre-paid model. The second reason lies in the<br />
rate of Return on Investments (RoI). Telecom industry is<br />
highly uncertain and the operators are not sure about the<br />
future direction of the market. Also, there is increasing<br />
pressure from the government on the defense to vacate the<br />
spectrum. In such a scenario spectrum might not command a<br />
similar premium it does presently. MVNOs provide a useful<br />
alternative of acquiring wholesale airtime from the operators<br />
at a fixed price. This ensures quicker RoI without worrying<br />
about adding new subscribers and market share.<br />
Table-1 depicts the projected revenue of MVNO players in<br />
United States.<br />
Across the world, it is believed that Value Added Services<br />
(VAS) will be the growth driver for telecom companies. Focus<br />
is shifting from voice based services to content based services.<br />
MVNOs with specialized services can take the lead here.<br />
MVNOs who can provide customized services such as<br />
providing market rates of agricultural products to a village<br />
farmer, live video streaming of cricket matches to a sports fan,<br />
international calls at discount rates for an exporter may<br />
appeal more than the normal service providers with a one-forall<br />
stereotype service package. Also, marketing efforts can be<br />
channeled towards the targeted customers augmenting the<br />
subscriber base and boosting the ARPUs.<br />
Infrastructure sharing is a common phenomenon across<br />
capital intensive industries from petrochemicals to broadcasting.<br />
Now, in broadcasting industry players are interested in<br />
content development instead of developing transmission<br />
networks. They share infrastructure with transmission service<br />
providers. In a similar fashion, telecom industry is also<br />
moving from a voice dominated industry to a content based<br />
industry. As the industry matures, this has been the paradigm<br />
shift across sectors. MVNOs have the potential to offer<br />
personalized services to consumers and also add value to the<br />
entire industry by broadening the subscriber base especially<br />
after the rollout of 3G services.<br />
References and Additional Thinking<br />
• Dong, Hee, Shin, & Micheal, B. (2005)A study of MVNO<br />
diffusion and market structure in the EU, US, Hong Kong,<br />
and Singapore<br />
• TRAI, (2008). TRAI Recommendation on MVNO<br />
• Yike, L., & Kathik, B., & Yezdan, B. (2007) Helio’ Stategy<br />
for Differentiating the MVNO Market<br />
• Timothy, S., & LOC, H., & Do, Van, T. (2001) why should<br />
you invest in MVNO?<br />
(The views expressed in the write-up are personal and do not<br />
reflect the official policy or position of the organisation).<br />
86 THE IIPM THINK TANK
I NDIA CALLING<br />
AD<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
87
M ANAGEMENT OF DEVELOPMENT<br />
Renewable Energy and Its<br />
Policy Prospects In India<br />
Introduction<br />
Energy plays a very important role in everyday life. In a<br />
developing country like India, the growth of the economy is<br />
largely dependent on adequate availability and supply of<br />
energy. In conventional economic understanding, the prosperity<br />
of a country is measured by looking into per capita consumption<br />
of energy. Per capita primary energy consumption<br />
is still comparatively low in the country (520 kg of oil equivalent—less<br />
than a third of the world average), with large<br />
disparities in the energy consumption pattern (Times of India,<br />
December 2006).<br />
To sustain India’s staggering economic growth and support<br />
the country’s population which is expected to increase to 1.13<br />
billion by 2030, India’s primary energy demand has to multiply<br />
three to four folds (IEA 2007) and in the past thirty years, the<br />
demand for energy has grown at an average of 3.6 per annum.<br />
Table 1, illustrates this demand.<br />
In spite of an ambitious rural electrification program and a<br />
rural electrification policy passed in August, 2006 more than<br />
Table 1: India's Energy Sources<br />
Fuel MW Percentage<br />
Coal 77,648.88 53.3<br />
Gas 14,876.71 10.5<br />
Oil 1,199.74 0.9<br />
Hydro 36,877.76 24.7<br />
Nuclear 4,120.00 2.9<br />
Renewable Energy<br />
13242.41 7.7<br />
Sources<br />
Total 1,47,965.51<br />
Sources: Ministry of power, Govt of India<br />
Manu Sankar Subhagalal<br />
Policy Officer,<br />
World Future Council, New Delhi<br />
88 THE IIPM THINK TANK
R ISE OF RENEWABLES<br />
400 million Indians have no access to electricity (Business<br />
India, July 2008). This in no way does show India, which has<br />
ambitions of becoming a Global super power, in a good light.<br />
The Energy Overview<br />
The distribution of primary commercial energy resources in<br />
India is skewed. 70 percent of the total hydro potential is<br />
located in the Northern and North-eastern regions, whereas<br />
the Eastern region accounts for nearly 70 percent of total coal<br />
reserves in the country. The Southern region, which has only<br />
six percent of the total coal reserves and 10 percent of the total<br />
hydro potential, has most of the lignite deposits occurring in<br />
the country. (Planning Commission)<br />
On the consumption front, the industrial sector in India is a<br />
major energy user accounting for about 52 percent of<br />
commercial energy consumption. Per capita energy<br />
consumption in India is one of the lowest in the world<br />
(Raghuraman 2003). But, energy intensity, which is<br />
energy consumption per unit of GDP, is one of the<br />
highest in comparison to other developed and developing<br />
countries. For example, it is 3.7 times that of Japan,<br />
1.55 times that of the United States, 1.47 times that of<br />
Asia and 1.5 times that of the world average. As a result,<br />
there is a huge scope for energy conservation in the<br />
country.<br />
Before the Indian economy was liberalized in<br />
1991, the commercial energy sector was totally<br />
regulated by the government. The economic<br />
reform and liberalization, in the post 90s, has gradually<br />
welcomed private sector participation in the coal, oil, gas<br />
and electricity sectors in India. Energy prices in India<br />
have been under an administrated regime with subsidies<br />
provided to meet certain socio-economic needs of the<br />
public. This has led to distortion and inefficiency in the<br />
use of different sources of energy. The government has<br />
taken serious steps to deregulate the energy price from<br />
an Administered Price Mechanism (APM) regime. The<br />
prices of all grades of coal and petroleum products have<br />
already been deregulated. In the electricity sector, most<br />
of the State Electricity Boards (SEBs) have started<br />
taking reform measures and regulatory commissions<br />
have been set up to determine tariffs based on economic<br />
rational. All these measures were adopted to prepare<br />
India for greater economic growth leading to future<br />
emissions as well.<br />
Renewable Energy Scenario in India<br />
Even though India is a developing country with global<br />
super power ambitions, the fruits of its economic<br />
development are yet to reach to all strata of the society.<br />
In such a scenario India needs to have a space to<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
89
M ANAGEMENT OF DEVELOPMENT<br />
grow both economically and environmentally and to balance<br />
between economic development and sustainability. The<br />
Government recognizes the fact that global warming will<br />
affect India adversely and the process of adaptation to climate<br />
change must have priority and “the most important adaptation<br />
measure is development itself” (National Five Year Plan, June,<br />
2008). What the government needs to do is to harness cleaner<br />
and renewable energy by exploiting the existing resources of<br />
biomass, wind, solar and tidal. By speeding up the deployment<br />
of renewable energy what the country automatically does is<br />
development of renewable energy not only as an adaptation<br />
measure, but also as mitigation. Therefore greater policy<br />
emphasis and political will need to be demonstrated for the<br />
accelerated switch to renewable energy.<br />
Ministry of New and Renewable Energy (MNRE) is the<br />
nodal Ministry of the Government of India at the National<br />
level for matters relating to new and renewable energy. The<br />
Ministry has been facilitating implementation of broad<br />
spectrum of programmes including harnessing renewable<br />
power, renewable energy to rural areas for lighting and<br />
cooking, use of renewable energy in urban, industrial and<br />
commercial applications and development of alternate fuels<br />
and applications. In addition, it supports research, design and<br />
development of new and renewable energy technologies,<br />
products and services.<br />
In India, the importance of the role of renewable energy in<br />
the transition to a sustainable energy base was recognized as<br />
early as the 1970s. At the Government level, political commitment<br />
to renewable energy manifested itself in the establishment<br />
of the Department of Non-Conventional Energy Sources<br />
in 1982, which was subsequently upgraded in 1992 to a fullfledged<br />
Ministry of Non-Conventional Energy Sources, now<br />
re-christened as Ministry of New and Renewable Energy, since<br />
October, 2006.<br />
India’s Renewable Energy Potential: Solar & Wind<br />
Solar<br />
India lies in the sunny regions of the world. Most parts of India<br />
receive 4–7 kWh (kilowatt-hour) of solar radiation per square<br />
metre per day with 250–300 sunny days in a year (Majumdar,<br />
August, 2008). The highest annual radiation energy is received<br />
in western Rajasthan while the north-eastern region of the<br />
country receives the lowest annual radiation. Solar energy,<br />
experienced by us as heat and light, can be used through two<br />
Table 2: Renewable Energy Sources In India<br />
Technology<br />
Cumulative Achievements (MW)<br />
GRID INTERACTIVE<br />
Wind 8,757<br />
Small Hydro 2,181<br />
Bagasse CHP 810<br />
Biomass 606<br />
Waste to Energy 56<br />
Solar PV 2<br />
Solar Thermal 0<br />
Geo Thermal 0<br />
Tidal Wave 0<br />
OFF GRID<br />
Biomass 95<br />
Biomass Gasifier 86<br />
Waste to Energy 24<br />
Solar PV 2<br />
Total 12,610<br />
Small Scale Systems Cumulative Achievements<br />
Family Bio-gas Plants 4 million<br />
Solar Street Lights 69,549<br />
Solar Home System 3,63,399<br />
Solar Lantern 5,85,011<br />
Solar Pumps 7,148 no<br />
Solar Water Heating 2.15 million sq km<br />
Solar Cookers 6,20,000<br />
Wind Pumps 1,294 no<br />
Source: Ministry of New & Renewable Energy (MNRE), March 2008<br />
routes: the thermal route uses the heat for water heating,<br />
cooking, drying, water purification, power generation, and<br />
other applications; the photovoltaic route converts the light in<br />
solar energy into electricity, which can then be used for a<br />
number of purposes such as lighting, pumping, communications,<br />
and power supply in non electrified areas. Energy from<br />
the sun has many features, which make it an attractive and<br />
sustainable option: global distribution, pollution free nature,<br />
and the virtually inexhaustible supply.<br />
India due to its geo-physical location receives solar energy<br />
equivalent to nearly 5,000 trillion kWh/year (Roul, <strong>May</strong>,<br />
2007), which is far more than the total energy consumption of<br />
90 THE IIPM THINK TANK
R ISE OF RENEWABLES<br />
the country today. But India produces a very negligible amount<br />
of solar energy - a mere 0.2 percent compared to other energy<br />
resources. Power generation from solar thermal energy is still<br />
in experimental stages in India. Up till now, India's energy<br />
base has been more on conventional energy like coal and oil.<br />
However, India has now attained 7 th place worldwide in Solar<br />
Photovoltaic (PV) Cell production and 9 th place in Solar<br />
Thermal Systems. Grid-interactive renewable power installed<br />
capacity as on 31 st October, 2006 aggregated 9,013 MW<br />
corresponding to around seven percent of the total power<br />
installed capacity which equates to over two percent of total<br />
electricity.(MNRE)<br />
The Ministry of New and Renewable Energy (MNRE) has<br />
initiated innovative schemes to accelerate utilization and<br />
exploitation of the solar energy. Number of incentives like<br />
subsidy, soft loan, 80 percent accelerated depreciation,<br />
confessional duty on import of raw materials and certain<br />
products, excise duty exemption on certain devices/systems etc.<br />
are being provided for production and use of solar energy<br />
systems. However the Indian government support is insignificant<br />
compared to support solar energy receives by governments<br />
in Europe and East Asia.<br />
Wind<br />
The Indian wind energy sector has an<br />
installed capacity of 8757.2 MW (as on<br />
March 31 st , 2008) and a potential capacity<br />
of 45,000 MW (MNRE). In terms of wind<br />
power installed capacity, India is ranked 4 th<br />
in the World. Today India is a major player<br />
in the global wind energy market. India is<br />
one of the fastest growing producers of<br />
Wind energy, behind only to Germany, Spain, United States<br />
and Denmark. India currently produces approximately 3,000<br />
MW of wind energy annually (only marginally behind Denmark,<br />
which is at a total installed capacity of 3,117 MW,<br />
according to a recent World Wind Energy Association report),<br />
and had a growth rate last year of over 40 per cent.<br />
Per capita energy<br />
consumption in<br />
India is one of<br />
the lowest in the<br />
world and the<br />
energy intensity is<br />
one of the highest<br />
of renewable energy technologies for supplying power to the<br />
utility grid as well as in stand-alone systems. The Act provides<br />
for the Independent Power Producers (IPP) to set up renewable<br />
power plants for captive use, third party sale, power<br />
trading and distribution. The most important feature and the<br />
highlight of the Act is that it empowers the State Electricity<br />
Regulatory Commissions (SERCs) to promote renewable<br />
energy and specify, for purchase of electricity from renewable<br />
energy sources, a percentage of the total consumption of<br />
electricity in the area of a distribution licensee. This is considered<br />
a major boost for promotion of the renewable energy<br />
sector in India. They have also announced Renewable Portfolio<br />
Standards varying from one percent to 10 percent for<br />
reasonable periods. Ministry has initiated a process for linking<br />
incentives on renewable electricity with generation by introducing<br />
a scheme for providing generation linked incentive for<br />
grid interactive solar electricity.<br />
The Electricity Act contains the following provisions<br />
pertaining to non conventional energy sources.<br />
Sections 3(1) and 3(2)<br />
Under Sections 3(1) and 3(2), it has been<br />
stated that the Central Government shall,<br />
from time to time, prepare and publish the<br />
National Electricity Policy and Tariff<br />
Policy, in consultation with the state<br />
governments and authority for the development<br />
of the power system based on optimal<br />
utilization of resources such as coal,<br />
natural gas, nuclear substances or material,<br />
hydro and renewable sources of energy.<br />
Section 4<br />
Section 4 states that the Central Government shall, after<br />
consultation with the state governments, prepare and notify a<br />
national policy, permitting stand-alone systems (including<br />
those based on renewable sources of energy and other nonconventional<br />
sources of energy) for rural areas.<br />
Policy Promulgation for Renewable Energy in India<br />
Legislative support- “Electricity Act 2003”<br />
The most important legislative development, which had<br />
induced the recent growth in renewable power, is the “Electricity<br />
Act 2003’’ notified in June, 2003. It recognizes the role<br />
Section 61<br />
Section 61, 61(h) and 61(i) state that the appropriate commission<br />
shall, subject to the provision of this Act, specify the terms<br />
and conditions for the determination of tariff, and in doing so,<br />
shall be guided by the following, namely, the promotion of<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
91
M ANAGEMENT OF DEVELOPMENT<br />
cogeneration and generation of electricity from renewable<br />
sources of energy; and the National Electricity Policy and<br />
Tariff Policy<br />
Section 86(1)<br />
Section 86(1) and 86(1)(e) state that the state commissions<br />
shall discharge the following functions, namely, promote<br />
cogeneration and generation of electricity from renewable<br />
sources of energy by providing, suitable measures for connectivity<br />
with the grid and sale of electricity to any person, and<br />
also specify, for purchase of electricity from such sources, a<br />
percentage of the total consumption of electricity in the area of<br />
a distribution license.<br />
Renewable Purchase Obligations<br />
Under the above mentioned sections of the Electricity Act of<br />
2003, fourteen State Electricity Regulatory Commissions have<br />
issued orders/regulations for the purchase of minimum<br />
quantity of energy under Renewable Purchase<br />
Obligation(RPO) or Renewable portfolio Standard(RPS).<br />
According to these specifications, the distribution licensees<br />
are required to purchase specified quantum<br />
of renewable electricity out of their<br />
total electricity portfolio. These minimum<br />
purchase obligations are gradually increasing<br />
year by year varying from 0.5% to 10%<br />
over a period of 10-20 years depending<br />
upon each state. However, only 14 states in<br />
India has declared these purchase obligations<br />
even though the Electricity Act 2003<br />
mandates for all the states in India to have<br />
such purchase obligations.<br />
The Need for a National Renewable Energy Act<br />
India is all set to formulate a Renewable Energy Act with the<br />
target to meet 20 per cent of country’s energy requirements<br />
from this sector by 2020. The centre, in a bid to give a major<br />
push to the renewable sector, has appointed a high-level<br />
committee to prepare the national renewable energy law<br />
(Financial Express, November 2008). Hopefully, the law will<br />
deal with issues relating to providing renewable energy<br />
certificates, strict implementation of renewable purchase<br />
agreement and above all imposition of penalty for breach of<br />
such agreement. Already certain state electricity regulatory<br />
India is all set to<br />
have a Renewable<br />
Energy Act with<br />
the target to meet<br />
20% of energy<br />
requirements by<br />
the year 2020<br />
commissions have passed orders with regard to renewable<br />
purchases, it needs to be spread across the country. Similarly,<br />
the law should enable imposition of penalty for violation of<br />
such purchases as at present some state regulatory commissions<br />
have passed orders in this regard.<br />
The Renewable Energy Act is needed to facilitate the much<br />
needed transition to a sustainable energy system. The barriers<br />
to the development of renewable energy run across a wide<br />
spectrum. A comprehensive legislation aimed at removing<br />
these barriers and accelerating the development of renewable<br />
energy technologies is necessary. Even though the government<br />
has been favourable towards renewables, the efforts so far are<br />
not backed by legislation. Legislation is a proven instrument of<br />
change in this field, as seen in many countries across the world.<br />
What is needed is political will to make it happen.<br />
Besides energy independence, the devastating impact of<br />
climate change has become an issue of critical importance.<br />
Energy production using fossil fuels is the major contributor to<br />
greenhouse gas emissions. Hence, transition to a low-carbon<br />
energy economy is the real solution for mitigating the impact<br />
of climate change.<br />
Feed in Tariffs (FIT)<br />
as a Policy Instrument in India<br />
Feed in Tariff provide a minimum guaranteed<br />
price per unit of electricity produced<br />
to be paid to the producer or as a premium<br />
in addition to the market electricity prices.<br />
In other words they put a legal obligation<br />
on utility companies to buy electricity from<br />
renewable energy producers at a premium<br />
rate, usually over a guaranteed period,<br />
making the installation of renewable energy systems a worth<br />
while and secure investment in the future. Regulatory measures<br />
are usually applied to impose an obligation to electricity<br />
utilities to pay the renewable energy power producer a price as<br />
specified by the government electricity regulatory body. The<br />
level of the tariff is set for some years to give the investors<br />
some security on income.<br />
Feed in Tariffs have been empirically proven to generate the<br />
fastest, lowest-cost deployment of renewable energy, and with<br />
this as a priority for climate protection and security of energy<br />
supply, not to mention job creation and competitiveness. Feed<br />
in Tariffs are the best vehicle for delivering these benefits.<br />
92 THE IIPM THINK TANK
R ISE OF RENEWABLES<br />
Some countries have opted for other instruments, such as<br />
government grants schemes for micro generation (wind and<br />
solar) by tax payers. Germany is a good example of how Feed<br />
in Tariff can be used for the promotion of renewable energy in<br />
a country. They introduced Feed in Tariff law in 1990 and Germany<br />
has achieved substantial growth in the jobs created and<br />
investments achieved. 97 million tonnes of carbon dioxide<br />
emissions has been avoided in 2006 through the renewables<br />
(German Federal Environment Ministry, 2006). The demand<br />
for renewable energy systems has increased dramatically and<br />
the installation costs are coming down fast. The Feed in tariff<br />
financial model has now been taken up by many countries<br />
around the world.<br />
India, with big investments lined up for renewable energy<br />
need to adopt this mechanism for the accelerated deployment<br />
of renewable energy for its consumption. The Renewable<br />
purchase Obligations (RPO) that are part of the Electricity<br />
Act 2003 empowers the state regulatory commissions to give<br />
preferential treatment to renewable sources of energy. The<br />
RPOs can be considered much closer to Feed in Tariffs. The<br />
Central and the state Governments need to make optimum<br />
utilization of this innovative legislation of<br />
Feed in Tariff which has been highly<br />
successful in many parts of Europe.<br />
Renewables for Rural Development<br />
Even though India is one of the fastest<br />
developing economies of the world, 400<br />
million of the populations do not have<br />
access to electricity. While advocating for<br />
policy formulations that will help in<br />
massive deployment of grid connected<br />
Renewable energy, we should also be equally concerned about<br />
millions of people in rural India who does not have access to<br />
electricity at all. It is widely acknowledged that key to lifting<br />
millions out of poverty in India is the development of rural<br />
economies and energy is the prime mover in economic<br />
development. Per capita energy consumption is directly<br />
correlated to the overall quality of life of the person. Lack of<br />
energy is among the key retarding forces preventing economic<br />
development and slowing down poverty alleviation and growth<br />
of the rural sector.<br />
Until now, most of the rural energy needs have been met by<br />
biomass burning, of which the preferred fuel is firewood, while<br />
Germany is a very<br />
good example of<br />
how Feed in Tariff<br />
can be used for<br />
the promotion of<br />
renewable energy<br />
in an economy<br />
animal dung and crop residues are also widely used. Commercial<br />
fuels, such as kerosene and Liquid Petroleum Gas, have<br />
not penetrated rural areas due in most part to low purchasing<br />
power of the majority of the rural population and poor rural<br />
infrastructure. Continued dependence on biomass fuels has<br />
resulted in serious environmental problems of resource<br />
degradation and pollution with local as well as global manifestations.<br />
Also, quality of life remains poor, particularly of<br />
women who are prime collectors, processors and users of<br />
biomass.<br />
The main issue that is to be looked into is how to bring about<br />
rural development and bridge the gap between the power<br />
requirements for rural development and the energy policies of<br />
the government. The deployment of renewable energy has<br />
answers to this. The policy makers have to recognize that<br />
development is not equal to economic growth and increasing<br />
energy consumption. They need to increase energy services<br />
with a primary focus on livelihoods and other basic services for<br />
the poor. It also need to be recognized that the cost of energy<br />
produced is paid not just in terms of money but also in terms of<br />
social impacts and environmental degradation. Renewable<br />
energy is environmentally safer and has<br />
the potential to influence the social and<br />
economic life of the villagers in a positive<br />
way.<br />
Conclusion<br />
The official position of the Government of<br />
India has been that its per capita GHG<br />
emissions are much lower than those in<br />
rich developed countries whose GHG<br />
emissions have grown practically unhindered<br />
since the start of the 20 th century. However, because of<br />
the increasing international pressure the Government of India<br />
has come out with a National Action Plan for Climate Change<br />
(NAPCC). The NAPCC does not consider any voluntary<br />
binding emissions reduction target. Given this background, the<br />
only way for Government of India to reduce its GHG emissions,<br />
increase the energy supply and its access to the people<br />
would be by stepping up the use of Renewable energy. Large<br />
scale deployment of renewable energy in India is possible only<br />
with proactive government intervention in the form of legislation,<br />
policies and initiatives. Currently, while there are<br />
National Laws for electricity and energy conservation, there is<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
93
M ANAGEMENT OF DEVELOPMENT<br />
no national law for renewable energy. The Electricity Act 2003<br />
has specific provisions to promote grid connected renewable<br />
energy sources through the provisions of section 61 and section<br />
86(1). But harnessing renewable energy has been constrained<br />
due to large variation in policies and regulations across all<br />
states and the lack of energy source wise legal mandate. India’s<br />
federal set up and fragmentation of laws impinging on different<br />
renewable sources, the case for a comprehensive integrated<br />
renewable energy act with specific focus to Feed in Tariffs is<br />
very persuasive and is the need of the hour.<br />
References and Additional Thinking<br />
• Amory Lovins, “Energy surprises for the 21 st century”.<br />
www.rmi.org/images/PDFs/Energy/E99-16_EnergySurprises<br />
• Bisht & Patra, “Solar Energy, Alternative to combat energy<br />
insecurity in India” Society for the Study of Peace Conflict,<br />
Article No:96, December 12 th , 2006<br />
• CR Bhattacharjee, “Feed in Tariffs and Solar energy”<br />
03-06-08, The Financial Express<br />
• D. Murali, “Subsidies have not helped solar power in India”<br />
Businessline., 26-05-2007<br />
• Majumdar Shoumya (2008) A report on the current scenario<br />
of development in Renewable energy in India,<br />
REEEP publications<br />
• Mendonca Miguel (2007) , Feed in Tariffs, Accelerating the<br />
deployment of Renewable Energy, Earthscan UK<br />
• Raghuraman & Ghosh,(2003) Indo-US cooperation on<br />
Energy-India Perspective, Confederation of Indian Industries<br />
• “Centre plans to frame National Renewable Energy<br />
Law”,25-11-08, Financial Express.<br />
• International Energy Agency(IEA), World Energy Outlook,<br />
2007<br />
• Planning Commission 2006, Report of the Expert Committee<br />
on Integrated Energy Policy, New Delhi, Government of<br />
India<br />
• “Policy regulation for grid connected Solar power projects”,<br />
Green Energy, Vol 3 No 4, July-Aug 2007<br />
• Rural Electrification Policy, Ministry of Power, Government<br />
of India, 23-08-06, New Delhi<br />
• Brook & Gaurav Bhagat, “Solar energy heats up in<br />
India”,Nov 17 th , 2003, ecoworld.com/features/2003/11/17/<br />
solar-energy-heats-up-in-india<br />
• “Development of Solar Power in India”, An NTPC<br />
perspective www.ese.iitb.ac.in/activities/solarpower/ntpc.<br />
pdf<br />
• Electricity Act 2003, Ministry of Power, Government of<br />
India, http://www.powermin.nic.in/acts_notification/<br />
electricity_act2003/preliminary.htm<br />
• Electricity Act 2003, Ministry of Power, Government of<br />
India, powermin.nic.in/acts_notification/electricity_<br />
act2003/pdf/TheElectricityAct_2003.pdf<br />
• “Energy Sector”, www.economywatch.com/business-andeconomy/india-energy.html<br />
• Guidelines of wind Power projects, Government of India,<br />
India,www.windpowerindia.com/govtmnes.html<br />
• India Energy Portal, http://www.indiaenergyportal.org/<br />
overview.php<br />
• “India’s solar power: Greening India’s Future energy<br />
demand”: http://ecoworld.com/features/2007/05/15/indiassolar-power/<br />
• Ministry of New and Renewable energy resources(MNRE),<br />
http://mnes.nic.in/<br />
• MNRE announces incentive for wind energy projects,<br />
Business standard, 28-06-06, www.business-standard.com/<br />
india/storypage.php?tp=on&autono=41043<br />
• National Action Plan for Climate Change(NAPCC), Prime<br />
Minister Office, Government of India, http://pmindia.nic.<br />
in/Pg01-52.pdf<br />
• Renewable energy, http://www.greenbusinesscentre.com/<br />
renenegy.asp<br />
• Renewable energy Policy directives, http://www.newenergyindia.org/Policy%20Page.htm<br />
• Solar Indiaonline.com www.solarindiaonline.com/solarindia.htm`<br />
• “We need major rebranding of renewable in India”- interview<br />
with Malini Mehra, www.financialexpress.com/news/<br />
We-need-major-rebranding-of-the-renewable-industry/341166/<br />
• Wind Energy India, Clean Energy ideas, http://www.<br />
clean-energy ideas.com/articles/wind_energy_india.html<br />
• Wind power programmes, Revised guidelines for wind<br />
power projects, /www.cwet.tn.nic.in/Docu/WIND POWER<br />
PROGRAMME.pdf<br />
(The views expressed in the write-up are personal and do not<br />
reflect the official policy or position of the organisation).<br />
94 THE IIPM THINK TANK
R ISE OF RENEWABLES<br />
AD<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
95
M ANAGEMENT OF DEVELOPMENT<br />
William Antholis*<br />
Managing Director, Brookings<br />
Institution, Washington D.C<br />
96 THE IIPM THINK TANK
W INDS OF CHANGE<br />
FIVE “GS”:<br />
LESSONS FROM WORLD TRADE<br />
FOR GOVERNING GLOBAL CLIMATE<br />
I - Introduction<br />
Reversing the greenhouse gas (GHG) emissions of the world’s<br />
$60 trillion economy will be among the most complex international<br />
governance challenges ever – rivaling the forty year<br />
effort to dramatically reduce tariffs and establish a rulesbased<br />
trading system. Given that nearly 15 years have passed<br />
since the completion of the last global trade pact, it is easy to<br />
forget that the World Trade Organization stands tall among<br />
the great successes of global governance, precisely because it<br />
was so difficult to accomplish. A counterpart twin tower – a<br />
global system to address climate change – can mimic the trade<br />
regime’s most successful governance principles, and learn<br />
from its structural weaknesses. Perhaps<br />
more important, as this volume’s theme<br />
suggests, the two regimes need to work<br />
diligently to avoid colliding with one<br />
another. Indeed, it would be both unfortunate<br />
and ironic if a global climate regime<br />
only could succeed at the expense of the<br />
global trade regime – or vice versa. What<br />
lessons should the climate regime learn<br />
from the trade regime? It may be helpful to<br />
break the issue down into five core<br />
questions for any attempt to govern: Who governs? What is<br />
the structure of the basic governing agreement? Where is it<br />
“binding”? When can we expect the agreement to take effect?<br />
How does it bring new nations in? For each question, preliminary<br />
answers can be found in what we might think of as the<br />
five “G’s” that should govern climate change. By looking to the<br />
lessons from the WTO, I try to make the case for a climate<br />
regime that:<br />
1. starts with a group of major emitters, which together<br />
2. forge a general agreement to tackle the issue, one that<br />
3. gears up nations’ domestic action and that<br />
4. organizes itself around a generational goal that<br />
It would be ironic<br />
if a global climate<br />
regime only could<br />
succeed at the<br />
expense of<br />
the global<br />
trade regime<br />
5. allows for the graduation of developing countries into full<br />
commitments.<br />
In a few of these areas, such an approach can provide a<br />
roadmap to resolving potential conflicts between the two<br />
regimes.<br />
II – Who Governs? The Right Group of Nations,<br />
Matched to the Challenge<br />
International regimes need to be designed to their purposes.<br />
Are they debating forums? Are they negotiated agreements<br />
that govern in particular fields? Trade and climate change<br />
have both benefited considerably from both kinds of organizations.<br />
This chapter assumes that concerned<br />
nations are moving toward a<br />
governing regime for GHG emissions, and<br />
that they need mechanisms equipped to<br />
address that challenge.<br />
Since the formation of the UN system,<br />
two bodies have existed along side one<br />
another on the issue of global trade, one<br />
for discourse, the other for governance.<br />
The UN Conference on Trade and<br />
Development (UNCTAD) has largely<br />
functioned as a forum for assessing the twin goals and<br />
accomplishments of trade and development. Alongside it, the<br />
General Agreement on Tariffs and Trade (GATT) and its<br />
successor the World Trade Organization (WTO) have been<br />
the governing body for global trade. Though some might find<br />
it odd to point to the WTO as a successful model of international<br />
governance (especially given recent difficulties in<br />
completing the Doha Round of multilateral negotiations), it is<br />
easy to forget how significant its contributions have been to<br />
both international cooperation and to economic growth over<br />
the last sixty years. 1 The GATT/WTO system began as both a<br />
smaller (in terms of membership) and more ambitious (in<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
97
M ANAGEMENT OF DEVELOPMENT<br />
terms of governance) world body than the UNCTAD when a<br />
group of the right countries decided to work together.<br />
Lesson learned: <strong>size</strong> matters. When it comes to global<br />
governance, it was and is easier to get things done with a<br />
smaller number of the right countries. The GATT process was<br />
managed by the biggest and most technically competent trade<br />
players – the co-called “Quad” of the U.S., Japan, Canada and<br />
Europe. Occasionally, when formal negotiations bogged<br />
down, the Group of Seven (and later Group of Eight) would<br />
weigh in to give the talks a boost, such as in 1978 and 2001<br />
when the leaders themselves helped spur breakthroughs<br />
leading, respectively, to the close of the Tokyo Round and the<br />
launch of the Doha Round.<br />
As the WTO’s membership grew in <strong>size</strong><br />
over its first five decades, negotiations<br />
became more unwieldy. The greatest<br />
number of new entrants came from developing<br />
countries. After an initial sorting out,<br />
the lesson of <strong>size</strong> was relearned: a new<br />
Quad was established, where India and<br />
Brazil joined the U.S. and EU as the<br />
principal negotiators.<br />
Further complicating matters, over the<br />
years, a plethora of regional and bilateral<br />
agreements have advanced trade liberalization<br />
world-wide. The EU has led the<br />
pack in depth of integration and effectiveness,<br />
but the last forty years have seen the<br />
rise of a South American commercial<br />
union (MERCOSUR), the North American<br />
Free Trade Agreement, the Southern<br />
African Customs Union (SACU), and the<br />
Association of Southeast Asian Nations Free Trade Area. Of<br />
course, there is considerable debate about whether this<br />
spaghetti soup of different agreements has been good for the<br />
global trading system. Supporters of the three way street (i.e.<br />
global, regional and bilateral), have found “competitive<br />
liberalization” to be a positive force. Regional agreements<br />
help drive reluctant countries to the global negotiations for<br />
fear of missing gains from trade. Opponents see the growing<br />
complexity and difficulty of multiple trade talks to exceed the<br />
negotiating capacity of diplomats and the political will of<br />
elected officials. Complexity is unavoidable, to be sure. That<br />
the complexity has been at all manageable is due, in part, to<br />
Over the years,<br />
a plethora<br />
of regional<br />
and bilateral<br />
agreements have<br />
advanced trade<br />
liberalization<br />
the bedrock of a rules-based system that was established sixty<br />
years ago, and the committed leadership of a relatively small<br />
number of players.<br />
So what does this mean for the climate change regime? The<br />
half-true cliché about climate change is that it is a global<br />
problem that requires a global solution. Still, moving forward<br />
does not require all countries to be part of the solution – at<br />
least not at first. The UN-sponsored Kyoto Protocol process<br />
was slowed down by trying to conduct a global research<br />
initiative on the nature of the challenge (largely led by the<br />
UN’s Intergovernmental Panel on Climate Change or IPCC)<br />
while also debating who was responsible for addressing the<br />
challenge and negotiating an agreement<br />
among 140 nations under the UN’s Framework<br />
Convention on Climate Change<br />
(UNFCCC). Though data, debate and<br />
dialogue were critical to convincing these<br />
nations of the challenge at hand, the<br />
negotiations over what to do about it<br />
became rancorous and left many questions<br />
unanswered. They gave way to several more<br />
years of disputed talks on how to implement<br />
the agreement, a lengthy and<br />
unsuccessful ratification discussion in the<br />
U.S., and uninspiring results on the<br />
ground – even from enthusiastic backers<br />
like the EU and Japan, which face an<br />
uphill battle to in meeting their 2008–12<br />
GHG emission targets. Meanwhile, the<br />
main developing country bloc is an eclectic<br />
group, including nations ranging from<br />
giant powerhouses such as Brazil, China,<br />
and India to small, poor, landlocked nations in Africa to small<br />
island nations. With the exception of these island countries<br />
– who literally could get washed away if there is no progress<br />
– most have been quite comfortable with the UN’s penchant<br />
for discussion, so long as those discussions don’t lead to<br />
binding obligations for their own economies.<br />
In short, we have a potentially large problem coupled with a<br />
complicated, bureaucratic and torpid negotiating mechanism.<br />
If <strong>size</strong> matters when setting up a governing regime, then the<br />
climate system needs to separate the broad and inclusive<br />
dialogue about the challenge from the more narrow and<br />
detailed challenge of negotiating an agreement. The latter<br />
98 THE IIPM THINK TANK
W INDS OF CHANGE<br />
task is best taken by a smaller group of nations. 2<br />
The great bulk of GHG emissions likely to spew into the<br />
atmosphere over the next three decades – not to mention the<br />
economic and technical capacity to reverse course – can be<br />
found in fewer than two dozen countries. The creation of<br />
smaller groupings – such as a Major Emitters (E-8) – could<br />
help to address these challenges. 3 The United States, European<br />
Union, China, Russia, Japan and India are the top six<br />
emitters of GHGs, and South Africa and Brazil rank 10 th and<br />
13 th , respectively, but their contributions are significant in<br />
representing their regions – especially Brazil, where protecting<br />
the Amazon is a major priority in storing carbon. This<br />
same logic lies behind the major emitters<br />
meeting that President Bush hosted in<br />
September 2007, which adds to my list of<br />
eight and included Canada (7 th ), South<br />
Korea (8 th ), Mexico (9 th ), Indonesia (12 th ),<br />
and Australia (15 th ). Together, these<br />
thirteen countries produce more than 80 %<br />
of all GHGs.<br />
Keeping the core group of negotiating<br />
nations small – and occasionally involving<br />
heads of state in the conversations – has<br />
one other signal virtue. The same set of<br />
players is at the center of WTO negotiations.<br />
As the two regimes begin to bump<br />
into each other on a range of issues – from<br />
border-surcharges to energy subsidies –<br />
resolution can be reached more easily if<br />
the same players from both regimes are<br />
talking. That is especially true if heads of<br />
state themselves are aware of the need to<br />
coordinate, and the perils of the failure to do so.<br />
III - What is the Form of Governance?<br />
A General Agreement<br />
One of the keys to the GATT/WTO’s success is that it did not<br />
start as a global body, but rather as a less formal arrangement.<br />
If this distinction seems unimportant, keep in mind that the<br />
WTO started not as the successful WTO, or even the successful<br />
GATT, but as the failed International Trade Organization<br />
– which was envisioned at Bretton Woods along with the<br />
World Bank and the International Monetary Fund and whose<br />
treaty died on the U.S. Senate floor, because two thirds of that<br />
The fear that<br />
nations will lose<br />
their sovereignty<br />
similarly has<br />
plagued the<br />
climate change<br />
discussions<br />
august body was not prepared to hand over highly political<br />
decisions regarding trade policy to an international organization.<br />
The negotiators went back to the drawing board. Only<br />
after the International Trade Organization’s high profile<br />
failure did they come up with the General Agreement on<br />
Tariffs and Trade (GATT).<br />
The core lesson: do not start with an international treaty<br />
organization responsible for data, debate, and enforcing<br />
compliance. And when it comes to enforcement, build<br />
confidence through general agreements, which are “binding”<br />
in that they synchronize and increase the ambition of domestic<br />
action that states see as being in their best interest. For nearly<br />
fifty years, the GATT was able to negotiate<br />
and adjudicate agreements that bound<br />
nations in a way that less directly called<br />
national sovereignty into question. Each<br />
participating nation pledged to cut tariffs<br />
and other trade barriers in a coordinated<br />
way. Countries could choose what counted<br />
as significant reductions, and they would<br />
often trade fast action in one area for slow<br />
action in another. Once commitments<br />
were made, they had to be enforced. An<br />
adjudicative body was established to<br />
resolve trade disputes.<br />
Technically speaking, the adjudicative<br />
trade body did not enforce the treaty.<br />
Member nations did. Countries monitored<br />
one another’s behavior – including the<br />
most economically powerful trading<br />
nations. When a plaintiff country had a<br />
complaint, it brought it to the GATT/<br />
WTO’s dispute resolution mechanism. If a defendant country<br />
lost a dispute, it had a choice: change its domestic law, or allow<br />
a retaliatory tariff or other action by the plaintiff country. In<br />
this way, all countries felt the system to be self-enforcing. All<br />
of this gave negotiators the ability to say convincingly to their<br />
political masters – including general publics – that the agreement<br />
was not a sacrifice of sovereignty.<br />
The fear that nations will lose their sovereignty similarly has<br />
plagued the climate change discussions. If the U.S. had<br />
ratified the Kyoto Protocol, it would have been a “binding<br />
treaty”. Opponents of Kyoto claimed that the U.S. would have<br />
been liable for some set of sanctions that would be adminis-<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
99
M ANAGEMENT OF DEVELOPMENT<br />
tered and enforced by the mandates of the UN. America’s<br />
sovereignty over its energy future – and by extension, its<br />
national security – would be subject to external intervention.<br />
As a political matter, few American politicians want to be told<br />
that they must do something, or else face sanction by a global<br />
body.<br />
Whether or not those concerns have any factual merit,<br />
“sovereignty hawk” nations around the world (particularly in<br />
the United States and much of the developing world) have<br />
feared Kyoto-style obligations. Political leaders in the U.S.,<br />
China, India and Brazil also have refused to sacrifice their<br />
ability to control their economic destinies to a global energy<br />
regime – at least, not give up that sovereignty<br />
in a way that diverges from national<br />
interest. Only the European Union – whose<br />
members have grown comfortable sharing<br />
or even pooling their sovereignty – seems to<br />
like the idea of using an international<br />
agreement to compel domestic action.<br />
There is another way, of course. Building<br />
on the successful GATT model, negotiators<br />
could seek a General Agreement to<br />
Reduce Emissions (GARE). Like the<br />
GATT, the GARE would effectively link<br />
domestic action with an international<br />
agreement. 4 It would avoid moving too<br />
quickly to a full blown international<br />
institution, such as a World Environment<br />
Organization. If a “treaty” suggests that<br />
nations are tying their fates to one another,<br />
“general agreements” suggest that nations<br />
acknowledge one another’s interdependence,<br />
but also their autonomy. As they build confidence in<br />
their ability to work together under such agreements, they may<br />
become more willing to strengthen the regime.<br />
A GARE system could be built on the E8 or major emitters<br />
group outlined above. A core set of the most important<br />
countries could start the process, and this ultimately would be<br />
compatible with regional and bilateral agreements. On an<br />
annual basis, leaders of this group could meet at the summit<br />
level to evaluate progress and to help give a boost to the<br />
ongoing negotiations.<br />
What then of the UN? An important role remains for the<br />
UN in continuing to sponsor the broader climate talks as a<br />
Building on<br />
the successful<br />
GATT model,<br />
negotiators could<br />
seek a General<br />
Agreement to<br />
Reduce Emissions<br />
forum for helping nations share information and best practices<br />
with one another. The UN also has been path-breaking in<br />
supporting the critical work of the Intergovernmental Panel<br />
on Climate Change -- the scientific body that has helped<br />
establish that climate change is real, and that human action is<br />
contributing dramatically. Both these functions help support<br />
the negotiation and conflict resolution functions of a binding<br />
agreement. Eventually, once confidence is built in a self-enforcing<br />
agreement, the UN can be brought in to maintain the<br />
relationships.<br />
IV - Where Does it Bind Nations? It Gears up<br />
Domestic Steps Nations are Willing<br />
to Take<br />
Ask a State Department lawyer, and she will<br />
tell you that there is no difference between a<br />
Treaty, a Congressional-Executive Agreement,<br />
and a Presidential bilateral statement<br />
with a foreign head of state. The United<br />
States is honor-bound to live up to its<br />
agreements, whatever form they take. If the<br />
agreement includes consequences for<br />
violation, the U.S. is obligated to accept<br />
those. Yet in practice, nations (including<br />
the U.S.) frequently violate or ignore<br />
agreements – and either suffer the consequences<br />
or do not. Though the UN<br />
Charter provides some instances when<br />
states may be physically compelled to act<br />
in accord with violating international<br />
norms, in practice this rarely is the case for<br />
non-military agreements.<br />
What makes some international agreements binding? What<br />
makes some “bindings” succeed and others fail? There are at<br />
least three ways to discuss the success of binding agreements.<br />
First, some pacts succeed because states feel no need to<br />
violate them. These agreements succeed because they create a<br />
structure that allows states to do what they would prefer to do,<br />
but might not do because they fear non-compliance by others.<br />
By giving states confidence that other states will live up to<br />
their end of the bargain, agreements allow states to do what is<br />
in their best interest. This is what de Tocqueville called<br />
“self-interest rightly understood.”<br />
Second, some agreements succeed because nations realize,<br />
100 THE IIPM THINK TANK
W INDS OF CHANGE<br />
The United<br />
States and China<br />
are particularly<br />
dependent on<br />
carbon intensive<br />
industries<br />
such as coal<br />
upon violating an agreement, that the net costs of doing so are<br />
not worth it. This is usually the case when nations contemplate<br />
sanctions from an agreement – and the political impact those<br />
sanctions could have domestically and internationally – and<br />
choose to get right by the law. Third and last, agreements work<br />
when nations suffer appropriate consequences for their<br />
violations, and both the violating nation and the nation that<br />
applies the sanction feels the consequences to be appropriate<br />
and adequate.<br />
In theory, all three cases do not require an outside enforcing<br />
body. It is governance without government, or what the<br />
great international relations theorist Hedley Bull called “the<br />
efficacy of international law” which<br />
“depend[s] on measures of self-help.” 5 The<br />
GATT/WTO succeeded because, for its first<br />
fifty years, all three forms of self-help<br />
worked. First, the commitments were<br />
sufficiently robust that countries could plan<br />
to cut trade barriers – that is, gear up their<br />
commitment – knowing that counterpart<br />
nations would do the same. GATT/WTO<br />
negotiations helped nations to cut their<br />
own trade barriers further than they<br />
otherwise would. In return, counterpart<br />
nations also lowered their barriers.<br />
Consumers benefited from cheaper<br />
imports, and exporters benefited from<br />
wider markets. Nations understood the<br />
tough domestic challenges other nations<br />
felt in trying to lower trade barriers.<br />
This worked in practice, particularly<br />
when Congress signaled its willingness to<br />
lower barriers in specific product areas in advance of a<br />
negotiation. Making a priority of domestic action is actually<br />
enshrined in the domestic legal architecture of American<br />
trade diplomacy. From an American perspective, one reason<br />
that the United States is more easily bound by trade negotiations<br />
is that it uses Congressional-Executive Agreements,<br />
which require passing relatively detailed trade promotion<br />
authority in advance of negotiations. As a result, the trading<br />
system aspired toward laissez-faire goals as a general matter<br />
across national boundaries, but also accepted that national<br />
legislation was central to moving forward. Though laissezfaire<br />
remained a long-term goal, no single round or negotiation<br />
ever proposed to complete the process and each successive<br />
round depended on national action. The system<br />
recognized the domestic political and economic constraints<br />
that nations face in moving toward a globally integrated goal. 6<br />
Second, the GATT’s enforcement system sustained national<br />
cuts without appearing to undermine sovereignty. When a<br />
nation was found to be in violation of a trade rule, it had a<br />
choice: change its trade practice, or accept reciprocal trade<br />
sanctions on other goods. Even under trying circumstances,<br />
nations were willing to go back and change domestic law in<br />
order to come into compliance. In these instances, countries<br />
have avoided the imposition of sanctions, and they have been<br />
unwilling to sustain extended tit-for-tat<br />
sanctions. Third, in those few cases where<br />
sanctions have been applied, nations have<br />
generally been willing to accept them<br />
without counter-sanctions. Rather than<br />
starting trade wars, the GATT/WTO<br />
system has prevented them.<br />
A similar logic can guide a GARE:<br />
countries can choose domestically to cut<br />
their GHG emissions in the way that<br />
makes most sense, given their domestic<br />
constraints. Rather than prioritize a<br />
“treaty” as a goal in and of itself, a GARE<br />
would start with domestic legislation and<br />
help nations strengthen – that is, gear up<br />
– their ambition.<br />
Nearly all nations recognize that cleaner<br />
energy production and the protection of<br />
forests are a worthwhile goals in themselves,<br />
and that they should act to prevent<br />
irreversible climate change. Almost all nations have taken<br />
some steps in this regard. And a diversity of approaches is<br />
appropriate. Countries use energy and regulate pollution very<br />
differently, and they also differ widely in their capacity to<br />
track emissions and enforce compliance. The United States<br />
and China, for instance, are particularly dependent on carbon<br />
intensive industries such as coal. Brazil, conversely, has huge<br />
sources of renewable resources such as hydropower and<br />
bio-fuels, but also is struggling to save its rain forest – one of<br />
the great carbon reserves and “sinks” in the world. It is clear<br />
that a one-<strong>size</strong> fits all approach will not work.<br />
The threefold challenge for the international negotiations is,<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
101
M ANAGEMENT OF DEVELOPMENT<br />
first, how to get countries to take reciprocal domestic actions;<br />
second, how to structure compliance so that it reinforces or<br />
returns states to mutual action; and third, how to establish<br />
sanctions that nations can choose to accept as appropriate.<br />
Thus, first, a GARE should begin in domestic action, and use<br />
the negotiating process to gear up the ambition of states.<br />
States are “bound” to follow thru on actions they are likely to<br />
take on their own. 7 One way to make sure that that is the case<br />
is to legislate first and negotiate later. In the American<br />
context, GARE would take advantage of Congressional-Executive<br />
agreements, and avoid the treaty process. In a GARE,<br />
the domestic political hurdle to passage is whether to pass and<br />
implement domestic law. With the framework<br />
of such a domestic law in place, the<br />
international negotiations can focus on the<br />
level of ambition that all countries take, so<br />
as to help ratchet up ambition. The diplomatic<br />
challenge becomes whether that level<br />
of commitment is acceptable to counterpart<br />
nations. 8<br />
This is in slight, but significant, contrast<br />
to the Kyoto Protocol’s approach of<br />
binding a state to an international organization’s<br />
decision-making. 9 For instance, in<br />
the United States, the treaty process not<br />
only requires the supermajority in one<br />
house of Congress, it also requires passage<br />
of implementing legislation in both houses.<br />
Agreements, by contrast, require majorities<br />
in both houses – first for authorization<br />
to negotiate, second for the final agreement<br />
itself. The authorization to negotiate<br />
– so-called “Fast Track” in trade talks – gives negotiators a<br />
road-map for what can be negotiated, and as a result begins to<br />
involve members of congress in the talks themselves. 10 In a<br />
real sense, for the United States a GARE would start with<br />
domestic action, and seek to ratchet it upward, in sync with<br />
other nations.<br />
Second, a GARE would need to be “binding” by addressing<br />
non-compliance. As with the early GATT system, it should<br />
include avenues for self-enforced sanctions by nations. Exactly<br />
how nations will self-enforce an agreement is still being<br />
debated. Some analysts have called for a common global<br />
carbon tax. Others have called for a “pledge and review”<br />
If one country<br />
violates its<br />
emissions limits,<br />
however, the<br />
permits in that<br />
country become<br />
less valuable<br />
process, in which nations pledge to reduce GHGs, and then<br />
review one another’s progress on a regular basis. There may be<br />
merit to both kinds of agreements. Yet neither one, on its face,<br />
appears to encourage the gearing up of domestic commitments,<br />
while also discouraging nations from breaking those<br />
commitments by imposing sanctions that deny nations the<br />
benefits of the agreement. 11<br />
One approach, in theory, does accomplish these goals:<br />
international trading of GHG emissions. As a domestic<br />
matter, the EU has already adopted emissions trading, and the<br />
United States is considering such legislation, having successfully<br />
pioneered a sulfur dioxide system under George Herbert<br />
Walker Bush in the late 1980s. Though<br />
there have been some initial problems with<br />
the EU’s system, it has now done largely<br />
what it intended to do: put a price on carbon<br />
emissions, and create incentives for the<br />
private sector to find emissions cuts where<br />
most efficient to do so.<br />
International emissions trading would<br />
extend these advantages across national<br />
borders. The United States insisted on<br />
GHG emissions trading at Kyoto, and for<br />
nearly two years afterwards haggled with<br />
the European Union over the rules.<br />
Ironically enough, once the United States<br />
walked away from emissions trading<br />
during the George W. Bush presidency, the<br />
EU began to aggressively pursue international<br />
emissions trading. Trading can<br />
happen in two forms – in either a closed or<br />
an open system. In a closed system, two<br />
different national economies agree that total emissions in<br />
both economies will not exceed a fixed amount. As long as<br />
both nations comply in the aggregate, permits would remain of<br />
equal value and freely tradable between countries. If one<br />
country violates its emissions limits, however, the permits in<br />
that country become less valuable. In an open system, nations<br />
are responsible only for their own reductions, though investors<br />
or companies may seek certifiable reductions in other countries,<br />
and simply be free to invest in such reductions. 12<br />
Both approaches have strengths and weaknesses from a<br />
“compliance as self-help” standpoint. The strength of the<br />
closed system is that it raises the stakes for compliance – and<br />
102 THE IIPM THINK TANK
W INDS OF CHANGE<br />
the penalties for non-compliance. In such a system, it is highly<br />
advantageous for nations to make broad progress on their<br />
GARE reduction commitments, as it would either force<br />
nations to seek permits from firms that have successfully cut<br />
GHG emissions in other nations, or provide incentives for<br />
nations to have the most number of such firms in their own<br />
territory. If it were possible to set up such a system, the<br />
incentives for success should be high. Yet the cost of failure<br />
should also be high, as less successful countries would be<br />
forced to pay dearly for emissions permits across borders. In<br />
contrast an open system would create incentives for investing<br />
across borders. That said, it would provide few downsides if<br />
nations failed to comply with the international<br />
agreement – other than the greater<br />
risk of failing to stabilize the climate.<br />
The joint challenges for a GARE that<br />
relied on trading for compliance would be to<br />
determine whether a member country<br />
seeking to join had proposed a strong<br />
enough target, and whether preexisting<br />
members had come close enough to their<br />
previous commitments in each successive<br />
round of negotiations. The first task would<br />
need to fall to member states. The second<br />
task could fall to a joint review panel<br />
established by GARE countries. If a<br />
country failed to meet its target by reducing<br />
its emissions or buying permits, it<br />
would forfeit the right to continue in the<br />
GARE in future periods. 13<br />
Third, establishing a successful binding<br />
agreement requires addressing how to deal<br />
with those who refuse to join. A growing chorus is raising the<br />
idea of using actual trade protections – such as demanding<br />
that imported goods from countries that have not adopted<br />
sufficient emission reductions would need to purchase<br />
emissions permits equivalent to their carbon footprints. The<br />
idea first arose in countries such as France, directed at the<br />
United States for not joining the Kyoto Protocol. Now that the<br />
United States is contemplating joining a post-Kyoto system,<br />
Americans are considering applying the same approach to<br />
developing countries that do not take binding targets. These<br />
“border permits” would be a way of placing some sanction on<br />
nations that refuse to join or comply with an emissions<br />
The potential<br />
disruptive<br />
element is that<br />
all economies do<br />
not recognize the<br />
public good in the<br />
same way<br />
agreement – and thereby help share the cost of compliance.<br />
This has the potential both to be a constructive way to think<br />
through the problem, but also to undermine the trade regime,<br />
the climate regime, or both. The constructive element of such<br />
an approach would be to provide real leverage for nations to<br />
actually transfer the costs of non-compliance in an effort to<br />
address a global public good – something for which the trade<br />
regime allows exemptions.<br />
The potential disruptive element is that all nations do not<br />
recognize the public good in the same way, let alone the means<br />
to address it. Developing countries, which likely would be the<br />
targets of such a system, are almost certain to claim that a)<br />
this is a violation of the WTO’s rules against<br />
non-discrimination, and b) that it does not<br />
meet the standard for environmental<br />
exemption for those rules. The “global<br />
public good standard”, developing countries<br />
would likely argue, is not met because the<br />
current international climate treaty already<br />
embodies how the international community<br />
defines the climate challenge. That treaty,<br />
they will claim, explicitly demands that<br />
industrial nations act first, and that<br />
developing countries are exempt from<br />
binding targets. Because the standing<br />
global consensus is that industrial nations<br />
must act first, any effort to use the trade<br />
regime to shift that burden would be seen<br />
as illegitimate.<br />
So if industrial countries persist in<br />
imposing such tariffs in order to build a<br />
more effective climate regime, they might<br />
undermine the WTO – regardless of which way the dispute<br />
settlement system determines the merits of the case. If a<br />
developing country claimed that this was a violation of WTO<br />
rules but lost the dispute, the victory for industrial countries<br />
would come as an additional blow to developing nations, on<br />
the heels of the WTO’s long-stalled Doha development round,<br />
which has failed to produce market openings to industrial<br />
markets. Conversely, a victory for developing countries might<br />
further undermine public support for the WTO within<br />
industrial nations – which continues to wane. Likewise, the<br />
effect on the climate regime could be enervating. Emerging<br />
market players such as Brazil, China and India will feel that<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
103
M ANAGEMENT OF DEVELOPMENT<br />
they are being forced into a climate agreement by being<br />
denied access to an international trading regime that they<br />
have worked hard to enter as full participants. And industrial<br />
countries might be less inclined to join the climate regime if<br />
border adjustments are found to be illegal vis-à-vis the WTO,<br />
because they will feel their competitiveness further eroded.<br />
Avoiding this clash of global governance regimes should be<br />
a priority for not only leading nations but also for the heads of<br />
both global regimes. It is perhaps the best argument for the<br />
world’s leading economies to not treat these issues in isolation<br />
from one another, or from broader global economic developments.<br />
Indeed, one of the ironies of the spread of democracy<br />
has been that those governments have to<br />
work so hard to accomplish domestic<br />
regulation and, as a result, are often the<br />
least inclined to take direction from<br />
international organizations. The relatively<br />
fragile support for international regimes<br />
should not be easily challenged – particularly<br />
in the name of establishing other<br />
regimes.<br />
V - When Can We Expect the New<br />
Climate Regime to Take Effect?<br />
Over A Generation<br />
The idea of extending the enforcement of<br />
commitments over time gets at a central<br />
element of any governance challenge. One<br />
of the great successes of the trade regime<br />
was that it built itself gradually. Only after<br />
forty-five years of operating did it lead to a<br />
treaty organization.<br />
The long-term nature of the climate challenge means that<br />
solutions must also be long-term. Today’s warmer climate is<br />
the result of GHG emissions accumulated over the last half<br />
century. Today’s emissions add to those historic concentrations,<br />
and are already locking in warmer temperatures well<br />
past the middle of this century. Little can be done now to stop<br />
that warming from happening. So the effort to slow emissions<br />
over the next several decades will most affect temperature in<br />
the second half of this century.<br />
What is the appropriate long-term goal? The starting point<br />
for all climate negotiations, the 1992 Rio Treaty (ratified by<br />
the U.S. Senate, and adopted world-wide), included an<br />
The relatively<br />
fragile support<br />
for international<br />
regimes<br />
should not be<br />
easily challenged<br />
at all<br />
abstract long-term goal: “stabilization of greenhouse gas<br />
concentrations in the atmosphere at a level that would prevent<br />
dangerous anthropogenic interference with the climate<br />
system”. The Kyoto Protocol was a practical attempt to<br />
implement Rio, yet it only set one target – a short term<br />
reduction of GHG emissions by industrial nations. This was<br />
seen as a first step toward the longer-term goal. But because it<br />
lacked any second or third step, it was widely criticized for not<br />
getting at the longer-term challenges.<br />
As with the trade regime, the climate regime should keep<br />
this long-term focus that was part of Rio’s plan and be geared<br />
around a portfolio of long-term targets – including concentration<br />
levels and global temperature change.<br />
As with any law or diplomatic agreement,<br />
those targets could be adjusted later as<br />
scientific and economic evidence is collected.<br />
But the key is to get some agreement<br />
on the long-term goals so that short term<br />
steps can be seen in their broader context.<br />
Right now, many scientists believe that<br />
dangerous interference with the climate<br />
could be avoided if temperature increase is<br />
limited to two degrees centigrade. Consensus<br />
estimates predict that doing so requires<br />
at least stabilizing GHG concentration<br />
levels at 550 parts per million (ppm)<br />
by 2050.<br />
If the E-8 or a major emitters group<br />
adopted two degree centigrade and 550<br />
ppm as global goals – and urged other<br />
nations to do the same – countries could<br />
then target their short-term and long-term<br />
emissions cuts at levels that they felt to be effective and fair<br />
steps toward that goal. When diplomats try to negotiate over<br />
relatively short-term emissions cuts they would be better able<br />
to explain to their political leaders and publics how each<br />
short-term stop contributes to a longer-term effort. (Indeed, in<br />
the recent proposed Lieberman-Warner climate legislation, a<br />
series of emissions cuts are written in, extending out to 2050.)<br />
As nations reach their shorter term benchmarks, they could<br />
assess how they are doing toward that longer-term goal.<br />
Among other things, this will help industrial countries signal<br />
to developing countries what they consider to be fair burdensharing<br />
for all nations over a future term, and that it is<br />
104 THE IIPM THINK TANK
W INDS OF CHANGE<br />
possible to achieve these marks without hurting economic<br />
growth.<br />
Setting targets for temperature increase and gas concentrations<br />
can also help politicians, the media, and the public stay<br />
focused on the purpose of the undertaking: whether emission<br />
cuts are sufficient to slow and eventually stop global warming.<br />
Though scientists now overwhelmingly agree that human<br />
activities are leading to global warming, new evidence is<br />
coming in constantly. The consensus is being affirmed, but<br />
also challenged and updated on a nearly daily basis – mostly in<br />
the direction of sending more dire warning signals. Some<br />
scientists, for instance, now think that stabilization at 450 ppm<br />
is needed to prevent two degrees of warming.<br />
Of greater concern, two degree celsius<br />
of warming may not be so safe. Recent<br />
research, for instance, finds that the current<br />
level of warming is melting the Arctic ice<br />
cap faster than had been anticipated,<br />
potentially weakening the ice cap’s ability to<br />
reflect sunlight and cool the planet. If the<br />
ice cap were to disappear with less than two<br />
degree celsius of warming, it could be a<br />
tipping point that would lead to a more<br />
dramatic and dangerous shock to the<br />
earth’s climate.<br />
<strong>VI</strong> - How Does it Bring New Nations<br />
into the Agreement? It Must Pro-<br />
vide A Path for Graduation<br />
Perhaps the greatest lesson the climate<br />
regime can learn from the trade regime is<br />
something that the latter has failed, so far,<br />
to entirely address: how to bring the developing countries into<br />
the regime in a way that acknowledges their development<br />
challenge, but also allows them to graduate to full responsibility<br />
as their economies grow.<br />
The trading regime is now in the midst of its longest<br />
negotiating round in its sixty year history – the so-called WTO<br />
Doha development round. One of the main reasons why it has<br />
been so difficult to conclude this round is that it is trying to<br />
address the regime’s core weakness: that the two basic groups<br />
– the industrial countries and the developing countries – have<br />
differing sets of obligations. The developing countries enjoy<br />
“special and differential treatment,” which means that they<br />
Most industrial<br />
economies are<br />
now poised to<br />
take near-term<br />
and middle-term<br />
efforts to cut<br />
GHG emissions<br />
are exempt from the more drastic tariff reductions taken by<br />
industrial nations. Not only is the regime asymmetrical, but it<br />
is also unclear how any developing nation would graduate to<br />
taking on an industrial-strength obligation, when the time was<br />
right. Thus, although the addition of these developing countries<br />
has been critical to achieving global scope for the<br />
organization, it also has added to the complexity of the<br />
process – and the current stalemate in negotiations.<br />
As with the global trading system, the developing countries<br />
will ultimately need to graduate and become part of the<br />
post-Kyoto Protocol climate system. Kyoto was problematic in<br />
several regards, but perhaps its biggest drawback was that the<br />
developing countries did not commit to cut<br />
their GHG emissions – in fact, the treaty<br />
actually prevents them from taking a<br />
binding target even if they want to do so.<br />
Argentina, for instance, tried to take on a<br />
binding target in 1998, but it was prevented<br />
from doing so by other developing countries.<br />
It certainly makes sense for the developing<br />
countries to have different obligations,<br />
or obligations that kick in later, given the<br />
industrial world’s historic responsibility<br />
and much greater wealth of the industrialized<br />
world, along with the generational<br />
nature of the problem. But there is simply<br />
no way to solve the climate problem<br />
without the active involvement of the<br />
developing countries – which, according<br />
to current projections, will account for<br />
more than 70% of GHG growth in next<br />
twenty-five years. Yet these countries show no willingness to<br />
accept Kyoto-style targets.<br />
This catch-22 is not just a political problem; it is an economic<br />
one that goes to the heart of getting clean energy markets<br />
up and running. Most industrial countries are now poised to<br />
take near-term and middle-term efforts to cut GHG emissions,<br />
which is already leading to some increased investment<br />
in clean energy. However, if the world economy is going to cut<br />
its carbon emissions by as much as 80%, enormous amounts of<br />
capital investment will be required to find transformative,<br />
carbon-free sources of energy. The more certain investors feel<br />
that the industrial countries will keep seeking ever deeper<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
105
M ANAGEMENT OF DEVELOPMENT<br />
reductions in GHG emissions, the more likely they will be to<br />
commit that kind of capital up front. The key is for the<br />
industrial countries to signal their long-term cuts. But they are<br />
less likely to do so long as developing country action is not a<br />
sure thing. Right now, the developing countries are saying that<br />
they will not act, and they are refusing to address the longterm<br />
challenge.<br />
How can the international community break out of this box?<br />
The effort must begin with the industrial world, by responding<br />
realistically to developing country concerns about equity. The<br />
developing countries rightfully feel that the rich countries are<br />
largely responsible for the problem to date, and probably for<br />
the global warming that will take place over the next fifty<br />
years. The industrial countries should not dismiss these<br />
concerns, particularly because the developing countries,<br />
particularly China and India, despite their recent economic<br />
gains, still have a nearly unfathomable number of their<br />
citizens living in extreme poverty – well over a billion people<br />
combined in those two countries alone. In addition to taking<br />
seriously efforts to estimate how much the industrial countries<br />
have contributed to current GHG concentration levels, these<br />
nations should also consider very long-term targets on a<br />
per-capita basis.<br />
Second, the industrial countries should appeal to the<br />
developing countries’ own self-interest. Climate change is<br />
most likely to hurt poor countries the worst, accentuating<br />
droughts and severe storms, for which these nations are least<br />
prepared. Moreover, many of these countries are facing the<br />
local air-pollution that comes in the early stages of industrialization,<br />
and the health care challenges of clean air and water<br />
that could be lessened by early adoption of clean energy<br />
technology. Moreover, investing in energy efficiency and clean<br />
energy is ultimately cost-effective.<br />
One possible motive for joining a GARE would be the<br />
potential to earn emissions trading credits on a <strong>size</strong>able scale.<br />
In the near term, this would mean continuing to explore<br />
opportunities to earn emissions reduction credits on a project<br />
by project basis. This could potentially build support within<br />
the developing countries for adopting country-wide emissions<br />
policies, linked to the GARE.<br />
And last, the industrial countries should not be shy about<br />
public diplomacy on climate change. Right now, the developing<br />
countries do not feel any public pressure to respond to<br />
climate change – which is probably not surprising, given the<br />
development challenges many of them are facing. Thus, a<br />
public diplomacy strategy is needed that stresses each topic<br />
noted above – from equity to self-interest to the power of<br />
global markets to help transfer technology and capital to<br />
developing countries. Of course, all of these efforts require<br />
that the real first steps be taken in the industrial world.<br />
<strong>VI</strong>I - Conclusion<br />
The political will has begun to develop in the United States<br />
and even in a few key developing countries for a global effort<br />
to reduce GHG emissions. This public support, however, still<br />
remains far from the dramatic shift in consensus needed to<br />
establish a full-blown global institution to address the climate<br />
challenge. In addition to the costs associated with acting, a<br />
core concern is a familiar one in global governance: loss of<br />
sovereignty. There is some good reason for this. Even for<br />
the most committed nations, the climate change challenge<br />
is of such great economic and environmental complexity<br />
that few politicians are likely to simply turn over the keys<br />
of their national policy-making to an international treaty<br />
organization.<br />
In taking the first steps toward a global climate regime, the<br />
industrial nations can learn from the experience of how the<br />
global trading regime built confidence in a self-regulating<br />
system. The GATT/WTO system built on a small group of<br />
states that, through a general agreement, were able to gear up<br />
domestic action over a generation. The advantages of this<br />
approach are that it does not pose a direct challenge to<br />
national sovereignty. Instead, it coordinates the work of states<br />
in a way that respects the diversity of local governance, and<br />
has a greater chance of getting buy-in from the key players.<br />
The challenge of such an approach is that it does not guarantee<br />
fast domestic action, that many smaller states will feel left<br />
out of the process, and that the transition to the system may<br />
be difficult for many participating states. Last, as with the<br />
trade regime, it must overcome the biggest challenge for<br />
global governance in today’s world: how to graduate nations<br />
when they emerge from the development process into the<br />
industrial world.<br />
Endnotes and Additional Thinking<br />
1<br />
That success was apparent twenty-five years ago, when the<br />
GATT system was held up as the model for global governance<br />
– including among “realist” theorists of international<br />
106 THE IIPM THINK TANK
W INDS OF CHANGE<br />
relations, who tend to hold a dim view for institutions. See<br />
John Ruggie, “International regimes, transactions, and<br />
change: embedded liberalism in the postwar economic<br />
order,” in International Regimes edited by Stephen<br />
Krasner (Ithaca: Cornell University Press, 1983), p.<br />
195-231. While Ruggie would not classify himself as a<br />
realist, his general argument was accepted by realists such<br />
as Krasner. In the real world of politics, the GATT and<br />
WTO’s acceptance among American political conservatives<br />
– including their willingness to accept binding<br />
decisions by international tribunals – is striking.<br />
2<br />
One commentator questioned whether the problem of<br />
protecting the earth’s climate is analogous to that of<br />
expanding free trade. As a general matter, most analysts<br />
would agree that protecting the climate is a non-excludable<br />
public good, while free trade has been less so, since only<br />
the participants in a trading regime enjoy the benefits.<br />
Some might even question whether free trade is a public<br />
good, though cf. Charles P. Kindleberger, “International<br />
Public Goods without International Government,” The<br />
American Economic Review 1, no. 76, 1986, p. 2-13.<br />
Indeed, a strong argument can be made that both a climate<br />
regime and a trade regime offer both excludable and<br />
non-excludable public goods. In trade, the excludable<br />
public goods are the lower tariffs and trade barriers offered<br />
to the members of the regime; the non-excludable good is<br />
the stable international economic order that has economic<br />
and political benefits for all countries. In climate change,<br />
the non-excludable good would be climate protection. The<br />
excludable good would be an emissions trading regime.<br />
Many thanks to Lael Brainard for helping clarify this<br />
distinction.<br />
3<br />
Todd Stern and William Antholis, “Creating an E-8”, The<br />
American Interest, vol. 2:3 (January 2007), pg. 43-48.<br />
4<br />
See the first suggestion for such an approach in Todd Stern<br />
and William Antholis, “A Changing Climate: The Road<br />
Ahead for the United States,” The Washington <strong>Quarterly</strong>,<br />
Vol 31:1 (Winter 2007-2008), p. 175-188.<br />
5<br />
Hedley Bull, The Anarchical Society (Columbia University<br />
Press, 1977), p. 131, and Ch. 6 generally.<br />
6<br />
See Ruggie, “International regimes, transactions, and<br />
change: embedded liberalism in the postwar economic<br />
order.”.<br />
7<br />
For an overview of what a domestic and international<br />
approach for the U.S. might look like, see Stern and<br />
Antholis, “A Changing Climate.”<br />
8<br />
One model example for this would be the EU’s proposal to<br />
unilaterally cut their emissions by 20% below 1990 levels in<br />
the post-Kyoto commitment period, and to extend those<br />
cuts to 30% if an international agreement is reached.<br />
9<br />
One advantage by not being a treaty, the GARE would<br />
avoid another major drawback of Kyoto: it would not need a<br />
two-thirds majority in the United States Senate, a minefield<br />
where countless treaties have gone to die. Indeed, by the<br />
treaty process, internationally agreed emissions targets and<br />
timetables the policies and regulations needed to comply<br />
with them become deeply enshrined in domestic law as they<br />
have been passed by a supermajority in the Senate. By<br />
contrast, the GARE would only require simple majorities<br />
in both the House and the Senate, putting the domestic<br />
legislation horse in front of the global treaty cart – just the<br />
way it should be. See both Stern and Antholis, “The Road<br />
Ahead,” and also Nigel Purvis, “Treat Climate Like Trade:<br />
The Case for Climate Protection Authority” (unpublished<br />
policy brief manuscript).<br />
10<br />
See William Antholis and Strobe Talbott, “Tackling Trade<br />
and Climate Change: Leadership on the Home Front of<br />
Foreign Policy,” in Michael O’Hanlon, ed., Opportunity 08<br />
(Brookings Institution Press, 2007), p. 63-67.<br />
11<br />
For a useful discussion on this, see Jonathan Wiener,<br />
“Incentives and Meta-Architecture,” in Joseph Aldy and<br />
Robert Stavins, Architectures for Agreement: Addressing<br />
Global Climate Change in a Post-Kyoto World, (Cambridge<br />
University Press, 2007), especially p. 74-76.<br />
12<br />
As mentioned earlier, establishing an emissions trading<br />
system would move from the non-excludable public good<br />
system of climate protection to a system with excludable<br />
benefits: access to trading with other parties, with the<br />
enhanced efficiency and reduced compliance costs this<br />
implies. See endnote. 3, above.<br />
13<br />
See Stern and Antholis, “A Changing Climate,” p. 183.<br />
(* The author is indebted to comments from Scott Barrett, Colin<br />
Bradford, Lael Brainard, Daniel Drezner, Stuart Eizenstat,<br />
Lauren Fine, Warwick McKibbin Carlos Pascual, Nigel Purvis,<br />
David Sandalow, and Strobe Talbott . The views expressed in the<br />
write-up are personal and do not reflect the official policy or<br />
position of the organisation).<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
107
M ANAGEMENT OF DEVELOPMENT<br />
Globalisation<br />
To Global<br />
Governance:<br />
Hegemony To<br />
Legitimacy?<br />
B. Ramesh Babu<br />
Formerly Sir Pherozeshah Mehta Professor<br />
of Civics and Politics, University of Bombay.<br />
Specialist in International Relations, American<br />
politics and public affairs<br />
The contemporary phenomenon of globalisation is<br />
to be seen as the continuation of the historic,<br />
secular, and uneven transition of the world from<br />
INTER-NATIONAL POLITICS (i.e. politics among<br />
nations) to GLOBAL POLITICS. The role and reach of<br />
this transformation have grown during the past three or<br />
four decades on an unprecedented scale in human history.<br />
All major (and many not so major) issues and challenges<br />
confronting each and every nation today have become<br />
global and demand global solutions. Yet, there is no<br />
genuine global response, let alone a globally agreed<br />
framework or approach to deal with global challenges like<br />
the current economic meltdown, climate change, ecological<br />
balance, security of persons, national security, poverty,<br />
destitution, domestic violence and international<br />
terrorism. Sadly, the way our world is constituted today<br />
concerted, comprehensive, and truly global solutions are<br />
not possible, not even conceivable, as will be elucidated as<br />
we proceed further.<br />
There are global MNCs and some of them are bigger,<br />
richer, and more powerful than many sovereign nation<br />
states. However, there are no global unions, nor a world<br />
federation of farmers or agricultural workers. There are<br />
no global citizens either. But, we have a plethora of ‘super’<br />
patriotic leaders of nation states (big and small) masquerading<br />
as global leaders. Some of them harbour even<br />
planetary pretensions. Unfortunately, we do not have<br />
truly global leaders, who are genuinely concerned about<br />
the welfare of all the people all over the world. Even if<br />
some individual leaders dare to stray beyond, the extant<br />
international system (a legacy of the West) will not allow<br />
them to rise above their country’s ‘narrow’ and ‘parochial’<br />
national interests. The leaders are expected and duty<br />
bound to further their national goals and objectives at the<br />
expense of other nations, welfare of the mankind, and<br />
world peace. At the most some grudging concessions are<br />
made in the direction of enlightened self interest, if and<br />
when national interests of the other states involved<br />
converge. Furthermore, in operational terms, even this<br />
narrow and parochial national interests approach does<br />
108 THE IIPM THINK TANK
G OOD GOVERNANCE<br />
not encompass the welfare of all the citizens of the<br />
country. The rich and the powerful in all the countries<br />
(i.e. ‘the establishment’) utilise the State and the Flag to<br />
advance their own private and personal interests at<br />
expense of the masses, the poor, and the marginalised,<br />
who constitute an overwhelming majority of the population.<br />
It must be added that such inequity and injustice are<br />
pervasive in the rich as well as poor countries. Greed,<br />
graft, corruption (corporate, governmental, and private),<br />
and nepotism, discrimination, and racial prejudice of all<br />
hues, and aggrandisement of the powerful (local, national,<br />
and global) rule the roost. Ironical as it may seem, the<br />
good old question “whose interests are national interests?”<br />
has become doubly pertinent today. Yet, the<br />
juggernaut of the liberal capitalist globalisation rolls on<br />
spewing misery, despair, destitution, resentment, and<br />
terrorism at home and abroad, even as it achieves measurable<br />
economic growth. The recent economic meltdown<br />
worldwide has put the capitalist fundamentalists on the<br />
defensive. Free market and unregulated capitalism have<br />
lost their euphoric edge. The classic ‘growth versus<br />
development’ quarrel is back to the<br />
front burner.<br />
This indeed is the most fundamental<br />
and overarching crisis confronting mankind<br />
in the 21 st century. There is a wide<br />
and cruel gap between the representational<br />
legitimacies and the extant<br />
structures of governance at all levels,<br />
local to global. Our focus in this essay is<br />
on global governance. The UN and the<br />
entire Brettonwood system of the<br />
Second World War era had their innings. They are<br />
inadequate to cope with the greatly transformed world of<br />
today. A paradigm shift is taking place in global affairs<br />
since the mid-1980s. A new web of identities and loyalties<br />
(parallel and hierarchical) is in the making everywhere.<br />
Over time a new architecture of jurisdictions structuring<br />
power and authority in line with the altered framework of<br />
loyalties (and identities) will have to emerge. 1 This will<br />
happen sooner than we think. Whether such a new<br />
equation/engagement between loyalties and jurisdictions<br />
stretching from local to global will be arrived at relatively<br />
peacefully (or not) is the fundamental issue of our times. 2<br />
We will need<br />
new forms of<br />
governance<br />
and newer<br />
combinations of<br />
jurisdictions and<br />
mix of the two<br />
This is the most crucial challenge confronting mankind<br />
today and in the immediate future. It is important that we<br />
build on the emerging global web of governance and keep<br />
it in step with the pace and extent of globalisation taking<br />
place in finance, commerce, communications, culture and<br />
most other spheres of our lives. If the disjunction between<br />
the emerging loyalties and jurisdictions strays beyond the<br />
(retractable range of) elasticity of the governing institutions<br />
in place (at the national and international levels),<br />
there would be violence, disorder and chaos. Reforms will<br />
not be enough. We will need new forms of governance<br />
and newer combinations of jurisdictions (territorial and<br />
functional) and creative mix of the two.<br />
Consumerism and Conflict<br />
The propensity of man to grab what all he wants, whether<br />
he needs it or not, i.e. consumerism, is certainly one of the<br />
most subversive legacies of the West that is threatening<br />
the planet earth with exhaustion and possible extinction.<br />
The liberal capitalist western mindset, which insists on<br />
the rights of the individual and his entitlements against<br />
the State and society without giving<br />
equal importance to his concomitant<br />
obligations and duties to the community<br />
and the nation, is fundamentally<br />
flawed. Such self-centred and essentially<br />
selfish (bordering on the greedy)<br />
and atomistic conceptions of society<br />
became the engines of achievement and<br />
‘progress’ in modern times. In the<br />
globalising world of ours such notions<br />
of progress and modernity are exercising<br />
enormous magnetic influence all over the world. The<br />
revolutionary advances in IT and communications have<br />
greatly magnified “the international demonstration<br />
effect” of consumerism and are raising popular expectations<br />
sky high all over the world. I have called this<br />
phenomenon “imperialism of attraction”, which is popularly<br />
and mistakenly dubbed as the “Americanisation of<br />
the world.” 3<br />
This is not to deny or decry the phenomenal achievements<br />
of man in every walk of life during the last four<br />
centuries under the leadership of the modern West and a<br />
lot more is expected in the future. However, this legacy<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
109
M ANAGEMENT OF DEVELOPMENT<br />
like so many others in history has overreached itself and is<br />
threatening the very humanity of man. Some perceptive<br />
minds (including in the West) are questioning the very<br />
concept of progress as it is understood and advocated till<br />
now. Mere material advancement without the redeeming<br />
humane values and spirituality do not and cannot lead to<br />
real progress. It is time to curb the excesses of logic/<br />
rationality and return to sanity, common sense and above<br />
all to moderation. ‘To shun too much’ of everything (even<br />
logic and goodness) should become the guiding principle<br />
for mankind at this juncture. An ancient Sanskrit axiom<br />
enjoins man to eschew excess in everything and everywhere,<br />
athi sarvatra varjayet! However, I concede that how<br />
much is too much is not an easy rubric to<br />
cross. But, the ravages of too much are<br />
easy to see, unless we choose to be blind<br />
to the excesses around us.<br />
Terrorism, the New Menace<br />
International terrorism spearheaded by<br />
Islamic fundamentalists is the latest<br />
combustible added to the already<br />
explosive global situation. India has<br />
been the earliest of the victims of cross<br />
border terrorism. But, it is only after<br />
the tragically spectacular attack of 9/11<br />
on the US, international terrorism graduated<br />
into a serious menace of global<br />
dimensions. Instead of going after the<br />
terrorists who attacked their country,<br />
the neocons led by President Bush and<br />
Vice-President Cheney went on a<br />
unilateral rampage. The US launched the so called global<br />
war on terror. By all accounts the war in Iraq degenerated<br />
into a big misadventure, made international terrorism a<br />
bigger threat than before and virtually destabilised the<br />
whole region (from Istanbul to Islamabad and Riyadh to<br />
Rawalpindi). Pakistan, the long standing epicentre of<br />
terrorism, is itself in mortal danger of being over taken by<br />
the Taliban. Ironically, it is Pakistan that nurtured the<br />
Taliban in Afghanistan with the active connivance of the<br />
US and its allies in the West, and above all Saudi Arabia.<br />
In the bargain the Pakistani Army and the ISI worked<br />
closely with the Taliban and other Islamic fundamentalist<br />
elements culminating in the talibanisation of Afghanistan<br />
and Pakistan. History tells us that those who ride the tiger<br />
can dismount the beast only at their own peril, as the<br />
current offensive of the Pak Army against the Taliban<br />
indicates. One need not be surprised if this cracking the<br />
whip turns out to be a drama enacted till the new multibillion<br />
dollar American aid flows in. Pakistan could then<br />
return to business as usual and be back on the fast track of<br />
a failed state!<br />
What is the Way Out?<br />
A return to common sense and fair play is and can be the<br />
only way out of the extant liberal capitalist western<br />
hegemony. I believe that a return to<br />
Gandhi, ‘Gramodaya,’ Green, God, and<br />
Green Peace and above all, to common<br />
sense and fair play is the need of the<br />
hour. My fervent plea for a return to<br />
Gandhi should not be misunderstood. I<br />
am not advocating a return to the<br />
obscurantisms of the past, nor to blind<br />
acceptance of everything the Mahatma<br />
stood for and preached. I am<br />
alluding to the essence of his philosophy<br />
of life: truth, non-violence, peace,<br />
and self-sacrifice. The Mahatma was<br />
an ardent advocate of simple living<br />
and service to fellow human beings.<br />
He declared that ‘Manava Seve’ is<br />
‘Madhava Seva’ (serving man is the<br />
only way to serve God). For example,<br />
the Mahatma urged people to cut<br />
down their needs and wants to the barest minimum. He<br />
practiced what he preached. A loin cloth, two dry rotis<br />
and a cup of goat’s milk was all he ever needed. Nobody<br />
could ask for a more simple living by example – the very<br />
opposite of the consumer culture that is driving the<br />
people mad and the planet earth to exhaustion. Power is<br />
to be seen and used as a trust and the more endowed<br />
among us have a greater obligation to work for the benefit<br />
of the masses, he insisted. He proclaimed that all policies<br />
and actions of the State must pass the ultimate test --<br />
whether they enhance the welfare of the poorest of the<br />
poor (antyodaya) in the remotest villages and hamlets of<br />
Gandhi insisted<br />
that the more<br />
endowed among<br />
us have a greater<br />
obligation to work<br />
for the benefit of<br />
the masses<br />
110 THE IIPM THINK TANK
G OOD GOVERNANCE<br />
the country (gramodaya). Today’s economic reforms in<br />
India and the world over (i.e. liberalisation, privatisation<br />
and globalisation) are far from meeting the Mahatma’s<br />
test. On the contrary, the rich and powerful are gaining<br />
more and more even as the marginalised millions are left<br />
out, nay, excluded mercilessly. Yet the rich and the upper<br />
classes are demanding and extracting more and more<br />
benefits for themselves, often at the expense of the poor<br />
and the hungry masses. Greed and callousness of the<br />
ruling elite are driving community after community and<br />
country after country around the world to protests, direct<br />
action, insurrection, revolution, and violence in sheer<br />
desperation. A return to Green refers to<br />
the famous philosopher Thomas Hill<br />
Green, who conceived rights of individuals<br />
as arising from obligations fulfilled.<br />
The Mahatma always insisted that all<br />
rights are contingent on and derived<br />
from duties. In fact he was so adamant<br />
on this score that he refused to endorse<br />
the Universal Declaration of Human<br />
Rights because it did not include a<br />
corresponding list of ‘Duties of Man’.<br />
Rights and entitlements should not get<br />
precedence over citizens’ duties and<br />
obligations to the State and Society.<br />
Rights and duties should forever be<br />
‘balanced.’ Obviously, a healthy balance<br />
between them is never static. Each<br />
generation must work for and find its<br />
optimum balance between rights and<br />
duties. It is my contention that this<br />
balance is skewed too much in favour of the individual<br />
and against the community in the modern era, especially<br />
in ‘the advanced’ countries of the West. Anxieties of<br />
freedom in ‘open societies’ (á l Karl Popper) are as<br />
problematic as anxieties of frustration in ‘traditional<br />
societies’, I would like to point out.<br />
A plea for a return to God in the age of ‘secularism’ and<br />
‘knowledge society’ may sound old hat. But, it is my contention<br />
that it is not. The modern western concept of secularism<br />
is sullied by a strong inherited prejudice of being<br />
anti-religion and even anti-God. Separation of the<br />
Church and the State in the West was a historical neces-<br />
Rights and duties<br />
should forever<br />
be ‘balanced.’<br />
Obviously, a<br />
healthy balance<br />
between them is<br />
never static<br />
sity for survival in Europe. The religion of the kings was<br />
forced on their subjects. Religious toleration did not grow<br />
because of faltering convictions or erosion of religious<br />
zeal. It emerged because the very survival of the kingdoms<br />
and the people in Europe was at stake. It may not be<br />
out of place to add that King Henry’s anxiety to add one<br />
more wife ‘sanctioned by the Church’ to his harem had<br />
played not so minor a part in the separation of the State<br />
and Church in England! Over time this practice evolved<br />
into a doctrine of sorts and became one of the cardinal<br />
principles of western society much later.<br />
Be that as it may, the West and the rest of the world<br />
have moved far from the sterile and obsolete<br />
notions of isolating religion from the<br />
other dimensions of people’s lives. Today<br />
it is widely accepted that religion is an<br />
integral part of man’s very being, his life<br />
and culture. In fact, in some western<br />
nations a return to faith is being perceived<br />
as an antidote to anomie, violence,<br />
and declining moral values. What<br />
needs to be done is to emphasise the<br />
spiritual dimension of religion and<br />
de-emphasise its dogmas and rituals.<br />
One of the central doctrines of the<br />
Sanatana Dharma is that reason and<br />
faith are not antithetical to each other.<br />
Reason gradually leads one to faith, the<br />
Hindu scriptures assert and the lives of<br />
sages of ancient India are testament to<br />
the coexistence of the two for mutual<br />
enrichment. In this short essay, I cannot<br />
discuss this phenomenal transformation of the perception<br />
of religion in the post modern society. It is adequate for<br />
our purposes here to recognise the commonalities of all<br />
living religions of man: humanity of man; equality of all<br />
people before God; acceptance of differences in faith as<br />
natural; to be at peace with oneself, one’s own God and<br />
fellow men. These are among the eternal values of life on<br />
earth. The rapidly globalising world of ours urgently<br />
needs the formulation of truly universal norms and values<br />
shared across cultures and continents. Otherwise planet<br />
earth will be engulfed in disorder, chaos, and wars.<br />
My plea for a return to ‘Green Peace’ is an all inclusive<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
111
M ANAGEMENT OF DEVELOPMENT<br />
term for the restoration of global ecological balance.<br />
Environmental pollution, global warming and all the other<br />
related threats to the future of man on earth are included.<br />
I extend this concern to the well-being of all the other<br />
living beings and non-living things that share the planet<br />
with us. Hinduism asserts that man has no superior claims<br />
or right of precedence over the other living and non-living<br />
inhabitants on the resources of the planet earth. In fact,<br />
being endowed with more intelligence and knowledge, man<br />
has greater responsibility to act as the trustee of the lesser<br />
beings, the Hindu scriptures ordain.<br />
We must advance (or is it return?) to conceptions of<br />
authority as trust, i.e., power with a redeeming (social and<br />
moral) purpose. In short, we must return to idealism.<br />
Rampant consumerism of here and now has to be given up.<br />
Similarly, the ‘presentism’ of modem times must yield place<br />
to a healthy balance between the present and the past, and<br />
also between the present and the future. Parochialisms of<br />
the whites, browns, blacks, and yellows; the rich and the<br />
poor; advocates of human rights (in a planet also inhabited<br />
by other living beings and non-living things) are essentially<br />
non-inclusive and discriminatory. Feminists, champions of<br />
children's rights (and all the other activists on behalf of this<br />
or that good cause) offer, even at their best, only a narrow<br />
and partial vision of mankind. Moderation has to become<br />
the hallmark of human civilisation in the new millennium.<br />
Need, not greed, should be the basis of all human endeavour<br />
on earth! Mother earth has enough for everyone's<br />
need, but not for his greed, as Mahatma Gandhi observed<br />
wisely.<br />
Globalisation and Globalism<br />
It is appropriate at this juncture to distinguish between<br />
globalisation and ‘globalism’. The former is a process of<br />
supra-national integration and sub-national disintegration<br />
occurring simultaneously, especially since the 1990s. This<br />
dual transformation is leading to an inchoate restructuring<br />
of the architecture of global power structure. However, the<br />
extant post Cold War globalisation can be seen as a<br />
phenomenon of integration of the major national economies<br />
into a liberal capitalist global ‘free market’ led by the<br />
US and the West. As such it is hegemonic, exploitative,<br />
unjust and unacceptable, especially to the Third world as<br />
well as the poor and marginalised millions in the advanced<br />
countries of the West. Globalism, on the other hand,<br />
conceptually envisions the whole world as one unit and is<br />
concerned with the welfare of all people everywhere and<br />
the planet earth as a whole.<br />
An effort is made here to conceptually bridge the gap<br />
between the extant institutions of global governance and<br />
their representational legitimacies. There is a huge democratic<br />
deficit, which needs to be acknowledged first. Then<br />
the will to undo the inherent injustice should follow. If<br />
there is a will, there is a way. Then we have to come up with<br />
new forms of governance which are capable of institutionally<br />
steering the globalization underway since the mid-<br />
1980s forward from hegemony to genuine global governance.<br />
This calls for a new philosophy of globalism that is<br />
valid across cultures and continents. I have some ideas on<br />
how to go about such an inter-civilizational intellectual<br />
exercise 4 and also my own notions of what could be the<br />
major constituents of such a philosophy of globalism. But,<br />
this will have to be attempted in my next venture.<br />
Endnotes and Additional Thinking<br />
1<br />
See B. Ramesh Babu ‘Glocalisation’ and the Indian<br />
Nation State: Jurisdictions and Loyalties in Flux, New<br />
Delhi: South Asian Publishers, 2004.<br />
2<br />
The current tussles over Telangana, Vidarbha and the<br />
armed the struggles of the Naxalites and other extremist<br />
groups around the country are classic examples of the<br />
ongoing flux in identities and loyalties of people. Similar<br />
mass struggles and passionate demands for justice and<br />
fair play are going on elsewhere in South Asia (Nepal,<br />
Pakistan, and Sri Lanka) and around the world (Palestine,<br />
Iraq, Indonesia, Philippines, Spain, Yugoslavia,<br />
Malta, Brazil, Argentina, Chile and sub-Saharan Africa,<br />
etc.)<br />
3<br />
See B. Ramesh Babu ‘Americanisation of the World:<br />
Myth and Reality,’ Freedom First, 422 (July-September<br />
1994), pp. 23-27<br />
4<br />
For an example of the inter-civilisational dialogue<br />
needed see Hu Yeping, ‘Asian Civilisational Dialogue<br />
between India and China,’ Word Affairs, Vo.8 no.4<br />
(October – December 2004), pp. 82-95.<br />
(The views expressed in the article are personal and do not<br />
reflect the official policy or position of the organisation).<br />
112 THE IIPM THINK TANK
G OOD GOVERNANCE<br />
AD<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
113
M ANAGEMENT OF DEVELOPMENT<br />
We Can Have Better Global<br />
Economic Governance<br />
Barry Herman<br />
Visiting Senior Fellow,<br />
Graduate Program in International Affairs,<br />
The New School, New York<br />
Introduction<br />
Opportunities rarely arise for changing global economic<br />
governance. One of those opportunities has been<br />
opened by the current global financial and<br />
economic crisis. Already, the leaders of<br />
the United States and the other<br />
members of the Group of eight<br />
(G8) have invited the leaders of<br />
Australia and some large<br />
developing countries,<br />
including India, to meet with<br />
them as the Group of 20<br />
(G20), first in Washington<br />
on 15 th November, 2008 and<br />
again in London on 2 nd April,<br />
<strong>2009</strong>. 1 While it is good to have<br />
more voices in the G20 than<br />
were heard in the G8, there are a<br />
lot more voices that are not being<br />
heard. Should India, the world’s largest<br />
democracy, merely take its seat in the G20?<br />
Or, should India also help the nations of the world<br />
take a more democratic and inclusive governance direction?<br />
This paper is a brief for how it might support the latter.<br />
The question is who makes the policy decisions that shape<br />
global monetary, financial and trade flows — and on whose<br />
behalf? Some of those decisions are embodied in negotiations<br />
leading to multilateral agreements, as on international trade.<br />
Some are embodied in one-time policy decisions of national<br />
authorities, as in the partially successful effort of some mem-<br />
bers of the G20 to engineer a joint fiscal stimulus in <strong>2009</strong>. Some<br />
are reflected in regulatory norms adopted by specialized bodies<br />
that, by force of example, become the global norm, as in the<br />
capital adequacy standards recommended for commercial<br />
banks by the so-called Basel Committee. Still others become<br />
the policies applied by the International Monetary Fund (IMF),<br />
the World Bank and other official financial institutions in<br />
shaping their programs of assistance. Decision-making processes<br />
are distinct in each case. But, as the biggest<br />
powers acting together can wield major<br />
influence in the decisions taken in<br />
each forum, they have sometimes<br />
used the mechanism of their G8<br />
summits to come to common<br />
views, which then are<br />
adopted in the other<br />
forums as global policy.<br />
This process can foster<br />
some limited coherence<br />
among the policy realms.<br />
There are also implicit<br />
commitments not to overwhelm<br />
the interests of smaller<br />
economies, and explicit commitments<br />
to seek international policies<br />
that promote the development of the<br />
developing countries and help eradicate<br />
poverty. These latter, however, are moral imperatives.<br />
They determine policy outcomes only to the degree that<br />
they are not overridden by domestic political needs in the G8<br />
economies.<br />
Today, it seems the G20 may supplant the G8 as the premier<br />
“executive committee” for world economic policy making. If so,<br />
a natural question is will the new members adopt the views and<br />
perspectives of the already established world leaders once in<br />
their charmed circle or will they turn global policy in new<br />
114 THE IIPM THINK TANK
G LOBAL GOOD<br />
directions? The newly included leaders will surely promote and<br />
defend their national interest — and presumably the interests<br />
of developing countries more generally — to the extent they<br />
can influence the debate. Is this good enough?<br />
Before answering this question, we should review in somewhat<br />
more detail how the current global governance system<br />
operates. This paper thus begins with a broad-brush characterization<br />
of official oversight of the world economy as it has been<br />
and how it appears set to operate if the G20 supplants the G8.<br />
This will be contrasted with the “Financing for Development”<br />
process that planted the seed of a new mechanism of global<br />
governance. A seedling sprouted, but it then dried up. Now, a<br />
number of developing country governments are trying to<br />
nurture it back to life. We conclude that India should join<br />
that effort.<br />
Global Economic Governance since the 1970s<br />
Economic oversight within national economies is an inescapable<br />
responsibility of governments. Each country’s authorities<br />
intervene more or less in the workings of their private sector<br />
and directly provide goods and services to varying degrees<br />
depending on national goals and strategies.<br />
Whether or not governments explicitly<br />
think about economic governance, they do<br />
it. One may similarly say that there is a<br />
system of economic governance at the<br />
global level, even though there is no global<br />
government.<br />
The global governance system today<br />
involves a decentralized collection of both<br />
formal international institutions and<br />
agreements and informal relationships<br />
among countries. Each of the specific institutions or forums is<br />
independently governed. There is no formal mechanism for the<br />
overall coordination of their respective policies. Many of them<br />
are “specialized agencies” of the United Nations (UN) and in<br />
principle are coordinated in the UN Economic and Social<br />
Council (ECOSOC). However, ECOSOC has never had the<br />
political stature or technical capacity to undertake such a role. 2<br />
Overview discussions are held in ECOSOC and other UN<br />
bodies (e.g., the General Assembly or the UN Conference on<br />
Trade and Development), but they rarely affect actual policies. 3<br />
Rather, the coordination that does take place, at least since the<br />
1970s, has been by the Group of seven major industrialized<br />
Economic<br />
oversight<br />
within national<br />
economies is<br />
an inescapable<br />
responsibility of<br />
the governments<br />
countries (G7), which brings together the political leaders of<br />
the largest economies in the world on a regular basis to discuss<br />
world economic problems.<br />
Some of the individual institutions in the system enjoy great<br />
power, the IMF being the most powerful throughout most of<br />
this period. Its mandate has been fundamental: oversight of<br />
national balances of payments and exchange rates. The basis<br />
for the mandate is the simple fact that exchange-rate volatility<br />
in one country may well seriously disturb the economies of<br />
other countries. IMF has thus had a strong power in “surveillance,”<br />
policy advice and providing partial funding to help<br />
countries out of unsustainable situations. At first, IMF’s remit<br />
was universal, but this effectively ended when the Bretton<br />
Woods monetary system collapsed following the 1971 decision<br />
of the United States to break the link of its dollar to gold.<br />
Instead, the major economies shifted to a system of floating<br />
exchange rates and whatever effort they made to cooperate on<br />
macroeconomic policy shifted to the newly created G7. IMF<br />
was reduced to being the monetary overseer (and creditor) of<br />
the developing countries and later the formerly centrally<br />
planned economies of Europe and Asia. The Fund’s policy<br />
guidelines, which increasingly reflected the<br />
emerging neoliberal “Washington consensus”<br />
of the G7 countries, were coupled with<br />
a willingness to see far sharper economic<br />
contractions (“corrections”) than the G7<br />
would have tolerated in their own countries.<br />
The speed and depth of the correction of<br />
an unsustainable balance-of-payments<br />
deficit has been a function, not only of how<br />
“distorted” the economy had become, but<br />
also of how much external financing was available to the<br />
country during the adjustment period. IMF has been able to<br />
deploy large funding packages at certain points in time and far<br />
smaller ones at others, using both its own resources and those<br />
made available by the multilateral development banks and<br />
donor governments. The amount of financing needed has also<br />
sometimes been reduced through postponed or cancelled<br />
external debt servicing, as agreed in the informal Paris Club of<br />
major government creditors. In this regard, IMF has played a<br />
coordinating role in calculating the sums that could or would be<br />
made available from the various sources in individual cases.<br />
This notwithstanding, countries that were politically important<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
115
M ANAGEMENT OF DEVELOPMENT<br />
to the major powers have generally had better financed<br />
programs than others. In other words, while IMF may nominally<br />
have been at the center of the balance-of-payments<br />
adjustment process, the G7 (or certain members) have at times<br />
directed the process for political purposes.<br />
Besides adjustment financing, the World Bank and the<br />
regional development banks (e.g., the Asian Development<br />
Bank for Asia and the Pacific) provide substantial long-term<br />
financing for development projects and programs, complemented<br />
by resources from smaller and more specialized<br />
multilateral lenders, like the International Fund for Agricultural<br />
Development. Each institution has its own executive<br />
board that, like the Board of IMF, has been effectively dominated<br />
by its founders, which is to say, the countries in the G7,<br />
and owing to the growing contributions of new donors, some<br />
emerging economy members of the G20. Not surprisingly, when<br />
new funding plans for the main institutions were recently<br />
agreed, it was at the London G20 meeting. 4<br />
There has long been, however, a potential alternative forum,<br />
the so-called Development Committee. 5 It is a high-level<br />
committee that might have coordinated the different multilateral<br />
financial institutions, as it brings<br />
together primarily development cooperation<br />
ministers from the rich countries and<br />
finance ministers from developing countries<br />
for semi-annual discussions at the World<br />
Bank. Some of the ministers represent their<br />
own countries (e.g., France, United States,<br />
China, Saudi Arabia, Russia) and others<br />
represent constituencies of countries in a<br />
very uneven mixture. For example, India<br />
also represents Bangladesh, Bhutan and Sri<br />
Lanka, while Liberia and Mauritius represent 21 and 23<br />
sub-Saharan African countries, respectively. 6 However, the<br />
Committee focuses almost entirely on programs and resources<br />
of the World Bank Group.<br />
There is a parallel and actually more powerful committee at<br />
the IMF that also meets semi-annually, indeed, always a day<br />
before the Development Committee. This is the International<br />
Monetary and Financial Committee (IMFC), comprised of<br />
finance ministers and central bank governors. It primarily<br />
focuses on policies and funding of the IMF, although it also<br />
takes account of financial regulatory matters, as IMF encourages<br />
and monitors implementation of international financial<br />
With time, it was<br />
realised that the<br />
international<br />
regulatory<br />
committees<br />
needed a way to<br />
talk to each other<br />
standards and codes of good practice (in some cases jointly with<br />
the World Bank).<br />
Most countries actively regulate the bulk of the activities of<br />
their financial sectors, ranging from commercial banking to<br />
insurance to the operation of securities markets. Countries<br />
have traditionally taken different approaches to meet needs<br />
differently defined. However, with increased cross-border<br />
provision of financial services and resources, there has been a<br />
growing global interest that national regulations adopted for<br />
prudential reasons not unfairly tilt a market to one nation’s<br />
firms or another, as well as that the regulations effectively<br />
attenuate inherent volatile tendencies of the financial sector.<br />
Various international committees of regulators have thus<br />
formed since the 1970s to develop generally approved<br />
norms for regulation, such as the Basel Committee on<br />
Banking Supervision, the International Organization of<br />
Securities Commissions, the International Association of<br />
Insurance Supervisors, and so on. Some are broader based than<br />
others, but developed country regulators generally play the<br />
dominant role.<br />
Increasingly, it was realized that the international regulatory<br />
committees needed a way to talk to each<br />
other. Thus, in the wake of the East Asian<br />
and Russian financial crisis in the late<br />
1990s, attributed in part to inadequate<br />
regulation, the G7 convoked a new committee<br />
to bring together the national regulatory<br />
authorities, central banks and finance<br />
ministries of the major financial center<br />
countries, the international norm-setting<br />
committees, the IMF and the World Bank<br />
as the “Financial Stability Forum” (FSF).<br />
In the light of today’s global financial crisis, it is difficult to say<br />
how effective the FSF has been in strengthening regulatory<br />
norms or bringing coherence across the regulations of different<br />
financial industries. The same may be said about IMF efforts to<br />
promote adoption of the international standards in its member<br />
countries, developed as well as developing.<br />
In response, the G20 has recently pledged to tighten regulatory<br />
standards and expand the scope of regulatory oversight to<br />
some previously exempted sectors, such as hedge funds and<br />
credit-rating agencies. 7 The G7 also invited the G20 countries<br />
not already members to join the FSF, now renamed the<br />
Financial Stability Board. It will be most interesting to watch<br />
116 THE IIPM THINK TANK
G LOBAL GOOD<br />
how much of a difference any of this makes. The G7 proponents<br />
of “light touch” regulation have been roundly discredited<br />
by the current crisis, but the financial industry in the major<br />
countries can be expected to seek to escape whatever regulatory<br />
shackles are put on them in the near term. Some of the<br />
emerging market countries in the G20 have shared the “light<br />
touch” approach to regulation, while others, including India,<br />
have been slower to adopt it. At best, the rest of the world gets<br />
to comment from afar on proposals considered within the FSB<br />
and its component parts.<br />
Another major institution is also not at this table. As already<br />
noted, regulatory changes can affect the competitive conditions<br />
of international trade in financial services, which is one focus of<br />
concern of the World Trade Organization (WTO). In fact, there<br />
are several policy areas in which trade concerns rub up against<br />
financial ones. For example, some countries have responded to<br />
the global recession with new trade-restricting measures,<br />
violating the spirit if not necessarily their formal WTO obligations.<br />
The G20 have committed not to do so, but some have<br />
done it anyway, as have other countries. 8<br />
Policymakers have sought ways to forge better coherence of<br />
trade and financial policies in the Bretton<br />
Woods institutions and WTO, but with little<br />
success. While staffs of the trade and<br />
financial institutions cooperate on technical<br />
issues, no joint forum has been created to<br />
promote trade and financial policy coherence.<br />
The Director-General of WTO may<br />
visit the ministerial committees of the<br />
Washington institutions and WTO may<br />
organize occasional discussions on policy<br />
coherence and invite senior officials of the<br />
Fund and the Bank, but these efforts have not produced policy<br />
coherence.<br />
This could become an active matter for discussion in the G20,<br />
especially as some of its emerging market members have played<br />
a prominent role in the now-stalled trade negotiations at WTO.<br />
But that would not be an appropriate solution to the impasse in<br />
WTO, as many importantly concerned parties are not members<br />
of the G20 and G20 countries do not represent constituencies<br />
but only themselves. Those were the terms of their invitation.<br />
The G8 could not invite their new partners on any other terms,<br />
since they too are an ad hoc, self-appointed group of countries.<br />
We can do better.<br />
It was the first<br />
time in decades<br />
that policy makers<br />
gathered under<br />
a UN banner to<br />
endorse decisions<br />
on few hard issues<br />
A First Step is Possible This Year<br />
In fact, the global community — what the current President of<br />
the UN General Assembly, Father Miguel D’Escoto of Nicaragua<br />
calls the “G192” — has done better, although only temporarily.<br />
Beginning in 1997, government representatives at the<br />
UN developed a discussion process that over five years — and<br />
with many ups and downs — built a new measure of confidence<br />
between countries of the North and South, between finance and<br />
foreign affairs ministries, and between the Bretton Woods<br />
institutions and the United Nations, while also substantively<br />
involving the WTO in a UN policy forum. The practical<br />
question of global governance is can this process be revived?<br />
Yes, it can.<br />
The original process reached fruition in a summit meeting on<br />
“Financing for Development” (FfD) at Monterrey, Mexico in<br />
March 2002 attended by 55 heads of state or government, over<br />
200 ministers of finance, foreign affairs and trade, the heads of<br />
the major international trade and financial institutions (including<br />
the Chair of the FSF), and leading business leaders and civil<br />
society advocates. It was the first time in decades that policy<br />
makers gathered under a UN banner to endorse decisions on<br />
“hard” financial, trade and development<br />
issues.<br />
The “Monterrey Consensus” adopted at<br />
that conference included commitments to<br />
increase the “voice and participation” of<br />
developing countries in decision making at<br />
the Bretton Woods institutions, seek to<br />
devise a comprehensive international<br />
mechanism for workouts from the sovereign<br />
debt crises that developing countries<br />
repeatedly suffer, reverse the decline in<br />
official development assistance, make aid programs more<br />
effective, strengthen international cooperation on tax matters<br />
(as in better combating tax evasion), and in myriad pragmatic<br />
ways accelerate development and reduce poverty. 9 Some of<br />
those promises were delivered, others are still being worked on,<br />
and, alas, still others fell by the wayside.<br />
The five-year discussion leading to Monterrey was far from a<br />
“love in.” Governments and institutions jealously defended<br />
their interests throughout and negotiated very hard to win their<br />
points of view. There were enemies of the process as well as<br />
friends. Governments and institutions had agendas. Monterrey<br />
succeeded because it created a sense in enough people that<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
117
M ANAGEMENT OF DEVELOPMENT<br />
something more than the routine was possible, something<br />
collective and creative could be achieved that required stretching,<br />
that merited taking political risks.<br />
This is not the place to explain how the “spirit of Monterrey”<br />
was built, nor how that spirit all but evaporated in ensuing<br />
years. 10 By the end of 2008, when an international conference<br />
was held in Doha, Qatar to review implementation of the<br />
Consensus, the diplomatic atmosphere had become quite<br />
strained. To the degree there was any shared goal at that<br />
meeting, it was about not allowing a much weakened Monterrey<br />
process to disappear entirely. It barely succeeded, as an agreed<br />
“Doha Declaration” was not produced until virtually the last<br />
minute of the conference. 11 Most of the text is hortatory when<br />
not descriptive, although it contained two important agreements<br />
relating to global governance. One was to hold a “conference at<br />
the highest level on the world financial and economic crisis and<br />
its impact on development” (para. 79). That conference will<br />
take place on 24 th -26 th June <strong>2009</strong> at the UN in New York. At the<br />
time of writing there is much controversy (and concern) over its<br />
prospective outcome. In this regard, it seems to be replicating<br />
— perhaps intensifying — the strains already evident in Doha.<br />
The other agreement in Doha was to<br />
develop a more effective mechanism for<br />
FFD discussions at the UN, an effort to<br />
revive the “spirit of Monterrey”. The<br />
process as set out in 2002 had two parts. The<br />
first was to hold a one-day meeting every<br />
spring in ECOSOC at which senior officials<br />
of the Bretton Woods institutions and<br />
members of their executive boards would<br />
join with UN delegates, representatives<br />
from WTO and the UN Conference on<br />
Trade and Development, other UN officials, private sector and<br />
civil society organizations to take a holistic view of trade,<br />
financial and development policy, consider inconsistencies, and<br />
seek ways to enhance coherence. In practice, the discussions<br />
were superficial and frustrating to participants all around. The<br />
second part of the Monterrey follow-up was meant to be a<br />
biennial, high-level, two-day discussion in the General Assembly<br />
of the same stakeholder groups, undertaking a fuller review of<br />
the implementation of the Consensus. These meetings were also<br />
disappointments.<br />
The Doha agreement thus proposed developing a different<br />
approach and targeted reaching agreement on it within a year.<br />
A small but<br />
representative FFD<br />
committee under<br />
the UN should<br />
have various<br />
means to develop<br />
its policy positions<br />
The key step is to be taken at the July ECOSOC meeting when a<br />
draft proposal is to be agreed. In fact, the Rio Group of 23 Latin<br />
American countries proposed just such a mechanism during the<br />
preparatory meetings for the Doha conference in 2008 and the<br />
Secretary-General advanced a variant of that approach in a<br />
report to the Council for its annual spring FfD meeting. 12<br />
Details are less important here than the concept, which is to<br />
bring a workable number of governments, international<br />
institutions and other stakeholders together who can effectively<br />
exchange views from different perspectives, take the views of<br />
others back to colleagues in their constituencies and return with<br />
amended views so as to build consensus and the political<br />
momentum for taking the actions required. The objective is to<br />
forge coherent, development-advancing policies.<br />
Consensus views in the new committee would sometimes<br />
need to be adopted as policies in other forums, but one cannot<br />
count on participants in the FfD forum being able to deliver<br />
their institutions. However, we may propose that members of<br />
the FfD forum visit other institutions for informal discussions to<br />
make the case for the proposed changes, bringing to bear<br />
considerations that might not be sufficiently salient. Again, it is<br />
a matter for winning agreement through<br />
dialogue (and oftentimes it will be dialogue<br />
between foreign and finance ministry<br />
representatives of the same countries).<br />
Political momentum around proposals from<br />
the FfD forum could also be generated by<br />
how items are prepared for its discussion. In<br />
particular, the UN committee might request<br />
that multi-stakeholder consultations be<br />
convoked to consider an item of interest<br />
and prepare a recommendation so that it<br />
arrives for discussion with some start to a buy-in by the relevant<br />
parties.<br />
The point, in short, is that a small but representative FFD<br />
committee under the UN should have various means to develop<br />
its policy positions, including multi-stakeholder consultations,<br />
and various means to advocate for those positions, including in<br />
the forums that the international community has specifically<br />
mandated be responsible. Only if the players, large and small,<br />
see a serious effort to regenerate the collaborative global<br />
economic governance process that had been intended in<br />
Monterrey will they take the risks needed to make it work.<br />
Several governments have already shown interest at the UN<br />
118 THE IIPM THINK TANK
G LOBAL GOOD<br />
in developing such a model and no governments have voiced<br />
determined opposition. Governments, such as India’s, that are<br />
emerging economy members of the G20, should encourage<br />
establishing this additional forum which would enjoy formal<br />
legitimacy, which would chose its membership in a transparent<br />
and democratic manner, and which would engage in open<br />
discussion involving civil society and private sector partners as<br />
well as key institutions. This would advance the cause of a more<br />
democratic — and possibly more effective — system of global<br />
economic governance.<br />
Endnotes and Additional Thinking<br />
1<br />
The G8 comprises the Group of seven (Canada, France,<br />
Germany, Italy, Japan, United Kingdom and United States)<br />
plus the Russian Federation on mainly political matters. The<br />
G20 members include these countries and Argentina,<br />
Australia, Brazil, China, India, Indonesia, Mexico, Saudi<br />
Arabia, South Africa, South Korea, and Turkey, plus the<br />
European Union.<br />
2<br />
The UN nevertheless plays an important role in specific<br />
aspects of economic governance, including serving as a<br />
forum for the negotiation of treaties on economic issues<br />
(e.g., Law of the Sea, UN Convention against Corruption),<br />
for the elaboration of international policy norms (e.g.,<br />
Universal Declaration on Human Rights, Beijing Declaration<br />
on Women) and for developing legal models for<br />
bilateral negotiation or governmental legislation (e.g., UN<br />
Model Double Taxation Convention, UNCITRAL Model<br />
Law on Cross-Border Insolvency), as well as for launching<br />
multi-country or multi-stakeholder initiatives (e.g., Leading<br />
Group on Solidarity Levies, UNAIDS).<br />
3<br />
One important exception was the “Monterrey Process” in<br />
the early years of this decade, which we will argue should be<br />
rebuilt.<br />
4<br />
See Group of 20, “Declaration on Delivering Resources<br />
through the International Financial Institutions” London,<br />
2 nd April <strong>2009</strong> (see http://www.g20.org/pub_communiques.<br />
aspx).<br />
5<br />
The committee’s formal name is the “Joint Ministerial<br />
Committee of the Boards of Governors of the Bank and the<br />
Fund on the Transfer of Real Resources to Developing<br />
Countries”, which is sufficient explanation for why it is just<br />
called the “Development Committee”.<br />
6<br />
Information as of 1 st February <strong>2009</strong>; three additional African<br />
countries did not participate in the 2008 voting (as per http://<br />
siteresources.worldbank.org/BODINT/Resources/278027-1215526322295/BankExecutiveDirectors.pdf).<br />
7<br />
See Group of 20, “Leaders Statement: The Global Plan for<br />
Recovery and Reform” and “Declaration on Strengthening<br />
the Financial System,” London, 2 nd April <strong>2009</strong> (http://www.<br />
g20.org/pub_communiques.aspx).<br />
8<br />
For details, see WTO, “Report to the TPRB from the<br />
Director-General on the Financial and Economic Crisis and<br />
Trade-Related Developments,” 26 th March <strong>2009</strong> (http://www.<br />
wto.org/english/news_e/news09_e/trdev_dg_<br />
report_14apr09_e.doc)<br />
9<br />
See United Nations, Monterrey Consensus on Financing for<br />
Development: The final text and agreements adopted at the<br />
International Conference on Financing for Development,<br />
Monterrey, Mexico, 18 th -22 nd March 2002 (http://www.un.<br />
org/esa/ffd/monterrey/MonterreyConsensus.pdf).<br />
10<br />
See Barry Herman, “The Politics of Inclusion in the Monterrey<br />
Process,” available online as United Nations, Department<br />
of Economic and Social Affairs, Working Paper No.<br />
23, April 2006 (http://www.un.org/esa/desa/papers/2006/<br />
wp23_2006.pdf).<br />
11<br />
See United Nations, Doha Declaration on Financing for<br />
Development: Outcome Document of the Follow-up<br />
International Conference on Financing for Development to<br />
Review the Implementation of the Monterrey Consensus,<br />
Doha, Qatar, 29 th November -2 nd December 2008 (http://<br />
www.un.org/esa/ffd/doha/documents/Doha_Declaration_<br />
FFD.pdf).<br />
12<br />
See United Nations, “Coherence, Coordination and<br />
Cooperation in the Context of the Implementation of the<br />
Monterrey Consensus and the Doha Declaration on<br />
Financing for Development” Report of the Secretary-General<br />
(E/<strong>2009</strong>/48), paragraphs 58-60.<br />
(This paper builds on a presentation at a seminar organized by the<br />
member governments of the Association of South-East Asian<br />
Nations and the Friedrich Ebert Stiftung (FES) at the United<br />
Nations on 1 st <strong>May</strong>, <strong>2009</strong> and at the discussion held by the UN<br />
Economic and Social Council on 20 th April, <strong>2009</strong>. The author is<br />
grateful for the opportunity to have made those presentations and<br />
for the comments on them, which have improved this paper. The<br />
views expressed in the paper are personal and do not reflect the<br />
official policy or position of the organisations.)<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
119
M ANAGEMENT OF DEVELOPMENT<br />
More Effective Global Financial<br />
Regulation<br />
K. U. Mada<br />
Economist and former Executive Director,<br />
erstwhile Industrial Development Bank of<br />
India, Mumbai<br />
Well-accepted it is, global financial regulation<br />
should be integral to the process of globalization.<br />
Operating in national or international<br />
context, unfettered freedom of operations is tantamount to<br />
virtually allowing unrestricted freedom to operatives to do<br />
whatever they intend to do without their realizing that they<br />
are restricting the freedom of people across nations<br />
or the world. It is devil care what happens to others<br />
attitude, creating messy chaos all around with far<br />
and deep effects, often adverse. It is not merely<br />
beggar-thy-neighbour policy but beggar-thy-humanity<br />
policy. The call for global arrangements<br />
for financial regulation on a world-wide basis is the<br />
realization of the sensible inner call that in the<br />
currently wired world, none could save himself if he<br />
operates as if he is the only one who has the right to<br />
survive even at the cost of the humanity at large.<br />
That is, interpreting freedom of action in a<br />
vacuum. The world-wide clamour of world leaders itself<br />
proves beyond an iota of doubt the utility and inevitability<br />
of a set of globally agreed rules and regulations of the<br />
economic game even from a purely commonsense standpoint.<br />
All the more, it is so when it is being asked “regardless<br />
of political complexion” ”in the light of the convulsions<br />
the world economy is going through”, whether “we need<br />
much stronger global regulation as well” with a set of<br />
international regulators enforcing an international code,<br />
notes Dr. Dani Rodrik(vide, the Economist, March 14 th ,<br />
<strong>2009</strong>), while arguing the logic of such global financial<br />
regulation as flawed.<br />
Financial sovereignty is a misnomer as much as a myth.<br />
Be it said, restricting sovereignty for mutually agreed<br />
purposes for overall good does not mean surrendering<br />
sovereignty. If you want to play the game fairly, frankly,<br />
fully and transparently, be it banking or sport, follow the<br />
pre-set rules and retain your cherished sovereignty. International<br />
game means international rules; that’s it. Even in<br />
American hegemonic heydays, its dependence on savings<br />
120 THE IIPM THINK TANK
T HE NEW MANTRA<br />
from the rest of the world for meeting its deficit financing is<br />
an accepted fact. It is not convincing when Dr. Dani<br />
Rodrik argues that a thin veneer of “international co-operation<br />
superimposed on strong national regulations” should<br />
be enough for a “far more stable and prosperous” world<br />
economy. Despite the recent excesses exposed externally in<br />
the banking field, Dr. Dani Rodrik is not convinced that<br />
operatives do not perform on highest ethical standards.<br />
The question of surrendering sovereignty does not arise<br />
here. There would not be intensive oversight over domestic<br />
operational practices. What will be put in place are issues<br />
like consensus in the creation of uniquely new financial<br />
instruments, mortgage practices where securitization is<br />
integrated, proof of their base while introducing newer<br />
instruments, a mechanism to supervise the modus operandi<br />
of supervision envisaged, accounting practices and standards<br />
that could adequately reveal transparency, and goalsetting<br />
based on good of all the international level participants.<br />
Knowing the performance of the International<br />
Monetary Fund over the years, it is felt, it cannot be made a<br />
global lender of last resort. Global participants should join<br />
in any rescue efforts. Cooperation and<br />
coordination of central banks and the<br />
issues they discussed be made known to<br />
all the global participants and that their<br />
suggestions should be followed up. The<br />
weaknesses of Basel I and Basel II be<br />
rectified based on reviews and continuous<br />
action taken reports and actions. It is<br />
precisely for preventing the neglect of<br />
the macro-prudential aspect of regulation<br />
that all countries have to keep<br />
adhering to rules of the game set at international level. It is<br />
not a question of sovereignty but accepting certain principles<br />
for safety. When credit ratings are downgraded, at<br />
present, they are often neglected or not taken seriously. The<br />
system should accept that such firms or institutions should<br />
be put under rigorous surveillance for remedial action and<br />
their merger or rehabilitation should be set into motion.<br />
The stage and state of development and the preferences<br />
and priority goals of nations form the basis for providing for<br />
their diversity through the global regulators. Global<br />
regulators could comprise personalities representing the<br />
four major clusters of nations viz. America, Europe, Asia<br />
For preventing<br />
the neglect<br />
of the macroprudential<br />
aspect<br />
of regulation, all<br />
must adhere to<br />
international rules<br />
and Emerging Economies. In fact, the fundamentally<br />
differing nature of each of these clusters could be evened<br />
out through concerted efforts at coordinating board levels,<br />
for, the financial regulations entail trade-offs to accommodate<br />
conflicting and competing objectives, practices and<br />
priorities. Dani Rodik says, “The more you value financial<br />
stability, the more you have to sacrifice financial innovation”.<br />
The recent financial innovations as collateral debt<br />
obligations/credit-default swaps/securitizations/mortgagebacked<br />
assets have been the sources of creative complexities<br />
which landed the world economy in the current mess.<br />
Innovations by themselves have no place in normal way of<br />
life unless they are likely to benefit very significantly. Few<br />
understood some of the recent financial innovations and yet<br />
few had the capacity and honesty to operate them. Regulators<br />
tend to become ignorant of the complexity of financial<br />
innovations and being regulators develop a tendency to take<br />
for granted that they are all-knowledgeable and capable of<br />
handling them. In actual practice, they remain in askance<br />
always and instruments were all-pervasive at country-level,<br />
state-level, prefectural level and the smallest of smallest<br />
geography and more so, thanks to recent<br />
highly innovative transport and communications<br />
technologies, move to different<br />
parts of America, Europe, Asia and the<br />
rest of the world. Ignorance of the<br />
ramifications of the financial instruments<br />
was regarded as an insult and<br />
hence all pretended and acted as if they<br />
are an inherent part of the newly created<br />
innovative financial world in which<br />
money just grows. Result, the world<br />
economy collapsed. One side may not fit all but the basic<br />
rules are universally applicable and of scientific value which<br />
should be respected by international participants.<br />
The recent international meltdown holds pointed lessons.<br />
That unless we act with intensity and in electric quickness<br />
with imaginative responses on an all-comprehensive basis,<br />
the broken inter-link between the real economy and<br />
financial sector cannot be reestablished in normal course<br />
as, for instance, banks may be coaxed to lend to borrowers<br />
but they do it at their own pace and tactics. Further, a<br />
cautious approach in Japan in the 1990s towards its housing<br />
and stock markets problems contributed to its ‘lost decade’.<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
121
M ANAGEMENT OF DEVELOPMENT<br />
On the other hand, the Nordic banking crisis in the 1990s<br />
was handled with alacrity to reverse the downturn. Again,<br />
macro-economic policies towards boosting the financing of<br />
infrastructure projects for sustaining creative consumption<br />
demand, on the lines John <strong>May</strong>nard Keynes had envisaged,<br />
could pave the way for accelerating the pace of reversing<br />
their slowdown. In these endeavours, coordinated efforts<br />
at global level are sine qua non for ensuring that the<br />
countries do not adopt beggar-thy-neighbour policies and<br />
take, in unison, steps to minimize damage, to extend<br />
support on all fronts and to have access to external funding.<br />
What is more, already in a globalised world, it is a fait<br />
accompli that no country could be “sovereign” in the<br />
traditional kingly way, (especially when<br />
every country swears to treat every other<br />
country as a sovereign independent<br />
nation) though it takes time to its realization<br />
(Charles Collyns: The Crisis through<br />
the Lens of History, Fund & Development,<br />
IMF, December 2008).<br />
Dr. Dani Rodrik maintains that different<br />
countries could have their own<br />
frontiers with some like France preferring<br />
to have more stability in reference to<br />
financial innovations or Brazil preferring<br />
to treat development banks on a different<br />
footing. In fact, however, within the<br />
broad consensus at global participatory<br />
agreement levels, broader issues are to<br />
be dealt with; each country depending on<br />
its economic, social and political structures<br />
continue to retain the functional<br />
independence. This is but obvious. This would mean that<br />
only rules are set as in GATT and the individual governments<br />
are liberty to implement as it suits them but only<br />
whether the ground rules agreed are followed be kept track<br />
for follow-up discussions from time to time and remind the<br />
governments of the expectations based on the pre-set<br />
consensus.<br />
The Rodrik prescription to fortify the home front first is<br />
irrefutable. Nonetheless, stricter international guidelines<br />
on setting limits on offshore centres to prevent transmission<br />
of financial instability and introduction of new financial<br />
instruments and such other contagion-generating practices<br />
The international<br />
architecture<br />
which is six<br />
and half<br />
decades old<br />
requires drastic<br />
reorganization<br />
and “products”, safety standards for new instruments,<br />
discipline to be ensured, would have to be monitored.<br />
Schemes for funds flow and cross-border transactions are<br />
central to the discussion. Financial segmentation is inevitable<br />
but decoupling would have to be ensured in matters<br />
contagious. Transparency is the essential core need for the<br />
system.<br />
The Bretton Woods experience reveal that instead of<br />
recognizing the diversity in socio-economic structures, the<br />
IMF and the World Bank prescribe “Washington consensus”<br />
and limit the operational freedom of countries in<br />
difficulty. Apart from prima facie national diversity in ways<br />
of living, prescriptions for a globalised world require much<br />
more deeper understanding of the<br />
economic lives within even the clusters of<br />
people living.<br />
Frequent interactions are essential at<br />
chief executives’ level to pinpoint aberrations<br />
observed in each other country’s<br />
supervisory work for monitoring follow-up<br />
work. While the leverage regulating,<br />
prescribing capital adequacy standards<br />
and keeping track of capital markets<br />
would be done by domestic authorities,<br />
the limits prescribed at mutually accepted<br />
global standards should be adhered to<br />
over a staggered periods by different<br />
countries depending on their level of<br />
development in their economies. But the<br />
time-frame set mutually be supervised at<br />
international levels.<br />
Whereas we may give credit to Bretton<br />
Woods institutions for achieving part of the agenda and<br />
objectives envisaged, the fact remains that the world<br />
economy would have grown in any case by their own efforts<br />
of several individual countries like Japan, Germany, China,<br />
India, and the rest of Asia leading to large quantum jumps<br />
in international trade, tie-ups, technological and financial<br />
collaborations and investments. The international architecture<br />
which is six and half decades old requires drastic<br />
reorganization in the light of newer economic and political<br />
powers with tectonic changes in widening and deepening<br />
relationships among the participants in globalization<br />
process. Progress cannot emerge on a near-automatic basis.<br />
122 THE IIPM THINK TANK
T HE NEW MANTRA<br />
Hot money flows, stock markets internationalization,<br />
capital flows of long-term nature, legal, diplomatic and<br />
economic advisories on a global scale, commercial and<br />
investment banks operating on cross-border spectrum and<br />
news flows through hyperactive media are some of the<br />
pointers to urgency for change in mindsets. The entire<br />
frame-work for operational groundwork has undergone a<br />
sea change. Virtually this situation leads to central banks<br />
becoming heavily dependent on their counterparts in the<br />
rest of the world more in some cases but not so much in<br />
others. Recent initiatives in policy-making amply prove<br />
this point. Perforce, one takes cognizance of the rest.<br />
Hence, they need jointly approve new financial instruments<br />
at a joint forum after weighing, in advance, the pros and<br />
cons of their short-term and long-term impacts bearing in<br />
mind that their world-wide impacts cannot be negated as<br />
fast and as easily as domestic impact could be done. After<br />
all, they are to be implemented in the highly and intensively<br />
linked global banking structures. Such mechanisms would<br />
throw up scope to react or reject hyperactivity in any one<br />
sector of industry, region, business area, geography, or<br />
service providers. Also, even excessive progress in one<br />
specific area be subject to questioning at the level of<br />
international forum for ensuring suitable balancing act.<br />
Events have proved that volatility in progress is as dangerous<br />
as volatility in sluggishness. Question success as much<br />
as failure. Danger is also embedded in success.<br />
In banking, which is the nerve centre of modern economic<br />
activity, the executives remunerations cannot be linked to<br />
higher figures of sanctions, disbursements, deposit raisings<br />
or in spreading any other banking and related activities,<br />
especially because extremely high figures would mean<br />
efficiency in processing is diluted. Loans could be without<br />
rigorous evaluation of credit proposals, deposit-raising at<br />
extra-hidden costs, disbursements by sacrificing compliances<br />
by the borrowers or without requisite progress in<br />
implementation of the assisted projects, or spread of<br />
banking habits etc. by creating paper records without any<br />
lasting impact, now or later, on the beneficiaries. In any<br />
case, extra payments be restricted to a minimum and be<br />
confined to extra human efforts - manual or intellectual -<br />
put in for specific purposes. Moreover, institutional success<br />
is a team effort of several executives/operatives and therefore<br />
one section, especially the higher ones, should not be<br />
liberally rewarded ignoring the rest of the team members.<br />
By now, it has emerged that for better world order the<br />
major objectives include boosting global demand; regulating<br />
hedge funds, global banks, and tax havens; reforms in<br />
bank regulating mechanisms, in supervising structures, and<br />
in accounting standards; bankers’ remunerations; effective<br />
trading in derivatives; role of rating agencies; preventing<br />
disunity among global players; information sharing among<br />
the top international banks; dynamic provisioning standards<br />
with variations in good and bad times; and globally<br />
acceptable coordination and cooperating standards. In<br />
November 2008 and in April <strong>2009</strong>, international efforts<br />
being made, it is hoped, will bear fruit. Viewed against this<br />
background, in a globalised world, intensity in monitoring<br />
should be raised to a higher level. We cannot say that a<br />
“global” village is not some sort of a loosely-knit political<br />
and economic entity. Coupling of the world has proved<br />
itself despite reluctance on the part of thinkers. Apart from<br />
trade and capital flows, several human activities that have<br />
ample bearing, crave for overall treatment, for which it is<br />
sine qua non to have international supervisory arrangements,<br />
agreed in advance, for adoption of innovative<br />
operative mechanisms and their products and for monitoring<br />
the activities for smoother functioning of the world<br />
economy.<br />
References and Additional Thinking<br />
• Thomas L. Friedman, The World is Flat, Allen Lane -<br />
Penguin Books, 2005<br />
• Allen Greenspan, The Age of Turbulence, The Penguin<br />
Press, 2007<br />
• David M. Smick, The World is Curved, Portfolio, 2008<br />
• A special report on the world economy, The Economist,<br />
London, October 11 th , 2008<br />
• Dani Rodrik, The Economist, March 14 th , <strong>2009</strong><br />
• Charles Collyns, The Crisis through the Lens of History,<br />
Fund & Development, IMF, December 2008<br />
• Obama seeks global action : The Economic Times, 25 th<br />
March, <strong>2009</strong><br />
• Mada, K.U., "A Journey Through Development Banking",<br />
Kamal Offset Printers, Mumbai, 2005.<br />
(The views expressed in the write-up are personal and do not<br />
reflect the official policy or position of the organisation).<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
123
M ANAGEMENT OF DEVELOPMENT<br />
Internationalization of<br />
Intellectual Property Rights and<br />
its Impact on the Developing<br />
Countries: A Review<br />
Ruchi Sharma<br />
Department of Economics<br />
and Statistics, Tata Services<br />
Limited, Mumbai<br />
K.K.Saxena<br />
Director, Pacific Institute of<br />
Management and Technology,<br />
Udaipur<br />
Intellectual property (IP) refers to<br />
creations of the mind: inventions,<br />
literary and artistic works, and<br />
symbols, names, images, and designs used<br />
in commerce. Intellectual property rights<br />
(IPRs) are legal and institutional devices to<br />
protect IP as these rights bestow the status of<br />
property on inventions and expression (Sherwood<br />
1997). These rights give right holder an exclusive<br />
control over the commercial use of a creation for a<br />
limited time period. IPRs are territorial in<br />
nature, that is, the level and conditions<br />
of protection are determined<br />
by the national laws<br />
and enforcement institutions.<br />
1<br />
124 THE IIPM THINK TANK
K NOWLEDGE WITHOUT BORDERS<br />
Internationalization has entered the arena of IPRs that<br />
has been traditionally regarded to be in the purview of<br />
domestic regulations with Trade Related Aspects of Intellectual<br />
Property Rights (TRIPs) under the aegis of World<br />
Trade Organization (WTO). This agreement has triggered<br />
the debate on the implications of the internationalization of<br />
IPRs for the countries with varying level of economic and<br />
technological development. The theoretical models have<br />
extended competing hypotheses on the impact of stronger<br />
IPRs on the developing countries. The empirical literature<br />
has not helped much in removing the ambiguity over the<br />
potential impact of TRIPs. This paper reviews the concerned<br />
theoretical as well as the empirical literature<br />
mapping the process of internationalization<br />
of IPRs and its impact on the developing<br />
countries. 2<br />
The organization of the paper is as<br />
follows: Section 1 discusses the concept<br />
and the quantification of internationalization<br />
of IPRs. It further delineates the<br />
evolution in the academic argument for<br />
the introduction of these rights at<br />
international level. Section 2 discusses<br />
the theoretical and empirical literature<br />
on internationalization of the IPRs<br />
across the globe. In subsection 2.1 we<br />
have discussed the literature arguing a<br />
case against the internationalization of<br />
IPRs. In subsection 2.2 we have built a<br />
case for the internationalization of IPRs.<br />
Section 3 concludes the paper and<br />
identifies gaps in the literature for future<br />
research.<br />
1. Internationalization of IPRs<br />
1.1 The Concept<br />
The need for international protection of IP became evident<br />
when foreign exhibitors refused to attend the International<br />
Exhibition of Inventions in Vienna in 1873 because they<br />
were afraid that their ideas would be stolen and exploited<br />
commercially in other countries (WIPO 2005). These rights<br />
entered the arena of multilateral agreements with the<br />
introduction of TRIPs under the aegis of WTO.<br />
The protection of IP at international level comprises of<br />
The empirical<br />
literature has<br />
not helped much<br />
in removing the<br />
ambiguity over the<br />
potential impact<br />
of TRIPs<br />
national treatment, reciprocity, and harmonization of legal<br />
stipulations and enforcement procedures. National treatment<br />
and reciprocity have been formalized in international<br />
treaties since the Paris Convention of 1883 and the Berne<br />
Convention of 1886. TRIPs agreement has introduced<br />
further stipulations on IPRs legislation by referring to<br />
previous international treaties. National treatment, according<br />
to Article 3 of the TRIPs agreement, implies that “each<br />
Member accord to the nationals of other Members treatment<br />
no less favourable than that it accords to its own<br />
nationals with regard to protection of intellectual property”.<br />
In addition to these provisions TRIPs agreement has<br />
extended the basic principle of WTO that is most favored<br />
nation (MFN) to IPRs. MFN requires,<br />
according to Article 4 of TRIPs, that<br />
“with regard to the protection of intellectual<br />
property, any advantage, favour,<br />
privilege or immunity granted by a<br />
Member to the nationals of any other<br />
country shall be accorded immediately<br />
and unconditionally to the nationals of all<br />
other Members”. TRIPs agreement<br />
covers seven types of IP. These are: (i)<br />
copyrights, (ii) trademarks, (iii) geographical<br />
indications, (iv) patents, (v)<br />
industrial designs, (vi) layout-designs<br />
(topographies) of integrated circuits and,<br />
(viii) trade secrets. This agreement lays<br />
down minimum substantive standards of<br />
protection for formulating domestic<br />
legislation on IPRs. It has specific<br />
provisions for the subject matter of the<br />
coverage, rights covered, exceptions granted, and duration<br />
of the coverage. The agreement prescribes remedies which<br />
should be available in member states to enforce these rights.<br />
Disputes under TRIPs are brought before the WTO which<br />
is authorized to carry very specific enforcement actions.<br />
Thus TRIPs as an umbrella agreement for various types of<br />
IP has internationalized the IPRs regime of every signatory<br />
country of WTO that will essentially result in the increase<br />
in the strength of IPRs of these countries. 3<br />
The empirical analysis of the implications of the growing<br />
strength of IPRs as under TRIPs requires indices to gauge<br />
the strength of IPRs across nations. A few studies have been<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
125
M ANAGEMENT OF DEVELOPMENT<br />
conducted to formulate such an index. The existing indices<br />
to quantify IPRs strength across countries are distinguished<br />
on the basis of the construction approach adopted by these<br />
indices. First category of these indices is based on survey of<br />
practitioners’ opinions, survey data, interview studies and<br />
statistical analysis of the data thus collected. Mansfield<br />
(1995), Seyoum (1996), and Ostergard (2000) have used this<br />
technique to calculate the difference in IPRs protection<br />
across different countries. The second sect of indices is<br />
constructed on the basis of legislative provisions of the<br />
domestic laws and among these indices Ginarte and Park<br />
(1997) index (hereinafter GPI) is widely used. They have<br />
calculated index of patent rights for 110 countries for the<br />
period 1960-1990. 4 Index is calculated as unweighted<br />
average of the five values measuring extent of the coverage,<br />
membership in the international agreement, provision for<br />
the loss of protection, enforcement mechanism, and duration<br />
of the protection. Lesser (2002) have further updated<br />
the GPI as developing countries abide by the TRIPs stipulations.<br />
The revised index includes protectable subject matter,<br />
convention membership, enforcement, administration and<br />
the duration of protection as different<br />
components. The protectable subject<br />
matter is accepted to be compliant with<br />
the TRIPs agreement if countries<br />
certify their compliance with WTO as<br />
mandated by Article 63.2 of the TRIPs<br />
agreement. However, it does not reflect<br />
on the change in the coverage followed<br />
by the compliance. The membership of<br />
countries to UPOV and the PCT are<br />
mandated though TRIPs does not<br />
require compulsory membership to<br />
these treaties. It is evident that none of the above mentioned<br />
studies has minimum standards based on specifications of<br />
the TRIPs. An index based on such standards will show the<br />
change in the protection enjoyed by the right holders in<br />
respective countries after complying with the agreement.<br />
1.2 The Background<br />
During 19 th century, the proponents of free trade opposed<br />
the patent rights provision as an institution for restriction of<br />
competition. The antipatent movement disappeared after<br />
1873 with simultaneous weakening of the free trade movement<br />
in Europe (Machulp and Penrose 1954). In the 20 th<br />
century, proponents of the free trade have argued for<br />
building strong and similar IPRs across the globe as evident<br />
from the passage of TRIPs. The agreement has been<br />
incorporated to remove uncertainty in the international<br />
trade of knowledge sensitive goods by internationalizing<br />
IPRs across the globe. This ideological shift calls for<br />
attention and the analysis of probable reasons for the same.<br />
This requires observation of the key economic phenomenon<br />
of the mid and late 20 th century vis-à-vis the theoretical<br />
developments in the economic literature.<br />
The growth in the institutional economics, following<br />
seminal work of Coase (1960) in identifying the market<br />
failure in case of goods with externalities, has contributed<br />
to the shift in the trade theorists’ perspective from antipatent<br />
protection to pro-patent protection. The market<br />
failure in knowledge sensitive goods as discussed by Arrow<br />
(1962) is due to the economic characteristics of information<br />
as a commodity and, in particular, of invention as a process<br />
for the production of information. According to him, the<br />
basic characteristics of information, indivisibilities, inappropriability,<br />
and uncertainty, are the<br />
classic reasons for the failure of<br />
perfect competition to achieve<br />
optimality in resource allocation and<br />
utilization. Non rivalry and partial<br />
excludability have been identified as<br />
the defining characteristics of<br />
knowledge by Romer (1990). These<br />
characteristics render knowledge<br />
goods - goods that have market value<br />
derived from the knowledge contained-<br />
as impure public goods.<br />
Owing to these features, the marginal cost of providing<br />
additional unit of knowledge good is zero or minimal once<br />
fixed costs have been incurred to produce these goods.<br />
Therefore, according to the marginalistic principle of<br />
optimization the price of the knowledge good must be zero.<br />
The initial costs of generating these knowledge goods,<br />
however, are quite extensive. Consequently, market fails in<br />
providing efficient output of knowledge goods and necessitates<br />
state intervention. The state intervention by means of<br />
IPRs makes knowledge based products or processes<br />
excludable 5 . Thus approbability of knowledge 6 depends<br />
The basic<br />
characteristics<br />
of information,<br />
inappropriability and<br />
uncertainty are the<br />
classic reasons for<br />
the failure of perfect<br />
competition<br />
126 THE IIPM THINK TANK
K NOWLEDGE WITHOUT BORDERS<br />
upon the IPRs regime of a country for that defines the<br />
Table 1: Share of Counterfeit Goods<br />
Industry<br />
Source: OECD (1998)<br />
In recent times,<br />
knowledge is<br />
identified as a<br />
'Global Public<br />
Good' with<br />
wide spread<br />
externalities<br />
Share of Counterfeit Goods as a<br />
Percentage of Turnover<br />
Watches 5<br />
Medicine 6<br />
Perfumes 5<br />
Aircraft spare parts 10<br />
Toys 12<br />
Music 33<br />
Video 50<br />
Software 43<br />
extent to which innovators are able to recoup their investment<br />
in research and development (R&D hereinafter). In<br />
the recent times, knowledge is identified as a “Global Public<br />
Good” with wide spread externalities that do not respect<br />
national boundaries (Maskus and Reichman 2004). Specifically,<br />
countries that do not undertake significant amount of<br />
R&D have strong free riding incentives and patent protection<br />
is not necessarily welfare enhancing for these countries.<br />
Intervention by an international organization is thus<br />
required to deal with the consequential market failure by<br />
providing adequate IPRs protection at global level. The<br />
recognition of these aspects has not only brought the issue<br />
of IPRs on the front of multilateral agreements but also<br />
blended it with the trade talks under WTO. Stiglitz (1989)<br />
and Stewart and Ghani (1991) have furthered the argument<br />
for constructing appropriate IPRs as they consider the<br />
positive impact of economic institutions, shielding goods<br />
with strong positive externalities like knowledge, on the<br />
economic growth of the developing countries.<br />
Krugman (1979) in his seminal paper discussed issues of<br />
technological development and transfer<br />
in the North-South framework and<br />
concluded that technology transfer from<br />
North to South will increase the welfare<br />
of South. He foresaw that “… the income<br />
of Northern resident depends in part on<br />
the rents from their monopoly of newly<br />
developed products. This monopoly is<br />
continually eroded by technological<br />
borrowings and must be maintained by<br />
constant innovation of new products.<br />
Like Alice and the Red Queen, the developed region must<br />
keep running to stay in the same place”, (Krugman 1979, p.<br />
262). The key economic phenomena of the last three<br />
decades of the 20 th century corroborated Krugman’s insight.<br />
Japan, South Korea, Singapore, Hong Kong and Taiwan<br />
witnessed unparalleled economic growth after 1970’s.<br />
These newly industrialized countries absorbed substantial<br />
amount of technological learning under their respective<br />
weak IPRs protection regime during the early years of their<br />
development 7 . Secondly, knowledge goods entering the<br />
international trade increased considerably as shown by<br />
Braga et al. (2000, p. 16) “…that share of knowledge-intensive<br />
or high technology products in total world goods trade<br />
has doubled between 1980 and 1994 from 12 to 24 percent.”<br />
Thirdly, there has been considerable increase in the imitation<br />
of these knowledge goods. The estimates of the counterfeit<br />
and pirated goods as a percentage of turnover of the<br />
different industry are collected from various sources by<br />
OECD (1998) are shown in Table 1. It is evident that huge<br />
economic losses are suffered by firms on<br />
account of counterfeiting and pirating.<br />
During the later part of 1970’s and early<br />
1980’s the developing countries afforded<br />
very little or no protection for IPRs 8 .<br />
Therefore, TRIPs agreement could be<br />
perceived as a panic reaction by the<br />
developed countries to the fear of losing<br />
their comparative advantage in knowledge<br />
goods in the global market. The<br />
developed countries needed to freeze<br />
their monopoly rents by increasing the strength of IPRs in<br />
the developing countries 9 .<br />
1.3 The Debate<br />
The study of history of patent laws in developed nations<br />
shows that they have chosen IPRs regime according to the<br />
need of their industries; e.g. Switzerland introduced mechanical<br />
invention patent to protect its watch industry, but<br />
initially withheld patent protection on chemical substances<br />
and processes because its infant chemical industry relied<br />
upon imitating other’s technology (Kaufer 1989, p.10).<br />
Ginarte and Park (1997) shows that more developed<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
127
M ANAGEMENT OF DEVELOPMENT<br />
Table: 2 GPI of the South and North from 1985-2000<br />
1985 1990 1995 2000<br />
South<br />
Mean 2.11 2.12 2.43 2.86<br />
Standard Deviation 0.76 0.76 0.76 0.75<br />
Count 50 50 50 50<br />
North<br />
Mean 3.40 3.45 3.80 4.08<br />
Standard Deviation 0.65 0.69 0.58 0.59<br />
Count 23 23 23 23<br />
countries provide stronger protection. However, IPRs<br />
protection does not depend upon level of economic development<br />
per se; it varies with R&D, market freedom and<br />
openness. Maskus (2000b) has extended this work through<br />
an extensive regression analysis of the determinants of<br />
patent index in 1985 and 1990 for 72 countries. Results show<br />
that market <strong>size</strong> has no significant impact on IPRs. There is<br />
an inverted U shape relationship between patent strength<br />
and real per capita income. The results suggest that the per<br />
capita real capita real income at which patent protection<br />
become weakest is approximately $2000 in 1985 international<br />
dollars. Chen and Puttitanun (2002) have shown that<br />
country’s IPRs depend upon the level of development<br />
(technological ability) in a non monotonic way, first decreasing<br />
and then increasing, that is the presence of U-shaped<br />
relationship between IPRs and levels of economic development<br />
10 . This questions the validity of the internationalization<br />
of the IPRs regime of the developing country (referred<br />
to as South hereinafter) 11 at varying level of economic<br />
development under TRIPs that essentially results in the<br />
increase in the strength of IPRs. Table 2, shows the GPI for<br />
the South and the developed countries (referred to as North<br />
hereinafter) 12 . There is difference between the North and<br />
South mean value with no sign of convergence that is<br />
antithesis to the internationalization of IPRs. However, the<br />
difference between two averages that was increasing until<br />
1995 decline considerably in 2000. Since, GPI is not based<br />
on TRIPs stipulation it cannot capture the convergence<br />
between the North’s and South’s IPRs regime. The important<br />
issue is the growth in the mean value of the South IPRs<br />
strength and reduction in its standard deviation over the<br />
past 15 years for the South. It is evident that the strength of<br />
IPRs has increased in the South.<br />
The economic differences between the North and the<br />
South are captured by per capita gross domestic product<br />
(GDPPC) and the growth rate of per capita gross domestic<br />
product (GGDPPC). The existing level of technological<br />
activity in both regions is captured by a technological index<br />
(TI) that is a simple average of four variables. These<br />
variables are: (i) R&D expenditure as a percentage of gross<br />
domestic product (GDP) 13 (Lall 2003), (ii) Researchers per<br />
million inhabitants, (iii) total number of patents granted<br />
(Kumar 2002; Lall 2003), and (iv) scientific and technical<br />
journal articles (Kumar 2002). The last two measures are<br />
deflated by GDP to adjust for the economic <strong>size</strong> of individual<br />
country. The R&D expenditure and researchers are<br />
inputs in the R&D production function where as patents<br />
and scientific and technical journal articles capture the<br />
output produced 14 . The value of each variable for every<br />
country is standardized to calculate an index for every<br />
country (Lall 2003) 15 . Further, simple average of index value<br />
of countries stratified as North and South is calculated for<br />
each variable to get a collective index for the North and the<br />
South. The results are given in the Table 3. It is evident that<br />
the level of economic growth is very high for North as<br />
compare to South. The growth index is almost similar that<br />
makes the convergence further difficult for the countries<br />
starting with low base. TI shows that North is more involved<br />
in the technological activity for all the years covered. It is<br />
evident that North is technological leader with extensive<br />
Table 3: Economic and Technological Differences<br />
between North and South<br />
GDPPC 1985 1990 1995 2000<br />
North 0.732 0.730 0.695 0.734<br />
South 0.163 0.163 0.171 0.179<br />
GGDPPC<br />
North 0.529 0.480 0.178 0.622<br />
South 0.469 0.469 0.181 0.585<br />
TI<br />
North 0.462 0.375 0.460 0.405<br />
South 0.111 0.133 0.145 0.118<br />
Note that the data set for each year may not consist of all the countries contained in the<br />
previous years thus inter-temporal comparison based on this table are not reliable.<br />
128 THE IIPM THINK TANK
K NOWLEDGE WITHOUT BORDERS<br />
research activity. These differences are at the root of the<br />
debate on the validity of harmonization of IPRs for the<br />
South on the lines of the North. It has been argued that<br />
TRIPs has taken away the flexibility of South to design their<br />
IPRs regime as per their developmental needs. On the<br />
contrary, some researchers have argued that there are many<br />
in built flexibilities with in the TRIPs that can be exploited<br />
by South to their advantage (Watal 2001). In the wake of<br />
growing discontent with the TRIPs flexibilities are given to<br />
developing and least developed countries in Doha declaration<br />
on the TRIPs and public health. There is, however, no<br />
empirical evidence to check whether South has used the in<br />
built flexibilities in the TRIPs.<br />
2. Impact of Internationalization of IPRs on South<br />
The subsection 2.1 discusses theoretical literature on the<br />
case against internationalization of IPRs and the empirical<br />
findings of a few studies conducted for the same. Section 2.2<br />
makes a case for internationalization of IPRs.<br />
2.1 Case against Internationalization of IPRs<br />
IPRs involve trade off between static<br />
losses due to dead weight losses generated<br />
as supplier monopolized and gains<br />
as innovations are stimulated in the long<br />
run. The impact of important innovations<br />
(in the form of dynamic gains),<br />
however, is not restricted to national<br />
boundaries. Thus the international<br />
attitude regarding the protection of IPRs<br />
provides incentive to innovators to<br />
conduct R&D. Theoretical literature on<br />
the international protection of the IPRs is very limited and<br />
most of it originated during and after TRIPs negotiations.<br />
This literature has focused on the issue of strengthening of<br />
the IPRs in the South as the reduction of imitation of<br />
knowledge goods. The analysis of internationalization of<br />
IPRs in North-South framework has predominantly inferred<br />
that developing countries tend to lose from protecting<br />
IPRs.<br />
In partial equilibrium model, Chin and Grossman (1988)<br />
have considered a case of an innovating firm in North (process<br />
innovation) and the imitating firm in South and the<br />
strategic interactions between these firms competing in an<br />
The impact of<br />
innovations,<br />
in the form of<br />
dynamic gains,<br />
is not restricted<br />
to national<br />
boundaries<br />
oligopolistic market. The welfare of the South, sum of<br />
producers’ and consumers’ surplus depends upon the<br />
market <strong>size</strong> of South and the productiveness of R&D<br />
expenditure of North (that determines the extent of cost<br />
reduction). As provision for IPRs protection is provided in<br />
South the outcome of strategic interactions between firms<br />
can result in either strategic predation or monopoly by<br />
Northern firm when cost reductions are extensive. In both<br />
situations producers’ in South gain nothing. The welfare of<br />
South thus increases only if the consumers’ surplus is high<br />
due to major cost reductions. Deardroff (1990) argued that<br />
there are diminishing returns to inventive activity, i.e., as<br />
more countries provide IPRs coverage extra stimulation<br />
provided to innovation becomes smaller. Therefore, at some<br />
point costs of extending monopoly outweigh the benefits of<br />
generating inventions.<br />
Helpman (1993) uses a dynamic general equilibrium<br />
North-South model to study IPRs, growth and welfare. It is<br />
assumed that North innovates and South imitates. Innovation<br />
is modeled as an ongoing process and the strength of<br />
the IPRs regime is associated with the flow probability that<br />
a given product protected by a patent in<br />
North will be imitated in South.<br />
Thus this study evaluates the welfare<br />
consequences of marginal changes in the<br />
rate of imitation. The regional welfare<br />
levels are influenced through two<br />
channels as IPRs protection gets stronger<br />
in South. Firstly, the reduction of imitation<br />
shifts production to North. Secondly,<br />
this inter regional shift improves terms<br />
of trade of North (as wages increases)<br />
and deteriorates terms of trade of South (as wages decline).<br />
These factors lead to welfare losses for South. Moreover, by<br />
lowering the rate of imitation and prolonging the expected<br />
duration of monopoly of each Northern innovator innovation<br />
increases in North. As firms now produce longer in<br />
North, the demand for Northern labor and Northern wage<br />
increase and hence raise the cost of innovation. Thus the<br />
rate of innovation decreases in steady state. The study<br />
concludes: “Who benefits from tight intellectual property<br />
rights in less developed countries? My analysis suggests that<br />
if anyone benefits, it is not the South”, (Helpman 1993, p.<br />
1274). The empirical study by Kanwar and Evenson (2003)<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
129
M ANAGEMENT OF DEVELOPMENT<br />
has refuted these claims of non linear relationship between<br />
the rate of innovation and IPRs. The results of above<br />
mentioned studies depend on assumptions of similar tastes<br />
in both regions, no innovative capacity of South and imitation<br />
as the only mode for technology transfer. The results<br />
change as these assumptions are relaxed.<br />
2.2 Case for Internationalization of IPRs<br />
The issue pertinent for South as its IPRs regime is internationalized<br />
is the impact of IPRs on the economic growth.<br />
Falvey, Foster and Greenaway (2004) employing panel of 80<br />
countries for four sub-periods: 1975-79, 1980-84, 1985-89<br />
and 1990-94 using GPI have analyzed the impact of IPRs on<br />
the economic growth. Their results<br />
indicate that countries with high per<br />
capita incomes are likely to grow more<br />
rapidly the stronger their IPR protection.<br />
By allowing for more than one threshold<br />
however, they revealed that among the<br />
lower-income countries there are differences<br />
in the relationship between IPR<br />
protection and growth. IPR protection<br />
has significantly positive impact on<br />
growth in the very poor countries,<br />
however, for the middle-income countries<br />
no significant relationship is found.<br />
Falvey, Foster and Memedovic (2006)<br />
have further confirmed the results.<br />
IPRs influence economic growth<br />
through increase in total factor productivity<br />
by stimulating innovation. Technical<br />
change in Solow (1957) sense implies<br />
shift in the production possibility curve that occurs due to<br />
the positive dynamic externalities of innovations (Stewart<br />
and Ghani 1991). Deolalikar and Roller (1989) using panel<br />
firm level data for the period 1975-79 for 145 firms in<br />
chemical and engineering sectors for India has shown that<br />
despite the limited protection of IPRs in India, patenting is<br />
positively and significantly associated with total factor<br />
productivity growth at firm level. Lach (1995) has used data<br />
of 20 manufacturing industries from 1959-86 and has shown<br />
that output elasticity of knowledge is 0.30. Now I will<br />
discuss the impact of IPRs on spurring domestic as well as<br />
international innovations to ascertain two broad channels of<br />
IPRs influence<br />
economic growth<br />
through increase<br />
in total factor<br />
productivity<br />
by stimulating<br />
innovation<br />
gain for the South. International innovations are further<br />
transferred by means of imports, foreign direct investment<br />
(FDI), and licensing which are influenced by IPRs.<br />
2.2.1 Domestic Innovation<br />
The impact of IPRs on innovation is much debated upon.<br />
The empirical literature considers the issue employing<br />
either firm/industry or cross country data. IPRs gain<br />
importance as imitation threat is faced by producers of<br />
knowledge goods. Mansfield (1985) in a study of 100 firms<br />
from 13 manufacturing industries shows that for products<br />
and process, odds are better than 50-50 that a development<br />
decision leaks out in less than 18 months. Personnel turnover,<br />
informal communication networks<br />
among engineers and scientists working at<br />
various firms, professional meetings, input<br />
suppliers, and customs are different<br />
channels through which information leaks<br />
out. The extent of imitation is determined<br />
by industry specific characteristics (Mansfield<br />
1985). These characteristics include<br />
R&D undertaken by competitors that<br />
affects the absorptive capacity of firms<br />
(Cohen and Levinthal 1989), tacitness of<br />
the technology, and circumstantial<br />
sensitivity of industry technology (Evenson<br />
and Westphal 1995). The benefits of<br />
the original producers from the commercialization<br />
of new knowledge good fall<br />
considerably due to imitation.<br />
Machlup and Penrose (1950) have<br />
propounded exchange for secret thesis<br />
(apart from the abovementioned monopoly-profit-incentive<br />
thesis) for making provision for IPRs. Disclosure requirements<br />
of the patent application ensure that ample information<br />
is made available to researchers for furthering R&D<br />
process. Mazzoleni and Nelson (1998) have elaborated that<br />
disclosure requirements are important as the inventor<br />
cannot exploit all the possible uses of an invention. IPRs by<br />
facilitating contractual agreements between the original<br />
right holder and other innovators help in wider dissemination<br />
and use of intellectual creations.<br />
In the cross country analysis, Chen and Puttitanun (2002)<br />
have focused on the issue of innovativeness of the develop-<br />
130 THE IIPM THINK TANK
K NOWLEDGE WITHOUT BORDERS<br />
ing countries as their strength of IPRs increases. They have<br />
a one country two sector model (domestic and importing<br />
sector). The basic trade-off that is faced by the government<br />
for making an optimal choice of IPRs policy is as follows. In<br />
the importing sector, less imitation (strong IPRs) means<br />
lower product quality of the domestic firm and less competition<br />
for the foreign firm. Thus consumers pay high prices for<br />
goods. It not only reduces consumer surplus but also shifts<br />
income to the foreign firm and further reduces domestic<br />
social surplus. In the local sector, less imitation provides<br />
incentive to the domestic firm for innovation and efficient<br />
investment in higher quality technology (product) leading to<br />
higher social surplus. The optimal choice varies with the<br />
technological capability of a country that<br />
is determined by the level of her economic<br />
development. The study concludes that<br />
with low level of technological capability a<br />
country is likely to have greater benefits<br />
from imitation of foreign technology as<br />
compare to innovation. However, after<br />
reaching a certain level of technological<br />
capability domestic innovation responds<br />
to IPRs and innovation effect dominates.<br />
Chen and Puttitanun (2002) empirically<br />
verified their thesis in a panel of 64 developing<br />
countries over the time period<br />
1975-95 using GPI for measuring IPRs<br />
strength. The results show that innovation<br />
in a developing country (measured<br />
by number of patent applications filed by<br />
residents of a country) increases in its<br />
IPRs protection. Kanwar and Evenson<br />
(2003) estimate a panel model for two time periods for 32<br />
countries using GPI. They measured the impact of IPRs<br />
protection on innovation using R&D investment as a<br />
proportion of GNP. The study concludes that stronger IPRs<br />
protection can help spur innovation and technological<br />
progress which in turn should positively affect growth. In a<br />
related paper, Schneider (2005) examines the importance of<br />
IPR protection, high-tech imports and FDI on innovation<br />
and on per capita GDP growth. Innovation is measured<br />
using the number of U.S. patent applications made by<br />
residents of a given country. The model is estimated on<br />
panel data for 47 developed and developing countries over<br />
The research<br />
undertaken by<br />
Schneider suggest<br />
that innovation<br />
responds<br />
positively to IPR<br />
protection<br />
the period 1970-1990. The results suggest that innovation<br />
responds positively to IPR protection. Splitting the sample<br />
into developed and developing countries, Schneider finds<br />
that while IPRs have a positive impact on innovation in<br />
developed countries, the impact in developing countries is<br />
negative, and often significant. Falvey, Foster and Memedovic<br />
(2006) have further confirmed the impact of IPRs on<br />
domestic patenting as well as nonlinearities involved using<br />
threshold analysis.<br />
2.2.2 International Innovation and Technology<br />
Transfer<br />
Theoretical model shows that increase in the strength of<br />
South’s IPRs increases the innovativeness<br />
of the North. The North, with comparative<br />
advantage in technology production,<br />
responds to the increase in the market <strong>size</strong><br />
of the South as the trade in the counterfeit<br />
and pirated goods is restricted by stronger<br />
IPRs stipulation (Chin and Grossman<br />
1988). This increase can be a potential<br />
source of gain for the developing countries<br />
if the R&D productivity is high.<br />
Diwan and Rodrik (1991) argue that<br />
Northern and Southern countries have<br />
different technological needs. For<br />
example, North would like to develop<br />
drugs against cancer and heart disease,<br />
where as South benefits more from drugs<br />
against tropical diseases. In their model,<br />
innovation takes place in North and<br />
different degrees of IPRs protection is<br />
granted in North and South. Owing to the scarcity of R&D<br />
resources, two regions compete with each other to encourage<br />
the development of technologies suited to their needs.<br />
Innovators in North face a market that is a weighted average<br />
of North and South’s market with weights being the relative<br />
market <strong>size</strong> and patent protection. Increase in any of these<br />
factors increase the weights assigned to South and more<br />
resources are diverted to innovations catering to needs of<br />
the South. Thus they have concluded that but for strong<br />
Southern protection of IPRs Northern countries will not<br />
develop technologies largely needed by the South 16 . Sharma<br />
and Saxena (2007) have provided empirical evidence to<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
131
M ANAGEMENT OF DEVELOPMENT<br />
support the hypothesis by using cross country data of 39<br />
developing countries for the year 1995.<br />
The current literature extensively analyzes channels of<br />
transmission for the R&D conducted in North to flow to<br />
South. South is a net importer of technology for its developmental<br />
needs. Technology transfer is, therefore, an important<br />
issue in the internationalization of IPRs for South.<br />
“Technology transfer” is the process by which commercial<br />
technology is disseminated (UNCTAD 2001). It refers to<br />
the spread of technology from one industry to another, or<br />
among different economies (Rosegger 1996, p.198). The<br />
market for technology transfer is susceptible to market<br />
failure from small number bargaining, appropriability<br />
problem, uncertainty, transaction costs,<br />
and impacted information coupled with<br />
opportunism (Caves, Crookell, and<br />
Killing 1983). With respect to market<br />
failure in technology goods IPRs play<br />
different role, against the traditional role<br />
of providing exclusive commercial rights<br />
to creators, of facilitating market transactions.<br />
“Rather, by protecting property<br />
rights, patent here open the market for<br />
trade in technological information”<br />
(Gallini and Winter 1985, p. 238). The<br />
market facilitating aspect of IPRs was<br />
identified in the 14 th century as noted by<br />
David and Olsen (1992, p. 518) “in the<br />
fourteenth century such (patent) grants<br />
were employed to encourage the introduction<br />
of foreign technologies through<br />
the transfer of skilled craftsmen from<br />
abroad”. Penrose (1973) identified MNEs as the “chief<br />
international investors” and an important source of technology<br />
transfer. The means for technology transfer include<br />
trade in capital and intermediate goods, FDI and licensing<br />
(Saggi 2003; Falvey, Foster, and Memedovic 2006). The<br />
impact of IPRs on these three modes is discussed below.<br />
Trade, FDI, and Licensing<br />
Grossman and Helpman (1991) have modeled an endogenous<br />
technological progress that results from the profit<br />
maximizing behavior of far-sighted entrepreneur. They have<br />
shown that as the resident of the small country interact with<br />
The research<br />
results of Fink<br />
and Braga show<br />
significant positive<br />
impact of IPRs on<br />
bilateral flows of<br />
non fuel trade<br />
agents of the outside world they gain access to a body of<br />
accumulated wisdom as well as some of the new discoveries.<br />
The foreign contribution to local knowledge capital stock<br />
increases with the number of commercial interactions<br />
between domestic and foreign agents and the extent of<br />
spillovers increase between two countries with increase in<br />
the bilateral trade.<br />
Maskus and Penubarti (1995) address whether the<br />
distribution of bilateral trade across nations depends on the<br />
importing country’s IPRs regime. The reason for ambiguity<br />
is the trade off between the enhanced market power for the<br />
firm created by strong IPRs and the larger effective market<br />
<strong>size</strong> generated by reduced abilities of local firm to imitate<br />
the product. The market power effect<br />
would reduce the elasticity of demand for<br />
the foreign firm and would ordinarily<br />
induce the firm to export less of its<br />
patentable product. The market expansion<br />
effect would, however, increase the<br />
demand. The market expansion effect<br />
tends to be more dominant in larger<br />
countries with highly competitive local<br />
imitative firms while the market power<br />
tends to be stronger in smaller countries<br />
with limited capacity for imitation.<br />
The empirical results strongly suggest<br />
that exporters discriminate in their<br />
sales decision across export markets,<br />
taking account of local patent laws.<br />
Fink and Braga (1999) have analyzed<br />
bilateral trade flow for countries during<br />
1989 for non fuel and technology trade<br />
flows (knowledge sensitive goods) using GPI. Their results<br />
show significant positive impact of IPRs on bilateral flows of<br />
non fuel trade. This result is, however, not confirmed in case<br />
of high technology goods. Authors have argued that this<br />
results show that the market power impact of IPRs may be<br />
stronger than the market expansion or knowledge sensitive<br />
goods have other legal means that are more important for<br />
appropriating investment in R&D.<br />
In general equilibrium framework, Lai (1998) has considered<br />
a case whereby production is transferred internationally<br />
by FDI. Northern firms move production to South to<br />
take advantage of the lower wages in the South; they<br />
132 THE IIPM THINK TANK
K NOWLEDGE WITHOUT BORDERS<br />
balance these gains against the probability that they will<br />
loose their monopoly to imitators after investing in South. A<br />
strong IPRs regime in South increases the rate of innovation<br />
in two stages. Firstly, it increases the expected lives of<br />
monopolies and the resulting increase in demand for labor<br />
falls entirely on South. Thus the return to innovation rises<br />
without a rise in cost. Secondly, with increase in returns for<br />
Northern firms more firms move to South that increase the<br />
return on innovation further as the pressure on the Northern<br />
resources eases off. This result has made R&D of North<br />
an endogenous variable as not only R&D determines FDI<br />
but also is influenced by it. Therefore, where FDI is an<br />
option, the resource competition effect noted by Helpman<br />
(1993) is moderated. Helpman (1993) and<br />
Lai (1996) have treated stronger IPR as<br />
exogenous reduction in the intensity of<br />
imitation. Alternatively, Glass and Saggi<br />
(2002) have treated strong IPRs as the<br />
increase in the cost of imitation. In this<br />
case, Southern firms find themselves<br />
devoting greater resources to imitation,<br />
but lower available for production,<br />
causing FDI to shrink. In response FDI<br />
is shifted back to North that leaves fewer<br />
resources for innovation, and thus<br />
reduction in the overall innovation.<br />
Theoretical relationship between FDI<br />
and IPRs at micro level can be traced<br />
through the eclectic approach to FDI by<br />
Dunning (1979). According to this<br />
approach activities of MNEs can be<br />
explained by ownership, localization and<br />
internalization (OLI) advantages. The ownership advantages<br />
accrue to firms from the possession of tangible and<br />
intangible knowledge based assets. These assets can take<br />
the form of new product, superior production technology,<br />
management skills, trademarks, availability of human<br />
capital, marketing system, organizational skills, R&D<br />
capacity etc. The control over such assets and joint-input<br />
property of knowledge based assets support the MNEs<br />
structure and give an edge to MNEs vis-à-vis domestic<br />
firms. It presents series of options of different modes to<br />
MNEs to choose for serving a foreign market (Either and<br />
Markusen 1991). Having such an advantage is no guarantee<br />
The results of<br />
empirical studies<br />
exploring the<br />
impact of IPRs<br />
protection on<br />
FDI yield<br />
ambiguous results<br />
that MNEs will decide to undertake production activities in<br />
the host country as they will always have the option to serve<br />
the foreign market by exporting. Such decision is based on<br />
the localization advantages which a host country can offer<br />
over and above the home country of MNEs. There are<br />
numerous factors that affect such advantage e.g. factors of<br />
production (their prices, quality, and productivity), transport<br />
and communication costs, governmental intervention,<br />
infrastructure (commercial, legal and transport), economic<br />
and cultural distance etc. These advantages affect the<br />
decision of MNEs whether to indulge in production activities<br />
in host country or to export. Given that MNEs posses<br />
both ownership and localization advantage, they can either<br />
internalize their advantages through an<br />
extension of their own activities or<br />
externalize through licensing or some<br />
other similar contract with independent<br />
firm. Such a decision is affected by<br />
internalizing factor like transaction costs<br />
which include negotiation costs, costs of<br />
enforcing contracts etc.<br />
Numerous variables play important<br />
and intricate role in determining MNEs<br />
decision of mode choice. IPRs become<br />
important in MNEs decision making as<br />
the exploitation of ownership advantages<br />
is affected by the strength of IPRs regime<br />
of the host country. If IPRs protection is<br />
weak imitators can swarm the market<br />
with similar products and MNEs will<br />
lose their position of a single supplier.<br />
Furthermore, decision regarding whether<br />
to externalize or internalize will be affected by the strength<br />
of IPRs regime. The strength of IPRs protection reduces<br />
costs of licensing considerably 17 and shifts MNEs choice to<br />
licensing from FDI. An inadequate IPRs regime, therefore,<br />
deters FDI and encourages exports. A strong IPRs system<br />
has a negative impact on FDI by making licensing more<br />
viable alternative to direct investment 18 .<br />
The results of empirical studies exploring the impact of<br />
IPRs protection on FDI yield ambiguous results. Ferrantino<br />
(1993) has empirically tested the policy variables determining<br />
the decisions of MNEs to sell the goods (export),<br />
technology (licensing), or establish factories (FDI) in the<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
133
M ANAGEMENT OF DEVELOPMENT<br />
Research studies<br />
show that when<br />
IPRs are weak<br />
firms rely on<br />
non-market<br />
transactions, i.e.,<br />
fewer licensing<br />
host countries. The results show that the U.S. MNEs move<br />
goods to its affiliates in countries with low IPRs so as to<br />
keep the technology with them. IPRs protection reduces the<br />
costs of enforcing contracts among MNEs and their partners<br />
(affiliates or non affiliates) for buying and selling<br />
technology. Seyoum (1996) has studied the level of IPRs<br />
protection provided in 27 countries from five geographical<br />
clusters for the time period 1975-90. Study shows that 13%,<br />
43% and 35% of variations in FDI is explained by IPRs with<br />
respect to least developed, newly industrializing and<br />
developed countries. On the other hand, other economic<br />
variables (market <strong>size</strong>, public investment, external debt and<br />
exchange rate) explained 21%, 28%, and 20% of variations<br />
in FDI for least developed, newly industrializing and<br />
developed countries respectively. Lesser (2002) has used<br />
two models to study the determinants of FDI flows and<br />
imports. Using cross section regression analysis, he has<br />
concluded that stronger IPRs increase both FDI and<br />
imports. The results indicate that a one point increase in the<br />
IPRs score will increase a country FDI by $1.5 billion and<br />
imports by $ 8.9 billion. The FDI effect is substantially<br />
greater than the $200 million as found by<br />
Mansfield (1994), but this study considered<br />
only sources from the U.S.<br />
Lee and Mansfield (1996) have used<br />
index of weakness of IP protection as<br />
developed by Mansfield (1994). They<br />
found that weak IPRs have significant<br />
negative impact on the flow of U.S. FDI<br />
in manufacturing. Further, in a sample of<br />
chemical firms the proportion of FDI to<br />
final production or R&D facilities is<br />
significantly and negatively associated with weak IPRs.<br />
From these results, it appears that both the volume and<br />
quality of FDI diminishes in countries with limited property<br />
rights. Mansfield (1995) also conducted the survey on the<br />
same lines for German and Japan affiliates and his results<br />
supported the results found in his earlier survey of U.S.<br />
affiliates. Javorick (2004) has further empirically verified<br />
the issue of composition of FDI vis-à-vis IPRs by using firm<br />
level data set from Eastern Europe and former Soviet<br />
Union. Results have shown that investment decisions in<br />
IPRs sensitive sectors like drugs, cosmetics, health care<br />
products, chemicals, machinery and equipment and electrical<br />
equipment are affected by the IPRs regime of a country.<br />
Moreover, weak IPRs keep FDI in areas of distribution<br />
activities rather than local production. Kumar (2002) shows,<br />
that R&D by MNEs is insensitive to the strength of IPRs<br />
protection of the host country. Indeed the coefficient of<br />
IPRs strength on R&D activity is negative though statistically<br />
insignificant in case of U.S. affiliates. In the case of<br />
Japanese affiliates the sign of coefficient is positive but<br />
statistically insignificant. Therefore, the relationship<br />
between R&D activities carried out by MNEs and the<br />
strength of IPRs is not very clear. Moreover, there is<br />
tendency of MNEs to conduct R&D activities in their home<br />
countries or to concentrate in a few industrialized countries.<br />
EU accounts for nearly 70% of R&D expenditure by<br />
U.S. MNEs and in case of Japanese MNEs over 90% of<br />
their overseas R&D is conducted in EU or U.S. (Kumar<br />
2002).<br />
Horstmann and Markusen (1987) discuss host of variables<br />
that affect the decision of MNEs on the mode selection for<br />
serving different international markets. Anand and Khana<br />
(2000) have empirically shown, in case of Indian firms with<br />
imported technology for the time period<br />
1950-75, that when IPRs are weak firms<br />
rely on non-market transactions, i.e.,<br />
fewer licensing. Smith (2001) empirically<br />
link IPRs of South on bilateral exchange<br />
via the ownership, location, and internalization<br />
concepts that are central to<br />
the multinational literature. Her analysis<br />
of location and internalization of knowledge<br />
allows assessment of the relative<br />
magnitudes of the effects of IPRs of<br />
South on the three forms of bilateral exchange. The study<br />
has used cross-sections of 50 countries on U.S. outward<br />
bilateral exchange, including exports, affiliate sale, and<br />
licenses to 8 unaffiliated foreign firms and GPI for IPRs<br />
strength of South. The study found that the enhanced<br />
ownership advantage from strong IPRs increases bilateral<br />
exchange across all countries. Secondly, strong IPRs of host<br />
country confer a location advantage which increases<br />
affiliate sales and licenses relative to exports. Third, strong<br />
IPRs of host country confer an internalization effect which<br />
increases licenses relative to affiliate sales and exports.<br />
McCalman (2004) in his empirical study of the behavior of<br />
134 THE IIPM THINK TANK
K NOWLEDGE WITHOUT BORDERS<br />
Hollywood studios in feature films and video market in the<br />
foreign markets did not find any support for the hypothesis<br />
that as IPRs strength increases there is a shift from FDI to<br />
licensing. In his analysis moderate IPRs are associated with<br />
high degree of licensing and both high and low standards of<br />
IPRs encourage more integrated governance. Over all the<br />
impact of IPRs on FDI, quality of FDI, licensing, exports as<br />
evident from empirical studies is ambiguous.<br />
Following UNCTAD (2001) technology transfer should<br />
be distinguished from technology diffusion. The latter is<br />
seen as another benefit that the transfer of technology may<br />
bring to the host economy. Grossman and Helpman (1991)<br />
define technological spillovers occurring when firm acquire<br />
information created by others without paying for it in a<br />
market transaction, and creators (or current owners) have<br />
no effective recourse under prevailing laws to prevent other<br />
firms from utilizing information so acquired. The technology<br />
diffuses through demonstration effect, labor mobility,<br />
linkages between buyers and suppliers, reverse engineering,<br />
defection by employees, emigration of highly skilled<br />
workers, creating awareness of that technology and this<br />
awareness spills over the whole economy 19 .<br />
Aitken and Harrison (1999) in their study of FDI benefits<br />
in Venezuela found that increases in foreign equity participation<br />
are correlated with increases in productivity for<br />
recipient plants suggesting that these plants benefit from the<br />
productive advantages of foreign owner. However, increases<br />
in foreign ownership negatively affect the productivity of<br />
wholly owned firms in the same industry. This could be due<br />
to the competition effects of FDI that causes the inefficient<br />
firms to leave in the long run. However, the empirical<br />
analysis could not capture this aspect of the FDI. Blomström<br />
and Kokko (1996) have concluded that MNCs may<br />
play an important role for productivity and export growth in<br />
their host countries, but that the exact nature of the impact<br />
of FDI varies between industries and countries, depending<br />
on country characteristics and the policy environment. Liu<br />
and Wang (2003) have shown the positive and significant<br />
impact of the FDI on industry productivity in China. The<br />
impact increases if the firms are performing their own R&D<br />
that is have some absorptive capacity. Hu, Jefferson and<br />
Jinchang (2006) show that technology transfers has positive<br />
impact on the productivity of Chinese firms. However, these<br />
positive results depend upon the absorptive capacity of the<br />
firm captured by domestic R&D.<br />
3. Conclusion<br />
The objective of TRIPs as laid down by Article 7 of the<br />
TRIPs reads as “The protection and enforcement of<br />
intellectual property rights should contribute to the promotion<br />
of technological innovation and to the transfer and<br />
dissemination of technology, to the mutual advantage of<br />
producers and users of technological knowledge and in a<br />
manner conducive to social and economic welfare, and to a<br />
balance of rights and obligation”. The current theoretical<br />
literature analyzes the impact of strengthening of IPRs in<br />
the South to comply with TRIPs in general as well as partial<br />
equilibrium models with the empirical literature focusing<br />
on validating competing hypotheses. The strengthening of<br />
IPRs affects the economic growth of the South. The two<br />
channels have been explored extensively. Firstly, the promotion<br />
channel whereby, the IPRs affect the innovativeness of<br />
the South and concomitantly the productivity that per se is<br />
related to the economic growth. Secondly, the transfer<br />
channel whereby the new technology generated in the North<br />
is transferred by means of trade, FDI and licensing. The<br />
dissemination aspect of the transferred technology is not<br />
directly related to IPRs and is expected to be captured by<br />
studying the impact of trade, FDI and licensing on the<br />
productivity of the host country in the South. The empirical<br />
studies lend very little support to theoretical models as<br />
results obtained are not consistent. IPRs strength is among<br />
the innumerable variables that affect the economic agents’<br />
decision of knowledge creation and its dissemination<br />
though different modes. It is therefore, not very surprising<br />
that most of the results are not replicated as the sample<br />
changes for the individual country and industry specific<br />
effects are very difficult to capture. Grossman and Helpman<br />
(1990) noted that international economic environment<br />
affects the incentive that firm in specific country have to<br />
invest in the creation of knowledge. These features of global<br />
set up include comparative advantage, market <strong>size</strong>, appropriability<br />
conditions and finance. Does IPRs of the South<br />
have any role in determining the innovativeness of the<br />
North? What determines R&D is typically not modeled<br />
though many studies have already shown the spillover effect<br />
of international R&D. There is need to study whether the<br />
IPRs are in any way directly related to the spillovers of the<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
135
M ANAGEMENT OF DEVELOPMENT<br />
technology transferred.<br />
Endnotes<br />
1 IPRs in this paper refer largely to patent as copyrights<br />
and trademarks raise different set of issues<br />
2 We will primarily concentrate on the theoretical litera-<br />
ture that analyzes issues in the North (developed coun-<br />
tries or technological leaders) and South (developing<br />
countries or technological followers) framework. The<br />
multilateral character of TRIPs agreement has clubbed<br />
different countries (in terms of economic development)<br />
together and has imposed same stipulations regarding<br />
IPRs regime. This warrants the study of issues at aggre-<br />
gate level.<br />
3 See, Braga (1995) and Adolf (2001) for discussion on<br />
changes introduced by the developing countries for<br />
complying with the TRIPs.<br />
4 GPI has been updated by authors for years 1995 and 2000<br />
and is available upon request.<br />
5 This excludability is limited to the commercial use of the<br />
products that is for making, using, offering for sale,<br />
selling, or importing of these products. Disclosure<br />
requirements in patent laws ensure that knowledge is<br />
available to other researchers for research purpose.<br />
6 Scherer (1980) has argued that existence of non patent<br />
barriers, substantial natural imitation lags, first mover<br />
advantage, oligopolistic market structure are important<br />
factors that reduces the importance of IPRs as the<br />
mechanism to appropriate returns from R&D invest-<br />
ments. Moreover, state can reward innovators to recog-<br />
nize their contribution to the society and make the<br />
innovations available to public. Shavell and Ypersele<br />
(2001) have shown that IPRs do not posses a fundamental<br />
social advantage over reward system and that an optional<br />
reward system under which innovator chooses between<br />
rewards and IPRs is superior to IPRs. However, the<br />
principle difficulty with rewards is the information<br />
required for its determination.<br />
7 See, Kim (2002) for the analysis of Korea and Kumar<br />
(2003) for Japan, South Korea and Taiwan.<br />
8 India revised its patent law in 1970 and made it more lax.<br />
Kaufer (1989) noted that this is the reaction against what<br />
was perceived during 1960’s and 1970’s to be a persisting<br />
condition of technological dependence on foreigners<br />
including supplies of inappropriate technologies.<br />
9 See, Watal (2001) for further discussion on how develop-<br />
ing countries yielded to the developed countries during<br />
the Uruguay round of talk of WTO.<br />
10 One must note that the empirical relationship between<br />
IPRs and economic growth is marred with the problem of<br />
endogenity.<br />
11 The South for the study is defined as 72 member states of<br />
the WTO that are required to change the domestic<br />
legislations on IP with in the time frame of five years of<br />
the passage of the TRIPs according to the Article 65 of<br />
the agreement. GPI is, however, available for only 50<br />
countries.<br />
12 The North for the study comprises of 23 countries that<br />
are defined as industrial countries by International<br />
Monetary Fund (IMF) for the Direction of Trade<br />
Statistic (DOTS) as WTO also follow the similar defini-<br />
tion.<br />
13 R&D financed by the business enterprises would have<br />
been preferable to the total R&D as a percentage of the<br />
GDP as the latter includes expenditure on defense,<br />
agriculture and so on that are not directly relevant to<br />
innovation by the private agents. However, due to non<br />
availability of data we have used total R&D. Lall (2003)<br />
has reported that both measures yield similar results.<br />
14 Patents are frequently viewed as an output indicator.<br />
Patent could, however, be viewed as an input indicator<br />
since these are used as a source of information by<br />
subsequent inventors (Griliches 1990).<br />
15 Index = , where the highest country in the rank scores 1<br />
and the lowest scores 0.<br />
16 Both the above mentioned causes allude to demand pull<br />
factors determining R&D. See, for instance, Scherer<br />
(1982), Levin, Cohen and Mowery (1985), and Geroski<br />
and Walters (1995).<br />
17 See, for instance, Yang and Maskus (2001).<br />
18 See, for instance, Vishwasrao (1993), Markusen (1995),<br />
Saggi (1999), Maskus (2000a), and Markusen (2001) for<br />
the relationship among IPRs, FDI, and licensing.<br />
19 See, Görg and Greenaway (2004) for the review of<br />
empirical literature on spillovers from FDI.<br />
Reference and Additional Thinking<br />
• Adolf,H. 2001. Trade Related Aspects of Intellectual<br />
136 THE IIPM THINK TANK
K NOWLEDGE WITHOUT BORDERS<br />
Property Rights and Developing Countries. The Devel-<br />
oping Economies 39 (1): 49-84.<br />
• Aitken, B. and A. E. Harrison. 1999. Do Domestic Firms<br />
Benefit from Direct Foreign Investment? American Eco-<br />
nomic Review 89: 605-618.<br />
• Anand,B.N., and T.Khanna. 2000. The Structure of Li-<br />
censing Contracts. Journal of Industrial Economics 48:<br />
103-135.<br />
• Arrow,K.J. 1962. Economic Welfare and the Allocation of<br />
Resources for Invention.” In The Rate and Direction of<br />
Innovative Activity: Economic and Social Factors. Wash-<br />
ington: National Bureau of Economic Research.<br />
• Braga,C.A.P. 1995. Trade-Related Intellectual Property<br />
<strong>Issue</strong>s: The Uruguay Round Agreement and its Economic<br />
Implications. In The Uruguay Round and the Develop-<br />
ing Economies, edited by Martin,W. and Winters, L.A.,<br />
World Bank Discussion Paper 307, Washington, D.C.: The<br />
World bank.<br />
• Braga,C.A.P., Fink,C., and Sepulveda,C.P. 2000. Intellec-<br />
tual Property Rights and Economic Development. World<br />
Bank Discussion Paper No. 412. Washington, D.C.: The<br />
World Bank.<br />
• Caves,R., H.Crookell and P.J.Kiling. 1983. The Imper-<br />
fect Market for Technology Licenses. Oxford Bulletin of<br />
Economics and Statistics 45 : 249-267.<br />
• Chen,Y., and T.Puttitanun. 2005. Intellectual Property<br />
Rights and Innovation in Developing Countries. Journal<br />
of Development Economics 78: 474-493.<br />
• Chin,J. and G.M.Grossman. 1990. Intellectual Property<br />
Rights and North-South Trade. In The Political Economy<br />
of International Trade, edited by R. W. Jones and A. O.<br />
Krueger, Cambridge, MA: Basil Blackwell.<br />
• Coase, R.A. 1960. The Problem of Social Cost. Journal<br />
of Law and Economics 3: 1-44.<br />
• Cohen, W. M. and D. A. Levinthal. 1989. Innovation and<br />
Learning: The Two Faces of R&D. The Economic Journal<br />
99: 569-596.<br />
• David, P., & Olsen, T. 1992. Technology Adoption, Learn-<br />
ing Spillovers, and the Optimal Duration of Patent-Based<br />
Monopolies. International Journal of Industrial Organiza-<br />
tion 10: 517-543.<br />
• Deardoff,A.V. 1992. Welfare Effects of Global Patent<br />
Protection. Economica 59: 33-51.<br />
• Deolalikar,A.B. and R.Lars-Hendrik. 1989. Patenting by<br />
Manufacturing Firms in India: Its Production and Impact.<br />
Journal of Industrial Economics 37(3): 303-314.<br />
• Diwan,I. and D.Rodrik. 1991. Patents, Appropriate Tech-<br />
nology, and North-South Trade. Journal of International<br />
Economics 63: 79-90.<br />
• Dunning, J.H. 1979. Explaining Changing Pattern of<br />
International Production: In Defense of the Eclectic<br />
Theory. Oxford Bulletin of Economics and Statistics 41:<br />
269-296.<br />
• Evenson,R. and L.Westphal. 1995. Technological Change<br />
and Technology Strategy. In Handbook of Development<br />
Economics Vol. 3A, edited by J. Behrman and T. Srinivas-<br />
an, Amsterdam: North Holland Publishing Company.<br />
• Falvey, R.E., N.Foster and D.Greenaway. 2004. Intellec-<br />
tual Property Rights and Economic Growth. GEP Re-<br />
search Paper no. 04/12, Leverhulme Centre for Research<br />
on Globalisation and Economic Policy Nottingham: The<br />
University of Nottingham.<br />
• Falvey,R.E., N.Foster and O.Memedovic. 2006. The Role<br />
of Intellectual Property Rights in Technology Transfer<br />
and Economic Growth: Theory and Evidence. Vienna:<br />
UNIDO.<br />
• Ferrantino,M.J. 1993. The Effect of Intellectual Property<br />
Rights on International Trade and Investment. Weltwirt-<br />
schaftliches Archiv 129: 300-331.<br />
• Fink,C. and C.A.P.Braga. 2005. How Stronger Protec-<br />
tion of Intellectual Property Rights Affects International<br />
Trade Flows. In Intellectual Property and Development:<br />
Lessons from Recent Economic Research, edited by C.<br />
Fink and K. E. Maskus Washington, DC: The World<br />
Bank/Oxford University Press.<br />
• Gallini,N.T., and R.A.Winter. 1985. Licensing in the The-<br />
ory of Innovation. RAND Journal of Economics 16(2):<br />
237-252.<br />
• Geroski,P.A., and C.F.Walters. 1995. Innovative Activ-<br />
ity over the Business Cycle. Economic Journal 105 (431):<br />
916-928.<br />
• Ginarte,J.C. and W.G.Park. 1997. Determinants of Pat-<br />
ent Rights: A Cross-National Study. Research Policy 26:<br />
283-301.<br />
• Glass,A. and K.Saggi. 2002. Intellectual Property Rights<br />
and Foreign Direct Investment. Journal of International<br />
Economics, 56: 387-410.<br />
• Görg,H. and D.Greenaway. 2004. Much Ado about Noth-<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
137
M ANAGEMENT OF DEVELOPMENT<br />
ing: Do Domestic Firms Really Benefit from Foreign<br />
Direct Investment? World Bank Research Observer19:<br />
171-197.<br />
• Griliches,Z. 1990. Patent Statistics as Economic Indica-<br />
tors: A Survey. Journal of Economic Literature 28(4):<br />
1661-1707.<br />
• Grossman,G.M. and E.Helpman.1990. Trade, Knowledge<br />
Spillovers and Growth. European Economic Review 35:<br />
517-526<br />
• Grossman,G.M. and E.Helpman. 1991. Trade, Innovation<br />
and Growth. American Economic Review 80 (2): 86-91.<br />
• Helpman,E. 1993. Innovation, Imitation, and Intellectual<br />
Property Rights. Econometrica, 61: 1247-1280.<br />
• Horstmann, I. and J.R.Markusen. 1987. Licensing ver-<br />
sus Direct Investment: A Model of Internalization by the<br />
Multinational Enterprise. Canadian Journal of Econom-<br />
ics, 20: 464-481.<br />
• Hu,A.G.Z. and G.H.Jefferson, and Q.Jinchang. 2005.<br />
R&D And Technology Transfer: Firm level Evidence<br />
from Chinese Industry. The Review of Economic and<br />
Statistics 87(4): 780-786.<br />
• Javorick,B.K. 2004. Composition of Foreign Direct In-<br />
vestment and Protection of Intellectual Property Rights<br />
in Transition Economies. European Economic Review<br />
48(1): 39-64.<br />
• Kanwar,S. and R.E.Evenson. 2003. Does Intellectual<br />
Property Protection Spur Technological Change? Oxford<br />
Economic Papers 55: 235-264.<br />
• Kaufer,E. 1989. The Economics of the Patent System. New<br />
York: Harwood Academic Publishers.<br />
• Kim,L. 2003. Technology Transfer and Intellectual Prop-<br />
erty Rights: The Korean Experience. <strong>Issue</strong> Paper No. 2<br />
for UNCTAD-ICTSD Project on IPRs and Sustainable<br />
Development, Geneva.<br />
• Krugman,P. 1979. A Model of Innovation, Technology<br />
Transfer, and the World Distribution of Income. Journal<br />
of Political Economy 87(2): 253-66.<br />
• Kumar,N. 2002. Globalization and the Quality of Foreign<br />
Direct Investment. New Delhi: Oxford University Press<br />
Inc.<br />
• Kumar,N. 2003. Intellectual Property Rights, Technol-<br />
ogy and Economic Development: Experience of the<br />
Asian Countries. Economic and Political Weekly 38(3):<br />
209-226.<br />
• Lach, S. 1995. Patents and productivity growth at the<br />
industry level: A First look. Economics Letters .49:<br />
101-108.<br />
• Lall,S. and M.Albaladejo. 2003. Indicators of the Relative<br />
Importance of the IPRs in Developing Countries. <strong>Issue</strong><br />
Paper No. 3, for UNCTAD-ICTSD Project on IPRs and<br />
Sustainable Development.<br />
• Lai, E.L.-C. 1998. International Intellectual Property<br />
Rights Protection and the Rate of Product Innovation.<br />
Journal of Development Economics 55: 133-153.<br />
• Lee, J.Y. and E.Mansfield. 1996. Intellectual Property<br />
Protection and U.S. Foreign Direct Investment. The Re-<br />
view of Economics and Statistics 78:181-186.<br />
• Lesser,W. 2002. The Effects of Intellectual Property<br />
Rights on Foreign Direct Investment and Imports into<br />
Developing countries in the Post TRIPs Era. IP Strategy<br />
Today 5: 1-16.<br />
• Levin,R.C.,W.M.Cohen, and D.C.Mowery. 1985. R&D<br />
Appropriability, Opportunity and Market Structure: New<br />
Evidence on Some Schumpeterian Hypotheses. American<br />
Economic Review, 75: 20-24.<br />
• Liu,X. and C.Wang. 2003. Does Foreign Direct Invest-<br />
ment Facilitate Technological Progress? Evidence from<br />
Chinese Industries. Research Policy 32: 945-953.<br />
• Machlup,F.,and E.Penrose. 1950. The Patent Controversy<br />
in the Nineteenth Century. The Journal of Economic His-<br />
tory 10(1): 1-29.<br />
• Mansfield,E. 1985. How Rapidly Does Industrial Tech-<br />
nology Leak Out? Journal of Industrial Economics 34:<br />
217-223.<br />
• Mansfield,E. 1994. Intellectual Property Protection, For-<br />
eign Direct Investment, and Technology Transfer. Discus-<br />
sion Paper no. 19, Washington DC: International Finance<br />
Corporation.<br />
• Mansfield,E. 1995. Intellectual Property Protection,<br />
Direct Investment and Technology Transfer: Germany,<br />
Japan and the United States. Discussion Paper no. 27,<br />
Washington, DC: The World Bank and International Fi-<br />
nance Corporation.<br />
• Markusen,J.R. 1995. The Boundaries of Multinational<br />
• Enterprises and the Theory of International Trade. Jour-<br />
nal of Economic Perspectives 9: 169-190.<br />
• Maskus,K.E. and M.Penubarti. 1995. How Trade-Related<br />
are Intellectual Property Rights? Journal of International<br />
138 THE IIPM THINK TANK
K NOWLEDGE WITHOUT BORDERS<br />
Economics 39: 227-248.<br />
• Maskus,K.E. 2000a. Intellectual Property Rights and<br />
Foreign Direct Investment. Policy Discussion Paper no.<br />
0022, Centre for International Economic Studies, Ad-<br />
elaide: University of Adelaide.<br />
• Maskus,K.E. 2000b. Intellectual Property Rights and<br />
Economic Development. Paper prepared for the series<br />
Beyond the Treaties: A Symposium on Compliance with<br />
International Intellectual Property Law, Cox Internation-<br />
al Law Center, Cleveland, Ohio: Case Western Reserve<br />
University.<br />
• Maskus,K.E. and J.Reichman, 2004. International Public<br />
Goods and the Transfer of Technology under a Globalized<br />
Intellectual Property Regime. Journal of International<br />
Economic Law 7(2): 275-278.<br />
• Mazzoleni,R. and R.R.Nelson. 1998. The Benefits and<br />
Costs of Strong Patent Protection: A Contribution to the<br />
Current Debate. Research Policy 27: 273-284.<br />
• McCalman,P. 2004. Foreign Direct Investment and In-<br />
tellectual Property Rights: Evidence from Hollywood's<br />
Global Distribution of Movies and Videos. Journal of<br />
International Economics 62: 107-123.<br />
• Organization for Economic Cooperation and Develop-<br />
ment (OECD). 1998. The Economic Impact of Coun-<br />
terfeiting. Document URL: http://www.oecd.org/datao-<br />
ecd/11/11/2090589.pdf<br />
• Ostergrad,Jr.R.L. 2000. The Measurement of Intellectual<br />
Property Rights Protection. Journal of International Busi-<br />
ness Studies 200: 349-360.<br />
• Penrose,E. 1973. International patenting and the less-<br />
developed countries. Economic Journal 83: 768–86.<br />
• Romer,P.M. 1990. Endogenous Growth and Technical<br />
Change. Journal of Political Economy 99: 807-827.<br />
• Saggi,K. 2002. Trade, Foreign Direct Investment, and<br />
International Technology Transfer: A Survey. World Bank<br />
Research Observe 17: 191-235.<br />
• Scherer,F.M. 1980. Industrial Market Structure and Eco-<br />
nomic Performance. Houghton Mifflin: Boston.<br />
• Scherer,F.M. 1982. Demand-Pull and Technological In-<br />
vention: Schmookler Revisited. The Journal of Industrial<br />
Economic 30(3): 225-237.<br />
• Schneider,P. 2005. International Trade, Economic Growth<br />
and Intellectual Property Rights: A Panel Data Study of<br />
Developed and Developing Countries. Journal of Devel-<br />
opment Economics, 78: 529-547.<br />
• Seyoum,B. 1996. The Impact of Intellectual Property<br />
Rights on Foreign Direct Investment. Columbia Journal<br />
of World Business 31: 50-59.<br />
• Sharma,R. and K.K.Saxena. 2007. Internationalization<br />
of Intellectual Property Right: Implications for the De-<br />
veloping Countries. In Globalization: Capital Flows,<br />
Competition, and Regulation, edited by B.Batavia and P.<br />
Nandakumar. Toronto, Canada: APF Press.<br />
• Sherwood,R.M. 1997. The TRIPS Agreement: Implica-<br />
tions for Developing Countries. The Journal of Law and<br />
Technology 37: 491-544.<br />
• Solow,R. 1957. Technical Change and the Aggregate Pro-<br />
duction Function. Review of Economics and Statistics<br />
39:312-320.<br />
• Smith,P.J. 2001. How Do Foreign Patent Rights Affect<br />
U.S. Exports, Affiliate Sales, and Licenzes? Journal of<br />
International Economics 55: 411-440.<br />
• Stewart,F. and E.Ghani. 1991. How Significant are Ex-<br />
ternalities for Development? World Development. 19 (6):<br />
569-594.<br />
• Steven,S. and T.Ypersele. 1999. Rewards versus Intellectu-<br />
al Property Rights. NBER Working Papers 6956, National<br />
Bureau of Economic Research, Cambridge, Mass.<br />
• Stiglitz,J.E. 1989. Markets, Market Failure and Eco-<br />
nomic Development. American Economic Review 79 (2):<br />
197-203.<br />
• UNCTAD. 2001. Transfer of Technology.UNCTAD/ITE/<br />
IIT/28, UNCTAD Series on issues in international invest-<br />
ment agreements, Geneva.<br />
• Vishwasrao,S. 1994. Intellectual Property Rights and the<br />
Mode of Technology Transfer. Journal of Development<br />
Economics 44 (2): 381-402.<br />
• Watal,J. 2001. Intellectual Property Rights in the WTO<br />
and Developing Countries, New Delhi: Oxford University<br />
Press<br />
• WIPO. 2005. Document URL: www.wipo.org.<br />
• Yang,G. and K.E.Maskus. 2001. Intellectual Property<br />
Rights, Licensing, and Innovation in an Endogenous<br />
Product-Cycle Model. Journal of International Econom-<br />
ics, 53: 169-187.<br />
(The views expressed in the write-up are personal and do not<br />
reflect the official policy or position of the organisation).<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
139
F INANCIAL ECONOMICS<br />
Just How Much Money is at<br />
Stake in Shares Pledged by<br />
Promoters?<br />
Jayesh Kumar<br />
Associate Vice President,<br />
Industry Research Group,<br />
Kotak Mahindra Bank<br />
SEBI in its recent directive in January mandated<br />
disclosures regarding pledge of shares by the pro-<br />
moter and persons forming part of the promoter<br />
group to the company and by the company to the stock<br />
exchanges where shares of the company are listed, post<br />
Satyam fiasco.<br />
Ever since the companies started disclosing this information,<br />
market learned the degree of this financial engineer-<br />
140 THE IIPM THINK TANK
P APER MONEY<br />
Why do firms<br />
need to take six<br />
months to disclose<br />
their financial<br />
results? Are firms<br />
capitalized well to<br />
survive?<br />
ing, which looks like an Indian version of western word’s<br />
sub-prime CDO/MBS.<br />
Majority of Indian companies have been pledging shares<br />
for more than two decades, if not longer. Promoters of 467<br />
companies have pledged with lenders an average 23% of their<br />
holdings so far. There are 114 companies whose promoters<br />
have pledged more than 50% of their own stake, and promoters<br />
of 22 companies (about five percent of disclosing companies)<br />
have pledged more than 50% of paid up shares. At<br />
current market prices, the total value of pledged stocks is<br />
over Rs 62,000 crore. This is over two percent of Indian stock<br />
market’s market-cap of Rs 30.33 lakh crore.<br />
As per the data available for 3,483 listed companies, Indian<br />
promoters hold 49.85% of paid-up shares of<br />
these companies as on December 2008.<br />
Promoter’s pledged shares on average<br />
17.07% of paid up shares. Generalization of<br />
this to all listed entities, suggests whopping<br />
258,107 crore 1 . Assuming 50% margin, the<br />
bank credit to these promoters could be<br />
pegged at Rs. 129,000 crore (about five<br />
percent of credit by entire banking system<br />
in the economy)!<br />
What would happen if the equity prices<br />
continue in its downward trend, eventually<br />
forcing promoters (those who have pledged<br />
their almost entire stake in the company)<br />
to default leaving financial institutions no<br />
other choice than to off-load all the equity<br />
in the market? And if they choose to<br />
off-load these pledged shares in the<br />
market, its bound to cause havoc on the<br />
equity prices, set to crash by at least 20-30%, and eventually<br />
the losses financial institutions may have to bear could be well<br />
about 100,000 crore (about 25% of Scheduled commercial<br />
banks capital, reserves and surplus as on March 2008).<br />
Promoter’s pledging of shares pose a corporate governance<br />
challenge in view of the indirect reduction in shareholding.<br />
Besides impacting share prices, in cases where promoter's<br />
holding is small, such sales can destabilize companies as<br />
they would become vulnerable to takeovers. SEBI introduced<br />
this new requirement because pledged shares are subject to<br />
material risks or contingencies that do not apply to other<br />
shares owned by the promoters. Moreover, these circumstances<br />
could influence the policies and decisions of the pledgor.<br />
The concern with companies, whose promoters have already<br />
pledged their entire stake, is that they now have little leeway.<br />
Any further fall in share prices may lead to margin calls by<br />
lenders and with no more shares left to be pledged, lenders<br />
could start off-loading the pledged shares in the market to<br />
recover their funds. Such off-loads highlight the potential for<br />
insider trading resulting from such involuntary sales of shares.<br />
In addition to the potential insider trading, this could also lead<br />
to violation of the insider trading policy if such off-load<br />
occurred during a blackout period.<br />
As far as, enhanced disclosures are concerned it makes more<br />
sense to also disclose other indirect pledging or shorting the<br />
direct holding, say through OTC derivatives<br />
contracts like swap agreement with overseas<br />
funds. Exclusive disclosure of pledged shares<br />
only, provides incentives financial engineering<br />
to come up with alternative ways of<br />
raising fund against equity without exclusively<br />
pledging them.<br />
Taking some more liberty, I would rather<br />
argue about increased disclosure of<br />
financials as well, if we can have quarterly<br />
reporting of P&L (un-audited) why<br />
shouldn’t we have quarterly reporting of<br />
B&S (un-audited) as well. Why do companies<br />
need to take six months to disclose<br />
their financial results when shareholders<br />
are subjected to high price volatility on<br />
daily basis?<br />
The question in every investor’s mind is<br />
whether it is just a corporate governance<br />
issue or a much deeper financial problem looming its head? Is<br />
our banking system strong enough, as argued by almost<br />
everyone in past, to weather out such blow on their balance<br />
sheets? Are they capitalized well to survive?<br />
Endnotes and Additional Thinking<br />
1<br />
SEBI directive doesn’t ask mutual funds to disclose their<br />
pledged shareholding. Mutual funds are also expected to<br />
have pledged shares to the tune of Rs. 3,000 crore.<br />
(The views expressed in the write-up are personal and do not<br />
reflect the official policy or position of the organisation)<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
141
F INANCIAL ECONOMICS<br />
Table 1: CASH COUNTER: Pledging as a percentage of Paid-up Capital<br />
Source: Company Data, Author’s calculations<br />
COMPANIES<br />
%Paid-up<br />
Shares<br />
COMPANIES<br />
%Paid-up<br />
Shares<br />
COMPANIES<br />
%Paid-up<br />
Shares<br />
India Cements Capital 85.58% Anjani Portland Cement 35.98% Pitti Laminations 25.91%<br />
Satra Properties India 73.54% Kitply 35.19% Suzlon Energy 25.85%<br />
Micro Inks 70.50% Sakthi Sugars 35.12% Excel Glasses 25.62%<br />
Falcon Tyres 68.00% Brushman India 35.07% Glory Polyfilms 25.27%<br />
Jaiprakash Hydro Power 67.52% Sudal Industries 34.91% Grabal Alok Impex 25.23%<br />
Vinay Cements 66.38% Shetron 34.71% Sona Koyo Steering 25.12%<br />
Parsvnath Developers 63.88% Dhanus Technologies 34.39% Adani Enterprises 24.98%<br />
Carol Info Services 62.82% BPL Ltd. 34.21% Super Forgings 24.92%<br />
Shaw Wallace & Co. 62.50% Birla Precision Tech 34.19% Rain Commodities 24.90%<br />
Kerala Ayurveda 61.52% Temptation Foods 34.11% Prithvi Information 24.84%<br />
JHS Svendgaard 60.00% Vanasthali Textile I. 33.87% Max India 24.81%<br />
Tata Coffee 57.48% Steel Strips Wheels 33.50% Dharani Sugars & Chem. 24.79%<br />
Era Infra Eng. 56.60% United Spirits 33.22% Nagarjuna Fertilizers 24.56%<br />
Sri Ramakrishna Mills 54.11% Shoppers Stop 33.10% CCAP 24.48%<br />
Gem Spinners 54.03% Shree Ram Mills 33.00% Medicamen Biotech 24.11%<br />
Gayatri Projects 53.73% Lloyds Metals 32.94% Genus Power Infra. 23.72%<br />
Financial Eyes India 53.33% SRF 32.83% Uttam Sugar Mills 23.28%<br />
Refnol Resins & Chem. 52.57% Uttam Galva Steels 32.19% Radaan Mediaworks 23.08%<br />
Millennium Beer 51.75% JSW Steel 31.87% Media Video 22.98%<br />
Hathway Bhawani Cable 51.00% Rama Phosphates 31.86% SAL Steel 22.95%<br />
Zandu Pharmaceutical 50.76% Lokesh Machines 31.59% LN Polyesters 22.80%<br />
Arvind Products 50.12% Essel Propack 31.16% UTV Software 22.76%<br />
Tata Teleservices Maha. 49.70% Emmsons International 30.83% Clutch Auto 22.75%<br />
Kirloskar Electric Co. 48.48% Tulip Star Hotels 30.42% South Asian Petrochem 22.75%<br />
Kamat Hotels India 47.09% JD Orgochem 30.40% Balasore Alloys 22.72%<br />
Plethico Pharma 46.97% Dolphin Offshore Ent. 30.07% Tulip Telecom 22.57%<br />
Star Paper Mills 46.54% Bhuwalka Steel 30.00% India Cements Ltd 22.43%<br />
JK Cement 45.58% Dr Agarwals Eye 30.00% Amar Remedies 22.37%<br />
Hatsun Agro Product 45.46% Ganesh Housing Corp. 30.00% Kilburn Engineering 22.23%<br />
Tuticorin Alkali 45.15% Ispat Industries 29.98% MIC Electronics 22.07%<br />
Spentex Industries 44.52% IMP Powers 29.86% Omaxe 21.95%<br />
Kingfisher Airlines 43.80% Ansal Housing & Const. 29.70% Alcobex Metals 21.88%<br />
Euro Ceramics 43.68% Polar Pharma 29.57% STL Global 21.85%<br />
Raasi Refractories 43.52% APW President Systems 29.17% Pyramid Saimira 21.72%<br />
Wockhardt 43.11% Ansal Properties 29.11% Zensar Technologies 21.55%<br />
Suryalata Spinning 41.95% Indokem 29.09% Ganesh Benzoplast 21.45%<br />
Todays Writing Products 41.46% Panchmahal Steel 29.00% Pasupati Acrylon 21.26%<br />
Haldyn Glass Gujarat 40.16% Sobha Developers 28.39% Expo Gas Containers 21.21%<br />
HFCL Infotel 39.39% Time Technoplast 28.18% Alok Industries 21.06%<br />
142 THE IIPM THINK TANK
P APER MONEY<br />
Source: Company Data, Author’s calculations<br />
COMPANIES<br />
%Paid-up<br />
Shares<br />
COMPANIES<br />
%Paid-up<br />
Shares<br />
COMPANIES<br />
%Paid-up<br />
Shares<br />
Supreme Holdings 39.29% Solix Technologies 28.11% Kalpataru Power Trans. 20.92%<br />
Aurobindo Pharma 38.97% Emami 27.89% Hotel Leelaventure 20.87%<br />
Manali Petrochemical 38.29% Broadcast Initiatives 27.28% Fortis Healthcare 20.75%<br />
Dharamsi Morarji Chem. 38.00% Indage Vintners 27.16% ETC Networks 20.33%<br />
UB Engineering 37.81% Cranes Software Int. 27.00% Rajratan Global Wire 20.13%<br />
ORG Informatics 37.27% Entegra 26.89% Murudeshwar Ceramics 20.08%<br />
Oricon Enterprises 36.93% Jindal Drilling & Ind. 26.86% Tata Chemicals 20.02%<br />
Mirc Electronics 36.82% Mukand 26.67% Amit Spinning 20.00%<br />
Bell Ceramics 36.80% Refex Refrigerants 26.60% Srinivasa Shipping 20.00%<br />
GEI Industrial Sys. 36.78% Photoquip India 26.21% SSPDL 20.00%<br />
Videocon Industries 36.41% Sri Adhikari Brothers 26.04% Kriti Industries 19.95%<br />
S.Kumars Nationwide 36.21% Regency Ceramics 26.03% Balaji Amines 19.85%<br />
Bihar Sponge Iron 36.06% Simbhaoli Sugars 25.95% Blue Coast Hotels 19.81%<br />
Shyam Telecom 19.52% Prime Focus 14.93% Lyka Labs 11.82%<br />
Pantaloon Retail 19.49% Escorts Finance 14.91% Usha Martin 11.82%<br />
Winsome Yarns 19.48% Suryachakra Power Corp. 14.91% Raj Rayon 11.75%<br />
Shrenuj & Company 19.47% Sintex Industries 14.90% Prajay Engineers 11.66%<br />
Ahlcon Parenterals 19.44% Great Offshore 14.88% Zee Entertainment 11.53%<br />
Quintegra Solutions 19.42% Fluidomat 14.83% Ess Dee Aluminium 11.49%<br />
Jyoti 19.37% Polar Industries 14.78% Tata Tea 11.32%<br />
Deepak Spinners 19.33% Nikhil Adhesives 14.71% Gemini Communication 11.28%<br />
Innocorp 18.98% Tata Power 14.59% Visaka Industries 11.24%<br />
Raunaq Automotive 18.91% Vikash Metal & Power 14.54% Arvind International 11.22%<br />
Karuturi Global 18.77% Kreb Biochemicals 14.53% Tata Consultancy Serv. 11.14%<br />
Ahluwalia Contracts 18.76% Richa Industries 14.53% Bihar Tubes 11.09%<br />
Gallantt Metal 18.64% Khandwala Securities 14.52% Torrent Power 11.07%<br />
Software Technology Grps 18.59% LGS Global 14.49% Bilpower 11.05%<br />
Mcleod Russel 18.47% Peninsula Land 14.36% Ritesh Properties 10.92%<br />
Bombay Rayon 18.43% Gati 14.34% Gammon India 10.85%<br />
Riga Sugar Company 18.36% Wintac 14.29% Diana Tea Co. 10.72%<br />
Arvind Ltd 18.18% Dagger Forst Tools 14.28% Shreyas Intermediates 10.69%<br />
Well Pack Papers 18.04% Elecon Engineering 14.27% Apollo Tyres 10.62%<br />
Jasch Industries 17.65% Kale Consultants 13.82% Rajapalayam Mills 10.59%<br />
Heritage Foods India 17.35% Wanbury 13.71% Premier Explosives 10.57%<br />
Zee News 17.17% Jubilant Organosys 13.66% Tata Communications 10.53%<br />
Bhushan Steel 17.01% Williamson Magor 13.56% Granules India 10.43%<br />
ASM Technologies 17.00% Zicom Electronic S S 13.54% Value Industries 10.40%<br />
PBA Infrastructure 16.99% Tata Steel 13.53% Nijjer Agro Foods 10.39%<br />
Tamilnadu Petro. 16.93% Akruti City 13.34% Alps Industries 10.14%<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
143
F INANCIAL ECONOMICS<br />
Source: Company Data, Author’s calculations<br />
COMPANIES<br />
%Paid-up<br />
Shares<br />
COMPANIES<br />
%Paid-up<br />
Shares<br />
COMPANIES<br />
%Paid-up<br />
Shares<br />
Reliance Chemotex Inds. 16.91% Integra Capital Manag. 13.34% Accentia Technologies 10.00%<br />
Aurionpro Solutions 16.85% Sterling Biotech 13.32% Onward Technologies 9.83%<br />
Wire & Wireless 16.84% McDowell Holdings 13.22% J Kumar Infraprojects 9.76%<br />
Strides Arcolab 16.83% Reliance Communications 13.19% Supreme Industries 9.72%<br />
Pioneer Embroideries 16.75% Lloyds Steel Inds. 13.13% Shree Ashtavinayaka CV 9.71%<br />
Sky Industries 16.68% IG Petrochemicals 13.11% Spanco 9.69%<br />
GI Engineering 16.64% Provogue India 12.98% DCM Shriram Inds. 9.53%<br />
Ipca Laboratories 16.41% Rama Petrochemicals 12.98% Nirlon 9.51%<br />
NOCIL 16.41% Rajvir Industries 12.95% Rainbow Denim 9.51%<br />
BGIL Films 16.35% Marg Ltd. 12.78% Orient Press 9.50%<br />
Reliance Infra 16.35% Cupid 12.72% HEG 9.47%<br />
Transformers & Rectif. 16.33% C&C Construction 12.60% Dabur India 9.24%<br />
Hindustan Motors 16.30% Lupin 12.60% Nagarjuna Construction 9.20%<br />
Amrit Banaspati 16.28% Schrader Duncan 12.58% Bartronics India 9.17%<br />
Alembic 16.10% Arshiya International 12.55% Eimco Elecon India 8.67%<br />
Sutlej Textiles & Inds. 16.10% Sankhya Infotech 12.43% Ruchi Strips & Alloys 8.64%<br />
Gujarat NRE Coke 15.96% Futura Polyesters 12.40% Lanco Infratech 8.53%<br />
Saurashtra Cement 15.63% Motilal Oswal Fin 12.38% Shree Renuka Sugars 8.45%<br />
Amforge Industries 15.60% Resurgere Mines 12.26% Raymond 8.31%<br />
Helios & Matheson 15.58% Adhunik Metaliks 12.16% CHD Developers 8.25%<br />
Vipul 15.48% Alchemist 12.07% Damodar Threads 8.22%<br />
Jindal Worldwide 15.44% XL Telecom 12.05% Tata Motors 8.15%<br />
Network 18 Media & I. 15.20% Godawari Power & Ispat 12.04% Aban Offshore 8.14%<br />
<strong>May</strong>tas Infra 15.14% Genesys International 12.01% Indage Restaurants 8.12%<br />
Nova Petrochemicals 15.00% Thiru Arooran Sugars 11.97% Mahindra & Mahindra 8.09%<br />
Asian Paints 14.98% Kemrock Inds. & Exports 11.89% Chowgule Steamships 7.99%<br />
Nachmo Knitex 7.88% Bajaj Finserv 4.41% Pennar Industries 1.98%<br />
Pradeep Metals 7.86% GVK Power & Infra. 4.37% Modison Metals 1.90%<br />
Chambal Fert. & Chem. 7.72% LG Balakrishnan & Bros 4.28% CCL Products 1.87%<br />
Mold Tek Technologies 7.60% Birla Ericsson Optical 4.17% Khaitan Electricals 1.84%<br />
Simplex Infra 7.60% Gangotri Iron & Steel 4.15% Shree Bhawani Paper 1.73%<br />
Godrej Consumer Products 7.58% Elpro International 4.05% IOL Netcom 1.72%<br />
United Breweries Holdings 7.48% ISMT 4.03% ICSA India 1.71%<br />
Jindal Saw 7.32% Reliance Capital 4.03% Aksh Optifibre 1.69%<br />
Accel Transmatic 7.25% Mangalam Drugs 3.98% Jindal Steel & Power 1.65%<br />
Premier Ltd. 7.24% Indian Metals 3.90% Kopran 1.64%<br />
Subex 7.20% Bajaj Holdings & Inv. 3.82% Moser Baer India 1.56%<br />
Dish TV India 7.17% Everonn Systems India 3.81% Television Eighteen 1.52%<br />
Sahara One Media & Ent. 6.97% Taneja Aerospace 3.81% Sarda Energy & Minrls. 1.47%<br />
144 THE IIPM THINK TANK
P APER MONEY<br />
COMPANIES<br />
%Paid-up<br />
Shares<br />
COMPANIES<br />
%Paid-up<br />
Shares<br />
COMPANIES<br />
%Paid-up<br />
Shares<br />
Zuari Industries 6.90% Andhra Pradesh Paper M. 3.77% Vardhman Polytex 1.46%<br />
Gammon India Ltd. 6.86% Natco Pharma 3.74% Bajaj Electricals 1.45%<br />
Sujana Metal Products 6.79% EIH 3.64% Goldstone Infratech 1.39%<br />
Balaji Telefilms 6.59% Panoramic Universal 3.61% Pioneer Investcorp 1.25%<br />
Vamshi Rubber 6.59% Multi Arc India 3.60% Punj Lloyd 1.20%<br />
Silktex 6.56% Vishal Retail 3.51% Nakoda Textile Inds. 1.18%<br />
Nicco Corpporation 6.52% Indian Hotels Company 3.46% Camlin Fine Chemicals 1.03%<br />
Suryajyoti Spng. Mills 6.48% Logix Microsystems 3.44% Khaitan Chemicals 1.03%<br />
Dishman Pharmaceuticals 6.44% Ballarpur Industries 3.38% Camlin Ltd. 1.00%<br />
Nava Bharat Ventures 6.44% LGB Forge 3.36% Marsons Ltd. 0.93%<br />
B.L. Kashyap & Sons 6.40% Shasun Chemicals 3.23% Crest Animation Studios 0.89%<br />
PI Industries 6.37% PVP Ventures 3.22% Ramco Systems 0.85%<br />
Crompton Greaves 6.22% Paramount Comm 3.20% Geodesic 0.82%<br />
Ashapura Minechem 6.20% KLG Systel 3.18% HBL Power Systems 0.78%<br />
Facor Alloys 6.20% Cambridge Technology 3.13% HCL Infosystems 0.77%<br />
Ontrack Systems 6.20% Sujana Towers 3.12% Religare Enterprises 0.58%<br />
Dr Reddys Laboratories 6.19% Neuland Labs. 3.10% Astra Microwave Prod. 0.56%<br />
Oxford Industries 5.98% Ashima 3.00% Gillette India 0.49%<br />
Navin Fluorine 5.83% Golden Tobacco 3.00% Sree Rayalaseema Alkl. 0.44%<br />
CESC 5.74% Jai Balaji Industries 2.96% Priyadarshini Spinning 0.42%<br />
Ramsarup Industries 5.70% Sanghvi Movers 2.95% Sun Pharmaceutical 0.42%<br />
Upper Ganges Sugar1 5.69% Filatex India 2.91% Asian Electronics 0.40%<br />
Four Soft 5.52% McNally Bharat 2.89% Maxwell Industries 0.40%<br />
United Phosphorus 5.52% Oriental Carbon & Chem. 2.87% Kpit Cummins 0.38%<br />
Setco Automotive 5.48% Mascon Global 2.73% First Leasing Co. 0.37%<br />
Bharati Shipyard 5.44% Electrotherm India 2.62% Forbes & Company 0.37%<br />
Hind Syntex 5.33% Rolta 2.58% Phoenix Mills 0.35%<br />
MSK Projects India 5.33% Bajaj Auto 2.57% Ruchi Soya 0.29%<br />
Walchandnagar Inds. 5.25% Marsons 2.57% MindTree 0.27%<br />
Digjam 5.24% Ruchi Infrastructure 2.46% Astra Microwave Prod 0.24%<br />
Jain Irrigation Systems 5.13% Emco 2.36% Century Textiles & Ind. 0.21%<br />
Kavveri Telecom 5.09% Uflex 2.28% Comfort Intech 0.19%<br />
Usher Agro 5.04% Upper Ganges Sugar2 2.25% DCW 0.16%<br />
Godawari Power 4.92% PVR 2.17% JIK Industries 0.13%<br />
Zylog Systems 4.86% Jaiprakash Associates 2.15% OCL India 0.09%<br />
Hikal 4.72% Madras Cements 2.11% India Infoline Ltd. 0.05%<br />
KEI Industries 4.59% Atlanta 2.05% JB Chemicals 0.04%<br />
Kirloskar Oil Engines 4.55% Kajaria Ceramics 2.04% Kotak Mahindra Bank 0.01%<br />
Mundra Port 4.51% Upper Ganges Sugar3 2.03% Great Eastern Shipping 0.01%<br />
Source: Company Data, Author’s calculations<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
145
E CONOMIC SOCIOLOGY<br />
Consumerism in the Eyes of a<br />
Rational Optimist<br />
Suchismita Mondal Sarkar<br />
Assistant Professor,<br />
University of Burdwan,<br />
West Bengal, India<br />
146 THE IIPM THINK TANK
B OURGEOIS BOHEMIANS<br />
“Earth provides enough to satisfy everyman’s need but not<br />
everyman’s greed.” -Mahatma Gandhi<br />
When the global economic players are cheering<br />
on India’s fostering economic growth with<br />
increasing shopping mall as the symbol of this<br />
growth, consumerism and consumer culture have become<br />
central to ethical discussions of identity, post modernity<br />
and culture as never before.<br />
Economic expansion takes place through mass production<br />
of more goods in a efficient manner. This increased<br />
production needs to be consumed. When market comes to<br />
the picture, country like India tops the list. Goods from<br />
the western world has a ready market in India. When<br />
different countries are having discussions over the core<br />
issue of climate change and environmental pollution, our<br />
focus is to the rapidly growing consumer class that appears<br />
to enthusiastically welcoming the western way of<br />
living.<br />
This has unleashed the demons of pollution economy<br />
wide. Pollution created in this process<br />
can be of two types– one is the environmental<br />
pollution resulting from the<br />
manufacturing process, dumping of<br />
consumer goods etc and the other is the<br />
pollution of culture and mind. Here the<br />
latter is the central point of discussion.<br />
It results as the proliferation of consumer<br />
goods- the culture and meanings<br />
being ascribed to these goods by their<br />
marketing agencies are injected (impinges)<br />
into the consumer. A culture thus being created is<br />
transformed that gradually occupies the mental space of<br />
the consumer. Marketing agencies thus became an industry<br />
producing culture.<br />
Environmental pollution is a problem that can be<br />
addressed by technical solutions and social restructuring<br />
but pollution of mind and erosion of culture is rather<br />
difficult to address. The problem has no technical fixes<br />
nor any discourse of thinking about solutions.<br />
Culture and Consumer Culture<br />
A culture is a set of rules, people use to function in a<br />
Pollution of mind<br />
and erosion of<br />
culture is rather<br />
difficult to address<br />
rather than the<br />
environmental<br />
pollution<br />
society. A society is dominated and identified by its<br />
culture – tangible and intangible or material and symbolic,<br />
resources available to the members living in it.<br />
Consumer culture therefore can be defined as a social<br />
arrangement between culture and the resources that<br />
members of the society have at their disposal are distributed.<br />
Individual transforms into consumer and whatever<br />
material resources she or he needs to function in a society<br />
– status, prestige, esteem, love and salvation are all<br />
available in the marketplace. Cultural meanings and<br />
values get imbibed in material possession and eventually it<br />
becomes easier to communicate information about<br />
oneself through possessions and through deeds.<br />
In consumer culture everything that we want from basic<br />
needs (food, shelter) to entertainment, gossip etc. are<br />
available through market. Culture continues to be produced<br />
and reproduced through market.<br />
From a Marxist perspective, it is a wage relation – the<br />
consumer’s access to consumption is structured by distribution<br />
of material and cultural resources (money and<br />
taste), that is, it is determined by crucial ways of market<br />
relations – wage relation and social<br />
class. It is capitalist relations of production<br />
that produces the consumer.<br />
Capitalism requires a constantly<br />
expanding consumer class for the mass<br />
production of consumer goods to get<br />
distributed in an efficient way. Consumer<br />
culture is incompatible with political<br />
regulation of consumption that suppresses<br />
the market. So it does not arise<br />
in a non-capitalist society.<br />
Features of Consumer Culture<br />
It is inherent in consumer culture that :<br />
1) Consumption becomes the central focus of social life.<br />
Values are dominated by a culture that encourages<br />
consumption practices, more commodified and as a<br />
society of choice and consumer sovereignty.<br />
2) The culture is dictated by market relations of consumers<br />
having resources at their disposal, who are free to<br />
make choices and mindless consumption, which is<br />
ideologically declared out of bounds to public intervention,<br />
social and political authority.<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
147
E CONOMIC SOCIOLOGY<br />
Globally, the 20% of the world’s people in the highestincome<br />
countries account for 86% of total private<br />
consumption expenditures — the poorest 20% a<br />
minuscule 1.3%.<br />
More specifically, the richest fifth:<br />
Consume 45% of all meat and fish, the poorest fifth 5%<br />
Consume 58% of total energy, the poorest fifth less<br />
than 4%<br />
Have 74% of all telephone lines, the poorest fifth 1.5%<br />
Consume 84% of all paper, the poorest fifth 1.1%<br />
Own 87% of the world’s vehicle fleet, the poorest fifth<br />
less than 1%<br />
Runaway growth in consumption in the past 50 years is<br />
putting strains on the environment never before seen.<br />
-Human Development Report 1998 (UNDP)<br />
belief that economic growth advances the development of<br />
mind, spirit and culture. Values are being redefined<br />
according to the purpose they serve.<br />
Today’s consumption is undermining the environmental<br />
resource base. It is exacerbating inequalities. And the<br />
dynamics of the consumption-poverty-inequality-environment<br />
nexus are accelerating. If the trends continue<br />
without change — not redistributing from high-income to<br />
low-income consumers, not shifting from polluting to<br />
cleaner goods and production technologies, not promoting<br />
goods that empower poor producers, not shifting priority<br />
from consumption for conspicuous display to meeting<br />
basic needs — today’s problems of consumption and<br />
human development will worsen. The real issue is not<br />
consumption itself but its patterns and effects. Inequalities<br />
in consumption are stark.<br />
3) In consumer culture, possessions and goods signify<br />
status, social identity and dictate the ways to make<br />
social appearance, networks and social values.<br />
Consumerism – An Iron Cage<br />
In thinking about modernity and<br />
modern capitalism, Max Weber spoke a<br />
century ago about an iron cage.<br />
Consumerism brings to mind a<br />
different cage.<br />
The ethos of limitless consumption<br />
encourages us to regress, privatization<br />
compels us to withdraw from our public<br />
selves and force ourselves to get confined<br />
to small enclaves where we deploy private resources<br />
to turn what were once public goods such as garbage<br />
collection, police protection, and schooling into private<br />
commodities. To protect a few in midst of general insecurity,<br />
to educate a few in the midst of societal ignorance<br />
becomes increasingly difficult.<br />
According to some psychologist by embracing this<br />
freedom of market place in every aspects of our lives, the<br />
things we value most – the relations that are core to<br />
human existence are being threatened and becoming<br />
increasingly difficult to achieve. The ‘consumption<br />
maximum’ attitude strictly contrast the long standing<br />
In wealthy<br />
countries,<br />
economic growth<br />
rather than culture<br />
advancement<br />
continues to be a<br />
central policy goal<br />
The Paradox of Growth<br />
Modern affluent societies are characterized by an increasing<br />
hectic pace of living, growth oriented economic<br />
policies and wasteful service economies. Economic<br />
growth leads people to optimize the use<br />
of time they spend, by increasing the<br />
amount of goods consumed and decreasing<br />
the amount of time spent on<br />
with each.<br />
In wealthy countries, economic<br />
growth rather than culture advancement<br />
continues to be a central policy<br />
goal even though general welfare has<br />
advanced to the point where most<br />
people can satisfy their basic material<br />
needs. This is paradoxical since the historical image of a<br />
affluent society is one in which the satisfaction of basic<br />
needs leads to individual and cultural development. The<br />
increasing scarcity of time is probably the root cause of<br />
this paradox. The scarcity of time is reflected in every<br />
sphere of life from our food habits to entertainment.<br />
People are more indulged towards fast food at restaurant<br />
than cooking at home. Night clubs, Pizza huts and cafes<br />
now resembles an affluent society.<br />
Again a growing economy is defined by its consumption<br />
pattern and expenditure. Expanding market implies<br />
growing economy. But the question that arises is if this<br />
148 THE IIPM THINK TANK
B OURGEOIS BOHEMIANS<br />
growth is driven by market orientation rooted in the<br />
culture of mindless consumption, with people doing well<br />
enough to have discretionary income to spend, with<br />
personal problems turning towards market for solutions,<br />
then in the long run larger social problems may arise,<br />
which may threaten our integrity.<br />
In times of recession, people restrain from spending.<br />
When people buy less, businesses need to produce less, so<br />
they need fewer employees. So people lose their jobs and<br />
then they too spend less and eventually more people lose<br />
their jobs in this process. Some social scientists believe<br />
that an economy based on consumerism is somehow an<br />
offense against virtue. But what else, actually, could any<br />
economy be based on? The “economy” means that the<br />
goods and services are produced and consumed which<br />
makes everyone better off. That production of things<br />
people want is the source of all wealth and income and<br />
our entire standard of living. It doesn’t come from heaven,<br />
or “society,” or government.<br />
We are employed to produce these goods. And if all<br />
consumerism is stopped, we’d all be out of jobs. The<br />
paradox lies here. This paradox is based on the proposition,<br />
put forth in Keynesian economics, that many economic<br />
downturns are demand based. Excess of anything,<br />
including consumerism can be bad. But people have to<br />
consume. It’s a question of balance.<br />
Higher Education Engulfed in Consumerism<br />
Recent trends have produced a job oriented consumer of<br />
higher education. This ‘consumerist attitude’ has been a<br />
great concern for many academics and non-academics.<br />
The increasing reach of ideologies of consumerism and<br />
commodification worries some. People experience<br />
freedom by choosing what to consumer, at the same time,<br />
consumerism forces everything to become a commodity<br />
that must work to attract consumers so it can be judged<br />
and then either purchased or rejected.<br />
Faculty worry that the whole of the market logic is transferred<br />
to the educational arena, resulting in constrained<br />
freedom of expression and challenges to academic freedom.<br />
The academic world is the only place where the<br />
consumers eventually becomes the product and literally<br />
does sell themselves.<br />
The expanding attitude of consumerism has reached out<br />
from the shopping malls and stock markets into the very<br />
heart of the academy. It unchecked, this capitalist society<br />
will consume the heart of knowledge and learning and<br />
have in its place – memorization and passionless lectures.<br />
Higher education was a service to society and society<br />
sought to serve the academy in return. The senses of civic<br />
duty, democracy and spirituality were the components of<br />
education which were further considered as moral backbone<br />
of society. But from its noble beginnings as instruction,<br />
higher education has transformed into a training<br />
ground for professions. Thus we are approaching towards<br />
an era of educational consumerism.<br />
Conclusion<br />
India is changing rapidly with the world and we have no<br />
idea about the changing scenario that will engulf our<br />
culture and tradition. Light cannot be seen at the end of<br />
the tunnel but the only hope is that some people are<br />
asking questions against full-fledged consumerism and<br />
are thinking of a reasonable approach to combine tradition,<br />
culture with it and make consumerism unique in<br />
India.<br />
Thus, India should endeavour to evolve its own unique<br />
consumer cultures that will not only produce thriving<br />
economies but also offer people more meaningful and less<br />
market based ways to develop a sense of self. It must adopt<br />
the technologies and practices that will create a new<br />
standard of consumerism so that the potential impact of<br />
businesses would help to address climate and poverty<br />
related problems as well as those that support traditional<br />
consumerism in a more efficient, eco-friendly manner.<br />
So we must believe to be optimistic about what can be<br />
changed and not what can be eliminated or subtracted.<br />
References and Additional Thinking<br />
• Zavestosky Dr Stephen; 2007: “Consumerism in<br />
India:A Faustian Bargain?”in ‘<strong>Issue</strong>s in development<br />
Management’ UGC DRS Publications of University of<br />
Calcutta.<br />
• Kaplan Jeffrey;2008: “The Gospel of Consumption”<br />
published in “Orion” Magazine.<br />
(The views expressed in the article are personal and do not<br />
reflect the official policy or position of the organisation).<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
149
P OLITICAL ECONOMY<br />
A DIFFERENT PERSPECTIVE<br />
ON THE US-INDIA NUCLEAR DEAL<br />
150 THE IIPM THINK TANK
I N PERSPECTIVE<br />
Peter Custers<br />
Affiliated Researcher, International<br />
Institute for Asian Studies (IIAS), Leiden,<br />
Netherlands<br />
Introduction<br />
This essay discusses the hazardous and wasteful implications<br />
of the US-India nuclear deal beyond its implications<br />
for the nuclear arms’ race in the subcontinent. Most of the<br />
key objections against the deal that have been put forward<br />
by progressive opponents of the deal in India and internationally,<br />
have addressed the fact that it legitimizes India’s<br />
status as a nuclear weapons’ state, and that it will enable<br />
India to expand its production of weapons’ grade plutonium.<br />
Already, India is estimated to possess a sufficient<br />
amount of plutonium for the manufacturing of at least a<br />
hundred atomic bombs. Since India reportedly has agreed<br />
to place only 14 out of its 22 civilian reactors under the<br />
IAEA’s inspection regime, it is free to produce in the<br />
remaining 8 reactors another 200<br />
kilograms of weapons’ grade plutonium<br />
per year 1 . Thus, fears that the controversial<br />
deal will enhance the danger of a<br />
nuclear conflagration in South Asia<br />
appear to be well grounded, - even if we<br />
leave aside all other interrelated objections<br />
that have been raised.<br />
In this essay, the spotlights will not be<br />
put on India’s past and future plans for<br />
production of weapons’ grade plutonium<br />
and nuclear bombs, but on two other major questions.<br />
For the US-India nuclear deal needs to be also and<br />
fiercely questioned with regard to its ostensible aims, i.e.<br />
the vast expansion in the production of nuclear energy.<br />
Whereas a more than 10-fold increase in generation of<br />
nuclear energy, as foreseen, may help to overcome India’s<br />
rapidly growing energy needs, - the side-effects in terms of<br />
generation of nuclear waste are so ponderous, that from<br />
this perspective too, implementation of the deal needs to<br />
be pre-empted. Moreover, as reported briefly in India’s<br />
national press in September last, when the signing of the<br />
deal was being debated, - there is a little discussed ‘reverse<br />
The N-deal is<br />
bound to result in<br />
huge quantities<br />
and extremely<br />
dangerous waste<br />
that can't be sold<br />
on the market<br />
side’ to the nuclear deal, being the US’s additional commercial<br />
objectives relating to its arms’ exports. For the US<br />
is poised to lobby aggressively, so as to capture a larger<br />
share of India’s arms’ imports than it has held up until<br />
now.<br />
The conceptual approach proposed so as to address<br />
these combined issues, is a holistic view on waste. In this<br />
view, processes of manufacturing that result in military<br />
commodities, i.e. in weaponry, basically need to be<br />
analyzed as processes that result in wastage of economic<br />
resources. This, for instance, is the case where economic<br />
policymakers deciding to purchase armament systems do<br />
not primarily have in mind security considerations, but<br />
macro-economic stimulation of domestic demand for<br />
goods. However, this, the production of ‘social waste’,<br />
generally does not stand alone, but needs to be juxtaposed<br />
with the generation of ‘non-commodity waste’ during the<br />
same industrial processes. Whereas conventional economics<br />
discusses these side-effects of industrial manufacturing<br />
under the heading of ‘externalities’, - in this essay the term<br />
non-commodity waste will be used, whenever reference<br />
will be made to the ecologically harmful<br />
by-products of industrial manufacturing<br />
2 .<br />
Whereas ‘social’ waste and ‘non-commodity’<br />
waste are rarely juxtaposed in<br />
public debate, - the US India nuclear<br />
deal and its reverse side offer an occasion<br />
to do precisely this. As the below<br />
cited data on the generation of waste in<br />
the nuclear production chain show, - the<br />
US-India nuclear deal is bound to result<br />
in huge quantities and extremely dangerous waste that<br />
cannot be sold on the market, but needs to be put aside, at<br />
great risks to humans and to our natural environment.<br />
Again, the importation of expensive armament systems<br />
entails the waste of vast economic resources that could be<br />
used towards relieving India’s persistent mass poverty,<br />
hence should be considered importation of social waste.<br />
Moreover, the issues of ‘social’ and ‘non-commodity’<br />
waste can also be posed in relation to the manufacturing<br />
of weapons’ grade plutonium and atomic weapons, where<br />
generation of the two given forms of waste occurs simultaneously<br />
3 .<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
151
P OLITICAL ECONOMY<br />
The Nuclear Deal: Importation of Nuclear Tech-<br />
nology and and Importation of US Armament<br />
Systems<br />
As starting point for my discussion I will take two newspaper<br />
articles published in the Times of India on September<br />
11 th last. One of these highlighted the business prospects<br />
of the US-India nuclear deal via the sale of nuclear<br />
production technology, and via the importation and the<br />
construction of nuclear reactors in India. The second<br />
article discussed the aspiration of the US in terms of<br />
expanded exports of armament systems to India. To take<br />
the article on plans for expansion of nuclear energy<br />
production first, - it spoke very glowingly about the <strong>size</strong> of<br />
business that will be generated, mentioning<br />
a figure of 40 Billion US Dollars<br />
worth of orders Indian and foreign<br />
enterprises stand to receive, and hailing<br />
the deal as a ‘project’ having a financial<br />
<strong>size</strong> of Rupees 2.4 lakh crore. Under the<br />
deal, a reported 24 light-water reactors<br />
will be imported from abroad and<br />
installed along India’s coasts (!). India<br />
plans to build a further 12 indigenous<br />
nuclear plants, consisting of pressurized<br />
heavy water reactors. At no point in the<br />
article are the implications of the<br />
nuclear deal in terms of generation of<br />
additional nuclear waste discussed 4 !<br />
In another article published in the<br />
Times of India on the very same day, the<br />
secondary objectives of the US, which<br />
traditionally is not a major seller of<br />
military hardware to India, are described. The article<br />
delineates the huge <strong>size</strong> of India’s overall arms’ imports. It<br />
states that since the Kargil conflict, India has spent a<br />
‘whopping’ $ 25 Billion on imports of weaponry. The<br />
country is ‘poised’ to spend another $ 30 Billion on such<br />
purchases over the next 5-6 years (!). Thus, the US is vying<br />
to capture a whole series of arms’ orders which India<br />
intends to place on the world market for arms. Indian<br />
import plans reportedly include a $ 170 million plan for<br />
the buying of anti-ship Harpoon missiles, a Rs 42,000<br />
Crore project for the purchase of multi-role combat<br />
aircraft, and purchases of 197 light utility and observation<br />
India plans to<br />
build a further<br />
12 indigenous<br />
nuclear plants,<br />
consisting of<br />
pressurized heavy<br />
water reactors<br />
helicopters worth another Rs 3,000 Crore. A deal mentioned<br />
that has already been clinched, and has been sent<br />
for approval to the US Congress, is the arms’ deal – described<br />
as India’s ‘biggest ever’ with the US – for the<br />
purchase of 8 Boeing reconnaissance aircraft, estimated<br />
to cost no less than Rs 8,500 Crore. At no point in the<br />
article is it explained that such lavish spending on arms’<br />
imports represents a form of social waste, and that the<br />
same financial resources could well be spent on alleviating<br />
the massive poverty that still exists in India 5 .<br />
Officially, of course, the US- India nuclear deal and the<br />
listed plans to import armaments are no interconnected<br />
issues. The arms’ purchases do not directly form part of<br />
the agreement surrounding importation<br />
of nuclear technology. And yet it is<br />
probably correct to see the US’s hopes to<br />
overtake other foreign suppliers of arms<br />
to India as a reverse side of the nuclear<br />
deal, as was indeed hinted at in the<br />
article of the Times of India. In any case,<br />
juxtaposition of the two issues enables us<br />
to look more holistically at the wasteful<br />
implications of the Indian government’s<br />
behavior, than a focus on the US-India<br />
nuclear deal alone would allow us to do.<br />
Hence, below I am going to address<br />
both the generation of nuclear waste<br />
that will occur in consequence of the<br />
nuclear deal, and India’s arms’ imports,<br />
in order to show the full extent of waste<br />
creation that is involved.<br />
The Generation of Hazardous Waste in the<br />
Nuclear Production Chain<br />
Let’s take the issue of nuclear waste generation first. I do<br />
not possess comprehensive data on the nuclear waste that<br />
has been generated by nuclear production in India so far.<br />
Nor am I in a position to give a precise assessment regarding<br />
the waste that importation and construction of new<br />
reactors will result in. However, the experience of nuclear<br />
production worldwide is unequivocal: nuclear waste<br />
emerges at each and every link in the nuclear production<br />
chain, starting from the very first stage, i.e. that of uranium<br />
mining and milling, and lasting up to the stage where<br />
152 THE IIPM THINK TANK
I N PERSPECTIVE<br />
nuclear fuel elements are treated in reprocessing facilities.<br />
An important source for my own understanding of these<br />
issues is the book ‘Nuclear Wastelands’, written by a group<br />
of scientists led by the US-based Indian academician<br />
Arjun Makhijani, which book primarily reviews waste<br />
generation by nuclear-military production facilities 6 . From<br />
this and other sources, I have selected three cases of waste<br />
generation, namely: the waste tailings that emerge when<br />
uranium is mined and milled; depreciated fuel elements<br />
which themselves are a form of nuclear waste; and the<br />
high-level waste that needs to be put aside when former<br />
nuclear fuel elements are reprocessed.<br />
Uranium mining is, of course, the very first stage in the<br />
whole nuclear production chain. As<br />
known, such mining is also undertaken in<br />
India, and would likely be intensified in<br />
consequence of the US-India nuclear<br />
deal. When uranium ore is mined and<br />
uranium is prepared and enriched,<br />
towards employment as raw material for<br />
making nuclear fuel elements, a truly<br />
huge amount of hazardous material in<br />
the form of mill tailings is left behind, -<br />
tailings which do contain radioactive<br />
substances and are therefore hazardous<br />
for humans and for nature. Speaking in<br />
volume terms, these tailings reportedly<br />
constitute 95% of all the nuclear waste<br />
that is generated in the nuclear production<br />
chain. Among the radioactive<br />
substances found in mill tailings are for<br />
instance radium-226 and thorium-230,<br />
which latter radioactive element has a half-life of 76<br />
thousand years, meaning that it will take that many years<br />
before half of the radioactivity contained in the thorium<br />
will have decayed. In mining uranium and in creating the<br />
tailings, capitalist entrepreneurs are not just burdening<br />
our children and grand children with the consequences of<br />
uranium extraction, but entire future generations, and<br />
such for an almost indefinite period of time. The damaging<br />
consequences of uranium mining have been recorded<br />
well in the US, where nuclear production was historically<br />
started. Here, tailing dams have turned into slurry after<br />
downpours of rain. Between 1955 and 1977 a total of<br />
Even microgram<br />
quantities<br />
of plutonium,<br />
when inhaled<br />
by humans, are<br />
known to result in<br />
fatal cancers<br />
fifteen tailing dams have broken. In one such case, the<br />
river Rio Puerco was flooded with 94 million gallons of<br />
tailing liquids, resulting in contamination of a long stretch<br />
of the river 7 .<br />
Another stage in the nuclear production chain known to<br />
generate dangerous waste, is the stage where nuclear<br />
energy is generated in reactors. Surely, the production of<br />
nuclear energy can be seen as a contribution to human<br />
welfare, if purely looked at from the perspective of energy<br />
generation. Yet the hazardous implications from employment<br />
of the nuclear fuel rods in the reactors are multifarious.<br />
A section of the rods needs to be taken out regularly,<br />
as the nuclear fuel elements can be utilized for only three<br />
years. Now in the parlance of economic<br />
theory the fuel elements once taken out<br />
are considered 'depreciated means of<br />
production'. They are presumed to have<br />
lost all the value that has been transferred<br />
to the new commodity, the nuclear<br />
energy. Yet the fuel elements undoubtedly<br />
are a form of hazardous waste.<br />
Speaking in quantitative terms, the <strong>size</strong><br />
of this waste seems small. Yet the<br />
radioactivity contained in the spent fuel<br />
elements is truly intense. The radioactive<br />
elements present in this nuclear<br />
waste include uranium, strontium-90,<br />
caesium-137 and plutonium. Of these,<br />
plutonium is entirely the outcome of<br />
human production; as such it does not<br />
exist in nature. It is known to be the very<br />
most toxic substance on earth, its<br />
half-life being exceedingly long. The half-life of plutonium-239<br />
is 24,400 years, that of plutonium-242 as much as<br />
380,000 years. Even micro-gram quantities of plutonium,<br />
when inhaled by humans, are known to result in fatal<br />
cancers 8 . Hence, the expansion in construction and<br />
utilization of nuclear reactors worldwide is a reason for<br />
grave concerns. Each additional nuclear reactor generates<br />
spent nuclear fuel rods containing different forms of<br />
high-level waste.<br />
The third distinct stage in the chain of nuclear production<br />
I wish to refer to, is the stage of reprocessing. For<br />
decades, policymakers in the West have tried to make the<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
153
P OLITICAL ECONOMY<br />
It is worth<br />
recalling the<br />
fact that India<br />
today heads the<br />
list of Southern<br />
importers of<br />
armament systems<br />
public believe that they had solved the above-sketched<br />
issue of dangerous waste, i.e. the issue of spent fuel<br />
elements. They did so by arguing that these fuel rods can<br />
well be reprocessed, i.e. they may be treated chemically in<br />
reprocessing facilities so as to allow for re-use of the<br />
uranium and to pave the way for use of the fresh plutonium<br />
for ´productive´ ends, towards the manufacturing of<br />
new fuel elements. Yet it is at the stage of reprocessing<br />
that problems really pile up. First, it is at this stage that<br />
high-level waste comes into being as a distinct category of<br />
waste, since the chemical treatment of the fuel rods does<br />
not only help to separate out uranium and plutonium, but<br />
also results in high-level waste that needs to be put aside.<br />
This counts for uranium-236, to be<br />
distinguished from uranium-235, incorporated<br />
in the fuel elements. Uranium-236,<br />
mind you, has a half-life of 24.2<br />
million years. Again, there is the radioactive<br />
element jodium-129 which has a<br />
half-life of 15.7 million years. These are<br />
time-scales which as humans we are<br />
hardly able to imagine, but which make<br />
the consequences of nuclear production<br />
that much graver. The high-level waste<br />
in liquid form put aside after chemical<br />
treatment of the fuel rods is commonly<br />
stored in tanks.<br />
Now, the risks involved in such<br />
storage can be visualized through the<br />
accidents that have taken place in<br />
nuclear-military production facilities in<br />
both the US and the former Soviet<br />
Union. The Hanford nuclear complex in the US is the<br />
complex where the US used to manufacture its military<br />
plutonium. Here, high-level waste in liquid form was<br />
stored in 117 stainless steel tanks, each containing half a<br />
million gallons of waste. In 1973, a leak was discovered<br />
which had caused massive dissipation of radioactivity into<br />
Hanford’s subsoil 9 . But the most dramatic example of an<br />
accident with high level radioactive waste has been reported<br />
from the former Soviet Union. In the Cheliabinsk<br />
complex, a military-nuclear complex located in the Ural<br />
mountains, a tank explosion occurred in 1957. The government<br />
of the then USSR suppressed the news of the accident<br />
in name of guarding ‘state secrets’, but Soviet scientists<br />
unraveled the accident long before the Gorbachev<br />
government instituted an enquiry. Just as in Hanford, the<br />
high-level waste from the reprocessing in Cheliabinsk was<br />
stored in stainless steel tanks, located in a canyon-shaped<br />
area 8 meters under the soil´s surface. Yet the explosion in<br />
Cheliabinsk‘s tanks resulted in a massive leakage of<br />
radioactivity. A reported 22 million curies of radio-activity<br />
were released, two million curies in the form of a plume<br />
that reached a height of one kilometer above the Cheliabinsk<br />
complex. The explosion and the releases of radioactivity<br />
destroyed entire eco-systems in the surrounding<br />
region. Villages had to be evacuated, rivers and lakes were<br />
polluted, and the government had to take<br />
draconian measures to contain the<br />
danger of the accident for the region’s<br />
ecology 10 .<br />
Above I have simply summarized data<br />
on selected aspects of nuclear waste<br />
generation, focusing on waste tailings<br />
from uranium mining and milling, on the<br />
waste represented by spent nuclear fuel<br />
elements, and on the high-level waste<br />
that is put aside whenever nuclear fuel<br />
rods are reprocessed. Surely, given the<br />
risks they represent for humans and for<br />
nature surrounding us, there is no way<br />
one can belittle the occurrence of<br />
multiple waste in the nuclear production<br />
chain. Nor can one deny the validity of<br />
posing the consequences of the US-<br />
India nuclear deal in these terms.<br />
India as Importer of Weapons Systems - The<br />
Question of Disparate Exchange<br />
I will now turn to the second form of waste I have spoken<br />
of in the introduction to this essay, namely waste in the<br />
social sense of the term. As said, here I will focus on the<br />
reverse side of the US-India nuclear deal which is the US’s<br />
eagerness to expand its arms’ sales to India. In this context<br />
it is worth recalling the fact that India today heads the list<br />
of Southern importers of armament systems. Whereas in<br />
the past this position was held by the Middle Eastern oil<br />
giant Saudi Arabia, - India has meanwhile displaced the<br />
154 THE IIPM THINK TANK
I N PERSPECTIVE<br />
latter country as leading Southern importer, along with<br />
China. This may be illustrated with concrete figures.<br />
According to a report brought out by the US–based<br />
Congressional Research Service (CRS), in 2005 India<br />
ranked first among developing nations weapons’ purchasers,<br />
in terms of the market value of agreements signed to<br />
import weaponry. Further, whereas the total value of<br />
Southern arms’ imports in this year was $ 30 Billion, the<br />
value of the agreements concluded by India alone was $ 5.4<br />
Billion, meaning that India was set to swallow fully one<br />
sixth of the total! 11 While these data could be biased, they<br />
are in fact corroborated by data which have been compiled<br />
by the respectable Stockholm based peace research<br />
institute SIPRI. In its 2007 annual<br />
report, SIPRI offers comprehensive<br />
figures for the value of arms’ imports by<br />
individual Southern states over a period<br />
of 30 years. Again, India heads the list of<br />
these totals. This of course does not<br />
imply that India has been the leading<br />
Southern importer in each and every<br />
year. But it does signify that the accumulated<br />
arms’ imports of India have<br />
been so big over the last decade as to<br />
make up for the comparatively ‘smaller’<br />
<strong>size</strong> of arms’ imports in earlier decades<br />
12 .<br />
Now, the role which arms’ transfers<br />
between North and South hold in the<br />
world economy can be assessed from<br />
either a Southern or a Northern perspective.<br />
If looked at from a Southern<br />
perspective, one has to reflect on India’s arms’ imports in<br />
terms of disparate exchange. The term disparate exchange<br />
expresses the fact that Southern economies, when importing<br />
armament systems from the North, are losers. Whereas<br />
they import military commodities which from a social<br />
point of view should be considered waste, - the Northern<br />
states which export the armaments are benefactors, for<br />
they directly or indirectly transfer the arms in exchange<br />
for raw materials, semi-finished goods and labor- intensive<br />
commodities representing wealth. This is indeed a form of<br />
international exchange which may be characterized as<br />
disparate (as opposed to unequal) exchange, since there is<br />
Today, when India<br />
has emerged as a<br />
leading Southern<br />
arms’ importer,<br />
the US is eager to<br />
expand its arms’<br />
sales to India<br />
a qualitative difference between the commodities flowing<br />
in parallel between Northern and Southern trade ‘partners’.<br />
Although in certain cases the inter-linkages between<br />
exported and imported goods are explicit (notably in case<br />
of barter agreements where crude oil is exchanged against<br />
weaponry), - more generally processes of disparate<br />
exchange are less easy to pinpoint, i.e. are indirectly<br />
interlinked 13 .<br />
To highlight the imperialist nature of this trading<br />
mechanism, it needs to be stated that the given trading<br />
mechanism was historically instituted by the United<br />
States. For when OPEC’s oil-exporting countries in the<br />
1970s decided to take their fate in their own hands, by<br />
insisting on the right to fix the international<br />
price of crude oil, the US immediately<br />
tried to take advantage of the<br />
changing situation. It knew of course<br />
that increased prices of oil would inter<br />
alia result in additional dollar incomes<br />
for members of OPEC 14 . Hence it<br />
feverishly worked to channel such<br />
Southern income towards additional<br />
Southern imports of weapon systems<br />
from the US and other Northern arms’<br />
exporters, and with success 15 . Leading<br />
oil exporters, such as Saudi Arabia and<br />
Iran, in the seventies were easily<br />
deluded into buying fighter planes and<br />
other expensive weaponry. These<br />
Middle Eastern countries right then<br />
headed the list of Southern importers of<br />
weapons’ systems. Today, when India<br />
has emerged as a leading Southern arms’ importer, the<br />
US is eager to expand its arms’ sales to India, at the<br />
expense of the country’s traditional suppliers of arms 16 .<br />
And whereas it needs to be assessed whether the exports<br />
of social waste from the US towards India will be undertaken<br />
at the expense of wealth belonging to India’s own<br />
population, or rather at the expense of wealth belonging<br />
to the people of India and other Southern states combined,<br />
- the arms’ transfers are bound to represent further<br />
cases of disparate exchange.<br />
India’s massive imports of armament systems can,<br />
however, also be analyzed from a Northern perspective.<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
155
P OLITICAL ECONOMY<br />
Here we need to highlight the fact that the hegemonic<br />
power in the world system, ever since the days of British<br />
imperialism, has used its leverage as dominant power to<br />
export weaponry as a part of macro-economic policymaking.<br />
This is true in particular for the presently tottering<br />
hegemonic power, the US. Ever since the sixties of the<br />
previous century, the US has used its exports of armament<br />
systems as replacement mechanism, as supplement to<br />
ensure that American armament corporations at all times<br />
are supplied with orders sufficient in amount to protect<br />
their production capacity and guarantee accumulation.<br />
For instance, when the US government at the end of the<br />
1980s needed to partly scale down the <strong>size</strong> of its orders<br />
towards monopoly corporations based in the US military<br />
sector, - it heavily pushed military corporations into<br />
expanding their exports. It even employed the second<br />
Gulf war staged in 1991 towards this end. Moreover, the<br />
US’s Ministry of Defense, the Pentagon, itself embraces<br />
the economic logic behind armament exports. This is<br />
evident, for instance, from statements contained in its<br />
2006 report to the US Congress, the Annual Industrial<br />
Capability Report (AICR). As the<br />
report states, ´Defense exports play an<br />
important economic role in strengthening<br />
the US defense industrial base’;<br />
‘about 20% (sic) of US weapons systems<br />
items are exported…’; and ’sales to<br />
foreign customers have frequently been<br />
critical to keeping entire production<br />
lines open…’ 17 . Hence, it is difficult to<br />
interpret these sales as necessitated by<br />
the US’s ‘security’, when the US Pentagon<br />
itself admits to the US Congress that the exports of<br />
armament systems represent a leverage for macro-economic<br />
policymaking. The combined historical evidence<br />
for the past several decades indicates that exports play an<br />
active role towards solving dilemmas in connection with<br />
the US’s business cycle, driven as it largely is by military<br />
allocations.<br />
Conclusions: Juxtaposing Social Waste and<br />
Non-Commodity Waste<br />
Let me state my conclusions in brief. As suggested, the<br />
US-India nuclear deal should be analyzed in terms of<br />
In assessing the<br />
implications of the<br />
US-India nuclear<br />
deal, the issue<br />
of nuclear waste<br />
surely needs to be<br />
taken on board<br />
wasteful implications which the deal is set to have in two<br />
ways. If strictly looked at from a perspective of expanded<br />
production of nuclear energy in India, as is the official<br />
line of the Indian government, - the deal already needs to<br />
be severely criticized. For it will undoubtedly result in<br />
vastly increased generation of nuclear waste, which from<br />
the standpoint of critical economic theory is to be considered<br />
non-commodity waste. Above I have not presented<br />
specific data on the waste which India’s own production of<br />
nuclear energy has generated in the past, but have concentrated<br />
on international data regarding the generation of<br />
waste at three stages in the nuclear production chain, i.e.<br />
the stage of uranium mining and milling, the stage of<br />
production in nuclear reactors, and the stage of reprocessing<br />
of nuclear fuel elements. These data unequivocally<br />
bring out that in assessing the implications of the US-<br />
India nuclear deal, the issue of nuclear waste needs to be<br />
taken on board.<br />
Yet if we are to assess the full extent of waste generation<br />
implied by the US-India nuclear deal, we also need to<br />
reflect on the reverse side of the deal. There needs to be,<br />
it seems, greater awareness of the fact<br />
that the US does not just intend to use<br />
the deal to promote the export of<br />
nuclear production technology towards<br />
India. The US also is keenly interested<br />
in greatly expanding its sales of armaments<br />
to India, in view of the fact that<br />
India is one of the global South’s<br />
leading arms’ importers, along with<br />
China. Here again, my data regarding<br />
the loss of wealth implied by these deals<br />
for India and the South are incomplete. Thus, further<br />
research on Indian armament imports should bring out<br />
how they express disparate exchange. They may lead to<br />
loss of wealth for the people of India alone - or ultimate<br />
lead to replication of disparate exchange via parallel<br />
exports of conventional arms by India to other countries<br />
of the global South. In any case, such research would have<br />
to focus on the precise way in which foreign currency<br />
towards payment of these imports is generated. In order<br />
to make a holistic assessment of the US-India nuclear<br />
deal and the mentioned arms’ deals, we need to juxtapose<br />
‘non-commodity’ waste and ‘social’ waste.<br />
156 THE IIPM THINK TANK
I N PERSPECTIVE<br />
Endnotes and Additional Thinking<br />
1<br />
See e.g. Praful Bidwai, ‘Manmohan’s False Nuclear<br />
Move’ (19 July, 2008 – www.cndp.org/; also Zia Mian<br />
and M.V.Ramana, ‘Going MAD: Ten Years of the<br />
Bomb in South Asia’’ (July 29, 2008 – www.cndp.org/;<br />
2<br />
A precursor of the concept of non-commodity waste is<br />
the term ‘discommodities’ coined by the Marginalist<br />
Jevons, but largely ignored by other economists of his<br />
time and subsequently – see W.Stanley Jevons, The<br />
Theory of Political Economy (Macmillan and Co.,<br />
London, United Kingdom, 1879, p.62);<br />
3<br />
For a full discussion, see Peter Custers, Questioning<br />
Globalized Militarism. Nuclear and Military Production<br />
and Critical Economic Theory (Tulika Publishers,<br />
New Delhi, India, 2007);<br />
4<br />
Srinivas Laxman, ‘N-Trade: It’s a $ 40 Billion Opportunity’<br />
(Times of India, New Delhi, September 11, 2008,<br />
p.15); for other estimates regarding the business prospects<br />
of the deal, see J.Sri Raman, ‘How India’s ‘Waiver’<br />
Has Won’ (September 9, 2008 – www.cndp.org/ );<br />
5<br />
Rajat Pandit, ‘In Defence, US Wants to be India’s<br />
Partner No.1’ (Times of India, New Delhi,<br />
September 11, 2008, p.13);<br />
6<br />
Arjun Makhijani, Howard Hu and Katherine Yih (eds.),<br />
Nuclear Wastelands: A Global Guide to Nuclear<br />
Weapons Production and its Health and Environmental<br />
Effects (MIT Press, Cambridge, Massachusetts, USA,<br />
1995);<br />
7<br />
Katherine Yih, Albert Donnay, Annalee Yassi, A.James<br />
Ruttenber and Scott Saleska,<br />
'Úranium Mining and Milling for Military Purposes' , in<br />
Arjun Makhijani, Howard Hu and Katherine Yih<br />
(1995), op.cit., p.121;<br />
8<br />
For details on the health and environmental hazards of<br />
plutonium production and use, see notably Frank<br />
Barnaby, Nuclear Legacy: Democracy in a Plutonium<br />
Economy (Cornerhouse Briefing Paper No.2, Sturminster,<br />
Newton, United Kingdom, November 1997);<br />
9<br />
See on the leakages of nuclear waste at the Hanford<br />
complex, see for instance Arjun Makhijani and Scott<br />
Saleska, 'The Production of Nuclear Weapons and<br />
Environmental Hazards' (in Arjun Makhijani, Howard<br />
Hu and Katherine Yih (1995), op.cit., p.44);<br />
10<br />
On the Cheliabinsk catastrophe, see for instance Zhores<br />
Medvedev, Nuclear Disaster in the Urals (Vintage<br />
Books, London, United Kingdom, 1980); also Arjun<br />
Makhijani, Howard Hu and Katherine Yih (1995), op.<br />
cit., p.335;<br />
11<br />
Richard Grimmett, ‘Conventional Arms Transfers to<br />
Developing Nations, 1998-2005’ (Congressional<br />
Research Service (CRS), The Library of Congress,<br />
Washington, USA, October 23, 2006);<br />
12<br />
For Sipri´s most recent data, see Paul Holtom, Mark<br />
Bromley and Pieter D.Wezeman, ´International Arms<br />
Transfers´ (Chapter 7 of the SIPRI Yearbook 2008:<br />
Armaments, Disarmament and International Security,<br />
Stockholm, Sweden, 2008, p.293);<br />
13<br />
An exposition regarding the trading mechanism of<br />
disparate exchange between North and South is stated<br />
in Peter Custers (2007), op.cit., Part Three, Chapter<br />
Nineteen: ´Unequal Exchange versus Disparate Exchange.<br />
A Theoretical Comparison. Succession and<br />
Coexistence of Two Imperialist Trading Mechanisms´<br />
(p.309);<br />
14<br />
For the views of US State Department officials regarding<br />
the implications of the historical price increases<br />
decided upon by OPEC in 1973, see Pierre Terzian,<br />
OPEC: The Inside Story (Zed Books, London, 1985);<br />
15<br />
See e.g. Anthony Sampson, The Arms Bazaar (Hodder<br />
& Stoughton, London, 1977); and Russell Warren<br />
Howe, Weapons. The Shattering Truth About the<br />
International Game of Power, Money and Arms (Abacus,<br />
London, 1980);<br />
16<br />
For India´s primary dependence on arms´ supplies from<br />
Russia, see e.g. Paul Holtom, Mark Bromley and Pieter<br />
D.Wezeman (2008), op.cit., p.300;<br />
17<br />
Office of the Undersecretary of Defence, Annual Industrial<br />
Capability Report (A.I.C.R. - (US Pentagon,<br />
Washington D.C., USA, February, 2006).<br />
(This is the revised text of a lecture given at the Jawaharlal<br />
Nehru University (JNU), New Delhi, on September the 17 th ,<br />
2008. Peter Custers is the author of ‘Questioning Globalized<br />
Militarism. Nuclear and Military Production and<br />
Critical Economic Theory’ (Tulika Publishers, New Delhi,<br />
India, 2007). The views expressed in the write-up are<br />
personal and do not reflect the official policy or position of<br />
the organisation)<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
157
P OLITICAL ECONOMY<br />
What Difference Does A<br />
Revolution Make?<br />
A Preliminary Contrast of<br />
India And China<br />
I. Commonalities<br />
At the time of their casting off of colonialism—India gaining<br />
independence from Britain in 1947, China putting an end to a<br />
century of imperialist domination in 1949—the two largest<br />
countries in Asia shared many common characteristics. Each<br />
possessed an enormous continental landmass with a population<br />
in the hundreds of millions, the most populous in the<br />
world. In both the anti-colonial struggle extended over many<br />
decades, with the forces that led to eventual victory having consolidated<br />
by the 1920s. Each inherited a fractured territory,<br />
with imperialist backed enemies forcing the diversion of<br />
limited resources into military preparations and conflicts—<br />
India with Pakistan, in three wars, and ongoing clashes<br />
over Kashmir, China still colonized in Hong Kong<br />
and Macao, divided from Taiwan, with open<br />
warfare in Korea, and threatened spillover from<br />
Vietnam. Both experienced extreme birthpains,<br />
in the Chinese case the aftermath of<br />
occupation and civil war, in the Indian-Pakistani,<br />
death and dislocation in the population<br />
exchange across their new border, and the<br />
assassination of Mahatma Gandhi. Despite<br />
their many obvious differences—China lacked<br />
the communal and caste divisions of India, had<br />
never been fully colonized, and could rely initially on assistance<br />
from the Soviet Union—the two countries began their<br />
new national stage in roughly similar shape.<br />
It is in their economic and social profiles, especially, that the<br />
two newly emerged nations most closely resembled each other.<br />
Before the colonial era, they had been among the richest<br />
societies in the world, but under the impact of occupation and<br />
exploitation, had rapidly declined. Both had seen their traditional<br />
economies undermined by cheap imported goods, and<br />
their old system of classes restructured to fit the new global<br />
order. In each country, a “feudal”<br />
class prevailed in the<br />
Robert Weil*<br />
Robert Weil, Retired Lecturer<br />
and Trade Union Organizer,<br />
The University of California in<br />
Santa Cruz, USA<br />
158 THE IIPM THINK TANK
T HE ELEPHANT AND THE DRAGON<br />
countryside, allied not only to the urban elites, but to comprador<br />
elements tied to the imperialists. The majority of the<br />
population in both was either poor peasants or landless<br />
laborers. Each faced deep rural poverty, with a small and<br />
oppressed urban working class. Demographics were abysmal.<br />
Illiteracy and lack of medical care were the norm for the<br />
working classes. In the 1940s, life expectancy in India was only<br />
around 32, and in China barely three years longer. The<br />
situation of women was especially dire, emerging from centuries<br />
old traditional oppression, including such barbaric practices<br />
as Indian sati and Chinese footbinding. Each faced<br />
similar difficulties, therefore, in entering a newly independent<br />
national stage.<br />
II. Divergence<br />
Yet within just a little over a quarter of a century, these two<br />
nations had diverged onto sharply different paths, resulting in a<br />
wide and lingering economic and social gap. This divergence<br />
had begun even before liberation, in their differing methods of<br />
struggle for national power. It would be easy, but simplistic, to<br />
attribute these distinct approaches to the non-violence of<br />
Mahatma Gandhi, and the revolutionary<br />
violence of Mao Zedong. Certainly, the<br />
Indian movement was unique in its utilization<br />
of civil disobedience. But while<br />
Gandhi also stressed the need for economic<br />
and societal changes, notably in his<br />
adoption of homespun and salt marches to<br />
challenge the British monopoly, and his call<br />
for an end to the oppression of untouchables<br />
or dalits, nevertheless, in the last<br />
analysis, the movement he led was a<br />
struggle primarily for national independence, not social<br />
revolution. Its outcome was the transfer of power to a rising<br />
class of Indian bourgeoisie, under Jawaharlal Nehru. Though<br />
there were quasi-socialistic aspects to the new India—national<br />
planning, state enterprises, social equality as a major goal,<br />
and recognition of socialism in the 1976 constitution—the<br />
economy was from the beginning a mixed one, and capitalist<br />
families such as the Tatas and Birlas, some of whom had been<br />
prominent in the fight for independence, rose to dominant<br />
economic positions.<br />
Even more significantly, though the feudal role of princely<br />
estates was ended by the Nehru government, the stranglehold<br />
The struggle<br />
led by Mao had<br />
united movements<br />
for national<br />
liberation and<br />
revolutionary<br />
transformation<br />
of large landlords over the rural areas was only partially and<br />
unevenly reformed. It was recognized early on that land reform<br />
was critical to an independent India, and measures were<br />
introduced to stabilize and ameliorate the conditions of<br />
tenantry, cap rents, limit the acreage that any one person could<br />
own, and eliminate the intermediaries who often brutally<br />
enforced the landholding system. These policies did bring<br />
relief to some poorer tenants, but mainly benefited the rising<br />
class of independent farmers, who had the resources to fully<br />
utilize their holdings. Even these measures were only partly<br />
successful due to wide variation from state to state, spotty<br />
enforcement and rampant corruption, the ability to employ<br />
“hidden tenancy” and bypass landholding limitations, and lack<br />
of credit, forcing many to turn to moneylenders—often large<br />
landholders—at exhorbitant interest. As a consequence,<br />
though advances were made, especially in West Bengal, Punjab<br />
and Kerala, in large parts of the country the system of tenantry<br />
and landlessness continued with only partial—if any—significant<br />
modification. In the nation as a whole, there was no<br />
consistent land reform, or end to the sharp division of rural<br />
classes, and hundreds of millions remained heavily exploited<br />
and impoverished, especially among the<br />
land poor, landless laborers, dalits and<br />
adivasis. As a result, though segments of<br />
the population gained new opportunities in<br />
postcolonial India, and took advantage of<br />
its democratic processes to advance their<br />
interests, the independence movement was<br />
not accompanied by revolutionary social<br />
transformation—either before or after<br />
1947. While gradual change brought<br />
improvement for some, it did not put an<br />
end to the institutional aspects of class exploitation and caste<br />
oppression.<br />
It is only against this background that the profoundly<br />
different experience of the Chinese socialist revolution can be<br />
understood. From the beginning, the struggle led by Mao had<br />
united movements for national liberation and revolutionary<br />
transformation. The Communist Party had an ideological<br />
commitment to the fundamental alteration of class relationships.<br />
But the specific form that this took was driven by<br />
objective conditions. As shown since immemorial times, and as<br />
failure of early efforts at urban based Communist revolution<br />
had once again demonstrated, political change in China, in the<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
159
P OLITICAL ECONOMY<br />
final analysis, almost always rested on mobilization of the<br />
peasantry as its mass base. Under conditions of semi-colonialism,<br />
Chinese liberation from imperial domination could only<br />
be achieved by again finding a means to tap this latent peasant<br />
power. But this required addressing the primary demand of the<br />
poor rural population, for land reform and an end to the<br />
rule—political and social, as well as economic—of the landlords.<br />
It was the recognition by Mao of this relationship of<br />
national liberation to revolutionary transformation of the countryside,<br />
and his linking of the Communist Party to uprisings<br />
already beginning among the peasantry, that laid the basis for<br />
eventual victory in 1949. From its earliest stages, therefore,<br />
unlike in India, the struggle for independence in China was<br />
tied to social revolution, to overthrow the class structure in the<br />
rural areas, and by extension, the entire feudal, national<br />
bourgeois and comprador alliance.<br />
This transformation began as far back as the 1920s, in<br />
regions under Communist control. But it was only after the<br />
triumph of the revolution that land reform began to be implemented<br />
nationwide, and gradually deepened until it had<br />
completely remade the rural areas. Beginning with reduction<br />
in rents and simple measures of cooperation,<br />
during the Great Leap Forward at the<br />
end of the 1950s, it advanced to the<br />
creation of the communes, each of which<br />
brought together many villages and tens of<br />
thousands of peasants under a single<br />
administrative authority. The commune<br />
was first and foremost a unit of collective<br />
agricultural production. But it was much<br />
more. For it provided a comprehensive set<br />
of benefits, including medical care—which<br />
during the Cultural Revolution took the form of “barefoot<br />
doctors,” who came from and served the rural population—<br />
free schooling for all children, support in old age, and social<br />
activities. Largescale collective organization allowed extensive<br />
infrastructure and environmental projects, such as irrigation<br />
works, fish ponds, opening of new land, and forestry. It also laid<br />
the basis for small “sideline industries,” which provided<br />
agricultural and consumer goods, and work in slow seasons.<br />
Above all, the communes completely eliminated the old<br />
landlord system, took the “sink or swim” pressure off individual<br />
families, and allowed all peasants—men and women—a<br />
high degree of equality in deciding the distribution of their<br />
From its earliest<br />
stages, therefore,<br />
unlike in India,<br />
the struggle for<br />
independence in<br />
China was tied to<br />
social revolution<br />
collective production, while providing an opportunity to share<br />
in village level governance.<br />
Much the same system was applied to the industrial working<br />
class and to urban professionals. Each large danwei or work<br />
unit provided not only guaranteed jobs, but medical clinics,<br />
schools, old age pensions, recreational facilities and housing<br />
for their employees, the so-called “iron rice bowl.” Workers<br />
had a role in the governance of their factories, regarding<br />
production policies and working conditions, rights that were<br />
further strengthened during the Cultural Revolution, when<br />
abusive use of power by many state and party officials, and<br />
managers, was challenged. The outcome of these transformations<br />
was that income distribution and provision of services<br />
became much more equal, and this in turn resulted in a rapid<br />
and dramatic improvement in demographics. While Indian life<br />
expectancy in 1951 was 32.1, virtually unchanged since<br />
independence, the rate in China rose to 40.3 by 1953, and such<br />
gains continued. “’It is probable that the pre-1949 crude death<br />
and infant mortality rate were approximately halved by 1957’”<br />
(Judith Banister, China’s Changing Population, 63, in Robert<br />
Weil, Red Cat, White Cat: China and the Contradictions of<br />
“Market Socialism,” New York: Monthly<br />
Review Press, 1996, 236). In the mid-1970s,<br />
life expectancy in China reached 63.6 for<br />
men and 66.3 for women, compared to an<br />
average of only 49.4 in India. By 1980-81,<br />
Chinese infant mortality fell to 56 per<br />
1,000 live births, while the Indian level<br />
remained at a high 122, and “while India<br />
reduced its IMR from 160 before Independence<br />
to 85 by 1989-90, China starting<br />
from a higher initial level had already<br />
reached this point two decades earlier, by 1970”<br />
(Utsa Patnaik, “On Famine and Measuring ‘Famine Deaths,’”<br />
in Sujata Patel, Jasodhara Bagchi, and Krishna Raj eds.,<br />
Thinking Social Science in India: Essays in Honour of Alice<br />
Thorner, New Delhi: Sage Publications, 2002) When literacy is<br />
added in, China in 1981 had a “physical quality of life index” of<br />
67 out of 100, with India at 44. In several categories,<br />
the Chinese were equal to or above the “middle” countries<br />
globally, escaping from “Third World” status. Though China<br />
remained among the poorer nations, the level of wellbeing<br />
of its working classes had been transformed by revolutionary<br />
socialism.<br />
160 THE IIPM THINK TANK
T HE ELEPHANT AND THE DRAGON<br />
These gains came at a very high cost. A combination of<br />
severe natural disasters, overly rigid implementation of<br />
policies, exaggerated reporting of grain production and<br />
excessive procurement during the Great Leap Forward led to<br />
famine conditions in many parts of the country. While debate<br />
continues over the scale of the losses and primary responsibility<br />
for them, estimates run from several to 30 million “excess<br />
deaths.” The loss of life during the 1966-76 Cultural Revolution<br />
was much smaller, but the social disruption and violence<br />
even more severe. The heavy cost of these and other campaigns<br />
led by Mao must be weighed against the gains that they<br />
achieved, and especially when compared with other countries,<br />
such as India. The deaths that accompanied the Chinese<br />
efforts to build a socialist society occurred mainly during a few<br />
years of intense struggle. But they led to improvements—especially<br />
in life expectancy and infant mortality—for hundreds of<br />
millions. Similarly, while the movement of the rural population<br />
to the cities was restricted, among the more striking results was<br />
a virtually total absence of sprawling urban slums that are<br />
ubiquitous across much of the global South. During the same<br />
period, India avoided famine and the social turmoil found in<br />
China. Amartya Sen has argued that<br />
Indian democracy and a less collectivized<br />
economy helped protect against such<br />
losses. But he also noted “that compared<br />
with China’s rapid increase in life expectancy<br />
in the Mao era, the capitalist experiment<br />
in India could be said to have caused<br />
an extra four million deaths a year since<br />
India’s independence.” As Sen put it,<br />
“‘India seems to manage to fill its cupboard<br />
with more skeletons every eight years than<br />
China put there in its years of shame, 1958-61’” (Mobo Gao,<br />
The Battle for China’s Past: Mao and the Cultural Revolution,<br />
London: Pluto Press, 2008, 139, Sen quote from Antony C.<br />
Black, “Black propaganda,” Guardian<br />
Weekly, 2/24/00.) Indian democracy blunted class conflict, and<br />
allowed for a flourishing of civil society and movements for<br />
social change. But it left in place a system of rigid divisions of<br />
class and caste, deep impoverishment and widespread malnutrition,<br />
a chronic semi-famine in some areas. As a result, from<br />
the 1940s-1970s, loss of life from the social conditions of<br />
Indian capitalism exceeded several times over those of Chinese<br />
socialism.<br />
III. Convergence<br />
Amartya Sen has<br />
argued that Indian<br />
democracy and a<br />
less collectivized<br />
economy<br />
helped protect<br />
against famines<br />
Beginning around the 1970s, and especially from the 1990s on,<br />
the paths of China and India began once again to converge, a<br />
process continuing down to today. Despite the gains made for<br />
the working classes by the time Mao died in 1976, the struggles<br />
that had accompanied them left many Chinese weary of social<br />
conflict and violence. There were also limits to what had been<br />
achieved. Though the national GDP had expanded greatly,<br />
average per capita income remained at a quite low level, only<br />
$290 per year—even if still above the $240 in India—in part<br />
due to a rapid rise in population, in turn promoted by the<br />
improved health conditions. In the rural areas, some one-third<br />
of communes were said to be flourishing, another third<br />
managing at a moderate level, and the final third facing more<br />
serious difficulties. The combination of these factors opened<br />
the door once again to those members of the Chinese leadership<br />
who had for years opposed the more radical policies of<br />
Mao, and had used every period of setback to promote a very<br />
different alternative path. After his death, these forces coalesced<br />
behind Deng Xiaoping, who began a dismantling of the<br />
collective socialist securities for the working classes, and<br />
initiated a policy of ever more capitalistic<br />
“reforms” and “opening up to the world.”<br />
The attack began with the forced dismantling<br />
of the communes—regardless of their<br />
economic condition—and their replacement<br />
by a system of individual “family<br />
responsibility contracts” for the land. For a<br />
few years, this led to improved incomes in<br />
the countryside, as government subsidized<br />
crop prices, new agricultural methods were<br />
introduced, and farmers cannibalized the<br />
former communal socialist accumulation. But these gains were<br />
only temporary, and in the process, the collective basis for<br />
rural life was shattered, with the rapid collapse of virtually free<br />
health care, schools, old age security and other benefits, and<br />
the dismantling of infrastructure and environmental projects.<br />
As individual farmers increasingly faced the global market,<br />
and a “scissors” opened up between costs of production and<br />
prices for crops, their relative position declined, and today<br />
much of the countryside is in crisis.<br />
In the cities, a “market economy” was also introduced,<br />
allowing small businesses to develop, while the door was<br />
opened to foreign investment, especially in new Special<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
161
P OLITICAL ECONOMY<br />
Economic Zones in the southern and eastern coastal regions.<br />
Once these forces were sufficiently developed, an assault was<br />
made on the main stronghold of the working class in the urban<br />
areas, State Owned Enterprises. Most of these were privatized<br />
outright or semi-privatized by putting them in the hands of<br />
managers, and party and state authorities, who treated them as<br />
their personal property. All corporations were required to<br />
operate on a profit basis, and tens of millions of workers were<br />
dismissed, losing their right to social securities, and in many<br />
cases even their housing. In their place, peasant migrants—<br />
now numbering some 130 million—were drawn into the cities,<br />
to labor under often brutal working conditions in construction<br />
or export factories. These policies laid the basis for an explosive<br />
expansion of the Chinese economy, which became “factory<br />
to the world.” But in the process, China was transformed from<br />
one of the most egalitarian countries in the world, into among<br />
the most polarized. Today, a growing number of billionaires<br />
live in extreme luxury, while a “new middle class” resemble<br />
their peers in rich nations. For workers and peasants there have<br />
been certain general gains—a wider variety of food and<br />
clothing, and greater access to consumer goods, if they can<br />
afford them. But the<br />
cost has been exceedingly high, in the<br />
loss of jobs and social securities, and<br />
tens of millions now form an impoverished<br />
“reserve army of labor.” After initially<br />
narrowing, the urban/rural gap is widening,<br />
and class polarization growing, reviving the<br />
prerevolutionary alliance<br />
of rich farmers, urban capitalists,<br />
and compradors.<br />
In India the changes during this period<br />
were in a similar direction, if less dramatic. The Green<br />
Revolution, which began in the 1960s, helped improve the<br />
conditions of some at first, especially in Punjab, but this only<br />
increased the uneven regional development and polarizing of<br />
classes, as those who could afford the needed inputs gained the<br />
main benefit. Today, the negative ecological and economic<br />
effects of a high cost “greening” of farming have led to<br />
increasingly nonviable consequences, with falling water tables<br />
and rising debt. In much of the rest of the country, the historic<br />
lack of adequate land reform continues, a main cause of vast<br />
rural impoverishment. Despite some recent state efforts to<br />
address it, the situation remains dire. “The number of utterly<br />
poor people in India at present is about the same as the entire<br />
population of the country in 1947 when India became independent<br />
from Britain. The absolute landless and the near<br />
landless (those with less than half an acre of land) make up<br />
43% of rural households in India”—unlike in China, where<br />
farmers still have a guaranteed right to land (Patralekha<br />
Chatterjee, “Land Reform in India: Necessary but not Sufficient<br />
to Fight Poverty,” Development and Cooperation, No. 2,<br />
March/April 2002, 21-22). But as in the Chinese case, individual<br />
Indian farmers now face the global economy on their own,<br />
defenseless against the rising cost of inputs, competition from<br />
cheap imports, and a lack of credit.<br />
Like China, India saw an economic explosion as it discarded<br />
many of its quasi-socialist remnants and turned toward “free<br />
market” neoliberalism. But it is primarily those at the top who<br />
have benefited the most, together with a new large middle class<br />
of educated elite. In addition to developing industries and<br />
natural resources—often driving the poor or indigenous off<br />
their land—India has been able to exploit a huge stratum of<br />
university graduates in high tech centers such as Bangalore,<br />
and its English speakers as the outsourcing capital for U.S. and<br />
Anglo service sectors. As in China,<br />
however, this has led to highly uneven<br />
development. Pockets of the rich and<br />
well off, primarily in a few large<br />
metropolises, are surrounded by vast<br />
urban slums, and a countryside that in<br />
many areas remains in deepest poverty,<br />
driving tens of millions into the cities,<br />
where they swell the ranks of the<br />
informal sector and temporary hires<br />
used to undercut and replace permanent<br />
workers. This sharpening contradiction is starkly revealed<br />
in Andhra Pradesh, where despite the rise of Bangalore,<br />
agricultural conditions deteriorated so drastically that the state<br />
is an epicenter of the suicides of farmers—though they have<br />
their counterpart in Maharashtra, Punjab, Rajasthan, Kerala<br />
and elsewhere. As the number of billionaires grows, so do the<br />
ranks of the desperately impoverished, under an alliance of<br />
rural rich, urban capitalists and compradors, similar to the<br />
Chinese.<br />
As the 21 st century opens, both China and India are reemerging<br />
as global powers. The Chinese have taken the early lead.<br />
World Bank figures for 2007 put GDP for China at some $3.28<br />
Negative ecological<br />
and economic<br />
effects of a high<br />
cost “greening” of<br />
farming have led to<br />
increasingly nonviable<br />
reactions<br />
162 THE IIPM THINK TANK
T HE ELEPHANT AND THE DRAGON<br />
trillion, almost three times that of India at $1.17 trillion. The<br />
gap in per capita income is only slightly less, $2,360 and $950,<br />
respectively. Life expectancy in China is 72, that in India just<br />
64. The Chinese literacy rate is around 91, the Indian only in<br />
the 60s. Yet the uncontrolled growth in China has left it worse<br />
off than India in other respects. The Chinese Gini index, a<br />
measure of inequality, is now around 47—above the “danger<br />
level”—while the Indian rate is more than ten points lower.<br />
Terrible as the high incidence of farmer suicides in India<br />
is—some 200,000 over the past decade or more—in China<br />
about the same number of mainly rural residents have killed<br />
themselves each year recently, with women in the majority.<br />
This is a consequence not only of the desperation of many<br />
Chinese farmers in the face of the global “free market,” but of<br />
how much they have lost with elimination of former social<br />
securities, and the return of a high degree of gender inequality.<br />
The demand for greater transparency and democratic rights—<br />
though not necessarily following Western or Indian patterns—<br />
is widespread in China. These contrasts produce contradictory<br />
attitudes toward the Chinese “model” in India—generally<br />
divided along class lines. Some Indians, especially in the upper<br />
and middle classes, look to the current<br />
policies in China, with unrestrained<br />
capitalist development tied to a still fairly<br />
high degree of state control, as an<br />
example to be followed. What they in<br />
most cases forget, however, is that though<br />
the rapid Chinese rise in recent years<br />
results from many causes, it was the<br />
“head start” provided by the socialist<br />
revolution—in better health, education,<br />
infrastructure development and social<br />
egalitarianism—that laid the basis for this later advance.<br />
Lacking a similar revolutionary transformation, Indian<br />
economy lagged in most key economic and demographic<br />
indicators already by the late 1970s, and this difference has<br />
remained down to the present day.<br />
Many in the Indian working classes and among oppressed<br />
communities have not forgotten this lesson. For them, the<br />
Chinese “model” is not its current capitalist market system, but<br />
the socialist revolution that preceded it under the leadership of<br />
Mao. In India today—as well as in Nepal, the Philippines, and<br />
elsewhere—Maoist revolutionaries are a growing force, as they<br />
try to carry out the social transformation that was never<br />
Though Chinese<br />
and Indian<br />
economies have<br />
little contact at<br />
present, the future<br />
may bring a<br />
new unity<br />
completed after 1947. But they are still active largely in more<br />
remote regions, with their main base among the rural poor,<br />
dalits and adivasis. Ironically, the current government of China<br />
has no use for such revolutionaries, and rejects their claims to<br />
“Maoism,” as if it were a copyrighted national brand. While<br />
Chinese with a Maoist orientation are again growing in<br />
strength, they are limited in their activism, unity, organization<br />
and ties to the working classes—and they too have made little<br />
efforts to develop links to the Indian followers of Mao. Whether<br />
India and China further converge or diverge in the coming<br />
period remains to be seen. Many political forces—Gandhian,<br />
social democratic, “new left,” as well as Marxist and Maoist—<br />
are competing for influence. In both nations the desperation of<br />
hundreds of millions in the face of “globalization” is growing,<br />
now heightened by the worldwide capitalist crisis. Though each<br />
government has shown an ability to buffer some of the worst<br />
effects of this collapse, and taken recent measures to ameliorate<br />
the burdens on the working classes, in the longer run they<br />
will not be able to escape the growing contradictions of world<br />
capitalism. Already, in both China and India, protests against<br />
ever widening polarization, impoverishment, corruption, land<br />
thievery and ecological devastation are<br />
growing in number, <strong>size</strong> and violence. For<br />
the Chinese, who had a revolution and<br />
then turned back to the capitalist road, it<br />
would take a major reversal to once again<br />
move toward socialism. India never had a<br />
similar revolutionary socialist transformation,<br />
but the forces to carry it out are<br />
stronger now than ever. The Indian and<br />
Chinese working classes and leftist forces<br />
today increasingly face parallel conditions<br />
under global capitalism led by an imperial U.S. Though they<br />
have little contact at present, the future may bring a new unity,<br />
as the contradictions of the world capitalist system deepen and<br />
drive them more closely together.<br />
(*He is the author of Red Cat, White Cat: China and the Contradictions<br />
of "Market Socialism," and many articles and papers on<br />
Chinese political economy, social conditions, and class relations.<br />
He has been a lifelong activist in labor, civil rights, international<br />
solidarity, environmental and peace movements. The views<br />
expressed in the write-up are personal and do not reflect the<br />
official policy or position of the organisation).<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
163
U SA<br />
The Obama Crossroads: Neo-Liberal<br />
Coup or Responsible Government<br />
When the U.S. Treasury gave away<br />
$700 billion to Wall Street banks<br />
with no strings attached in October<br />
of 2008, the Obama team gave a green light. A<br />
popular insurgence was soon silenced, with<br />
public wrath directed instead at the U.S. auto<br />
producers (and unions) who followed with a<br />
request for $25 billion. The auto companies<br />
ended up with a loan of about 1/50 th the amount<br />
that went to Wall Street as a gift. The subtext<br />
message was disturbing. Wall Street firms<br />
produce nothing, no-one is required to explain<br />
what they are doing with all the public money<br />
they received, and no criteria of public benefit<br />
are applied.<br />
With the Obama team onside, rule by the<br />
fast-money men is set to continue. The neartrillion<br />
quick hand-out of citizen debt to the<br />
bankers with no conditions has remained a<br />
non-issue. Even the shift from buying Wall<br />
Street assets to direct capital infusion has<br />
raised no questions. Obama’s subsequent<br />
appointments of his economic and financial<br />
directors follow in line. Those now in charge of<br />
the U.S. money-printing machine (alias the<br />
world’s reserve currency) and of the financially<br />
hollowed-out system that was once the U.S.<br />
economy have not really changed. Even the<br />
education cabinet post has been filled by what<br />
his Bush predecessor says is “a kindred spirit”.<br />
He (Arne Duncan) has enthusiastically<br />
implemented the Bush school program in<br />
Chicago - testing children instead of teaching<br />
them, firing lots of teachers, pressuring<br />
test-failures out of school, and degrading public<br />
education with corporate-quiz mechanisms in<br />
place of sound learning methods.<br />
John McMurtry<br />
University Professor Emeritus,<br />
University of Guelph, Canada<br />
Illustration : Shantanu Mitra<br />
164 THE IIPM THINK TANK
C AN WE CHANGE?<br />
The Number One <strong>Issue</strong>: Who Now Runs The Economy<br />
and Finance<br />
Obama’s new U.S. Treasury Secretary is Tim Geithner, a former<br />
chief deputy of his Democrat predecessors at Treasury - Robert<br />
Rubin (who presided in the first Clinton government and later<br />
Citigroup over the “new financial instruments” that have<br />
subsequently wrecked the U.S. and world economy), and Larry<br />
Summers (who as Secretary of the Treasury in 1999 tore down<br />
barriers between commercial and investment banks in the<br />
deregulation frenzy that set up the Wall Street crash). Geithner<br />
originally came from Kissinger and Associates - “a bipartisan<br />
man” - before moving on from deputy at Treasury to head of the<br />
New York Federal Bank Reserve. His main qualifying distinction<br />
- not mentioned in press releases - has been as chair of a<br />
central committee of the BIS (Bank of International Settlements),<br />
a body of chief-executive international bankers which<br />
has been the unseen point-man of neoliberalism over the last 25<br />
years. The BIS first cut its teeth on collecting debt reparations<br />
from Germany which seeded the Nazi Party - for which the BIS<br />
later also stored stolen gold. In between these assignments,<br />
Geithner served the then-collapsing IMF as director of Policy<br />
Development and Review.<br />
In short, Geithner is an international<br />
money-man following in the tracks of what<br />
has preceded him. Behind all the hoopla of<br />
“Change We Need” and “The People’s<br />
President” lies the same monetocracy.<br />
Geithner assisted in the massive bank<br />
giveaway and its sequel of another further 25<br />
billion plus 300-billion credit to Citigroup, a<br />
Rockefeller bank led by Rubin. Neither he<br />
nor Summers, the new economic czar, lent<br />
anything but support when the flood of public money into the<br />
Wall Street hole more than doubled before Christmas from the<br />
original $700 billion to $1.5 trillion with no more conditions than<br />
before.<br />
The biggest heist ever from the public treasury, some might<br />
say an extortionate swindle, has been backed by the threat of<br />
“give it over, or Americans won’t get credit”. No-one appears to<br />
notice the fraudulent pretext on which it is based. Who needs<br />
credit from the private banks when the public and government<br />
already back them for any credit they have got? Why pour public<br />
money into private-bank hands to lend money they do not have<br />
and are not lending when they get it?<br />
“Banking<br />
institutions are<br />
more dangerous<br />
to our liberties<br />
than standing<br />
armies”, Jefferson<br />
pragmatically said<br />
More Dangerous to Our Liberties than Standing<br />
Armies<br />
Former Federal Reserve chief, Allen Greenspan, observes that<br />
“sovereign credit and guarantees put in place during the crisis<br />
[i.e., new government money to private banks] is now estimated<br />
at seven trillion”. Yet after 1.5 trillion U.S. public dollars thrown<br />
at the Wall Street hole, not one homeowner has been relieved of<br />
bankruptcy proceedings, the banks do not lend to productive<br />
enterprises or even themselves, and no-one tells anyone in<br />
America what’s been done with all the public money.<br />
The idea of a central public bank system controlling the<br />
currency and credit constitutionally held by governments and<br />
lending it for purposes that serve the public interest (e.g., social<br />
infrastructure, housing, environment and education) is as old as<br />
the modern state. But it has been dinned out of citizens’ minds.<br />
In fact, the only democratically accountable and efficient<br />
banking system is one in which skyrocketing non-productive<br />
costs, unaccountable debt creations and pyramid schemes are<br />
made impossible inside the law. Yet most are enslaved to a false<br />
double dogma - first, that unaccountable big banks creating<br />
compound-interest debts for everyone including governments<br />
are economically necessary; and, second,<br />
that they must be left free to leverage, mix<br />
and repackage debt assets as they please<br />
without the money to back the credit or<br />
capital they allocate. Statesmen since<br />
Thomas Jefferson have not been so foolish.<br />
“Banking institutions are more dangerous to<br />
our liberties than standing armies”, Jefferson<br />
pragmatically observed. “Already they<br />
have raised up a monied aristocracy that has<br />
set the Government at defiance. The issuing<br />
power [of credit] should be taken from the banks and restored to<br />
the people to whom it properly belongs”.<br />
Instead, the “monied aristocracy” and its servants are now<br />
loaded with public cash even as their vast global pyramid<br />
schemes have cratered. The consistent policy to prevent what<br />
bankers themselves call “moral hazard” is to leave them to their<br />
market fate where their plundering of the world with toxic<br />
financial products has poisoned them. The responsible public<br />
solution to “keep credit flowing” is for government to keep its<br />
control over currency and credit issue to direct loans to public<br />
and productive purposes. Let the banks lend money they can<br />
back with 100% reserves, and manage as their private depositors<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
165
USA<br />
allow them to - what in fact the best economists have recommended<br />
since the 1929 Crash.<br />
Yet even conditions of public service by the banks loaded with<br />
public cash have not surfaced to debate. Instead a Bush-Obama<br />
transition has handed over the keys of the U.S. Treasury to the<br />
very coterie of neoliberal money manipulators who have<br />
hollowed out the country’s wealth and much of the world. As<br />
long as they run the show, the people and the real economy<br />
continue down the hole.<br />
Eco-Economy and Social Justice in Reverse<br />
Obama claims that he is bringing “fresh thinking” with Larry<br />
Summers as chief of economic policy formation. If you think he<br />
can lead a new program of productive economics, employment,<br />
non-oil energy, and environmentally friendly manufacture - what<br />
every sane person wants and what Obama hope promises - consider<br />
the track record of his economics czar. Before becoming<br />
Clinton’s second-term Secretary of the Treasury where he<br />
mentored Geithner, Larry Summers had distinguished himself<br />
as an outspoken neoliberal advocating the loot-and-pollute<br />
globalization that has brought cumulative ecological as well as<br />
financial catastrophe. In a leaked Memorandum<br />
as Chief Economist of the World Bank,<br />
Summers urged “more migration of the<br />
dirty industries to the LDCs [Less Developed<br />
Countries]” for three reasons (all his<br />
words):<br />
1) The measurements of the costs of health<br />
impairing pollution depends on the<br />
foregone earnings from increased<br />
morbidity and mortality. - - - I think the<br />
economic logic behind dumping a load of<br />
toxic waste in the lowest wage country is impeccable and we<br />
should face up to that.<br />
2) I've always thought that under-populated countries in Africa<br />
are vastly UNDER-polluted, their air quality is probably<br />
vastly inefficiently low compared to Los Angeles or Mexico<br />
City. - - [We should prefer] world welfare enhancing trade in<br />
air pollution and waste.<br />
3) The demand for a clean environment for aesthetic and health<br />
reasons is likely to have very high income elasticity. - - - While<br />
production is mobile the consumption of pretty air is a<br />
non-tradable.<br />
Summers then explains where he stands on “deregulation”<br />
When banks failed<br />
and credit dried<br />
up, Roosevelt’s<br />
administration<br />
ploughed all the<br />
public money into<br />
public works<br />
versus “moral and social concerns” in an epitome of neoliberal<br />
life blindness: “The problem with the arguments against all of<br />
these proposals for more pollution in LDCs (intrinsic rights to<br />
certain goods, moral reasons, social concerns, lack of adequate<br />
markets, etc.) is that it could be turned around and used against<br />
every Bank proposal for liberalization.” Summers here lets the<br />
cat out of the bag on what “liberalization” demands to be<br />
sacrificed to it - “goods”, “moral reasons” and “social concerns”,<br />
all the values Obama says he stands for.<br />
After the memo became public, Brazil’s Secretary of the<br />
Environment Jose Lutzenburger wrote back to Summers: “Your<br />
reasoning is perfectly logical but totally insane...” Mr. Lutzenburger<br />
was fired. Summers has become President Obama’s chief<br />
economic adviser.<br />
No Roots in Adam Smith or the New Deal<br />
Adam Smith’s vision of the free market did not envisage exporting<br />
toxic wastes to the poor to save rich polluters from cleaning<br />
up their act. When the market’s “invisible hand” was briefly<br />
annunciated by Smith, he was clear that the free market was only<br />
in “tangible goods useful to mankind”. The neoliberal school<br />
invokes Smith, but simply erases the<br />
productive economy from its models where<br />
only money coordinates count.<br />
For them, the New Deal is an enemy.<br />
When banks failed and credit dried up,<br />
Roosevelt’s administration ploughed all the<br />
public money into public works and productive<br />
employment, not into banks’ coffers .<br />
One New Deal program, the Works<br />
Progress Administration (WPA), became<br />
the largest employer in the nation financing<br />
the arts as well as public infrastructures. The New Deal also<br />
started old-age and unemployment insurance, loans to local<br />
authorities for slum clearance, and guaranteed income to the<br />
indigent - the latter program scrapped by Summers under<br />
Clinton. Even now with promises of new major spending on<br />
“infrastructures”, we may observe it is targeted to upgrade<br />
highways, computers and airports rather than to build and<br />
protect social and ecological life support systems.<br />
The Turn to Responsible Government<br />
The imperatives are clear. Return constitutional powers over<br />
currency and credit to accountable public authority, and away<br />
166 THE IIPM THINK TANK
C AN WE CHANGE?<br />
from private banks free-riding on public cash and guarantees for<br />
no productive or public goal. Let credit and the allocation of<br />
capital flow in correspondence to productive function for what is<br />
needed - that without which the life capacity of citizens is<br />
reduced. Allocate new capital and interest charges to meet the<br />
greatest economic chall enge in history - the conversion from<br />
fossil to clean renewable fuels, and the re-tooling of manufacture<br />
towards ecologically coherent industry, both of which massively<br />
create jobs.<br />
The eco-energy rescue of the economy with the money for it to<br />
come from a responsible central public bank system is a conjuncture<br />
made in heaven. It has become politically possible with Wall<br />
Street’s corrupt collapse, and economically imperative with<br />
America and the world facing a life-and-death policy crossroads.<br />
Canada’s long-serving Prime Minister, MacKenzie King, was<br />
no radical. But he realized that “once a nation parts with control<br />
of its credit, it matters not who makes the laws - - -Privatized<br />
money control is the single greatest threat to democratic<br />
freedom”. Thus was born the public Bank of Canada in 1935<br />
with statutory public functions of “regulating credit and currency”<br />
and of “making loans and advances” to governments.<br />
Since the Reagan-Mulroney turn, however, public banks and<br />
government have been bent into service to the deregulating,<br />
money-leveraging and casino speculations of the borderless<br />
money party - all on the back of Canada’s social programs, its<br />
manufacturing base, its integrity of ecology and resource<br />
bases, and secure employment of citizens in good jobs and<br />
life-serving vocations.<br />
Presidential Brand Change in Place of Economic<br />
Reform<br />
Is Obama’s administration only a presidential brand change? Is<br />
the same rule of money, waste, toxic commodities and foreign<br />
occupations to continue? Observe closely Obama’s building of a<br />
“new job-creating energy-efficient economy”. The image has<br />
certainly changed, but the reality remains that a Washington-led<br />
carcinogenic capitalism continues to cumulatively strip the earth<br />
of its species and resources, impoverish life vocations and the<br />
poor, and allocate public policy and wealth for decoupled money<br />
multiplication, industrial agribusiness and armed forces with no<br />
committed life function.<br />
America’s President is where the buck stops, but the buck has<br />
been passed on to the people who helped end the New Deal,<br />
deregulated the financial sector, and broke the wheels of the<br />
productive economy. Neoliberal religion still rules. In a lecture<br />
at the University of Toronto a few years ago as Harvard’s<br />
President, Larry Summers, the new chief of economic planning<br />
for Obama, proclaimed his credo as “the essential truth” that all<br />
“basic value including “literacy is linked to market growth”. This<br />
is the ultimate neo-liberal equation - More Money-Value<br />
Exchanges = More Market Growth = More Basic Values. The<br />
social and ecological goods and resources on which every life<br />
depends, the most basic values that exist, are simply blinkered<br />
out. Since fresh air to breathe, stable climate cycles and life<br />
spaces to live and work securely do not compute to this life-blind<br />
economics, money-sequence and commodity growth continue to<br />
depredate and destabilize human and ecological life systems<br />
with no accountability to their requirements. Perpetually turning<br />
leveraged money into more money for private money possessors<br />
with no life standards is, in the end, the logic of a global cancer.<br />
Obama’s First Crisis: Forgetting the Past<br />
The most instructive moments in America’s history have been<br />
forgotten - for example, the 1776 American Revolution itself<br />
which Benjamin Franklin said was most of all to wrest back<br />
control over the issuing of money from the private Bank of<br />
England; Abraham Lincoln’s issue of “greenbacks” to go over<br />
the head of the New York bankers’ demand of 17% compound<br />
interest to fund the war for the Union; and FDR’s historic New<br />
Deal which guaranteed minimum economic security and put<br />
people back to work in rebuilding the real economy. Yet not even<br />
the Depression has demanded the economic reset now required<br />
to resolve the coinciding energy, environmental, employment<br />
and financial crises confronting America and the world.<br />
As with soaps, so with Presidents. Sales pitches metamorphize<br />
reality into miracles with nothing in fact changed. We are<br />
conditioned to the magical thinking - the pervasive images and<br />
parables of super cleansers and cosmetics, new vehicles of<br />
transfiguring power, aphrodisiac doorways to paradise,<br />
redeeming graces for the rejected, and people who pretend to<br />
care for us. Is the Obama presidency merely a macro variation<br />
on the theme? Already many believe that Obama will save the<br />
day without policies to do so, even Europeans gushing over his<br />
hope of a climate solution. A deeper turn is required, as events<br />
will show.<br />
(The views expressed in the article are personal and do not reflect<br />
the official policy or position of the organisation).<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
167
I NTERNATIONAL AFFAIRS<br />
POST- SO<strong>VI</strong>ET CENTRAL ASIA:<br />
<strong>Issue</strong>s and Problems of<br />
Security and Cooperation<br />
Illustration : Shantanu Mitra<br />
168 THE IIPM THINK TANK
T URBULENT TIMES<br />
R.G.Gidadhubli<br />
Adjunct Professor and Former Director<br />
Center for Central Eurasian Studies,<br />
University of Mumbai, Mumbai<br />
Five Central Asian States (CAS) –Kazakhstan, Kyrgyz<br />
Republic, Tajikistan, Turkmenistan and Uzbekistan—became<br />
sovereign and independent<br />
countries in 1991 after the disintegration of the former Soviet<br />
Union. Even though nearly two decades have passed since<br />
their independence, they continue to face several problems of<br />
security relating to social, political and economic developments,<br />
which have been of great concern for their leaders.<br />
This is in sharp contrast to the past when being part of the<br />
superpower, the people of the Central Asian republics<br />
enjoyed high degree of socio-economic and political security.<br />
Hence when the Referendum was carried out in March 1991,<br />
95 % of the electorate of these Central Asian republics voted<br />
in favor of the preservation of the USSR. This was in contrast<br />
to the people of the Baltic republics who<br />
spearheaded the movement for autonomy<br />
and ultimately separation from the USSR.<br />
The Soviet Union did break-up and<br />
Commonwealth of Independent States<br />
(CIS) was formed excluding the three<br />
Baltic States.<br />
In the chaotic period that followed for<br />
several years, each of the CAS had to find<br />
its own security and path of development.<br />
Even as independence was thrust on them,<br />
protecting sovereignty, independence and territorial integrity<br />
became the primary concern of the leaders of these states.<br />
Turkmenistan was in favor of keeping its distance from the<br />
CIS and favored neutrality status as its foreign policy.<br />
Uzbekistan tried for several years to distance itself form<br />
Russia moving closer to the USA for political and economic<br />
gains. Tajikistan which experienced the worst fears of the<br />
Soviet dissolution, was facing problems of security as it was<br />
threatened by the civil war triggered by divisive elements of<br />
regionalism, factionalism of various ethnic groups that got<br />
support from external forces. Moreover, the spillover effects<br />
of the developments in the neighboring state of Afghanistan<br />
The CAS which<br />
are richly<br />
endowed with<br />
energy & mineral<br />
resources have<br />
unique geographic<br />
location<br />
further aggravated security scenario in Tajikistan, which<br />
sought the help of Russia to overcome it and retain its<br />
independence and territorial integrity. The magnitude of the<br />
problem was relatively less for Kazakhstan and Kyrgyz<br />
Republic. A major part of the first decade of independence<br />
was marked by economic crisis of unprecedented magnitude<br />
marked by steep decline of over 40-50 % in the first decade in<br />
Gross Domestic Product, industrial and agricultural production,<br />
hyper inflation, unemployment and so on. Thus as<br />
opined by some analysts in the 1990’s the impact of political<br />
instability and economic crisis was felt by all the CAS even as<br />
it varied from country to country, which covered all aspects<br />
of life of the people affecting their security 1 . With improvement<br />
in political and economic developments during the last<br />
about a decade the magnitude of the problems has somewhat<br />
reduced.<br />
The CAS which are richly endowed with energy and<br />
mineral resources have unique geographic location situated<br />
in the southern underbelly of Russia and flanked by China on<br />
the East. Hence the region has assumed geopolitical and<br />
geo-economic dimension during the last two decades. Yet the<br />
CAS felt a sudden ‘vacuum’ partly<br />
because of the fact that these states were<br />
by and large isolated from the rest of the<br />
world during the Soviet era, Hence an<br />
effort has been made in this paper to<br />
analyze some of the security concerns and<br />
to what extent the CAS have succeeded to<br />
overcome them.<br />
Political Security<br />
In the post-Soviet era, the Central Asian<br />
region has witnessed security threats caused by certain<br />
socio-political forces and extremist organizations. The<br />
former Russian president Vladimir Putin was candid in his<br />
statement that Russia’s withdrawal from Central Asia after<br />
the Soviet break-up created a socio-political vacuum, which<br />
religious and terrorist organizations were trying to fill. Since<br />
the communist ideology had lost its relevance for the newly<br />
independent CAS, extremist elements took advantage of this<br />
situation to push religious elements in these predominantly<br />
Islamic countries. This was particularly evident in the<br />
Fergana valley, which is being straddled by three states<br />
namely, Uzbekistan, Tajikistan and Kyrgyz Republic has<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
169
I NTERNATIONAL AFFAIRS<br />
witnessed offensives from Islamic rebels in the 1990’s 2 . There<br />
were clashes between secular and extremist forces in Uzbekistan<br />
and hence the Uzbek president Islam Karimov<br />
sought the help of international forces including the support<br />
from Russia to deal with the Islamic Movement of Uzbekistan<br />
(IMU) and Hizb-ul-Tahrir (HT), which are extremist<br />
organizations. As opined by analysts their goal has been to<br />
set up a caliphate that rejects the modern state. IMU has<br />
merged with Islamic Movement of Turkistan (IMT). Russia<br />
was also aware of the fact that the IMU had links with<br />
Islamic extremist groups which had escalated conflicts in<br />
Russia’s southern region of Chechnya.<br />
Some analysts including Graham Fuller have attributed the<br />
cause of extremism in Central Asia to political deprivation,<br />
economic deterioration, corruption etc. Analyzing the bloody<br />
clashes that engulfed Andijan city of Uzbekistan in 2005, S.<br />
Akiner has argued that they were driven not by socio-economic<br />
but by strong religious and political motivations<br />
revealing the power struggle with secular forces in the<br />
region 3 . Ramakant Dwivedi, on the basis of his detail study of<br />
political developments in Central Asia has argued that<br />
threats of extremism in Uzbekistan and<br />
other CAS are due to religious extremism.<br />
They have caused a major threat to<br />
security and stability in Central Asia 4 .<br />
While elements of religious extremism in<br />
Central Asia can be traced to the 1950’s<br />
and 1960’s, they were unable to pose a<br />
threat to the mighty Soviet power. But a<br />
large number of groups emerged in<br />
Central Asia particularly in the 1990’s<br />
with Islamic moorings with external<br />
financial and political support affecting socio-political fabric<br />
of the region. The leadership of the CAS and a major section<br />
of intelligentsia educated with secular outlook have succeeded<br />
to some extent in overcoming the security threats posed by<br />
extremist groups 5 . In this regard they have received strong<br />
support by Russia and China at a bilateral level and at<br />
multilateral level through their association in regional organization<br />
such as the Shanghai Cooperation Organization. Thus<br />
while Islam per se is not a threat to the CAS but Islamisation<br />
of politics on the line of IMT and HT are serious threats to<br />
stability and development and modernization of Central<br />
Asia. The security concerns do persist in the Central Asian<br />
Between<br />
Uzbekistan and<br />
Tajik republic 86 %<br />
of the border was<br />
delimited by 2002<br />
and disputes are<br />
yet to be resolved<br />
region and hence a comprehensive and sustained regional<br />
cooperation of all the CAS is needed to counter these<br />
threats.<br />
Border Security<br />
After the Soviet break-up, borders between the CAS have<br />
often become sources of conflict and contention. In fact<br />
under Stalin’s regime these Central Asian States came into<br />
existence on the basis of his ‘Policy of Nationality’ but<br />
borders were drawn rather artificially in the 1920’s when the<br />
Soviet Union was formed and they were meant mainly for<br />
administrative purposes. This is evident from the fact that in<br />
many cases people of same ethnic community had to live on<br />
either side of the border. For instance, Samarkand Oblast is<br />
in Uzbekistan but people in Samarkand are mainly of Tajik<br />
nationality. Similarly, Fergana Valley, where people of three<br />
nationalities namely, Kyrgyz Republic, Tajik and Uzbek have<br />
been living for generations but the valley has been spread<br />
over these three states. Although in the aftermath of the<br />
Soviet break-up, the leaders of the CAS decided not to<br />
redraw the borders there has been a felt need by the CAS for<br />
the delimitation and demarcation of<br />
borders in the interest of border security.<br />
Hence in 1999 Kyrgyz republic and<br />
Uzbekistan undertook the task of demarcation<br />
and over the next five years out of<br />
1,400 km border only 290 km had been<br />
fixed. Even now major part of the border<br />
is yet to be demarcated. There are<br />
contentions over 39 sections of the border<br />
in the Batken Oblast which is a sensitive<br />
area. Similarly, disagreements have<br />
persisted in few other sections. Similarly, between Uzbekistan<br />
and Tajik republic 86 % of the border was delimited by 2002<br />
and disputes are yet to be resolved over four areas. Similarly,<br />
Kazakhstan and Russia initiated the process of delimitation<br />
work of the border in 2000.<br />
Differences among the CAS on border issues could be<br />
potential sources of conflict causing security threat for the<br />
concerned states. In fact, conflicts have been occurring from<br />
time to time due to illegal movement of population, drug<br />
trafficking and so on. For instance, in April <strong>2009</strong> the Uzbek<br />
authorities have erected a border signpost on disputed<br />
territory near the Kyrgyz-Uzbek village of Chek, which has<br />
170 THE IIPM THINK TANK
T URBULENT TIMES<br />
alarmed residents caught up in a long-running dispute over<br />
which the Kyrgyz Republic possesses the concerned territory.<br />
Hence this may create tension between Uzbekistan and<br />
Kyrgyz Republic. The agriculturally rich Fergana Valley has<br />
been witnessing such migration, leading to interethnic<br />
conflicts affecting the relations among the CAS. 6 While<br />
efforts have been to intensify vigilance at border control<br />
posts, infiltration and illegal migration has been going on by<br />
mafia elements dealing with drug trafficking which has been<br />
carried out on a large scale involving millions of dollars.<br />
Hence cooperation at the regional and bilateral levels is<br />
needed to overcome these conflicts.<br />
Environmental Security<br />
Environmental security has assumed importance in the<br />
desert and semi-desert region of Central Asia and the life of<br />
millions of people has been threatened due to deteriorating<br />
conditions in some parts of this region. A major source of<br />
security concern affecting the environment has been the<br />
degradation of the Aral Sea. This is the fourth largest inland<br />
sea in the world bordering Uzbekistan and Kazakhstan. The<br />
two major rivers of the Central Asian<br />
region namely Syr Darya and Amu Darya<br />
are tributaries of the Aral Sea. For the<br />
desert and semi-desert region of Central<br />
Asia, these two rivers are the main source<br />
of supply of water for sustaining the life of<br />
millions of people including agriculture.<br />
During the Soviet era these two rivers<br />
were used for intensive irrigation for<br />
cotton cultivation which was a major<br />
source of income for the backward<br />
republics of Central Asia. With the exploitation of these two<br />
rivers for irrigation, the Aral Sea has been shrinking during<br />
the last several decades. This is evident from the fact that<br />
while in 1960 55 billion cubic meters of water was flowing into<br />
the Aral Sea annually, but by the year 2000 only about 1-5<br />
billion cubic meters of water was reaching the Sea. This<br />
decline in water flowing into the Aral Sea, has caused drying<br />
up of the sea by thousands of square kms. As pointed out by<br />
Rama Sampathkumar, the Aral Sea has been shrinking<br />
rapidly and turning into a ‘dry, contaminated, toxic slat pan.<br />
The seriousness of the degradation can be visualized from<br />
the fact that ecologists warned a few years back that it was<br />
A major source of<br />
security concern<br />
affecting the<br />
environment<br />
has been the<br />
degradation of<br />
the Aral Sea<br />
only about a quarter of its original <strong>size</strong> and at this rate of<br />
shrinkage, it may cease to exist by 2020. The problem of<br />
drying up was known and realized even during the Soviet era.<br />
There was a bold proposal in the 1970’s to divert a Siberian<br />
river and linking it up with the Central Asian rivers to help<br />
irrigation and save the degradation of the Aral Sea. But apart<br />
from technical complications, high economic cost involved<br />
and likely adverse impact on the Siberian region might have<br />
been responsible for not pursuing this Grand Project.<br />
The process of drying up of the Aral Sea has resulted in<br />
major climate changes and has caused several ecological<br />
problems in the region. For instance, due to drying up of sea,<br />
hundreds of tons of salt and sand are carried away by winds<br />
over long distances affecting the ecological balance and<br />
specifically flora and fauna. The Kara Kalpak region of<br />
Uzbekistan is severely affected causing various ailments<br />
including kidney trouble, gastric problems and respiratory<br />
diseases for the inhabitants of the region reducing the life<br />
expectancy as a whole 7 . Infant morality in the Kara Kalpak<br />
oblast is very high. The incidence of esophageal cancer in this<br />
region is reported to be seven times higher than in other<br />
areas. The Uzbek president Islam Karimov<br />
has opined that the Aral Sea shrinkage<br />
has been a ‘global Disaster’ and hence<br />
he has been seeking global help.<br />
At the same time neglect of environment<br />
by the authorities has been causing<br />
health hazards in Central Asia not only by<br />
the degradation of the Aral Sea, but also<br />
due to pollution of the water of the two<br />
main rivers Syr Darya and Amu Darya.<br />
On this issue the United Nations Development<br />
Program had carried out a detailed study and a report<br />
was released in 2004 highlighting poor quality of water of the<br />
two rivers which would lead to the deterioration of the health<br />
of the people in the region. It was stated by the UNDP<br />
specialist Sagimbayeava that about 50 % of the population in<br />
Kazakhstan uses drinking water which did not meet the<br />
international standard of salinity and hardness 8 . It appears<br />
not much effort has been made by the Central Asian authorities<br />
to improve the situation. In March <strong>2009</strong>, Bruce Panner<br />
reported the findings of studies carried out recently by some<br />
Central Asian research institutes according to which the<br />
situation has worsened. For instance, as observed by the<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
171
I NTERNATIONAL AFFAIRS<br />
deputy director of Kazakhstan's agency for Applied Ecology,<br />
Malik Burlibaev, "the Syr Darya was so polluted that water<br />
from it should not be used for drinking or for irrigation." and<br />
that rice harvested in Kyzyl-Orda was so loaded with cancercausing<br />
agents that it should not be eaten. The water of Syr<br />
Darya contained high levels of copper, cadmium, and zinc.<br />
Apart from the garbage, detergents and effluents thrown by<br />
urban population, factories, plants, and mining operations<br />
along the river present formidable environmental hazards to<br />
the pollution of the Syr Darya. On the basis of an independent<br />
study, Burlibaev has claimed that intestinal-cancer rates<br />
of residents in Kyzyl-Orda region were the highest in Kazakhstan,<br />
and that 90 % of nursing mothers in the province<br />
were passing pesticides to their babies through their breast<br />
milk. Further adding to the credibility of this study, Orazgul<br />
Zhunusova, the head of the state's department for expertise<br />
and control of the Aral-Syr Darya ecology has confirmed<br />
Burlibaev's findings. In the UNDP report of 2004, there was<br />
also a warning bell by experts that Lake Balkash the second<br />
largest lake in Central Asia was also in danger of drying out if<br />
the Kazakh authorities did not adopt better water-management<br />
practices.<br />
There is realization of this ecological<br />
problem at the regional level as well as at<br />
global level. For instance, at the meeting<br />
of Central Asian Cooperation Organization<br />
(CACO) held in 2002 in Tajikistan,<br />
the matter was discussed by the heads of<br />
the CAS for taking urgent steps to tackle<br />
the problem. A declaration was passed to<br />
appeal to the UN Commission on Sea for<br />
help, since these states could not mobilize<br />
resources on their own. In fact in the early 1990’s the World<br />
Bank has carried out a detail study of the problem of Aral<br />
Sea calling the attention of the CAS to conserve the sea and<br />
prevent ecological disaster. But according to some analysts<br />
political will and genuine cooperative spirit has been lacking<br />
among the CAS to tackle this vital issue. The main solution<br />
has been to reduce the use of water of the two rivers for<br />
irrigation. But the agricultural lobby in Central Asia is<br />
against such a proposal as it would affect their cotton production,<br />
which has been one of the major sources of income for<br />
farmers and hard currency earning of Uzbekistan.<br />
The issue has remained highly sensitive and controversial<br />
World Bank has<br />
got the attention<br />
of the CAS to<br />
conserve the<br />
sea and prevent<br />
ecological disaster<br />
in the region<br />
which is evident from the fact that the summit meeting of the<br />
heads of the five CAS members of the International Fund for<br />
Saving the Aral Sea held in April <strong>2009</strong> ended in bitter<br />
disagreements. The ‘Upstream States’ of Kyrgyz Republic<br />
and Tajikistan facing energy shortage insist that they want to<br />
go ahead in constructing dams and store and conserve water<br />
for new hydropower projects. But this reduces water flowing<br />
downstream affecting ‘Downstream States’ of both Kazakhstan<br />
and Uzbekistan. There were strong differences among<br />
the heads of CAS which was evident from angry reaction of<br />
Uzbek president Islam Karimov. As reported by Anton Blua<br />
there is a new dimension to the issue. Due to decline in water<br />
levels the Aral Sea is split into two separate parts -- the<br />
Northern and the Southern Aral Seas. While there was no<br />
consensus among the leaders, the Kazakh government is keen<br />
to initiate measures on its part and thus in 2005 a 13-km dike<br />
was opened which has been replenishing water to the northern<br />
part of the Aral Sea. This has helped in reducing the<br />
drying up of Aral Sea and increasing surface of the Sea to<br />
some extent. This is a positive development and with wider<br />
regional cooperation and technical and financial support by<br />
international institutions, the degradation<br />
of the Aral Sea might be checked in the<br />
near future. Hence lack of resources,<br />
neglect by the authorities have contributed<br />
to the environmental problems<br />
created over the last few decades.<br />
Besides the problems mentioned above<br />
some parts of the Kyrgyz Republic have<br />
been affected by hazardous nuclear<br />
‘tailings’. During the Soviet era this<br />
republic was an important producer of<br />
uranium, which was used for defense needs also for industrial<br />
purposes. As opined by Jyldyz Sydygalieva huge quantities of<br />
nuclear waste had been buried in several places including in<br />
the region of Mailu- Suu where there are 18 uranium ore<br />
dumps, and at Kaji-Sai village, and also near Issuk Kul lake.<br />
These nuclear tailings have polluted ground water and<br />
atmosphere in these regions affecting flora and fauna. Some<br />
efforts have been made by the Kyrgyz government by adopting<br />
a national plan for preserving the environment building<br />
storehouses for radioactive waste products. There is unanimity<br />
among the experts in Central Asia that to prevent any<br />
major catastrophic events, there is need for regional coopera-<br />
172 THE IIPM THINK TANK
T URBULENT TIMES<br />
tion among the CAS which should evolve a regional policy for<br />
creating a ‘Nuclear Free Zone’.<br />
Energy Security<br />
The sharing of river water of Syr Darya and Amu Darya is also<br />
linked to energy security. Tajikistan and Kyrgyz Republic are<br />
the ‘Up Stream’ countries, which have abundance of water but<br />
they are deficit in hydrocarbon resources. On the other hand,<br />
Kazakhstan and Uzbekistan are ‘Down Stream’ countries,<br />
which are rich in oil and natural gas and are major producers<br />
and exporters of energy to global markets but face acute water<br />
shortage. During the Soviet era this problem did not exist since<br />
all decisions were made in Moscow with regard to the sharing<br />
of water and energy by the CAS. In fact this is an ideal case<br />
calling for interdependence and cooperation among these four<br />
states for mutual benefit for sharing water and hydrocarbon<br />
resources. In fact this interdependence has continued to some<br />
extent by virtue of the fact that both Tajikistan and Kyrgyz<br />
Republics have been importing oil and natural gas from<br />
Kazakhstan and Uzbekistan. But they are economically less<br />
developed as compared to other three CAS and have been<br />
facing acute financial problems due to<br />
which they are often been defaulter states.<br />
For instance, in October 2001 when the<br />
Kyrgyz government was unable to pay to<br />
Uzbekistan the outstanding debt of about $<br />
1.5 million for the supply of natural gas,<br />
the Uzbek government suspended natural<br />
gas deliveries which severely affected<br />
several industrial enterprises in Chu Oblast<br />
of Kyrgyz Republic In turn Kyrgyz government<br />
threatened to cut down water supply<br />
to Uzbekistan. With the intervention at the highest levels of<br />
the presidents of the two states matter was temporarily<br />
resolved. Similar problems have arisen between Kazakhstan<br />
and Kyrgyz Republic. In 2002, Kazakhstan paid its water debt<br />
to Kyrgyz Republic by supplying four lakh tons of coal and<br />
power generating equipments worth $ 5.8 million. Thus during<br />
the last about two decades there are on going conflicts of<br />
interests among them. Both Kyrgyz Republic and Tajikistan<br />
have proposed to solve their problem of energy security by<br />
increasing the production of hydel power by utilizing the rivers<br />
in their territory and reduce their dependence upon imported<br />
energy. The Kyrgyz government has taken steps to privatize<br />
CAS have the<br />
benefit of the<br />
Caspian Sea,<br />
which is even<br />
more important<br />
for the energy<br />
security of region<br />
energy sector to attract private investment from abroad and<br />
reduce dependence on Uzbekistan for energy supplies.<br />
Similarly, Tajikistan proposed in 2005 to build the 4 th dam on<br />
the Vaksh cascade to produce more electricity.<br />
The problem of energy security persists even now which is<br />
evident from the fact that at the April <strong>2009</strong> summit meeting of<br />
the heads of the CAS, the Kyrgyz president Kurmanbek<br />
Bakiev raised the issue of energy shortages in his state and his<br />
decision to built new hydropower stations. As stated earlier<br />
there was strong reaction on this by the Uzbek president, since<br />
this will reduce water availability and will adversely affect<br />
Uzbek agriculture 9 . Bruce Panner has opined that Uzbekistan<br />
has been waging a campaign against the construction of large<br />
hydropower stations in Kyrgyzstan (Kambar-Ata) and<br />
Tajikistan (Roghun), where Soviet-era projects that were left<br />
incomplete when the USSR was dissolved. Similarly disagreeing<br />
with the contention of the Uzbek president, the president<br />
of Tajikistan Emomali Rahmon has asserted in his address at<br />
the summit meeting in April <strong>2009</strong> that water-energy projects<br />
being built in Tajikistan will not harm the neighboring countries.<br />
The World Bank and UNDP experts have time and again<br />
contended during the last two decades that<br />
solution to the energy and water problems<br />
of Central Asia depended upon the<br />
agreements and cooperation among the<br />
concerned states. In full support to the<br />
opinion of international experts, the<br />
Kyrgyz president Bakiev has proposed<br />
"The strategic issue that requires resolution<br />
is the coordination of our timetables<br />
of water release for irrigation and energy<br />
needs and compensatory fuel supplies [to<br />
Kyrgyzstan], and this is what should be the subject of international<br />
cooperation among parties interested in using watersaving<br />
technologies".<br />
In addition to the hydel source of energy, the CAS have the<br />
benefit of the Caspian Sea, which is even more important for<br />
the energy security of the Central Asian region. The Caspian<br />
Sea which borders two CAS namely Kazakhstan and Turkmenistan<br />
apart from Russia, Azerbaijan and Iran has hydrocarbon<br />
reserves estimated at about 300 billion barrels of oil.<br />
During the last two decades the Caspian has emerged as one<br />
of the major sources of hydrocarbon resources in the world.<br />
Moreover, it has gained considerable geopolitical and geo-<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
173
I NTERNATIONAL AFFAIRS<br />
economic significance by virtue of the fact that it has attracted<br />
the interest and involvement of major powers including the<br />
USA, European Union, Russia, and China. India has also<br />
been taking active interest but is not a major player. Both<br />
Kazakhstan and Turkmenistan have immensely benefited with<br />
huge inflow of petrodollars by the increasing demand for oil<br />
and natural gas and unprecedented rise in international price<br />
for oil during the last few years before the present global<br />
financial crisis. At the same time the CAS have become the<br />
victims of the on-going conflicts among the littoral states of<br />
the Caspian Sea due to several issues involved. The member<br />
states are unable to arrive at a consensus over several issues--<br />
the legal status of the Caspian Sea; sharing of energy resources;<br />
disputes over the ownership of oil-natural fields lying on<br />
the borders of national sectors and so on. Due to on-going<br />
differences there were threats of military conflict during the<br />
1990’s. Moreover, there are also differences between Russia on<br />
the one hand and the USA and the European Union countries<br />
on the other, which have made huge investment in the energy<br />
sector of Kazakhstan and Turkmenistan the Caspian region<br />
over the issue of multiple-pipeline policy for the transportation<br />
of oil to global markets. Apart from Baku-Tbilisi-Ceyhan<br />
pipeline, the Western countries are interested in getting oil<br />
and natural gas from Turkmenistan and Kazakhstan through<br />
the trans-Caspian pipeline 10 . While these multiple pipelines<br />
will bring in huge petrodollars to the CAS, the Great Game<br />
which is being replayed in Central Asia will also cause security<br />
concerns for the region.<br />
Thus in lieu of conclusion it may be stated that during the last<br />
two decades the CAS have substantially achieved political<br />
stability and economic progress and have overcome the vacuum<br />
and economic crisis after the Soviet disintegration. However,<br />
they face many problems affecting their security such as<br />
religious extremism, border disputes which have caused<br />
concern for the leaders of the CAS. The rapid rate at which the<br />
Aral Sea has been drying up causes serious environmental<br />
threats affecting the lives of millions of people in Central Asia.<br />
Similarly, conflicts with regard to the sharing of river waters for<br />
irrigation and energy are often becoming acute with the<br />
passage of time. While regional cooperation is urgently needed<br />
to solve problems of security facing the CAS, efforts being<br />
made by the leaders to arrive at agreements at bilateral and<br />
regional levels have achieved limited success and have often<br />
ended up on paper. It appears that often there is lack of<br />
political will to implement major decisions due to vested<br />
interests. Hence there is urgent need for effective regional<br />
cooperation among the CAS to overcome security threats<br />
facing the region as a whole.<br />
Endnotes and Additional Thinking<br />
1<br />
Murat Shaikhutudinov “Regional and Global Security in the<br />
21 st Century: Conceptual Approaches and Reality” in the<br />
Journal Kazakhstan in Global Processes (In Russian)<br />
Almaty . No 3 2008.<br />
2<br />
Tim Helelniak “The Changing Composition of Nationality<br />
of the Central Asian Transcaucasian States” Post-Soviet<br />
Geography and Economics. UK. Vol 38 no 6- 1997<br />
3<br />
Akiner S “Violence in Andijon” 13 th <strong>May</strong> 2005 “An Independent<br />
Analysis”<br />
4<br />
Ramakant Dwivedi ‘ Threats of Religious Extremism in<br />
Uzbekistan: An Analysis in the book Edited by K. Santhanam,<br />
Abdusamant Khaydarov and Ramakant Dwivedi<br />
“Contemporary Indo-Uzbek Perspectives on Bilateral and<br />
Regional <strong>Issue</strong>s. Published by India-Central Asia Foundation.<br />
New Delhi <strong>2009</strong>.<br />
5<br />
Kosichenko A. G “ Kazakhstan Model of Interethnic and<br />
Inter-religious Cooperation” (In Russian) in the book<br />
Modern Kazakhstan Strategy of Success Almaty 2008<br />
6<br />
Fredrick Starr “ Historical Perspectives of Cooperation in<br />
Central Asia” in the Journal Kazakhstan in Global Processes.<br />
(In Russian) Almaty No 3 2008<br />
7<br />
Antoine Blua “Kazakhstan: UN Report Highlights Poor<br />
State of Water Resources”<br />
Prague, 20 th January 2004 (RFE/RL)<br />
8<br />
Antoine Blua “Central Asian Leaders Fail to Overcome<br />
Difference at Water Summit” 28 th April <strong>2009</strong> RFE/RL --<br />
Central Asia<br />
9<br />
R.G.Gidadhubli “Uzbek Economic Development model: An<br />
Appraisal” Dialogue <strong>Quarterly</strong>- A Journal of Astha Bharati<br />
April –June 2002. New Delhi<br />
10<br />
R.G.Gidadhubli “Caspian Region:The Unending Conflicts”<br />
In the book ‘Central Asia Since Independence’ Edited by K.<br />
Warikoo and Mahavir Singh Maulana Abdul Kalam Azad<br />
Institute of Asian Studies Kolkata. SHIPRA New Delhi<br />
2004<br />
(The views expressed in the write-up are personal and do not reflect<br />
the official policy or position of the organisation)<br />
174 THE IIPM THINK TANK
T URBULENT TIMES<br />
AD<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
175
M ICRO MACRO<br />
The Shrinking<br />
Rice Paddies<br />
Of Kerala<br />
Nikhil Raj and PA Azeez<br />
Environmental Impact Assessment Division,<br />
Sálim Ali Centre for Ornithology and Natural<br />
History (SACON), Coimbatore<br />
Kerala the southern most state of India is unique<br />
in several aspects; the demography of the state,<br />
especially in death rate and birth rate, apparently<br />
follow a trend similar to some developed countries (www.<br />
planningcommission.nic.in). The state is first in the<br />
country in human development index (Pillai 2008),<br />
literacy rate (90.9%) and sex ratio (1058 female: 1000<br />
male, www.ibef.org). In the recent years the state is going<br />
ahead in show casing its potentials as a destination for<br />
(eco)tourism, information technology (IT), information<br />
technology enabled services (ITES) and the like. However,<br />
the predominantly agro based rural economy drags<br />
back the financial system of the state. The state’s agriculture<br />
sector contributes only 13.5% of the total state’s GDP<br />
176 THE IIPM THINK TANK
R ICE BOWL<br />
compared 54.4% for Punjab. Traditionally rice paddy has<br />
been the prime crop in the rural Kerala and the customs<br />
and culture of the state were intimately woven around rice<br />
paddy cultivation. Other cash crops such as rubber, which<br />
currently plays much greater economic role, came to Kerala<br />
much later perhaps in the late eighteen century. However,<br />
recent years have seen drastic changes in the rice<br />
paddies in the state, both in quality and quantity. In this<br />
paper we examine the issues related with declining rice<br />
paddies of the state.<br />
Rice Paddies of Kerala<br />
Kerala is a narrow stretch of 38,864 Square Kilometer,<br />
lying along the south western aspect of<br />
the Western Ghats of Indian peninsula.<br />
Its topography of undulating terrain<br />
ranging in altitude from below sea level<br />
to above 2000m set apart the state with<br />
almost distinct three elevation zones (the<br />
high ranges, the midlands and the costal<br />
gradients) with varying agro ecological<br />
settings. Comparing to other states of<br />
India, the state of Kerala is endowed<br />
with largest proportion of land area<br />
under wetlands (Nayar and Nayar,<br />
1997). The paddy cultivating wetlands<br />
of the state are mainly located in the<br />
costal plains and the midlands (Varghese<br />
1970). Extensive rice fields, growing<br />
specific cultivars (more than 600 in the<br />
state), are seen in the costal region of<br />
Kerala, along the coastal marshes and<br />
the backwaters, lying almost at the sea level. The midland<br />
region, with altitudes ranging up to 75 meters above mean<br />
sea level, are made up primarily of flat-bottomed valleys<br />
and undulating terrain with net work of streams, rivulets<br />
and rivers. The highly fertile wetlands in this area make<br />
good locations for rice paddies. The major paddy producing<br />
areas of the state are Palakkad, Kuttanad and Kole<br />
wetlands.<br />
There are economical, socio-cultural and political<br />
grounds to the rapid transformation of the ‘rice culture’ of<br />
the sate. The factors at different levels during the mid 19 th<br />
century and afterwards were persuaded the social set up<br />
The major paddy<br />
producing areas<br />
of the Kerala<br />
state are<br />
Palakkad,<br />
Kuttanad and<br />
Kole wetlands<br />
of the state hugely. The stage, during and immediately<br />
after the formation of the Kerala state, was the period in<br />
which left and socialist ideologies were getting deep<br />
rooted in the state. This was accompanied by the “gulf<br />
boom” arising from the export of human resources in the<br />
seventies to the oil rich Middle East. In nineties, India was<br />
liberalizing the trade and globalizing economy. The effect<br />
of globalization was wide and pervasive forcing the<br />
paradigm of development advocating the primacy of<br />
market forces, further and further. All these developments<br />
and their underlying ideological ramifications<br />
brought drastic changes in the Kerala state that are<br />
reflected in its social settings, environment, economy, and<br />
culture.<br />
Kerala had the world’s first democratically<br />
elected communist government in<br />
power in 1957. The communist government<br />
conceived several new programs for<br />
welfare of the state especially the under<br />
privileged segments of the state, underdogs<br />
of the erstwhile feudal landlords.<br />
The land laws initiated or enacted in the<br />
state during this period brought in<br />
radical changes in the social structure<br />
of the state. The Kerala Land Reform<br />
Act (1971) abolished the feudal landholding<br />
system leading to more equitable<br />
distribution of arable land in the<br />
state and disposition of higher equality<br />
among the public at large. The redistribution<br />
of land owner ship had revolutionised<br />
the social setup of the state.<br />
Nevertheless, it in turn split agricultural land to smaller<br />
holdings, which in turn during the seventies reduced the<br />
agricultural income (Mahesh 2000, Gopikuttan and<br />
Kurup 2004). The seventies also experienced the ‘oil<br />
boom’ in the Middle East countries and consequent high<br />
demand of workforce in those nations. The decline in the<br />
agriculture yield and the demand for workforce in the oil<br />
economies attracted large scale migration of people from<br />
Kerala. The ‘blue collar migration’ and the consequent<br />
availability of surplus income again jeopardised the state’s<br />
rice fields by ushering people towards ‘white collar’ jobs.<br />
Globalisation and the exposure of the farmers to the<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
177
M ICRO MACRO<br />
global volatility of prices also<br />
were happening next. These<br />
changes placed the rice culture<br />
of Kerala on an irreversible<br />
momentum towards decline.<br />
Rice Statistics<br />
Since the middle of the last<br />
century, the rice statistics of<br />
the state shows a steep fall in<br />
500<br />
400<br />
300<br />
200<br />
100<br />
the annual production; during<br />
0<br />
1960s the state had a share of<br />
2.5 % of the total rice produced<br />
nationally, which<br />
towards the late nineties came<br />
to a low 0.79% (Thomas, 2002). The area under rice<br />
cultivation of the state decreased drastically over the past<br />
several decades (fig.1.). The decrement in the area under<br />
rice paddy began during the late 70s, picked a faster pace<br />
and it still continues further. The farmers of Kerala have<br />
almost discarded rice cultivation for cash crops or left<br />
their land fallow for years, for lack of justifiable economic<br />
returns. In the state, the area under cash crops expanded<br />
lakhs tonnes of rice per annum to feed 31,948,619 people.<br />
However, it hardly produces 7.7 lakhs tonnes (Nair, 2004).<br />
The major factors jeopardizing the rice culture are<br />
apparently the changes in the socio cultural settings of the<br />
state, urbanization and infrastructure development,<br />
economic empowerment due to foreign remittance,<br />
inadequate wetland conservation laws, and boom in the<br />
real estate ventures.<br />
during the last 20 years, while that of food crops plummeted<br />
to just nine percent of the total cultivated area<br />
(www.keralabiodiversity.org). Rice remains the staple<br />
food in the state. Although radical changes have happened<br />
in the state’s food habit, the primacy of rice (Agarwal,<br />
2008) remains unchallenged. The state needs about 40<br />
Lack of Interest in Agriculture<br />
In general, during the last few decades people entering<br />
agriculture as an occupation in rural Kerala has reduced<br />
drastically. Only around 26% of the total rural population<br />
in the state now goes for agriculture as a line of work (Raj<br />
2003). Labor shortage, in-<br />
Fig.2. Status of Rice and Other Cash Crop Cultivation in Kerala<br />
creased labor charges, and<br />
hikes in the cost of input are<br />
900000<br />
800000<br />
direct detractive factors. The<br />
growing apathy to cultivation of<br />
700000<br />
rice is an important thrust for<br />
600000<br />
farmers to gradually divert the<br />
500000<br />
paddy<br />
coconut water logged rice fields to drier<br />
400000<br />
Rubber and perennial crops such as<br />
300000<br />
200000<br />
coconut, areca nut or rubber.<br />
100000<br />
0<br />
The state’s agriculture scenario<br />
has under gone a drastic shift in<br />
1985-86 2007-08<br />
various aspects giving more<br />
importance to the cash crops<br />
Source: www.ecostatkerala.org<br />
than the cultivation of cereals.<br />
Area in hectare<br />
Fig.1. Rice Statistics Of The State<br />
Area in '000hectare<br />
1000<br />
900<br />
800<br />
700<br />
600<br />
1960-61<br />
1963-64<br />
1966-67<br />
1969-70<br />
1972-73<br />
1975-76<br />
1978-79<br />
1981-82<br />
1985-86<br />
1988-89<br />
1991-92<br />
1994-95<br />
1997-98<br />
2000-01<br />
2003-04<br />
2006-07<br />
178 THE IIPM THINK TANK
R ICE BOWL<br />
The area under coconut<br />
Fig.3. Production and Productivity of Rice<br />
plantation and rubber along<br />
with cashew, areca nut has<br />
increased rapidly; the land<br />
under rubber alone has been<br />
increased to 45% during the<br />
period (www.ecostatkerala.<br />
org, Fig.2). During the<br />
beginning of the new millennia<br />
crops such as vanilla<br />
diverted much of the farmer’s<br />
attention from rice cultivation.<br />
Keeping the wetland fallow<br />
for a while, as a prelude to<br />
3000<br />
2500<br />
2000<br />
1500<br />
1000<br />
500<br />
0<br />
Production ('000 tonnes) Productivity (in kg)<br />
diverting it for real estate ventures is also become a<br />
common trend in the state. Thus annual production of rice<br />
in the state shows a trend of decrease, although there is a<br />
comparative hike in the productivity thanks to perhaps<br />
new fertilizers, high yielding varieties and cropping<br />
procedures (fig. 3).<br />
It is reported that the agriculture<br />
crops. The disparity in minimum support price (MSP) for<br />
rice and other cereals is also obvious; MSP for wheat is<br />
almost double the MSP for rice (www.ers.usda.gov). Rice<br />
paddy provides several ecological services, to a great that<br />
are derived from a wetland ecosystem. Recognizing such<br />
monetized ecological services derived from rice paddy<br />
system government need to offer more<br />
laborers have also decreased in the state<br />
or less satisfactory level of incentives. In<br />
from 25.6% to 16.1% of the total during The agriculture approximate and crude monitory terms<br />
1991-2001. There is also a fall of 12.2 to laborers have the value for the services for wetlands is<br />
7.1 in the percentage of cultivators to decreased in the about US$ 15,000/- per hectare per<br />
main workers during the same period<br />
annum.<br />
state from 25.6%<br />
(Kerala state planning board 2004).<br />
to 16.1% of the<br />
However, still about 60 lakhs of people<br />
Urbanization and Infrastructure<br />
in the state directly depend on rice total between Development<br />
cultivation (Harigovindan, 2007) 1991 and 2001 Urbanization in Kerala resembles that<br />
including about three lakhs rice cultivators<br />
(Suchitra, 2008).<br />
Agriculture provides maximum opportunity to the local<br />
labors especially women and it offers job consistency for<br />
most part of the year. About 600 labor days are expected<br />
for cropping one hectare of land (Rajendran, 2007). It is<br />
also noted that Kerala’s agriculture workers are privileged<br />
to have highest real wage rate compared to other states of<br />
India, although this is a major reason for low return from<br />
agriculture. The lack of government support for rice<br />
cultivation also seems to be a factor for the loss of interest;<br />
the incentive for rice production in the state is only Rs.<br />
350/- per hectare, which is negligible compared to other<br />
of some Asian countries, in that the<br />
urban growths here always coexist with rural attributes.<br />
The state’s major urban centres, Trivandrum, Cochin and<br />
Calicut were growing with the small rural centres, of trade<br />
and other related activities, skirting and associated with<br />
these cities budding rapidly resulting in the state as a<br />
whole blending more or less a single town ship. Agglomerations<br />
or out growths were rarer in Kerala till 1981 while<br />
later their number have been almost doubling every<br />
decade (Eapen, 1999). The transformation of rural to<br />
urban in Kerala usually happens by conversion of the rural<br />
agriculture lands particularly the rice growing wetlands,<br />
primarily because of the low market price for such water<br />
1960-61<br />
1963-64<br />
1966-67<br />
1969-70<br />
1972-73<br />
1975-76<br />
1978-79<br />
1981-82<br />
1985-86<br />
1988-89<br />
1991-92<br />
1994-95<br />
1997-98<br />
2000-01<br />
2003-04<br />
2006-07<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
179
M ICRO MACRO<br />
Fig .4. Population Density of the State<br />
boardkerala.nic).<br />
Road development is<br />
900<br />
800<br />
700<br />
600<br />
500<br />
400<br />
single most critical<br />
factor that opens up<br />
any ecosystem or<br />
traditional practices<br />
for rapid changes.<br />
Infrastructure<br />
development demands<br />
300<br />
200<br />
100<br />
0<br />
considerable<br />
lands to be divested<br />
from its former /<br />
original use. The<br />
1951 1961 1971 1981 1991 2001 high demand of<br />
independent houses<br />
Source: www.planningboardkerala.nic<br />
logged lands and the prevailing market forces do not<br />
appreciate the value of ecological services that such lands<br />
provide the community.<br />
Kerala has shown a consistent growth in population<br />
density (Fig.4.). However in recent years it is showing a<br />
trend of flattening and it has become<br />
due to the breakdown of the erstwhile joint family system<br />
also has lead considerable demand in diversion of lands,<br />
and the first victim is the wetlands or rice paddy, because<br />
of their low market price.<br />
Growth of real estate business in the state was rapid<br />
since late nineties. The declaration of the 8 th five year plan<br />
during 1998 by the central government<br />
lowest (9.1%) among the Indian states<br />
that assured private support for ‘national<br />
housing and habitat development<br />
during the 1991-2001 periods. During The Kerala Land<br />
this period, the average number of Reform Act acted policy’ gave it a further push. Significant<br />
persons in each household in the State changes in the laws and regula-<br />
towards abolishing<br />
also has declined from 5.3 in 1991 to 4.7<br />
tions, including the urban land (Ceiling<br />
matrilineal system<br />
in 2001 and the state has almost<br />
and Regulation) act by the central<br />
of joint family and<br />
achieved a sub-replacement fertility<br />
government and amendment to the<br />
rate. Nevertheless, the population development of National Housing Bank (NHB) act<br />
density of the state (819 people per nuclear families provided an attractive climate for<br />
square kilometers) remains almost<br />
three times the national average. The recent census shows<br />
that 25% of the total population of the state comes under<br />
urban category, much closer to the national statistics<br />
(27.8%).<br />
Urbanization always involve growth of infrastructure;<br />
buildings, roads, communication facilities etc. In the case<br />
of Kerala the road network particularly is growing in rapid<br />
pace, although not much in its quality. The road density of<br />
the state is 374.9 /100 Sq. Km; far ahead of the national<br />
average of 74.9 Km/100 Sq. Km. The length of road per<br />
one lakh population is also much higher than the national<br />
average (462.6 Km against 259.2 Km, www.planning-<br />
foreign investments further pushing up<br />
the real estate growth (Joshi 2006). The rapid development<br />
in retail, entertainment sectors, financial institutions,<br />
information technology centers and the boom in the<br />
tourism sector all enhanced the growth rate. More over<br />
the Kerala Land Reform Act (1971) acted towards abolishing<br />
matrilineal system of joint family and development<br />
of nuclear families (Sushma, 1996). This resulted in the<br />
growth of housing units without keeping pace with population<br />
growth in the state. The statistics shows the state is<br />
still having a high demand for houses; demand is always<br />
doubling as the year passes (fig.5). Since the real estate<br />
sector is believed to provide much higher annual return on<br />
Density (per sq.km)<br />
180 THE IIPM THINK TANK
R ICE BOWL<br />
Fig.5. House Construction Trend in the State<br />
Number in lakhs<br />
18<br />
16<br />
14<br />
12<br />
10<br />
8<br />
6<br />
4<br />
2<br />
investment, ranging 10-12%, compared to other investments<br />
(Mahurkar and Senthil 2004), it attracts the resident<br />
and non resident Keralites equally. It is also believed<br />
to be a safe long term investment among all sections of the<br />
society who has additional surplus income to save. Moreover,<br />
it is highly lucrative for the middle<br />
men and the promoters of real estate<br />
ventures.<br />
Foreign Remittance<br />
The gulf boom happened in the later<br />
half of the seventies paving way for the<br />
flow of foreign remittances, essentially<br />
for the purpose of expenditure of the<br />
family members, of the migrants, left in<br />
the sate. This brought in considerable<br />
economical empowerment, especially of the lower middle<br />
class. Currently it is reported that in the state about 27<br />
persons per hundred households work abroad, making<br />
Kerala one of the states in India having very high remittance<br />
rate from abroad (Zachariah et al., 2000; Kannan &<br />
Hari, 2002). Zachariah and Rajan (2004) has reported<br />
35% rise in the total annual foreign remittance to Kerala<br />
during the period 1999-2004. Recently it has been reported<br />
that the total bank deposits in Kerala has crossed Rs<br />
122000/- crores of which more than Rs 34000/- crores are<br />
of non-resident Keralites. However the deposit to lending<br />
ratio has declined by aboutfive percent during the period.<br />
The funds flowing in<br />
from the migrant<br />
workers are not put<br />
into any sustaining<br />
productive ventures<br />
and it largely goes to<br />
constructing residential<br />
buildings. The<br />
high remittance from<br />
abroad (more than<br />
Rs. 24000 crores /<br />
year) along with<br />
rising disregard<br />
towards environment,<br />
ecology,<br />
agriculture or<br />
agriculture-based industries pushed the state to change its<br />
physical terrain and setup, not to talk about its social and<br />
value systems, as a whole. The state is increasingly becoming<br />
a consumer state and in terms of food crops it is totally<br />
dependent on imports. Pushapangadan (2003) observes<br />
that the leading sources of growth in the<br />
state are the services sector rather than<br />
the conventional commodity producing<br />
sectors.<br />
The larger flow of foreign money is<br />
promoting high degradation of ‘rice<br />
culture’ in Kerala, and along with the<br />
valuable wetland ecosystems, which<br />
provides ample scenic beauty if nothing<br />
else, and several invaluable ecological<br />
services. As the remittance rate grows<br />
up it pushes up the craze for more globalized life style, the<br />
number of houses, consumer shops and vehicles on the<br />
road increases, and every road junction grows like a<br />
miniature city. Moreover as the surplus money is not put<br />
into productive uses, it promote an incessantly consumer<br />
society that relies exclusively on imports for its needs. The<br />
rising demands for buildable lands detract the public to go<br />
for an efficient use of their local resources, ecological<br />
setup or agriculture, and instead they adopt the much<br />
more lucrative step of selling out their holding to real<br />
estate ventures or build hosing colonies or big shopping<br />
plazas. Large shopping malls and auditorium are becom-<br />
0<br />
2001 2002 2003 2004 2005 2006 2007 2008<br />
The gulf boom<br />
happened in the<br />
later half of the<br />
seventies paving<br />
way for the<br />
flow of foreign<br />
remittances<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
181
M ICRO MACRO<br />
ing quintessential trade marks of Keralites rural<br />
centers recently.<br />
Wetland Conservation Laws<br />
The Kerala state practically lacks an effective act to<br />
conserve the wetlands and its rice paddies from the<br />
apocalyptic conversions. The Ramsar convention (International<br />
convention on wetlands) had prioritized four<br />
wetlands of the state, for conservation actions. However,<br />
illegal transformation is not news even in such areas (Raj<br />
and Azeez <strong>2009</strong>). The Kerala Land Reform Act (1971)<br />
had a direct negative impact on the rice culture of the<br />
state (Mahesh 2000, Gopikuttan and Kurup 2004). It<br />
enforced the ownership of the land<br />
holdings to the tenants and had notable<br />
advancement in socioeconomic empowerment<br />
of the less privileged people.<br />
However, as it promoted small land<br />
holding, the huge gap between the investment<br />
and return, most of the small land<br />
holders stopped cropping rice. There<br />
were laws and regulations for protecting<br />
rice paddies of the state particularly<br />
those in the Kuttanad region of Alappuzha<br />
District right from 1952. At least<br />
12 committees were formed to look into<br />
the issues plaguing rice cultivation in<br />
the state. Vaidyanathan committee<br />
(1950), Central-State engineers committee<br />
(1952), Mangalabhanu committee<br />
(1965), M S Swaminathan committee<br />
(2005) are some such committees.<br />
However these committees are yet to make notable impact<br />
on the state’s rice culture crisis.<br />
Conversion of wetlands to house hold is a usual practice<br />
in Kerala. Most of the agriculture belts of Palakkad have<br />
got legally converted as housing plots prior to the Land<br />
acquisition (amendment) bill, (2007). The new ‘Regulatory<br />
Framework for Conservation of Wetlands (2008)’ by<br />
the central government also does not affirm the future of<br />
rice paddies, as it do deter filling up wetlands for other<br />
uses. Aquaculture is considered as a sustainable proposition<br />
in many costal rice paddies of the state. However,<br />
recent trend of aquaculture in the midland rice paddies<br />
For the last several<br />
decades in Kerala<br />
the area under<br />
rice cultivation and<br />
rice production<br />
has shown a<br />
consistent fall<br />
have to be considered as threat for several obvious reasons.<br />
The Kerala Conservation of Paddy Land and Wetland<br />
Bill (2007) is a recent attempt to prevent paddy and other<br />
wetland encroachment. The bill stress upon conservation<br />
of rice paddies and dissuade fallowing cultivable lands in<br />
the state. However, the bill apparently is not farmer<br />
friendly for various reasons and most of the rice paddies<br />
in the Malabar region are not covered by the bill. Moreover,<br />
recent trend of growing political interference in<br />
enforcement of the rules is also going to be a challenge to<br />
rice paddies. It is claimed that the bill would prevent<br />
conversion of Kerala’s agriculture wetland, about 22,000<br />
hectares per annum. The states new farm<br />
policies promoting organic farming, and<br />
campaigns such as “every one to the<br />
paddy fields” and “organic Kerala” are<br />
optimistic endeavour to sustain the<br />
fading rice culture and to relieve the<br />
environment of many unsafe agrochemicals<br />
and pesticides.<br />
Conclusion<br />
For the last several decades in Kerala<br />
the area under rice cultivation and rice<br />
production has shown more or less a<br />
consistent fall. Framers divert their<br />
arable land for cash crops, despite rice<br />
being the staple food in the state and<br />
the state almost fully depends upon its<br />
import. The major factors that cause<br />
depletion in the rice culture are related<br />
with the socio cultural and economic changes in the state.<br />
The disregard of the ecological services from the rice<br />
paddies is another reason for the mass conversion of the<br />
rice paddies. The gap between investment and production<br />
made the cultivators away from rice cultivation, while the<br />
high job opportunity and attractive wages shifted the<br />
workforce to other lucrative construction works. The high<br />
remittance from abroad boosted the real estate / construction<br />
sector in the state weaning away the lands under rice<br />
paddy and the labor force involved in cultivation and the<br />
small land owners to real estate sector. Most of the<br />
wetlands in the state are under threat from being trans-<br />
182 THE IIPM THINK TANK
R ICE BOWL<br />
formed in to built-up areas since the late 90s. No effective<br />
and appropriate legal or administrative measures are<br />
taken to protect the rice paddy in the state, or to protect<br />
the wetland ecosystems. Rice paddy which is close to<br />
wetland ecosystem serves the community and the environment<br />
in the form of several ecological goods and services.<br />
However these ecological services remains consistently<br />
sidelined mainly because of the lack of appreciation by the<br />
prevailing market forces. It is time that the authorities<br />
give ample attention to pay for such services to the<br />
farmers and those who maintain their rice paddy or<br />
wetland under their ownership.<br />
References and Additional Thinking<br />
• Pillai, NV (2008) Infrastructure, growth and human development<br />
in Kerala. Munich Personal RePEc Archive MPRA<br />
Paper No. 7017<br />
• Nayar, S and Nayar, N.M (1997). Wetlands In: The Natural<br />
resources of Kerala. K.B. Thampi, N.M. Nayar and C.S.<br />
Nayar (Ed.). WWF State office, Trivandrum.<br />
• Varghese (1970) Agrarian change and economic consequences<br />
land tenures in Kerala 1850-1960. Allied publishers<br />
Bombay.<br />
• Mahesh, R. 2000. Farm <strong>size</strong> – Productivity relation ship:<br />
Some evidence from Kerala; KIED working paper, Kerala<br />
Institute for Environment and Development, Thiruvananthapuram.<br />
• Gopikuttan,G &Kurup, K.N.P. 2004. Paddy land conversion<br />
in Kerala An inquiry into Ecological and Economic aspects<br />
in a Midland Watershed Region. Centre for Development<br />
Studies, Thiruvananthapuram<br />
• Kannan, K P., &Hari, KS. 2002. Kerala’s gulf connection:<br />
emigration, remittances and their macroeconomic impact<br />
1972-2000 Centre for Development Studies Thiruvananthapuram.<br />
• Thomas, PM (2002) Problems and prospects of paddy cultivation<br />
in Kuttanad region: A Case Study of Ramankari<br />
Village in Kuttanad Taluk. A Project of Kerala Research<br />
Programme on Local Level Development (KRPLLD),<br />
Thiruvananthapuram<br />
• Agarwal, A (2008) Dissecting the Food Consumption Pattern<br />
of Households in India. IDBI Gilts Limited<br />
• Nair, 2004 Sharp fall in area under paddy The Hindu Business<br />
line Kochi February 3 rd , 2004<br />
• Raj, RM (2003). Patterns of social change among the migrant<br />
farmers of Kannur district- a case study. Project report<br />
submitted to Kerala Research Programme on Local<br />
Development, Centre for Developmental Studies, Thiruvanandapuram<br />
• Harigovindan (2007)‘Tharisakunna padangal durithamozhiyatha<br />
karshakar’(in Malayalam) Mathrubhoomi Daily 28 th<br />
November, 2005.<br />
• Suchitra, M (2008) Who will grow food? Down to Earth,<br />
September 2008<br />
• Rajendran, K P (2007)The Law for Conserving Wetlandand<br />
Agricultural Fields (Malayalam),Mathrubhoomi Daily, 22 nd<br />
September, 2004.<br />
• Eapen, M.(1999) Economic diversification in Kerala: A spatial<br />
analysis Centre for Development Studies, Thiruvananthapuram.<br />
• Joshi, H (2006) Identifying Asset Price Bubbles in the Housing<br />
Market in India- Preliminary Evidence. Reserve Bank<br />
of India Occasional Papers, 27(1&2).<br />
• Sushama, P N (1996) Transition from high to replacementlevel<br />
fertility in a Kerala<br />
• Village, Health Transition Review 6, 1996, 115–136, Office<br />
of Population Health and Nutrition, New Delhi.<br />
• Mahurkar P,G Senthil (2004). Final Paper on Real estate<br />
fund management Indian Perspective, Asian Real estate<br />
Society AsRES conference.<br />
• Zachariah, KC., Mathew, ET., Rajan, SI. (2000) Socio economic<br />
and demographic consequences of migration in Kerala,<br />
Centre for Development Studies Thiruvananthapuram<br />
• Zachariah, KC, and I Rajan (2004).Gulf revisited economic<br />
consequences of emigration from Kerala, emigration and<br />
unemployment. Centre for Development Studies Thiruvananthapuram<br />
• Raj, PPN and Azeez, PA (<strong>2009</strong>) Real Estate and Agricultural<br />
Wetlands in Kerala Economic & Political Weekly,<br />
XLIV:5, Pp. 63-66.<br />
• K. Pushpangadan K (2003) Remittances, consumption and<br />
economic growth in Kerala: 1980-2000. Centre for Development<br />
Studies, Thiruvanathapuram<br />
• Nair, 2004 Sharp fall in area under paddy The Hindu Business<br />
line Kochi, February 3 rd , 2004<br />
(The views expressed in the write-up are personal and do not<br />
reflect the official policy or position of the organisation).<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW<br />
183
CALL FOR PAPERS<br />
IER is a quarterly journal featuring contents of academic and professional interest that are of utility to managers, policy<br />
makers, politicians, consultants, teachers and students in the areas of Economics and Management. It is a multidisciplinary<br />
platform for sharing and disseminating knowledge in the issues of education, health, poverty, unemployment, agriculture,<br />
industry, service, FDI, international trade, infrastructure and environment, pertaining to Indian economy. We passionately<br />
believe in the credo that we constantly seek to follow: rethink, edify and delineate. This enduring commitment has helped us<br />
foster and broaden the parameters of public policy debate and alternatives. Toward that goal, we strive to achieve greater<br />
involvement of the intelligent, concerned change agents (reform minded politicians, public servants, academicians, socially<br />
responsible firms, civil society organizations and citizens) in questions of policy and the ideation. In order to further augment<br />
value and provision a broad perspective to Indian economic problems, your knowledge and expertise in the above mentioned<br />
fields would be highly valuable to IER. We would like the possibility of receiving a write-up from you, on a topic of your expertise<br />
and interest as per the under-mentioned guidelines.<br />
Guidelines For Contributors<br />
Content: Articles should be in the areas of education, health, poverty, unemployment, agriculture, industry, service, FDI,<br />
international trade, infrastructure and environment, pertaining to Indian economy, which are of contemporary interest and<br />
value to the esteemed and intellectual readers. The journal seeks to present an eclectic approach supported by empirical<br />
research or practical applications as necessary. Contents that demonstrate clear and bold thinking, fresh and useful ideas and<br />
solutions, accessible and jargon-free expression, and unmistakable authority and proficiency are those most likely to meet our<br />
reader’s needs.<br />
Reviewing Process: Each article is reviewed by the Economics Research Group (ERG). If found suitable, the same may be sent<br />
for another round of review before final acceptance. With prior information and consent, the editors reserve the right to modify<br />
and improve the manuscripts to meet IER’s standards of presentation and style. The editors also have full right to accept or<br />
reject an article for publication. Editorial decisions will be communicated within a period of two weeks of the receipt of the<br />
article submission.<br />
Word Length: Articles should be of 2,500 to 3,000 words including abstract and references.<br />
Headings And Sub-Headings: Headings should be typed in capital and underlined; sub-headings should be typed in upper<br />
and lower case and underlined.<br />
References: References to other publications should follow the Harvard style.<br />
Figures, Charts And Diagrams: Use of figures, charts and diagrams should be kept to the minimum and text should indicate<br />
where the same will appear. All tables, charts, graphs should be typed on separate sheets. They should be numbered as<br />
Table-1, Table 2, etc. The graphs must have the minimum amount of descriptive text and the axes should be labeled with<br />
variable written out in full, along the length of axes.<br />
Abstract And Key Words: An abstract within 100 words and three key words should be submitted.<br />
Author’s Bio-data And Photograph: A brief bio-data with full postal and e-mail addresses and a coloured photograph should<br />
be sent along with the articles.<br />
Copyright: Authors should warrant that their work is not an infringement of any existing copyright and will indemnify the<br />
publisher against any breach of warranty. The articles published in IER will become the legal copyright of the publisher. The<br />
articles appearing in IER are the personal responsibility of the authors themselves and do not reflect the views of the editor,<br />
principal or the Economics Research Group (ERG) or the sponsoring organization. The author(s) will receive a complementary<br />
copy of IER in which their articles are published and this does not include postal/courier charges.<br />
Submission: The submission should be sent to M.N.V.V.K. Chaitanya at m.chaitanya@iipm.edu
THE HUMAN FACTOR<br />
THE<br />
INDIA ECONOMY RE<strong>VI</strong>EW<br />
<strong>2009</strong><br />
<strong>Volume</strong> <strong>VI</strong> | <strong>Quarterly</strong> <strong>Issue</strong>: <strong>31st</strong> <strong>May</strong> <strong>2009</strong><br />
www.iipmthinktank.com<br />
www.gidf.org<br />
MANAGEMENT OF<br />
DEVELOPMENT<br />
RETHINK<br />
EDIFY<br />
DELINEATE<br />
INSIDE THIS ISSUE<br />
Winds of Change<br />
Can We Change?<br />
Corruption Concerns<br />
Bourgeois Bohemians<br />
Global Good<br />
Turbulent Times<br />
A N I I P M T H I N K T A N K<br />
&<br />
G R E A T I N D I A N D R E A M F O U N D A T I O N P R E S E N T A T I O N<br />
August-October 2005<br />
185 | An IIPM Intelligence Unit Publication
D A R E T O D R E A M : S T R A T E G I C A L L Y ! I N N O V A T I V E L Y !<br />
THE END OF A FINANCE WISDOM – DR. HAROLD BIERMAN, Jr.<br />
NICHOLAS H. NOYES PROFESSOR OF BUSINESS<br />
ADMINISTRATION, CORNELL UNIVERSITY<br />
THE VEXED QUESTION OF THE MELTDOWN – GLEN T. MARTIN,<br />
PRESIDENT, INSTITUTE ON WORLD PROBLEMS,<br />
PROFESSOR, RADFORD UNIVERSITY<br />
E-LEARNING: ROADMAP FOR A SUSTAINABLE GLOBAL<br />
KNOWLEDGE SOCIETY: L. RAJASINGHAM, SCHOOL OF<br />
INFORMATION MGMT, <strong>VI</strong>CTORIA UNIVERSITY OF WELLINGTON<br />
SYSTEMATIC RISKS: IMPLICATIONS FOR REGULATION AND<br />
BAILOUT STIMULATION EFFORT – LOK SANG HO, DIRECTOR,<br />
CENTER FOR PUBLIC POLICY STUDIES, LINGNAN UNIVERSITY<br />
www.iipm.edu<br />
THE HUMAN FACTOR<br />
Subscription Form<br />
OTHER IIPM JOURNALS<br />
Strategic Innovators<br />
w<br />
February-April <strong>2009</strong>, <strong>Volume</strong> 2 <strong>Issue</strong> 3<br />
Mending the meltdown<br />
transformatively<br />
INSIDE THIS ISSUE<br />
08<br />
Can a CFO be too aggressive in seeking to reduce legally a<br />
corporation’s tax bill? A discussion...<br />
11<br />
How the global meltdown creates a conducive environment for<br />
creating vision<br />
32<br />
Questioning whether the mode of ‘e-learning’ brings about a<br />
paradigm shift in higher education<br />
44<br />
Contrary to common belief, bailouts only create more debt for<br />
the economy<br />
w w . i i p m p u b l i c a t i o n s . c o m<br />
AN IIPM INTELLIGENCE UNIT PUBLICATION<br />
M A K E W E A L T H W H I L E O T H E R S T H I N K O F I T<br />
NEED THE DOUGH?<br />
August-October 2008 <strong>Volume</strong> 3 <strong>Issue</strong> II www.iipmthinktank.com<br />
SPECIAL ISSUE<br />
STOCK MARKET<br />
BIG NUMBERS<br />
MISS REAL FIGURES<br />
AN IIPM THINK TANK PUBLICATION<br />
Rs.100<br />
Rs. 100<br />
Please enter my subscription for The India Economy Review<br />
The IIPM Think Tank’s publications address the full range of public policy and managerial issues, wherein<br />
the emphasis is on addressing the new economic and managerial challenges. The IER journal is priced<br />
notably below both the discipline’s standard price and the rates characteristic of large commercial publishers<br />
in India and practically all over the world. The idea is to reach out to a general-interest audience,<br />
practitioners, and other non-academics.<br />
Note : All prices excluding shipping cost<br />
The India Economy Review<br />
Subscription<br />
Per <strong>Issue</strong><br />
1 year (4 issues)<br />
2 years (8 issues)<br />
3 years (12 issues)<br />
I am enclosing my cheque/DD no. __________ dated __________ for INR/USD ________<br />
on bank ________________________ branch ____________________ drawn in favour of<br />
“The Indian Institute of Planning and Management”.<br />
My Personal Details (IN BLOCK LETTERS)<br />
For India And SAARC Region<br />
INR 140<br />
INR 520<br />
INR 990<br />
INR 1400<br />
Name ______________________________________________________________________<br />
Designation _________________________________________________________________<br />
Organization ________________________________________________________________<br />
Address ____________________________________________________________________<br />
City ________________________________ State __________________________________<br />
Country _______________________________ Pin (mandatory) _____________________<br />
Tel ______________________Mobile __________________ e-mail ___________________<br />
Age Below 25 25-35 35-50 Above 50<br />
Education Graduate MBA CA/CFA Other<br />
Signature (Mandatory) __________________. We will not be responsible for journals lost in the post/courier.<br />
The Subscription amount is NOT refundable. All subscriptions must be paid in advance in INR.<br />
Contact Details<br />
THE INDIA ECONOMY RE<strong>VI</strong>EW, The IIPM Think Tank,<br />
Shweta Shukla (Subscription Manager)<br />
Satbari, Chandan Haula, Chattarpur, Bhatimines Road, New Delhi-110074<br />
Contact Details: 91-11-42789904; e-mail: shweta.shukla@iipm.edu<br />
IIPM reserves the right to accept subscriptions. For any another queries please write to<br />
m.chaitanya@iipm.edu<br />
An IIPM Intelligence Unit Publication | 186 August-October 2005
PRAISE FOR IER<br />
“In my opinion, it has fulfilled its objective in presenting a<br />
comprehensive, up-to-date and clear exposition of the issues and<br />
concerns that are essential for understanding, evaluating and suggesting<br />
solutions to the important national economic problems.”<br />
Mr. U.K.S.Chauhan, Director, Department of Agriculture and Cooperation,<br />
Ministry of Agriculture, New Delhi<br />
“...I laud your info base and analytical prowess; particularly your solutions<br />
vis-a-vis international experience...you may like to examine further<br />
from your side the aspects of futures trading in the perspective of the Indian<br />
farming community given your extant knowledge base in agriculture.”<br />
Mr. Suvendu Ganguly, Deputy Director, Forward Markets Commission,<br />
Kolkata<br />
“…I thoroughly enjoyed going through your recent issue of Indian<br />
Economic Review…it is undoubtedly a mammoth task of pulling together<br />
divergent perspectives on the critical issues of the nation…”<br />
Dr. Parth.J.Shah, Centre for Civil Society, New Delhi<br />
“The IER, a thematic compilation of economic thoughts, ideas,<br />
questions, answers and solutions...promises to usher in a potentially<br />
better, if not necessarily newer, dawn of economic policies that radiates<br />
the power to dispel the current darkness of socio-economic and socio<br />
political confusion... the review exudes qualified optimism about country’s<br />
prospects.”<br />
Mr. S.R.Kasbekar Senior Editor, The Financial Express, Mumbai<br />
“I have to say that the Indian Economic Review, 2005 <strong>Volume</strong>-<br />
III, is very impressive and the material is very good. I send all of you<br />
involved with it, my heartiest congratulations and wish you all the best.”<br />
The Lord Paul, The Rt. Hon. Lord Paul of Marylebone<br />
“Undoubtedly, it is of exceptional quality and amongst the best<br />
that I have seen in my interaction with similar organisations in different<br />
countries. I merely wanted to write to you and congratulate you<br />
and your institution on an extremely well researched and presented<br />
endeavour... I have taken the liberty of putting the copies that I had<br />
got along in the WTO library.”<br />
Mr. Shishir Priyadarshi, Development Division, WTO, Geneva<br />
“...The Indian Economic Review is a very informative document.”<br />
Dr. V.L.Chopra, Member, Planning Commission, New Delhi<br />
“...I found it very useful material, which has dealt with the vital<br />
issues that we are facing in the field of education, health, poverty<br />
and employment. I would like to compliment all the authors as well as<br />
the editorial team for bringing out such a valuable publication.”<br />
Dr. Arun Nigavekar, Chairman, UGC, New Delhi<br />
“If the purpose of a think tank is not merely to think issues through<br />
but also to ignite thinking among the readers, I think you have succeeded<br />
very well indeed.”<br />
Mr. R.Badrinath, Director, Division of Trade Support Services, International<br />
Trade Centre, Geneva<br />
“Modern India certainly needs more think tanks like yours... unlike<br />
most academic journals, yours is well-designed, readable and also<br />
conveys a sense of aesthetics and humour through the illustrations...<br />
it well reflects the high standards of the IIPM.”<br />
Mr. Brij Khindaria, President, Diplomatic forum for Business, Geneva<br />
“I have received the IER issue...very impressively put together with<br />
a lot of solid analysis...kudos to those who are bringing it out.”<br />
Mr. B.S.Raghavan, IAS(Retired), ex-US Congressional Fellow, ex-Policy<br />
Adviser to UN(FAO), ex-Adviser to International Commission on Peace and<br />
Development, ex-Director, Politician and Security Policy Planning, Government<br />
of India<br />
“I am much impressed by the content and quality of the journal<br />
Indian Economic Review and the wide range of issues it covers.<br />
The editors indeed fully deserve the title of ‘think tank’!”<br />
Dr. V.M.Madiman Rao, Institute for Social and Economic Change,<br />
Bangalore<br />
FOR LIMITED AND PRIVATE CIRCULATION ONLY
PRAISE FOR IER<br />
“Thank you very much for sending me the Indian Economic Review<br />
2007 on India’s Policy Deficit: Planning for Change. I appreciate the<br />
initiative taken by the IIPM Think Tank in this area.”<br />
Dr. Indira Hirway, Centre for Development Alternatives, Ahmedabad<br />
“Your publication is interesting and useful to us in our work.”<br />
Mr. Mihir.R.Bhatt, Honorary Director, All India Disaster Mitigation Institute,<br />
Ahmedabad<br />
“It is nicely designed and also rich in contents.”<br />
Dr. Rudra Narayan Mishra, Gujarat Institute of Development Research,<br />
Ahmedabad<br />
“We at IDEI do appreciate the efforts being made by your organization...IER<br />
which is committed to enhance public awareness of policy<br />
issues in economics and management and to engineer solutions that<br />
will fulfil the Great Indian Dream.”<br />
Ms. Rajpreet Kaur, Program Support Officer, International Development<br />
Enterprises (India), New Delhi<br />
“I like the content, which is extremely detailed but balanced and<br />
certainly offers a good non-ideological mix from leading authors.”<br />
Dweep.I.Chanana, UBS Philanthropy Services, a consulting unit of UBS<br />
AG, Zurich<br />
“I managed to flip through the Review and found some of the articles<br />
very interesting ... IER has an interesting mix of articles and the photos<br />
and layout are also very well done.”<br />
Ms. Kumkum Dasgupta, Hindustan Times, New Delhi<br />
“They are highly informative, focusing on contemporary issues.”<br />
Dr. Rajib Kumar Sahoo, Senior Economist, Canara Bank, Bangalore<br />
“Presentation of IIPM Think Tank is really of high quality. Your team<br />
led by Dr. M. K. Chaudhuri and Prof. Arindam Chaudhuri deserve<br />
the appreciation from every one who has a vision and dream for a<br />
new innovative India. Hope your effort will become a path finder for<br />
innovative research workers.”<br />
Dr. Gouri Pada Dutta, Chairman, Subject Committee (Health), State Planning<br />
Board, West Bengal, Kolkata<br />
“I would like to Congratulate IIPM for bringing such critical policy<br />
issues to the forefront, especially as India and world’s other great economies<br />
tread on the path of globalization and economic liberalization.<br />
Your efforts at adding the human face to some very core management<br />
areas are indeed commendable.”<br />
Mr. Bharti Ali, Co-Director, HAQ: Centre for Child Rights, New Delhi<br />
“I have been reading it with great enthusiasm, interest and curiosity<br />
nonetheless. I would also like to congratulate you and your team for<br />
truly high-quality editions of IER that are of the prime importance to<br />
the future of India’s thriving economy.”<br />
Dr. Rok Spruk, Slovenia<br />
“I have received your energy /environment special issue. I enjoyed<br />
reading it. This is one of the most comprehensive reviews available on<br />
the subject today... This number is timely and will serve as a basic reference<br />
for leading policy makers/planners in India. In fact, I can say that<br />
all your volumes are packed with information/ideas for development<br />
workers. I wish you all the best in your new assignment.”<br />
Dr. G.Poyya Moli, Member, CEM, IUCN & Member, SEAC & SHCC, Govt of<br />
Puducherry, Reader, Department of Ecology & Environmental Sciences, Pondicherry<br />
University, Pondicherry<br />
“I am impressed particularly with the varieties of issues that you have<br />
been able to cover in this publication. Thank you for this spectacular<br />
piece of work.”<br />
Dr. Soumendra K. Dash, Chief Economist, CARE Ratings Ltd, Mumbai<br />
“I find that the journal covers a wide range of subjects in Economics,<br />
and is very useful both for reference and research.”<br />
Dr. Prabha Panth, Professor of Economics, Osmania University, Hyderabad<br />
“The copies of IER are excellently produced and its so nice to see<br />
that you have many new names from new institutions.”<br />
Dr. PadmaPrakash, Editor, eSocialSciences