[Volume VI | Quarterly Issue: 31st May 2009] Pdf File size

THE
INDIA ECONOMY REVIEW
2009
Volume VI | Quarterly Issue: 31st May 2009
www.iipmthinktank.com
www.gidf.org
MANAGEMENT OF
DEVELOPMENT
RETHINK
EDIFY
DELINEATE
INSIDE THIS ISSUE
Winds of Change
Can We Change?
Corruption Concerns
Bourgeois Bohemians
Global Good
Turbulent Times
A N I I P M T H I N K T A N K
&
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
“A Society where man is at the centre of all activities,
a society where exploitation of man by man has been
abolished, where he is cared for as an in a family, where
“to each according to his need’ is practised, a society where
non bureaucratic National Economic Planning is given due
importance for sustainable optimum growth, where adequate
social safety net is a reality and yet market’s advantages are
fully taken care of for creativity and entrepreneurship, such
a society can be truly described as humane society and the
vision as “Humanism”.
Dr. M K Chaudhuri
The Great Indian Dream, 2003, Macmillan
India,New Delhi
“Let us together dream of a country where poor are not
just merely reduced to statistics but where there are no poor.
Let there be a day when small children are taken to a poverty
museum like science museum where they shiver at the plight
of the way people used to live in the last millennium. Let this
dream take the form of a revolution and as long as our dreams
keep outweighing our memories, India would remain a young
and dynamic nation on this path to global equality. And for
this let the wait not be for eternity. Let us together achieve this
in the next 25 years.”
Prof. Arindam Chaudhuri
The Great Indian Dream, 2003, Macmillan
India,New Delhi

IIPM: THE FUTURE IS HERE
Since its incorporation (1973), IIPM has been an institution with privileged traditions, in the diversity of its fraternity, its global outlook, its world
class research and its commitment to alternative national economic planning process.
It can be said, without much oversimplification that there are no ‘underdeveloped economies’. There are only ‘under managed’ countries. Japan
140 years was ago was an underdeveloped country by every material measurement. But it very quickly produced management of great competence,
indeed of excellence. The policy inference is that ‘management’ is the prime mover and ‘development’ is the consequence. At IIPM, every one
considers that development is a matter of human energies rather than economic wealth. And the generation and direction of these human energies
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
are determined to realise and that too in our own lifetimes. Each bit of cynicism and condemnation from pessimists makes us evolve even stronger
and determined.
All our endeavours and initiative is towards realisation of this dream, where in we produce committed ‘bare foot’ managers and entrepreneurs
who are needed by nation, on an insistent basis. As an educational institute, we aim at initializing a three dimensional personality in IIPMites, viz.
Pursuit of knowledge in economics and management
Commitment to economic, social, political and technological upliftment of masses and
Cultivation of taste for literature, fine arts and etc.
Economists often have limited access to the practical problems facing senior managers, while senior managers often lack the time and motivation
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
towards the needs of both the private and public sectors and to establish the link between the National Economic Planning and the development
of private enterprises in Indian economy. IIPM dares to look beyond, and understands that what we teach today, other adopt tomorrow. IIPM’s
service output (education, research and consulting,) is a unique combination of two distinct disciplines: economics and management. Through
this integration, IIPM helps guide business and policy leaders in shaping the Indian and global economy, bringing together the practical insights of
industry with broader national and global perspectives.
A hall mark of IIPM is that it is armed with the comparative advantage of engaging the committed, passionate and brightest management post
graduates and undergraduates, who pursued the education at IIPM and subsequently joined it, to realise the dream. IIPM alumni, spread across the
globe, holding crucial decision-making positions in the corporate sector, are bonded by the one ideology of making a positive difference, turning
that ideology into a movement itself.
The India Economy Review is another humble initiative towards the realisation of the same and more distinctly, engaging the broader publics
and pertinent stakeholders.
SEARCH, SIEVE, SCHEME...
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
together a selection of important contributions on a particular theme, authored by some of the brightest minds in different areas of Indian economics.
The provocation for publishing these issues arises from the fact that over the years economic journals have become copious, exclusive and expensive.
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
for them that these issues are primarily being raised and debated here.
Much about India is transparent enough. One does not require detailed criteria, cunning calibration or probing analysis to pinpoint India’s
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
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
and paradigm the constituent parts of which would fail to reveal the entirety. Obviously and observably, no suggested solution to any protracted
and complex socio-economic problem will satisfy all sides and stake-holders evenly. Consequently, there exists an enormous diversity in economic
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
facilitate the invention, improvement, deliberation and dissemination of innovation in economic thinking and national economic planning, insisting
merely on well-grounded, open and unbiased debates, without predetermined outcomes. It is impossible to do justice to the entire field of Indian
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
freshly and exclusively written. Encapsulated, it is a constructive attempt aimed at helping India actualise its promises and potential. The editors hope
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
‘The Great Indian Dream’. At the same time, it illuminates the terrible, practical problems of India and Bharat.
ACKNOWLEDGEMENTS
The IIPM Think Tank likes to thank all the internal faculty who have been instrumental in coordinating with
many authors all across India and according their unstinted support. The assistance of Prof. R.Krishnan (IIPM
Lucknow) Prof. Amlan Ray (IIPM Lucknow), Prof. Tareque Laskar (IIPM Bangalore) and Mr. Robin Thomas
(IIPM Ahmedabad) has been more valuable than, perhaps, they realise. Mr. R. Nagendra Prasad, Senior
Manager at SMG, IIPM Hyderabad, particularly did all that it was possible to do for this issue of IER. Lastly,
Prof. Shyam.S.Pujala (Dean, IIPM Hyderabad) deserves a special mention for his eager and energetic support,
without which this issue would not have been possible.

CREDITS
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Dr. M. K. Chaudhuri
Editor-in-Chief
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Managing Editor
Prasoon.S. Majumdar
Deputy Editor
M.N.V.V.K. Chaitanya
Consulting Editor
Prashanto Banerji
Research Fellows
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The First Words And The Last Word
A Hard Look at the Soft Practice of Managing Development
Dear Reader,
Currently, the main focus of all – those who
matter and those who don’t – is on the current
global crisis. But even with optimistic assumptions
about sustained growth in the industrialised
world, limited capital flows and trade
growth are likely to remain serious constraints
to developing economies growth, including
India. Raising living standards and combating
poverty for us will actually depend more than
ever on achieving greater efficiency in the use
of human and material resources. Governments
everywhere must wrestle with difficult
management problems as they seek to fulfill
their heavy and varied responsibilities.
Against this backdrop, Indian economy has
uniquely demonstrated remarkable resilience.
How has the country managed to cope? Is India
finally emerging as an engine of global
demand? Can its economy engender enough
new jobs to maintain social stability? What
will drive future growth, and how should policy
mandarins adapt? In this issue, a panel of
leading Indian and international economists
explores these questions and other pertinent
socio-economic issues.
Should India, the world’s largest democracy,
merely take its seat in the G20? Or, should
India also help the nations of the world take a
more democratic and inclusive governance
direction? Dr. Barry Herman’s paper about
global governance is a brief for how it might
support the latter. Dr. C. Ramachandraiah
argues in his paper that urban transport policies
should be city specific and be designed to
suit is geography, heritage, history and land
use patterns. Manu Sankar Subhagalal’s article
aims to give an overview of the energy sector
in India and advocates for the right kind
Prasoon.S Majumdar
Managing Editor
M.N.V.V.K.Chaitanya
Deputy Editor
of balance to be struck for economic growth
and environmental sustainability. In financial
sector, lack of channelizing existing
recourses, catastrophic policy implementation
and lower technological penetration
and adoption are the main causes of financial
exclusion, as pointed by Ms. Purti
Sharma in her research paper. Prof. Rafiq
Dossani, Executive Director, South Asia
Initiative at Shorenstein APARC, Stanford
University elucidates that, in a growing
economy, the incentives for institutional
corruption are higher because higher
bribes are more affordable than when the
economic pie is small. Mustering the collective
will to tackle these forms of corruption
remains a challenge for India in the
twenty first century. The common thread
running through all these topics is ‘managing
efficiency’ for greater development experience.
Lastly and on a different note, thank you
for inspiring and encouraging our team
every day. Over the coming months, you
will see more exciting changes in IER. The
best is yet to come.
Best
Prasoon.S.Majumdar
M.N.V.V.K. Chaitanya

(F)ACT SHEET
Cover Design: Dinesh Chandelkar
MANAGEMENT OF DEVELOPMENT:
Bird of Gold
India on Top
David A Andelman 08
MANAGEMENT OF DEVELOPMENT:
The Poverty Puzzle
Demographics of Poverty and Economic
Growth
K.R. Shah 14
MANAGEMENT OF DEVELOPMENT:
A Growth Paradigm
Road to Rendition
Pathikrit Payne 26
MANAGEMENT OF DEVELOPMENT:
Golden Drop
Problem of Water Pollution in India: A
Possible Solution
Arpita Khanna 32
MANAGEMENT OF DEVELOPMENT:
(Na)No Way Forward
Urban Transport in India: A contested
Issue
C. Ramachandraiah 40
MANAGEMENT OF DEVELOPMENT:
Watered Down
Urban Water Supply Sector in India: The
Need for the Management Reforms in
the ULBs
Ramakrishna Nallathiga 46
MANAGEMENT OF DEVELOPMENT:
Corruption Concerns
Corruption and corporate governance in
India
Rafiq Dossani 56
MANAGEMENT OF DEVELOPMENT:
India Insured
A review of the Regulatory and
Developmental Role of IRDA in context to
the Indian Insurance Market
Sanjay Tewari 68
MANAGEMENT OF DEVELOPMENT:
Innovative Inclusion
Financial Inclusion by Channelizing
Existing Resources in India
Purti Sharma 76
MANAGEMENT OF DEVELOPMENT:
India Calling
MVNO: A new Business Paradigm in the
Telecom Industry in India
Hardikkumar Doshi, Gaurav Joshi and Mahim
Sagar 84
MANAGEMENT OF DEVELOPMENT:
Rise of Renewables
Renewable Energy and Its Policy
Prospects in India
Manu Sankar Subhagalal 88
MANAGEMENT OF DEVELOPMENT:
Winds of Change
Five “Gs”: Lessons from world Trade For
Governing Global Climate
William Antholis 96
MANAGEMENT OF DEVELOPMENT:
Good Governance
Globalisation to Global Governance:
Hegemony to Legitimacy?
B. Ramesh Babu 112
MANAGEMENT OF DEVELOPMENT:
Global Good
We Can Have Better Global Economic
Governance
Barry Herman 114
MANAGEMENT OF DEVELOPMENT:
The New Mantra
More Effective Global Financial
Regulation
K. U. Mada 120
MANAGEMENT OF DEVELOPMENT:
Knowledge Without Borders
Internationalization of Intellectual
Property Rights and its Impact on the
Developing Countries: A Review
K.K.Saxena and Ruchi Sharma 124
FINANACIAL ECONOMICS: Paper Money
Just How Much Money is at Stake in
Shares Pledged by Promoters?
Jayesh Kumar 140
ECONOMIC SOCIOLOGY:
Bourgeois Bohemians
Consumerism in the Eyes of A Rational
Optimist
Suchismita Mondal Sarkar 146
POLITICAL ECONOMY: In Perspective
A Different Perspective on the US-India
Nuclear Deal
Peter Custers 150
POLITICAL ECONOMY:
The Elephant and the Dragon
What Difference Does a Revolution Make?
A Preliminary Contrast of India & China
Robert Weil 158
USA: Can we Change?
The Obama Crossroads: Neo-Liberal Coup
or Responsible Government
John McMurtry 164
INTERNATIONAL AFFAIRS:
Turbulent Times
Post- Soviet Central Asia: Issues and
Problems of Security and Cooperation
R.G.Gidadhubli 168
MICRO MACRO: Rice Bowl
The Shrinking Rice Paddies of Kerala
Nikhil Raj and PA Azeez 176

M ANAGEMENT OF DEVELOPMENT
“India on Top”
David A. Andelman
Editor, World Policy Journal,
Published by the World Policy Institute
and the MIT Press
Two rivals are contesting for the economic domination
of the Asian mainland in the 21 st century—a
quiet contest that will only intensify in the course
of the next ninety years. Ultimately, it will be won by
India, but not without some considerable frictions en
route and some powerful economic, as well as political
and military forces, that will come to define the process.
But it is the demographic forces, already intense in both
nations, and the responses to such challenges by the
government of each that will truly shape the battlefield.
By mid-century, according to this year’s most recent
United Nations estimates, India’s population will have
passed China’s, assuming the role of the world’s largest
nation. Indeed, the crossover is projected to take place
sometime during the period 2025 to 2030. After India has
achieved this distinction, however, the distance between
the two countries’ populations will remain little changed
for the next century and a half—through at least the year
2300 as their rates of growth slow to a near halt. Indeed in
the last half of this century, India’s population is expected
actually to fall by four million people, though China’s will
grow by more than 50 million as its traditional one-child
per family edict begins to loosen in the face of an increasingly
liberalized market and an accompanying free and
more mobile society.
The rate of change is critical in this case. In the first
half of this century, the population of India will be
expanding nearly five times as fast as China, while for the
second half of the century China’s population will be
contracting at a rate triple that of India’s. Still, India will
remain the more populous.
Size is not the only important element of the demographic
equation, however. The distribution of these
billions of individuals—particularly rural vs. urban—is of
equal, if not greater, significance when it comes to the
quality of life and India’s role in international trade and
finance. Here, the contrast between India and China is
striking as well. By 2050, China, which had just 13 percent
of its population in urban areas a century earlier, is
expected to have 72.9 percent in cities. By contrast, India,
which was marginally more urbanized in 1950 with 17
percent of its people in cities, will have 55.2 percent in
urban areas a century later.
This vast disparity of rural-urban distribution is potentially
the most significant, and most destabilizing factor of
all in this century. For the past decade and more, as
Chinese communism began to give way to some form of
crypto-capitalism, the nation created tens of millions of
8 THE IIPM THINK TANK

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new jobs. In the late 20 th and early 21 st centuries, entire
new cities sprang from the countryside, pressing into the
China’s vast rural interior. A population equivalent to the
entire United States was lured away from a subsistence
existence scratched from the land for centuries to a new
life of opulence and hope for the future. Suddenly,
though, barely eight years into the new century, these
hopes have to at least a temporary halt. The global
economic meltdown hit China hard, idling thousands of
factories. By the turn of the Chinese New Year in 2009,
the year of the Ox, as many as 130 million people—onetenth
of the nation— found themselves in a desperate
state of suspended animation, sloshing between their new
jobless existence in big cities like Shanghai not to mention
new factory cities, now virtual ghost towns, and the rural
villages they had left behind less than a decade before.
By contrast, India is already managing to weather the
economic downturn more effectively. While building its
cities, it has left a strong foundation in the countryside—
raising aspirations in place so that a substantial population
will continue to produce food to feed the urban areas
without the kind of unemployment and
urban discontent inevitable in neighboring
China. Again, the shift — when
India’s rural population passes China
— occurs around the year 2025, the gap
continues to widen dramatically. This is
by no means a good thing. In such a
situation, China risks becoming a major
food importer at a time when other
parts of the world are also seeing vast
increases in urban concentrations
competing for the output of rural landscapes.
At the same time, China’s urban areas will be stagnating.
Its cities, having ballooned suddenly at the end of the
20 th century—growing at an astounding annual rate of
nearly five percent in 1985 to 1990—will find their
growth slowing to barely 0.5 percent by the year 2050.
India, meanwhile, will find itself with a strong well-balanced
population, its urban areas growing modestly, but
steadily at an annual rate ranging from 2.13 percent to
2.35 percent for the first four decades of this century,
while China’s generation-long, male-oriented, one-child
policy may have permanently skewed its ability to grow
Each year,
through 2050,
both countries
will be sending
substantial
numbers of their
residents abroad
and prosper. By the end of the century, it is India that
will be the economic, financial, indeed productive engine
of Asia.
Indeed, UN population experts suggest that when
India, particularly urban India, reaches the level of
affluence of urban areas of the developed world, particularly
Western Europe, and with India’s population living
in metro areas that are far larger even than London, Paris
or Berlin, these Indian cities will begin to demonstrate
fertility rates as low as those of the west, further restraining
the growth of the population that must be sustained
by the agricultural output of rural regions.
One key example of this gradual, but steady internal
development is the international migration patterns of
Indians and Chinese. Each year, through 2050, both
countries will be sending substantial numbers of their
residents abroad — between 200,000 and 400,000 per
year. But even as India’s population passes China’s, the
number of its emigrants remains steadily fixed at a lower
rate. Hence, the percentage of China’s population leaving
the country continues to rise, while the percentage of emigration
from India falls — in both cases
without any coercive force.
What all these population trends
mean for both countries — in the
near-term, through the present global
economic contraction, and the longterm
for the rest of this century — is
critical, and not merely for these two
nations.
These trends are also especially
significant for their principal trading
and commercial partners as well, especially for the
United States. India was particularly adept, early on, in
realizing that its future lay in global integration — but
especially in service industries which are less susceptible
to the whims of overseas consumer demand to which
manufacturing, especially consumer-driven manufacturing,
is prone. Installing a substantial telecommunications
infrastructure linked into global information networks,
India early on became a destination of choice for foreign
companies looking to expand their intellectual capital.
Call centers quickly morphed into vast centers of computer
programming, research and technological innovation.
THE INDIA ECONOMY REVIEW
9

M ANAGEMENT OF DEVELOPMENT
The slow, but steady, rise of the nation’s urban population
enabled India’s monetized economy to absorb more
readily the influx from rural regions. By contrast, the
sudden and explosive growth of Chinese urban areas was
based almost entirely on export-oriented, consumer-driven
manufacturing.
So when last year’s global economic meltdown hit, India
was less immediately impacted than China. Moreover,
India’s recovery promises to be more rapid and more
sustainable as well. In the first quarter of this year,
according to government statistics, China posted a 6.1
percent growth in GDP, lower than the 6.8 percent posted
in the fourth quarter, indeed the lowest reading since the
quarterly methodology was implemented
in 1992. That represents quite a dramatic
drop from the 11.4 percent GDP growth
that China posted last year—a 46
percent drop year-over-year. India grew
at a more modest, though by global
standards quite impressive, rate of 7.4
percent last year, and is expected to post
a more modest growth of nearly 4.5
percent this year—a 39 percent drop.
What is of greater significance,
though, is the distribution of India’s
GDP. According to World Bank figures,
agriculture accounts for 18.5 percent of
the nation’s total output, industry 26.4
percent, while the robust services sector
contributes a startling 55.1 per cent.
Indeed, this type of distribution is
remarkably close to that of the United
States and most other leading developed countries.
In China, services accounted for just 40 percent of
value added GDP while manufacturing accounts for 48
percent and agriculture just twelve percent. The fact that
India’s service sector now produces more than half the
nation's GDP is a milestone in the nation's economic
history and takes it closer to the fundamentals of a
developed economy. At the time of independence,
agriculture occupied the major share of GDP while the
contribution of services was relatively far less.
By the end of 2010, most economic projections suggest
that the worst of the global economic contraction will be
By the end of
year 2010,
the worst of
the global
economic
contraction
will be behind us
behind us. Indeed the most rapidly growing nations in the
developing world will likely return to robust growth even
before the largest economies, and especially the United
States. Still what will not change will be the demographic
realities, and it’s here that the South Asian region finds
itself poised on the most difficult, potentially destabilizing
precipice. Much of it has to do with the neighborhood
where India finds itself.
While India will have passed China as the world’s most
populous nation, both Pakistan and Bangladesh will be
moving up dramatically. By the end of this century,
according to the “medium growth” scenario of the United
Nations, Pakistan will have passed the 400 million mark,
ranking just behind the United States as
the world’s fourth most populous nation,
surging from seventh place today.
Bangladesh’s population will have nearly
doubled to 270 million, moving it up to
seventh spot in the world. In both cases,
this surge will have serious consequences—potentially
catastrophic growth in
their population densities. India’s
population density could increase less
than 15 percent to 422 persons
per square kilometer between now and
2050, though it will not peak until the
year 2065 when it tops out at nearly 524
people per square kilometer. Meanwhile,
China’s population density could
actually drop by 8.5 percent between
now and 2050, though it is expected to
top out at 155.5 per square kilometer
in the year 2030. By contrast, Bangladesh’s population
density is projected by UN figures to rise more than 57
percent to 1,799 people per square kilometer in 2050,
while Pakistan’s density will more than double, rising
106 percent to 478 people per square kilometer in the
year 2050.
The situation becomes even more desperate if we look
at the population density with respect to actual cropland
that can be used to feed their people. In Bangladesh, if we
go as far as the year 2100, its paralyzing density of 1,997
persons per square kilometer of total land area surges to
2,793 persons per square kilometer of potential cropland,
10 THE IIPM THINK TANK

B IRD OF GOLD
or 28 persons per hectare, approaching the figure for
Afghanistan which, while overall more sparsely populated,
has a smaller arable area capable of supporting
cultivation and a population that is expected to rise nearly
as rapidly.
Age is another critical factor when we examine population
development and densities, particularly in relation to
the nation’s ability to support, house and feed its people,
not to mention the ability to achieve some degree of
prosperity and move upward and out of the status of a
marginally developing nation.
The central measurement of age as it impacts the ability
of a nation to grow and prosper is known as the demographic
window, defined by the United
Nations as the moment when the number
of children below 15 years of age falls
below 30 percent of the total population
and those over the age of 65 remains
below 15 percent. In this case, those of
functional working age are able to
sustain and feed theoretically non-working
youths and the elderly. By these
criteria, India is projected to go
through that window next year (2010),
while Bangladesh won’t reach that level
until 2020 and Pakistan won’t pass that
threshold until 2035. By contrast, China
reached the window in 1990.
What is of potentially even greater
interest, however, is how long these
nations remain within that window
before exiting on the other side (in
other words, the aging of the population adds a new
burden on those of working age). India stays within that
window for 40 years—or two generations—exiting it in
2050 as the life expectancy of the average Indian is
increasing dramatically and will continue to increase.
While an Indian male born in1950 to 1955 could expect to
live an average of 39.4 years, an Indian male born today
can be expected to live 63.2 years and one born at the end
of this century will live an average of 81.8 years. By the
year 2300, that will figure will have jumped to 94.9 years.
Still, with a decelerating birthrate, the nation will be able
to extend its demographic window. By contrast, China,
There is
considerable
attractiveness to
creating a form of
Asian economic
community, not
dissimilar to EU
with its one-child policy, will be out of the window by the
year 2025, as a shrinking working population must feed a
rapidly aging nation. As for Bangladesh, it will remain
within the demographic window for 40 years, exiting in
2060, while Pakistan will remain in it for the briefest
period—just 30 years, exiting in 2065.
The length of time within the demographic window
is perhaps the single most critical factor when it comes
to understanding the prospects of a nation to grow,
even prosper.
All of these population projections, of course, are based
on several key assumptions—most importantly that
diseases, particularly HIV/AIDS continues to abate
worldwide and that it is not replaced
by any new pandemic or other demographic
catastrophe.
For Bangladesh and Pakistan, in
particular, the question of how to house,
feed and protect their incredibly dense
populations poses all but insurmountable
problems without some attempts to
encroach on neighboring territory.
Clearly, China, with barely 129 people
per square kilometer (and certainly
somewhat lower in the more remote
border areas) would be quite tempting
targets for encroachments. However,
both China and India with their
nuclear arsenals and formidable
conventional military forces are both
well equipped to deter such actions,
certainly by Bangladesh.
The alternative is potentially more palatable. India and
China must become breadbaskets—or rice bowls—exporting
food to their more densely populated neighbors.
At the same time, there is considerable attractiveness to
creating a form of Asian economic community, not
dissimilar to the European Union—an expansion of the
existing Association of Southeast Asian Nations
(ASEAN) to include four of the world’s five most populous
countries—India, China, Pakistan and Indonesia, as
well as Bangladesh. By the end of this century it is quite
reasonable to expect such a regional economic group will
assume its place as one of the four great trading blocks of
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M ANAGEMENT OF DEVELOPMENT
the world, alongside the European Union, the Gulf
Cooperation Council (which includes the major economic
powerhouses of the Middle East including the Gulf states
and Saudi Arabia), and Western hemisphere nations
grouped under NAFTA.
Getting there, of course, is the biggest challenge facing
the entire region, but certainly India as a lynchpin in the
process. The immediate, and clearly most pressing task is
to find ways that will turn the current economic contraction
into an opportunity to insure future growth and
accelerating GDP expansion. First and most critical is to
ensure the expansion and effectiveness of public sector,
especially infrastructure spending, which now accounts
for eight percent to 10 percent of GDP, according to
World Bank estimates. New power, especially hydropower,
projects, roads and rail networks are all most urgent,
and the bank has recommended spending at least an
additional three percent to four percent of GDP on such
priority projects.
Additionally, with the rapidly increasing population, it’s
clear that one resource needs particular attention — water.
A recent study by Orville Schell of the Asia Society
in New York and published in World Policy Journal’s
Fall 2008 issue, documented the accelerating melting of
the Tibetan glaciers, which are the primary source of
virtually every important river in Asia, particularly in
India and China.
The melting will cause uneven, eventually substantially
reduced water flows at the very moment when populations
are reaching their peak, even though the rate of growth
may be tapering off.
At the same time, priorities must be given to reducing
potentially destabilizing disparities between the wealthiest
and poorest regions of each country, since many
western economists believe that the current economic
downturn could only broaden existing pockets of poverty
and make recovery a longer and more difficult procedure—not
only in India but in much of the more rapidly
developing world. With this goal in mind, World Bank
projects are assisting across India—improving soil and
water conservation, modernizing irrigation and rain water
capture systems and reclaiming saline lands in a number
of states including Uttar Pradesh, Rajasthan, Maharashtra
and Madhya Pradesh.
All these projects will help keep pace with the demographic
realities as the one apparent constant in this
period of economic uncertainty is the growth of population
in India, and indeed in much of Asia. Moreover, the
continued investment in critical infrastructure will also
help lure foreign investors as capital for such ventures
begins to return in leading global money centers. A recent
visitor from Procter & Gamble’s Pakistan organization
said that her company was investing $100 million in that
country, much of it in a plant producing disposable
diapers. Why? To take advantage of the eleven million
new babies arriving there each year.
Without question, there will be critical issues to be
faced in the nations of South Asia, especially in India,
over the next half century or more as the demographic
realities outlined here begin to take hold. At the same
time, global corporations will eventually emerge from the
investment paralysis that has gripped them in recent
months and search for new opportunities grounded in the
ineluctable realities of population shifts and the parallel
shifts in money and wealth. The key for nations like India
is to position themselves to seize the opportunities
generated by their growing populations, especially as they
move to a more urbanized, more highly engineered
culture of industry and innovation.
Above all, each must retain the values of openness and
transparency, a respect for the rule of law and membership
in the global community of free trade and commerce
without the kinds of barriers that have so often stymied
growth in the past. But certainly, with a birth rate that is
hovering at the replacement level, and an expanding
network of higher education throughout the country,
India is well placed to maintain its role as a leader in
bringing Asia out of the ranks of developing nations into
the forefront of world leadership, where it will hopefully
find itself at the end of this century.
(David A. Andelman is the author of A Shattered Peace:
Versailles 1919 and the Price We Pay Today. (Wiley: 2007).
His next book, Future Present: A Portable History of the
Next 100 Years, will deal with the shape of the world at the
end of this century. The views expressed in the write-up are
personal and do not reflect the official policy or position of
the organisation.)
12 THE IIPM THINK TANK

B IRD OF GOLD
AD
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M ANAGEMENT OF DEVELOPMENT
Demographics of Poverty
and Economic Growth
14 THE IIPM THINK TANK

T HE POVERTY PUZZLE
K. R. Shah
Former Professor of Business Economics,
The M. S. University of Baroda, Vadodara
Introduction
The dawn of the 21 st century seems to have brought new
hopes for the millions of the Indian poor. The deadlock
between the official poverty ratio (Head Count Ratio-
HCR) and the numerical size of the poor- the former
falling without any dent in the latter- observed during
1973-74 to 1994-95 has been broken of late. For the first
time between 1994-95 and 2005-06, the poverty ratio came
down to 20.4% from 39.6% and the number of poor from
365 million to 228 million.
Above poverty pattern attains a new significance in the
light of another deadlock between the literacy rate and the
number of illiterates which has also been broken for the first
time since independence between 1991 and 2001. The
improvement in the literacy rate from 52.2% to 65.38% was
accompanied by the decline in the number of the illiterates
from 328 million to 296 million. The closeness of these
numbers- the poor and the illiterates- implies that poverty
and illiteracy are two sides of the same coin. These two
events thus are mutually reinforcing, i.e. above the poverty
line also means above the illiteracy level and vice versa. The
grip of the vicious circle of poverty and illiteracy appears to
have been loosened.
Further, the gap in the rural-urban poverty ratio of the
magnitude of almost ten percentage points in the year 1983
(45.31% and 35.63% respectively) has been wiped out
completely in the year 2005-06- the respective poverty ratios
being 20.4% and 20.7%. This pattern mainly owes to a
relatively faster rate of decline in the rural poverty.
The main objective of this paper is to study the emergence
of the above three favourable patterns since the mid-1990s
in India.
Relevance of the Official Poverty Line
A paragraph or two on the relevance of the OPL may not be
out of tune. The poverty line laid down by the Planning
Commission in 1973-74 is still in vogue. The consumption
expenditure mainly on food of Rs. 11.88 and Rs. 17.95 per
person per day of rural and urban areas respectively in
1973-74 was adequate enough to achieve the calorie norm of
2400 for rural households and 2100 for urban households.
This is the minimum calorie requirement for subsistence
living. Thus, households not able to meet this norm are
below the poverty line. The poverty line thus fixed is adjusted
from time to time for inflation keeping intact the original
nexus between the calorie norm and the poverty line.
Abraham Maslow, an American behavioural scientist in
his 1943 article “A Theory of Human Motivation” argued
that the people world over are subject to ‘ hierarchy of needs’.
The foremost are the basic physiological needs, namely,
food, shelter, sex and sleep. Every aspect of life of the
billions of the world’s poor undoubtedly is dominated by the
struggle for these needs. Once these basic needs are fulfilled,
they start looking for other things (The Economist, February
14 th -20 th , 2009). In this context the initial focus on income/
expenditure required to consume food (and other basic
needs items) commensurate with the calorie intake norm was
justified. Once that level of income is attained , the poor
households have crossed the major hurdle of undernourishment
inhibiting their productivity growth. In that case,
assuring that much intake of food partakes of the nature of
‘investment’. They are empowered this way and the consequent
productivity enhancement helps them earn more. Even
after six decades of economic planning the focus on food
security is not altogether unwarranted in ameliorating the
poverty status of the people who spend around two-thirds of
their income on food. Recent double digit inflation caused
mainly by the rise in food prices hints at the vulnerability not
only of the poor but also of the persons brought above the
poverty line but still on its periphery. The Economic Survey
(2007-08) has voiced similar concern when it says “there are
concerns about the vulnerability of people who crossed the
poverty line and are at present above the poverty line”---
“high share of expenditure on food items (most basic of
all basic needs) would be indicative of the vulnerability to
some extent”.
It is our contention that shifting from income poverty to
multidimensional poverty, in all probability, may perpetuate
both. One clue for this contention could be found in a study
on multidimensional poverty and vulnerability. To quote:
“However, at the bottom rankings, the comparison shows
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M ANAGEMENT OF DEVELOPMENT
that there is not much difference in the list of states that are
identified as income poor and multidimensional poor”. The
study further states that in almost 50% out of fifteen major
states both in urban and rural areas, income poverty exceeds
the multidimensional poverty (Rosa A. Abraham, and K. S.
Kavi kumar, 2008). The marketization even of basic education
and health care—two main components of multidimensional
poverty which are public goods by nature—has made
these goods above the reach of the so-called non-poor. So,
the continuation of the focus on the removal of income
poverty is logical.
We are fully aware of the fact that to sustain in a knowledge
economy there is no escape from controlling poverty in
its various dimensions. But the removal of income poverty
first and foremost amounts to crossing the critical level of
wellbeing and surpassing the “take-off” stage of poverty.
Thus, crossing the” take-off” stage of poverty seems to be a
precondition for alleviating multidimensional poverty in the
manner similar to the take-off stage of economic growth for
achieving and sustaining the high growth path. Things would
have been different had we achieved cent percent literacy
like Japan and China or accomplished the
constitutional obligation of universal
primary education much earlier in our
development journey.
Questionable Poverty Pattern
Let us peep into the recent poverty
estimates for India brought out by such
international agencies as the World Bank
(WB) and the Asian Development Bank
(ADB). Their estimates contradict the
poverty pattern based on India’s OPL. Not only the poverty
ratios of the order of 41.6% (WB) and 54.8% (ADB) in 2005
are far in excess of 20.4% (OPL) but the fall in these ratios
have been accompanied by the rise in the number of the
poor which varies in the range of 456 million to 622 million
unlike the symmetrical pattern given by the OPL. This is
astonishing when the same agencies regard India as an
emerging super economic power and an important constituent
of the ‘emerging markets’- Brazil, India ,China, and
Russia (BRIC) not giving any credit whatsoever to the
impact of sustained high economic growth of nearly six
percent per annum on poverty implying thereby that our
India’s Poverty
Gap Index (PGI)
has also fallen
from twenty
percent in 1980 to
eleven percent
in 2005
growth strategy is not pro-poor.
On the other hand, considering the value of India’s OPL
exactly equal to one dollar per day cutoff line, Martin
Ravallion (2008) observes that during 1980 to 2005 India’s
poverty ratio fell from 42% to 24% accompanied by the fall
in the number of the poor from 296 million to 267 million.
India’s Poverty Gap Index (PGI) has also fallen from 20
percent in 1980 to 11% in 2005.
Commenting on the WB’s updated estimates of global poverty,
Sanjay G. Reddy writes, “there is no basis to conclude
that the new set of PPP rates (Purchasing Power Parity)
employed to generate the new poverty estimates are closer to
the truth”(2008).
The recently emerged symmetrical poverty pattern of
declining poverty ratio accompanied also by the falling
absolute size of the poor itself is beset with challenges. It is
argued that “ the poverty line updated for price alone will
be unable to meet the calorie requirements. The per capita
monthly expenditure which corresponds to the required
calorie norms is much higher than the OP Lines.” (T. K.
Krishna kumar, Jayrama Holde, Puja Guha, 2008). The
authenticity of the current poverty
pattern depends on the matching of the
calorie consumption pattern with the
calorie norms. Unfortunately, 76% of the
population living in households consume
per capita calorie below the ‘norms’
prescribed. Though the real average
household consumption expenditure
during 1983-2004-05 has increased, the
per capita calorie consumption has
decreased. This explains the divergence
between the two poverty measures-one based on real
expenditures and the second on calorie cutoff—21.8 and
76% respectively (Angus Deaton and Jean Dreze, 2009).
This suggests rather a poor link between the OPL and
calorie requirements due to changes in dietary practices
(Ranjan Ray, 2008). Does it mean the observed poverty
pattern during 1994-95 to 2005-06 is fluke and an eye wash
or simply propagandist? Is this trend worth ignoring? The
answer is firm ‘no’. Reasons given below explain our
assertion.
First, the emergence of the poverty pattern during the
last decade has coincided with the period of sustained high
16 THE IIPM THINK TANK

T HE POVERTY PUZZLE
economic growth path and low inflation rate unlike the
period 1973-74 to 1993-94 \ 1994-95. Second, the deviation
between the two poverty estimates reported earlier should
not necessarily be interpreted as the fall in the nutritional
status of the population. Deaton and Dreze observe that “
without understanding why per capita calories are falling
despite rising per capita expenditures, it is difficult to
decide what, if anything, these numbers (two-thirds to
four- fifths of rural population in 1983 and 2004-05
respectively and from 65% to 75% in India as a whole) tell
us about poverty.” Moreover, even if the poor engaged in a
globalised economy are becoming a little richer, by
implication, those poor brought above the OPL should
have become relatively better off. Third, according to “A
Special Report on the New Middle Classes” (The Economist,
February 14 th , 2009) the surge in the middle class
population (population living on $2- $13 a day, 2005 prices
at PPP) by 1.2 billion between 1990 and 2005 is by and
large”attributed to the persons lifted out of poverty. Since
majority of them are dangerously close to the poverty line,
they do not have a good hold on the middle class status
and are likely to slip backwards”. The
Indian middle class grew by 116.9
million from 146.8 million in 1990 to
263.7 million in 2005. As per the classification
of the world middle class into the
upper ($9-$13 a day) and the lower
middle class ($2 -$9 a day) in the ratio of
1: 11 (around), 107.9 million Indian
persons belong to the lower middle class
out of additional 116.9 million. How
many poor persons brought above the
poverty line are a part of the lower middle class? If the
number is good enough, it lends credence to the phenomenon
of growing middle class and the resultant spurt in
domestic demand. Fourth, when the emerging markets’
(BRIC) resilience to the current economic meltdown
(financial crises) is, itself, in question, to sustain and
promote further the emerging Indian poverty pattern
invites a renewed focus on our growth strategy. Which of
the following three—export-led, overseas borrowing and
equity financed and domestic demand- led—either
individually or jointly, will act as a cushion against such
periodic bouts?
Frame Work of Analysis
It is our contention
that shifting from
income poverty to
multidimensional
poverty, in all
probability, may
perpetuate both
At the all India level, we propose to contrast the poverty
pattern during 1994-95 to 2005-06 from the earlier one
between 1973-74 and 1993-94 in terms of three macro
variables--- (1) economic growth, (2) inflation, and (3)
population growth. This is covered in section-1 on poverty
and economic growth. At the state level, we have examined
trends in poverty among the fourteen major states accounting
for around nine-tenth of total population in 2001 classifying
them into demographically and economically more and
less progressive states taking all-India as the cutoff point.
This constitutes section-2 on state level poverty trends.
Section -3 is on concluding observations.
SECTION-1
Poverty and Economic Growth
With regard to the poverty pattern during 1973-74 to 1993-
94, it is appropriate to quote the observation made by the
Economic Survey (2001-02): “ though the poverty rate
declined , the number of poor remained stable at around 320
million for a fairly long period of two decades
(1973-74-1993=94) due to a countervailing
growth in population”. How to explain
this asymmetrical pattern? Can we take
the only explanation offered by the survey
at its face value?
Let us gauge the extent of the impact of
population growth on the poverty pattern
by making two simplistic assumptions.
First, keep the total population in 1951 of
361 million unchanged as it is almost
equal to 320 million poor in 1973- 74 and
1993-94 (365 million in 1994-95). Taking 1951 size of
population as the base, the estimated number of the poor in
1993-94 works out to just 130 million with the fall in poverty
ratio from 55% in 1973-74 to 36% in 1993-94. The estimated
number is 41% of the actual number (320 million). Second,
now keep the poverty ratio unchanged and allow for the
growth of population. Taking the poverty ratio of 55% in
1973-74 as the base, the number of the poor so calculated
shoots up to 496 million in 1993-94 from 320 million—an
increase of 1.6 times the actual number. Both the calculations
show a formidable impact of the population size on the
numerical size of the poor persons.
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M ANAGEMENT OF DEVELOPMENT
Table 1-A: Factors Influencing Distinct Poverty Patterns
Year Poverty Ratio (%) Number of
Poor(Million)
Population
Growth (% P.A.)
Economic Growth
GNP (1999-2000
Prices) % P.A.
Inflation
WPI(93-94=100) %
(1) (2) (3) (4) (5) (6)
1973-74
54.9
321
2.5
4.8 (3.08) 11.8 (10.9)
1977-78
51.3
329
(1971-81)
1983-84
44.5
323
2.4
5.6 (5.5) 6.8 (8.0)
1989-90
34.3
290
(1981-91)
1990-91 35.6 307 4.8 10.6
1993-94
36
320
2.2
6.6
5.4
1994-95
39.6
365
(1991-2001)
(5.7)
(8.12)
2005-06
20.4
228
1993-94
2004-05 (URP)
36
27.5
320
300
6.3 5.6
1999-2000
2004-05 (MRP)
26.1
21.8
260
239
1.65(2001-08)
(Projected)
6.1
(7.03)
4.98
(4.68)
Sources: (1) Various issues of Economic Survey, Ministry of Finance, Government of India.
(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
(3) Census of India 2001.
(4) Economic Survey 2007-08
(5) (a) Economic Survey 2001- 02, 2007-08
(b) Economic and Political Weekly, April 25 th - May 1 st , 2009.
Notes: (1) Figures in column 4 are decennial average annual rates of population growth.
(2) URP-Uniform Recall Period: MRP-Mixed Recall Period.
(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.
(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
is the average of 70—71,71-72 to 75-76 (10.8%) and 75-76,76-77 to 80-81 (11%).
(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
improved significantly since the mid-1990s” (Economic Survey,2001-02).
How have the poverty ratio and the number of the poor
tended to behave during the intervening years of the period
1973-74 to 1993-94 once these assumptions are dropped?
Our contention is that given the rate of population growth,
the fluctuations in the rates of economic growth and inflation
might have influenced the course of poverty pattern. Concentrate
on the quinquennium 1973-74 to 1977-78. Though
the poverty ratio fell from 55% to 51.3%, the absolute
number of the poor increased marginally from 321 to 329
million—an asymmetrical pattern. The increase was caused
jointly by the average annual rate of economic growth (Gross
National Product-GNP) of 4.8% during 1973-74 to 1977-78
and the inflation rate of 11.8% per annum (Table---1-A).
During the decade 1970s, the growth rate was just three
percent and the inflation was almost 11%.
Focusing on the period 1983-84 to 1989-90, the persistent
decline in the poverty ratio was accompanied by the decline
in the number of the poor persons from 323 million to 290
million--- a symmetrical pattern. The emergence of this
much desired pattern owes mainly to the acceleration in the
rate of economic growth to almost six percent(1985-90) as
against the Seventh Plan target of five percent and the
sizeable dip in the rate of inflation to 6.8% (1983-84-1989-
90) when the rate of population growth was 2.4% per
annum(1981-91).Unlike the period 1983-84-1989-90, the
subsequent five year period,1990-91-1994-95, saw a persistent
rise both in the poverty ratio and the number of the poor
persons. The former rose from 35.6% to 39.6% and the latter
from 307 million to 365 million-symmetrical but unfavourable
pattern. Two main culprits of this rather disturbing
outcome were below five percent annual rate of GNP growth
and a relatively higher inflation rate of 10.6% (93-94=100)
18 THE IIPM THINK TANK

T HE POVERTY PUZZLE
when the rate of population growth was slightly lower(not
higher) at 2.2% during the 1990s. These were the initial
years of economic reforms regime heavily bent upon correcting
the fundamentals-macro economic imbalances. The
decade 1995-96 to 2005-06 - the period of further acceleration
in the rate of economic growth to 6.58%, the inflation
rate of around five percent and the population growth rate
down to less than two percent – has seen the rebirth of the
much adored pattern of declining poverty ratio and the
number of the poor - a favourable symmetrical pattern. The
ratio came down to 20.4% in 2005-06 from 39.6% in 1994-95
and the size of the poor fell from 365 million in 1994-95 to
228 million in 2005-06.
Poverty estimates based either on the uniform recall
period (URP) or on the mixed recall period (MRP) also
endorse the earlier observed pattern. In the URP, the
consumption expenditure data for all the items are collected
from a thirty day recall period. These estimates show that
between 1993-94 and 2004-05, the poverty ratio fell from
36% to 27.5% and the absolute number from 320 million to
300 million.
In the MRP, the consumption expenditure
data for five non- food items, namely,
clothing and foot ware, durable goods,
education, and institutional medical
expenses are collected from a 365 day
recall period, and the consumption data
for the remaining items are collected
from a thirty day recall period. Comparable
poverty estimates for the period
1999-2000 to 2004-05 show that the ratio
fell from 26.1% to 21.8% and with that
the number of the poor persons declined from 260 million to
244 million. During the ten year URP period or the shorter
MRP period, the Indian economy had hardly experienced
ups and downs in the average annual rates of economic
growth and inflation. (Table-1-A)
There is no exaggeration when we assert that growth and
inflation are two overriding factors governing the Indian
poverty patterns since 1973-74. A case in point is the poverty
trend in the highly populous country China. India was better
placed than China in the mid seventies (1975) when its
poverty ratio of 55% was lower than China’s 59.5%. The
reversal in the respective countries poverty status in 1995-
One may infer
that persons
brought above the
poverty line have
benefited from
accleration in the
economic growth
India’s poverty ratio of 36% against China’s 22.2 %-owes to a
much higher rate of economic growth of the Chinese economy
from a mere five percent per annum during 1970-1980 to
11.1 % during 1980-1995. Comparatively India’s annual
growth rate of three percent during 1970s rose to 5.6 % per
annum during 1980-95(Economic Survey, 1998-99).Though
the pace of economic growth and poverty reduction in India
is slow compared to China, the inequality (relative poverty)
has increased at a faster rate in China than in India. The
share in national income of poorest 20 % in China is 5.9 %
as against 8.2 % in India. The poorest 20 % receives about
40 % of per capita average income in India as against 30 %
in China (Amit Bhaduri, 2008). Thus, the economic growth
has driven India towards a “new era” of low ‘absolute’ as well
as ‘relative’ poverty. One is tempted to infer that the persons,
numbering in the range of 92 to 137 million brought above
the poverty line have benefited from the acceleration in the
rate of economic growth and are instrumental in controlling
the speed of growing inequality. It would be in our interest to
strengthen the favourable symmetrical pattern by moving
ahead on a high growth path with inflation rate of around
five percent. This seems to be a plausible
way of getting rid of their vulnerability.
Retaining majority of the poor brought
above the poverty line, in itself, will be a
great achievement. Conferring permanent
‘non-poor’ status to these persons lends
substance to both the processes.
The number of poor brought above the
poverty line in the range of 92 to 137
million accounts for 9-12 % of the total
population and for 20 to 30 % of the
addition to the total population during 1993-94 to 2005-06.
If this number is genuinely a part of ‘non-poor, then it is a
source of boosting up the domestic demand making the
Indian economy more resilient.
Poverty and Illiteracy
Poverty and illiteracy are very similar to the proverbial
Siamese Twins. For the first time on the eve of the 21 st
century the number of poor and illiterate persons has fallenthe
former with the decline in the poverty ratio and the latter
with the increase in the literacy rate. At present 228 million
are poor persons and 296 are illiterates-the closeness of
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M ANAGEMENT OF DEVELOPMENT
these numbers is significant.
We take the help of two studies on life expectancy to
examine this welcome trend. One study has revealed that for
every extra year of life expectancy in population, there is a
seven percent rise in per capita Gross National Product
(GNP)-(The Economist, 2009). In the second study, life
expectancy is taken as a factor in explaining the intergenerational
nature of poverty. Life expectancy lower than the
average implies a less than the average per capita GDP
growth rate, low human capital accumulation and poverty
ratio above the average. Low life expectancy deters poor
families from investing in education which in turn percolates
down to their children. Like their parents they also work as
non-educated workers and remain poor. The poverty trap
created by low life expectancy and not enough human capital
accumulation perpetuates intergenerationally (Amparo Castello
Climent and Refel Domenech, 2008). These two types
of deprivations- poverty and illiteracy- are intergenerational
in nature in the same manner as the intergenerational debt
of the Indian farming community.
In the wake of the falling numbers of poor and illiterates,
the question that requires to be probed is: have these persons
succeeded in overcoming the interlinked deprivations of
poverty and illiteracy? If yes, then these deprivations will
cease to be intergenerational over a period of time. Since
both are empowered economically and educationally, to that
extent, they start realizing the virtue of this empowerment
which they would prefer their children to emulate or imbibe.
To know whether this process of poverty and illiteracy
ceasing to be intergenerational has, in fact, commenced,
the newly emerged class of ‘non-poor’ is to be identified to
assess any improvement in the quality of life on account of
improvement in their human development status. This
identification will lend substance to the OPL which the
critics have found propagandist.
Rural-Urban Poverty
Our emphasis on locating the birth of the “non-poor” class
can further be supported on one more count having a
demographic content, namely, the rural-urban divide of poor
persons during 1973-74 to 1993-94 when their number
remained constant at 320 million.
During this twenty year period the number of rural poor
fell from 261.3 million to 244 million whereas the number of
urban poor rose from 60.3 million to 76.3 million. As a
result, the rural poor accounting for a little above four-fifths
came down to three-fourths of the total number of poor. If
the increase in the urban poor is caused by the migration of
Table 1-B : Long Term Rural-Urban Poverty Trends
Year Rural Urban Total
(1) (2) (3) (4)
Ratio(%) Number(Mill.) Ratio(%) Number(Mill.) Ratio(%) Number(Mill.)
1973-74 56.4 261.3 49 60 54-9 321.3
1977-78 53.1 264.3 45.2 64.6 51.3 328.9
1983 45.3 252 35.6 70.9 44.5 322.9
1987-88 39.1 231.9 38.2 75.2 38.9 307.1
1993-94 37.3 244 32.4 76.3 36 320.3
1999-2000 27.1 193.2 23.6 67.1 26.1 260.3
2003 24.03 184.8 22.63 68.8 23.8 253.6
2004-05 21.8 170.3 21.7 68.2 21.8 238.5
2005-06 20.4 161.3 20.7 66.5 20.4 227.8
Source: (1)Various issues of Economic Survey
(2) K. L. Datta: Same as source 2 of Table 1-A
(3) R. Radhakrishnan & Manoj Panda: “Macroeconomics of Poverty Reduction-India case Study”(U.N.D.P.),IGIDR,
Mumbai,2006
20 THE IIPM THINK TANK

T HE POVERTY PUZZLE
the rural poor to urban areas, then it simply amounts to a
locational shift of poor population without any improvement
in their levels of living.
This pattern has altered for good since 1999-2000 when
both these numbers have started falling simultaneously
though the pace of urbanization has slowed down from six
percentage points increase (17.7 % to 23.7%) during 1961-
1981 to four percentage points rise (23.7% to 27.8%) during
1981-2001. In 2005-06, the number of rural poor was further
lower at 70 % of the total. The gap in the rural-urban poverty
ratio of 9.68 percentage points (45 .31 and 35.63 respectively
in 1983) was completely wiped out in 2005-06- the respective
ratios being 20.4 and 20.7 (Table 1.B). This is mainly on
account of the enhanced pace of fall in the number of rural
poor by 83 million during a relatively period of shorter
duration(1993-94 to 2005-06) as against the decline of only
17 million during 1973-74 to 1993-94. The decline in the
number of urban poor by 10 million between 1993-94 and
2005-06 is of much lower magnitude comparatively.
Thus, the rate of reduction in rural poverty has outstripped
that of the urban poverty. The acceleration of the
rate of economic growth appears to have
trickled down and thus inclusive. Especially
between 2004-05 and 2005-06, the
interplay of the following three factors
has played a crucial role in bringing about
this hospitable trend: (a) 8.5 % average
economic growth; (b) almost six percent
growth in the agricultural sector in
2005-06 compared to an average annual
rate of growth of five percent in the
previous two years, and (c) stable inequality
in the distribution of per capita consumption (K. L.
Datta, 2008). Thus, the number of rural poor crossing the
OPL does not appear to be fake.
Hierarchy of the Incidence of Poverty
This much appreciable poverty pattern does not seem to
have made any dent on the hierarchy of the incidence of
poverty as can be seen from the incidence of poverty among
the three broadly classified socio-economic groups—Scheduled
Castes and Scheduled Tribes(SCs\STs), other backward
communities(OBCS), and Others.
According to NSSO Seventh quinquennial consumption
Unless incidence
of poverty of SCs
& STs are brought
down significantly,
the slow pace of
poverty reduction
will continue
expenditure survey (July 2004-June 2005), the incidence of
poverty among rural and urban SCs and STs is disproportionately
higher than their share in population. Their
respective poverty shares of 43.35 % and 31.73 % (rural)
and 29.81 % and 33.12 % (urban) are much above their
share of 16.2 % (SCs) and 8.2 % (STs) in total population.
The corresponding poverty ratios among rural OBCs and
Others are 22.9 % and 13.01 % respectively. The respective
poverty ratios among urban OBCs and Others are 24.22 %
and 12.06 %.
High incidence of poverty among nearly one-fourth of
population might be responsible for the overall slow pace
of poverty reduction. The question deserves to be probed
is: How many persons brought above the OPL belong to
the SCs and STs? Unless their high incidence of poverty
is brought down significantly, the slow pace of poverty
reduction continues despite high economic growth as in
their case cultural causes of poverty namely, indifference,
laziness, and ineptitude might have played the part.
Economic growth to be truly sustainable and inclusive
has to break the stranglehold of the age-old social
stratification.
In nutshell, the decade old poverty
pattern featured by the decline in the
absolute number both of the poor and
illiterates and the relative faster
decline in rural poverty has coincided
with the period of sustained high rate
of economic growth and low inflation.
This gives the impression that the
growth has trickled down and become
inclusive. To be on a more safer ground,
the newly emerged “non-poor’ class in the range of 92-137
million need to be identified and monitored to trace their
chances of vulnerability, to assess the degree of economic
and educational empowerment acquired by them making
inroads on the intergenerational nexus of poverty and
illiteracy, and to understand more intimately the puzzle
between the declining calorie intake below norm in the
face of rising real consumption expenditures. Then, the
OPL and the ongoing symmetrical pattern are expected to
lend credibility to the Indian poverty estimates. Policy
makers have to respect this pattern enabling teeming
millions to be an active agent of the development process.
THE INDIA ECONOMY REVIEW
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M ANAGEMENT OF DEVELOPMENT
SECTION-2
Poverty Trends among States
Fourteen major states accounting for 87.5 % of total population
in 2001 are undoubtedly heterogeneous demographically
and economically. So the possibility of varying poverty
trends cannot be ruled out.
States are classified into demographically and economically
more and less progressive states taking all-India as
a cutoff point to examine the trends in poverty at the
state level.
A new factor assisting the long term high economic growth
path, namely, “Demographic Dividend” has emerged on the
horizon. Various studies using a panel data of countries from
1960-2000 have established a positive association between
the age structure and economic growth prospects for India
over the next thirty years (K. S. James,2008). In this respect,
India has an advantage over China. China’s dependency
ratio- the percentage of the working population (15-65
age-group) to the rest (0-14 and 65+ age-groups)—is likely
to deteriorate from 2010. In contrast, India’s dependency
ratio is to improve until the 2040s (Edward Luce, 2007). If
demographic dividend, bonus or gift,
implying a smaller dependency ratio, can
speed up the process of economic growth
both from the demand side (higher
domestic demand) and the supply side
(greater propensity to save and invest),
then in turn, it can also propel the pace of
poverty reduction.
There is no need to restate the role of
life expectancy, another demographic
feature, in understanding the association
between growth, human capital accumulation and poverty,
which has already been explained in section-1. It is intended
to test the hypothesis that the demographically progressive
states are economically advanced and hence experience a
faster decline in their poverty ratios versus demographically
less progressive states.
States are progressive or laggard if change (fall or no or
negligible fall) in their dependency ratios (DR) is greater or
smaller than the all-India average between 1961 and 2001.
Or alternatively, if their dependency ratios are below or
above the all-India average.
The DR of each of the following eight states is below the
India has an
advantage over
China. China’s
dependency
ratio is likely to
deteriorate from
year 2010
all-India average. The states are: Andhra Pradesh, Gujarat,
Karnataka, Kerala, Maharashtra, Punjab, Tamil Nadu and
West Bengal. Haryana can be added to this list. Taking
Punjab’s DR of 1.00 in 1961 as that of Haryana, then
Haryana’s DR of 0.77 in 2001 shows a 23 percentage points
fall which is faster than the 12 percentage fall in the all- India
average of 0.75 These eight states’ average DR was 0.65
(0.66 including Haryana) in 2001 as against India’s 0.75. In
the four BIMARU states- Bihar, Madhya Pradesh, Rajasthan
and Uttar Pradesh- there was virtually no change in the
said ratio between 1961 and 2001. Their average DR of 0.88
was far above the all-India average. Though Orissa’s ratio of
0.71 is lower than the all-India average, it is not a part of the
eight\nine progressive states on the basis of a much slower
decline by ten percentage points compared to the 24 percentage
points decline in the combined average of eight states.
The average life expectancy of 66.9 years in 2001 of the
progressive nine states was 3.4 years above the all-India
average of 63.5 years. Average life expectancy of 60.4 years
of the four BIMARU states and that of 59.6 years of Orissa
were respectively three to four years lower than the average
for all-India. Even in terms of demographic
features other than the above
two, namely, death rate, infant mortality
rate, and the rank based on Human
Development Index (HDI), these five
states are not even up to the all India
level. Their average death rate of 8.5 is
higher than 7.6 for all-India and also
infant mortality rate of 70.6 as against
all-India’s 58. The respective average
rates for nine states are 6.87 and 43.3.
HDI ranks of states have remained fairly stable between
1961 and 2001. The average HDI rank of five of the progressive
nine states is much superior to that of 11 of the other five
less progressive states (Table-2-A).
How are these states placed economically? Are the
demographically more progressive states more advanced
than the less progressive one?
During 1980-81 to 1991-92, the Indian economy grew at
the annual rate of 3.1 % (Per capita income at 1999-2000
prices) and from 1992-93 to 2002-03, its per capita income
growth rate was higher at 3.7 % per annum (Economic
Survey, 2007-08). Seven states whose growth rates (per
22 THE IIPM THINK TANK

T HE POVERTY PUZZLE
Table 2-A: Rates of Poverty Reduction at the State Level
Demographically and Economically More Progressive States
State
Dependency
Ratio
Death
Rate
Life
Expectancy
(Years)
Infant
Mortality
Rate
HDI Rank
Economic Growth
(Per Capita GSDP)
%
Rate of Poverty
Decline
(%)
(1970-2003)
1961 2001 2001 2001 2001 1991 2001 1980-81 1993-2004 Rural Urban
1992-93
Andhra Pradesh 0.84 0.66 64.4 7.3 57 9 10 3.41 4.3 4.17 1.67
Gujarat 0.92 0.66 64.1 7.1 54 6 6 2.84 3.55 3.57 3.82
Haryana N.A. 0.77 66.9 6.9 43.3 5 5 3.71 3.25 3.42 3.98
Karnataka 0.92 0.66 65.3 7.1 50 7 7 3.42 5.57 2.73 1.69
Kerala 0.94 0.58 74 6.4 14 1 1 2.26 3.92 4.72 3.37
Maharashtra 0.85 0.69 67.2 6.7 36 4 4 3.81 2.73 1.15 1.3
Punjab 1 0.68 69.4 6.7 44 2 2 3.19 2.29 3.87 4.38
Tamil Nadu 0.76 0.56 66.2 7.4 37 3 2 3.84 3.61 2.98 1.57
West Bengal 0.85 0.67 64.9 6.4 38 8 8 2.43 5.42 1.98 1.49
Average 0.89 0.66 66.9 6.87 43.3 5 5 3.21 3.85 3.18 2.59
Demographically and Economically Less Progress States
Bihar 0.92 0.92 61.6 8.1 61 15 15 1.55 2.19 1.1 1.96
Madhya Pradesh 0.85 0.83 58 9 76 13 12 1.64 1.77 2.44 0.75
Orissa 0.81 0.71 59.6 9.5 75 12 11 1.69 2.33 0.97 1.4
Rajasthan 0.92 0.88 62 7 68 11 9 3.83 2.24 2.84 1.71
Uttar Pradesh 0.88 0.9 60 8.7 73 14 13 2.34 0.89 0.91 1.62
Average 0.89 0.88 60.4 8.2 69.5 13 12 2.34 1.77 1.82 1.51
All India 0.87 0.75 63.5 7.6 58 - - 3.1 3.7 1.69 1.64
Sources: (1) K.S. James “Glorifying Malthus: Current Debate on ‘ Demographic Dividend’ in India”. EPW, June 21,2008.
(2)Ashish Bose: “ Increasing Life Expectancy and the Elderly” EPW,August,9,2008.
(3) Govt. of India : Planning Commission,2002.
(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).
(5) Economic Survey of India, 2007-08.
capita Gross state Domestic Product) were higher than the
all-India between 1980-81 and 1992-93 are Andhra Pradesh,
Haryana, Karnataka, Maharashtra, Tamil Nadu, Punjab and
Rajasthan. All but Rajasthan are demographically better
placed. States whose growth rates exceeded the Indian
growth rate during 1993-2004 are Andhra Pradesh, Gujarat,
Haryana, Karnataka, Kerala, Tamil Nadu and West Bengal.
All the states have retained their demographically progressive
character. Their average annual growth rate (PCGSDP)
accelerated to 4.23 % (1993-2004) from 3.6 % between
1980-81 and 1992-93. Out of the remaining seven states, not
in the above list, five-four BIMARU and Orissa states- are
economically and demographically less advanced. The
notable exceptions are Maharashtra and Punjab. The
average annual growth rate of these seven states fell from
2.33 % to 2.06 % between two periods under consideration.
The average annual growth rate of five demographically less
progressive states was not only lower than Maharashtra and
Punjab but fell relatively faster from 2.21 % to 1.88 %. Thus,
a close association, not necessarily causation, is observed
between demographic and economic levels.
Let us view the rate of poverty reduction during 1970-2003
separately for rural and urban areas of the nine more and
five less progressive states. In the nine states the average
rates of rural and urban poverty reductions of 3.18 % and
2.59 % respectively are above the average rates of 1.82 %
THE INDIA ECONOMY REVIEW
23

M ANAGEMENT OF DEVELOPMENT
and 1.54 % observed in the rural and urban areas of the four
BIMARU states respectively. The respective rates of 0.97 %
and 1.40 % for the Orissa are the lowest. The average rate of
rural poverty reduction being higher than the urban poverty
can be taken as the sign of inclusive growth. If majority of
the poor who have crossed the OPL belong to the nine states,
it would be better to identify them to verify their non-poor
status. Are they less vulnerable compared to the non-poor in
less progressive states? Also, how many SCs and STs in these
states have crossed the OPL since they bear the brunt of the
incidence of poverty (Table-2A).
The state wise poverty trends suggest the divergence and
not the convergence. The polarization will gather momentum
unless economic growth in less progressive states
catches up with the more advanced states. Since catching up
is time consuming, they may continue to lag behind. Then,
what is the alternative to halt the widening divergence? What
about making poverty alleviation measures more result
oriented if that is the surest way to prevent political strife and
turmoil? (A.K.Sen 2006). On one more ground also the
implementation of these measures is to be strengthened as
these less progressive states together account for a higher
proportion of SCs and STs(28 %) than the all-India average.
Here comes the role of expenditure on social services and
poverty alleviation measures along with role of economic
growth, inflation and population growth to speed up the
poverty reduction rate. During 1990-91 to 2006-07, the per
capita real expenditure (1999-2000 prices) on social services
and poverty alleviation measures both by the central and
state governments as a proportion of per capita GDP has
increased from 5.9 % to 6.2 % (EPW, 2008). But almost all
the studies on the impact of these measures have categorically
concluded that the outcomes of such measures are not
in proportion to outlays as they are not well targeted and
implemented.
SECTION-3
Concluding Observations
Asymmetrical poverty pattern of falling poverty ratio
without any decline in the numerical size of the poor during
1973-74 to 1993-94\ 1994-95 highlighted in the Economic
Survey has given only a partial picture of the pattern as it has
simply focused on population ignoring the impact of fluctuations
in the rates of economic growth and inflation on
poverty. In fact, the prominent feature of the pattern is its
symmetrical nature, i. e. , falling\ rising poverty ratio accompanied
also by the falling \ rising number of the poor brought
about by the higher\ lower rate of economic growth and low\
high inflation rate even when the rate of population growth
has slowed down.
The period, 1993-94 to 2005-06, of sustained high rate of
economic growth and low inflation has lent consistency to
the symmetrical pattern of falling poverty ratio as well as the
number of the poor. During this period persons ranging
from 92-137 million have crossed the Official Poverty Line
(OPL). They are in the possession of the non-poor status
having crossed the “take-off” stage of poverty.
Analysis of the state level poverty trends has shown that
India is poised for the continuation of the high economic
growth path phase accompanied by the falling poverty ratio
and the number of the poor. The two contributory demographic
factors are ‘ demographic dividend’ (lower dependency
ratio) and the improved and still rising life expectancy.
The classification of 14 major states into more and less
progressive states has revealed that in the nine more progressive
states the lower average dependency ratio and the higher
life expectancy than the all-India average have contributed
to the higher average annual rate of economic growth than
the all-India average and the resultant relatively faster rate
of poverty reduction.
The lower average rate of poverty decline in the five less
progressive states, accounting for two-fifth of the total
population, might have pulled down the overall rate of
poverty reduction than the one expected out of rapid growth
of per capita GDP. High incidence of poverty among the SCs
and STs and poor implementation of poverty alleviation
measures, to an extent, may be other factors for the overall
slow rate of poverty decline.
This symmetrical pattern fortunately has found a good
companion in the pattern of falling number of illiterates with
the rise in the literacy rate. These simultaneous appearance
of the above two patterns seems to have initiated the process
of empowerment of the underprivileged. The fillip to this
process will also be provided by the pattern of rural poverty
ratio declining at a rate higher than that of the urban
poverty, where the majority of the poor are concentrated.
Glimpse of economic growth trickling down and becoming
inclusive appears to have arisen on the Indian arena.
24 THE IIPM THINK TANK

T HE POVERTY PUZZLE
Countering the global economic downturn to sustain our
high economic growth path with tolerable inflation levels
responsible for the emergence of the poverty pattern outlined
in the text requires a policy direction on three counts.
One, understanding fully the significance of domestic
demand-led vs. export-led and overseas borrowing and
equity financed-led growth strategies in such a scenario.
Two, maximizing the gains from demographic dividend and
increasing life expectancy by deploying persons of the
working age group most productively and gainfully. Three,
complete overhauling of poverty alleviating measures
assuring that money spent on different programmes reaches
in full to the intended beneficiaries. The problem is not one
of under spending but of disciplining spending.
While appraising and appreciating this poverty pattern,
throughout the paper rather a strong plea is made to identify,
survey, and monitor the persons who on the basis of the
Official Poverty Line estimates are above the poverty. Who
are these persons and where located? Have they continued to
be above the OPL? Are they the part of the declining poverty
gap index? To which social strata do they belong? How has
their consumption pattern changed? Have they fulfilled the
calorie norm? Where are they employed? Have they overcome
their and their children’s illiteracy? Is there any
improvement in their purchasing power? Are they still
exposed to the risk of vulnerability? Taken in the right spirit,
this plea is intended to serve as a guide to the debatable
issues of the questionable nature of the newly emerged
poverty pattern, whether the growth strategy is pro-poor or
not, and the relevance of calorie norms.
References and Additional Thinking
• The Economist: “Special Report on the New Middle
Classes in Emerging Markets”. February,14 th -20 th , 2009.
• Ministry of Finance,Govt. of India: “ Economic Survey,
2007-08
• Rosa A. Abraham: “Multidimensional Poverty and Vulnerability”.
Economic and Political Weekly, May 17 th , 2008.
• World Bank: “ World Bank Survey on Global Poverty”.
2007
• Himansu: “What are these estimates and what do they
imply? Economic and Political Weekly.
• Editorial: Economic and Political Weekly, October,
25 th -31 st , 2008.
• Martin Ravallion : “ A Global Perspective on Poverty in
India”. Economic and Political Weekly, October 25 th -31 st ,
2008.
• Sanjay G. Reddy: “ Differently Distorted :The W. B.
‘updated’ estimates” Economic and Political Weekly,
October 25 th -31 st , 2008.
• T. Krishna Kumar,Jayrama Holle,& Puja Guha: “Engel
Curve Method for Measuring Poverty”. Economic and
Political Weekly, July 26 th , 2008.
• Angus Deaton & Jean Dreze:” Food and Nutrition in India:
facts and Interpretations”.EPW, February 14 th , 2009
• Ranjan Ray: “Diversity in calorie sources and undernourishment
during rapid economic growth” EPW, February
23 rd , 2008.
• Ministry of Finance, Govt. of India: Economic Survey,
2001-02.
• Ministry of Finance, Govt. of India: Economic Survey,
1998-99.
• Amit Bhaduri: “ Predatory Growth”.EPW, April 19 th -26 th ,
2008.
• Adams Roberts: “ Farewell to Youth”, P.81, The World in
2009, Special issue of The Economist, 2009.
• Amparo Castello Climent & Rafael Domenech: “ Human
capital Inequality, Life Expectancy and Economic Growth”
Economic Journal, Vol. 118, issue 528, PP. 653-677, April,
2008.
• K. L. Datta: “ An Estimate of Poverty Reduction between
2004-05 and 2005-06”. EPW, October, 25 th -31 st , 2008.
• K. S. James: “ Glorifying Malthus: Current Debate on
Demographic Dividend”, EPW, June 21 st , 2008.
• Edward Luce: “ Inspite of the Gods- The strange rise of
Modern India, P. 351
• R. Radhakrishnan & Manoj Panda: “ Macro Economics of
Poverty Reduction: India- case study”, U. N.D. P., 2006.
IGIDR, Mumbai, 2006.
• Asish Bose: “ Increasing Life Expectancy and the Elderly”
EPW, August, 2008.
• A. K. Sen “Identity and Violence- The Illusion of Destiny.”
W. W. Norto & Co.. Inc.\ Ltd.,N. Y. 2006.
• EPW:” Budgetary Expenditure on Social Sector”, March
15 th , 2008
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organisation).
THE INDIA ECONOMY REVIEW
25

M ANAGEMENT OF DEVELOPMENT
The Road to Rendition
Rural India doesn’t need amnesty or alms. A mere intent to bridge
the rural urban divide by doing away with the populist schemes and
replacing them with pragmatic ones can not only bridge all the rural
urban divide but also unleash an economic giant that would never be
in recession.
In most of the European cities packaged mineral
water is often an alien term as even the
four or five star rated hotels would
have water of the sink as the staple
drinking water. But such is the quality
of that water that it can any day beat the
best packaged drinking water
available in this part of the world.
Over here in India, even sixty
years after attaining independence,
forget anywhere
else, municipal corporations
of the political and
the commercial capitals
of this country cannot
even provide water good
enough to drink and stay
healthy. Packaged
drinking water thus is a
norm than an exception.
For those who cannot afford
packaged water, jaundice and
other water borne diseases 1 is
a norm than exception. This is
the tragedy of a country which
is the latest entrant to the trillion
dollar club 2 . One then wonders that if this is the condition of
the cities then the predicament of the villages can easily be
gauged. And the irony is that even then, if there is one
country which can inspire hope of keeping the giant global
economic machine of the future running, it is India, if there is
one country which has demonstrated that pluralism and
democracy can defeat radicalism, it is India. And last but not
the least, if there is one country which has
demonstrated that it is possible for a third world
bankrupt economy to be a trillion dollar
economy in less than seventeen years’
time, it is again this very India 3 .
For ages the concept of India
has mesmerised the world and it
continues to do so even now. If
till a few decades back it was
India’s philosophy, culture, path
of non-violence and poverty that
inspired the west, today, along
with them it is India’s incredible
entrepreneurship, giant
strides in technology,
military prowess, its
consumerism and the sheer
resilience of its economy
that continues to draw
admiration and awe. Two
decades back when the
Indian economy was on the
verge of bankruptcy and could
have gone the Afghanistan’s
way, many in India were reluctant
to open up the economy even
though it was inevitable and of absolute necessity. And many
more were haunted by the ghost of East India Company 4 .
Nobody had imagined then that in less than two decades’
time, this crumbling economy would not just germinate
companies which would eventually turn out to be giant killers
but would also be a torchbearer of the future global economy
along with China. Tata Group’s acquisition of British steel
26 THE IIPM THINK TANK

A GROWTH PARADIGM
Pathikrit Payne
Senior Faculty Member
IIPM, New Delhi
giant Corus, Jaguar and Land Rover (JLR) or the Hindalco’s
takeover of Novelis are just examples of hundreds of relentless
acquisitions having been made by Indian companies
abroad in the recent past. And many more are waiting to
happen. Yet who would believe that in India, it is still a
nightmare to endeavor becoming an entrepreneur? That’s the
irony of this nation.
In the same league, for a trillion dollar economy which is
slated to become the third largest economy of the world by
2050 (according to the predictions by Goldman Sachs in the
BRIC Report) 5 , India continues to be the only nation among
the trillion dollar economies with a Human Development
Index rank 6 which is worse than that of some of the Sub
Saharan impoverished African economies. Thus the irony
unfolds this way that at a time when the American economy is
reeling under the pressure of recession as a consequence of
their near banking collapse 7 and its iconic
companies going bankrupt; and in the
chain effect even Europe and South East
Asia is feeling the heat, the Indian
economy on a whole seem to be completely
oblivion to it. No doubt slowdown is
here too, but if the foot falls in the
shopping malls, the passion around IPL
and the long queues of the middle class
Indians to book the Nano car is anything
to go by, recession is merely superficial
here. That’s the better part though, but recession or no
recession India continues to be the place where more than
400 million people go to bed everyday half nourished or
malnourished while food grains continue to rot in the FCI
godowns 8 . Recession or no recession, India remains the place
where more than 1,50,000 farmers have committed suicide in
the last one decade 9 . And ironically recession or no recession,
India continues to be at the receiving end of the tirade of
mindless mayhem unleashed by terrorism. Thus the question
that remains unanswered is that whether India is succeeding
or failing, where India’s future is doomed or vivid and
whether India is poised or paused.
Recession or no
recession, India is
the place where
1,50,000 farmers
have committed
suicide in the last
one decade
It goes without saying that most of the intellectual debates
in this country would invariably steer once around India’s
apocalyptic rural-urban divide. The usual phrase that would
generally sum up the situation is that while India’s phenomenal
growth story in the last one decade has invariably helped
it in leapfrogging into the league of the trillion dollar economies
and that it has no doubt created a plethora of job
opportunities, the sad part of the same saga is that the
phenomenal growth story of India is often paradoxed by an
equally appalling story of the degeneration of rural India
where even having most of the basic amenities, which are
generally taken for granted in the West and even in urban
India, remains a daydream. Thus, one wonders how far
India’s growth story would be sustainable in the long run if
more than 400 million Indians continue to go to be half fed
and malnourished, if the quality of education imparted by the
state run schools in rural India remains a major question
mark, if availability of quality electricity and roads still
remain a major challenge in major parts of rural India. The
problem is not just about conscience and bridging the rural
-urban divide for the sake of propriety. The real issue is that
India’s urban centric growth story would
stagnate in the long run if it fails to
convert the 600 million plus rural population
into future customers and employees.
Let’s take a simple example to vindicate
this point: In the last one decade time
since the unfolding of India’s incredible
IT story 10 , the industry has charted a
backward journey from cosmopolitan
cities to tier-II cities to tier-III cities and
now even in the townships to reduce cost
without compromising on the quality. But beyond a point
thanks to global competition and the upwardly surge of the
townships (which would invariably push up the real estate
prices and employee cost), if the need arises to move beyond
the townships to say into the heart of rural India for the sake
of reducing cost without compromising on quality, then, is
rural India in a position to welcome the industry with requisite
physical and social infrastructure? The answer is an
invariable no. And that’s where stagnation would not just
come for IT industry but for every industry worth talking
about as there is a limit to how much reduction the prices of
products can attract new customers unless an equal effort is
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M ANAGEMENT OF DEVELOPMENT
made to boost the purchasing power of the potential customers.
And that’s where rural India is lacking. Yet the more
pertinent issue is whether it is fair enough to blame globalization
for the increasing rural urban divide, or is it something
else that’s responsible for it and whether there are new ways
to bridge this gap.
In the hindsight one has to look at the way rural is defined
in India to find a suitable answer for the malaises plaguing it.
In generic terms anything that is rural in India is surely a
place devoid of basic education, healthcare, sanitation, roads,
electricity, productivity and a vibrant market for products.
This incidentally was aptly depicted in the film Swadesh in
which the protagonist Mohan Bhargava, a scientist working
with NASA, during his return to native village in India,
preferred to have his journey and sojourn in a caravan. The
reason being that inside the controlled environment of the
caravan he felt more at ease than the external heat, dust,
impure water, threats of water borne and air borne diseases,
lack of electricity and of course the difficult terrains in the
absence of roads. But can the likes of Mohan Bhargava be
blamed for the same? Or say, would they have done the same
while visiting to some hamlet in United
Kingdom or France? Well, probably not
as (ironically) this isn't the way the rural
place is defined in Europe or USA. There
aren't too many differences between their
cosmopolitan cities and villages or say
downtown places. Both would have more
or less the same kind of amenities or at
least the differences in terms of quality of
roads, power availability, education
facilities, hospitals, sanitation and quality
of drinking water would not be as stark as it is in countries
like India. At most the differences would be in terms of
population and the extent of pollution. Villages might have
more trees, less population and pollution than cities.
In fact this is not a new phenomenon. India’s growth story
has always been urban-centric, since independence. And thus
one would find that be it centres of higher education, hospitals,
markets, quality road connectivity and every other
related thing which reflects development, would always be in
the vicinities of the cities. One wonders why for an economy
with a near 1,150 million population, India has only one
AIIMS like hospital and that too in the heart of the political
Political class finds
it convenient to
keep the systemic
problems alive
and treat the mass
with painkillers for
temporary relief
capital with half of it being perennially reserved for the VIPs?
One then wonders that if each of the district hospitals of 625
odd districts 11 of India were to be brought anywhere near the
standard of AIIMS, wouldn’t it then be possible to take care
of the some of the lacunae in the Indian healthcare system?
In fact one should look at the way the giant retail companies
streamline their procurement by putting bulk orders to a
select list of companies. If this can help companies reduce
their cost and thus price through economy of scale, can’t this
process be similarly emulated by the government of India by
going for bulk procurement of all medicines and related
equipments for all the government owned hospitals? And
wouldn’t then it be possible in delivering affordable healthcare,
if not free healthcare, in every district of India? But
unfortunately that’s not to be so thanks to the idiosyncrasies
that govern this country in spite of the fact that in the 2009-10
interim budget total money allocated for rural health spending
was Rs 120 billion 12 .
The strange case of India is that here populism has more
acceptance than socialism. Thus the political class finds it
much more convenient to keep the systemic problems alive
and then treat the mass with painkillers
for temporary relief. No one in essence is
actually interested in solving the real
issues. And whenever things go out of
hand, there’s always the excuse of stating
that subjects like agriculture, rural
development or say law & order are state
subjects and that the government at the
centre cannot do much beyond advising
and giving financial assistance. On the
other hand the state governments generally
put the ball in the centre’s court by simply stating that the
centre has not done enough and has shown step-motherly attitude
towards the particular state. Take for example two of
much hyped and fan fared schemes of the UPA Government,
i.e. the loan waiver scheme and the National Rural Employment
Guarantee Scheme. No wonder both these schemes did
play crucial roles in catapulting the UPA back into power but
a deeper scrutiny of these two schemes would reveal that
neither of them are as effective as they are made to look. In
case of the first scheme, the government didn’t spare any
opportunity to chest thump its so called pro-poor image by
waiving off Rs 70,000 crore 13 worth of farm loans. Yet the
28 THE IIPM THINK TANK

A GROWTH PARADIGM
irony is that in spite of this, farm suicides continue vindicating
that a one time waiver of loans would at best jeopardize
the stability of the banking system of the nation rather than
boosting the rural economy. At worse, in a country where
nearly 50% of the population don’t have access to banking
and resort to taking loans from the money lenders, has
anybody from the government ever tried to find out as to who
the real beneficiaries of this scheme has been? Certainly the
private money lenders wouldn't care two hoots about what
Indian's Finance Minister or the RBI Governor states. So the
predicament of millions who took debts worth billions from
the money lenders continue. Likewise, would this loan waiver
make sure that there would be no more future need for such
loan waivers? Or for that matter does the government have
any clue as to why the farmers fail to perennially utilize the
loans? And last but not the least, if the real intent is to release
the farmers from the clutches of the farm debt, why is it that
till date no serious efforts have been made or legislations
passed to stringently deal with the private money lenders'
syndicates that have plagued rural India in the absence of
banks? That’s where the difference between populism and
socialism lies. A government with vote
banks in mind would surely resort to quick
fix measures like a loan waiver while a
truly socialistic government would rather
prefer to take care of the systemic flaws
because of which agriculture in India has
become a completely unviable proposition.
Today, rural India is mostly about
disguised unemployment where a majority
of people resort to agriculture simply for
the sake of remaining engaged even
though their engagement hardly have any value addition. In
case of the much trumpeted NREGS or the National Rural
Employment Guarantee Scheme, if there were to be one last
nail in the coffin of rural India, then nothing can be better
than NREGS. It might sound to be too harsh a statement,
especially on something which is often touted as a path breaking
social scheme. But the devil actually lies in the detail.
That there is rampant corruption with respect to implementation
of the scheme and siphoning of fund is something which
is known to all and needs no elaboration. The more intriguing
thing is that when a scheme aims at giving a mere Rs.60 per
day for a maximum of 100 days in a year, can there be any real
Indian policy
makers still believe
that replacing
machines with
manual labour
would increase
employment
improvement in the quality of life of the recipients? If one
were to argue that even this much can bring about substantial
improvement in the quality of life of the rural lot, then this in
itself vindicates the plight of rural India. NREGS wouldn’t
have been a necessity had agriculture been viable. And now
instead of having any long term policy of improving the
productivity or the skill levels of the rural manpower, a
pittance of Rs 60 a day for 100 days at most is just the perfect
recipe to degrade them farther. Is this amount anyway even
worth to take care of a family and then give quality education
to the next generation? Would any able bodied person with
some kind of aspiration (well- unless and otherwise it is
presumed that rural folks cannot have aspirations) can stick
to this and yet make it better in life or have a better future?
Can a scheme like NREGS ever bring the rural folk out of
their subsistence living? The answer is a blatant no. Yet there
is a bigger devil. The NREG Act states, ‘Creation of durable
assets and strengthening of the livelihood resource base of
the rural poor shall be an important objective of the scheme.’
It further states, ‘The cost of material component of projects,
including the wages of skilled and semi skilled workers taken
up under the scheme, shall not exceed
forty percent of the total project cost’ and
that ‘ as far as practicable, task funded
under the scheme shall be performed by
using manual labour and not machines.’
Probably India is the only trillion dollar
economy in the world where its policy
makers still continue with the Jurassic
Age ideology that replacing machines with
human labour would increase employment.
NREGS talks about creation of
durable assets like rural connectivity through all weather
roads and irrigation canals and yet limits the use of machines
and materials for the sake of using more and more manual
labour to increase, what can easily be termed as disguised
unemployment. Now for a country like India, a substantial
part of which is flood prone, does it make sense to make rural
roads and embankments by using mud instead of concrete?
To witness the shocking outcome of the same, one simply has
to visit Bihar, Uttar Pradesh, Orissa, West Bengal or even
Gujarat and Maharashtra and Karnataka during the monsoons.
Most of the mud embankments and rural roads simply
get washed away thanks to the fact that most of them have
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M ANAGEMENT OF DEVELOPMENT
been made by using mud or earth instead of concrete. And
thus in the following year the same work would be repeated
and the saga continues year after year. No wonder then why
the real developments in rural India don’t happen. One
wonders what would have happened if instead of mud, most of
the work on rural roads and embankments would have been
made of concrete. Much of that, if not all, would have then
been able to withstand the tirade of floods and need not be
reconstructed again the following year. The money in the
following year could then have been more judiciously used for
making more of durable assets in the concerned village, say a
health centre, a school building or a community centre as well
as for setting up of skill enhancement schools for the rural
lot. In fact there are already so many schemes for rural
development that the addition of NREGS to it and allocation
to the extent of Rs 30,000 crore that has been made this time
in the interim budget is too much of a profligacy for the sake
of creating disguised unemployment and assets which
perennially gets washed away by rain.
If archaic laws that govern our agriculture
and competitive populism has kept
development out of bound for the rural
India and made sure that improvement in
purchasing power and quality life would
never be possible by staying in the villages,
it is the quality of education that is
imparted by the state owned primary
schools in rural India that creates the
lasting difference between the quality of a
convent educated kid in urban India and a
state-educated kid of rural India. Doing away with the
pass-fail system and inability to replace it with an appropriate
grading policy tend to create a comfort zone among the rural
lot who are still not aware about the intense competition that
await them in the real world. Thus a student who has never
faced peer pressure is suddenly made to give a secondary
exam and face the same kind of questions for which the urban
lot have been preparing for ages. Conventional education is
just one aspect of the real development of a child. In urban
places it is ably complimented by several other types of
audio-visual methods as well as sports and development of
competitive spirit, out-knowledge and overall personality.
Since these might not be possible in rural India, it becomes all
the more imperative that there is no compromise at least with
Rural India doesn't
need subsidies,
employment
guarantee or
amnesty from
governments at
centre and states
the conventional education being imparted by schools.
Unfortunately, merely for the sake of increasing the percentage
of people who can read or write, India is badly compromising
with what being imparted in the name of education in
the state run primary schooling system. When the rural kids
grow up and head for the cities for further education, it is then
they realise for the first time how unprepared they are to face
the competitive world and their urban counterparts. Most thus
prefer to come back into the cocoon of comfort zone in their
native places. And thus the rural-urban divide prevails. In fact
the irony is that today a substantial portion of the rural lot
generally prefer to spend money, in spite of abject poverty, to
send their children to private schools than to let them rot in
government schools. Rural India doesn’t need subsidies,
employment guarantee or amnesty from the governments at
the centre and the states. It doesn’t even need crocodile tears
from the city based page three type social activists. Sixty years
of all of these didn’t benefit them anyway. What it needs in
contrast is a treatment at par with the cities. If the cities can
have quality education system why can’t
India make sure that the same can be
delivered in villages too? Why can’t the
primary schools in some of the remotest
corners of Jharkhand or Chhattisgarh be
at par with the Kendriya Vidyalayas? Why
can’t each health centre of rural India be
at par with the clinics of Apollo or Max?
Why can’t each cluster of villages or say
each block have its own college imparting
both technical and non-technical courses?
Why can’t the rural roads be at par with that of the cities?
Why can’t the rural folk have access to seamless banking the
way it is available in urban India? Why is it that when prices of
most of the consumer durable and FMCG goods can be
decided by the companies and the market competition , the
prices of the agricultural produce should be so stringently
dictated by the state governments through the archaic Agriculture
Produce Market Committee or the APMC? Unfortunately
much of the rural urban divide can be done away with if
industrialisation carries its march from urban to rural India.
If industrialisation starts in rural India, it would not only help
in adding value to the farm produce but also help in igniting
the much needed rural economy and improve the rural
purchasing power. For long the rural produce have desper-
30 THE IIPM THINK TANK

A GROWTH PARADIGM
ately tried to seek markets in urban India and had no option
but to bypass much of rural India as people there would not be
having the requisite purchasing power. What India needs is a
national market for agricultural produce. What India needs is
to make sure that food grains stop rotting in the Food Corporation
of India godowns (FCI) while 400 million 14 Indian got
to bed malnourished and half fed every night.
Urbanisation of rural India in the form of making all civic
amenities available would not only just improve India’s dismal
ranking in the Human Development Index of UNDP (India
ranked 128 th in 2007-08 report) but would also make sure that
the mass migration of rural folks into urban India in search of
livelihood come to an end. Interestingly most of the urban
poor of India do have land holdings in their own native places
where they would be most willing to go back if economic
activity is ignited there. And thus urban slums might just
vanish one day if urban slum dwellers find that their income
back in their native place reaches somewhere near to their
urban income. In fact Indian governments have this unique
tendency to follow private investments to a place. Wherever
private investments come up, investments by the government
for improving social and physical infrastructure in those
places follow. Gurgaon is a sure case in point. All the more
reason as to why more of private investments are needed in
rural India.
Given the amount of money that is being spent every year
on rural development, fund should essentially not be the
prime obstacle if one were to develop city level amenities in
rural India. What is needed badly is the intent and a better
delivery of the services by the government. So, if a day arrives
when people from urban India go to a not-so-urban place of
India for a higher education course simply because that
particular college in one sub division of rural India has
emerged as a centre of excellence, or if we can trust India with
its glass of water without any apprehension of any water borne
disease, if that day arrives when the likes of Mohan Bhargava
need not travel back to his native place in rural India in a
caravan, that day we can presume that India’s real development
has just begun. And if that day possibly comes, the
incredible Indian consumer market which today (for most of
the products is not anywhere beyond the thousand odd cities
and townships), would be in the threshold of the six lakh odd
villages. And given the exponential demand that it would
generate, India might never get into recession even if the
whole world gets into one. Such would be the power of the
incredible market then that it would take the whole world to
cater to that market. Starvation, deprivation, discrimination
and divides would be a passé then.
If India endeavours to ever realise fairy tale future that
Goldman Sachs has woven for it in their reports on the BRIC
economies, where it has stated that India has the potential to
be among the top three economies of the world (with a GDP
of $38.2 trillion by 2050), then it has to realize that only an all
inclusive growth can give it that firepower to reach that goal.
And with it would come the long awaited dream to create that
ideal state, which would be run by institutions and not by
individuals where true socialism would replace petty populism
and where rural would no more be the place which is devoid of
everything that are taken for granted in cities.
Endnotes and Additional Thinking
1 7.8 lakh deaths annually - www.indiaenvironmentportal.org.
in
2 Hindu Business Line, 25 th May 2007
3 Indian economy became bankrupt in 1991
4 The British Empire came to India and consolidated its
business through the East India Company
5 Reports of Goldman Sachs namely, 'Dreaming with BRICs:
The Path to 2050' and 'BRICs and Beyond'
6 India's rank in UNDP Human Development Report 2008
was a dismal 128
7 As per IMF report, US banks suffered a loss of $2.7 trillion
due to sub prime crisis
8 Over 1 million tonne of food grains damaged in FCI
godowns in last one decade as per PTI
9 Website- indiatogether.org/agriculture/
10 As per NASSCOM Report, India's revenue from software
industry and outsourcing pegged at $71 billion for the
current fiscal
11 As per the National Portal of India,
12 Outlay of the National Rural Health Mission in the interim
Budget of 2009-10
13 In the Union Budget of 2008-09, Rs 70,000 crore of farm
loan was waived off.
14 Report of International Food Policy Research Institute
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organisation.)
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31

M ANAGEMENT OF DEVELOPMENT
Problem of Water Pollution In
India : A Possible Solution
32 THE IIPM THINK TANK

G OLDEN DROP
Arpita Khanna
Centre for International Trade and
Development, School of International
Studies, Jawaharlal Nehru University
I. Introduction
Comprising over 70% of Earth’s surface, water is undoubtedly
the most precious natural resource that exists on our
planet. Without this seemingly invaluable compound
comprised of Hydrogen and Oxygen, life on Earth would
be non existent. Although we as humans recognize the
fact, we disregard it by polluting our rivers, lakes and
oceans. This has many adverse consequences. In order to
combat water pollution, we must understand the sources
and the problems caused.
Water pollution occurs when the body of water is adversely
affected due to the addition of large amounts of
materials to the water. There are two sources of water
pollution: point source and non point source. Point source
of pollution occurs when harmful substances are emitted
directly into a body of water. Example: a pipe from an
industrial facility discharging effluents directly into a river.
Non point source of pollution occurs when pollutants are
delivered indirectly through transport or environmental
change. Example: when fertilizer from a farm field is
carried into a stream by rain. The technology exists for
point sources of pollution to be monitored and regulated.
Non point sources are much more difficult to control.
Pollution arising from non point sources accounts for a
majority of the contaminants in streams and lakes.
Domestic wastes, industrial, effluents, agricultural
wastes, etc are the major pollutants entering our water
bodies. They contain chemicals and organic compounds
which enter the bodies of many aquatic animals. Most of
the problems occur due to the lack of proper sanitation
facilities and waste disposal system.
The water pollutants are responsible for decreasing the
self-purifying ability of the water bodies. Water clarity is
affected and the water bodies become shallower. Also, the
rate of photosynthesis is decreased, killing many aquatic
plants. Water pollution such leads to water borne diseases
like cholera, typhoid, diarrhea, hepatitis, jaundice, dysentery,
etc. It can even render the water unfit for industrial or
agricultural purposes, let alone for drinking.
Therefore, it can be concluded that the problems associated
with water pollution have the capabilities to disrupt
life on the planet to a great extent. If we don’t save our
water resources, then we can soon bid them goodbye.
Therefore, it is very important to arrest the problem before
it gets too late.
II. Water Pollution in India: Facts and Figures
Today India stands as the second fastest growing economy
in the world. During the past few decades Indian industries
have registered a quantum jump, which has contributed
to high economic growth. However, this has given rise
to severe environment pollution. Consequently, water
quality is seriously affected which is far lower in comparison
to the international standards. In India, 1.03 crore
people die annually of which, nearly 7.5 % of deaths (7.8
lakh deaths) are due to water, sanitation and hygiene.
Diarrhoeal diseases make up a chunk of this number.
Intestinal infections and water borne diseases like malaria,
dengue etc together cause nearly 19,000 deaths.
The Environmental sustainability index (ESI) 1 , 2007,
for Indian states indicates that most of the larger and
higher growth states with concentration of industrial and
Table 1: Water Quality Status of Various States in
India
States Desired Class Existing Class
Haryana C D
Himachal Pradesh A C
Karnataka C E
Kerala C E
Madhya Pradesh C E
Manipur C B
Meghalaya C D
Pondicherry C D
Punjab C D
Rajasthan C C
Uttar Pradesh C D
Gujarat C D
Source: Water quality status and statistics 1998, Central Pollution
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M ANAGEMENT OF DEVELOPMENT
Figure 1: State Wise Habitations Affected by the Quality of Water
States
Arunachal
Uttar Pradesh
Rajasthan
Madhya Pradesh
Haryana
Andhra Pradesh
0 10000 20000 30000 40000 50000 60000 70000
Habitations affected
Habitants affected in 2006
Habitants affected in 2004
Source: Indiastat
constant while for some other, it declined considerably.
This shows that the attention has been paid to the
control of pollution, both in the political as well as
academic spheres. However, much remains to be
done to overcome this deadly problem of water
pollution. A study conducted by Brandon and
Hammon(1995) gave a nation wide cost of water
pollution. As per the study, the total cost of pollution
stands at 4.53 %, with surface water pollution
accounting for 59% 2 . Thus, India cannot afford not
to deal with water pollution. But now the question is
how to deal with the problem. Does our literature
suggest any mechanisms that can deal with the
problem, without substantial cost being incurred?
agricultural activities featured at the bottom of ranking.
While, the states which are relatively greener fared better
in the ranking. Industrialization has led to pollution of
water bodies in various areas. There
are sufficient evidences available
related with mismanagement of
industrial wastes. The surface water is
the main source of industries for waste
disposal. It is found that almost all
rivers are polluted in most of the
stretches by some of the industry or
the other. This has resulted in acute
and chronic morbidity among people.
In India, water is classified into five
classes based on the quality: A, B, C,
D, E. Class A is the clean water quality, Class B is the
slightly polluted water quality, Class C is the moderately
polluted water quality, Class D is the heavily polluted
water quality and Class E indicates severe pollution. Table
1 shows state wise water quality status of Lakes, Canals,
Creeks, Ponds, Drains and Tanks.
Table 1 shows that in almost all the states, the existing
class of water quality is below the desired class. Therefore,
it can be concluded that pollution is exceeding the standards
in many places. Also, looking at Figure 1, we see
that Habitations affected with the quality of water is not
only high but has increased over the years, for most states.
However, for some states, the figures have remained
Government has
basically three basic
choices: non market
policy instruments,
market based
instruments and
any combination
of these two
III. Mechanisms to Deal with the Problem
One mechanism available is government intervention. The
government has three basic choices: non market policy
instruments, market based instruments
and combination of two. Non
market policy instruments include
command and control instruments
such as fines, penalties, threats of
legal action for closure etc. These
instruments do not provide any
incentives to polluters to choose cost
minimizing pollution abatement
technologies and hence, are not
efficient.
Market based instruments usually
consists of pollution taxes, marketable pollution permits or
hybrid instruments. These instruments are termed as ‘First
best instruments’ because they guarantee market efficiency
even in the presence of environmental externalities.
The choice between pollution taxes and marketable
permits depends both on the efficacy in achieving target
level of emissions as well as on the relative size of welfare
losses they produce ( Baumol and Oates, 1988). There may
however be cases where it is necessary to use a mixture of
both taxes and permits, instead of either one of them
(Roberts and Spence, 1976).
The optimal control of pollution through taxes or
pollution permits requires both the pollution abatement
34 THE IIPM THINK TANK

G OLDEN DROP
cost function for generators and
the damage function of receivers
of pollution to be convex. Given
this condition, tax on generators
equivalent to sum of marginal
damages to receiver, will provide
incentives to generators for
spending on pollution abatement,
until the MC of abatement is
equal to marginal damages
received by affected parties
( Baumol, 1972, Murty and
Nayak, 1982).
However, some empirical
studies about the cost of the
technological processes used for
water pollution abatement
confirm the presence of increasing
returns to scale with respect
to pollution loads, so that abatement
cost functions are non
convex. (Dasgupta and Murty 1985,
Batstone et al, 1989, Mehta, Mundle and
Sankar, 1993, Murty and James, 1996).
In other words, there is decreasing
marginal cost in water pollution
abatement, the presence of which will
make pollution tax or marketable
permits ineffective. They will not
provide any incentive to the pollution
firm to adopt pollution abatement technologies or spend
something on pollution abatement.
Therefore, the incentives based on governmental
instruments like taxes and marketable pollution permits
fail to control water pollution. Hence, despite its inefficiency,
government does not have any alternate but to
adopt command and control mechanisms. This is precisely
why in India, we see command and control mechanisms
instead of market based instruments.
Thus, it can be concluded that market based instruments,
despite their efficiency cannot be adopted. The
command and control mechanisms can be adopted,
however, are inefficient. Therefore, we need to look for
some alternate mechanism.
Incentives based
on governmental
instruments, taxes
and marketable
pollution permits,
will fail to control
water pollution
IV. Alternate Mechanisms
The waste released by these
factories is an externality. It does
not monetarily affect the producer
of goods, however, has a very
strong influence on the standard
of living of the society as a whole.
The notion of externality is linked
with the non existence of markets.
It occurs when a decentralized
economy has insufficient incentives
to create a potential market
in some commodity and where
market equilibrium is pareto
inefficient.
One mechanism to deal with
the problem of externality was
given by Coase in 1960. This
mechanism holds good even with
increasing returns to scale in
pollution abatement, while
pollution tax is ineffective in such a
situation. According to Coase, with
clear property rights and minimal
transaction costs, the parties to an
externality can create the market in an
externality, leading to a pareto efficient
solution. Also, under certain conditions,
the resource allocation result of coasian
bargaining will be same regardless of
which party is given right to the environmental resource.
Coasian bargaining approach looks very attractive. An
economy may be able to move towards pareto efficient
allocation without pervasive government regulation.
However, what remains to be seen is whether we can apply
the coasian approach to the water pollution problems
faced by people in India. For this, let us consider a following
case study.
V. A Case Study
Patancheru in Andhra Pradesh, became a hub for largely
unregulated chemical and drug factories in the 1980s,
creating what is described as an “ecological sacrifice zone”
with its pharmaceutical waste.
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M ANAGEMENT OF DEVELOPMENT
A recent report by Times of India shows that these drug
factories, have been releasing a mix of powerful antibiotics
into a stream used for drinking water, fishing and as a
water source for cattle. Today, its water is the most drug
polluted in the World. As per the researchers, it is the
highest level of pharmaceuticals ever detected in the
environment. The poor in Andhra are consuming an array
of chemicals that may be harmful and can lead to proliferation
of drug resistant bacteria. Higher incidence of
cancer has already been noticed. Other biological aberrations
are also anticipated.
VI. Application of Coase Theorem
The first important condition of the
Coase theorem is the existence of well
defined property rights. Establishment of
enforceable property rights makes good
excludable and thus allow a market
system to operate efficiently. As per
Coase, under some conditions, it makes
no difference to the efficiency whether
polluter has a right or the victim (although
it will make a huge deal of a
difference to each of the two parties).
Since the right to pollute is a property
right that has value, if trade is allowed
in those rights, efficiency would prevail
no matter how they were initially
allocated. If the right is worth more to a
victim than the polluter, the victim will
end up with a right no matter how it is
initially distributed. Therefore, when
there are no impediments to buying and selling property
rights, initial distribution of rights does not matter. However,
when there are impediments, initial distributions
does matter.
Before we move on to discussing whether we would face
any impediments or costs in transacting these rights, the
attention needs to be drawn on the fact that initial distribution
of rights does not matter to efficiency, however, it
does matter to equity. Rights can be valuable. Resting
somebody with rights is like giving them money and
resources. But in this paper, we ignore the distributional
effects and simply concentrate our attention on whether
Establishment
of enforceable
property rights
makes good
excludable and
allow a market to
operate efficiently
efficiency can be attained in the region so badly affected
by water pollution.
Coasian solution assumes minimum transaction cost.
This assumption implies that the damages due to pollution
caused by industry can easily be measured, compensation
costlessly, negotiated with all affected people and payments
can be enforced. In this case, we have 80 drug
factories inflicting uncompensated costs on the large
number of people. Therefore, we don’t expect bargaining
to be easy. A significant transaction cost is likely. Therefore,
it does matter where the rights are initially vested.
If the victims are given the right to environmental
resource, the factories would have to compensate them for
any damage caused. There is a possibility
that the political power of polluters is
such that it is impossible to force them to
reduce pollution and get them to pay for
it, resulting in a stalemate that can last
for years. However, we still can expect
some lump sum compensation.
On the other hand, if the property
rights are given to the polluter, the
victims would have to get together to pay
the factories. The problems of reaching
the agreement among people surrounding
the area are significant. The basic
problem is of free riding. Individuals
will tend to act as free riders in negotiations,
undermining the negotiation
themselves. In such cases, individuals
would treat the outcome of negotiations
as beyond their control and therefore,
would be unwilling to bear transaction cost. Also, we can
face a problem of truthful revelation of demand. This is
because the cost of damage due to pollution is private
information to individuals. Therefore, it might become
very difficult to reach a coasian solution when rights are
vested with the factories.
By the above logic, property rights should be given to the
victims. Now, the factories would have to look at the cost
of damage and see if it exceeds the cost of pollution
control. Once again, factories need to ask citizens what
their damage is, however, there are incentives to overstate
this damage, since compensation may be based on the
36 THE IIPM THINK TANK

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response. In this case, result would be installation of
common effluent treatment plant. However, suppose
damages are more modest and it is optimal to compensate.
Then the tendency to overstate the damage would lead to
excessive compensation or overzealous pollution control
measures. The problem arises because of non rival aspect
of pollution. This leads to free riding and difficulty in
striking bargains.
Now having established the property rights, it is very
important to make bargaining possible between the
polluters and victims to achieve coase like solutions. The
coase theorem is the most effective when two individual
firms or people are bargaining. We do not have any
problem of free riding or negotiating cost.
However, many externalities involve
substantial numbers of participants either
generating the externality or receiving it
or both. Under these conditions, transactions
costs of aggregating the interest of
all affected parties, negotiating an
optimal abatement level and then enforcing
the market agreement will preclude
a purely private bargain, even if allocation
of rights is clear.
Generally, it becomes difficult to
bring the affected parties together as
the impact of water pollution is uniformly
distributed and is not immediate.
Example: Chipko movement, the large
scale movement to resist the destruction
of forest of 1970s and 80s, was possible
only because the impact was immediate.
Also, many externalities are intertemporal, and future
generations are simply not present to make bargains, which
preclude the coasian solution between private parties to
the externality.
However, we do not confront some of the problems
mentioned above like realization of impact in the case of
Patancheru. This area has been so severely impacted, that
people do realize that it is in their interest to get together
and look for possible ways to overcome the problem. This
also becomes easy given the publicity and media attention
this issue has received.
Therefore, high transaction costs of bargaining and
The organization
of affected people
into a community
depends upon
their perception of
damages from the
pollution
paying compensation can be reduced to manageable level,
if the affected parties and the factories can organize
themselves into groups/communities. These groups, within
themselves, can elect representatives who would bargain
with the opposite party. The community of factories would
either pay the compensation or would set up Common
Effluent Treatment Plant themselves. The community of
affected parties may threaten the factories by legal action
or by setting up a treatment plant and collecting the cost
from polluters. The bargaining would result in the adoption
of Common Effluent Treatment plant by either party,
which is clearly what is happening in Andhra Pradesh 3 .
Generally, getting the factories together into a community
would not face as many problems as
getting affected parties together. This is
possible only in the presence of an
intervention by a political party. However,
given the conditions prevailing in
Patancheru, wherein local activists and
environmentalists have started ‘Anti
Pollution Committee’, affected people
have made representation to the government
and industry, threatened factories
with blockages, filed court cases against
the factories, formation of communities
would not be a problem. Also, given the
rising damages from water pollution,
NGOs are playing a very important role
in increasing awareness of households
about these damages. Local politicians
have realized that it is in their interest to
fight against pollution.
VII. Possible Constraints and Policy Implications
What we saw above was the cosean bargaining with
positive transaction cost. The transaction costs include
cost of disseminating information about damages among
the people, forming them into a community, the cost of
public litigation, legal actions against factories etc. The
organization of affected people into a community depends
upon their perception of damages. If damages from the
pollution are fully perceived by the public and they are
substantive enough to justify transaction costs of forming a
coalition and bargaining, collective action follows. Also,
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M ANAGEMENT OF DEVELOPMENT
we need to keep in mind that the formation of groups or
community is feasible only if the effects of pollution are
not dispersed geographically, and are confined to local
communities or settlements. Otherwise, transaction costs
or costs of managing a group would be very high.
For efficient bargaining, it is important that the
information is complete. When there are information
asymmetries, the parties will have an incentive to
cheat and reveal false information, thereby making
bargaining inefficient. Therefore, it is important for the
government to induce people to reveal true information
through incentive scheme and render participation to that
scheme compulsory.
All the parties in the coasean framework should be in a
position to negotiate. However, as mentioned before, many
externalities are inter temporal in nature. The future
generation bear the cost of externality and it is not clear
how their interest may be accounted for in the bargaining
process. Therefore, it becomes important for the government
to become an advocate of the missing parties.
A situation of non cooperation can be faced among
affected people. The problem arises for
sharing the transaction cost. Given the
output of collective action is the power
of local communities to deal with
industry through legal action or other
means of controlling water pollution,
each affected people would want to
enjoy the fruit without contributing to
the cost. This stalemate of non cooperation
can be broken by outside
agency like NGO by educating the
people about the damages from water pollution and
benefits that can be obtained from cooperation.
It is in the interest of affected parties, factories and
government to cooperate in management of an environmental
externality, thus making possible contractual
arrangements. However, there are various factors that
constraint the agent’s willingness and the ability to
participate.
Firstly, we have inadequate and ambiguous environmental
law protecting the rights of affected parties to a
clean environment. Secondly, public is generally not
aware about the magnitude of damages to the community
The future
generations
should not be
deprived of
something that
rightly belongs
to them too
from pollution and the existence of environmental law.
Thirdly, resources are not available to local communities
to organize themselves as politically active groups for
taking recourse to legal action against polluters. Fourthly,
we need to have laws in place to enforce cost sharing
agreements among factories for setting up pollution
control plants.
Government can play an important role in removing
some or all of constraints. The legislatures can enact
environmental laws and create legal institutions to
protect the rights of citizens to a clean environment.
Public awareness about the magnitude of damages from
pollution can be promoted by creating institutions for
environmental education. NGOs and civil society organization
can also play a very important role in spreading
awareness. It would be fruitful to give some power to the
local communities like a say in the spheres of licensing,
fixation of local environmental quality, monitoring and
enforcement of environmental regulation. Their participation
should be promoted in the environmental management.
Also, the extent to which these communities can
influence factories to undertake
pollution abatement depends, among
other things, the degree of political
organizations, education and environmental
awareness. As mentioned
above, the desired outcome can be
attained only in the presence of political
intervention. The vested interests of
political parties have a very important
bearing on the policies introduced and
initiatives taken in the country. We can
make politicians accountable for the performance of
community in bargaining with industries.
Like we have environment sustainability index, wherein
we rank states according to their performances in managing
the natural resource stock, we can have an index
wherein we rank the performances of these communities
headed by different political leaders.
This index should be given enough publicity and media
attention, especially at the time of elections. This would
promote competition among political leaders and contribute
to their efficiency in attaining optimal pollution
levels in the country.
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VIII. Conclusions
We saw that the Coasean assumption of zero transaction
cost does not hold in real life. The transaction costs of
dealing with the problem of environment pollution
abatement is generally positive. The high transaction cost
can be reduced to manageable levels by forming groups.
The bargaining between a coalition of polluters and a
grand coalition of affected parties can result in optimal
control of environmental pollution. In the cases, like that
of Patancheru, forming people into groups with the help of
intervention by political parties, NGOs, local organizations
etc, can easily be attained. This is because the
impact of the pollution is immediate and alarming. There
are places where the problem prevails, however, people do
not realize as the impact is not immediate and is uniformly
distributed. Therefore, it is very important to spread
awareness among the people about the environmental
problems and the damages caused. We all need to collectively
work to prevent further pollution.
Nature and man must work together. If we won’t care
about nature, nature too won’t bother to nurture us.
As the well known saying goes, “We do not inherit the
world from our parents. We borrow it from our children”.
Thus, the most important reason to save this important
component of the world is that the future generations
should not be deprived of something that rightly belongs
to them too.
Endnotes
1
ESI measures the state of environment along multiple
dimensions, aggregates it into a single index that is
interpretable and comparable across all the states. A
state with higher ESI ranking means it has managed its
natural resource stock judiciously. On the contrary, a
state with lower ESI indicates that it has depleted its
stock of natural resources.
2
The cost provided was deduced from the overall figures
on diarrhoeal diseases occurrence in the country, and
many other significant costs were put aside. Therefore,
the above figure is an underestimation of the actual
cost of pollution.
3
The legal action through the collected efforts of
affected people has ultimately forced the factories in
the industrial estates of Patancheru to have effluent
treatment plant. Also, government is playing a catalytic
role in promoting the use of ETPs in industrial estates.
References and Additional Thinking
• M.N. Murty, A.J.James, Smita Misra (1999) “Economies
of Water Pollution: The Indian Experience”,
Oxford University Press.
• Baumol, W.J and W.E. Oates(1988): The Theory of
Environmental Policy, 2 nd Edition, Cambridge University
Press, Cambridge.
• Roberts, M.J. and M. Spence (1976): ‘ Effluent Charges
and Licences under Uncertainity’, Journal of Public
Economics.
• Baumol, W.J. (1972): ‘On taxation and control of
Externalities’, American Economic Review, vol 42,
no.3, pp 307-22.
• Murty, M.N. and P.B.Nayak(1982):’ Externality Abatement
Technologies, Pigouvian Taxes and Property
Rights’, Indian Economic Review, vol. 17, pp 1-26
• Dagupta, A.K. and M.N.Murty(1985): ‘Economic
Evaluation of Water Pollution Abatement’: A case
study of Paper and Pulp Industry in India’, Indian
Economic Review, vol 20, no.2, pp 231-67.
• Batstone et al(1989): ‘ The Safe Disposal of Hazardous
Wastes’, vol II, World Bank technical paper no.90.
• Mehta.S, S.Mundel and U.Sankar(1993): Incentives
and Regulations for Pollution Abatement with an
Application to Waste Water Treatment, NIPFP, New
Delhi.
• Coase, R.H.(1960): ‘ The Problem of Social Cost’, The
Journal of Law and Economics, vol III, pp 1-44.
• Becker, G.S.(1983): ‘A theory of Competition among
Pressure Groups for Political Influence’, Quarterly
Journal of Economics, vol 98, pp 371-400
• Stigler, G.J.(1989): ‘Two Notes on Coase Theorem’,
Yale Law Journal, vol 99, pp 631-3.
• Murty, M.N. and U.R. Prasad(1977): ‘ Emission
Reduction and Influence of Local Communities in
India, mimeo, Institute of Economic Growth, Delhi.
• Charles Kolstad, ‘Environmental Economics’, Oxford
University Press.
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organisation).
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C. Ramachandraiah
Associate Professor,
Centre for Economic and Social Studies (CESS), Hyderabad
Introduction
Out of the total population of 1027 million in India as per
the 2001 census, about 742 million (72.2%) live in rural areas
and 285 million (27.8%) in urban areas. The decadal growth
of population in rural and urban areas during the last decade
was 17.9% and 31.2% respectively. The census shows that
there are 4,378 urban centers. The 35 million-plus cities
account for about 39% of total urban population. There are
358 cities with a population in the range of one lakh to one
million, 401 towns in the range of 50,000 to one lakh, and a
large number of small towns (3,574) with below 50,000
population. From 285 million in 2001 the urban population
in India is estimated to grow to 540 million by 2021. The
percentage of urban population is expected to increase to
around 37% by the year 2021. About 60-70 large cities having
a population of one million or more will play a crucial role in
the future demographic and economic growth in the country
(MUD, 2008).
Travel within the city is essential to actualise the economic
and cultural potential of a place. People need to travel for
work, for education, for socialisation and for procuring the
needs of daily life. The choices of work, residence, consumption
and socialization will increase if more areas of the city
are within easy reach of the people. Increase in either the
time or money required for such travel proportionately
reduces the citizens’ ability to participate in civic and
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Urban Transport in India:
A Contested Issue
economic activities and thus impacts adversely on them
(EPW, 2009). Ability to travel easily at a low cost and in a
shorter time has several benefits for the citizens and the city
in terms of saving time, energy, money, reduced fuel consumption,
less vehicular pollution, less noise and a overall
better quality of life. Lack of efficient mass public transport
systems and a phenomenal growth of private vehicles in
Indian cities have resulted in congestion, increased travel
times, rising pollution levels, noise, higher stress levels etc.
making commuting in a city a nightmarish experience to
most citizens in everyday life.
In the last decade or so, the governments have responded
only in an ad hoc manner by constructing flyovers or widening
roads that have facilitated only
movement of vehicles rather than masses
of people. Putting comprehensive and
integrated public transport systems in
place has never been on the agenda. As a
result, the people using public transport
buses, pedestrians and cyclists have been
marginalized on the roads of Indian
cities. After Delhi metro rail was inaugurated
in 2002, metro rail projects have
come to the centre stage of urban transport
in several cities. Simultaneously, bus rapid transit
systems (BRTS) have also been planned (and introduced in
some) in several cities. While the metro rail is a highly
capital intensive technocratic model involving construction
of either underground tunnels or elevated corridors, the
BRTS is a low cost option and is a more equitous and
eco-friendly concept. It involves reallocation of the road
space for different users (buses, pedestrians, cyclists, and
others). This system is in operation in over 35 cities in the
world. With the introduction of BRTS in a small corridor in
Delhi, and the massive media campaign against it, the issue
of the options of public transport and the rights of different
As opposed to
Metro Rail, the
BRTS is relatively,
a low cost option
and is a more
equitous and ecofriendly
concept
citizen groups for access to the road has come to the centre
stage of debate in the country. This debate acquires significance
because of the overt preferences shown by different
state governments for the capital intensive metro rail
projects over the BRTS.
Neglect of Public Transport and NMT
The city administrators, state and central governments have
grossly neglected public transport which has impacted the
poor and low-income people the most. Buses are the main
backbone of public transport in Indian cities except in
Mumbai and Chennai where local trains play a crucial role
(Delhi and Kolkata are also served by metro rails to a small
extent). Yet, despite a growing demand
for commuting, the fleet sizes in most of
the state transport undertakings (STUs)
have declined (Table 1). In terms of
quality of travel comfort, the public
transport system buses are nothing but
“benches and a metal roof stuck on a
truck chassis”. It is no surprise then that
the citizens have increasingly turned
towards private vehicles and increasing
their number phenomenally. While there
were five private vehicles for each bus in India in 1951, today
there are 80 private vehicles for each bus (EPW, 2009).
For instance, the total number of cars in the 23 metropolitan
cities was 3.6 million as on 31 st March 2004. The number
of two-wheelers was 14.9 million. Delhi had about 1.3 million
cars. During 2003-04, Delhi added about 263 cars and 433
two-wheelers per day (Sivaramkrishnan, 2009). A study
sponsored by the ministry of urban development predicts a
declining share of public transport from 16% in 2007 to 15%
in 2011, 11% in 2021 and 9% in 2031. The decline may be
even worse in the mega cities from 46% in 2007 to 31% in
2021 along with a decline in the average journey speeds
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Table 1: Growth of Bus Fleet of the State Transport Undertakings
City 2000 2001 2002 2003 2004 2005 2006 2007 Annual
Average
Growth
Rate(%)
-(2000-07)
Mumbai 3269 3155 3075 3075 3074 3069 3075 3081 -0.8
Delhi 4916 4330 4466 2496 2905 3010 3143 2814 -7.7
Chennai 2353 2314 2211 2270 2251 2187 2176 2087 -1.7
Kolkata 814 821 856 800 769 707 659 635 -3.5
Ahmedabad 752 729 630 410 382 371 545 727 -0.5
Pune 657 664 647 662 697 764 784 752 1.9
Chandigarh 393 395 404 - - - 405 404 0.4
Bangalore 2110 2250 2446 2656 3062 3533 3802 3967 9.4
Source: MUD (2008)
(MUD, 2006).
In cities with better public transport services the transport
indices such as congestion index and safety index have
performed better. With the decline of the environment
friendly non-motorised transport (NMT),
our cities are fast losing sustainability.
About 40% of trips in cities these days are
by NMT and 25% of all fatal accidents
involve this category. Yet, there has been
no focus on the NMT. On a walkability
index, on a scale of four, most Indian
cities scored less than one, with Chandigarh
coming on top with 0.91. Hyderabad’s
score was 0.68 while Bangalore was
still lower at 0.63 whereas the bigger cities
like Delhi, Mumbai and Kolkata scored above 0.80 (MUD,
2008). The national urban transport policy (NUTP) admits
that the “use of cheaper non-motorised modes like cycling
and walking has become increasingly risky, since these
modes have to share the same right of way with motorized
modes”. The policy also noted that the number of persons
killed in road accidents has also gone up from 28,400 to over
80,000 during 1981-2001. The poor were more severely
affected as many of those killed or injured tend to be cyclists,
pedestrians or pavement dwellers (GOI, 2006). In recent
years the cities around the world have started to include
walking and cycling as integral parts of the transport modes.
With the decline
of the eco-friendly
non-motorised
transport,
our cities are
fast losing
sustainability
Walking is not only an inherent mode of all other modes but
is by far “the most important means for achieving urbanity in
public spaces” (TOI, 2008).
More on Metro Rails - Less on
BRTS
Since the opening up of Delhi metro rail
in late 2002, similar projects have been
pushed in several other cities. A similar
project is under construction in Bangalore.
Proposals for metro rails are in
different stages in Mumbai (with work in
progress in phase I), Chennai, Hyderabad,
Pune, Ahmedabad etc. Going by the
way these project proposals have been
finalized in some of these cities, it appears very much clear
that big construction companies like Reliance, NCC,
Maytas, GMR, GVK, Gammon etc., together with international
construction companies and railway coach manufacturers
are behind pushing such projects. Finalisation and
implementation of these projects are characterized by
absence of transparency, lack of public debate, and (in most
cases) non-involvement of local experts whether such
projects are owned by the public sector (as in Delhi and
Bangalore) or are proposed to be taken up under public
private partnership (PPP) as in the case of Hyderabad. In
none of these cities, the project proposals have been made
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available to the public to facilitate a comprehensive debate.
For a detailed account of how the Hyderabad Metro was
pushed without any public debate, how its concession
agreement is much against public interest and is in favour of
the Satyam-linked Maytas company, and how the whole
project was designed on real estate plans of Maytas, see
Ramachandraiah (2009).
Residents are protesting in Bangalore against taking over
of parts of Lalbagh and Lakshman Rao parks for the metro
rail, and are demanding realignment of the stretch. Though
taken up under public sector, several aspects of the project
are not known to the public. Thousands of people in Janata
Colony, Sanjay Nagar, Ekta nagar, Azad Compund, Gandhi
Nagar & KD Compound areas in Mumbai are protesting
against attempts at forced displacement for the phase II of
the metro. The residents are demanding that the Mumbai
metro should go underground, instead of elevated corridor,
in the congested areas between JVPD and Bandra in the
Charkop-Mankhurd route. A similar demand to go underground
in several colonies in Delhi metro phase-II was made
by residents and they even approached the Delhi High
Court. In all instances, the authorities
have reflected an adamant attitude and
have only one answer – that these aspects
have already been decided and will not be
changed now. Some of the serious
environmental problems being faced by
the people in the congested areas along
the elevated metro corridor in Delhi
(phase-I) are – high noise, vibrations to
buildings and intrusion of privacy of the
residents.
There seem to be a pattern to such mega projects in the
world – pushing without public debate. Based on international
evidence it was noted that “...the project promoters
often avoid and violate established practices of good governance,
transparency and participation in political and administrative
decision-making, either out of ignorance or because
they see such practices as counterproductive to getting
projects started” and “...citizens are kept at a substantial
distance from megaproject decision-making” (Flyvbjerg et
al., 2003). The strategy of inflating the benefits and depressing
the costs employed by the big project promoters to get
the projects sanctioned have been exposed and questioned
Global cities like
Tokyo, New York,
Paris and London
have exceedingly
large CBDs
with more than
7,50,000 jobs
by experts in the transport sector. After analyzing a sample
of 258 transportation infrastructure projects in different
geographical regions, and historical periods, it is found that
the cost estimates used to decide whether such projects
should be built are “highly and systematically misleading.
Underestimation cannot be explained by error and is best
explained by strategic misrepresentation, that is, lying. The
policy implications are clear: legislators, administrators,
investors, media representatives, and members of the public
who value honest numbers should not trust cost estimates
and cost-benefit analyses produced by project promoters and
their analysts” (Flyvbjerg et al, 2002).
While the metro rails are very expensive infrastructure
projects and the middle class has tended to like them (as
seems in Delhi) because of the “global image” such projects
bring to the cities, their utility to serve public transport has
not been encouraging and this aspect cannot be ignored
while investing huge sums of public money. The report of the
working group for the 11 th five year plan notes that the metro
in Delhi is operating at about 20% of its projected capacity
for December 2005 (4-5 lakh passengers per day vs. projection
of 21.8 lakh passengers per day) and
the Kolkata metro is operating at 10%
capacity. The report further states that
the cities like Tokyo, New York, Paris and
London have exceedingly large central
business districts (CBDs) with more than
7,50,000 jobs. No other urbanised area in
the developed countries has a CBD of
more than four lakh jobs. Metro rails are
successful in such situations. Indian cities
are developing on the peripheries and are
polynuclear. Thus they cannot feed mass transit systems of
more than 30,000 pphpd (persons per hour per direction)
capacity (GOI, 2007). For a discussion on the mythologies of
metro rails, suitability of BRTS and future of urban transport
in Indian cities, see Mohan (2008).
Plans for BRTS have also been prepared for Delhi, Pune,
Ahmedabad, Jaipur, Indore, Visakhapatnam, Vijayawada
etc. It was launched in Delhi in April 2008 and has generated
a lot of controversy due to some poor logistics and genuine
difficulties as well as virulent criticism of it as “disastrous” by
the upper middle classes. The most successful aspect of the
BRTS in Delhi seems to be its cycle tracks, probably the only
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stretch in Delhi where cycling is safe. This is in total contrast
to the elevated metro corridor along which not even a single
stretch of cycling track is developed. The BRTS was
launched in Pune without putting the proper systems in place
and got adverse publicity. Two routes in Ahmedabad are
getting designed for BRTS and the system is likely to be
inaugurated in 2009. The work is underway in other cities.
Several pronouncements have been made in Hyderabad
about the introduction of BRTS in the last five years but has
been practically shelved in favour of the metro rail. What is
significant about BRTS in Indian cities is the inability of the
car-using middle class to digest the fact that a lane could be
left free for buses on the existing roads.
Taxing the Public - Subsidising the Private
Distortions in motor vehicle taxation abound in the country
sometimes the tax rates themselves being absurdly low. Delhi
only recently revised its tax rates to two percent for vehicle
costing up to rupees four lakh and four percent for those
above. Most of the states also levy a tax on passenger buses.
In Gujarat the rates are Rs. 840 per year on buses with more
than nine passengers, Rs. 72 for every
additional seat and Rs. 36 for every
standing passenger. Maharashtra charges
Rs. 71 per passenger plus 17.5% of the
fare collected. Delhi collects Rs. 1,915 up
to 18 passengers and Rs. 280 for every
additional passenger. Even if it is calculated
on per passenger per km basis, the
tax incidence on a bus passenger in a city
is more than on a private car passenger
(Sivaramakrishnan, 2009). There are
experiences that taxation has been used as a weapon against
the public sector buses to push the public sector corporation
into losses to make it a justifiable case for privatization as
happened with the Andhra Pradesh State Road Transport
Corporation (APSRTC) earlier. Similarly, raising of passenger
tariff steeply has also pushed the travelling public
towards private vehicles. For more discussion on this with
respect to APSRTC, see Ramachandraiah and Patnaik
(2005).
For the much hyped Nano, Sunita Narain argues that the
incentives rolled out by the Gujarat government amount to a
fat write-off - as much as Rs. 50,000-60,000 per this rupees
Since January
2009, the
ministry of urban
development has
sanctioned Rs.
4,726 crore for
bus procurement
one lakh car. In other words, its cost is so low only because of
subsidies offered by the government. The cars have been
subsidized in India while taxing the buses. The tax is over 12
times more on buses than on cars in many states. The public
subsidy should go to everybody to exercise their right to
mobility (Narain, 2009). A comparison of the taxes on public
transport with other modes of personalised transport reveals
that the existing taxation structure is inequitable and not
congenial for growth of bus-based public transport system.
Economic theory would suggest that the taxation on personalized
modes of transport should be commensurately higher
than what exists for the public transport. The taxation policy
should be effectively used to bring in equity (Kharola and
Tiwari, 2008).
Road as a Contested Space
Mobility, more than technology choice, should be the main
concern. Today, the city space for mobility has become a
highly contested issue. The private vehicle has proliferated,
“thanks as much to the uncalled for subsidies for
automobile production and use as well as consistent
lobbying practices of the auto industry”,
perfected over the years in the United
States and the West. Since January this
year, the ministry of urban development
has sanctioned Rs 4,726 crore for
procurement of 14,240 buses in 59 cities.
Given the congestion, will these additional
buses be able to move anywhere?
(Sivaramkrishnan, 2009). Users of
nonmotorized modes have tended to be
squeezed out of the roads on account of
serious threats to their safety. If the focus of the principles
of road space allocation were to be the people, then much
more space would need to be allocated to public transport
systems than is allocated at present (GOI, 2007).
The neglect of public transport shows itself as a class
issue. The investments in urban mobility – flyovers,
parking lots, wider roads, smaller pavements, etc – are all
focused on easing the mobility of the middle classes in
urban India. The orchestrated media campaign against
faster and safer bus services through the BRT corridors
only indicates the strength of class interests seeking to
mould urban transport systems. The political function of
44 THE IIPM THINK TANK

(NA ) NO WAY FORWARD
the Nano lies in securing firmly the interests of the middle
class on the class-divided road and skew the class divides
which fracture our cities. The central concern should be to
build a more democratic city which provides equal opportunities
of mobility to all its residents (EPW, 2009). The
dispute about the BRTS in Delhi is probably the first
serious contestation in the country for a city’s road space
between the bus and the car. It is hoped that the majority
of the public, dependent on public transport, will become
more assertive and demand that a city’s road space cannot
be pre-empted by the car-using elite (Sivaramakrishnan,
2009).
Conclusion
Urban transport policies should be city specific and be
designed to suit its geography, heritage, history and
landuse patterns. What is happening now is a thrust from
above of uniform technology-centric models pushed by the
big companies. As the number of vehicles is going to
increase unabated in the coming days, the car-owning
middle class will continue to assert its domination in
policy making on urban transport. A combination of
contractors, big construction companies, bureaucracy and
political class may make it easier to push through such
projects as the experience has shown over the last several
years. The large mass of people, should also assert their
right to the road and to the equitable allocation of road
space to different users. Utilisation of the existing railway
network in cities and extension of these lines further,
wherever necessary, to connect more areas is required to
cater to the suburban locations. The PPPs for metro rail
projects, as revealed in the case of the currently uncertain
Hyderabad metro, may end up benefiting the private real
estate companies and cause irreparable damage to the
larger public interests. Provision of public transport should
be the domain of the public sector. The contest for equitable
allocation of road space will spread to several other
cities in the coming days in India. In the ultimate analysis,
rather than huge mega projects, pedestrian friendly roads
with adequate provision for cycling and informal sector
activities (hawkers, street vendors etc) along with highquality
bus transport with dedicated lanes may help make
our cities more inclusive and democratic, and promote
sanity in public spaces.
References and Additional Thinking
• EPW (2009): “Democracy and the Small Car”, Economic
and Political Weekly, Editorial, April 4 th .
• Flyvbjerg, Bent., Nils Bruzelius and Werner Rothengatter
(2003): Megaprojects and Risk: An Anatomy of Ambition,
Cambridge.
• Flyvbjerg, B., Mette Skamris Holm and Soren Buhl
(2002): “Underestimating Costs in Public Works Projects:
Error or Lie?”, Journal of the American Planning Association,
68(3), 279-295.
• GOI (2007): “Report of the Working Group for the 11th
Five Year Plan on Urban Transport including MRTS”,
Government of India, New Delhi.
• GOI (2006): “National Urban Transport Policy”, Government
of India, New Delhi.
• Kharola, P.S. and Gitam Tiwari (2008): Urban Public
Transport Systems: Are the Taxation Policies Congenial
for Their Survival and Growth?, Economic and Political
Weekly, 11 th October.
• Mohan, Dinesh (2008): “Mythologies, Metro Rail Systems
and Future Urban Transport”, Economic and Political
Weekly, 26 th January, pp 41-53.
• MUD ( 2008): “Study on Traffic and Transportation
Policies and Strategies in Urban Areas in India”, Final
Report, Wilbur Smith Associates, Ministry of Urban
Development, Government of India.
• Narain, Sunita (2009): “The right right”, CSE's Fortnightly
News Bulletin, 8 th April.
• Ramachandraiah, C. (2009): “Maytas, Hyderabad Metro
and the Politics of Real Estate”, Economic and Political
Weekly, 44(3), 17 th January, 36-40.
• Ramachandraiah, C. and Arun Kumar Patnaik (2005):
“State versus Public Sector Profitability: Andhra Pradesh
State Road Transport Corporation”, in Mooij, Jos (ed.)
The Politics of Economic Reforms in India, Sage, New
Delhi.
• Sivaramakrishnan, K. C. (2009) “A bus to nowhere”, The
Economic Times, 20 th April, Hyderabad.
• TOI (2008) “Walking is crucial to achieving urbanity”,
(Interview with Philip Rode in the Edit Page), The Times
of India, 23 rd June, Hyderabad.
(The views expressed in the article are personal and do not
reflect the official policy or position of the organisation).
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M ANAGEMENT OF DEVELOPMENT
Urban Water Supply
Sector in India: The Need
for the Management
Reforms in the ULBs
Ramakrishna Nallathiga
Knowledge Manager (Infrastructure and
Environment), Centre for Good Governance,
Hyderabad
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1. Introduction
Water is an important resource available for humans and
fresh water is much more important given its limited
availability and erratic distribution over space and time.
India roughly accounts for 4.5% of the World’s fresh water
resources, while at the same time it accounts for 2.5% of
total land mass and 16% of total population. However, the
availability of fresh water per capita itself has come down
from about 5,177 cubic meter per head in 1951 to 1,820
cubic meter per head in 2001 and it is expected to further
go down to 1,140 by 2050 AD (Sankarnarayan 2005).
The total water availability in India is 2,301 bcm, of
which surface water source accounts for 1,869 bcm and
ground water source accounts for 432 bcm.
However, not that the entire water can be utilized: only
690 bcm of the surface water can be utilized through
storage structures and ground water can be utilized only to
the extent of its annual recharge. According to assessment
made by the Ministry of Water Resources, the total water
requirement of the country for various sectors was estimated
to grow from 694 km 3 in 2010 to 973 km 3 in 2050.
The utilizable water resources by 2050
were estimated to be 996 km 3 , suggesting
no overall deficit like situation,
which is not correct. The water availability
is highly skewed in the Eastern
part of the country, whereas the population
and economic activities are concentrated
in the Western part of the
country, thereby an accentuating water
availability problems in the West.
Water supply and sanitation is a State
subject according to the provisions of Indian constitution,
and State/Urban Local Bodies (ULBs) are vested with
constitutional right for planning, designing, implementing,
operation and maintenance of water and sanitation
projects. The Union Ministry provides technical assistance
to the states/ULBs in the project formulation. The
National Water Policies provide guidelines to state governments
on the priorities of allocation, methods of management,
resource management and institutional issues,
emerging approaches and trends.
Urban water supply and sanitation sector remained an
important area of concern from First Five-Year Plan. The
Availability of
fresh water per
capita reduced
from 5,177 cubic
meter per head in
1951 to 1,820 cm
per head in 2001
plan outlay has constantly increased from Rs 43 crores
(1.28% of public sector outlay) in the First Five-Year Plan
to Rs 18,624 crores (2.17% of public sector outlay in the
Ninth Five Year Plan; the Tenth Five-Year Plan outlay was
estimated as Rs 44,206.55 crores. The estimates of likely
available funds from various sources were Rs 35,800
crores. Moreover, the millennium development goals
(MDGs) for water supply and sanitation laid down to
reduce half the proportion of population without access to
safe and sustainable water supply and sanitation by 2015.
The Tenth Plan however had laid the target of achieving
100 % drinking water supply and 75% coverage of sewerage
and sanitation facilities and is more comprehensive.
2. Challenges of Urban Water Sector
Fresh water resources are increasingly becoming scarcer
across the country, particularly with respect to catering to
the human activities, due to several reasons: (a) the
existing water resources have already been tapped through
various development projects but have been utilized
inefficiently, leaving little water available for the actual use
(b) water pollution has rendered several
of the water resources – both surface
and ground water – unfit for use by
any sector (c) the rising population and
the trends of rapid urbanization necessitate
a good amount of water devoted
to human consumption, thereby not
only reducing the per capita availability
but also raising competition with other
sectors.
Rapidly rising population and increasing
urbanization are rendering high demands on water in
India. However, the service levels and quality are very
poor, for example the average water supply is just 2-4
hours a day. Moreover, in terms of absolute figures, only
36.86 million of the 53.69 urban households have tap water
supply, of which 26.67 have in their premises, 8.08 million
have outside their premises and 2.09 million have within
100 metres (Sankarnarayan 2005).
Large metropolitan cities, in particular, are becoming
critical areas due to increasing water demand for domestic
consumption, which often competes with other uses of
fresh water. Apart from the challenges of water availabil-
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M ANAGEMENT OF DEVELOPMENT
ity, major attention needs to be paid to
From
Towards
their management in the urban
Water resource development Water resource management
context i.e., achieving maximum gains
Supply-oriented approach Demand-driven approach
within the constraints through efficient
use of all resources (Saleth and
Disjoint water management Conjunctive water management
Dinar 1997).
Use maximization and extraction Use efficiency and conservation
In spite of the enormous challenge, Treating water as social good Treating water as economic and social good
water resource management in India, Public sector management Public-private partnerships
in general, in urban areas, particular Public sector monopoly Private sector participation
has heavily focused on the supply Top-down approach
Participatory approach
expansion, whereas a good scope Centralised operations
Decentralised operations
exists for demand management and Government responsibility Stakeholder engagement
improving use efficiency, which means
taking a balanced approach to water management (Maheshwari
and Pillai 2001). Whereas the water scarcity
calls for an efficient utilization of water at all levels in
order to meet with the sustainable development goals of
human society, few cities are gearing up their water
systems towards efficient water management and improved
service delivery. In reality, Indian cities are not fully
geared-up for reforms as (i) they are highly top-driven and
follow the old guiding principle of water
particular, is plagued by several factors contributing to
their poor status. Some of these will be discussed in the
following sub-sections. The current status of water sector
performance – both resource allocation and service
delivery – can be characterized by a vicious circle of
various causative forces. We will examine these underlying
structural and non-structural variables as how they
interact yield such poor outcome in this section (see figure
1) and then embark on the reform
development and supply expansion, (ii)
agenda that is needed to overcome this
they use irrational water pricing methods
and inefficient tariff structures, (iii) organizations
Service delivery problem in the next section.
they persist with ill-adequate organizations
have to reform 3.1 Water Resource Allocation
and systems and are yet to formu-
organizational
and Management
late their agenda in implementable
Policy, Legislative and Regulatory
design to be
terms. Service delivery organizations
Framework
have to reform organizational design to more effective The National Water Policy, 1987
be effective (Rangachari 2003). and efficient proposed several desirable objectives
The World Bank (1999) mentions that
the two critical challenges for urban water sector in India
today are the need to: (a) improve resource allocation
(both inter-sectoral and spatial) and management of water
(both quantity and quality) (b) improve service delivery in
the water sector (towards efficient, equitable and customer
oriented service). To meet these challenges, it suggests the
following major shift in the current approaches towards
water resource management in general and urban water in
particular.
towards better water resources management.
The revised policy in 2002 went further by advocating
community participation, public-private partnerships.
However, the missing element was an enabling framework
for implementing sound water allocation, planning and
management. Moreover, the policy documents do not go
beyond the ‘conventional thinking’ of fi xed allocations
and utilizing administrative mechanisms for achieving
the goal.
The constitutional provisions and water legislation in
India do not provide appropriate framework for tackling
3. Need for Urban Water Sector Reforms
Water sector, in general, and Urban water supply sector, in
water issues across jurisdictions, between sectors as well as
individuals. The current set-up has following short-com-
48 THE IIPM THINK TANK

W ATERED DOWN
Figure 1 : The Vicious Circle of Urban Water Sector
No Customer
Focus
Poor
Service
Customer
Unsatisfied
Poor Revenues
Poor
Finances
Inadequate capital
Inadequate
skills/MIS
Poor
Infrastructure
Poor
Institutions
Inadequate
systems/ MIS
Construction
focus
Inappropriate Governance
& Management
Inappropriate
Policies
( Macro/Micro
Source: The World Bank (1999)
ings: (a) water has been delegated as state subject but
water resource issues cross these boundaries (b) surface
water rights are ill defined, unsecure and non-transferable
leaving little scope for their utilisation, whereas ground
water rights are purely private causing environmental
damages (c) environmental laws have not been comprehensively
operationalised and regulatory standards are
either not enforced or do not exist.
Institutional Arrangements and Mechanisms
The current institutional arrangements for water resource
managements at all levels, central, state and local, and
both formal and informal structures, do not enable
comprehensive water allocation, planning and management.
The main problems that exist are (World Bank
1999):
(i) inadequacies in necessary institutions for comprehensive
water allocation, planning and management at
city, basin and state levels, which are frequently absent
(ii) lack of coordination between the institutions; duplica-
tion of responsibility and accountability gaps
(iii) inadequate fostering of grass root institutions
(iv) lack of involvement of civil society – local community,
NGOs, private sector and academia.
Economic and Financial Incentives and Mechanisms
The current incentive structure of water resource management
leaves little scope for efficient use of water and its
allocation between the sectors and users in an economically
efficient manner. Bagchi (2003) clearly notes that
cost recovery of water supply in major cities is far less
from satisfactory. Inappropriate pricing, lack of well
designed tariffs and absence of metering all lead to
wastage of water and make the water services delivery to
the risks of poor maintenance due to inadequate recovery
of financial costs.
Moreover, there is an absence of institutional, legal,
administrative and technical mechanism for decentralized
management, wherever possible, through development of
formal water markets. However, there are some risks
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M ANAGEMENT OF DEVELOPMENT
associated with such markets like unsustainable extraction
of water especially ground water and imposition of barriers
to access water on certain sections of the society.
Information, Technology and Database Systems
There is a great scope for improvement on these fronts,
given the large gaps in these areas of water systems. The
water losses at plants, during conveyance and distribution
are very high to the tune of almost 30-50% in many urban
water systems. Database management and technology
upgradation are not undertaken periodically and any type
of audit is not prevalent. Water use efficiency is poor in all
major uses/sectors – domestic, irrigation and industrial.
Moreover, data and information systems of water availability
and technology for monitoring water pollution are
not given adequate attention. Likewise, metering, billing
and pipeline flow inspection are not well executed and
management structures are largely absent.
3.2 Water Resources Service Delivery
However, apart from improving water allocation and
management efficiency of water sector
through reform process, it is also to
undertake the reforms in the service
delivery, wherein the potential is also
very high due to the much closer
interface with public. The major areas
of reform in service delivery include:
(i) Governance and management
(ii) Organisational design and focus
(iii) Information/ database management
and technology deployment
(iv) Economic incentives and accounting systems
Governance and Management
Urban water governance is highly skewed towards bureaucratic
or departmental functioning without much involvement
of all stakeholders. Even in the current design, the
institutional arrangements are weak and the management
organization lacks incentives for giving better outputs.
Most of the water supply functions are catered by the
public health engineering, municipal water works and
public works departments with little coordination among
them. The organizational structures do not encourage
Urban water
governance is
highly skewed
towards
bureaucratic or
departmental
functioning
efficiency and outputs, but reward positions based on the
tenure and past experience. It is therefore geared towards
serving the needs of public/departmental services rather
than catering to the needs of the customers/citizens.
Organisational Design and Focus
The organizational design is hierarchical, which is mostly
the case of large public organizations, and not suited to a
customer-focused service delivery. The technical staff
members (engineers) are promoted based on their tenure
but not outcomes; the service staff is assigned jurisdictions
but its accountability is often poor.
It is reported that the staffing ratio in water organizations
in India is very high in the range of 40 – 60 persons per
1,000 service connections as compared to around 10 staff
per 1,000 connections in South Asia and international
benchmark of about 2-3 staff per 1,000 connections (The
World Bank 1999). The focus of the organization has also
to shift from that driven by supply expansion and bureaucratic
style of functioning to that driven by customers’
demand and service oriented functioning, which requires
appropriate organizational design
(Rangachari 2003).
Information /Database Management
and Deployment of Technology
For an effective functioning of any
organization, information/database
management is essential, particularly in
the case of customer oriented organization.
However, most of the water supply
entities lack good management information
systems (MIS) of their organization. The data
generation methods and recoring are poor, data formats
are not well designed, record maintenance and retrieval is
done in a haphazard manner.
The result is poor capacity of the organization to understand
its own business and run it in an efficient manner.
Not only that there is potential for automation of operations
but also restructuring the organization and management
structures. For this to be effective and to enhance
the capacity to monitor water resources – both quantity
and quality – deployment of new technologies is very
necessary.
50 THE IIPM THINK TANK

W ATERED DOWN
Table 1: Types of Public-Private Partnerships
PPP Option
Source: The World Bank (2004)
Asset
Ownership
Operation &
Maintenance
Capital
Investment
Commercial
Risk
Management Contract Public Private Public Public 3-5
Lease Contract Public Private Public Shared 8-15
Concession/ BOT Public Private Private Private 25-30
BOOT/BOO Public/ Private Private Private Private 20-30
Duration (years)
Economic Incentives and Accounting Systems
The current structure of water tariffs do not provide any
economic incentives in terms of recovering costs – both
operation and maintenance and depreciation of capital
– in the urban areas; rather, they provide incentives for
over consumption and inefficient use while not reflecting
the scarce conditions of water availability. Further, most
of the water supply organizations face financial constraints
as their business is not completely run on the
revenues, especially when it comes to the capital works
this is a major constraint. It is therefore imperative that
they become more proactive and
borrow finances from private sector
to provide adequate returns. Bonds
have been recently used by urban
local bodies for financing their operations,
which can be extended to water
services exclusively. Water accounting
needs to be separated from general
pool and it should be based on the
double entry or fund based accounting
systems.
4. Reform Agenda for Urban Water Sector
The above discussion clearly implies that the urban water
sector needs to be reformed on several major fronts,
given the inadequacies and shortcomings of the current
status. Even in large metropolitan cities like Mumbai,
there are severe water service delivery and management
issues and the scope for remains large (see Nallathiga
2006 for more details). It becomes evident that the
reforms are required on the fronts of water allocation
and management as well as service delivery. We discuss
the reform agenda for urban water sector hereunder
Water accounting
must be separated
from general pool
and should be
based on double
entry or fund
based accounting
under the broad headings of institutional, governance
and financial reforms.
4.1 Institutional Reforms
The above discussion clearly outlined that the current
urban water management institutions are not well designed
to provide incentives for better performance and
efficient management.
Changing the Priority
The orientation of the water supply agencies has been not
appropriate to the needs as they are
more inclined towards supply expansion
but not demand management in meeting
with the challenges of providing water.
However, this inevitably results in
conflicts and pressures on inter-sectoral
allocation of water; given the scarcity of
water, a favourable shift towards higher
allocation to urban areas requires all
other means are exhausted. Instead of
undertaking new water supply projects,
the options for repair and rehabilitation of water supply
systems, at a low cost, need to be undertaken. This is the
case given that water losses in the conveyance and distribution
are very high and so is the proportion of ‘unaccounted
for water (UFW). The operations and maintenance
of water supply is a gigantic task that can be
done much better with the help of participation of local
community and private NGOs, which can also lead to
savings on costs.
Organisational Restructuring
Water supply system is organized through departmental
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Table 2: Various Types of Tariffs and Their Characteristics
Tariff/ Charge Rationale Merits/Demerits Examples
Fixed water charge Water tariff levied as a fixed It is useful when water metering
Canada
is not done and can be
water charge irrespective of
the water use/ consumption used where water available is Norway
(however, it can be made plenty.
variable by discriminating
user groups or classes or locations
It does not provide any incentives
for economic uses of wa-
United Kingdom
with differential fixed ter
charges)
Uniform Volumetric charges
Increasing Block Tariffs
(IBT)
Water tariff levied based on
the quantity of water consumption,
while the unit price
of water is fixed but subject to
periodic revision.
Water tariffs are levied in
consumption blocks such that
the price charged increases
with the increase of block.
Consumers pay a uniform
rate until the first block, and
then they pay higher charges
with every additional volume
of water consumed in successively
higher blocks.
It is simple and reflects the
marginal costs of water provision
to the consumer when the
prices are fixed so.
It requires complete water metering
and recording.
It provides for affordability
of the poor through a life line
block; it promotes water conservation;
it can achieve efficiency
by confronting consumers
in higher blocks with the
marginal costs of using water;
it can raise sufficient revenues
to recover costs.
It needs to be designed very
carefully and revised when
required. Bad designs can adversely
affect all consumers.
United States of America
Australia
European Countries
Canada
United States of America
Decreasing Block Tariffs
(DBT)
Increasing Linear Tariff
Water tariffs are levied such
that the charges actually decrease
with the increase in
consumption blocks, in an
opposite direction. The users
of higher blocks pay lesser
and lesser charges with every
additional volume of water
consumed.
Water tariff continuously
changes with the quantity of
water consumed and users
are confronted with the tariff
prevalent at that point of
consumption. The base and
rate of tariff increase are set
to achieve desired goals.
It is primarily useful in the new
townships and new industrial
settlements, where economies
of scale are important in providing
water supply and meeting
the costs.
It discourages conservation and
can be politically unattractive
as it results in high volume users
paying low average water
prices.
It sends powerful signals to the
consumer that increased water
use is costly as the charge
is levied not alone on the last
consumption unit but also on
all preceding units. It is rarely
used as it often confronts users
with rates higher than marginal
costs.
Canada
United States of America
---
Sources: Prepared based on Boland and Whittington (2002)
52 THE IIPM THINK TANK

W ATERED DOWN
apparatus - water production is undertaken by public
(water) works department, its conveyance and distribution
undertaken by hydraulic/water engineering department,
water pollution/quality is checked by either public health
department or pollution control board. Coordination of
these departments is very crucial but no mechanisms for
their coordination are designed other than their function
overseen by the municipal commissioner. It implies that
the current institutional arrangements have little incentives
for efficient functioning and lack a holistic view of
their management. However, this does not mean they need
to be abolished; rather, adequate and appropriate participation
of private sector will certainly help in overcoming
the drawback.
Private Sector Participation
It is also essential that for efficient management of water
sector, the involvement of private sector is an essential
ingredient. However, it needs to be
distinguished from and not understood
as total privatization, which can be
undertaken only after a thorough
analysis of the state of economy and
depth of its institutions. This does not
even mean total ‘roll back’ of State. It
essentially means engaging private
sector in those operations, which it can
perform with better efficiency and
improve the service quality more
effectively. There are several variants of private sector
involvement in the provision of urban water supply
services in the form of public-private partnerships (PPPs),
which are described in table 1.
4.2 Financial Reforms
Most of the urban water supply systems have not
been able to perform well because of the inappropriate
design of their finances and their monitoring systems.
The first aspect refers to the design of financial mechanisms
that adequately recover costs and make the service
delivery a viable option, whereas the second one refers
to the design of financial management systems – accounting,
information/database management, financing
capital. We will examine the scope for reforms on these
aspects hereunder.
There is a general
failure in using
water tariff to the
potential because
of the differences
over its objectives
and outcomes
Cost Recovery
An important aspect of the financial performance of the
urban water supply systems is their ability to provide the
service at a price that recovers the cost towards the
production. A wide varying approaches and arguments
exist in this case from full cost recovery to recovery of
operations and maintenance. It is rationally argued that
the water supply pricing should at least recover the costs
incurred in the operation and maintenance of water
supply system and part of the capital costs – especially
either the depreciation cost of the asset or the interest
payment costs on the capital deployed. It has been widely
reported that most of the cities are not able to raise
finances not even equal to operation and maintenance
through the user charges, which led to the sheer neglect of
the assets and inefficient service delivery i.e., high losses
of water (e.g., see Bagchi 2003). An
important part of this process is the
water tariff design, which does not
adequately address the issues of longterm
financial viability of the systems.
Tariff Structure Reform
Water tariff is an important management
tool, yet there is a general failure
in using it to the potential because of
the differences over its objectives and
outcomes. Quite often, apprehensions are made over
consumer choices and responses, and market test for
the same are lacking. The water tariff setting needs to
strike a balance between the following different goads
(Mann 1993):
(a) Economic Efficiency: Economic efficiency requires
that the prices signal to consumer of the full costs
(financial, environmental and social) of their decision
to use water (on the rest of the system and the economy).
The cost of bringing additional water is higher
than the costs of supplying existing water in many
cities, as the cheapest sources are exhausted first.
Therefore, the marginal cost, which reflects the financial
costs of laying down asset and the social cost of
diverting water from other purposes, needs to become
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M ANAGEMENT OF DEVELOPMENT
the guiding method according to this criterion of water
pricing.
(b) Cost Recovery: This criterion seeks to achieve the
financial goals – recovering the full financial costs of
water supply service, which includes both capital costs
as well as operations and maintenance costs. The
underlying reason is that urban water supply systems,
like other assets, needs to be created to recover full
cost so that the asset life is longer and its service
delivery efficiency is not compromised.
(c) Equity: This criterion essentially seeks water tariff
treats similar customers equally and that customers in
different situations are not treated the same. Equity
goals are pursued to ensure that the customers in same
class/category are not treated differently and there
should not be any price discrimination.
(d) Affordability: This refers to the aspects of treating
water as a social good and providing it at a price which
the various users can afford to pay. However, it does not
mean uniform low pricing of services, rather it means
designing water tariff such that the (rich) users of large
amounts of water subsidize the
(poor) users of small amounts of
water However, it is practically very
difficult to achieve.
The various types of water tariffs/
charges used in fixing the water price
and their relative merits and demerits
are shown in table 2.
5.3 Governance Reforms
Governance reforms are an important
constituent of the water supply reforms. In fact, the actual
water supply reforms start from it through the changing
conditions conducive to achieving the desirable results.
Although a smaller entity, public utility is a part of
government, either directly if it is publicly owned, or
indirectly if it is privately owned but publicly regulated,
and hence principles of good governance should apply to
their management as is the case of other constituents of
government (Dole and Bartlett 2004).
The public utility – water supply undertaking of the
Urban Local Body – has to primarily reform the way the
business is run while committing itself to the principles of
Three aspects of
good governance
must be considered
in setting tariffs:
Transparency,
Simplicity and
Predictability
good governance. Some of the major reforms (although
not complete) that we discuss include reforming the
process of tariff setting, unbundling of the policy and
regulation from the service delivery and alternate institutional
arrangements.
Tariff Setting
Good governance applies to public utility management in a
variety of ways: one of the important issues is the tariff
setting process described above. Three aspects of good
governance need to be considered in setting tariffs and
tariff structure (ibid):
(i) Transparency: The public should be able to understand
the tariff setting process, how the charges were set for
every type of customer;
(ii) Simplicity: The charges resulting from the tariff should
be clear and understandable, so that the customer can
understand how they modify their use of the service
and reduce their bills;
(iii) Predictability: The tariff should not disrupt otherwise
rational private decisions, especially investment
decisions and others with long-term
implications.
Unbundling
However, apart from the tariff setting,
governance reforms are required on
several other fronts for the sustainability
of water supply systems in the long run.
An important aspect of the governance
reform is how well the organization is
structured and aligned to meet with the
objectives of efficient service delivery. An important
governance issue is the unbundling of pricing and services
of urban water supply systems, which is akin to the unbundling
of regulation and policy functions from the service
delivery achieved in the case of electricity and telecommunication
services. The water tariffs have to be set independently
through a different process requiring social and
economic analysis of the customers and achieving wider
consensus through a variety of processes. Service delivery,
on the other hand has to focus exclusively on the demands
made, current capacity and the methods of handling
customers.
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W ATERED DOWN
Alternative Institutional Arrangements
Governance reforms also pertain to how institutions are
arranged and structured while incorporating the principles of
transparency, accountability and participation in the framework.
The current institutional arrangements leave little scope
for the participation of the private sector – both for-profit and
non-profit organizations (NGOs) and community/ neighbourhood
groups, which enjoy much closer rapport with the general
public at local level. The for-profit organizations can potentially
play a good supportive role as ‘Bulk water supply entity’
that can engage in the water production through extraction
from the reserves upon the consent given by the government
and sell it to the retail water suppliers i.e., the urban local
bodies/ panchayats in the nearby and private/community water
supply entities that undertake water supply service to these
areas This will not only improve the efficiency of service
delivery but also make the retail water supply entities much
better aligned towards becoming accountable and participative.
Information Technology and Accounting Systems
As noted earlier, the information systems of the water supply
entities follow archaic methods of information generation,
recording, retrieval and data base management. Most of the
water supply information is not generated in a structured
manner following any standard designs of bills/vouchers and
most of it is not recorded and stored. Data retrieval of any
query requires case to case manual search and poor quality
and reliability of retrieval. The management information
systems (MIS) are not well established and unless they are well
established it is difficult to see some visible progress in database
storage, retrieval and management. Moreover, such data
shall be of immense use for understanding the functioning of
the organization by the human resources division or consultants
to redesign/alter the structure. There is a tremendous
scope for the application of information technology
here, which can help the concerned organizations to organize
more efficiently and use the advantages of speedy data
entry, processing and queries that can be performed on
the computers.
References and Additional Thinking
• Bagchi, Soumen (2003): ‘Pricing and cost recovery of urban
services: issues in the context of decentralized urban governance
in India’, International Journal of Regulation and
Governance 3(2): 103-134.
• Boland, John and Dale Whittington (2002): ‘The Political
Economy of Water Tariff Design in Developing Countries:
Increasing water tariffs versus uniform Price with Rebate’,
In: Ariel Dinar (Ed), The Political Economy of Water
Pricing Reforms, Oxford University Press, New York (pp
215-235).
• Dole, David and Ian Bartlett (2004): ‘Beyond Cost Recovery:
Setting User Charges for Financial, Economic and
Social Goals’, ERD Technical Note No. 10, Asian Development
Bank, Manila.
• Maheshwari, G. C. and B. R. K. Pillai (2001): ‘The water
crisis in India: need for a balanced management approach’,
International Journal of Regulation and Governance I(2):
159-179
• Mann, Patrick (1993): ‘Water utility regulation: Rates and
cost covery’, Policy Study No. 155, Reason Public Policy
Institute, USA
• Nallathiga, R. (2006): “Reforming Water Sector Governance
and Institutions for improving Efficiency: The Case of
Mumbai”, International Journal of Regulation and Governance
6(1): 99-133
• Rangachari, C. S. (2003): ‘Organisational Design for Service
Delivery’, CGG Working Papers: Volume 2: 38-64, Centre
for Good Governance, Hyderabad
• Saleth, R. M. and A. Dinar (1997): ‘Satisfying Urban Thirst:
Water Supply Augmentation and Pricing Policy in Hyderabad
City, India’, World Bank Technical Paper No. 395, The
World Bank, Washington DC.
• Sankarnarayan, K. (2005): ‘Urban Water Supply – Challenges
Ahead’, Presentation made in the XII World Water
Congress of the International Water Resources Association
held on November 25-26, 2005.
• The World Bank (1999): Initiating and Sustaining Water
Sector Reforms: A Synthesis, Published by Allied Publishers
Limited, New Delhi for The World Bank, Washington DC.
• The World Bank (2004): Reforming Infrastructure: Privatisation,
Regulation and Competition, Published by Allied
Publishers Limited, New Delhi for The World Bank,
Washington DC.
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organisation).
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Corruption and Corporate
Governance in India
Rafiq Dossani
Senior Research Scholar; Executive Director,
South Asia Initiative, Shorenstein APARC,
Stanford University
Introduction
Satyam Computers was nationalized in January 2009 after its
executive Chairman, Ramalinga Raju, confessed to fraudulently
overstating profits. In subsequent investigations, it
emerged that over one and a half billion dollars was illegally
transferred from Satyam to Raju’s personally-owned firms;
these included a property firm, Maytas, that owned a $3
billion contract to build the Hyderabad Metro Rail system.
The collapse of Satyam, India’s 4 th largest IT firm, challenged
the usefulness of two pillars of Indian corporate
governance laws – that listed firms employ an independent
auditor and that the board should have a majority of independent
directors. Satyam’s auditor was PWC and six of
Satyam’s nine-member board were independent directors.
The debacle was a shock to Satyam’s clients (whose list
included 185 of the Fortune 500 companies), to the IT
industry, and to industry generally.
Satyam’s failure raises several questions about corporate
governance and corruption in India: the scope and effectiveness
of the laws on corporate governance, the scope and
endemism of corporate corruption, the causes and underlying
trends.
Corruption in India is neither new nor limited in scope.
India after independence in 1947 became a byword for
corruption of all kinds, particularly the abuse of political
power for personal and corporate gain, and the illegal
transfer of resources or rights from owners to other parties
through the use of entrusted power for private gain. India
ranks poorly on political corruption, having ranked 85 th out
of 180 countries in a recent study by Transparency International.
1 According to the World Bank’s governance indicators,
India ranks in the 25 th -50 th percentile of countries
ranked by the ability to control corruption. 2 The World Bank
argues that greater individual freedoms, democracy and a
vibrant and free media are critical for reducing corruption.
The latter view is widespread as regards the ingredients for
a corruption-free 3 society. It helps explain why such widespread
corruption has vexed Indians more than anyone else.
They have suffered its consequences for decades, all the
while wondering why a democracy that should allow for the
imposition of collective will has not been able to impose
minimal ethical principles. The conclusion – that the average
Indian tolerates corruption willingly – is probably as untrue
in a natural sense as for citizens of any country, though – per-
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C ORRUPTION CONCERNS
haps thanks to India’s free press – it has been widely proposed
as the logical explanation.
Nevertheless, corruption is endemic in the sense of being a
characteristic of Indian society. How it became that way is
necessary if we are to understand its presence even today
even in those parts of India that are part of the new economy.
The Origins of Corruption
Corporate corruption in India arose in large part due to state
controls of production through licenses and quotas. This led
to shortages of goods and services. In the short-supply
economy that resulted, both public and private producers
became inefficient and produced goods and services of
relatively poor quality. To gain access to goods and services
in short supply, the public had to pay bribes. Thus, in the
public mind, corruption, slow growth, inefficiency and poor
quality became inextricably linked.
For instance, until the mid-1980s, India’s leading automobile
producers were two private firms, the Premier Automobile
Company and Hindustan Motors, both founded prior to
independence. Once licensing was introduced in the 1950s,
no other firm was allowed to produce cars.
The two private firms bribed the government
to ensure this and had side agreements
on market-sharing. The government
controlled the price of their cars in
order to protect the common man. As a
result, both companies’ products were
always in short supply. Between 1964,
when Premier Automobiles produced its
first car, the Premier 1100, based on the
1937-year Fiat 1100, and 1985, when it
introduced an equally outdated second model, the 1100 was
its only model. During this period, it shared the consumer
automobile market about equally with Hindustan Motors’
leading model (and its only model till 1978), the Ambassador,
based on the 1948 Morris Oxford.
Even as of 2006, the Premier Padmini (the 1100’s current
name) is still the mainstay of the Mumbai taxicab system,
while the more royal-looking Ambassador still leads the
Kolkata taxicab market and is even the official government
limousine. Although India proponents may validly claim that,
at least, India produces cars on its own--unlike, say, Singapore
or Indonesia--the distinction of producing a model that
Conglomerates
like the Tatas
survived because
of legacy assets
that went back to
the pre-licensing
reform days
was invented prior to World War II offsets that claim a bit.
Licensing induced private firms to be corrupt: they bribed
to obtain licenses and then bribed again to prevent others
from getting new licenses. Those few corporates that were
clean, such as the Tata group, suffered mightily in the form of
denied licenses – for example, Tata’s project to build cars in
collaboration with Honda was denied a license in the mid-
1980s and its project to build an international airport in
Banglore, jointly with Singapore Airlines was denied permission
in the 1990s. However, conglomerates like the Tatas
survived because of legacy assets that went back to the
pre-licensing days and by leveraging these assets to enter
unprotected sectors such as software services. The rest of the
clean firms that were started during the pre-reform days
largely folded or mended their straightforward ways.
The second source of corruption was the misuse of state
power. This was in several forms. First, the state had the
power to allocate, or at least influence the allocation of
valuable property rights. These included taxation, land
ownership and usage, electricity and telecommunications
generation and distribution, spectrum allocation, water
access and air-traffic. In some cases, the
state chose to be a monopoly provider,
such as in air-traffic, electricity and
telecommunications, and collected
side-payments for privileged access to its
services.
For instance, in Bombay city, even as of
1990, it took five years to be allocated a
telephone line. Side-payments to the local
telephone office were commonly paid to
jump the queue, with additional side-payments
to roll-back the meter down the road. The state was
vexed by this turn of events, it seems. It responded by introducing
a “Tatkal Phone Service” (an official out-of-turn
allocation): by paying an official premium of ten thousand
rupees in 1990 (about $650), a customer got the opportunity
to get an immediate allocation by further paying the “ordinary
price” of phone service. It almost did not feel like a
bribe. 4
The power to tax was misused by setting favorable tax rates
for favored corporates and large agriculturists. In one of the
more egregious cases on record, in 1982, Reliance Industries’
polyester filament yarn plant went on-stream using a particu-
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lar imported raw material called PTA (purified terephthalic
acid). A day later, the government sharply raised import
tariffs on a competing raw material, polyester chips, that was
used, via a different production process, by its main competitor,
Orkay Silk Mills. A few years later, in 1985, the then-
Finance Minister, V. P. Singh, decided to investigate whether
corruption had played any role in that process. In 1987, at the
height of the investigation, Singh (who would later become
Prime Minister after campaigning on an anti-corruption
platform), was fired as Finance Minister.
Agriculture has never been taxed, the power to do this
lying with state (provincial governments) rather than New
Delhi. Rich landlords ensured that this would not happen, in
return for patronage payments. Land
reforms were, similarly, thwarted by rich
landlords, with the result that over 50% of
the rural population is landless.
The third source of corruption was
patronage recruitment in the state sector.
State employment was highly sought by a
lawmaker’s constituents, not just because it
paid a good wage (due to the power of
unions, who were established primarily in
the state sector) but because it came with
the power to collect personal side-payments.
Most public services, as a result,
were overstaffed and, partly in consequence,
the staff was underpaid. The
staff, therefore, relied on corruption as a
source of making up the differential in
their salaries. In return, they enforced the
rules differentially.
In consequence, in due course, corruption became a
normal part of obtaining civic services. Civic servants had to
be bribed since one could not escape them--there were just
too many around and they had the authority of the state
behind them. By the late 1970s, without the backhander to all
types of public servants, urban survival would have been
impossible. Some were bribed in order to receive a personal
gain--the electrical meter reader, for example, who, in
exchange for a bribe, would underread the meter; or the
telephone man who levied a personal monthly charge in
return for letting the user make free long-distance calls.
Some were bribed to get one out of trouble, such as the
Most public
services were
overstaffed
and, partly in
consequence,
the staff was
underpaid
policeman who caught the motorist making a wrong turn.
And others were bribed so that they would not hurt the
citizen, such as the taxman who was bribed so that he would
not harass the honest citizen (despite knowing that he had
paid his taxes fairly). Railway-ticket checker, ration-card
issuer, gas-cylinder man, postman—the public had a special,
unethical relationship with each.
A government officer posted to a plum position, such as to
collect octroi (a tax imposed on the entry of goods into a
city), often paid a bribe to a higher officer to get such a
posting. He could collect that back several times over from
the share that truckers paid him for undervaluing goods at
the octroi checkpoint. Interestingly, such an officer, if single,
was prized in the marriage market. If male,
prospective in-laws were willing to pay a
dowry premium for a groom with a guaranteed
income over a run-of-the-mill groom
from the private sector! If female, the
dowry was often waived.
The private sector took advantage of the
state’s lax standards. In Kolkata, adherence
to building codes was abysmal enough so
that some buildings were actually leaning!
One was the nineteen-story Chatterjee
International Centre, once Kolkata’s
tallest building. When I viewed it from a
mile away, it looked as though it tilted
about 18 degrees. It stayed like that for
several years until it was recently renovated.
Another building on Camac Street
was eight floors high and had an even
greater tilt. Once, walking by, I asked a
resident coming out of it if he was not afraid of living in the
house. He said he had been terrified until quite recently.
However, it had finally listed enough that it touched the
building next to it and so was now stable!
The fourth source of corruption was to finance election
campaigns. According to the Center for Media Studies, an
Indian think-tank, the upcoming parliamentary elections will
cost $2 billion, which includes $500 m to be paid illegally to
voters by candidates. 5 As a share of per capita income, the
elections are probably the costliest in the world. The contributions
to finance the elections come from a variety of
national and international sources, many of which are
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legitimate, but the overwhelming majority of the amount is
believed to be illegitimate and to come from corporate
sources.
The fifth source of corruption was inadequate disclosure of
corporate actions, leading to widespread corporate and
securities fraud. With the exception of a few corporates, such
as the Tata group and multinationals, the mass of listed
companies were run as family firms who viewed their firms as
hereditary fiefdoms and who viewed public and institutional
shareholders as a nuisance arising from socialist policies.
They concealed large amounts of income from public
scrutiny, distributing it to themselves.
The Bombay Stock Exchange and other stock exchanges
abetted the process. The BSE was organized
as a club, which regulated itself;
members of the BSE were usually linked to
particular corporates whose interests they
supported. While this is not unusual
globally, the difference in India was that
the brokers’ goal was distorted by the
absence of external regulation. As a result,
the BSE – Asia’s oldest exchange founded
in the mid-nineteenth century – was a den
in which insider trading was rampant,
crises were manufactured to enable
powerful speculators to defer payments
and corporate insiders were part of the
game. Making money was not through
undertaking to complete trade at a fair
price, but through manipulating the share
price with the aid of corporate insiders
and then persuading, for a side-payment,
the state-owned financial institutions to place orders at the
manipulated prices.
As a securities trader on the Bombay Stock Exchange in
the 1980s and 1990s, I discovered that it was commonly
known among my fellow traders that the management of
certain firms were not to be trusted. Corporate announcements
from such firms were always received skeptically. Yet,
such firms persisted in their successful existence for decades.
They raised a minimum of finance from the equity markets
at prices that were laughably low by the standards of the
trusted firms, but their success was driven by licenses and
access to bank loans from state-controlled banks, both
through corruption.
Preponderance of
self-regulation in
important fields
like securities,
law, media and
accounting aided
corruption
As noted earlier, not all firms were like this, only the vast
majority. The exceptions were most of the multinational
firms, such as Unilever, a few clean family-run firms that had
established their credentials over many decades, such as the
Tata group, and no more than a handful of firms established
by professionals that had, against all odds, survived the
onslaught of licensing. By the mid-1980s, when reforms
began, the number of such firms listed on public markets
consisted of about 50 firms out of a total of over 2,000 listed
firms.
Given that corruption was a key component for success,
trust among top management, including at the boardroom,
was critical. Hence, the typical firm’s board
was staffed entirely with relatives and other
trusted cronies; the key functions needed
for control, particularly finance, were
always retained by the chief executive;
auditors, lawyers, consultants and other
professionals were chosen on the basis of
their loyalty to the top management rather
than competence.
The preponderance of self-regulation in
important fields like securities, law, media
and accounting aided such corruption. As
in stockbroking, accountants and lawyers
allied themselves to large corporates and
were reliant on those (largely corrupt)
corporates for their ongoing survival – after
all, who else would hire them? Their
loyalty to their primary client was far
greater than their loyalty to their profession;
corrupt practices were a natural outcome. The lax
self-regulatory framework allowed them to continue such
practices for decades.
In summary, there were many sources of corruption. In
answer to the question as to how corruption could flourish in
a democracy, there is likely more than one answer. One is the
weakness of civil society, itself an outcome of widespread
poverty and the state’s unwillingness, right from the beginnings,
to tolerate opposition. The second is that while the
poor own the vote, the rich own the campaign contributions.
The only way to manage both interests was to legislate
pro-poor policies and subvert them in practice, for a price.
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Thus, the state would officially control the price of wheat for
the poor (as the Congress party is promising to do if elected
next month) but would also, with less fanfare, cut the price of
fertilizers and power for rich farmers in order to protect their
profits. The campaign contribution mediates that process.
How Reforms Influenced Corruption
Due to economic reforms since the mid-1980s, the links
between corruption, slow growth and inefficiency have
weakened. This might lead those who are unaware of the
weakened links to look at India’s high growth rate and to conclude
that corruption, too, must have declined. The answer is
more complex: first, the state has made an effort to tackle
various types of corruption. Second, in
practice, corruption has declined in some
cases and risen in others. Overall, it is hard
to argue for a definitive trend.
The end of the quota/licensing system
has had the biggest single, positive impact
on the most important source of corruption,
that of the short supply of goods and
services. The objective of delicensing, to
produce goods and services more efficiently,
has begun to be achieved; along
with greater efficiency, corruption has
declined. For example, cellphone services
recorded an increase of 15 million
subscribers in January 2009. That is
equivalent to 5.6 new subscribers for every
second of the day.
At the level of the corporation, there
has been a transition from a reliance on
internal savings to external capital, both debt and equity, in
order to finance growth. This necessitated an opening up to
foreign investors and securities firms; the investment laws
were strengthened in the early 1990s to increase the attractiveness
of India as an investment destination. This has
reduced securities fraud.
When quotas were abolished in 1991, the public assumed
that corruption, too, would depart. The consequent arrival of
planeloads of western businesspersons eager to invest in
India was taken as the first positive signal of both growth and
of new standards of business practice as well. But it was to
take longer than most had anticipated.
The objective of
delicensing, to
produce goods
and services
more efficiently,
has begun to
be achieved
When foreign investors returned to India after 1991, they
assumed that in its operating practices India was probably
more like Indonesia than any other country in Asia and that
like the Suharto family in Indonesia, there was the Gandhi
dynasty to be managed. But they also assumed that India was
ready to do business. Thus, the type of foreign firm that
initially came to produce goods in India was the type used to
doing large deals with governments and paying the price: the
utility companies, the big commodity suppliers and the like,
wanting the annuity payments of early access. The “fixers” of
New Delhi, long accustomed to fixing bureaucrats for
domestic businesspeople, were quick to respond, offering
access to the highest levels of decision making for a price.
The foreign businessmen (mostly men,
indeed, with a few important exceptions as
we discuss below) found that the system
was not ready to receive new foreign firms,
especially the mid-size and smaller firms
that make up the bulk of the American
economy. India had opened up enough to
make it interesting for domestic enterprise
to dream anew. But the institutional
structure to allow full foreign ownership
in India was not yet there. Many of these
foreign businessmen became disappointed
and left.
The few successful foreign firms in the
1990s were those large ones that could
afford to be carpetbaggers. Certain
American investment banks, for example,
made lucrative deals to list Indian
public-sector giants on the Luxembourg
or London stock exchanges. They would make their pitches
over a week or so with plenty of glamour and sophistication
to policymakers and bureaucrats in Delhi and hope to return
with a contract in hand. They mostly succeeded because it
involved work that Indian firms could not yet handle. And
they succeeded even when they did not see the point of
setting up an office in India given the irregular flow of deals
and slim pickings in the domestic market.
This was a game of glitz, certainly, but corruption was also
an integral part of it. The American banks provided the
glamour and the Indian bureaucrat, perhaps realizing it was
his last time in the spotlight, demanded his price. The Indian
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public--long accustomed to the lordly and corrupt ways of the
bureaucrat--now had the pleasure of seeing him squirming as
he tried to polish his “yes, but what’s in it for me?” response
to someone whose culture he did not understand.
And how were the bureaucrats to respond to the glamorous
likes of Enron International chief Rebecca Mark, who,
according to her own account, explained her wardrobe style
to colleagues in an internal briefing. “Day in and day out,”
she said, she called on a foreign official who typically spent
most of his time with other conservative men, her competitors.
"He will not remember most of them," she said, "but he
will remember me."
Enron epitomized a regrettable phase in Indian reform. It
was remarkable that Enron was successfully
portrayed in the Indian media as an
electricity giant in the U.S., a false image
given that it was a mid-size trader of oil and
gas then (this was the early 1990s). The
image buffing, if not worse, helped Enron
sign a $2.5 billion deal for setting up a
power generation plant just north of
Mumbai in Dabhol, Maharashtra. The
deal was unfair to Indian consumers and
privately opposed even by the privatesector-friendly
World Bank for the lack of
transparency in the award process--
though the bank lacked the courage to
speak openly.
I was peripherally involved in the
process. In December 2000, at the
invitation of Maharashtra’s chief minister,
I presented the financial impact of the
Enron project to the Maharashtra Cabinet. It was clear from
the financial information available that the project would
bankrupt the state’s State Electricity Board by the first
quarter of 2001--and I said as much. Indeed, in the second
quarter of 2001, the SEB defaulted on payments to the
project.
The Enron Dabhol project exposed an unexpected, dark
side of western capitalism to Indians long isolated from the
West. Western businesses also began to learn that India was
quite different from Indonesia. It may be corrupt and opaque
like Indonesia, but the press was quite different from other
developing countries where they had worked. In those places
The image
buffing, if not
worse, helped
Enron sign a $2.5
billion deal for
setting up a power
generation plant
the press was more or less a nonentity in influencing business
outcomes. In the Dabhol case, the press followed Ms. Mark’s
every move (often breathlessly) and initially took a sympathetic
view of the high costs. Once the reason for the high
costs was discovered to be unrelated to the cost of inputs, the
press turned against Enron. In the process, westerners also
discovered through the work of anti-Enron activists like the
late P. D. Kaul that civil society in India could sometimes be
a force to be reckoned with.
Another case that exposed the muck on both sides was a
fiasco in telecommunications. In 1994 the Indian government
asked global firms to join with Indian firms and bid for
fixed-line and cellular licenses. An Indian firm, Himachal
Futuristic Communications Limited
(HFCL), in partnership with Israel’s Bezeq
and Thailand’s Shinawatra Corporation,
bid $27 billion--more than five times the
combined market value of these firms at
the time--for nine fixed-line licenses, This
was possible only because the bid terms
had been deliberately and corruptly set,
allowing even small participants entry so
that they could resell the licenses to more
credible providers down the line for a
large profit.
Of course, the winning bidders were
unable to achieve financial closure and
their bid collapsed. Ultimately, the
telecom minister who managed the bid
process was found with Rs.11 million
($300,000) in cash at home and was
prosecuted for corruption. The company
that allegedly bribed him was HFCL.
Surprisingly, even more credible firms--both domestic
firms such as the Birla Group, and their foreign partners such
as AT&T, grossly overbid as they later discovered. The
market was still too small to justify the sums bid. The domestic
partners then used the law to shield them by citing delays
on the part of government. The government fought back in
the courts and would have won--except that it would probably
have bankrupted at least some large Indian business houses
of long standing and close ties to political parties. It was not
until a new government came to power in New Delhi in 1998
that the issue was resolved--through the government’s
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M ANAGEMENT OF DEVELOPMENT
capitulation.
However patchy the process, as discussed above, the end of
quotas gradually ended corruption in accessing goods and
services. The government shifted to governance by regulation
rather than by quota. The domestic private sector, which had
introduced corruption to the general public in the 1950s, led
the way out by increasing output. By the year 2000, Indian
governance had moved from a controlling stance to a regulatory
stance.
The shift to a regulatory stance has had a beneficial impact
on corruption. Regulators in most cases, including finance,
insurance and telecommunications, have been appropriately
empowered and given independence from other organs of the
state. Thus, another important source of corruption, that of
the inefficient allocation of state-held property rights, has
been partially eliminated.
The remaining areas of corruption in public allocation are
in land and civic infrastructure allocation, due to continuing
short supply of quality urban space. Corruption is a factor in
determining who gets to build what, how much, and where. In
most cases, building permits are given liberally in return for a
bribe, with no consideration of additional
infrastructure needs such as roads and
water. Sadly, it is the poor, who lack
adequate infrastructure to begin with,
who suffer the most.
The United Nations Human Development
Report for 2006 notes that in a
run-down area of Bombay, Dharavi, there
is a slum that houses two million of
Bombay’s population. It says, “It is
estimated that there is one toilet for every
1,440 people. In the rainy season streets, lacking drainage,
become channels for filthy water carrying human excrement.
In a typical case, 15 families share one tap that works for two
hours a day.”
Yet, cities like Bombay and Delhi record one cell phone
per person. In other words, a majority of Dharavi’s residents
probably have one cell phone in the family while sharing a
toilet with over a thousand others. Even in the spiffy Churchgate
district of Bombay, where apartment prices exceed ten
thousand rupees per square foot, water is supplied for two
hours a day, usually in the evenings at around 8 p.m. Residents
keep large tanks in bathrooms and kitchens to store the
Inadequate
disclosure
of corporate
actions has lead
to widespread
corporate and
securities fraud
water for use during the rest of the day, but some appliances
such as washing machines and dishwashers can only be used
with the water at full pressure. So a maid, who will later
return to her slum-dwelling, is sure to be at her employer’s
home at 8 p.m. to operate these essential appliances.
The third source of corruption, patronage in state recruitment
and spending, has been sought to be tackled by introducing
fiscal discipline and paying state employees better
salaries. For instance, a professor at one of the state-owned
Indian Institutes of Technology, whose salary was earlier
capped at $19,700 a year can now earn up to $27,000 a year –
not inconsiderable considering that his student will typically
earn $9,000 as an annual starting salary at an outsourcing
firm, i.e., a ratio of 3 – the comparable ratio at Stanford
University is 1.6.
However, the enforcement of these rules remains weak and
the oversupply of underpaid staff continues and remains a
source of massive corruption.
A famous court case captures this cause of corruption. 6 In
December 2006, the Delhi High Court overturned the lower
court’s verdict acquitting Manu Sharma, the son of prominent
politician Venod Sharma, of killing
bartender Jessica Lall, in the presence of
several witnesses. The defense did all it
could to prevent a fair trial: at the retrial,
it emerged that the defense’s actions
included bribing and threatening witnesses.
The police, by their own admission,
shielded the accused and sought to
derail the case. Over thirty eyewitnesses
initially filed testimony but later retracted
and turned hostile toward the prosecution.
One witness, a prominent Delhi socialite whose testimony
remained unchanged, was the owner of the restaurant
where Jessica was murdered. That made a key difference to
the outcome. Venod Sharma was later exposed in a sting
operation by Tehelka, the famous investigative journal, as
having organized the payment of millions of rupees to some
of the witnesses. The only comment that the erstwhile Delhi
police commissioner made on the final verdict was that the
judgment seemed to be motivated by a judge with an agenda
but that it showed that the police could at least, on occasion,
be critical of themselves!
The speed with which the retrial was held and a verdict
62 THE IIPM THINK TANK

C ORRUPTION CONCERNS
Table 1: Sources of Corruption
Problem Corruption Reform Objective Ref Achieved? Corruption
controlled?
Short-supply of pub&pvt
consumer and industrial
goods and services
State-owned, inefficiently-used
property rights,
eg., spectrum, water, airtraffic,
power generation
and distribution
Patronage recruitment in
state sector; patronage
spending by MPs
High election costs and
vote buying by corporates
Poor disclosure on corporate
actions
Inefficient land allocations
SROs deny foreign access
(securities, foreign investors,
accounting, media,
law)
Sidepayments;
poor quality
Sidepayments;
monopoly rents
Sidepayments by
recruits and users
Corporate Sidepayments
Corporate and securities
fraud
Sidepayments
Poor quality
End Quotas Efficient Production Yes Yes (7)
Regulation
of allocation
Fiscal discipline;
higher
salaries
Legalize
contribution;
apply
limits and
disclose
Regulation
Eminent
domain
State takes
over regulation
Efficient property rights
allocation
Yes Partial (1)
Efficient state sector Partial No (6)
Reduce Corruption No No (2)
Adequate disclosure
and corporate governance
Efficient land allocations
Improve quality
Yes Partial (4)
Yes No (3)
Finance: Yes;
rest: No
No (5)
delivered (the original verdict was delivered in February
2006, although the murder occurred in April 1999) was
unprecedented and seems to have been a direct outcome of
the public uproar that followed the initial verdict. It is, of
course, too early to tell if this was an isolated occurrence or a
forerunner of positive change. A cautionary note was sounded
by the erstwhile solicitor general, Harish Salve, who
responded to a TV reporter’s question on the verdict with
“Jessica Lall’s case is only one of hundreds such that never
get reported because less prominent people are involved.”
And, it is worth noting that, to date, no one from the police
or those who paid illegal bribes on behalf of the defense has
yet been prosecuted. Even worse, perhaps, is that neither the
media nor other organs of civil society has bothered to follow
up on the case subsequently.
The fourth source of corruption, the cost of elections, was
addressed in the reforms by legalizing political contributions,
applying limits (five percent of net profit) and requiring
disclosure to shareholders of public companies. However, this
has not worked. The last requirement has apparently been a
reason in this rule being evaded, suggesting that the management
of public companies were already corrupt.
The fifth source of corruption, that of the low accountability
of professional self-regulatory organizations has been
addressed only partially. In securities markets, the state tried
to make the BSE more accountable, failed and set up its own,
more successful exchange, the National Stock Exchange.
Similar failures have occurred in the other SROs, but no
successful alternative has been found.
The past and present situations are summarized in table 1.
The table lists the sources of corruption in the author’s
assessment of their order of importance in the pre-reform
period. The numbers in parentheses show a corresponding
rank at the present time.
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M ANAGEMENT OF DEVELOPMENT
Corruption and Corporate Governance
We have already detailed the past and continuing existence
of corporate corruption. However, on January 7 th , 2009,
corporate India was shaken to its roots when Ramalinga
Raju, the Chairman and CEO of Satyam Computers, India’s
fourth largest IT company admitted, in a letter to the stock
exchanges, that he had falsified accounts for several years in
an effort to present a better picture of Satyam’s operations
than was the truth.
Information later emerged that the accounts were falsified
in connection with a massive transfer of funds to the Rajus’
family-owned property company and other personal accounts
to an amount that is still being determined, but it most likely
ranges between $1.4 bn and $2 bn. The government took over
the company and Raju, his brother and the CFO have been
jailed 7 and remain there, as of March 2009. Subsequent
investigations have revealed additional fraudulent actions
including undisclosed insider sales.
It also later emerged that the firm’s external auditor, a local
firm – Lovelock & Lewes (which represented PWC in India
Table 2: Current State of Regulation in India and US
India
US (NYSE)
Independent directors Minimum 50% Majority
Remuneration of independent directors Only director’s fees and firm’s equity-linked
Same
securites
Independent directors’ to be unrelated to Yes
Same
firm
Independent directors awareness of firm’s Yes
Yes
compliance status
Meetings of independent and non-executive No
Yes
(I/N-E) directors without executive directors
Compliance certification CEO and CFO Same
Audit Committee
All to be I/N-E, of whom majority Only independent persons (not necessarily
directors) may be audit com-
& Chair to be independent; broad
powers, including code of conduct, mittee members
governance, whistleblower protection
Board nominations & corporate governance
committee, composed of independent directors
Compensation committee, composed of independent
directors
Shareholder rights: voting, share transfer,
pre-emptive rights, disclosure of most material
information (eg., insider trades), internal
and external audit, equal rights for foreign
and minority shareholders
No: Corporate governance is part of
audit committee; nomination is by
the full board
No: Compensation is determined by
the full board
Best practices observed
Yes
Yes
Dual class stock remains an issue
Corporate strategy Management driven Board driven
Related party transactions
Disclosure to shareholders not required;
Disclosure to shareholders required
must be approved by audit
committee
Share pledging by insiders
Disclosure to shareholders not required
Disclosure to shareholders not required
Source: http://www.worldbank.org/ifa/rosc_cg_india.html
SEBI documents, various years
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C ORRUPTION CONCERNS
due to the SRO restrictions on PWC’s direct entry into India)
– was an intrinsic part of the fraud.
Satyam, at the time, had six independent directors and
three executive directors. The latter group consisted of Raju,
his brother and a long-time business associate. The independent
directors were an eminent group. They were
K.G.Palepu, a Harvard Business School professor of corporate
governance (ironically, his website says that “In the area
of corporate governance, Professor Palepu's work focuses on
how to make corporate boards more effective, and on
improving corporate disclosure.”); M. Rammohan Rao, a
recent appointee to the board and Dean of the Indian School
of Business; Vinod Dham, a well-known Indian engineer of
Silicon Valley, the founder of many successful startups, a
co-inventor of Intel’s Pentium chip, and a successful
venture capitalist; T.R.Prasad, a former Cabinet Secretary;
V.S.Raju (no relation), a former director of IIT, Delhi; and
Mangalam Srinivasan, a US-based academic, and former
advisor to Harvard’s Kennedy School of Government.
It appears clear that the independent directors did not
fulfill their duties. For instance, at a board meeting on
December 16, 2008, to vote on a resolution
to approve the acquisition of the
Rajus’ property firm by Satyam at short
notice, none of the independent directors
(all were present by phone or in person)
questioned why only that firm was being
considered for acquisition rather than any
of the other property firms on the market
(given the depressed state of such firms at
the time, this should have been an obvious
question). 8 Only Mangalam Srinivasan
stated that the board should have been involved in such a
large acquisition from the beginning rather than at that stage;
the response to her statement was provided by one of the
executives of the IT firm, that it was a sound derisking
strategy, given the state of the IT market globally (there was
no discussion of the state of the even-more depressed
property market in Hyderabad). All the directors voted for
the resolution.
Satyam’s failure shocked the Indian corporate world and
policymakers, since India has been seen as a leader among
developing countries in the area of corporate governance.
Starting in 1991, with a focus on improving investors’
Key oversight
functions such
as over finance
must contain
representation
from independent
directors
rights, the regulator, the Securities and Exchange Board of
India (SEBI) successfully introduced a range of reforms of
investor disclosure rules. The Company Law Board, working
with the Institute of Chartered Accountants of India,
reformed the accounting and auditing standards.
The rules for disclosure are widely considered to be
effective; Indian firms follow these rules that protect shareholder
pre-emptive rights over corporate actions, and have
internal and external auditors. There is only a single class of
stock, with the same rights whether held by institutions,
insiders, the general public or foreigners. The accounting
standards are based on internationally accepted accounting
standards. 9 There remain some significant differences with
US accounting standards, mostly in the area of disclosure of
contingent liabilities and deferred taxation.
Starting in 2000, rules for intra-firm corporate governance
have been enforced, with subsequent modifications to
accommodate the provisions contained in the Sarbanes-Oxley
Act of 2002.
Table 2 summarizes the current state of the regulations.
As Table 2 indicates, there are substantial similarities
between Indian and American rules: in
particular, the definition, percentage and
remuneration of independent directors
and the broad powers of the audit committee
are similar. There are some
significant differences as well. The
nomination of directors is a responsibility
of the board rather than the audit committee
and there is no independent
compensation committee. Given the
Satyam scandal, the issue of how Satyam
treated related-party transactions might have been driven by
the difference in rules. A key driver of the Satyam scandal,
that the insider directors pledged their shares in order to
raise money for their personal property company, was not
required to be revealed – although this is not required in the
US either.
Our discussion above puts a great deal of the onus for good
corporate governance on the independent directors; it is
clear, however, from any corporate environment, that it is
really the behavior of the insider directors that matters; and
that controlling their behavior is, in practice, very difficult.
Satyam’s Raju, for instance, was well-known for his wooing of
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M ANAGEMENT OF DEVELOPMENT
local politicians. For instance, several of the most senior
politicians of his home state, Andhra Pradesh, visited Silicon
Valley as his guests, including visits hosted at Stanford
University by this writer. It has been alleged, subsequent to
the Satyam scandal, that a proportion of the fraudulent
transfers were paid to politicians to clear land deals involving
his property firm.
Some of the flouting of the rules indicate that, at
Satyam, the corruption ran deep. For instance, one of the
rules (in India and the US) is that independent directors
are not permitted to obtain any other compensation apart
from director’s fees and unvested equity/options (with a
one year vestment, at least). Yet, Professor Palepu received
over $150,000 in annual fees for providing training
to Satyam’s senior staff (hopefully, not on the subject of
corporate governance). This required Professor Palepu’s
consent; but, obviously, also the consent of the insider
directors, management and external auditors to initiate
the transaction and to sign off on such payments.
Another question that this discussion raises is whether,
given that India is emerging from a controlled environment,
even stricter rules than otherwise
are necessary. For instance, consider
the question of family members on the
board. In the US, given its long history
of professional management, it would be
unusual to find more than one or two
family members of the original promoters
on the firm’s board.
In India, the presence of several
family members is common, even after a
generation has passed. In India’s largest
company, Reliance Industries, the second generation
executive chairperson is Mukesh Ambani. There are three
other executive directors, two of whom are his cousins.
The three cousins jointly constitute the finance committee.
The independent directors on Reliance’s board
include Dipak Jain, the Dean of Northwestern University’s
Kellogg School of Management, and S. Venkitaramanan,
a former Governor of the Reserve Bank of India. In the
venerable Birla group, which is among India’s largest and
oldest corporate groups, the founder’s great-grandson,
Kumar Mangalam Birla, and his mother, Rajashree Birla,
sit on the boards of each of their group companies. At
In US, it would
be unusual to
find more than
one or two family
members of the
original promoters
on the board
another successful company, Vedanta Group, which
recently agreed to buy America’s largest copper refiner,
Asarco, for $1.7 billion, the three executive directors
include the executive chairman, Anil Agarwal and his
brother and deputy chairman, Navin Agarwal. India’s largest
telecom company, Bharti Airtel, is headed by Sunil
Mittal, and board members include his two brothers.
As these examples of pre-eminent firms indicate, the
family-run corporation is not something unlikely given
India’s recent emergence and does not, by itself, indicate
suspect practice. A practical reason for family presence is
that, when dealing with a still corrupt government and a
generally corrupt environment, insiders need to have
strong trusted ties to each other. In a non-corrupt organization,
such ties are a strength in the Indian environment.
However, if the organization is corrupt, given the strength
of the tie between the non-independent directors, it is
unlikely that even a simple majority of independent
directors can be effective. What is needed is that key
oversight functions such as over finance contain representation
from independent directors.
The second concern in India is
enforcement. As we saw in the case of
Satyam Computers, the existing laws
were not enforced. The primary regulator,
SEBI, relied on the auditors, who
turned out to be part of the fraud.
In summary, it appears that, while the
Indian laws are better than in most
countries, though still below best
practice, the key issue is that corruption
is enabled by lax enforcement and the
failures engendered by self-regulation; and driven by the
forces of patronage. As a result, corruption remains
widespread enough and may be considered endemic. The
Satyam episode is symptomatic of a wider problem rather
than a one-off.
Conclusion
Resolving corruption is no easy problem. China is an
example of a society that is ranked by the above indices to
be corrupt (in the 25 th -50 th percentile, i.e., similar to India
in the World Bank estimates; and 72 nd on Transparency
International’s Index). Yet, unlike India, the Chinese state
66 THE IIPM THINK TANK

C ORRUPTION CONCERNS
relentlessly pursues corruption. According to a 2005 news
article, the Chinese government executes more officials
for corruption offences than the rest of the world combined.
At least 25 officials were given the death penalty for
accepting bribes or kickbacks in the four years to 2005.
More than 846,000 Communist Party members were
punished for corruption from 1998 to 2002 alone, and
58,000 officials have been punished in recent years at just
two of the state-owned banks. 10
The story can be different. For instance, Hong Kong’s
Independent Commission Against Corruption, formed in
1974, is credited with cleaning up the problem of endemic
corruption in Hong Kong. 11
In India, the Jessica Lall and Satyam cases show that
corruption at the corporation is going to be a difficult
problem to tackle since it is closely related to patronage
corruption and the lack of enforcement. One might expect
less corruption in civic life as an outcome of the improvement
in the wages of public servants and a reduction in
their numbers, but it will take several years to feel the full
impact of these.
Meanwhile, new types of corruption are constantly
invented. Thus, to avoid having to disclose insider sales,
Satyam’s two Rajus pledged their shares, something that
was permitted until after the Satyam scandal, when SEBI
changed the rules. The other new form of corruption is
institutionalized: policies that ignore the rights of the poor
and underprivileged in favor of the rich, as is becoming
evident in the exercise of eminent domain rights by the
state. In a growing economy, the incentives for such
institutional corruption are higher because higher bribes
are more affordable than when the economic pie is small.
Mustering the collective will to tackle these forms of
corruption remains a challenge for India in the twentyfirst
century.
Endnotes
1
http://www.transparency.org/policy_research/surveys_
indices/cpi/2008, accessed March 19, 2009
2
http://info.worldbank.org/governance/wgi/index.asp,
accessed March 19, 2009
3
One uses the term corruption-free society, with hesitation,
in the current times. Iceland was ranked 7 th in the
2008 Transparency International survey; it is unlikely to
rank so highly this year.
4
Not wanting to penalize its citizenry to death, however,
the state graciously declared that phone lines were
heritable assets. This meant that, upon the death of a
person, the right to the phone line (including the right
to assume the dead person’s place in the queue in case
the line had not yet come through) was transferable to
the next of kin.
5
http://www.thearynews.com/english/newsdetail.
asp?nid=22810, accessed March 25 th , 2009
6
See Dossani, India Arriving, (New York: AMACOM
Books), 2007, for more detail
7
The three men share a cell with a bootlegger, according
to news reports.
8
This report is based on leaked minutes obtained by the
Economic Times, India’s most reputable business daily.
9
www.pwc.com/Extweb/pwcpublications.nsf/docid/
A9E4E313EFE6F349CA2573F 5003FC982, accessed
March 26 th , 2009
10
http://www.globalpolicy.org/nations/launder/
regions/2005/0530china.htm, accessed March 19, 2009
11
Doig, A. Good government and sustainable anti-corruption
strategies: a role for independent anticorruption
agencies? Public Administration and Development, 15,
151-165 (1995)
References and Additional Thinking
• Thomas L. Friedman, The World is Flat, Allen Lane
- Penguin Books, 2005
• Allen Greenspan, The Age of Turbulence, The Penguin
Press, 2007
• David M. Smick, The World is Curved, Portfolio, 2008
• A special report on the world economy, The Economist,
London, October 11 th , 2008
• Dani Rodrik, The Economist, March 14 th , 2009
• Charles Collyns, The Crisis through the Lens of History,
Fund & Development, IMF, December 2008
• Obama seeks global action : The Economic Times, 25 th
March 2009
• Mada, K.U., "A Journey Through Development Banking",
Kamal Offset Printers, Mumbai, 2005.
(The views expressed in the article are personal and do not
reflect the official policy or position of the organisation).
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M ANAGEMENT OF DEVELOPMENT
A Review of the Regulatory and
Developmental Role of IRDA in Context
to The Indian Insurance Market
68 THE IIPM THINK TANK

I NDIA INSURED
Sanjay Tewari
Administrative Officer, Life Insurance
Corporation of India
A
thriving insurance sector is of vital importance to
Whether the
insurer is private
or public,
expanding the
market will
present multitude
of challenges
every modern economy. First because it encourages
the savings habit, second because it provides a
safety net to rural and urban enterprises and productive
individuals. And perhaps most importantly, it generates
long-term investing funds for infrastructure building. The
nature of the business is such that the cash inflow of insurance
companies is constant while the payout is deferred and
contingency related. This characteristic of their business
makes insurance companies the biggest investors in longgestation
infrastructure development projects in all developed
and aspiring nations. This is the most compelling
reason why private sector (and foreign) companies were
required to spread the insurance habit in the societal and
consumer interest. Whether the insurer is private or public,
expanding the market will present multitude of challenges
and opportunities. The passage of the
Insurance Regulatory & Development
Authority Bill on December 2 nd , 1999
heralded an era of cautious optimism
where stakes were high for all the parties
concerned. For the foreign insurers,
investments must start yielding returns,
for domestic insurance industry – their
market penetration should remain intact
and for the Government of India, Foreign
Direct Investment (FDI) must pour in as
anticipated. On the periphery, the customers are thinking
whether all the hype created on liberalization will actually
benefit them. The Bill of Rights 1 , over these years has
extended to a total of eight together forming the basis of any
regulatory framework.
The insurance / penetration in India is poor at two percent
of GDP, we may curse our past but it’s a big potential for our
next generation. Indian economy is 0.16 % of US economy
but insurance density of India is 0.004 % of USA. Purely for
equilibrating with its own economy the insurance sector has
not only got the obligation to grow with the economy but to
bridge the lag factor. This challenge offers the greatest opportunity
to the Insurance Regulator, the Insurers, the Re
insurers and the intermediaries apart from the Statesmen of
the country. This paper discusses that there has to be a
paradigm shift in the role of the IRDA, transforming from
primarily one of developing legal and regulatory frameworks
to increase the awareness levels, product innovation, distribution,
customer service and investments; and perhaps increasing
the penetration of insurance.
Insurance Regulation to Rectify Market Imperfections
The Government’s role in crafting insurance regulation
should be limited to rectifying the deficiencies or imperfections
that can cause significant harm. A pro-competitive
approach, therefore, would witness governmental regulation
of insurance only with respect to matters that meet the
following three conditions:
• an actual or potential market imperfection exists,
• the market imperfection causes or can reasonably be
believed to cause meaningful consumer or public harm,
and
• government action can ameliorate the harm.
Conversely, if any one of the three
conditions is not met, no government
intervention is warranted. In the Indian
context, these conditions do exist, and
hence the IRDA. Justifiable government
intervention should be minimally intrusive
and as efficient as possible. For example,
one way to minimize consumer harm
occasioned by insurer insolvencies is to
allow insurers to plot to set prices so high
that even the most inefficiently operated
insurer is guaranteed a profit and, therefore, survival. Such
an approach, however, results in high priced insurance and
excessive profits for insurers – all at the expense of consumers
and businesses, and therefore, at the expense of the national
interest. The superior approach is to allow price competition
but to establish reasonable capital standards while closely
monitoring the insurers financial condition. This approach
will yield lower priced insurance, thus benefiting the national
economy, while minimizing the possibility of consumer harm
that would otherwise arise form excessive insurer financial
risk and insolvencies. Now, briefly the specific arguments
favoring greater foreign insurer participation is that India
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M ANAGEMENT OF DEVELOPMENT
could realize one or more of the following benefits:
• increased domestic savings
• improvements in customer service and value
• additional external financial capital
• transfers of technological and managerial know how
• improvements in the quality of insurance regulation
• creation of beneficial domestic pouring, including the
addition of more and higher quality jobs, quality enhancing
backward and forward linkages, and societal loss
reductions.
However, there are concerns 2 or rather reservations about
the foreign insurer involvement and this is to be looked into
by the IRDA.
First, foreign insurers might dominate the domestic market
and thereby precipitate adverse microeconomic (less consumer
choice and value) or macroeconomic (failure to
contribute adequately to economic development) effects.
The Second reservation class for which factual justification
is lacking or for which more efficient means exist to address
the concern than denial of market access is that foreign
insurers might market insurance selectively (marketing
insurance to only most profitable segments,
to multinational corporations or to
the commercial sector, ignoring the retail
market).
The Third class is that foreign insurers
might fail to make lasting contributions to
the local economy.
The Fourth class of arguments for
limiting foreign insurer market access is
that the domestic market is already served
by locally owned insurers or through
reinsurance.
The Fifth reservation category is that the national industry
should remain locally owned for strategic reasons, such as
national security concerns or because of the desire for
economic diversification.
The Sixth reservation is that foreign insurers may provoke a
greater foreign exchange outflow. More importantly it is to be
noted : “ (any) loss of foreign exchange may not be substantial
enough to justify the opportunity cost involved in running
and upgrading national insurance corporations 3 .”
The Final reservation relates to the belief that the full
market liberalization should await insurance and possible
There are two
opposite ends
of a spectrum of
how regulations
can be developed:
Pluralist Vs.
Corporatist
macroeconomic regulatory reforms so as to minimize the
chances of micro – or macroeconomic disruptions.
Development & Regulation Combine to Build A
Strong Market
By assigning the developer’s role to the regulator the Government
has demonstrated that if the regulator is allowed to act
as the fulcrum between the load of prudent supervision on
one hand and the efforts of development of the insurance
market on the other, perhaps one can strike the right balance
most efficiently. In India, the regulatory legislation has made
a significant departure from the rest of the world by allocating
to the insurance regulator the role of development of the
industry. This change appears to have been carved out with
the intention to ensure that the regulator does not overlook
the need of developing and expanding the insurance market
and the institutions within the system so that the benefits of
liberalization and opening up of the sector trickle down to
the masses 4 .
Moreover, the regulations need to be seen as “drivers for
change to force players to do things in a better way”. However,
it is also recognized that on their
own, mechanisms that attempt to “force”
people to act are difficult to implement.
The process of development and amendment
of regulations is the starting point in
terms of understanding how future regulations
might relate to innovative behavior.
There are two opposite ends/approaches 5
of a spectrum of how regulations can be
developed:
1. Pluralist ( competitive ) Vs.
2. Corporatist ( partnering )
The pluralist / competitive approach assumes that the
government plays a neutral role as arbitrator between groups
of competing interests where those best able to mobilize
support and ‘justify’ their arguments win. The development
of regulations within this framework therefore relies upon
interpretations by interest groups that are most able to exert
pressures to succeed. The Corporatist / partnering, consensual
approach is more inclusive. It may also lead to long
discussions and consultations. Different interests are brought
together within the regulatory developmental process in
which the government plays an active role in order to con-
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struct a common way forward. The process is usually slow
and messy and not conducive to rapid innovation, or risk
taking. Whilst this system may not produce the ‘right’
answers (in many cases there are no single best solutions), it
often helps to avoid deeply problematic outcomes.
The form of regulatory policy is important with respect to
firms’ abilities and incentives to innovate. The traditional,
prescriptive approach to regulations is often thought to be
too rigid and inhibits innovation. This is one of the reasons
for the shift towards performance-based regulations, which
often offer greater flexibility to stakeholders in choosing
options to meet overall functional requirements. However,
there are limitations and contradictions in the new performance-based
approach. For example, it is not clear how
timescales within the performance criteria need to be met
relate to implementation of this approach. A flexible performance-based
form of standard could provide firms with the
freedom, market incentive and institutional frameworks
within which to innovate. There will always be tension
between the need for regulations for new technologies and
those covering old versions. This issue requires flexibility on
the part of regulators and those demonstrating
compliance. As bodies of knowledge
grow and become more precise in
new specialist areas it is possible that
organizations which can adapt in a flexible
manner will be able to comply more easily,
through their ability to adapt to the need
to show new evidence. There is therefore
more likely to be a link between organizational
flexibility, competencies to comply
with regulations and innovativeness.
Firms need to develop new skills to succeed in this environment.
This by itself could lead to information sharing and
co-operation, particularly if a portfolio of innovation and
regulatory policies are developed. A system of measuring the
regulator’s performance which is communicated to the public
in a consistent manner will, over passage of time, tend to
enhance the public’s confidence in the regulator and the
regulatory process.
An Ideal Developmental Strategic Plan for IRDA
A proper appreciation of the developmental role of the
There will always
be tension
between the need
for regulations for
new technologies
and those
covering old ones
regulator is not possible without a plan 6 . The planning
process for a modern regulatory body should include the
following elements:
• The plan should be based on the regulator’s mandate and
objectives, and should seek to achieve the objectives within
a realistic timeframe.
• The plan should be based on a thorough assessment of the
challenges faced by the regulator, including areas in which
the regulator is seen to fall short of its mandate and
objectives, deficiencies in compliance with standards of
best practice, and specific tasks such as the development of
the legislation and supervisory methodologies.
• Based on the regulators objectives and self-assessment
described above, the plan should set realistic medium-term
goals. These are goals or targets to be achieved in a three
to five year timeframe but generally not longer. The goals
should also be ambitious enough to stimulate genuine
action but should be few enough in number to permit a
concentration of effort on these goals.
• The plan should then set out the specific actions necessary
to achieve the medium-term goals. Often these actions are
set out in the form of annual business
plans. Reference is often made, however,
to the actions to be taken in the years
immediately following in order to create a
roadmap for achieving the medium-term
goals.
• Where possible the medium-term goals
and short-term actions should be measurable.
At the very least it should be possible
to determine whether the goal has or has
not been met.
The regulation should be adequate 7 , meaning that it should
be sufficient to rectify market failures and, thereby, protect
the public. Several principles should follow, commonly being:
• Competition Law: To establish an adequate system of
regulation, government must, first, have necessary laws
and regulations in place that create the framework for a
competitive market. The first principle, therefore is
“Government should enact and enforce laws that provide
an effective framework for competitive insurance markets.”
• Prudential Regulation: Insurance laws and regulations
also should address all relevant aspects of insurance
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operations, from creation to liquidation.
“Government should enact and enforce laws that establish
reasonable solvency standards and regulation as the
primary means of protecting the public. As a part of
reasonable solvency regulation, government should
establish, make public, and enforce appropriate and
consistent rules and procedures for identifying and dealing
with financially troubled insurers.”
• Regulatory Effectiveness: The next step to ensure adequate
regulation in a globally competitive market involves
creation of an independent regulatory agency.
“Government should establish an insurance regulatory
agency that operates in society’s interest and has sufficient
resources to efficiently, effectively, and impartially enforce
the nation’s insurance laws and regulations.”
• Impartial Regulation : The principal of impartiality is
fundamental to a competitive market.
“Government should ensure that insurance regulation and
enforcement are applied with consistency and impartiality
between competitors, irrespective of the nationality.”
International Cooperation in Insurance
IRDA has benefited from its association with the International
Association of Insurance Supervisors (IAIS) 8 and its
member countries, while formulating the various regulations
and guidelines, from time to time. The members of the IAIS,
being regulators in other jurisdictions with vast experience in
the insurance industry, have always co-operated whenever
reference has been made to them, with respect to insurance
Table 1: IAIS Committees/ Sub-Committees :
S.No.
IAIS / Committees
1 Executive Committee
2 Emerging Markets Committee
3 Technical Committee
4 Task Force on Assessment & Implementation of Insurance Core Principles
5 Working Group on Observer ship & Membership Issues
S.No.
IAIS / Sub-Committees
1 Insurance Fraud Sub-Committee
2 Insurance Laws, Regulations, Practices & Standards Sub-Committee
3 Re insurance Sub-Committee
4 Education Sub-Committee
5 Accounting Sub-Committee
companies and intermediaries licensed in their jurisdictions.
The IRDA has benefited from the learning curve in the
various jurisdictions across the globe. IAIS was associated
with the IRDA in organizing seminars and training programs
for regulators in the Asian region. The IRDA has been
actively associated with the working of the following Committee
/ Sub-Committees with Chairman / Members representing
the Authority on these Committees:
The Initiatives, Challenges and Limitations of IRDA
After elaborating the strategic role of the regulator, it is
time to take a stock after seven years of the formulation of
IRDA, as to how well or otherwise the companies have
adapted themselves to such an atmosphere 9 . Let me run
firstly into the initiatives taken up by the IRDA:
• Established the manner in which business is to be
transacted by its members ;
• Designed rules to ensure that the insurance market
functions for the benefit of policyholders and not solely
for the special benefit or advantage of its members ;
• Established the rights and obligations between members
and their customers including rules for members acting
in fiduciary capacity and for members acting as agents ;
• Established job procedures and requirements and record
keeping to provide an adequate audit trail ;
• Established priority, parity and precedence among
orders designed to ensure proper treatment of all orders ;
• Established the obligations of those acting as premiummakers;
• Established the obligations
safety for any transaction to be a
cash transaction;
• Established procedures to
ensure efficient, prompt and
orderly clearance, settlement and
payment of claims ;
• Provided effective and fair
procedures and standards under
which members and associated
persons shall be appropriately
disciplined, by expulsion, suspension,
limitation of activities and
functions, and other fitting sanctions
in case of violations of its
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own rules or of the IRDA regulations ;
• Provided for suspension or cancellation of business ;
• Established the duties of its members to obtain and
disseminate information provided by its clients and
• Established, strengthened and restructured insurance
market institutions (such as regulatory agencies, reinsurance
nets/exchanges, settlement organizations, data
exchanges), intermediaries ( well known), and activities
(such as establishment of internal procedures and
practices, development of appropriate organizational and
staffing structures, formulation of strategic initiatives,
and the design and implementation of customized
management information systems).
Simultaneously, it would be appropriate to measure the
challenges faced by IRDA, specifically with respect to
Research & Development & Risk-Based Capital System.
The R&D costs money but yields high return akin to the
system of venture capital. There is great temptation to enter
into low-end money making enterprises in the name of
R&D standing on high moral ground. Prudence lies in
leveraging on the existing infrastructure. Challenge lies in
thwarting personal agenda in this noble
cause of R&D. Leaving the hint to the
market, let me list the immediate
priorities for the IRDA in R&D and
insurance management in this knowledge
era economics.
a) IRDA scans its regulatory mandate,
market opportunities, existing products
and services, possible products
and services and a shortlist of net
opportunities. After identifying the
net opportunity for insurance industry as an enterprise
and resetting business objectives, design of each existing
and proposed product should be assessed followed by a
capability assessment of existing players.
b) IRDA may understand the working space for propelling
its operations from current data analysis instead of
commonsensical and lobbying oriented reactive action
and reliance on advise-as-you-asked (aaya) services.
c) The insurer may try to optimize its risk while maximizing
product range by use of ride-on and ride-off types of
riders allowed by the IRDA. But IRDA has the onus to
see that this does not bring further chaos to systematic
A look at the
IRDA’s annual
report reveals
that the regulator
is seemingly
nonchalant on
certain issues
risk.
d) IRDA should index insurance companies by what they
know (core competencies) and own (strategic assets) and
not what they do (products or services).
e) Capital, liability reserves and manpower in assorted
insurance skill areas are three critical capacity creators,
which will establish insurance industry’s business virtual
circle IRDA should monitor the aggregate of this
reinforced capacity at macro level.
IRDA is also challenged to speed up the development of
Risk – Based Capital System. The development of expertise
for off-site financial condition analysis and on-site inspections
has to be internalized by the IRDA. Dependence on
outsourcing for such supervision whether through domestic
or international individuals or organizations may create
impression of regulatory weakness as also sprout possibility
of self-serving supervision by such outsiders. The nest step
is development of a sound enforcement infrastructure
within the IRDA, including investigatory ad enforcement
procedures. Development and implementation of a risksensitive
early warning system to identify troubled insurance
companies should be in housed by
the regulator before such requirement
manifests. No prudent regulator can
wish away the law of averages, which
mandate development of troubled
insurance companies soon. A supplementary
requirement is development of
mechanisms for the liquidation of
insolvent insurance companies. The
IRDA may design and develop a policyholder
protection plan in the shape of
insolvency guarantee funds. There is also immediacy to
survey risk management practices and internal control
systems.
As for the limitations, a look at the IRDA’s annual report
reveals that the regulator is seemingly nonchalant on
certain issues. For instance, on the often-talked about issue
of rebating, the IRDA had the following saying;
“The problem of rebating, in both life and the non-life
sectors, has been engaging the attention of the Authority
for quite a while. The Authority, as part of the advertisement
campaign launched by it, has been creating awareness
that rebating is an offence, and insurers need to strengthen
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M ANAGEMENT OF DEVELOPMENT
their self-regulatory mechanism in this regard. Issues of
market conduct of both the insurers and the intermediaries
are a matter of concern. Insurers would need to evolve
methods of self-regulation, both at the corporate level and
collectively through their councils.”
A problem that needs and requires firm handling cannot
be soft pedaled like this. Again, in another crucial area of
management expenses containment, instead of chiding the
extravagant insurers sternly, the IRDA goes on in an
advisory mode thus;
“The insurers need to chalk out strategies to ensure that
their operating expenses are kept within the prescribed
limits. While in case of the new players, these limits may be
breached in initial years of their operations, managements
have to keep an eye on their expenses and draw up plans to
bring them down. This is particularly pertinent in context of
the opening up of the market to increasing competition and
the investment income continuing to move southwards on
account of the declining interest rate regime. In the case of
the Public Sector Insurers, reducing the existing operating
expenses would also be crucial in their strategy to compete
with the lean private players.”
One of the more limitations has been
the adaptability of International Insurance
Accounting Standards 10 . In Asia,
and specifically in India, the emerging
markets have been slower to adopt the
modern accounting principles. The
IRDA has designed the product and
issued regulations that set forth important
requirements respecting valuation
of assets and liabilities. The Appointed
Actuary regulation is there wherein the have to make a
number of informative disclosures to management and to
the IRDA and gives them a good deal of authority and
independence. However, actuaries are not accountants and
a non-ambiguous set of uniform accounting rules needs to
be adopted.
Analysis and Conclusions
There is a need for continued reforms to ensure an insurance
regulatory system that is more responsive to the needs
of a modern, evolving market place. At a more fundamental
level, it is yet to be demonstrated whether regulatory
In Asia, emerging
markets have
been slower to
adopt the modern
accounting
principles and
practices
networks are capable of addressing some of the fundamental
problems of global capitalism such as widespread
marginalization of whole geographic regions and large
sections of the society. For the regulation to succeed, it will
have to pass the test of legitimacy and accountability.
Development is the process of bringing current values of
the society to bear on current practices of an essential
industry, and hence regulation must seek relevance more
than permanence.
A pool of recommendations may be derived upon, but to
conclude, if we keep in mind, in simplest terms, what our
goals are, we will be best able to pursue those goals relentlessly.
If the limited resources of public attention and
government power are to do the most good in insurance
regulation, they should be directed at helping people get
the most insurance for their money. Some particular
standards can be adopted that create objective guidelines:
i) Increasing Media Understanding & Reporting on
Business Matters: Potential policyholders receive information
from multiple resources. Perhaps the most important
resource in terms of daily impact is the
print media. Sustained efforts should be
made by the regulator to educate the
media personnel to the nature and
delicacies of the insurance market, to
render to the media a basis for appropriate
analysis, and to bring the media into
the overall education public process.
ii) Committing to Public Education as a
primary responsibility 11 : Everyone
connected with the insurance market development agrees
that public education is a crucial factor. There is enormous
uncertainty within the public realm regarding such matters
as the nature of risk coverage for which premium is paid
and the logistics leading to mitigation payment. To enter the
world of contractual savings requires a much different
mental picture of the nature of the investment and the risks
that are involved. A common refrain throughout retail
savers is that much of the public is reluctant to engage in
contractual savings purchases because of fundamental lack
of understanding of the investment or the process. The
question is not whether public education is necessary to
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create public confidence in the markets; rather the question
is who will foot the bill for such education. The Public
Sector Undertaking insurers have engaged in education
efforts, but they operate on meager budgets and cannot
afford to finance the large-scale education that is needed.
Nor should the burden be put on the private units. They
are usually tight staffed. Moreover, the public perceives
them as having a vested interest in selling off and begins
with some distrust of the messenger. Brokers also do not
have adequate financial resources or length of contact to
inspire educational confidence in public. What is needed
is (a) much enhanced IRDA funding for education programs
and to be run by qualified Non-Governmental
Organizations that are not seen as having an agenda other
than public interest. Education is an indispensable tool in
generating a more favorable public attitude to the market
process.
iii) Increasing the enforcement authority of IRDA:
Insurance laws work on the carrot and stick basis. The
carrot is providing the ability to raise much needed
premium resource. The stick is the threat of punitive
damages or criminal liability if the process ingrained in
collection of premium to provide desired output is abused.
Unfortunately often the ‘stick’ exists much more as a
matter of theory than practice. That is because the enforcement
agencies are technically under-funded as money
harnessed from levy has agenda uses than the prioritized
purpose and the regulator may not have the personal
necessity to investigate instances of wrongdoings or to
take the time and effort to seek just remedies through
regulatory or judicial means. There must be the political
will to carry through the recommendations, no matter who
the company or its management may be. If the public
perceives that there is activity in the enforcement area that
regulators will act promptly in situations of possible public
abuse, the result will be increased awareness that the
agency is on public’s side, not on the side of the promoters
of insurance offerings. This is an important shift in the
attitude and we can expect the public to have faith in
IRDA overseeing insurance market development.
included the right to: safety, information, choice among
a variety of products and services at competitive prices,
and a fair hearing by governments in the formulation of
consumer policy. These rights are now added by the
right to: redress, consumer education and healthy and
sustainable environment.
2
This section draws from Harold D. Skipper, Jr., Foreign
Insurers in Emerging Markets: Issues and Concerns,
Washington, D.C.; International Insurance Foundation,
1997
3
UNCTAD study
4
Unique Experiment; IRDA Journal, Vol III, No.1, Dec
2004, p 25
5
Approaches to Regulation Making; India Insurance
Report (series I), p 61
6
The Future Regulation of Insurance – A Progress
Report, Financial Services Authority, UK, October,
2002
7
This paper was presented at the Seminar on Insurance
Markets in Transition: Balancing Competition, Fairness,
and Soundness, and was published by Journal of
Insurance & Risk Management, October, 2002
8
Source; IRDA 3 rd Annual Reports 2003
9
Source: Walking the talk-there’s little time for halfhearted
approaches, IRDA Journal
10
Leading issues in Worldwide Insurance Supervision: An
Overview, Thomas E. Power, Senior Manager, Bearing
Point, USA
11
A Critique of the Regulatory and Developmental Role
of IRDA, KC Mishra
References and Additional Thinking
• The Making of an Emerging MARKET, Emerging
Markets Quarterly, Spring 1997.
• Tinner, John – Reforming Insurance Regulation, Financial
Services Authority, February, 2002.
• Ray, Debapriya - Growth of Insurance vis-à-vis Role of
Intermediaries, VP, Reliance General Insurance, India.
• Mathur, Suresh – SRO Route to Growth: Insurance
Councils have busy days ahead, IRDA Journal, Vol. III,
No.3, February, 2005, p 21-22.
End Notes
1
The Bill of Rights, propounded by John F. Kennedy
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organisation)
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Financial Inclusion by Channelizing
Existing Resources in India
Purti Sharma
Economist,
India Development Foundation, Gurgaon
Financial inclusion proceeds towards integration of
people who are economically and socially excluded from
access to easy, safe and affordable credit and other
financial services. Due to lack of financial inclusion among the
lower income households, their protection from external
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economic shock becomes miniscule. As a result, income
disparity leads to vicious circle of poverty which continues to
persist in the lower income groups. According to IISS (Invest
India Incomes and Savings Survey, 2007), 55 percent of all
the households do not have bank accounts, 97 percent do
not have any health insurance and 61 percent do not have
life insurance 1 .
These missing financial markets among the lower income
groups could be because of demand and supply side constraints.
From the supply side, operating cost is considered as one of the
major obstacle in promoting financial inclusion. Salaries to staff,
travelling expenses, commissions, expenses on promotion of
groups, staff welfare expenses, amortisation and depreciation,
rent on hired buildings and other overheads - all constitutes the
operating cost. For instance, operating cost in the case of Canara
Bank for opening a new (no-frills 2 ) account was Rs. 48 and cost
of each transaction (deposit/remittance) was Rs. 1012. To reach
break even, the average amount of deposit required depends on
the number of transactions. The break even average deposit
level required was Rs. 1911 (for 12 transactions a year) and Rs.
11,465 (for 72 transactions a year) 3 . These costs are critical for
operating the formal banking system.
By looking at the general profiles of
various banks, it can be examined that the
number of employees has decreased, on the
other hand, business and profit per employee
has increased in the SBI and various
national banks (Table 1). Thus, we can at
least analyse that bank has efficiently
employed their resources. The total factor
productivity (TFP) enables disaggregation
of output change into two major components,
namely, output change due to change in efficiency and
output change attributable to change in technology. And the
combination of both of these components (resource allocation
and technology adoption) should reduce operational cost.
The combination which minimises the cost component is
necessary for the lower level of income bracket because majority
of the population works in un-organised sector and are less
educated.
From the demand side, the higher cost of financial services
(including the transportation cost) discourages inclusion. It is
argued that the operating cost is higher for maintaining large
number of account with lower average deposits. As a result, we
Financial inclusion
by introducing
electronic
payment system
is one of the
solutions to reach
the masses
found the lopsided distribution of banks and lack of availability
of formal institutional credit has occurred. And thus, it is
unviable for the banks to extend banking services to lower
income groups. For example, for the no frills savings account of
the HDFC bank, service charges for collecting an outstation
cheque is roughly around Rs. 50 (varies by banks) for a cheque
value of more than Rs. 500 (Table 2). On the other hand, the
service charges for transferring money using electronic medium
like mobile and net banking is free of cost from the service
provider’s side. But there is lower penetration of cellular phones
and internet in rural India. Along with that, the fixed and the
variable costs for cell phones makes it costlier for owning
cellular phones and thereby availing phone banking facility
would be still a distant dream for most of rural India. While
competitive market forces are increasingly expanding cellular
network to cover rural India, internet penetration will still take
some time. For example, to avail mobile banking services
minimum one time fixed cost would be approx. Rs. 1,000 for
buying a mobile hand set plus telecom operator’s monthly
service charges. The other electronic payment transfer facilities
like electronic bill payment cost around Rs. 25 per quarter per
customer ID, phone banking- non Interactive
voice response (IVR) cost around Rs.
50 per call (agent assisted calls), debit card
cost to Rs. 100 per year as annual fee, visa
money transfer cost to Rs. 20 (plus taxes)
per transaction etc 4 are too costly compared
to small deposit denominations and lack of
critical network of users.
Financial inclusion by introducing
electronic payment system is one of the
solutions to reach the masses. But in India
this solution is not feasible because poor households are out of
the domain of formal banking system and the large number of
lower deposits reduces the bank’s profitability. Secondly, the
concept of virtual money banking, technology usage and trust on
technology is difficult to promote among people who are
financially excluded as well as are financially illiterate. Thirdly,
majority of the population that belongs to poor class are working
in un-organised sector with irregular incomes. And finally, lack
of infrastructure availability (i.e disruptive electricity, low
cellular phones and internet penetration etc) makes it challenging
to initiate electronic payment system.
To mitigate the financial inclusion problem for the poor class
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Table 1: Profile of the Banks
SBI & its Associates
(Amount in rupees crore)
2003-04 2004-05 2005-06 2006-07 2007-08
No. of Offices 13782 13921 14190 14611 15512
No. of Employees 280676 277508 270608 255699 248425
Business per Employee (in Rs. lakh) 1810 2270.99 2826.53 3509.87 4314.37
Profit per Employee (in Rs. lakh) 23.68 15.16 16.58 21.78 25.66
Operating Expenses 12117 13410 15759 15988 16994
Nationalised Banks
No. of Offices 34460 34988 35590 37227 38726
No. of Employees 471951 471297 473725 473179 466368
Business per Employee (in Rs. lakh) 4864 7202 8761 10401 13233
Profit per Employee (in Rs. lakh) 47 49 55 65 84
Operating Expenses 20417 23629 25549 27267 29604
Foreign Banks
No. of Offices 209 234 254 264 278
No. of Employees 12654 15750 20344 26444 33114
Business per Employee (in Rs. lakh) 25108.56 25597.32 28632.73 29871.67 36963.72
Profit per Employee (in Rs. lakh) 641.77 330.04 765.29 753.89 1314.63
Operating Expenses 3450 4119 5554 7407 10355
Other Scheduled Commercial Banks
No. of Offices 4988 5539 6129 6984 8265
No. of Employees 72119 82959 103339 136121 166334
Business per Employee (in Rs. lakh) 9324 10402 11226 12018 13327
Profit per Employee (in Rs. lakh) 113 39 71 82 105
Operating Expenses 6547 8161 11639 15176 20268
Sources: RBI
households, solutions need to be devised for redundancy of all
these issues. The electronic payment system for the poor
household is not a perfect solution for promoting banking
activities. The electronic payment system is outstanding proposal
if it follows top to bottom approach. The access to formal
banking system among the rich class is higher in comparison to
the middle and the poor income groups; however usage of
electronic payment system is very low in all the classes at present
in India. The adoption cost as well as the benefit of using
electronic payment system is higher. So, the initial adoption cost
can be incurred by rich income groups. It is also important to do
so because it has been found that the job security increases the
chances of owning the electronic cards. And higher volume of
transactions reduces the transaction cost and the fixed income
reduces the default risk. Over the period of time, the growing
competitive markets are expected to reduce the adoption cost
and the spillover effect which would lead to the mass adoption.
Solutions for Poor Class Households
• Aim is to create smaller networks of people having access to
formal banking system (by offering lower rate of interest
using no frill accounts)
• Integrate smaller networks to themselves and in turn form a
bigger network of households having access to formal
banking system
• Induction of electronic banking payment system should
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Table 2: Service Charges for No Frills Savings Account
the habit of thrift and savings among
Phone Banking - IVR
Free
citizens of the country. The emphasis,
as the words “small savings” suggest, is
Phone Banking - Non IVR Rs. 50 per call (Agent assisted calls).
to bring the small depositor into the
ATM Card
Free
fold of the savings movement. Post
ATM Card - Transaction charge for Balance enquiry: Free & Rs.17.80 (plus taxes) Office Savings Banks were opened in
Partner banks- SBI & Andhra Bank per cash withdrawal
1882. Some of the small savings
BillPay
Rs. 25 (plus taxes) per qtr per Customer ID schemes i.e. Public Provident Fund
Mobile Banking
Free
and Senior Citizen's Savings Scheme
Net Banking
Free
are also operated through designated
Visa Money Transfer
Rs. 20 (plus taxes) per transaction
branches of nationalised banks and
Debit Card - Annual Fee - Regular Rs. 100 per year (plus taxes)
four private banks i.e. ICICI, IDBI,
Collection of outstation cheques at 1) Cheque value Rs. 0 to Rs. 500 -No charges HDFC and UTI Bank. The post
HDFC bank's location
2) Cheque value Rs. 501 & above Re. 1 per offices are not meant to replace banks
1000 (Min Rs. 50)
because it can not execute the
* Credit on receipt of clear funds
function of money multiplier. But
*Figures are for HDFC Bank
Source: HDFC website
happen as result of spill over effect from the top of the
pyramid, especially after the cost of service charge for using
electronic payment is reduced
• It is important not to introduce electronic payment system for
poor class because majority of the
nationalised and commercial banks
can use post office’s infrastructure to facilitate various banking
services.
The existing Indian Post Offices are strategically perfect
source available to promote inclusive financial growth especially
for poor population. Its connectivity enables us to reach the
remotest corners of the country. By utilising
population in this category are illiterate
existing Post Office’s infrastructure,
and the cost of deploying electronic The existing Indian developing technology and connecting
payment services for the large number of Post Offices are existing user with technology and expanding
account having lower deposit would not strategically the user base would be one of the solutions for
be profitable
financial inclusion. Since Post offices can
perfect source
• Introduction of formal banking system
not provide credit to its customers, banks
available to
should be encouraged by known faces
and post offices can collaborate together in
and trusted institutions like post offices. promote inclusive offering various financial services by
• All the Government welfare programmes financial growth managing channels/technological strengths.
targeted for the poor should be linked
with banks. All the monetary benefits should be routed
through banks only.
Thus, the solutions for financial inclusion lies in channelizing
existing resources and building up a platform for public –private
partnerships using technology. There are three important
constituents for inclusive growth i.e. infrastructure, advanced
technology and user’s network which are mandatory for providing
easy, safe and affordable financial services.
Encouraging small saving scheme among the poor was
considered a priority concern of the Government. The primary
objectives of the small savings programme have been to promote
The net collections in the small savings
schemes (gross collections minus withdrawals by subscribers)
have increased from Rs. 100 crores in 1948-49 to Rs. 96,788
crore (Net) in 2004-2005. 100 percent of net collections mobilized
in small savings schemes in a State/UT are transferred to
the concerned State/UT Govt. as investment in special securities
issued by that Government. All deposits under small savings
schemes are credited to the 'National Small Savings Fund'
(NSSF). All withdrawals by the depositors are made out of the
accumulations in this fund. The balance in the fund is invested in
special Government securities as per norms decided from time
to time by the Central Government. In nutshell, post offices can
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Figure 1: Top to Bottom Approach for Introducing Electronic Banking
Large Network of
Electronic Banking
Rich
Introduce e-payments system in banking
CRITICAL MASS
Small Network of
Formal Banking
Middle
Poor
Spill Over Effect of e-payment system
with the critical mass adoption
Introduce Banking by creating local groups using
known faces & trusted institution and later link it
to the larger network of electronic banking system
Total number of post offices in the country 155204
Total number of post offices in rural areas 139046
Total number of post offices in urban areas 16158
Population served by a post office* 7166
Population served by a post office (in rural area) 5687
Population served by a post office (in urban area) 19891
Area served by a post office (sq. km.) 21
Average distance to be travelled for postal facilities (in km.) 3
Sources: Department of Post
act as an important enabler through which various financial transmitting messages. There are various services offered by
services can be extended while the technological spill-over effect Indian Post Offices that are:
is taking place in the banking sector.
Technology
Infrastructure and Facilities of Post Offices
The adoption of technology in payment and settlement systems
Indian post office’s network forms the largest postal system in reduces the cost of providing services with wider adoption of
the world with an array of about 1.55 lakh post offices in India these technological products. It would play a pivotal role in
(Table 3). Out of the total number of the Indian post offices, 90 reducing operating cost and would enable transfer of payments
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
areas. On an average, a post office covers an area of 21 sq. km make transactions with the Post offices hassle free. At present,
and serves 5,687 and 19,891 people in rural and urban respectively.
The connectivity of the post offices are not only reflected computerised. Computerisation of the Post offices can bring
there are only five percent of the total post offices which are
in sheer size and numbers, but also in the average distance transparency and accountability. All payments to the public
travelled for availing postal facilities which is around three km could be uploaded on the network and the public can have
for all India.
option of availing these services through various technological
In the last 150 years, the Post offices have redefined ‘connectivity’
by expanding its wide range of services from mere transportation cost of the consumer). The increasing penetra-
processes, thereby, minimising the physical visits (includes
tion of technology in the Post Offices can also encourage
Table 3: Postal Network in India
partnership deals with financial institutions, insurance companies,
banks and logistics in the remotest corner of
the country. The entire organisational structure can
be linked with the central government and Panchayats
to run various developmental schemes especially
in the rural area.
One of the recent initiatives in this direction was
launch of e-bill post/e-payment. e-Bill Post is a
facility for accepting payment of bills or payments
from many-to-one in post offices. The amount
collected is consolidated electronically in a web
based Central Server on line, and the information is
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Table 4: Main Services Offered by Indian Post
Communication services – Letters, Post Cards, etc.
Transportation services – Parcel, Logistics, etc.
Financial services – Savings Bank, Money Order, Insurance, etc.
electronic access of financial services can
affect decision to adopt if and only if cost and
benefits are higher. So the rate of change with
which new technology is adopted will decide
the operational cost and inclusion.
Value added services – Speed Post, Service, Business Post, Direct Post, etc.
Network
The Post offices can be biggest facilitator in
available to the e-Bill Post/e-payment user at any time. The bringing low income groups under the umbrella of saving and
traffic for e- Bill Post service was 25 lakh users through which investment opportunities by including workers from un-organised
sector. The Post office banks are the largest saving banks in
the amount of revenue earned was about Rs. 128.13 lakh in the
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
about 38 percent. For increasing network of technology users, and deposits amounting to Rs. 3,51,589.95 crore as on 31 st
educating illiterate population especially in rural locations is March, 2007. The total amount of savings with the post offices
the biggest challenge. However, this can be over come by ‘out has been accounted for about 8.20 percent of India’s GDP at
of home’ (OOH) media service which can be placed at each factor cost (current prices) during the year 2007-08. The
Post Office. This would not only help in educating people about untapped rural market has also shown faster growth in the
how to use technology (both pictorially and verbally), but insurance sector. The rural postal life insurance has grown at the
also advertise various financial options available to them and rate of 34.2 percent in terms of value of business in the year
their benefits.
2005-06 and 2006-07 respectively. In the same year, it has
The larger the technologically driven financial network, increased from Rs 25,229 crore to Rs. 33,865 crore (Table 5).
greater are the benefits for adopting it. For widening the The active number of rural insurance policies till the 2006-07
technologically driven network of financial services, adoption was around 52 lakh which grew at 11.5 percent from the
cost and its benefits would play a key role for the existing users. previous year.
So, building trust on money transactions through technology is a Similarly, one of the oldest and important financial services
key challenge to encourage people for adopting electronic offered by post offices is transfer of money by using money
medium. Initially the adoption has to be ‘top to bottom’ down orders without opening a bank account. This service is popular
approach to build the network effect and the competition for among rural labourers who works in un-organised sector and
reducing the higher service cost. The potential adopters would wants to remit amount for small denominations. There were 991
be encouraged if technology will help them in reducing cost and lakh money order issued in the year 2006-07 (Table 6). The
time spent on it. For example, having a large network of compatible
mobile phone users for instance makes new users more 782.72.
average value of money order in the same year was around Rs.
likely to join.
The post offices are like ‘one stop shop’ for providing a range
The existence of alternatives between physical access and of banking 6 and insurance services like term deposits, mutual
Table 5: Rural Postal Life Insurance
Items 2002-03 2003-04 2004-05 2005-06 2006-07
No. of Policies* upto the year 1795070 2666485 3738798 4702776 5246673
Value of Business upto the year (Rs. in Crore) 7464.53 12385.11 18520.93 25229.65 33865.66
Average sum Assured per Policy (in Rs.) 47654.8 54932.09 53958.05 61107 88002
Sources: Department of Post
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Table 6: Inland Money Orders During the Year 2002-2003 to 2006-07
Items 2002-03 2003-04 2004-05 2005-06 2006-07
Number issued(in Lakh) 1050.30 1101.47 1015.98 957.90 991.00
Value of M.O. Issued (Rs. in lakh) 865000.40 687502.40 705216.51 718342.93 775670.57
Commission (Rs. in Lakh) 29923.70 31137.50 32031.40 32792.43 34791.64
Average Value of Money Orders (In Rs.) 823.57 624.17 694.12 749.91 782.72
Sources: Department of Post
funds, pension, etc. Various initiatives have been taken by
Department of post to make growth inclusive for economically
exclusive population.
• In collaboration with State Bank of India, an extensive
network of Business Facilitators and Business Correspondents
covering one lakh villages in phase one under the Rural
and Agri Business Group (RABG) has been experimented.
• In partnership with Oriental Company Insurance Limited,
the post offices in the year 2006 launched accidental death
insurance cover for one year of Rs. 1,00,000 at the low annual
premium of Rs. 15 for its account holders.
• The memorandum of understanding (MoU) has been signed
between Postal Department and Rural Development Department
for payment of the wages to the workers under National
Rural Employment Guarantee Scheme (NREGS).
• The 300 finance marts are planned to provide products like
Insurance, Postal Life Insurance, Rural Postal Life Insurance,
Credit, Saving etc.
• Instant Money Order (iMO) is an online Money transmission
service which was launched in 2006. Presently it is available in
812 centres (till 2008).
• The electronic transmission of money orders (eMO) system
was commissioned in the year 2008.
• ‘Grameen Sanchar Sewak’ project was conceptualised to
provide accessibility to public telephone to the rural population
at their doorsteps by using latest Wireless in Local Loop
(WLL) technology.
Conclusion and Recommendations
All the above initiatives should eventually lead us towards
financial inclusion if collaborative actions are taken together.
Lack of channelizing existing recourses, catastrophic policy
implementation and lower technological penetration and
adoption are the main causes of financial exclusion. So, we
recommend that the facility of opening current account should
be introduced in post offices so that day to day transactions can
be done. Secondly, all the post offices should be computerized,
connected with internet and should have PCO booths. Thirdly,
the telephonic transfer of payments should be encouraged by
developing a technology wherein receipts of transfers of
payments can be obtained. It would be significant achievement
because most of the rural population working in un-organised
sectors are illiterate but can understand number system based
technology. Fourthly, for opening new accounts ‘Know your
customer’ norms should be routed through post offices. Fifth,
the monetary benefits for the poor under various government
schemes should be routed through post office accounts. Finally,
the wage payments in the un-organised sector should also be
routed through formal banking system for encouraging faster
financial inclusion.
Endnotes and Additional Thinking
1
Dataworks ,Invest India Income and Saving Survey, 2007
2
No Frills Savings Account allows maintaining the account
without any minimum or average balance requirement.
Generally, no frills saving account is opened for people who
does not have a bank account & has an annual income of less
than or equal to Rs. 50,000/- or does not have a bank account
& is a beneficiary under a Government Welfare Scheme.
3
Report on currency and finance 2006-08 Vol. II.
4
HDFC bank website ‘Service charges & fees’ applicable to
customers as on July, 2008.
5
India Post ‘Annual Report 2007-08’.
6
Banking services available in Post offices are Saving Account,
Recurring Deposit, Time Deposit, Monthly income Scheme,
Public Provident Fund, Senior Citizens Saving Scheme, Kisan
Vikas Patras and National saving certificates.
(The views expressed in the article are personal and do not reflect
the official policy or position of the organisation).
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MVNO – A new Business
Paradigm in the Telecom
Industry in India
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Hardik Kumar Doshi
Researcher, Telecommunication Industry
Gaurav Joshi
Researcher, Telecommunication Industry
Mahim Sagar
Faculty, Department of Management
Studies, IIT Delhi
Radio Spectrum is a valuable resource for a country
and its telecom industry. With the recent hue and
cry about the valuation of new telecom companies
which possess spectrum and the controversy between DoT
and Finance Ministry regarding reserve price for 3G auction
certainly leads us to think what drives
telecom industry. Is it obtaining the scarce
and precious spectrum or the rollout of
services or capturing the market share
through marketing? At present, all the
three are done by a single service provider
which limits market segmentation and
hence personalization of services.
Securing spectrum and developing
infrastructure is a onetime affair. What
Figure - 1 : MVNO Models
Across the world,
it is believed that
Value Added
Services will
be the growth
driver for telecom
companies
differentiates one operator from the other in the long run is
the reach of the network and effective marketing of services
for increased penetration. A new business model in the form
of Mobile Virtual Network Operator (MVNO) has evolved in
the western countries which provide services to consumers by
purchasing wholesale airtime from Mobile network operators
(MNOs). In India, recently the Department of Telecommunication
(DoT) had sought recommendations from the Telecom
Regulatory authority of India (TRAI) on the need, timing of
introduction as well as terms and conditions of the license to
be granted to MVNOs in India.
Full MVNOs, which have their own core network including
Mobile Switching Center (MSC); Intermediate MVNOs,
which acquire a switched service, but either provide their own
home location register (HLR) or share a jointly owned HLR
with an MNO; and Thin MVNOs, which may provide access
services with additional applications and content and they are
not much different from pure resellers. These thin MVNOs
are also called Enhanced Service Providers.
Is it prudent for Operators who shell out
crores of rupees to obtain spectrum to
share the spectrum? We believe the
proposal is feasible for two fundamental
reasons. First, there is an inherent value
proposition in the MNO-MVNO relationship.
MVNO services are transparent to
the customers and hence if MVNO
through effective marketing or by differentiation
and customization of the services
Radio
Access
Mobile
switching
centre
Network
Services
Application
Services
Marketing
Billing
Customer
&
Care Distribution Sales
Branding
MNO
Full MVNO
MNO
Intermediate/Hybrid MVNO
MNO
Thin MVNO/
Enhanced Service Provider
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Figure 2. Projected MVNO Revenues in US$, 2002-2010
Projected MNVO Revenues in US $(in billions)
$35.00
$30.00
$25.00
$20.00
$15.00
$10.00
9.60
14.50
$5.00
4.60
$0.00
0.20 1.00 2.20
2002 2003 2004 2005 2006 2007
Year
Source: ARC Group
18.90
23.90
29.60
2008 2009 2010
Table 1. US MVNO Subscribers as Percentage of
Mobile Subscribers, 1999-2010
MVNO Total Mobile Subscribers Percentage
Year Subscriber
1999 344,188 86,047,003 0.40
2000 437,912 109,478,031 0.40
2001 513,498 128,374,512 0.40
2002 2,106,824 140,454,918 1.50
2003 4,285,493 158,721,981 2.70
2004 8,014,176 182,140,362 4.40
2005 12,190,200 184,700,000 6.60
2006 19,286,750 187,250,000 10.30
2007 20,878,000 189,800,000 11.00
2008 21,541,500 192,350,000 11.00
2009 23,541,000 196,175,000 12.00
2010 25,000,000 200,000,000 12.50
Source: NERA research
helps in increasing the breadth and depth of the market then it
is beneficial for both parties. In the USA, MVNOs were
primarily responsible for increasing the market penetration by
introducing the pre-paid model. The second reason lies in the
rate of Return on Investments (RoI). Telecom industry is
highly uncertain and the operators are not sure about the
future direction of the market. Also, there is increasing
pressure from the government on the defense to vacate the
spectrum. In such a scenario spectrum might not command a
similar premium it does presently. MVNOs provide a useful
alternative of acquiring wholesale airtime from the operators
at a fixed price. This ensures quicker RoI without worrying
about adding new subscribers and market share.
Table-1 depicts the projected revenue of MVNO players in
United States.
Across the world, it is believed that Value Added Services
(VAS) will be the growth driver for telecom companies. Focus
is shifting from voice based services to content based services.
MVNOs with specialized services can take the lead here.
MVNOs who can provide customized services such as
providing market rates of agricultural products to a village
farmer, live video streaming of cricket matches to a sports fan,
international calls at discount rates for an exporter may
appeal more than the normal service providers with a one-forall
stereotype service package. Also, marketing efforts can be
channeled towards the targeted customers augmenting the
subscriber base and boosting the ARPUs.
Infrastructure sharing is a common phenomenon across
capital intensive industries from petrochemicals to broadcasting.
Now, in broadcasting industry players are interested in
content development instead of developing transmission
networks. They share infrastructure with transmission service
providers. In a similar fashion, telecom industry is also
moving from a voice dominated industry to a content based
industry. As the industry matures, this has been the paradigm
shift across sectors. MVNOs have the potential to offer
personalized services to consumers and also add value to the
entire industry by broadening the subscriber base especially
after the rollout of 3G services.
References and Additional Thinking
• Dong, Hee, Shin, & Micheal, B. (2005)A study of MVNO
diffusion and market structure in the EU, US, Hong Kong,
and Singapore
• TRAI, (2008). TRAI Recommendation on MVNO
• Yike, L., & Kathik, B., & Yezdan, B. (2007) Helio’ Stategy
for Differentiating the MVNO Market
• Timothy, S., & LOC, H., & Do, Van, T. (2001) why should
you invest in MVNO?
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organisation).
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Renewable Energy and Its
Policy Prospects In India
Introduction
Energy plays a very important role in everyday life. In a
developing country like India, the growth of the economy is
largely dependent on adequate availability and supply of
energy. In conventional economic understanding, the prosperity
of a country is measured by looking into per capita consumption
of energy. Per capita primary energy consumption
is still comparatively low in the country (520 kg of oil equivalent—less
than a third of the world average), with large
disparities in the energy consumption pattern (Times of India,
December 2006).
To sustain India’s staggering economic growth and support
the country’s population which is expected to increase to 1.13
billion by 2030, India’s primary energy demand has to multiply
three to four folds (IEA 2007) and in the past thirty years, the
demand for energy has grown at an average of 3.6 per annum.
Table 1, illustrates this demand.
In spite of an ambitious rural electrification program and a
rural electrification policy passed in August, 2006 more than
Table 1: India's Energy Sources
Fuel MW Percentage
Coal 77,648.88 53.3
Gas 14,876.71 10.5
Oil 1,199.74 0.9
Hydro 36,877.76 24.7
Nuclear 4,120.00 2.9
Renewable Energy
13242.41 7.7
Sources
Total 1,47,965.51
Sources: Ministry of power, Govt of India
Manu Sankar Subhagalal
Policy Officer,
World Future Council, New Delhi
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400 million Indians have no access to electricity (Business
India, July 2008). This in no way does show India, which has
ambitions of becoming a Global super power, in a good light.
The Energy Overview
The distribution of primary commercial energy resources in
India is skewed. 70 percent of the total hydro potential is
located in the Northern and North-eastern regions, whereas
the Eastern region accounts for nearly 70 percent of total coal
reserves in the country. The Southern region, which has only
six percent of the total coal reserves and 10 percent of the total
hydro potential, has most of the lignite deposits occurring in
the country. (Planning Commission)
On the consumption front, the industrial sector in India is a
major energy user accounting for about 52 percent of
commercial energy consumption. Per capita energy
consumption in India is one of the lowest in the world
(Raghuraman 2003). But, energy intensity, which is
energy consumption per unit of GDP, is one of the
highest in comparison to other developed and developing
countries. For example, it is 3.7 times that of Japan,
1.55 times that of the United States, 1.47 times that of
Asia and 1.5 times that of the world average. As a result,
there is a huge scope for energy conservation in the
country.
Before the Indian economy was liberalized in
1991, the commercial energy sector was totally
regulated by the government. The economic
reform and liberalization, in the post 90s, has gradually
welcomed private sector participation in the coal, oil, gas
and electricity sectors in India. Energy prices in India
have been under an administrated regime with subsidies
provided to meet certain socio-economic needs of the
public. This has led to distortion and inefficiency in the
use of different sources of energy. The government has
taken serious steps to deregulate the energy price from
an Administered Price Mechanism (APM) regime. The
prices of all grades of coal and petroleum products have
already been deregulated. In the electricity sector, most
of the State Electricity Boards (SEBs) have started
taking reform measures and regulatory commissions
have been set up to determine tariffs based on economic
rational. All these measures were adopted to prepare
India for greater economic growth leading to future
emissions as well.
Renewable Energy Scenario in India
Even though India is a developing country with global
super power ambitions, the fruits of its economic
development are yet to reach to all strata of the society.
In such a scenario India needs to have a space to
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grow both economically and environmentally and to balance
between economic development and sustainability. The
Government recognizes the fact that global warming will
affect India adversely and the process of adaptation to climate
change must have priority and “the most important adaptation
measure is development itself” (National Five Year Plan, June,
2008). What the government needs to do is to harness cleaner
and renewable energy by exploiting the existing resources of
biomass, wind, solar and tidal. By speeding up the deployment
of renewable energy what the country automatically does is
development of renewable energy not only as an adaptation
measure, but also as mitigation. Therefore greater policy
emphasis and political will need to be demonstrated for the
accelerated switch to renewable energy.
Ministry of New and Renewable Energy (MNRE) is the
nodal Ministry of the Government of India at the National
level for matters relating to new and renewable energy. The
Ministry has been facilitating implementation of broad
spectrum of programmes including harnessing renewable
power, renewable energy to rural areas for lighting and
cooking, use of renewable energy in urban, industrial and
commercial applications and development of alternate fuels
and applications. In addition, it supports research, design and
development of new and renewable energy technologies,
products and services.
In India, the importance of the role of renewable energy in
the transition to a sustainable energy base was recognized as
early as the 1970s. At the Government level, political commitment
to renewable energy manifested itself in the establishment
of the Department of Non-Conventional Energy Sources
in 1982, which was subsequently upgraded in 1992 to a fullfledged
Ministry of Non-Conventional Energy Sources, now
re-christened as Ministry of New and Renewable Energy, since
October, 2006.
India’s Renewable Energy Potential: Solar & Wind
Solar
India lies in the sunny regions of the world. Most parts of India
receive 4–7 kWh (kilowatt-hour) of solar radiation per square
metre per day with 250–300 sunny days in a year (Majumdar,
August, 2008). The highest annual radiation energy is received
in western Rajasthan while the north-eastern region of the
country receives the lowest annual radiation. Solar energy,
experienced by us as heat and light, can be used through two
Table 2: Renewable Energy Sources In India
Technology
Cumulative Achievements (MW)
GRID INTERACTIVE
Wind 8,757
Small Hydro 2,181
Bagasse CHP 810
Biomass 606
Waste to Energy 56
Solar PV 2
Solar Thermal 0
Geo Thermal 0
Tidal Wave 0
OFF GRID
Biomass 95
Biomass Gasifier 86
Waste to Energy 24
Solar PV 2
Total 12,610
Small Scale Systems Cumulative Achievements
Family Bio-gas Plants 4 million
Solar Street Lights 69,549
Solar Home System 3,63,399
Solar Lantern 5,85,011
Solar Pumps 7,148 no
Solar Water Heating 2.15 million sq km
Solar Cookers 6,20,000
Wind Pumps 1,294 no
Source: Ministry of New & Renewable Energy (MNRE), March 2008
routes: the thermal route uses the heat for water heating,
cooking, drying, water purification, power generation, and
other applications; the photovoltaic route converts the light in
solar energy into electricity, which can then be used for a
number of purposes such as lighting, pumping, communications,
and power supply in non electrified areas. Energy from
the sun has many features, which make it an attractive and
sustainable option: global distribution, pollution free nature,
and the virtually inexhaustible supply.
India due to its geo-physical location receives solar energy
equivalent to nearly 5,000 trillion kWh/year (Roul, May,
2007), which is far more than the total energy consumption of
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the country today. But India produces a very negligible amount
of solar energy - a mere 0.2 percent compared to other energy
resources. Power generation from solar thermal energy is still
in experimental stages in India. Up till now, India's energy
base has been more on conventional energy like coal and oil.
However, India has now attained 7 th place worldwide in Solar
Photovoltaic (PV) Cell production and 9 th place in Solar
Thermal Systems. Grid-interactive renewable power installed
capacity as on 31 st October, 2006 aggregated 9,013 MW
corresponding to around seven percent of the total power
installed capacity which equates to over two percent of total
electricity.(MNRE)
The Ministry of New and Renewable Energy (MNRE) has
initiated innovative schemes to accelerate utilization and
exploitation of the solar energy. Number of incentives like
subsidy, soft loan, 80 percent accelerated depreciation,
confessional duty on import of raw materials and certain
products, excise duty exemption on certain devices/systems etc.
are being provided for production and use of solar energy
systems. However the Indian government support is insignificant
compared to support solar energy receives by governments
in Europe and East Asia.
Wind
The Indian wind energy sector has an
installed capacity of 8757.2 MW (as on
March 31 st , 2008) and a potential capacity
of 45,000 MW (MNRE). In terms of wind
power installed capacity, India is ranked 4 th
in the World. Today India is a major player
in the global wind energy market. India is
one of the fastest growing producers of
Wind energy, behind only to Germany, Spain, United States
and Denmark. India currently produces approximately 3,000
MW of wind energy annually (only marginally behind Denmark,
which is at a total installed capacity of 3,117 MW,
according to a recent World Wind Energy Association report),
and had a growth rate last year of over 40 per cent.
Per capita energy
consumption in
India is one of
the lowest in the
world and the
energy intensity is
one of the highest
of renewable energy technologies for supplying power to the
utility grid as well as in stand-alone systems. The Act provides
for the Independent Power Producers (IPP) to set up renewable
power plants for captive use, third party sale, power
trading and distribution. The most important feature and the
highlight of the Act is that it empowers the State Electricity
Regulatory Commissions (SERCs) to promote renewable
energy and specify, for purchase of electricity from renewable
energy sources, a percentage of the total consumption of
electricity in the area of a distribution licensee. This is considered
a major boost for promotion of the renewable energy
sector in India. They have also announced Renewable Portfolio
Standards varying from one percent to 10 percent for
reasonable periods. Ministry has initiated a process for linking
incentives on renewable electricity with generation by introducing
a scheme for providing generation linked incentive for
grid interactive solar electricity.
The Electricity Act contains the following provisions
pertaining to non conventional energy sources.
Sections 3(1) and 3(2)
Under Sections 3(1) and 3(2), it has been
stated that the Central Government shall,
from time to time, prepare and publish the
National Electricity Policy and Tariff
Policy, in consultation with the state
governments and authority for the development
of the power system based on optimal
utilization of resources such as coal,
natural gas, nuclear substances or material,
hydro and renewable sources of energy.
Section 4
Section 4 states that the Central Government shall, after
consultation with the state governments, prepare and notify a
national policy, permitting stand-alone systems (including
those based on renewable sources of energy and other nonconventional
sources of energy) for rural areas.
Policy Promulgation for Renewable Energy in India
Legislative support- “Electricity Act 2003”
The most important legislative development, which had
induced the recent growth in renewable power, is the “Electricity
Act 2003’’ notified in June, 2003. It recognizes the role
Section 61
Section 61, 61(h) and 61(i) state that the appropriate commission
shall, subject to the provision of this Act, specify the terms
and conditions for the determination of tariff, and in doing so,
shall be guided by the following, namely, the promotion of
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cogeneration and generation of electricity from renewable
sources of energy; and the National Electricity Policy and
Tariff Policy
Section 86(1)
Section 86(1) and 86(1)(e) state that the state commissions
shall discharge the following functions, namely, promote
cogeneration and generation of electricity from renewable
sources of energy by providing, suitable measures for connectivity
with the grid and sale of electricity to any person, and
also specify, for purchase of electricity from such sources, a
percentage of the total consumption of electricity in the area of
a distribution license.
Renewable Purchase Obligations
Under the above mentioned sections of the Electricity Act of
2003, fourteen State Electricity Regulatory Commissions have
issued orders/regulations for the purchase of minimum
quantity of energy under Renewable Purchase
Obligation(RPO) or Renewable portfolio Standard(RPS).
According to these specifications, the distribution licensees
are required to purchase specified quantum
of renewable electricity out of their
total electricity portfolio. These minimum
purchase obligations are gradually increasing
year by year varying from 0.5% to 10%
over a period of 10-20 years depending
upon each state. However, only 14 states in
India has declared these purchase obligations
even though the Electricity Act 2003
mandates for all the states in India to have
such purchase obligations.
The Need for a National Renewable Energy Act
India is all set to formulate a Renewable Energy Act with the
target to meet 20 per cent of country’s energy requirements
from this sector by 2020. The centre, in a bid to give a major
push to the renewable sector, has appointed a high-level
committee to prepare the national renewable energy law
(Financial Express, November 2008). Hopefully, the law will
deal with issues relating to providing renewable energy
certificates, strict implementation of renewable purchase
agreement and above all imposition of penalty for breach of
such agreement. Already certain state electricity regulatory
India is all set to
have a Renewable
Energy Act with
the target to meet
20% of energy
requirements by
the year 2020
commissions have passed orders with regard to renewable
purchases, it needs to be spread across the country. Similarly,
the law should enable imposition of penalty for violation of
such purchases as at present some state regulatory commissions
have passed orders in this regard.
The Renewable Energy Act is needed to facilitate the much
needed transition to a sustainable energy system. The barriers
to the development of renewable energy run across a wide
spectrum. A comprehensive legislation aimed at removing
these barriers and accelerating the development of renewable
energy technologies is necessary. Even though the government
has been favourable towards renewables, the efforts so far are
not backed by legislation. Legislation is a proven instrument of
change in this field, as seen in many countries across the world.
What is needed is political will to make it happen.
Besides energy independence, the devastating impact of
climate change has become an issue of critical importance.
Energy production using fossil fuels is the major contributor to
greenhouse gas emissions. Hence, transition to a low-carbon
energy economy is the real solution for mitigating the impact
of climate change.
Feed in Tariffs (FIT)
as a Policy Instrument in India
Feed in Tariff provide a minimum guaranteed
price per unit of electricity produced
to be paid to the producer or as a premium
in addition to the market electricity prices.
In other words they put a legal obligation
on utility companies to buy electricity from
renewable energy producers at a premium
rate, usually over a guaranteed period,
making the installation of renewable energy systems a worth
while and secure investment in the future. Regulatory measures
are usually applied to impose an obligation to electricity
utilities to pay the renewable energy power producer a price as
specified by the government electricity regulatory body. The
level of the tariff is set for some years to give the investors
some security on income.
Feed in Tariffs have been empirically proven to generate the
fastest, lowest-cost deployment of renewable energy, and with
this as a priority for climate protection and security of energy
supply, not to mention job creation and competitiveness. Feed
in Tariffs are the best vehicle for delivering these benefits.
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Some countries have opted for other instruments, such as
government grants schemes for micro generation (wind and
solar) by tax payers. Germany is a good example of how Feed
in Tariff can be used for the promotion of renewable energy in
a country. They introduced Feed in Tariff law in 1990 and Germany
has achieved substantial growth in the jobs created and
investments achieved. 97 million tonnes of carbon dioxide
emissions has been avoided in 2006 through the renewables
(German Federal Environment Ministry, 2006). The demand
for renewable energy systems has increased dramatically and
the installation costs are coming down fast. The Feed in tariff
financial model has now been taken up by many countries
around the world.
India, with big investments lined up for renewable energy
need to adopt this mechanism for the accelerated deployment
of renewable energy for its consumption. The Renewable
purchase Obligations (RPO) that are part of the Electricity
Act 2003 empowers the state regulatory commissions to give
preferential treatment to renewable sources of energy. The
RPOs can be considered much closer to Feed in Tariffs. The
Central and the state Governments need to make optimum
utilization of this innovative legislation of
Feed in Tariff which has been highly
successful in many parts of Europe.
Renewables for Rural Development
Even though India is one of the fastest
developing economies of the world, 400
million of the populations do not have
access to electricity. While advocating for
policy formulations that will help in
massive deployment of grid connected
Renewable energy, we should also be equally concerned about
millions of people in rural India who does not have access to
electricity at all. It is widely acknowledged that key to lifting
millions out of poverty in India is the development of rural
economies and energy is the prime mover in economic
development. Per capita energy consumption is directly
correlated to the overall quality of life of the person. Lack of
energy is among the key retarding forces preventing economic
development and slowing down poverty alleviation and growth
of the rural sector.
Until now, most of the rural energy needs have been met by
biomass burning, of which the preferred fuel is firewood, while
Germany is a very
good example of
how Feed in Tariff
can be used for
the promotion of
renewable energy
in an economy
animal dung and crop residues are also widely used. Commercial
fuels, such as kerosene and Liquid Petroleum Gas, have
not penetrated rural areas due in most part to low purchasing
power of the majority of the rural population and poor rural
infrastructure. Continued dependence on biomass fuels has
resulted in serious environmental problems of resource
degradation and pollution with local as well as global manifestations.
Also, quality of life remains poor, particularly of
women who are prime collectors, processors and users of
biomass.
The main issue that is to be looked into is how to bring about
rural development and bridge the gap between the power
requirements for rural development and the energy policies of
the government. The deployment of renewable energy has
answers to this. The policy makers have to recognize that
development is not equal to economic growth and increasing
energy consumption. They need to increase energy services
with a primary focus on livelihoods and other basic services for
the poor. It also need to be recognized that the cost of energy
produced is paid not just in terms of money but also in terms of
social impacts and environmental degradation. Renewable
energy is environmentally safer and has
the potential to influence the social and
economic life of the villagers in a positive
way.
Conclusion
The official position of the Government of
India has been that its per capita GHG
emissions are much lower than those in
rich developed countries whose GHG
emissions have grown practically unhindered
since the start of the 20 th century. However, because of
the increasing international pressure the Government of India
has come out with a National Action Plan for Climate Change
(NAPCC). The NAPCC does not consider any voluntary
binding emissions reduction target. Given this background, the
only way for Government of India to reduce its GHG emissions,
increase the energy supply and its access to the people
would be by stepping up the use of Renewable energy. Large
scale deployment of renewable energy in India is possible only
with proactive government intervention in the form of legislation,
policies and initiatives. Currently, while there are
National Laws for electricity and energy conservation, there is
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no national law for renewable energy. The Electricity Act 2003
has specific provisions to promote grid connected renewable
energy sources through the provisions of section 61 and section
86(1). But harnessing renewable energy has been constrained
due to large variation in policies and regulations across all
states and the lack of energy source wise legal mandate. India’s
federal set up and fragmentation of laws impinging on different
renewable sources, the case for a comprehensive integrated
renewable energy act with specific focus to Feed in Tariffs is
very persuasive and is the need of the hour.
References and Additional Thinking
• Amory Lovins, “Energy surprises for the 21 st century”.
www.rmi.org/images/PDFs/Energy/E99-16_EnergySurprises
• Bisht & Patra, “Solar Energy, Alternative to combat energy
insecurity in India” Society for the Study of Peace Conflict,
Article No:96, December 12 th , 2006
• CR Bhattacharjee, “Feed in Tariffs and Solar energy”
03-06-08, The Financial Express
• D. Murali, “Subsidies have not helped solar power in India”
Businessline., 26-05-2007
• Majumdar Shoumya (2008) A report on the current scenario
of development in Renewable energy in India,
REEEP publications
• Mendonca Miguel (2007) , Feed in Tariffs, Accelerating the
deployment of Renewable Energy, Earthscan UK
• Raghuraman & Ghosh,(2003) Indo-US cooperation on
Energy-India Perspective, Confederation of Indian Industries
• “Centre plans to frame National Renewable Energy
Law”,25-11-08, Financial Express.
• International Energy Agency(IEA), World Energy Outlook,
2007
• Planning Commission 2006, Report of the Expert Committee
on Integrated Energy Policy, New Delhi, Government of
India
• “Policy regulation for grid connected Solar power projects”,
Green Energy, Vol 3 No 4, July-Aug 2007
• Rural Electrification Policy, Ministry of Power, Government
of India, 23-08-06, New Delhi
• Brook & Gaurav Bhagat, “Solar energy heats up in
India”,Nov 17 th , 2003, ecoworld.com/features/2003/11/17/
solar-energy-heats-up-in-india
• “Development of Solar Power in India”, An NTPC
perspective www.ese.iitb.ac.in/activities/solarpower/ntpc.
pdf
• Electricity Act 2003, Ministry of Power, Government of
India, http://www.powermin.nic.in/acts_notification/
electricity_act2003/preliminary.htm
• Electricity Act 2003, Ministry of Power, Government of
India, powermin.nic.in/acts_notification/electricity_
act2003/pdf/TheElectricityAct_2003.pdf
• “Energy Sector”, www.economywatch.com/business-andeconomy/india-energy.html
• Guidelines of wind Power projects, Government of India,
India,www.windpowerindia.com/govtmnes.html
• India Energy Portal, http://www.indiaenergyportal.org/
overview.php
• “India’s solar power: Greening India’s Future energy
demand”: http://ecoworld.com/features/2007/05/15/indiassolar-power/
• Ministry of New and Renewable energy resources(MNRE),
http://mnes.nic.in/
• MNRE announces incentive for wind energy projects,
Business standard, 28-06-06, www.business-standard.com/
india/storypage.php?tp=on&autono=41043
• National Action Plan for Climate Change(NAPCC), Prime
Minister Office, Government of India, http://pmindia.nic.
in/Pg01-52.pdf
• Renewable energy, http://www.greenbusinesscentre.com/
renenegy.asp
• Renewable energy Policy directives, http://www.newenergyindia.org/Policy%20Page.htm
• Solar Indiaonline.com www.solarindiaonline.com/solarindia.htm`
• “We need major rebranding of renewable in India”- interview
with Malini Mehra, www.financialexpress.com/news/
We-need-major-rebranding-of-the-renewable-industry/341166/
• Wind Energy India, Clean Energy ideas, http://www.
clean-energy ideas.com/articles/wind_energy_india.html
• Wind power programmes, Revised guidelines for wind
power projects, /www.cwet.tn.nic.in/Docu/WIND POWER
PROGRAMME.pdf
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organisation).
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AD
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William Antholis*
Managing Director, Brookings
Institution, Washington D.C
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FIVE “GS”:
LESSONS FROM WORLD TRADE
FOR GOVERNING GLOBAL CLIMATE
I - Introduction
Reversing the greenhouse gas (GHG) emissions of the world’s
$60 trillion economy will be among the most complex international
governance challenges ever – rivaling the forty year
effort to dramatically reduce tariffs and establish a rulesbased
trading system. Given that nearly 15 years have passed
since the completion of the last global trade pact, it is easy to
forget that the World Trade Organization stands tall among
the great successes of global governance, precisely because it
was so difficult to accomplish. A counterpart twin tower – a
global system to address climate change – can mimic the trade
regime’s most successful governance principles, and learn
from its structural weaknesses. Perhaps
more important, as this volume’s theme
suggests, the two regimes need to work
diligently to avoid colliding with one
another. Indeed, it would be both unfortunate
and ironic if a global climate regime
only could succeed at the expense of the
global trade regime – or vice versa. What
lessons should the climate regime learn
from the trade regime? It may be helpful to
break the issue down into five core
questions for any attempt to govern: Who governs? What is
the structure of the basic governing agreement? Where is it
“binding”? When can we expect the agreement to take effect?
How does it bring new nations in? For each question, preliminary
answers can be found in what we might think of as the
five “G’s” that should govern climate change. By looking to the
lessons from the WTO, I try to make the case for a climate
regime that:
1. starts with a group of major emitters, which together
2. forge a general agreement to tackle the issue, one that
3. gears up nations’ domestic action and that
4. organizes itself around a generational goal that
It would be ironic
if a global climate
regime only could
succeed at the
expense of
the global
trade regime
5. allows for the graduation of developing countries into full
commitments.
In a few of these areas, such an approach can provide a
roadmap to resolving potential conflicts between the two
regimes.
II – Who Governs? The Right Group of Nations,
Matched to the Challenge
International regimes need to be designed to their purposes.
Are they debating forums? Are they negotiated agreements
that govern in particular fields? Trade and climate change
have both benefited considerably from both kinds of organizations.
This chapter assumes that concerned
nations are moving toward a
governing regime for GHG emissions, and
that they need mechanisms equipped to
address that challenge.
Since the formation of the UN system,
two bodies have existed along side one
another on the issue of global trade, one
for discourse, the other for governance.
The UN Conference on Trade and
Development (UNCTAD) has largely
functioned as a forum for assessing the twin goals and
accomplishments of trade and development. Alongside it, the
General Agreement on Tariffs and Trade (GATT) and its
successor the World Trade Organization (WTO) have been
the governing body for global trade. Though some might find
it odd to point to the WTO as a successful model of international
governance (especially given recent difficulties in
completing the Doha Round of multilateral negotiations), it is
easy to forget how significant its contributions have been to
both international cooperation and to economic growth over
the last sixty years. 1 The GATT/WTO system began as both a
smaller (in terms of membership) and more ambitious (in
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terms of governance) world body than the UNCTAD when a
group of the right countries decided to work together.
Lesson learned: size matters. When it comes to global
governance, it was and is easier to get things done with a
smaller number of the right countries. The GATT process was
managed by the biggest and most technically competent trade
players – the co-called “Quad” of the U.S., Japan, Canada and
Europe. Occasionally, when formal negotiations bogged
down, the Group of Seven (and later Group of Eight) would
weigh in to give the talks a boost, such as in 1978 and 2001
when the leaders themselves helped spur breakthroughs
leading, respectively, to the close of the Tokyo Round and the
launch of the Doha Round.
As the WTO’s membership grew in size
over its first five decades, negotiations
became more unwieldy. The greatest
number of new entrants came from developing
countries. After an initial sorting out,
the lesson of size was relearned: a new
Quad was established, where India and
Brazil joined the U.S. and EU as the
principal negotiators.
Further complicating matters, over the
years, a plethora of regional and bilateral
agreements have advanced trade liberalization
world-wide. The EU has led the
pack in depth of integration and effectiveness,
but the last forty years have seen the
rise of a South American commercial
union (MERCOSUR), the North American
Free Trade Agreement, the Southern
African Customs Union (SACU), and the
Association of Southeast Asian Nations Free Trade Area. Of
course, there is considerable debate about whether this
spaghetti soup of different agreements has been good for the
global trading system. Supporters of the three way street (i.e.
global, regional and bilateral), have found “competitive
liberalization” to be a positive force. Regional agreements
help drive reluctant countries to the global negotiations for
fear of missing gains from trade. Opponents see the growing
complexity and difficulty of multiple trade talks to exceed the
negotiating capacity of diplomats and the political will of
elected officials. Complexity is unavoidable, to be sure. That
the complexity has been at all manageable is due, in part, to
Over the years,
a plethora
of regional
and bilateral
agreements have
advanced trade
liberalization
the bedrock of a rules-based system that was established sixty
years ago, and the committed leadership of a relatively small
number of players.
So what does this mean for the climate change regime? The
half-true cliché about climate change is that it is a global
problem that requires a global solution. Still, moving forward
does not require all countries to be part of the solution – at
least not at first. The UN-sponsored Kyoto Protocol process
was slowed down by trying to conduct a global research
initiative on the nature of the challenge (largely led by the
UN’s Intergovernmental Panel on Climate Change or IPCC)
while also debating who was responsible for addressing the
challenge and negotiating an agreement
among 140 nations under the UN’s Framework
Convention on Climate Change
(UNFCCC). Though data, debate and
dialogue were critical to convincing these
nations of the challenge at hand, the
negotiations over what to do about it
became rancorous and left many questions
unanswered. They gave way to several more
years of disputed talks on how to implement
the agreement, a lengthy and
unsuccessful ratification discussion in the
U.S., and uninspiring results on the
ground – even from enthusiastic backers
like the EU and Japan, which face an
uphill battle to in meeting their 2008–12
GHG emission targets. Meanwhile, the
main developing country bloc is an eclectic
group, including nations ranging from
giant powerhouses such as Brazil, China,
and India to small, poor, landlocked nations in Africa to small
island nations. With the exception of these island countries
– who literally could get washed away if there is no progress
– most have been quite comfortable with the UN’s penchant
for discussion, so long as those discussions don’t lead to
binding obligations for their own economies.
In short, we have a potentially large problem coupled with a
complicated, bureaucratic and torpid negotiating mechanism.
If size matters when setting up a governing regime, then the
climate system needs to separate the broad and inclusive
dialogue about the challenge from the more narrow and
detailed challenge of negotiating an agreement. The latter
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task is best taken by a smaller group of nations. 2
The great bulk of GHG emissions likely to spew into the
atmosphere over the next three decades – not to mention the
economic and technical capacity to reverse course – can be
found in fewer than two dozen countries. The creation of
smaller groupings – such as a Major Emitters (E-8) – could
help to address these challenges. 3 The United States, European
Union, China, Russia, Japan and India are the top six
emitters of GHGs, and South Africa and Brazil rank 10 th and
13 th , respectively, but their contributions are significant in
representing their regions – especially Brazil, where protecting
the Amazon is a major priority in storing carbon. This
same logic lies behind the major emitters
meeting that President Bush hosted in
September 2007, which adds to my list of
eight and included Canada (7 th ), South
Korea (8 th ), Mexico (9 th ), Indonesia (12 th ),
and Australia (15 th ). Together, these
thirteen countries produce more than 80 %
of all GHGs.
Keeping the core group of negotiating
nations small – and occasionally involving
heads of state in the conversations – has
one other signal virtue. The same set of
players is at the center of WTO negotiations.
As the two regimes begin to bump
into each other on a range of issues – from
border-surcharges to energy subsidies –
resolution can be reached more easily if
the same players from both regimes are
talking. That is especially true if heads of
state themselves are aware of the need to
coordinate, and the perils of the failure to do so.
III - What is the Form of Governance?
A General Agreement
One of the keys to the GATT/WTO’s success is that it did not
start as a global body, but rather as a less formal arrangement.
If this distinction seems unimportant, keep in mind that the
WTO started not as the successful WTO, or even the successful
GATT, but as the failed International Trade Organization
– which was envisioned at Bretton Woods along with the
World Bank and the International Monetary Fund and whose
treaty died on the U.S. Senate floor, because two thirds of that
The fear that
nations will lose
their sovereignty
similarly has
plagued the
climate change
discussions
august body was not prepared to hand over highly political
decisions regarding trade policy to an international organization.
The negotiators went back to the drawing board. Only
after the International Trade Organization’s high profile
failure did they come up with the General Agreement on
Tariffs and Trade (GATT).
The core lesson: do not start with an international treaty
organization responsible for data, debate, and enforcing
compliance. And when it comes to enforcement, build
confidence through general agreements, which are “binding”
in that they synchronize and increase the ambition of domestic
action that states see as being in their best interest. For nearly
fifty years, the GATT was able to negotiate
and adjudicate agreements that bound
nations in a way that less directly called
national sovereignty into question. Each
participating nation pledged to cut tariffs
and other trade barriers in a coordinated
way. Countries could choose what counted
as significant reductions, and they would
often trade fast action in one area for slow
action in another. Once commitments
were made, they had to be enforced. An
adjudicative body was established to
resolve trade disputes.
Technically speaking, the adjudicative
trade body did not enforce the treaty.
Member nations did. Countries monitored
one another’s behavior – including the
most economically powerful trading
nations. When a plaintiff country had a
complaint, it brought it to the GATT/
WTO’s dispute resolution mechanism. If a defendant country
lost a dispute, it had a choice: change its domestic law, or allow
a retaliatory tariff or other action by the plaintiff country. In
this way, all countries felt the system to be self-enforcing. All
of this gave negotiators the ability to say convincingly to their
political masters – including general publics – that the agreement
was not a sacrifice of sovereignty.
The fear that nations will lose their sovereignty similarly has
plagued the climate change discussions. If the U.S. had
ratified the Kyoto Protocol, it would have been a “binding
treaty”. Opponents of Kyoto claimed that the U.S. would have
been liable for some set of sanctions that would be adminis-
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tered and enforced by the mandates of the UN. America’s
sovereignty over its energy future – and by extension, its
national security – would be subject to external intervention.
As a political matter, few American politicians want to be told
that they must do something, or else face sanction by a global
body.
Whether or not those concerns have any factual merit,
“sovereignty hawk” nations around the world (particularly in
the United States and much of the developing world) have
feared Kyoto-style obligations. Political leaders in the U.S.,
China, India and Brazil also have refused to sacrifice their
ability to control their economic destinies to a global energy
regime – at least, not give up that sovereignty
in a way that diverges from national
interest. Only the European Union – whose
members have grown comfortable sharing
or even pooling their sovereignty – seems to
like the idea of using an international
agreement to compel domestic action.
There is another way, of course. Building
on the successful GATT model, negotiators
could seek a General Agreement to
Reduce Emissions (GARE). Like the
GATT, the GARE would effectively link
domestic action with an international
agreement. 4 It would avoid moving too
quickly to a full blown international
institution, such as a World Environment
Organization. If a “treaty” suggests that
nations are tying their fates to one another,
“general agreements” suggest that nations
acknowledge one another’s interdependence,
but also their autonomy. As they build confidence in
their ability to work together under such agreements, they may
become more willing to strengthen the regime.
A GARE system could be built on the E8 or major emitters
group outlined above. A core set of the most important
countries could start the process, and this ultimately would be
compatible with regional and bilateral agreements. On an
annual basis, leaders of this group could meet at the summit
level to evaluate progress and to help give a boost to the
ongoing negotiations.
What then of the UN? An important role remains for the
UN in continuing to sponsor the broader climate talks as a
Building on
the successful
GATT model,
negotiators could
seek a General
Agreement to
Reduce Emissions
forum for helping nations share information and best practices
with one another. The UN also has been path-breaking in
supporting the critical work of the Intergovernmental Panel
on Climate Change -- the scientific body that has helped
establish that climate change is real, and that human action is
contributing dramatically. Both these functions help support
the negotiation and conflict resolution functions of a binding
agreement. Eventually, once confidence is built in a self-enforcing
agreement, the UN can be brought in to maintain the
relationships.
IV - Where Does it Bind Nations? It Gears up
Domestic Steps Nations are Willing
to Take
Ask a State Department lawyer, and she will
tell you that there is no difference between a
Treaty, a Congressional-Executive Agreement,
and a Presidential bilateral statement
with a foreign head of state. The United
States is honor-bound to live up to its
agreements, whatever form they take. If the
agreement includes consequences for
violation, the U.S. is obligated to accept
those. Yet in practice, nations (including
the U.S.) frequently violate or ignore
agreements – and either suffer the consequences
or do not. Though the UN
Charter provides some instances when
states may be physically compelled to act
in accord with violating international
norms, in practice this rarely is the case for
non-military agreements.
What makes some international agreements binding? What
makes some “bindings” succeed and others fail? There are at
least three ways to discuss the success of binding agreements.
First, some pacts succeed because states feel no need to
violate them. These agreements succeed because they create a
structure that allows states to do what they would prefer to do,
but might not do because they fear non-compliance by others.
By giving states confidence that other states will live up to
their end of the bargain, agreements allow states to do what is
in their best interest. This is what de Tocqueville called
“self-interest rightly understood.”
Second, some agreements succeed because nations realize,
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The United
States and China
are particularly
dependent on
carbon intensive
industries
such as coal
upon violating an agreement, that the net costs of doing so are
not worth it. This is usually the case when nations contemplate
sanctions from an agreement – and the political impact those
sanctions could have domestically and internationally – and
choose to get right by the law. Third and last, agreements work
when nations suffer appropriate consequences for their
violations, and both the violating nation and the nation that
applies the sanction feels the consequences to be appropriate
and adequate.
In theory, all three cases do not require an outside enforcing
body. It is governance without government, or what the
great international relations theorist Hedley Bull called “the
efficacy of international law” which
“depend[s] on measures of self-help.” 5 The
GATT/WTO succeeded because, for its first
fifty years, all three forms of self-help
worked. First, the commitments were
sufficiently robust that countries could plan
to cut trade barriers – that is, gear up their
commitment – knowing that counterpart
nations would do the same. GATT/WTO
negotiations helped nations to cut their
own trade barriers further than they
otherwise would. In return, counterpart
nations also lowered their barriers.
Consumers benefited from cheaper
imports, and exporters benefited from
wider markets. Nations understood the
tough domestic challenges other nations
felt in trying to lower trade barriers.
This worked in practice, particularly
when Congress signaled its willingness to
lower barriers in specific product areas in advance of a
negotiation. Making a priority of domestic action is actually
enshrined in the domestic legal architecture of American
trade diplomacy. From an American perspective, one reason
that the United States is more easily bound by trade negotiations
is that it uses Congressional-Executive Agreements,
which require passing relatively detailed trade promotion
authority in advance of negotiations. As a result, the trading
system aspired toward laissez-faire goals as a general matter
across national boundaries, but also accepted that national
legislation was central to moving forward. Though laissezfaire
remained a long-term goal, no single round or negotiation
ever proposed to complete the process and each successive
round depended on national action. The system
recognized the domestic political and economic constraints
that nations face in moving toward a globally integrated goal. 6
Second, the GATT’s enforcement system sustained national
cuts without appearing to undermine sovereignty. When a
nation was found to be in violation of a trade rule, it had a
choice: change its trade practice, or accept reciprocal trade
sanctions on other goods. Even under trying circumstances,
nations were willing to go back and change domestic law in
order to come into compliance. In these instances, countries
have avoided the imposition of sanctions, and they have been
unwilling to sustain extended tit-for-tat
sanctions. Third, in those few cases where
sanctions have been applied, nations have
generally been willing to accept them
without counter-sanctions. Rather than
starting trade wars, the GATT/WTO
system has prevented them.
A similar logic can guide a GARE:
countries can choose domestically to cut
their GHG emissions in the way that
makes most sense, given their domestic
constraints. Rather than prioritize a
“treaty” as a goal in and of itself, a GARE
would start with domestic legislation and
help nations strengthen – that is, gear up
– their ambition.
Nearly all nations recognize that cleaner
energy production and the protection of
forests are a worthwhile goals in themselves,
and that they should act to prevent
irreversible climate change. Almost all nations have taken
some steps in this regard. And a diversity of approaches is
appropriate. Countries use energy and regulate pollution very
differently, and they also differ widely in their capacity to
track emissions and enforce compliance. The United States
and China, for instance, are particularly dependent on carbon
intensive industries such as coal. Brazil, conversely, has huge
sources of renewable resources such as hydropower and
bio-fuels, but also is struggling to save its rain forest – one of
the great carbon reserves and “sinks” in the world. It is clear
that a one-size fits all approach will not work.
The threefold challenge for the international negotiations is,
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first, how to get countries to take reciprocal domestic actions;
second, how to structure compliance so that it reinforces or
returns states to mutual action; and third, how to establish
sanctions that nations can choose to accept as appropriate.
Thus, first, a GARE should begin in domestic action, and use
the negotiating process to gear up the ambition of states.
States are “bound” to follow thru on actions they are likely to
take on their own. 7 One way to make sure that that is the case
is to legislate first and negotiate later. In the American
context, GARE would take advantage of Congressional-Executive
agreements, and avoid the treaty process. In a GARE,
the domestic political hurdle to passage is whether to pass and
implement domestic law. With the framework
of such a domestic law in place, the
international negotiations can focus on the
level of ambition that all countries take, so
as to help ratchet up ambition. The diplomatic
challenge becomes whether that level
of commitment is acceptable to counterpart
nations. 8
This is in slight, but significant, contrast
to the Kyoto Protocol’s approach of
binding a state to an international organization’s
decision-making. 9 For instance, in
the United States, the treaty process not
only requires the supermajority in one
house of Congress, it also requires passage
of implementing legislation in both houses.
Agreements, by contrast, require majorities
in both houses – first for authorization
to negotiate, second for the final agreement
itself. The authorization to negotiate
– so-called “Fast Track” in trade talks – gives negotiators a
road-map for what can be negotiated, and as a result begins to
involve members of congress in the talks themselves. 10 In a
real sense, for the United States a GARE would start with
domestic action, and seek to ratchet it upward, in sync with
other nations.
Second, a GARE would need to be “binding” by addressing
non-compliance. As with the early GATT system, it should
include avenues for self-enforced sanctions by nations. Exactly
how nations will self-enforce an agreement is still being
debated. Some analysts have called for a common global
carbon tax. Others have called for a “pledge and review”
If one country
violates its
emissions limits,
however, the
permits in that
country become
less valuable
process, in which nations pledge to reduce GHGs, and then
review one another’s progress on a regular basis. There may be
merit to both kinds of agreements. Yet neither one, on its face,
appears to encourage the gearing up of domestic commitments,
while also discouraging nations from breaking those
commitments by imposing sanctions that deny nations the
benefits of the agreement. 11
One approach, in theory, does accomplish these goals:
international trading of GHG emissions. As a domestic
matter, the EU has already adopted emissions trading, and the
United States is considering such legislation, having successfully
pioneered a sulfur dioxide system under George Herbert
Walker Bush in the late 1980s. Though
there have been some initial problems with
the EU’s system, it has now done largely
what it intended to do: put a price on carbon
emissions, and create incentives for the
private sector to find emissions cuts where
most efficient to do so.
International emissions trading would
extend these advantages across national
borders. The United States insisted on
GHG emissions trading at Kyoto, and for
nearly two years afterwards haggled with
the European Union over the rules.
Ironically enough, once the United States
walked away from emissions trading
during the George W. Bush presidency, the
EU began to aggressively pursue international
emissions trading. Trading can
happen in two forms – in either a closed or
an open system. In a closed system, two
different national economies agree that total emissions in
both economies will not exceed a fixed amount. As long as
both nations comply in the aggregate, permits would remain of
equal value and freely tradable between countries. If one
country violates its emissions limits, however, the permits in
that country become less valuable. In an open system, nations
are responsible only for their own reductions, though investors
or companies may seek certifiable reductions in other countries,
and simply be free to invest in such reductions. 12
Both approaches have strengths and weaknesses from a
“compliance as self-help” standpoint. The strength of the
closed system is that it raises the stakes for compliance – and
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the penalties for non-compliance. In such a system, it is highly
advantageous for nations to make broad progress on their
GARE reduction commitments, as it would either force
nations to seek permits from firms that have successfully cut
GHG emissions in other nations, or provide incentives for
nations to have the most number of such firms in their own
territory. If it were possible to set up such a system, the
incentives for success should be high. Yet the cost of failure
should also be high, as less successful countries would be
forced to pay dearly for emissions permits across borders. In
contrast an open system would create incentives for investing
across borders. That said, it would provide few downsides if
nations failed to comply with the international
agreement – other than the greater
risk of failing to stabilize the climate.
The joint challenges for a GARE that
relied on trading for compliance would be to
determine whether a member country
seeking to join had proposed a strong
enough target, and whether preexisting
members had come close enough to their
previous commitments in each successive
round of negotiations. The first task would
need to fall to member states. The second
task could fall to a joint review panel
established by GARE countries. If a
country failed to meet its target by reducing
its emissions or buying permits, it
would forfeit the right to continue in the
GARE in future periods. 13
Third, establishing a successful binding
agreement requires addressing how to deal
with those who refuse to join. A growing chorus is raising the
idea of using actual trade protections – such as demanding
that imported goods from countries that have not adopted
sufficient emission reductions would need to purchase
emissions permits equivalent to their carbon footprints. The
idea first arose in countries such as France, directed at the
United States for not joining the Kyoto Protocol. Now that the
United States is contemplating joining a post-Kyoto system,
Americans are considering applying the same approach to
developing countries that do not take binding targets. These
“border permits” would be a way of placing some sanction on
nations that refuse to join or comply with an emissions
The potential
disruptive
element is that
all economies do
not recognize the
public good in the
same way
agreement – and thereby help share the cost of compliance.
This has the potential both to be a constructive way to think
through the problem, but also to undermine the trade regime,
the climate regime, or both. The constructive element of such
an approach would be to provide real leverage for nations to
actually transfer the costs of non-compliance in an effort to
address a global public good – something for which the trade
regime allows exemptions.
The potential disruptive element is that all nations do not
recognize the public good in the same way, let alone the means
to address it. Developing countries, which likely would be the
targets of such a system, are almost certain to claim that a)
this is a violation of the WTO’s rules against
non-discrimination, and b) that it does not
meet the standard for environmental
exemption for those rules. The “global
public good standard”, developing countries
would likely argue, is not met because the
current international climate treaty already
embodies how the international community
defines the climate challenge. That treaty,
they will claim, explicitly demands that
industrial nations act first, and that
developing countries are exempt from
binding targets. Because the standing
global consensus is that industrial nations
must act first, any effort to use the trade
regime to shift that burden would be seen
as illegitimate.
So if industrial countries persist in
imposing such tariffs in order to build a
more effective climate regime, they might
undermine the WTO – regardless of which way the dispute
settlement system determines the merits of the case. If a
developing country claimed that this was a violation of WTO
rules but lost the dispute, the victory for industrial countries
would come as an additional blow to developing nations, on
the heels of the WTO’s long-stalled Doha development round,
which has failed to produce market openings to industrial
markets. Conversely, a victory for developing countries might
further undermine public support for the WTO within
industrial nations – which continues to wane. Likewise, the
effect on the climate regime could be enervating. Emerging
market players such as Brazil, China and India will feel that
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they are being forced into a climate agreement by being
denied access to an international trading regime that they
have worked hard to enter as full participants. And industrial
countries might be less inclined to join the climate regime if
border adjustments are found to be illegal vis-à-vis the WTO,
because they will feel their competitiveness further eroded.
Avoiding this clash of global governance regimes should be
a priority for not only leading nations but also for the heads of
both global regimes. It is perhaps the best argument for the
world’s leading economies to not treat these issues in isolation
from one another, or from broader global economic developments.
Indeed, one of the ironies of the spread of democracy
has been that those governments have to
work so hard to accomplish domestic
regulation and, as a result, are often the
least inclined to take direction from
international organizations. The relatively
fragile support for international regimes
should not be easily challenged – particularly
in the name of establishing other
regimes.
V - When Can We Expect the New
Climate Regime to Take Effect?
Over A Generation
The idea of extending the enforcement of
commitments over time gets at a central
element of any governance challenge. One
of the great successes of the trade regime
was that it built itself gradually. Only after
forty-five years of operating did it lead to a
treaty organization.
The long-term nature of the climate challenge means that
solutions must also be long-term. Today’s warmer climate is
the result of GHG emissions accumulated over the last half
century. Today’s emissions add to those historic concentrations,
and are already locking in warmer temperatures well
past the middle of this century. Little can be done now to stop
that warming from happening. So the effort to slow emissions
over the next several decades will most affect temperature in
the second half of this century.
What is the appropriate long-term goal? The starting point
for all climate negotiations, the 1992 Rio Treaty (ratified by
the U.S. Senate, and adopted world-wide), included an
The relatively
fragile support
for international
regimes
should not be
easily challenged
at all
abstract long-term goal: “stabilization of greenhouse gas
concentrations in the atmosphere at a level that would prevent
dangerous anthropogenic interference with the climate
system”. The Kyoto Protocol was a practical attempt to
implement Rio, yet it only set one target – a short term
reduction of GHG emissions by industrial nations. This was
seen as a first step toward the longer-term goal. But because it
lacked any second or third step, it was widely criticized for not
getting at the longer-term challenges.
As with the trade regime, the climate regime should keep
this long-term focus that was part of Rio’s plan and be geared
around a portfolio of long-term targets – including concentration
levels and global temperature change.
As with any law or diplomatic agreement,
those targets could be adjusted later as
scientific and economic evidence is collected.
But the key is to get some agreement
on the long-term goals so that short term
steps can be seen in their broader context.
Right now, many scientists believe that
dangerous interference with the climate
could be avoided if temperature increase is
limited to two degrees centigrade. Consensus
estimates predict that doing so requires
at least stabilizing GHG concentration
levels at 550 parts per million (ppm)
by 2050.
If the E-8 or a major emitters group
adopted two degree centigrade and 550
ppm as global goals – and urged other
nations to do the same – countries could
then target their short-term and long-term
emissions cuts at levels that they felt to be effective and fair
steps toward that goal. When diplomats try to negotiate over
relatively short-term emissions cuts they would be better able
to explain to their political leaders and publics how each
short-term stop contributes to a longer-term effort. (Indeed, in
the recent proposed Lieberman-Warner climate legislation, a
series of emissions cuts are written in, extending out to 2050.)
As nations reach their shorter term benchmarks, they could
assess how they are doing toward that longer-term goal.
Among other things, this will help industrial countries signal
to developing countries what they consider to be fair burdensharing
for all nations over a future term, and that it is
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possible to achieve these marks without hurting economic
growth.
Setting targets for temperature increase and gas concentrations
can also help politicians, the media, and the public stay
focused on the purpose of the undertaking: whether emission
cuts are sufficient to slow and eventually stop global warming.
Though scientists now overwhelmingly agree that human
activities are leading to global warming, new evidence is
coming in constantly. The consensus is being affirmed, but
also challenged and updated on a nearly daily basis – mostly in
the direction of sending more dire warning signals. Some
scientists, for instance, now think that stabilization at 450 ppm
is needed to prevent two degrees of warming.
Of greater concern, two degree celsius
of warming may not be so safe. Recent
research, for instance, finds that the current
level of warming is melting the Arctic ice
cap faster than had been anticipated,
potentially weakening the ice cap’s ability to
reflect sunlight and cool the planet. If the
ice cap were to disappear with less than two
degree celsius of warming, it could be a
tipping point that would lead to a more
dramatic and dangerous shock to the
earth’s climate.
VI - How Does it Bring New Nations
into the Agreement? It Must Pro-
vide A Path for Graduation
Perhaps the greatest lesson the climate
regime can learn from the trade regime is
something that the latter has failed, so far,
to entirely address: how to bring the developing countries into
the regime in a way that acknowledges their development
challenge, but also allows them to graduate to full responsibility
as their economies grow.
The trading regime is now in the midst of its longest
negotiating round in its sixty year history – the so-called WTO
Doha development round. One of the main reasons why it has
been so difficult to conclude this round is that it is trying to
address the regime’s core weakness: that the two basic groups
– the industrial countries and the developing countries – have
differing sets of obligations. The developing countries enjoy
“special and differential treatment,” which means that they
Most industrial
economies are
now poised to
take near-term
and middle-term
efforts to cut
GHG emissions
are exempt from the more drastic tariff reductions taken by
industrial nations. Not only is the regime asymmetrical, but it
is also unclear how any developing nation would graduate to
taking on an industrial-strength obligation, when the time was
right. Thus, although the addition of these developing countries
has been critical to achieving global scope for the
organization, it also has added to the complexity of the
process – and the current stalemate in negotiations.
As with the global trading system, the developing countries
will ultimately need to graduate and become part of the
post-Kyoto Protocol climate system. Kyoto was problematic in
several regards, but perhaps its biggest drawback was that the
developing countries did not commit to cut
their GHG emissions – in fact, the treaty
actually prevents them from taking a
binding target even if they want to do so.
Argentina, for instance, tried to take on a
binding target in 1998, but it was prevented
from doing so by other developing countries.
It certainly makes sense for the developing
countries to have different obligations,
or obligations that kick in later, given the
industrial world’s historic responsibility
and much greater wealth of the industrialized
world, along with the generational
nature of the problem. But there is simply
no way to solve the climate problem
without the active involvement of the
developing countries – which, according
to current projections, will account for
more than 70% of GHG growth in next
twenty-five years. Yet these countries show no willingness to
accept Kyoto-style targets.
This catch-22 is not just a political problem; it is an economic
one that goes to the heart of getting clean energy markets
up and running. Most industrial countries are now poised to
take near-term and middle-term efforts to cut GHG emissions,
which is already leading to some increased investment
in clean energy. However, if the world economy is going to cut
its carbon emissions by as much as 80%, enormous amounts of
capital investment will be required to find transformative,
carbon-free sources of energy. The more certain investors feel
that the industrial countries will keep seeking ever deeper
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reductions in GHG emissions, the more likely they will be to
commit that kind of capital up front. The key is for the
industrial countries to signal their long-term cuts. But they are
less likely to do so long as developing country action is not a
sure thing. Right now, the developing countries are saying that
they will not act, and they are refusing to address the longterm
challenge.
How can the international community break out of this box?
The effort must begin with the industrial world, by responding
realistically to developing country concerns about equity. The
developing countries rightfully feel that the rich countries are
largely responsible for the problem to date, and probably for
the global warming that will take place over the next fifty
years. The industrial countries should not dismiss these
concerns, particularly because the developing countries,
particularly China and India, despite their recent economic
gains, still have a nearly unfathomable number of their
citizens living in extreme poverty – well over a billion people
combined in those two countries alone. In addition to taking
seriously efforts to estimate how much the industrial countries
have contributed to current GHG concentration levels, these
nations should also consider very long-term targets on a
per-capita basis.
Second, the industrial countries should appeal to the
developing countries’ own self-interest. Climate change is
most likely to hurt poor countries the worst, accentuating
droughts and severe storms, for which these nations are least
prepared. Moreover, many of these countries are facing the
local air-pollution that comes in the early stages of industrialization,
and the health care challenges of clean air and water
that could be lessened by early adoption of clean energy
technology. Moreover, investing in energy efficiency and clean
energy is ultimately cost-effective.
One possible motive for joining a GARE would be the
potential to earn emissions trading credits on a sizeable scale.
In the near term, this would mean continuing to explore
opportunities to earn emissions reduction credits on a project
by project basis. This could potentially build support within
the developing countries for adopting country-wide emissions
policies, linked to the GARE.
And last, the industrial countries should not be shy about
public diplomacy on climate change. Right now, the developing
countries do not feel any public pressure to respond to
climate change – which is probably not surprising, given the
development challenges many of them are facing. Thus, a
public diplomacy strategy is needed that stresses each topic
noted above – from equity to self-interest to the power of
global markets to help transfer technology and capital to
developing countries. Of course, all of these efforts require
that the real first steps be taken in the industrial world.
VII - Conclusion
The political will has begun to develop in the United States
and even in a few key developing countries for a global effort
to reduce GHG emissions. This public support, however, still
remains far from the dramatic shift in consensus needed to
establish a full-blown global institution to address the climate
challenge. In addition to the costs associated with acting, a
core concern is a familiar one in global governance: loss of
sovereignty. There is some good reason for this. Even for
the most committed nations, the climate change challenge
is of such great economic and environmental complexity
that few politicians are likely to simply turn over the keys
of their national policy-making to an international treaty
organization.
In taking the first steps toward a global climate regime, the
industrial nations can learn from the experience of how the
global trading regime built confidence in a self-regulating
system. The GATT/WTO system built on a small group of
states that, through a general agreement, were able to gear up
domestic action over a generation. The advantages of this
approach are that it does not pose a direct challenge to
national sovereignty. Instead, it coordinates the work of states
in a way that respects the diversity of local governance, and
has a greater chance of getting buy-in from the key players.
The challenge of such an approach is that it does not guarantee
fast domestic action, that many smaller states will feel left
out of the process, and that the transition to the system may
be difficult for many participating states. Last, as with the
trade regime, it must overcome the biggest challenge for
global governance in today’s world: how to graduate nations
when they emerge from the development process into the
industrial world.
Endnotes and Additional Thinking
1
That success was apparent twenty-five years ago, when the
GATT system was held up as the model for global governance
– including among “realist” theorists of international
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relations, who tend to hold a dim view for institutions. See
John Ruggie, “International regimes, transactions, and
change: embedded liberalism in the postwar economic
order,” in International Regimes edited by Stephen
Krasner (Ithaca: Cornell University Press, 1983), p.
195-231. While Ruggie would not classify himself as a
realist, his general argument was accepted by realists such
as Krasner. In the real world of politics, the GATT and
WTO’s acceptance among American political conservatives
– including their willingness to accept binding
decisions by international tribunals – is striking.
2
One commentator questioned whether the problem of
protecting the earth’s climate is analogous to that of
expanding free trade. As a general matter, most analysts
would agree that protecting the climate is a non-excludable
public good, while free trade has been less so, since only
the participants in a trading regime enjoy the benefits.
Some might even question whether free trade is a public
good, though cf. Charles P. Kindleberger, “International
Public Goods without International Government,” The
American Economic Review 1, no. 76, 1986, p. 2-13.
Indeed, a strong argument can be made that both a climate
regime and a trade regime offer both excludable and
non-excludable public goods. In trade, the excludable
public goods are the lower tariffs and trade barriers offered
to the members of the regime; the non-excludable good is
the stable international economic order that has economic
and political benefits for all countries. In climate change,
the non-excludable good would be climate protection. The
excludable good would be an emissions trading regime.
Many thanks to Lael Brainard for helping clarify this
distinction.
3
Todd Stern and William Antholis, “Creating an E-8”, The
American Interest, vol. 2:3 (January 2007), pg. 43-48.
4
See the first suggestion for such an approach in Todd Stern
and William Antholis, “A Changing Climate: The Road
Ahead for the United States,” The Washington Quarterly,
Vol 31:1 (Winter 2007-2008), p. 175-188.
5
Hedley Bull, The Anarchical Society (Columbia University
Press, 1977), p. 131, and Ch. 6 generally.
6
See Ruggie, “International regimes, transactions, and
change: embedded liberalism in the postwar economic
order.”.
7
For an overview of what a domestic and international
approach for the U.S. might look like, see Stern and
Antholis, “A Changing Climate.”
8
One model example for this would be the EU’s proposal to
unilaterally cut their emissions by 20% below 1990 levels in
the post-Kyoto commitment period, and to extend those
cuts to 30% if an international agreement is reached.
9
One advantage by not being a treaty, the GARE would
avoid another major drawback of Kyoto: it would not need a
two-thirds majority in the United States Senate, a minefield
where countless treaties have gone to die. Indeed, by the
treaty process, internationally agreed emissions targets and
timetables the policies and regulations needed to comply
with them become deeply enshrined in domestic law as they
have been passed by a supermajority in the Senate. By
contrast, the GARE would only require simple majorities
in both the House and the Senate, putting the domestic
legislation horse in front of the global treaty cart – just the
way it should be. See both Stern and Antholis, “The Road
Ahead,” and also Nigel Purvis, “Treat Climate Like Trade:
The Case for Climate Protection Authority” (unpublished
policy brief manuscript).
10
See William Antholis and Strobe Talbott, “Tackling Trade
and Climate Change: Leadership on the Home Front of
Foreign Policy,” in Michael O’Hanlon, ed., Opportunity 08
(Brookings Institution Press, 2007), p. 63-67.
11
For a useful discussion on this, see Jonathan Wiener,
“Incentives and Meta-Architecture,” in Joseph Aldy and
Robert Stavins, Architectures for Agreement: Addressing
Global Climate Change in a Post-Kyoto World, (Cambridge
University Press, 2007), especially p. 74-76.
12
As mentioned earlier, establishing an emissions trading
system would move from the non-excludable public good
system of climate protection to a system with excludable
benefits: access to trading with other parties, with the
enhanced efficiency and reduced compliance costs this
implies. See endnote. 3, above.
13
See Stern and Antholis, “A Changing Climate,” p. 183.
(* The author is indebted to comments from Scott Barrett, Colin
Bradford, Lael Brainard, Daniel Drezner, Stuart Eizenstat,
Lauren Fine, Warwick McKibbin Carlos Pascual, Nigel Purvis,
David Sandalow, and Strobe Talbott . The views expressed in the
write-up are personal and do not reflect the official policy or
position of the organisation).
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Globalisation
To Global
Governance:
Hegemony To
Legitimacy?
B. Ramesh Babu
Formerly Sir Pherozeshah Mehta Professor
of Civics and Politics, University of Bombay.
Specialist in International Relations, American
politics and public affairs
The contemporary phenomenon of globalisation is
to be seen as the continuation of the historic,
secular, and uneven transition of the world from
INTER-NATIONAL POLITICS (i.e. politics among
nations) to GLOBAL POLITICS. The role and reach of
this transformation have grown during the past three or
four decades on an unprecedented scale in human history.
All major (and many not so major) issues and challenges
confronting each and every nation today have become
global and demand global solutions. Yet, there is no
genuine global response, let alone a globally agreed
framework or approach to deal with global challenges like
the current economic meltdown, climate change, ecological
balance, security of persons, national security, poverty,
destitution, domestic violence and international
terrorism. Sadly, the way our world is constituted today
concerted, comprehensive, and truly global solutions are
not possible, not even conceivable, as will be elucidated as
we proceed further.
There are global MNCs and some of them are bigger,
richer, and more powerful than many sovereign nation
states. However, there are no global unions, nor a world
federation of farmers or agricultural workers. There are
no global citizens either. But, we have a plethora of ‘super’
patriotic leaders of nation states (big and small) masquerading
as global leaders. Some of them harbour even
planetary pretensions. Unfortunately, we do not have
truly global leaders, who are genuinely concerned about
the welfare of all the people all over the world. Even if
some individual leaders dare to stray beyond, the extant
international system (a legacy of the West) will not allow
them to rise above their country’s ‘narrow’ and ‘parochial’
national interests. The leaders are expected and duty
bound to further their national goals and objectives at the
expense of other nations, welfare of the mankind, and
world peace. At the most some grudging concessions are
made in the direction of enlightened self interest, if and
when national interests of the other states involved
converge. Furthermore, in operational terms, even this
narrow and parochial national interests approach does
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not encompass the welfare of all the citizens of the
country. The rich and the powerful in all the countries
(i.e. ‘the establishment’) utilise the State and the Flag to
advance their own private and personal interests at
expense of the masses, the poor, and the marginalised,
who constitute an overwhelming majority of the population.
It must be added that such inequity and injustice are
pervasive in the rich as well as poor countries. Greed,
graft, corruption (corporate, governmental, and private),
and nepotism, discrimination, and racial prejudice of all
hues, and aggrandisement of the powerful (local, national,
and global) rule the roost. Ironical as it may seem, the
good old question “whose interests are national interests?”
has become doubly pertinent today. Yet, the
juggernaut of the liberal capitalist globalisation rolls on
spewing misery, despair, destitution, resentment, and
terrorism at home and abroad, even as it achieves measurable
economic growth. The recent economic meltdown
worldwide has put the capitalist fundamentalists on the
defensive. Free market and unregulated capitalism have
lost their euphoric edge. The classic ‘growth versus
development’ quarrel is back to the
front burner.
This indeed is the most fundamental
and overarching crisis confronting mankind
in the 21 st century. There is a wide
and cruel gap between the representational
legitimacies and the extant
structures of governance at all levels,
local to global. Our focus in this essay is
on global governance. The UN and the
entire Brettonwood system of the
Second World War era had their innings. They are
inadequate to cope with the greatly transformed world of
today. A paradigm shift is taking place in global affairs
since the mid-1980s. A new web of identities and loyalties
(parallel and hierarchical) is in the making everywhere.
Over time a new architecture of jurisdictions structuring
power and authority in line with the altered framework of
loyalties (and identities) will have to emerge. 1 This will
happen sooner than we think. Whether such a new
equation/engagement between loyalties and jurisdictions
stretching from local to global will be arrived at relatively
peacefully (or not) is the fundamental issue of our times. 2
We will need
new forms of
governance
and newer
combinations of
jurisdictions and
mix of the two
This is the most crucial challenge confronting mankind
today and in the immediate future. It is important that we
build on the emerging global web of governance and keep
it in step with the pace and extent of globalisation taking
place in finance, commerce, communications, culture and
most other spheres of our lives. If the disjunction between
the emerging loyalties and jurisdictions strays beyond the
(retractable range of) elasticity of the governing institutions
in place (at the national and international levels),
there would be violence, disorder and chaos. Reforms will
not be enough. We will need new forms of governance
and newer combinations of jurisdictions (territorial and
functional) and creative mix of the two.
Consumerism and Conflict
The propensity of man to grab what all he wants, whether
he needs it or not, i.e. consumerism, is certainly one of the
most subversive legacies of the West that is threatening
the planet earth with exhaustion and possible extinction.
The liberal capitalist western mindset, which insists on
the rights of the individual and his entitlements against
the State and society without giving
equal importance to his concomitant
obligations and duties to the community
and the nation, is fundamentally
flawed. Such self-centred and essentially
selfish (bordering on the greedy)
and atomistic conceptions of society
became the engines of achievement and
‘progress’ in modern times. In the
globalising world of ours such notions
of progress and modernity are exercising
enormous magnetic influence all over the world. The
revolutionary advances in IT and communications have
greatly magnified “the international demonstration
effect” of consumerism and are raising popular expectations
sky high all over the world. I have called this
phenomenon “imperialism of attraction”, which is popularly
and mistakenly dubbed as the “Americanisation of
the world.” 3
This is not to deny or decry the phenomenal achievements
of man in every walk of life during the last four
centuries under the leadership of the modern West and a
lot more is expected in the future. However, this legacy
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like so many others in history has overreached itself and is
threatening the very humanity of man. Some perceptive
minds (including in the West) are questioning the very
concept of progress as it is understood and advocated till
now. Mere material advancement without the redeeming
humane values and spirituality do not and cannot lead to
real progress. It is time to curb the excesses of logic/
rationality and return to sanity, common sense and above
all to moderation. ‘To shun too much’ of everything (even
logic and goodness) should become the guiding principle
for mankind at this juncture. An ancient Sanskrit axiom
enjoins man to eschew excess in everything and everywhere,
athi sarvatra varjayet! However, I concede that how
much is too much is not an easy rubric to
cross. But, the ravages of too much are
easy to see, unless we choose to be blind
to the excesses around us.
Terrorism, the New Menace
International terrorism spearheaded by
Islamic fundamentalists is the latest
combustible added to the already
explosive global situation. India has
been the earliest of the victims of cross
border terrorism. But, it is only after
the tragically spectacular attack of 9/11
on the US, international terrorism graduated
into a serious menace of global
dimensions. Instead of going after the
terrorists who attacked their country,
the neocons led by President Bush and
Vice-President Cheney went on a
unilateral rampage. The US launched the so called global
war on terror. By all accounts the war in Iraq degenerated
into a big misadventure, made international terrorism a
bigger threat than before and virtually destabilised the
whole region (from Istanbul to Islamabad and Riyadh to
Rawalpindi). Pakistan, the long standing epicentre of
terrorism, is itself in mortal danger of being over taken by
the Taliban. Ironically, it is Pakistan that nurtured the
Taliban in Afghanistan with the active connivance of the
US and its allies in the West, and above all Saudi Arabia.
In the bargain the Pakistani Army and the ISI worked
closely with the Taliban and other Islamic fundamentalist
elements culminating in the talibanisation of Afghanistan
and Pakistan. History tells us that those who ride the tiger
can dismount the beast only at their own peril, as the
current offensive of the Pak Army against the Taliban
indicates. One need not be surprised if this cracking the
whip turns out to be a drama enacted till the new multibillion
dollar American aid flows in. Pakistan could then
return to business as usual and be back on the fast track of
a failed state!
What is the Way Out?
A return to common sense and fair play is and can be the
only way out of the extant liberal capitalist western
hegemony. I believe that a return to
Gandhi, ‘Gramodaya,’ Green, God, and
Green Peace and above all, to common
sense and fair play is the need of the
hour. My fervent plea for a return to
Gandhi should not be misunderstood. I
am not advocating a return to the
obscurantisms of the past, nor to blind
acceptance of everything the Mahatma
stood for and preached. I am
alluding to the essence of his philosophy
of life: truth, non-violence, peace,
and self-sacrifice. The Mahatma was
an ardent advocate of simple living
and service to fellow human beings.
He declared that ‘Manava Seve’ is
‘Madhava Seva’ (serving man is the
only way to serve God). For example,
the Mahatma urged people to cut
down their needs and wants to the barest minimum. He
practiced what he preached. A loin cloth, two dry rotis
and a cup of goat’s milk was all he ever needed. Nobody
could ask for a more simple living by example – the very
opposite of the consumer culture that is driving the
people mad and the planet earth to exhaustion. Power is
to be seen and used as a trust and the more endowed
among us have a greater obligation to work for the benefit
of the masses, he insisted. He proclaimed that all policies
and actions of the State must pass the ultimate test --
whether they enhance the welfare of the poorest of the
poor (antyodaya) in the remotest villages and hamlets of
Gandhi insisted
that the more
endowed among
us have a greater
obligation to work
for the benefit of
the masses
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the country (gramodaya). Today’s economic reforms in
India and the world over (i.e. liberalisation, privatisation
and globalisation) are far from meeting the Mahatma’s
test. On the contrary, the rich and powerful are gaining
more and more even as the marginalised millions are left
out, nay, excluded mercilessly. Yet the rich and the upper
classes are demanding and extracting more and more
benefits for themselves, often at the expense of the poor
and the hungry masses. Greed and callousness of the
ruling elite are driving community after community and
country after country around the world to protests, direct
action, insurrection, revolution, and violence in sheer
desperation. A return to Green refers to
the famous philosopher Thomas Hill
Green, who conceived rights of individuals
as arising from obligations fulfilled.
The Mahatma always insisted that all
rights are contingent on and derived
from duties. In fact he was so adamant
on this score that he refused to endorse
the Universal Declaration of Human
Rights because it did not include a
corresponding list of ‘Duties of Man’.
Rights and entitlements should not get
precedence over citizens’ duties and
obligations to the State and Society.
Rights and duties should forever be
‘balanced.’ Obviously, a healthy balance
between them is never static. Each
generation must work for and find its
optimum balance between rights and
duties. It is my contention that this
balance is skewed too much in favour of the individual
and against the community in the modern era, especially
in ‘the advanced’ countries of the West. Anxieties of
freedom in ‘open societies’ (á l Karl Popper) are as
problematic as anxieties of frustration in ‘traditional
societies’, I would like to point out.
A plea for a return to God in the age of ‘secularism’ and
‘knowledge society’ may sound old hat. But, it is my contention
that it is not. The modern western concept of secularism
is sullied by a strong inherited prejudice of being
anti-religion and even anti-God. Separation of the
Church and the State in the West was a historical neces-
Rights and duties
should forever
be ‘balanced.’
Obviously, a
healthy balance
between them is
never static
sity for survival in Europe. The religion of the kings was
forced on their subjects. Religious toleration did not grow
because of faltering convictions or erosion of religious
zeal. It emerged because the very survival of the kingdoms
and the people in Europe was at stake. It may not be
out of place to add that King Henry’s anxiety to add one
more wife ‘sanctioned by the Church’ to his harem had
played not so minor a part in the separation of the State
and Church in England! Over time this practice evolved
into a doctrine of sorts and became one of the cardinal
principles of western society much later.
Be that as it may, the West and the rest of the world
have moved far from the sterile and obsolete
notions of isolating religion from the
other dimensions of people’s lives. Today
it is widely accepted that religion is an
integral part of man’s very being, his life
and culture. In fact, in some western
nations a return to faith is being perceived
as an antidote to anomie, violence,
and declining moral values. What
needs to be done is to emphasise the
spiritual dimension of religion and
de-emphasise its dogmas and rituals.
One of the central doctrines of the
Sanatana Dharma is that reason and
faith are not antithetical to each other.
Reason gradually leads one to faith, the
Hindu scriptures assert and the lives of
sages of ancient India are testament to
the coexistence of the two for mutual
enrichment. In this short essay, I cannot
discuss this phenomenal transformation of the perception
of religion in the post modern society. It is adequate for
our purposes here to recognise the commonalities of all
living religions of man: humanity of man; equality of all
people before God; acceptance of differences in faith as
natural; to be at peace with oneself, one’s own God and
fellow men. These are among the eternal values of life on
earth. The rapidly globalising world of ours urgently
needs the formulation of truly universal norms and values
shared across cultures and continents. Otherwise planet
earth will be engulfed in disorder, chaos, and wars.
My plea for a return to ‘Green Peace’ is an all inclusive
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term for the restoration of global ecological balance.
Environmental pollution, global warming and all the other
related threats to the future of man on earth are included.
I extend this concern to the well-being of all the other
living beings and non-living things that share the planet
with us. Hinduism asserts that man has no superior claims
or right of precedence over the other living and non-living
inhabitants on the resources of the planet earth. In fact,
being endowed with more intelligence and knowledge, man
has greater responsibility to act as the trustee of the lesser
beings, the Hindu scriptures ordain.
We must advance (or is it return?) to conceptions of
authority as trust, i.e., power with a redeeming (social and
moral) purpose. In short, we must return to idealism.
Rampant consumerism of here and now has to be given up.
Similarly, the ‘presentism’ of modem times must yield place
to a healthy balance between the present and the past, and
also between the present and the future. Parochialisms of
the whites, browns, blacks, and yellows; the rich and the
poor; advocates of human rights (in a planet also inhabited
by other living beings and non-living things) are essentially
non-inclusive and discriminatory. Feminists, champions of
children's rights (and all the other activists on behalf of this
or that good cause) offer, even at their best, only a narrow
and partial vision of mankind. Moderation has to become
the hallmark of human civilisation in the new millennium.
Need, not greed, should be the basis of all human endeavour
on earth! Mother earth has enough for everyone's
need, but not for his greed, as Mahatma Gandhi observed
wisely.
Globalisation and Globalism
It is appropriate at this juncture to distinguish between
globalisation and ‘globalism’. The former is a process of
supra-national integration and sub-national disintegration
occurring simultaneously, especially since the 1990s. This
dual transformation is leading to an inchoate restructuring
of the architecture of global power structure. However, the
extant post Cold War globalisation can be seen as a
phenomenon of integration of the major national economies
into a liberal capitalist global ‘free market’ led by the
US and the West. As such it is hegemonic, exploitative,
unjust and unacceptable, especially to the Third world as
well as the poor and marginalised millions in the advanced
countries of the West. Globalism, on the other hand,
conceptually envisions the whole world as one unit and is
concerned with the welfare of all people everywhere and
the planet earth as a whole.
An effort is made here to conceptually bridge the gap
between the extant institutions of global governance and
their representational legitimacies. There is a huge democratic
deficit, which needs to be acknowledged first. Then
the will to undo the inherent injustice should follow. If
there is a will, there is a way. Then we have to come up with
new forms of governance which are capable of institutionally
steering the globalization underway since the mid-
1980s forward from hegemony to genuine global governance.
This calls for a new philosophy of globalism that is
valid across cultures and continents. I have some ideas on
how to go about such an inter-civilizational intellectual
exercise 4 and also my own notions of what could be the
major constituents of such a philosophy of globalism. But,
this will have to be attempted in my next venture.
Endnotes and Additional Thinking
1
See B. Ramesh Babu ‘Glocalisation’ and the Indian
Nation State: Jurisdictions and Loyalties in Flux, New
Delhi: South Asian Publishers, 2004.
2
The current tussles over Telangana, Vidarbha and the
armed the struggles of the Naxalites and other extremist
groups around the country are classic examples of the
ongoing flux in identities and loyalties of people. Similar
mass struggles and passionate demands for justice and
fair play are going on elsewhere in South Asia (Nepal,
Pakistan, and Sri Lanka) and around the world (Palestine,
Iraq, Indonesia, Philippines, Spain, Yugoslavia,
Malta, Brazil, Argentina, Chile and sub-Saharan Africa,
etc.)
3
See B. Ramesh Babu ‘Americanisation of the World:
Myth and Reality,’ Freedom First, 422 (July-September
1994), pp. 23-27
4
For an example of the inter-civilisational dialogue
needed see Hu Yeping, ‘Asian Civilisational Dialogue
between India and China,’ Word Affairs, Vo.8 no.4
(October – December 2004), pp. 82-95.
(The views expressed in the article are personal and do not
reflect the official policy or position of the organisation).
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AD
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We Can Have Better Global
Economic Governance
Barry Herman
Visiting Senior Fellow,
Graduate Program in International Affairs,
The New School, New York
Introduction
Opportunities rarely arise for changing global economic
governance. One of those opportunities has been
opened by the current global financial and
economic crisis. Already, the leaders of
the United States and the other
members of the Group of eight
(G8) have invited the leaders of
Australia and some large
developing countries,
including India, to meet with
them as the Group of 20
(G20), first in Washington
on 15 th November, 2008 and
again in London on 2 nd April,
2009. 1 While it is good to have
more voices in the G20 than
were heard in the G8, there are a
lot more voices that are not being
heard. Should India, the world’s largest
democracy, merely take its seat in the G20?
Or, should India also help the nations of the world
take a more democratic and inclusive governance direction?
This paper is a brief for how it might support the latter.
The question is who makes the policy decisions that shape
global monetary, financial and trade flows — and on whose
behalf? Some of those decisions are embodied in negotiations
leading to multilateral agreements, as on international trade.
Some are embodied in one-time policy decisions of national
authorities, as in the partially successful effort of some mem-
bers of the G20 to engineer a joint fiscal stimulus in 2009. Some
are reflected in regulatory norms adopted by specialized bodies
that, by force of example, become the global norm, as in the
capital adequacy standards recommended for commercial
banks by the so-called Basel Committee. Still others become
the policies applied by the International Monetary Fund (IMF),
the World Bank and other official financial institutions in
shaping their programs of assistance. Decision-making processes
are distinct in each case. But, as the biggest
powers acting together can wield major
influence in the decisions taken in
each forum, they have sometimes
used the mechanism of their G8
summits to come to common
views, which then are
adopted in the other
forums as global policy.
This process can foster
some limited coherence
among the policy realms.
There are also implicit
commitments not to overwhelm
the interests of smaller
economies, and explicit commitments
to seek international policies
that promote the development of the
developing countries and help eradicate
poverty. These latter, however, are moral imperatives.
They determine policy outcomes only to the degree that
they are not overridden by domestic political needs in the G8
economies.
Today, it seems the G20 may supplant the G8 as the premier
“executive committee” for world economic policy making. If so,
a natural question is will the new members adopt the views and
perspectives of the already established world leaders once in
their charmed circle or will they turn global policy in new
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G LOBAL GOOD
directions? The newly included leaders will surely promote and
defend their national interest — and presumably the interests
of developing countries more generally — to the extent they
can influence the debate. Is this good enough?
Before answering this question, we should review in somewhat
more detail how the current global governance system
operates. This paper thus begins with a broad-brush characterization
of official oversight of the world economy as it has been
and how it appears set to operate if the G20 supplants the G8.
This will be contrasted with the “Financing for Development”
process that planted the seed of a new mechanism of global
governance. A seedling sprouted, but it then dried up. Now, a
number of developing country governments are trying to
nurture it back to life. We conclude that India should join
that effort.
Global Economic Governance since the 1970s
Economic oversight within national economies is an inescapable
responsibility of governments. Each country’s authorities
intervene more or less in the workings of their private sector
and directly provide goods and services to varying degrees
depending on national goals and strategies.
Whether or not governments explicitly
think about economic governance, they do
it. One may similarly say that there is a
system of economic governance at the
global level, even though there is no global
government.
The global governance system today
involves a decentralized collection of both
formal international institutions and
agreements and informal relationships
among countries. Each of the specific institutions or forums is
independently governed. There is no formal mechanism for the
overall coordination of their respective policies. Many of them
are “specialized agencies” of the United Nations (UN) and in
principle are coordinated in the UN Economic and Social
Council (ECOSOC). However, ECOSOC has never had the
political stature or technical capacity to undertake such a role. 2
Overview discussions are held in ECOSOC and other UN
bodies (e.g., the General Assembly or the UN Conference on
Trade and Development), but they rarely affect actual policies. 3
Rather, the coordination that does take place, at least since the
1970s, has been by the Group of seven major industrialized
Economic
oversight
within national
economies is
an inescapable
responsibility of
the governments
countries (G7), which brings together the political leaders of
the largest economies in the world on a regular basis to discuss
world economic problems.
Some of the individual institutions in the system enjoy great
power, the IMF being the most powerful throughout most of
this period. Its mandate has been fundamental: oversight of
national balances of payments and exchange rates. The basis
for the mandate is the simple fact that exchange-rate volatility
in one country may well seriously disturb the economies of
other countries. IMF has thus had a strong power in “surveillance,”
policy advice and providing partial funding to help
countries out of unsustainable situations. At first, IMF’s remit
was universal, but this effectively ended when the Bretton
Woods monetary system collapsed following the 1971 decision
of the United States to break the link of its dollar to gold.
Instead, the major economies shifted to a system of floating
exchange rates and whatever effort they made to cooperate on
macroeconomic policy shifted to the newly created G7. IMF
was reduced to being the monetary overseer (and creditor) of
the developing countries and later the formerly centrally
planned economies of Europe and Asia. The Fund’s policy
guidelines, which increasingly reflected the
emerging neoliberal “Washington consensus”
of the G7 countries, were coupled with
a willingness to see far sharper economic
contractions (“corrections”) than the G7
would have tolerated in their own countries.
The speed and depth of the correction of
an unsustainable balance-of-payments
deficit has been a function, not only of how
“distorted” the economy had become, but
also of how much external financing was available to the
country during the adjustment period. IMF has been able to
deploy large funding packages at certain points in time and far
smaller ones at others, using both its own resources and those
made available by the multilateral development banks and
donor governments. The amount of financing needed has also
sometimes been reduced through postponed or cancelled
external debt servicing, as agreed in the informal Paris Club of
major government creditors. In this regard, IMF has played a
coordinating role in calculating the sums that could or would be
made available from the various sources in individual cases.
This notwithstanding, countries that were politically important
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to the major powers have generally had better financed
programs than others. In other words, while IMF may nominally
have been at the center of the balance-of-payments
adjustment process, the G7 (or certain members) have at times
directed the process for political purposes.
Besides adjustment financing, the World Bank and the
regional development banks (e.g., the Asian Development
Bank for Asia and the Pacific) provide substantial long-term
financing for development projects and programs, complemented
by resources from smaller and more specialized
multilateral lenders, like the International Fund for Agricultural
Development. Each institution has its own executive
board that, like the Board of IMF, has been effectively dominated
by its founders, which is to say, the countries in the G7,
and owing to the growing contributions of new donors, some
emerging economy members of the G20. Not surprisingly, when
new funding plans for the main institutions were recently
agreed, it was at the London G20 meeting. 4
There has long been, however, a potential alternative forum,
the so-called Development Committee. 5 It is a high-level
committee that might have coordinated the different multilateral
financial institutions, as it brings
together primarily development cooperation
ministers from the rich countries and
finance ministers from developing countries
for semi-annual discussions at the World
Bank. Some of the ministers represent their
own countries (e.g., France, United States,
China, Saudi Arabia, Russia) and others
represent constituencies of countries in a
very uneven mixture. For example, India
also represents Bangladesh, Bhutan and Sri
Lanka, while Liberia and Mauritius represent 21 and 23
sub-Saharan African countries, respectively. 6 However, the
Committee focuses almost entirely on programs and resources
of the World Bank Group.
There is a parallel and actually more powerful committee at
the IMF that also meets semi-annually, indeed, always a day
before the Development Committee. This is the International
Monetary and Financial Committee (IMFC), comprised of
finance ministers and central bank governors. It primarily
focuses on policies and funding of the IMF, although it also
takes account of financial regulatory matters, as IMF encourages
and monitors implementation of international financial
With time, it was
realised that the
international
regulatory
committees
needed a way to
talk to each other
standards and codes of good practice (in some cases jointly with
the World Bank).
Most countries actively regulate the bulk of the activities of
their financial sectors, ranging from commercial banking to
insurance to the operation of securities markets. Countries
have traditionally taken different approaches to meet needs
differently defined. However, with increased cross-border
provision of financial services and resources, there has been a
growing global interest that national regulations adopted for
prudential reasons not unfairly tilt a market to one nation’s
firms or another, as well as that the regulations effectively
attenuate inherent volatile tendencies of the financial sector.
Various international committees of regulators have thus
formed since the 1970s to develop generally approved
norms for regulation, such as the Basel Committee on
Banking Supervision, the International Organization of
Securities Commissions, the International Association of
Insurance Supervisors, and so on. Some are broader based than
others, but developed country regulators generally play the
dominant role.
Increasingly, it was realized that the international regulatory
committees needed a way to talk to each
other. Thus, in the wake of the East Asian
and Russian financial crisis in the late
1990s, attributed in part to inadequate
regulation, the G7 convoked a new committee
to bring together the national regulatory
authorities, central banks and finance
ministries of the major financial center
countries, the international norm-setting
committees, the IMF and the World Bank
as the “Financial Stability Forum” (FSF).
In the light of today’s global financial crisis, it is difficult to say
how effective the FSF has been in strengthening regulatory
norms or bringing coherence across the regulations of different
financial industries. The same may be said about IMF efforts to
promote adoption of the international standards in its member
countries, developed as well as developing.
In response, the G20 has recently pledged to tighten regulatory
standards and expand the scope of regulatory oversight to
some previously exempted sectors, such as hedge funds and
credit-rating agencies. 7 The G7 also invited the G20 countries
not already members to join the FSF, now renamed the
Financial Stability Board. It will be most interesting to watch
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G LOBAL GOOD
how much of a difference any of this makes. The G7 proponents
of “light touch” regulation have been roundly discredited
by the current crisis, but the financial industry in the major
countries can be expected to seek to escape whatever regulatory
shackles are put on them in the near term. Some of the
emerging market countries in the G20 have shared the “light
touch” approach to regulation, while others, including India,
have been slower to adopt it. At best, the rest of the world gets
to comment from afar on proposals considered within the FSB
and its component parts.
Another major institution is also not at this table. As already
noted, regulatory changes can affect the competitive conditions
of international trade in financial services, which is one focus of
concern of the World Trade Organization (WTO). In fact, there
are several policy areas in which trade concerns rub up against
financial ones. For example, some countries have responded to
the global recession with new trade-restricting measures,
violating the spirit if not necessarily their formal WTO obligations.
The G20 have committed not to do so, but some have
done it anyway, as have other countries. 8
Policymakers have sought ways to forge better coherence of
trade and financial policies in the Bretton
Woods institutions and WTO, but with little
success. While staffs of the trade and
financial institutions cooperate on technical
issues, no joint forum has been created to
promote trade and financial policy coherence.
The Director-General of WTO may
visit the ministerial committees of the
Washington institutions and WTO may
organize occasional discussions on policy
coherence and invite senior officials of the
Fund and the Bank, but these efforts have not produced policy
coherence.
This could become an active matter for discussion in the G20,
especially as some of its emerging market members have played
a prominent role in the now-stalled trade negotiations at WTO.
But that would not be an appropriate solution to the impasse in
WTO, as many importantly concerned parties are not members
of the G20 and G20 countries do not represent constituencies
but only themselves. Those were the terms of their invitation.
The G8 could not invite their new partners on any other terms,
since they too are an ad hoc, self-appointed group of countries.
We can do better.
It was the first
time in decades
that policy makers
gathered under
a UN banner to
endorse decisions
on few hard issues
A First Step is Possible This Year
In fact, the global community — what the current President of
the UN General Assembly, Father Miguel D’Escoto of Nicaragua
calls the “G192” — has done better, although only temporarily.
Beginning in 1997, government representatives at the
UN developed a discussion process that over five years — and
with many ups and downs — built a new measure of confidence
between countries of the North and South, between finance and
foreign affairs ministries, and between the Bretton Woods
institutions and the United Nations, while also substantively
involving the WTO in a UN policy forum. The practical
question of global governance is can this process be revived?
Yes, it can.
The original process reached fruition in a summit meeting on
“Financing for Development” (FfD) at Monterrey, Mexico in
March 2002 attended by 55 heads of state or government, over
200 ministers of finance, foreign affairs and trade, the heads of
the major international trade and financial institutions (including
the Chair of the FSF), and leading business leaders and civil
society advocates. It was the first time in decades that policy
makers gathered under a UN banner to endorse decisions on
“hard” financial, trade and development
issues.
The “Monterrey Consensus” adopted at
that conference included commitments to
increase the “voice and participation” of
developing countries in decision making at
the Bretton Woods institutions, seek to
devise a comprehensive international
mechanism for workouts from the sovereign
debt crises that developing countries
repeatedly suffer, reverse the decline in
official development assistance, make aid programs more
effective, strengthen international cooperation on tax matters
(as in better combating tax evasion), and in myriad pragmatic
ways accelerate development and reduce poverty. 9 Some of
those promises were delivered, others are still being worked on,
and, alas, still others fell by the wayside.
The five-year discussion leading to Monterrey was far from a
“love in.” Governments and institutions jealously defended
their interests throughout and negotiated very hard to win their
points of view. There were enemies of the process as well as
friends. Governments and institutions had agendas. Monterrey
succeeded because it created a sense in enough people that
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M ANAGEMENT OF DEVELOPMENT
something more than the routine was possible, something
collective and creative could be achieved that required stretching,
that merited taking political risks.
This is not the place to explain how the “spirit of Monterrey”
was built, nor how that spirit all but evaporated in ensuing
years. 10 By the end of 2008, when an international conference
was held in Doha, Qatar to review implementation of the
Consensus, the diplomatic atmosphere had become quite
strained. To the degree there was any shared goal at that
meeting, it was about not allowing a much weakened Monterrey
process to disappear entirely. It barely succeeded, as an agreed
“Doha Declaration” was not produced until virtually the last
minute of the conference. 11 Most of the text is hortatory when
not descriptive, although it contained two important agreements
relating to global governance. One was to hold a “conference at
the highest level on the world financial and economic crisis and
its impact on development” (para. 79). That conference will
take place on 24 th -26 th June 2009 at the UN in New York. At the
time of writing there is much controversy (and concern) over its
prospective outcome. In this regard, it seems to be replicating
— perhaps intensifying — the strains already evident in Doha.
The other agreement in Doha was to
develop a more effective mechanism for
FFD discussions at the UN, an effort to
revive the “spirit of Monterrey”. The
process as set out in 2002 had two parts. The
first was to hold a one-day meeting every
spring in ECOSOC at which senior officials
of the Bretton Woods institutions and
members of their executive boards would
join with UN delegates, representatives
from WTO and the UN Conference on
Trade and Development, other UN officials, private sector and
civil society organizations to take a holistic view of trade,
financial and development policy, consider inconsistencies, and
seek ways to enhance coherence. In practice, the discussions
were superficial and frustrating to participants all around. The
second part of the Monterrey follow-up was meant to be a
biennial, high-level, two-day discussion in the General Assembly
of the same stakeholder groups, undertaking a fuller review of
the implementation of the Consensus. These meetings were also
disappointments.
The Doha agreement thus proposed developing a different
approach and targeted reaching agreement on it within a year.
A small but
representative FFD
committee under
the UN should
have various
means to develop
its policy positions
The key step is to be taken at the July ECOSOC meeting when a
draft proposal is to be agreed. In fact, the Rio Group of 23 Latin
American countries proposed just such a mechanism during the
preparatory meetings for the Doha conference in 2008 and the
Secretary-General advanced a variant of that approach in a
report to the Council for its annual spring FfD meeting. 12
Details are less important here than the concept, which is to
bring a workable number of governments, international
institutions and other stakeholders together who can effectively
exchange views from different perspectives, take the views of
others back to colleagues in their constituencies and return with
amended views so as to build consensus and the political
momentum for taking the actions required. The objective is to
forge coherent, development-advancing policies.
Consensus views in the new committee would sometimes
need to be adopted as policies in other forums, but one cannot
count on participants in the FfD forum being able to deliver
their institutions. However, we may propose that members of
the FfD forum visit other institutions for informal discussions to
make the case for the proposed changes, bringing to bear
considerations that might not be sufficiently salient. Again, it is
a matter for winning agreement through
dialogue (and oftentimes it will be dialogue
between foreign and finance ministry
representatives of the same countries).
Political momentum around proposals from
the FfD forum could also be generated by
how items are prepared for its discussion. In
particular, the UN committee might request
that multi-stakeholder consultations be
convoked to consider an item of interest
and prepare a recommendation so that it
arrives for discussion with some start to a buy-in by the relevant
parties.
The point, in short, is that a small but representative FFD
committee under the UN should have various means to develop
its policy positions, including multi-stakeholder consultations,
and various means to advocate for those positions, including in
the forums that the international community has specifically
mandated be responsible. Only if the players, large and small,
see a serious effort to regenerate the collaborative global
economic governance process that had been intended in
Monterrey will they take the risks needed to make it work.
Several governments have already shown interest at the UN
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G LOBAL GOOD
in developing such a model and no governments have voiced
determined opposition. Governments, such as India’s, that are
emerging economy members of the G20, should encourage
establishing this additional forum which would enjoy formal
legitimacy, which would chose its membership in a transparent
and democratic manner, and which would engage in open
discussion involving civil society and private sector partners as
well as key institutions. This would advance the cause of a more
democratic — and possibly more effective — system of global
economic governance.
Endnotes and Additional Thinking
1
The G8 comprises the Group of seven (Canada, France,
Germany, Italy, Japan, United Kingdom and United States)
plus the Russian Federation on mainly political matters. The
G20 members include these countries and Argentina,
Australia, Brazil, China, India, Indonesia, Mexico, Saudi
Arabia, South Africa, South Korea, and Turkey, plus the
European Union.
2
The UN nevertheless plays an important role in specific
aspects of economic governance, including serving as a
forum for the negotiation of treaties on economic issues
(e.g., Law of the Sea, UN Convention against Corruption),
for the elaboration of international policy norms (e.g.,
Universal Declaration on Human Rights, Beijing Declaration
on Women) and for developing legal models for
bilateral negotiation or governmental legislation (e.g., UN
Model Double Taxation Convention, UNCITRAL Model
Law on Cross-Border Insolvency), as well as for launching
multi-country or multi-stakeholder initiatives (e.g., Leading
Group on Solidarity Levies, UNAIDS).
3
One important exception was the “Monterrey Process” in
the early years of this decade, which we will argue should be
rebuilt.
4
See Group of 20, “Declaration on Delivering Resources
through the International Financial Institutions” London,
2 nd April 2009 (see http://www.g20.org/pub_communiques.
aspx).
5
The committee’s formal name is the “Joint Ministerial
Committee of the Boards of Governors of the Bank and the
Fund on the Transfer of Real Resources to Developing
Countries”, which is sufficient explanation for why it is just
called the “Development Committee”.
6
Information as of 1 st February 2009; three additional African
countries did not participate in the 2008 voting (as per http://
siteresources.worldbank.org/BODINT/Resources/278027-1215526322295/BankExecutiveDirectors.pdf).
7
See Group of 20, “Leaders Statement: The Global Plan for
Recovery and Reform” and “Declaration on Strengthening
the Financial System,” London, 2 nd April 2009 (http://www.
g20.org/pub_communiques.aspx).
8
For details, see WTO, “Report to the TPRB from the
Director-General on the Financial and Economic Crisis and
Trade-Related Developments,” 26 th March 2009 (http://www.
wto.org/english/news_e/news09_e/trdev_dg_
report_14apr09_e.doc)
9
See United Nations, Monterrey Consensus on Financing for
Development: The final text and agreements adopted at the
International Conference on Financing for Development,
Monterrey, Mexico, 18 th -22 nd March 2002 (http://www.un.
org/esa/ffd/monterrey/MonterreyConsensus.pdf).
10
See Barry Herman, “The Politics of Inclusion in the Monterrey
Process,” available online as United Nations, Department
of Economic and Social Affairs, Working Paper No.
23, April 2006 (http://www.un.org/esa/desa/papers/2006/
wp23_2006.pdf).
11
See United Nations, Doha Declaration on Financing for
Development: Outcome Document of the Follow-up
International Conference on Financing for Development to
Review the Implementation of the Monterrey Consensus,
Doha, Qatar, 29 th November -2 nd December 2008 (http://
www.un.org/esa/ffd/doha/documents/Doha_Declaration_
FFD.pdf).
12
See United Nations, “Coherence, Coordination and
Cooperation in the Context of the Implementation of the
Monterrey Consensus and the Doha Declaration on
Financing for Development” Report of the Secretary-General
(E/2009/48), paragraphs 58-60.
(This paper builds on a presentation at a seminar organized by the
member governments of the Association of South-East Asian
Nations and the Friedrich Ebert Stiftung (FES) at the United
Nations on 1 st May, 2009 and at the discussion held by the UN
Economic and Social Council on 20 th April, 2009. The author is
grateful for the opportunity to have made those presentations and
for the comments on them, which have improved this paper. The
views expressed in the paper are personal and do not reflect the
official policy or position of the organisations.)
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More Effective Global Financial
Regulation
K. U. Mada
Economist and former Executive Director,
erstwhile Industrial Development Bank of
India, Mumbai
Well-accepted it is, global financial regulation
should be integral to the process of globalization.
Operating in national or international
context, unfettered freedom of operations is tantamount to
virtually allowing unrestricted freedom to operatives to do
whatever they intend to do without their realizing that they
are restricting the freedom of people across nations
or the world. It is devil care what happens to others
attitude, creating messy chaos all around with far
and deep effects, often adverse. It is not merely
beggar-thy-neighbour policy but beggar-thy-humanity
policy. The call for global arrangements
for financial regulation on a world-wide basis is the
realization of the sensible inner call that in the
currently wired world, none could save himself if he
operates as if he is the only one who has the right to
survive even at the cost of the humanity at large.
That is, interpreting freedom of action in a
vacuum. The world-wide clamour of world leaders itself
proves beyond an iota of doubt the utility and inevitability
of a set of globally agreed rules and regulations of the
economic game even from a purely commonsense standpoint.
All the more, it is so when it is being asked “regardless
of political complexion” ”in the light of the convulsions
the world economy is going through”, whether “we need
much stronger global regulation as well” with a set of
international regulators enforcing an international code,
notes Dr. Dani Rodrik(vide, the Economist, March 14 th ,
2009), while arguing the logic of such global financial
regulation as flawed.
Financial sovereignty is a misnomer as much as a myth.
Be it said, restricting sovereignty for mutually agreed
purposes for overall good does not mean surrendering
sovereignty. If you want to play the game fairly, frankly,
fully and transparently, be it banking or sport, follow the
pre-set rules and retain your cherished sovereignty. International
game means international rules; that’s it. Even in
American hegemonic heydays, its dependence on savings
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T HE NEW MANTRA
from the rest of the world for meeting its deficit financing is
an accepted fact. It is not convincing when Dr. Dani
Rodrik argues that a thin veneer of “international co-operation
superimposed on strong national regulations” should
be enough for a “far more stable and prosperous” world
economy. Despite the recent excesses exposed externally in
the banking field, Dr. Dani Rodrik is not convinced that
operatives do not perform on highest ethical standards.
The question of surrendering sovereignty does not arise
here. There would not be intensive oversight over domestic
operational practices. What will be put in place are issues
like consensus in the creation of uniquely new financial
instruments, mortgage practices where securitization is
integrated, proof of their base while introducing newer
instruments, a mechanism to supervise the modus operandi
of supervision envisaged, accounting practices and standards
that could adequately reveal transparency, and goalsetting
based on good of all the international level participants.
Knowing the performance of the International
Monetary Fund over the years, it is felt, it cannot be made a
global lender of last resort. Global participants should join
in any rescue efforts. Cooperation and
coordination of central banks and the
issues they discussed be made known to
all the global participants and that their
suggestions should be followed up. The
weaknesses of Basel I and Basel II be
rectified based on reviews and continuous
action taken reports and actions. It is
precisely for preventing the neglect of
the macro-prudential aspect of regulation
that all countries have to keep
adhering to rules of the game set at international level. It is
not a question of sovereignty but accepting certain principles
for safety. When credit ratings are downgraded, at
present, they are often neglected or not taken seriously. The
system should accept that such firms or institutions should
be put under rigorous surveillance for remedial action and
their merger or rehabilitation should be set into motion.
The stage and state of development and the preferences
and priority goals of nations form the basis for providing for
their diversity through the global regulators. Global
regulators could comprise personalities representing the
four major clusters of nations viz. America, Europe, Asia
For preventing
the neglect
of the macroprudential
aspect
of regulation, all
must adhere to
international rules
and Emerging Economies. In fact, the fundamentally
differing nature of each of these clusters could be evened
out through concerted efforts at coordinating board levels,
for, the financial regulations entail trade-offs to accommodate
conflicting and competing objectives, practices and
priorities. Dani Rodik says, “The more you value financial
stability, the more you have to sacrifice financial innovation”.
The recent financial innovations as collateral debt
obligations/credit-default swaps/securitizations/mortgagebacked
assets have been the sources of creative complexities
which landed the world economy in the current mess.
Innovations by themselves have no place in normal way of
life unless they are likely to benefit very significantly. Few
understood some of the recent financial innovations and yet
few had the capacity and honesty to operate them. Regulators
tend to become ignorant of the complexity of financial
innovations and being regulators develop a tendency to take
for granted that they are all-knowledgeable and capable of
handling them. In actual practice, they remain in askance
always and instruments were all-pervasive at country-level,
state-level, prefectural level and the smallest of smallest
geography and more so, thanks to recent
highly innovative transport and communications
technologies, move to different
parts of America, Europe, Asia and the
rest of the world. Ignorance of the
ramifications of the financial instruments
was regarded as an insult and
hence all pretended and acted as if they
are an inherent part of the newly created
innovative financial world in which
money just grows. Result, the world
economy collapsed. One side may not fit all but the basic
rules are universally applicable and of scientific value which
should be respected by international participants.
The recent international meltdown holds pointed lessons.
That unless we act with intensity and in electric quickness
with imaginative responses on an all-comprehensive basis,
the broken inter-link between the real economy and
financial sector cannot be reestablished in normal course
as, for instance, banks may be coaxed to lend to borrowers
but they do it at their own pace and tactics. Further, a
cautious approach in Japan in the 1990s towards its housing
and stock markets problems contributed to its ‘lost decade’.
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On the other hand, the Nordic banking crisis in the 1990s
was handled with alacrity to reverse the downturn. Again,
macro-economic policies towards boosting the financing of
infrastructure projects for sustaining creative consumption
demand, on the lines John Maynard Keynes had envisaged,
could pave the way for accelerating the pace of reversing
their slowdown. In these endeavours, coordinated efforts
at global level are sine qua non for ensuring that the
countries do not adopt beggar-thy-neighbour policies and
take, in unison, steps to minimize damage, to extend
support on all fronts and to have access to external funding.
What is more, already in a globalised world, it is a fait
accompli that no country could be “sovereign” in the
traditional kingly way, (especially when
every country swears to treat every other
country as a sovereign independent
nation) though it takes time to its realization
(Charles Collyns: The Crisis through
the Lens of History, Fund & Development,
IMF, December 2008).
Dr. Dani Rodrik maintains that different
countries could have their own
frontiers with some like France preferring
to have more stability in reference to
financial innovations or Brazil preferring
to treat development banks on a different
footing. In fact, however, within the
broad consensus at global participatory
agreement levels, broader issues are to
be dealt with; each country depending on
its economic, social and political structures
continue to retain the functional
independence. This is but obvious. This would mean that
only rules are set as in GATT and the individual governments
are liberty to implement as it suits them but only
whether the ground rules agreed are followed be kept track
for follow-up discussions from time to time and remind the
governments of the expectations based on the pre-set
consensus.
The Rodrik prescription to fortify the home front first is
irrefutable. Nonetheless, stricter international guidelines
on setting limits on offshore centres to prevent transmission
of financial instability and introduction of new financial
instruments and such other contagion-generating practices
The international
architecture
which is six
and half
decades old
requires drastic
reorganization
and “products”, safety standards for new instruments,
discipline to be ensured, would have to be monitored.
Schemes for funds flow and cross-border transactions are
central to the discussion. Financial segmentation is inevitable
but decoupling would have to be ensured in matters
contagious. Transparency is the essential core need for the
system.
The Bretton Woods experience reveal that instead of
recognizing the diversity in socio-economic structures, the
IMF and the World Bank prescribe “Washington consensus”
and limit the operational freedom of countries in
difficulty. Apart from prima facie national diversity in ways
of living, prescriptions for a globalised world require much
more deeper understanding of the
economic lives within even the clusters of
people living.
Frequent interactions are essential at
chief executives’ level to pinpoint aberrations
observed in each other country’s
supervisory work for monitoring follow-up
work. While the leverage regulating,
prescribing capital adequacy standards
and keeping track of capital markets
would be done by domestic authorities,
the limits prescribed at mutually accepted
global standards should be adhered to
over a staggered periods by different
countries depending on their level of
development in their economies. But the
time-frame set mutually be supervised at
international levels.
Whereas we may give credit to Bretton
Woods institutions for achieving part of the agenda and
objectives envisaged, the fact remains that the world
economy would have grown in any case by their own efforts
of several individual countries like Japan, Germany, China,
India, and the rest of Asia leading to large quantum jumps
in international trade, tie-ups, technological and financial
collaborations and investments. The international architecture
which is six and half decades old requires drastic
reorganization in the light of newer economic and political
powers with tectonic changes in widening and deepening
relationships among the participants in globalization
process. Progress cannot emerge on a near-automatic basis.
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Hot money flows, stock markets internationalization,
capital flows of long-term nature, legal, diplomatic and
economic advisories on a global scale, commercial and
investment banks operating on cross-border spectrum and
news flows through hyperactive media are some of the
pointers to urgency for change in mindsets. The entire
frame-work for operational groundwork has undergone a
sea change. Virtually this situation leads to central banks
becoming heavily dependent on their counterparts in the
rest of the world more in some cases but not so much in
others. Recent initiatives in policy-making amply prove
this point. Perforce, one takes cognizance of the rest.
Hence, they need jointly approve new financial instruments
at a joint forum after weighing, in advance, the pros and
cons of their short-term and long-term impacts bearing in
mind that their world-wide impacts cannot be negated as
fast and as easily as domestic impact could be done. After
all, they are to be implemented in the highly and intensively
linked global banking structures. Such mechanisms would
throw up scope to react or reject hyperactivity in any one
sector of industry, region, business area, geography, or
service providers. Also, even excessive progress in one
specific area be subject to questioning at the level of
international forum for ensuring suitable balancing act.
Events have proved that volatility in progress is as dangerous
as volatility in sluggishness. Question success as much
as failure. Danger is also embedded in success.
In banking, which is the nerve centre of modern economic
activity, the executives remunerations cannot be linked to
higher figures of sanctions, disbursements, deposit raisings
or in spreading any other banking and related activities,
especially because extremely high figures would mean
efficiency in processing is diluted. Loans could be without
rigorous evaluation of credit proposals, deposit-raising at
extra-hidden costs, disbursements by sacrificing compliances
by the borrowers or without requisite progress in
implementation of the assisted projects, or spread of
banking habits etc. by creating paper records without any
lasting impact, now or later, on the beneficiaries. In any
case, extra payments be restricted to a minimum and be
confined to extra human efforts - manual or intellectual -
put in for specific purposes. Moreover, institutional success
is a team effort of several executives/operatives and therefore
one section, especially the higher ones, should not be
liberally rewarded ignoring the rest of the team members.
By now, it has emerged that for better world order the
major objectives include boosting global demand; regulating
hedge funds, global banks, and tax havens; reforms in
bank regulating mechanisms, in supervising structures, and
in accounting standards; bankers’ remunerations; effective
trading in derivatives; role of rating agencies; preventing
disunity among global players; information sharing among
the top international banks; dynamic provisioning standards
with variations in good and bad times; and globally
acceptable coordination and cooperating standards. In
November 2008 and in April 2009, international efforts
being made, it is hoped, will bear fruit. Viewed against this
background, in a globalised world, intensity in monitoring
should be raised to a higher level. We cannot say that a
“global” village is not some sort of a loosely-knit political
and economic entity. Coupling of the world has proved
itself despite reluctance on the part of thinkers. Apart from
trade and capital flows, several human activities that have
ample bearing, crave for overall treatment, for which it is
sine qua non to have international supervisory arrangements,
agreed in advance, for adoption of innovative
operative mechanisms and their products and for monitoring
the activities for smoother functioning of the world
economy.
References and Additional Thinking
• Thomas L. Friedman, The World is Flat, Allen Lane -
Penguin Books, 2005
• Allen Greenspan, The Age of Turbulence, The Penguin
Press, 2007
• David M. Smick, The World is Curved, Portfolio, 2008
• A special report on the world economy, The Economist,
London, October 11 th , 2008
• Dani Rodrik, The Economist, March 14 th , 2009
• Charles Collyns, The Crisis through the Lens of History,
Fund & Development, IMF, December 2008
• Obama seeks global action : The Economic Times, 25 th
March, 2009
• Mada, K.U., "A Journey Through Development Banking",
Kamal Offset Printers, Mumbai, 2005.
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organisation).
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M ANAGEMENT OF DEVELOPMENT
Internationalization of
Intellectual Property Rights and
its Impact on the Developing
Countries: A Review
Ruchi Sharma
Department of Economics
and Statistics, Tata Services
Limited, Mumbai
K.K.Saxena
Director, Pacific Institute of
Management and Technology,
Udaipur
Intellectual property (IP) refers to
creations of the mind: inventions,
literary and artistic works, and
symbols, names, images, and designs used
in commerce. Intellectual property rights
(IPRs) are legal and institutional devices to
protect IP as these rights bestow the status of
property on inventions and expression (Sherwood
1997). These rights give right holder an exclusive
control over the commercial use of a creation for a
limited time period. IPRs are territorial in
nature, that is, the level and conditions
of protection are determined
by the national laws
and enforcement institutions.
1
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K NOWLEDGE WITHOUT BORDERS
Internationalization has entered the arena of IPRs that
has been traditionally regarded to be in the purview of
domestic regulations with Trade Related Aspects of Intellectual
Property Rights (TRIPs) under the aegis of World
Trade Organization (WTO). This agreement has triggered
the debate on the implications of the internationalization of
IPRs for the countries with varying level of economic and
technological development. The theoretical models have
extended competing hypotheses on the impact of stronger
IPRs on the developing countries. The empirical literature
has not helped much in removing the ambiguity over the
potential impact of TRIPs. This paper reviews the concerned
theoretical as well as the empirical literature
mapping the process of internationalization
of IPRs and its impact on the developing
countries. 2
The organization of the paper is as
follows: Section 1 discusses the concept
and the quantification of internationalization
of IPRs. It further delineates the
evolution in the academic argument for
the introduction of these rights at
international level. Section 2 discusses
the theoretical and empirical literature
on internationalization of the IPRs
across the globe. In subsection 2.1 we
have discussed the literature arguing a
case against the internationalization of
IPRs. In subsection 2.2 we have built a
case for the internationalization of IPRs.
Section 3 concludes the paper and
identifies gaps in the literature for future
research.
1. Internationalization of IPRs
1.1 The Concept
The need for international protection of IP became evident
when foreign exhibitors refused to attend the International
Exhibition of Inventions in Vienna in 1873 because they
were afraid that their ideas would be stolen and exploited
commercially in other countries (WIPO 2005). These rights
entered the arena of multilateral agreements with the
introduction of TRIPs under the aegis of WTO.
The protection of IP at international level comprises of
The empirical
literature has
not helped much
in removing the
ambiguity over the
potential impact
of TRIPs
national treatment, reciprocity, and harmonization of legal
stipulations and enforcement procedures. National treatment
and reciprocity have been formalized in international
treaties since the Paris Convention of 1883 and the Berne
Convention of 1886. TRIPs agreement has introduced
further stipulations on IPRs legislation by referring to
previous international treaties. National treatment, according
to Article 3 of the TRIPs agreement, implies that “each
Member accord to the nationals of other Members treatment
no less favourable than that it accords to its own
nationals with regard to protection of intellectual property”.
In addition to these provisions TRIPs agreement has
extended the basic principle of WTO that is most favored
nation (MFN) to IPRs. MFN requires,
according to Article 4 of TRIPs, that
“with regard to the protection of intellectual
property, any advantage, favour,
privilege or immunity granted by a
Member to the nationals of any other
country shall be accorded immediately
and unconditionally to the nationals of all
other Members”. TRIPs agreement
covers seven types of IP. These are: (i)
copyrights, (ii) trademarks, (iii) geographical
indications, (iv) patents, (v)
industrial designs, (vi) layout-designs
(topographies) of integrated circuits and,
(viii) trade secrets. This agreement lays
down minimum substantive standards of
protection for formulating domestic
legislation on IPRs. It has specific
provisions for the subject matter of the
coverage, rights covered, exceptions granted, and duration
of the coverage. The agreement prescribes remedies which
should be available in member states to enforce these rights.
Disputes under TRIPs are brought before the WTO which
is authorized to carry very specific enforcement actions.
Thus TRIPs as an umbrella agreement for various types of
IP has internationalized the IPRs regime of every signatory
country of WTO that will essentially result in the increase
in the strength of IPRs of these countries. 3
The empirical analysis of the implications of the growing
strength of IPRs as under TRIPs requires indices to gauge
the strength of IPRs across nations. A few studies have been
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M ANAGEMENT OF DEVELOPMENT
conducted to formulate such an index. The existing indices
to quantify IPRs strength across countries are distinguished
on the basis of the construction approach adopted by these
indices. First category of these indices is based on survey of
practitioners’ opinions, survey data, interview studies and
statistical analysis of the data thus collected. Mansfield
(1995), Seyoum (1996), and Ostergard (2000) have used this
technique to calculate the difference in IPRs protection
across different countries. The second sect of indices is
constructed on the basis of legislative provisions of the
domestic laws and among these indices Ginarte and Park
(1997) index (hereinafter GPI) is widely used. They have
calculated index of patent rights for 110 countries for the
period 1960-1990. 4 Index is calculated as unweighted
average of the five values measuring extent of the coverage,
membership in the international agreement, provision for
the loss of protection, enforcement mechanism, and duration
of the protection. Lesser (2002) have further updated
the GPI as developing countries abide by the TRIPs stipulations.
The revised index includes protectable subject matter,
convention membership, enforcement, administration and
the duration of protection as different
components. The protectable subject
matter is accepted to be compliant with
the TRIPs agreement if countries
certify their compliance with WTO as
mandated by Article 63.2 of the TRIPs
agreement. However, it does not reflect
on the change in the coverage followed
by the compliance. The membership of
countries to UPOV and the PCT are
mandated though TRIPs does not
require compulsory membership to
these treaties. It is evident that none of the above mentioned
studies has minimum standards based on specifications of
the TRIPs. An index based on such standards will show the
change in the protection enjoyed by the right holders in
respective countries after complying with the agreement.
1.2 The Background
During 19 th century, the proponents of free trade opposed
the patent rights provision as an institution for restriction of
competition. The antipatent movement disappeared after
1873 with simultaneous weakening of the free trade movement
in Europe (Machulp and Penrose 1954). In the 20 th
century, proponents of the free trade have argued for
building strong and similar IPRs across the globe as evident
from the passage of TRIPs. The agreement has been
incorporated to remove uncertainty in the international
trade of knowledge sensitive goods by internationalizing
IPRs across the globe. This ideological shift calls for
attention and the analysis of probable reasons for the same.
This requires observation of the key economic phenomenon
of the mid and late 20 th century vis-à-vis the theoretical
developments in the economic literature.
The growth in the institutional economics, following
seminal work of Coase (1960) in identifying the market
failure in case of goods with externalities, has contributed
to the shift in the trade theorists’ perspective from antipatent
protection to pro-patent protection. The market
failure in knowledge sensitive goods as discussed by Arrow
(1962) is due to the economic characteristics of information
as a commodity and, in particular, of invention as a process
for the production of information. According to him, the
basic characteristics of information, indivisibilities, inappropriability,
and uncertainty, are the
classic reasons for the failure of
perfect competition to achieve
optimality in resource allocation and
utilization. Non rivalry and partial
excludability have been identified as
the defining characteristics of
knowledge by Romer (1990). These
characteristics render knowledge
goods - goods that have market value
derived from the knowledge contained-
as impure public goods.
Owing to these features, the marginal cost of providing
additional unit of knowledge good is zero or minimal once
fixed costs have been incurred to produce these goods.
Therefore, according to the marginalistic principle of
optimization the price of the knowledge good must be zero.
The initial costs of generating these knowledge goods,
however, are quite extensive. Consequently, market fails in
providing efficient output of knowledge goods and necessitates
state intervention. The state intervention by means of
IPRs makes knowledge based products or processes
excludable 5 . Thus approbability of knowledge 6 depends
The basic
characteristics
of information,
inappropriability and
uncertainty are the
classic reasons for
the failure of perfect
competition
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upon the IPRs regime of a country for that defines the
Table 1: Share of Counterfeit Goods
Industry
Source: OECD (1998)
In recent times,
knowledge is
identified as a
'Global Public
Good' with
wide spread
externalities
Share of Counterfeit Goods as a
Percentage of Turnover
Watches 5
Medicine 6
Perfumes 5
Aircraft spare parts 10
Toys 12
Music 33
Video 50
Software 43
extent to which innovators are able to recoup their investment
in research and development (R&D hereinafter). In
the recent times, knowledge is identified as a “Global Public
Good” with wide spread externalities that do not respect
national boundaries (Maskus and Reichman 2004). Specifically,
countries that do not undertake significant amount of
R&D have strong free riding incentives and patent protection
is not necessarily welfare enhancing for these countries.
Intervention by an international organization is thus
required to deal with the consequential market failure by
providing adequate IPRs protection at global level. The
recognition of these aspects has not only brought the issue
of IPRs on the front of multilateral agreements but also
blended it with the trade talks under WTO. Stiglitz (1989)
and Stewart and Ghani (1991) have furthered the argument
for constructing appropriate IPRs as they consider the
positive impact of economic institutions, shielding goods
with strong positive externalities like knowledge, on the
economic growth of the developing countries.
Krugman (1979) in his seminal paper discussed issues of
technological development and transfer
in the North-South framework and
concluded that technology transfer from
North to South will increase the welfare
of South. He foresaw that “… the income
of Northern resident depends in part on
the rents from their monopoly of newly
developed products. This monopoly is
continually eroded by technological
borrowings and must be maintained by
constant innovation of new products.
Like Alice and the Red Queen, the developed region must
keep running to stay in the same place”, (Krugman 1979, p.
262). The key economic phenomena of the last three
decades of the 20 th century corroborated Krugman’s insight.
Japan, South Korea, Singapore, Hong Kong and Taiwan
witnessed unparalleled economic growth after 1970’s.
These newly industrialized countries absorbed substantial
amount of technological learning under their respective
weak IPRs protection regime during the early years of their
development 7 . Secondly, knowledge goods entering the
international trade increased considerably as shown by
Braga et al. (2000, p. 16) “…that share of knowledge-intensive
or high technology products in total world goods trade
has doubled between 1980 and 1994 from 12 to 24 percent.”
Thirdly, there has been considerable increase in the imitation
of these knowledge goods. The estimates of the counterfeit
and pirated goods as a percentage of turnover of the
different industry are collected from various sources by
OECD (1998) are shown in Table 1. It is evident that huge
economic losses are suffered by firms on
account of counterfeiting and pirating.
During the later part of 1970’s and early
1980’s the developing countries afforded
very little or no protection for IPRs 8 .
Therefore, TRIPs agreement could be
perceived as a panic reaction by the
developed countries to the fear of losing
their comparative advantage in knowledge
goods in the global market. The
developed countries needed to freeze
their monopoly rents by increasing the strength of IPRs in
the developing countries 9 .
1.3 The Debate
The study of history of patent laws in developed nations
shows that they have chosen IPRs regime according to the
need of their industries; e.g. Switzerland introduced mechanical
invention patent to protect its watch industry, but
initially withheld patent protection on chemical substances
and processes because its infant chemical industry relied
upon imitating other’s technology (Kaufer 1989, p.10).
Ginarte and Park (1997) shows that more developed
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Table: 2 GPI of the South and North from 1985-2000
1985 1990 1995 2000
South
Mean 2.11 2.12 2.43 2.86
Standard Deviation 0.76 0.76 0.76 0.75
Count 50 50 50 50
North
Mean 3.40 3.45 3.80 4.08
Standard Deviation 0.65 0.69 0.58 0.59
Count 23 23 23 23
countries provide stronger protection. However, IPRs
protection does not depend upon level of economic development
per se; it varies with R&D, market freedom and
openness. Maskus (2000b) has extended this work through
an extensive regression analysis of the determinants of
patent index in 1985 and 1990 for 72 countries. Results show
that market size has no significant impact on IPRs. There is
an inverted U shape relationship between patent strength
and real per capita income. The results suggest that the per
capita real capita real income at which patent protection
become weakest is approximately $2000 in 1985 international
dollars. Chen and Puttitanun (2002) have shown that
country’s IPRs depend upon the level of development
(technological ability) in a non monotonic way, first decreasing
and then increasing, that is the presence of U-shaped
relationship between IPRs and levels of economic development
10 . This questions the validity of the internationalization
of the IPRs regime of the developing country (referred
to as South hereinafter) 11 at varying level of economic
development under TRIPs that essentially results in the
increase in the strength of IPRs. Table 2, shows the GPI for
the South and the developed countries (referred to as North
hereinafter) 12 . There is difference between the North and
South mean value with no sign of convergence that is
antithesis to the internationalization of IPRs. However, the
difference between two averages that was increasing until
1995 decline considerably in 2000. Since, GPI is not based
on TRIPs stipulation it cannot capture the convergence
between the North’s and South’s IPRs regime. The important
issue is the growth in the mean value of the South IPRs
strength and reduction in its standard deviation over the
past 15 years for the South. It is evident that the strength of
IPRs has increased in the South.
The economic differences between the North and the
South are captured by per capita gross domestic product
(GDPPC) and the growth rate of per capita gross domestic
product (GGDPPC). The existing level of technological
activity in both regions is captured by a technological index
(TI) that is a simple average of four variables. These
variables are: (i) R&D expenditure as a percentage of gross
domestic product (GDP) 13 (Lall 2003), (ii) Researchers per
million inhabitants, (iii) total number of patents granted
(Kumar 2002; Lall 2003), and (iv) scientific and technical
journal articles (Kumar 2002). The last two measures are
deflated by GDP to adjust for the economic size of individual
country. The R&D expenditure and researchers are
inputs in the R&D production function where as patents
and scientific and technical journal articles capture the
output produced 14 . The value of each variable for every
country is standardized to calculate an index for every
country (Lall 2003) 15 . Further, simple average of index value
of countries stratified as North and South is calculated for
each variable to get a collective index for the North and the
South. The results are given in the Table 3. It is evident that
the level of economic growth is very high for North as
compare to South. The growth index is almost similar that
makes the convergence further difficult for the countries
starting with low base. TI shows that North is more involved
in the technological activity for all the years covered. It is
evident that North is technological leader with extensive
Table 3: Economic and Technological Differences
between North and South
GDPPC 1985 1990 1995 2000
North 0.732 0.730 0.695 0.734
South 0.163 0.163 0.171 0.179
GGDPPC
North 0.529 0.480 0.178 0.622
South 0.469 0.469 0.181 0.585
TI
North 0.462 0.375 0.460 0.405
South 0.111 0.133 0.145 0.118
Note that the data set for each year may not consist of all the countries contained in the
previous years thus inter-temporal comparison based on this table are not reliable.
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research activity. These differences are at the root of the
debate on the validity of harmonization of IPRs for the
South on the lines of the North. It has been argued that
TRIPs has taken away the flexibility of South to design their
IPRs regime as per their developmental needs. On the
contrary, some researchers have argued that there are many
in built flexibilities with in the TRIPs that can be exploited
by South to their advantage (Watal 2001). In the wake of
growing discontent with the TRIPs flexibilities are given to
developing and least developed countries in Doha declaration
on the TRIPs and public health. There is, however, no
empirical evidence to check whether South has used the in
built flexibilities in the TRIPs.
2. Impact of Internationalization of IPRs on South
The subsection 2.1 discusses theoretical literature on the
case against internationalization of IPRs and the empirical
findings of a few studies conducted for the same. Section 2.2
makes a case for internationalization of IPRs.
2.1 Case against Internationalization of IPRs
IPRs involve trade off between static
losses due to dead weight losses generated
as supplier monopolized and gains
as innovations are stimulated in the long
run. The impact of important innovations
(in the form of dynamic gains),
however, is not restricted to national
boundaries. Thus the international
attitude regarding the protection of IPRs
provides incentive to innovators to
conduct R&D. Theoretical literature on
the international protection of the IPRs is very limited and
most of it originated during and after TRIPs negotiations.
This literature has focused on the issue of strengthening of
the IPRs in the South as the reduction of imitation of
knowledge goods. The analysis of internationalization of
IPRs in North-South framework has predominantly inferred
that developing countries tend to lose from protecting
IPRs.
In partial equilibrium model, Chin and Grossman (1988)
have considered a case of an innovating firm in North (process
innovation) and the imitating firm in South and the
strategic interactions between these firms competing in an
The impact of
innovations,
in the form of
dynamic gains,
is not restricted
to national
boundaries
oligopolistic market. The welfare of the South, sum of
producers’ and consumers’ surplus depends upon the
market size of South and the productiveness of R&D
expenditure of North (that determines the extent of cost
reduction). As provision for IPRs protection is provided in
South the outcome of strategic interactions between firms
can result in either strategic predation or monopoly by
Northern firm when cost reductions are extensive. In both
situations producers’ in South gain nothing. The welfare of
South thus increases only if the consumers’ surplus is high
due to major cost reductions. Deardroff (1990) argued that
there are diminishing returns to inventive activity, i.e., as
more countries provide IPRs coverage extra stimulation
provided to innovation becomes smaller. Therefore, at some
point costs of extending monopoly outweigh the benefits of
generating inventions.
Helpman (1993) uses a dynamic general equilibrium
North-South model to study IPRs, growth and welfare. It is
assumed that North innovates and South imitates. Innovation
is modeled as an ongoing process and the strength of
the IPRs regime is associated with the flow probability that
a given product protected by a patent in
North will be imitated in South.
Thus this study evaluates the welfare
consequences of marginal changes in the
rate of imitation. The regional welfare
levels are influenced through two
channels as IPRs protection gets stronger
in South. Firstly, the reduction of imitation
shifts production to North. Secondly,
this inter regional shift improves terms
of trade of North (as wages increases)
and deteriorates terms of trade of South (as wages decline).
These factors lead to welfare losses for South. Moreover, by
lowering the rate of imitation and prolonging the expected
duration of monopoly of each Northern innovator innovation
increases in North. As firms now produce longer in
North, the demand for Northern labor and Northern wage
increase and hence raise the cost of innovation. Thus the
rate of innovation decreases in steady state. The study
concludes: “Who benefits from tight intellectual property
rights in less developed countries? My analysis suggests that
if anyone benefits, it is not the South”, (Helpman 1993, p.
1274). The empirical study by Kanwar and Evenson (2003)
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has refuted these claims of non linear relationship between
the rate of innovation and IPRs. The results of above
mentioned studies depend on assumptions of similar tastes
in both regions, no innovative capacity of South and imitation
as the only mode for technology transfer. The results
change as these assumptions are relaxed.
2.2 Case for Internationalization of IPRs
The issue pertinent for South as its IPRs regime is internationalized
is the impact of IPRs on the economic growth.
Falvey, Foster and Greenaway (2004) employing panel of 80
countries for four sub-periods: 1975-79, 1980-84, 1985-89
and 1990-94 using GPI have analyzed the impact of IPRs on
the economic growth. Their results
indicate that countries with high per
capita incomes are likely to grow more
rapidly the stronger their IPR protection.
By allowing for more than one threshold
however, they revealed that among the
lower-income countries there are differences
in the relationship between IPR
protection and growth. IPR protection
has significantly positive impact on
growth in the very poor countries,
however, for the middle-income countries
no significant relationship is found.
Falvey, Foster and Memedovic (2006)
have further confirmed the results.
IPRs influence economic growth
through increase in total factor productivity
by stimulating innovation. Technical
change in Solow (1957) sense implies
shift in the production possibility curve that occurs due to
the positive dynamic externalities of innovations (Stewart
and Ghani 1991). Deolalikar and Roller (1989) using panel
firm level data for the period 1975-79 for 145 firms in
chemical and engineering sectors for India has shown that
despite the limited protection of IPRs in India, patenting is
positively and significantly associated with total factor
productivity growth at firm level. Lach (1995) has used data
of 20 manufacturing industries from 1959-86 and has shown
that output elasticity of knowledge is 0.30. Now I will
discuss the impact of IPRs on spurring domestic as well as
international innovations to ascertain two broad channels of
IPRs influence
economic growth
through increase
in total factor
productivity
by stimulating
innovation
gain for the South. International innovations are further
transferred by means of imports, foreign direct investment
(FDI), and licensing which are influenced by IPRs.
2.2.1 Domestic Innovation
The impact of IPRs on innovation is much debated upon.
The empirical literature considers the issue employing
either firm/industry or cross country data. IPRs gain
importance as imitation threat is faced by producers of
knowledge goods. Mansfield (1985) in a study of 100 firms
from 13 manufacturing industries shows that for products
and process, odds are better than 50-50 that a development
decision leaks out in less than 18 months. Personnel turnover,
informal communication networks
among engineers and scientists working at
various firms, professional meetings, input
suppliers, and customs are different
channels through which information leaks
out. The extent of imitation is determined
by industry specific characteristics (Mansfield
1985). These characteristics include
R&D undertaken by competitors that
affects the absorptive capacity of firms
(Cohen and Levinthal 1989), tacitness of
the technology, and circumstantial
sensitivity of industry technology (Evenson
and Westphal 1995). The benefits of
the original producers from the commercialization
of new knowledge good fall
considerably due to imitation.
Machlup and Penrose (1950) have
propounded exchange for secret thesis
(apart from the abovementioned monopoly-profit-incentive
thesis) for making provision for IPRs. Disclosure requirements
of the patent application ensure that ample information
is made available to researchers for furthering R&D
process. Mazzoleni and Nelson (1998) have elaborated that
disclosure requirements are important as the inventor
cannot exploit all the possible uses of an invention. IPRs by
facilitating contractual agreements between the original
right holder and other innovators help in wider dissemination
and use of intellectual creations.
In the cross country analysis, Chen and Puttitanun (2002)
have focused on the issue of innovativeness of the develop-
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ing countries as their strength of IPRs increases. They have
a one country two sector model (domestic and importing
sector). The basic trade-off that is faced by the government
for making an optimal choice of IPRs policy is as follows. In
the importing sector, less imitation (strong IPRs) means
lower product quality of the domestic firm and less competition
for the foreign firm. Thus consumers pay high prices for
goods. It not only reduces consumer surplus but also shifts
income to the foreign firm and further reduces domestic
social surplus. In the local sector, less imitation provides
incentive to the domestic firm for innovation and efficient
investment in higher quality technology (product) leading to
higher social surplus. The optimal choice varies with the
technological capability of a country that
is determined by the level of her economic
development. The study concludes that
with low level of technological capability a
country is likely to have greater benefits
from imitation of foreign technology as
compare to innovation. However, after
reaching a certain level of technological
capability domestic innovation responds
to IPRs and innovation effect dominates.
Chen and Puttitanun (2002) empirically
verified their thesis in a panel of 64 developing
countries over the time period
1975-95 using GPI for measuring IPRs
strength. The results show that innovation
in a developing country (measured
by number of patent applications filed by
residents of a country) increases in its
IPRs protection. Kanwar and Evenson
(2003) estimate a panel model for two time periods for 32
countries using GPI. They measured the impact of IPRs
protection on innovation using R&D investment as a
proportion of GNP. The study concludes that stronger IPRs
protection can help spur innovation and technological
progress which in turn should positively affect growth. In a
related paper, Schneider (2005) examines the importance of
IPR protection, high-tech imports and FDI on innovation
and on per capita GDP growth. Innovation is measured
using the number of U.S. patent applications made by
residents of a given country. The model is estimated on
panel data for 47 developed and developing countries over
The research
undertaken by
Schneider suggest
that innovation
responds
positively to IPR
protection
the period 1970-1990. The results suggest that innovation
responds positively to IPR protection. Splitting the sample
into developed and developing countries, Schneider finds
that while IPRs have a positive impact on innovation in
developed countries, the impact in developing countries is
negative, and often significant. Falvey, Foster and Memedovic
(2006) have further confirmed the impact of IPRs on
domestic patenting as well as nonlinearities involved using
threshold analysis.
2.2.2 International Innovation and Technology
Transfer
Theoretical model shows that increase in the strength of
South’s IPRs increases the innovativeness
of the North. The North, with comparative
advantage in technology production,
responds to the increase in the market size
of the South as the trade in the counterfeit
and pirated goods is restricted by stronger
IPRs stipulation (Chin and Grossman
1988). This increase can be a potential
source of gain for the developing countries
if the R&D productivity is high.
Diwan and Rodrik (1991) argue that
Northern and Southern countries have
different technological needs. For
example, North would like to develop
drugs against cancer and heart disease,
where as South benefits more from drugs
against tropical diseases. In their model,
innovation takes place in North and
different degrees of IPRs protection is
granted in North and South. Owing to the scarcity of R&D
resources, two regions compete with each other to encourage
the development of technologies suited to their needs.
Innovators in North face a market that is a weighted average
of North and South’s market with weights being the relative
market size and patent protection. Increase in any of these
factors increase the weights assigned to South and more
resources are diverted to innovations catering to needs of
the South. Thus they have concluded that but for strong
Southern protection of IPRs Northern countries will not
develop technologies largely needed by the South 16 . Sharma
and Saxena (2007) have provided empirical evidence to
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support the hypothesis by using cross country data of 39
developing countries for the year 1995.
The current literature extensively analyzes channels of
transmission for the R&D conducted in North to flow to
South. South is a net importer of technology for its developmental
needs. Technology transfer is, therefore, an important
issue in the internationalization of IPRs for South.
“Technology transfer” is the process by which commercial
technology is disseminated (UNCTAD 2001). It refers to
the spread of technology from one industry to another, or
among different economies (Rosegger 1996, p.198). The
market for technology transfer is susceptible to market
failure from small number bargaining, appropriability
problem, uncertainty, transaction costs,
and impacted information coupled with
opportunism (Caves, Crookell, and
Killing 1983). With respect to market
failure in technology goods IPRs play
different role, against the traditional role
of providing exclusive commercial rights
to creators, of facilitating market transactions.
“Rather, by protecting property
rights, patent here open the market for
trade in technological information”
(Gallini and Winter 1985, p. 238). The
market facilitating aspect of IPRs was
identified in the 14 th century as noted by
David and Olsen (1992, p. 518) “in the
fourteenth century such (patent) grants
were employed to encourage the introduction
of foreign technologies through
the transfer of skilled craftsmen from
abroad”. Penrose (1973) identified MNEs as the “chief
international investors” and an important source of technology
transfer. The means for technology transfer include
trade in capital and intermediate goods, FDI and licensing
(Saggi 2003; Falvey, Foster, and Memedovic 2006). The
impact of IPRs on these three modes is discussed below.
Trade, FDI, and Licensing
Grossman and Helpman (1991) have modeled an endogenous
technological progress that results from the profit
maximizing behavior of far-sighted entrepreneur. They have
shown that as the resident of the small country interact with
The research
results of Fink
and Braga show
significant positive
impact of IPRs on
bilateral flows of
non fuel trade
agents of the outside world they gain access to a body of
accumulated wisdom as well as some of the new discoveries.
The foreign contribution to local knowledge capital stock
increases with the number of commercial interactions
between domestic and foreign agents and the extent of
spillovers increase between two countries with increase in
the bilateral trade.
Maskus and Penubarti (1995) address whether the
distribution of bilateral trade across nations depends on the
importing country’s IPRs regime. The reason for ambiguity
is the trade off between the enhanced market power for the
firm created by strong IPRs and the larger effective market
size generated by reduced abilities of local firm to imitate
the product. The market power effect
would reduce the elasticity of demand for
the foreign firm and would ordinarily
induce the firm to export less of its
patentable product. The market expansion
effect would, however, increase the
demand. The market expansion effect
tends to be more dominant in larger
countries with highly competitive local
imitative firms while the market power
tends to be stronger in smaller countries
with limited capacity for imitation.
The empirical results strongly suggest
that exporters discriminate in their
sales decision across export markets,
taking account of local patent laws.
Fink and Braga (1999) have analyzed
bilateral trade flow for countries during
1989 for non fuel and technology trade
flows (knowledge sensitive goods) using GPI. Their results
show significant positive impact of IPRs on bilateral flows of
non fuel trade. This result is, however, not confirmed in case
of high technology goods. Authors have argued that this
results show that the market power impact of IPRs may be
stronger than the market expansion or knowledge sensitive
goods have other legal means that are more important for
appropriating investment in R&D.
In general equilibrium framework, Lai (1998) has considered
a case whereby production is transferred internationally
by FDI. Northern firms move production to South to
take advantage of the lower wages in the South; they
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balance these gains against the probability that they will
loose their monopoly to imitators after investing in South. A
strong IPRs regime in South increases the rate of innovation
in two stages. Firstly, it increases the expected lives of
monopolies and the resulting increase in demand for labor
falls entirely on South. Thus the return to innovation rises
without a rise in cost. Secondly, with increase in returns for
Northern firms more firms move to South that increase the
return on innovation further as the pressure on the Northern
resources eases off. This result has made R&D of North
an endogenous variable as not only R&D determines FDI
but also is influenced by it. Therefore, where FDI is an
option, the resource competition effect noted by Helpman
(1993) is moderated. Helpman (1993) and
Lai (1996) have treated stronger IPR as
exogenous reduction in the intensity of
imitation. Alternatively, Glass and Saggi
(2002) have treated strong IPRs as the
increase in the cost of imitation. In this
case, Southern firms find themselves
devoting greater resources to imitation,
but lower available for production,
causing FDI to shrink. In response FDI
is shifted back to North that leaves fewer
resources for innovation, and thus
reduction in the overall innovation.
Theoretical relationship between FDI
and IPRs at micro level can be traced
through the eclectic approach to FDI by
Dunning (1979). According to this
approach activities of MNEs can be
explained by ownership, localization and
internalization (OLI) advantages. The ownership advantages
accrue to firms from the possession of tangible and
intangible knowledge based assets. These assets can take
the form of new product, superior production technology,
management skills, trademarks, availability of human
capital, marketing system, organizational skills, R&D
capacity etc. The control over such assets and joint-input
property of knowledge based assets support the MNEs
structure and give an edge to MNEs vis-à-vis domestic
firms. It presents series of options of different modes to
MNEs to choose for serving a foreign market (Either and
Markusen 1991). Having such an advantage is no guarantee
The results of
empirical studies
exploring the
impact of IPRs
protection on
FDI yield
ambiguous results
that MNEs will decide to undertake production activities in
the host country as they will always have the option to serve
the foreign market by exporting. Such decision is based on
the localization advantages which a host country can offer
over and above the home country of MNEs. There are
numerous factors that affect such advantage e.g. factors of
production (their prices, quality, and productivity), transport
and communication costs, governmental intervention,
infrastructure (commercial, legal and transport), economic
and cultural distance etc. These advantages affect the
decision of MNEs whether to indulge in production activities
in host country or to export. Given that MNEs posses
both ownership and localization advantage, they can either
internalize their advantages through an
extension of their own activities or
externalize through licensing or some
other similar contract with independent
firm. Such a decision is affected by
internalizing factor like transaction costs
which include negotiation costs, costs of
enforcing contracts etc.
Numerous variables play important
and intricate role in determining MNEs
decision of mode choice. IPRs become
important in MNEs decision making as
the exploitation of ownership advantages
is affected by the strength of IPRs regime
of the host country. If IPRs protection is
weak imitators can swarm the market
with similar products and MNEs will
lose their position of a single supplier.
Furthermore, decision regarding whether
to externalize or internalize will be affected by the strength
of IPRs regime. The strength of IPRs protection reduces
costs of licensing considerably 17 and shifts MNEs choice to
licensing from FDI. An inadequate IPRs regime, therefore,
deters FDI and encourages exports. A strong IPRs system
has a negative impact on FDI by making licensing more
viable alternative to direct investment 18 .
The results of empirical studies exploring the impact of
IPRs protection on FDI yield ambiguous results. Ferrantino
(1993) has empirically tested the policy variables determining
the decisions of MNEs to sell the goods (export),
technology (licensing), or establish factories (FDI) in the
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M ANAGEMENT OF DEVELOPMENT
Research studies
show that when
IPRs are weak
firms rely on
non-market
transactions, i.e.,
fewer licensing
host countries. The results show that the U.S. MNEs move
goods to its affiliates in countries with low IPRs so as to
keep the technology with them. IPRs protection reduces the
costs of enforcing contracts among MNEs and their partners
(affiliates or non affiliates) for buying and selling
technology. Seyoum (1996) has studied the level of IPRs
protection provided in 27 countries from five geographical
clusters for the time period 1975-90. Study shows that 13%,
43% and 35% of variations in FDI is explained by IPRs with
respect to least developed, newly industrializing and
developed countries. On the other hand, other economic
variables (market size, public investment, external debt and
exchange rate) explained 21%, 28%, and 20% of variations
in FDI for least developed, newly industrializing and
developed countries respectively. Lesser (2002) has used
two models to study the determinants of FDI flows and
imports. Using cross section regression analysis, he has
concluded that stronger IPRs increase both FDI and
imports. The results indicate that a one point increase in the
IPRs score will increase a country FDI by $1.5 billion and
imports by $ 8.9 billion. The FDI effect is substantially
greater than the $200 million as found by
Mansfield (1994), but this study considered
only sources from the U.S.
Lee and Mansfield (1996) have used
index of weakness of IP protection as
developed by Mansfield (1994). They
found that weak IPRs have significant
negative impact on the flow of U.S. FDI
in manufacturing. Further, in a sample of
chemical firms the proportion of FDI to
final production or R&D facilities is
significantly and negatively associated with weak IPRs.
From these results, it appears that both the volume and
quality of FDI diminishes in countries with limited property
rights. Mansfield (1995) also conducted the survey on the
same lines for German and Japan affiliates and his results
supported the results found in his earlier survey of U.S.
affiliates. Javorick (2004) has further empirically verified
the issue of composition of FDI vis-à-vis IPRs by using firm
level data set from Eastern Europe and former Soviet
Union. Results have shown that investment decisions in
IPRs sensitive sectors like drugs, cosmetics, health care
products, chemicals, machinery and equipment and electrical
equipment are affected by the IPRs regime of a country.
Moreover, weak IPRs keep FDI in areas of distribution
activities rather than local production. Kumar (2002) shows,
that R&D by MNEs is insensitive to the strength of IPRs
protection of the host country. Indeed the coefficient of
IPRs strength on R&D activity is negative though statistically
insignificant in case of U.S. affiliates. In the case of
Japanese affiliates the sign of coefficient is positive but
statistically insignificant. Therefore, the relationship
between R&D activities carried out by MNEs and the
strength of IPRs is not very clear. Moreover, there is
tendency of MNEs to conduct R&D activities in their home
countries or to concentrate in a few industrialized countries.
EU accounts for nearly 70% of R&D expenditure by
U.S. MNEs and in case of Japanese MNEs over 90% of
their overseas R&D is conducted in EU or U.S. (Kumar
2002).
Horstmann and Markusen (1987) discuss host of variables
that affect the decision of MNEs on the mode selection for
serving different international markets. Anand and Khana
(2000) have empirically shown, in case of Indian firms with
imported technology for the time period
1950-75, that when IPRs are weak firms
rely on non-market transactions, i.e.,
fewer licensing. Smith (2001) empirically
link IPRs of South on bilateral exchange
via the ownership, location, and internalization
concepts that are central to
the multinational literature. Her analysis
of location and internalization of knowledge
allows assessment of the relative
magnitudes of the effects of IPRs of
South on the three forms of bilateral exchange. The study
has used cross-sections of 50 countries on U.S. outward
bilateral exchange, including exports, affiliate sale, and
licenses to 8 unaffiliated foreign firms and GPI for IPRs
strength of South. The study found that the enhanced
ownership advantage from strong IPRs increases bilateral
exchange across all countries. Secondly, strong IPRs of host
country confer a location advantage which increases
affiliate sales and licenses relative to exports. Third, strong
IPRs of host country confer an internalization effect which
increases licenses relative to affiliate sales and exports.
McCalman (2004) in his empirical study of the behavior of
134 THE IIPM THINK TANK

K NOWLEDGE WITHOUT BORDERS
Hollywood studios in feature films and video market in the
foreign markets did not find any support for the hypothesis
that as IPRs strength increases there is a shift from FDI to
licensing. In his analysis moderate IPRs are associated with
high degree of licensing and both high and low standards of
IPRs encourage more integrated governance. Over all the
impact of IPRs on FDI, quality of FDI, licensing, exports as
evident from empirical studies is ambiguous.
Following UNCTAD (2001) technology transfer should
be distinguished from technology diffusion. The latter is
seen as another benefit that the transfer of technology may
bring to the host economy. Grossman and Helpman (1991)
define technological spillovers occurring when firm acquire
information created by others without paying for it in a
market transaction, and creators (or current owners) have
no effective recourse under prevailing laws to prevent other
firms from utilizing information so acquired. The technology
diffuses through demonstration effect, labor mobility,
linkages between buyers and suppliers, reverse engineering,
defection by employees, emigration of highly skilled
workers, creating awareness of that technology and this
awareness spills over the whole economy 19 .
Aitken and Harrison (1999) in their study of FDI benefits
in Venezuela found that increases in foreign equity participation
are correlated with increases in productivity for
recipient plants suggesting that these plants benefit from the
productive advantages of foreign owner. However, increases
in foreign ownership negatively affect the productivity of
wholly owned firms in the same industry. This could be due
to the competition effects of FDI that causes the inefficient
firms to leave in the long run. However, the empirical
analysis could not capture this aspect of the FDI. Blomström
and Kokko (1996) have concluded that MNCs may
play an important role for productivity and export growth in
their host countries, but that the exact nature of the impact
of FDI varies between industries and countries, depending
on country characteristics and the policy environment. Liu
and Wang (2003) have shown the positive and significant
impact of the FDI on industry productivity in China. The
impact increases if the firms are performing their own R&D
that is have some absorptive capacity. Hu, Jefferson and
Jinchang (2006) show that technology transfers has positive
impact on the productivity of Chinese firms. However, these
positive results depend upon the absorptive capacity of the
firm captured by domestic R&D.
3. Conclusion
The objective of TRIPs as laid down by Article 7 of the
TRIPs reads as “The protection and enforcement of
intellectual property rights should contribute to the promotion
of technological innovation and to the transfer and
dissemination of technology, to the mutual advantage of
producers and users of technological knowledge and in a
manner conducive to social and economic welfare, and to a
balance of rights and obligation”. The current theoretical
literature analyzes the impact of strengthening of IPRs in
the South to comply with TRIPs in general as well as partial
equilibrium models with the empirical literature focusing
on validating competing hypotheses. The strengthening of
IPRs affects the economic growth of the South. The two
channels have been explored extensively. Firstly, the promotion
channel whereby, the IPRs affect the innovativeness of
the South and concomitantly the productivity that per se is
related to the economic growth. Secondly, the transfer
channel whereby the new technology generated in the North
is transferred by means of trade, FDI and licensing. The
dissemination aspect of the transferred technology is not
directly related to IPRs and is expected to be captured by
studying the impact of trade, FDI and licensing on the
productivity of the host country in the South. The empirical
studies lend very little support to theoretical models as
results obtained are not consistent. IPRs strength is among
the innumerable variables that affect the economic agents’
decision of knowledge creation and its dissemination
though different modes. It is therefore, not very surprising
that most of the results are not replicated as the sample
changes for the individual country and industry specific
effects are very difficult to capture. Grossman and Helpman
(1990) noted that international economic environment
affects the incentive that firm in specific country have to
invest in the creation of knowledge. These features of global
set up include comparative advantage, market size, appropriability
conditions and finance. Does IPRs of the South
have any role in determining the innovativeness of the
North? What determines R&D is typically not modeled
though many studies have already shown the spillover effect
of international R&D. There is need to study whether the
IPRs are in any way directly related to the spillovers of the
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M ANAGEMENT OF DEVELOPMENT
technology transferred.
Endnotes
1 IPRs in this paper refer largely to patent as copyrights
and trademarks raise different set of issues
2 We will primarily concentrate on the theoretical litera-
ture that analyzes issues in the North (developed coun-
tries or technological leaders) and South (developing
countries or technological followers) framework. The
multilateral character of TRIPs agreement has clubbed
different countries (in terms of economic development)
together and has imposed same stipulations regarding
IPRs regime. This warrants the study of issues at aggre-
gate level.
3 See, Braga (1995) and Adolf (2001) for discussion on
changes introduced by the developing countries for
complying with the TRIPs.
4 GPI has been updated by authors for years 1995 and 2000
and is available upon request.
5 This excludability is limited to the commercial use of the
products that is for making, using, offering for sale,
selling, or importing of these products. Disclosure
requirements in patent laws ensure that knowledge is
available to other researchers for research purpose.
6 Scherer (1980) has argued that existence of non patent
barriers, substantial natural imitation lags, first mover
advantage, oligopolistic market structure are important
factors that reduces the importance of IPRs as the
mechanism to appropriate returns from R&D invest-
ments. Moreover, state can reward innovators to recog-
nize their contribution to the society and make the
innovations available to public. Shavell and Ypersele
(2001) have shown that IPRs do not posses a fundamental
social advantage over reward system and that an optional
reward system under which innovator chooses between
rewards and IPRs is superior to IPRs. However, the
principle difficulty with rewards is the information
required for its determination.
7 See, Kim (2002) for the analysis of Korea and Kumar
(2003) for Japan, South Korea and Taiwan.
8 India revised its patent law in 1970 and made it more lax.
Kaufer (1989) noted that this is the reaction against what
was perceived during 1960’s and 1970’s to be a persisting
condition of technological dependence on foreigners
including supplies of inappropriate technologies.
9 See, Watal (2001) for further discussion on how develop-
ing countries yielded to the developed countries during
the Uruguay round of talk of WTO.
10 One must note that the empirical relationship between
IPRs and economic growth is marred with the problem of
endogenity.
11 The South for the study is defined as 72 member states of
the WTO that are required to change the domestic
legislations on IP with in the time frame of five years of
the passage of the TRIPs according to the Article 65 of
the agreement. GPI is, however, available for only 50
countries.
12 The North for the study comprises of 23 countries that
are defined as industrial countries by International
Monetary Fund (IMF) for the Direction of Trade
Statistic (DOTS) as WTO also follow the similar defini-
tion.
13 R&D financed by the business enterprises would have
been preferable to the total R&D as a percentage of the
GDP as the latter includes expenditure on defense,
agriculture and so on that are not directly relevant to
innovation by the private agents. However, due to non
availability of data we have used total R&D. Lall (2003)
has reported that both measures yield similar results.
14 Patents are frequently viewed as an output indicator.
Patent could, however, be viewed as an input indicator
since these are used as a source of information by
subsequent inventors (Griliches 1990).
15 Index = , where the highest country in the rank scores 1
and the lowest scores 0.
16 Both the above mentioned causes allude to demand pull
factors determining R&D. See, for instance, Scherer
(1982), Levin, Cohen and Mowery (1985), and Geroski
and Walters (1995).
17 See, for instance, Yang and Maskus (2001).
18 See, for instance, Vishwasrao (1993), Markusen (1995),
Saggi (1999), Maskus (2000a), and Markusen (2001) for
the relationship among IPRs, FDI, and licensing.
19 See, Görg and Greenaway (2004) for the review of
empirical literature on spillovers from FDI.
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(The views expressed in the write-up are personal and do not
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THE INDIA ECONOMY REVIEW
139

F INANCIAL ECONOMICS
Just How Much Money is at
Stake in Shares Pledged by
Promoters?
Jayesh Kumar
Associate Vice President,
Industry Research Group,
Kotak Mahindra Bank
SEBI in its recent directive in January mandated
disclosures regarding pledge of shares by the pro-
moter and persons forming part of the promoter
group to the company and by the company to the stock
exchanges where shares of the company are listed, post
Satyam fiasco.
Ever since the companies started disclosing this information,
market learned the degree of this financial engineer-
140 THE IIPM THINK TANK

P APER MONEY
Why do firms
need to take six
months to disclose
their financial
results? Are firms
capitalized well to
survive?
ing, which looks like an Indian version of western word’s
sub-prime CDO/MBS.
Majority of Indian companies have been pledging shares
for more than two decades, if not longer. Promoters of 467
companies have pledged with lenders an average 23% of their
holdings so far. There are 114 companies whose promoters
have pledged more than 50% of their own stake, and promoters
of 22 companies (about five percent of disclosing companies)
have pledged more than 50% of paid up shares. At
current market prices, the total value of pledged stocks is
over Rs 62,000 crore. This is over two percent of Indian stock
market’s market-cap of Rs 30.33 lakh crore.
As per the data available for 3,483 listed companies, Indian
promoters hold 49.85% of paid-up shares of
these companies as on December 2008.
Promoter’s pledged shares on average
17.07% of paid up shares. Generalization of
this to all listed entities, suggests whopping
258,107 crore 1 . Assuming 50% margin, the
bank credit to these promoters could be
pegged at Rs. 129,000 crore (about five
percent of credit by entire banking system
in the economy)!
What would happen if the equity prices
continue in its downward trend, eventually
forcing promoters (those who have pledged
their almost entire stake in the company)
to default leaving financial institutions no
other choice than to off-load all the equity
in the market? And if they choose to
off-load these pledged shares in the
market, its bound to cause havoc on the
equity prices, set to crash by at least 20-30%, and eventually
the losses financial institutions may have to bear could be well
about 100,000 crore (about 25% of Scheduled commercial
banks capital, reserves and surplus as on March 2008).
Promoter’s pledging of shares pose a corporate governance
challenge in view of the indirect reduction in shareholding.
Besides impacting share prices, in cases where promoter's
holding is small, such sales can destabilize companies as
they would become vulnerable to takeovers. SEBI introduced
this new requirement because pledged shares are subject to
material risks or contingencies that do not apply to other
shares owned by the promoters. Moreover, these circumstances
could influence the policies and decisions of the pledgor.
The concern with companies, whose promoters have already
pledged their entire stake, is that they now have little leeway.
Any further fall in share prices may lead to margin calls by
lenders and with no more shares left to be pledged, lenders
could start off-loading the pledged shares in the market to
recover their funds. Such off-loads highlight the potential for
insider trading resulting from such involuntary sales of shares.
In addition to the potential insider trading, this could also lead
to violation of the insider trading policy if such off-load
occurred during a blackout period.
As far as, enhanced disclosures are concerned it makes more
sense to also disclose other indirect pledging or shorting the
direct holding, say through OTC derivatives
contracts like swap agreement with overseas
funds. Exclusive disclosure of pledged shares
only, provides incentives financial engineering
to come up with alternative ways of
raising fund against equity without exclusively
pledging them.
Taking some more liberty, I would rather
argue about increased disclosure of
financials as well, if we can have quarterly
reporting of P&L (un-audited) why
shouldn’t we have quarterly reporting of
B&S (un-audited) as well. Why do companies
need to take six months to disclose
their financial results when shareholders
are subjected to high price volatility on
daily basis?
The question in every investor’s mind is
whether it is just a corporate governance
issue or a much deeper financial problem looming its head? Is
our banking system strong enough, as argued by almost
everyone in past, to weather out such blow on their balance
sheets? Are they capitalized well to survive?
Endnotes and Additional Thinking
1
SEBI directive doesn’t ask mutual funds to disclose their
pledged shareholding. Mutual funds are also expected to
have pledged shares to the tune of Rs. 3,000 crore.
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organisation)
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Table 1: CASH COUNTER: Pledging as a percentage of Paid-up Capital
Source: Company Data, Author’s calculations
COMPANIES
%Paid-up
Shares
COMPANIES
%Paid-up
Shares
COMPANIES
%Paid-up
Shares
India Cements Capital 85.58% Anjani Portland Cement 35.98% Pitti Laminations 25.91%
Satra Properties India 73.54% Kitply 35.19% Suzlon Energy 25.85%
Micro Inks 70.50% Sakthi Sugars 35.12% Excel Glasses 25.62%
Falcon Tyres 68.00% Brushman India 35.07% Glory Polyfilms 25.27%
Jaiprakash Hydro Power 67.52% Sudal Industries 34.91% Grabal Alok Impex 25.23%
Vinay Cements 66.38% Shetron 34.71% Sona Koyo Steering 25.12%
Parsvnath Developers 63.88% Dhanus Technologies 34.39% Adani Enterprises 24.98%
Carol Info Services 62.82% BPL Ltd. 34.21% Super Forgings 24.92%
Shaw Wallace & Co. 62.50% Birla Precision Tech 34.19% Rain Commodities 24.90%
Kerala Ayurveda 61.52% Temptation Foods 34.11% Prithvi Information 24.84%
JHS Svendgaard 60.00% Vanasthali Textile I. 33.87% Max India 24.81%
Tata Coffee 57.48% Steel Strips Wheels 33.50% Dharani Sugars & Chem. 24.79%
Era Infra Eng. 56.60% United Spirits 33.22% Nagarjuna Fertilizers 24.56%
Sri Ramakrishna Mills 54.11% Shoppers Stop 33.10% CCAP 24.48%
Gem Spinners 54.03% Shree Ram Mills 33.00% Medicamen Biotech 24.11%
Gayatri Projects 53.73% Lloyds Metals 32.94% Genus Power Infra. 23.72%
Financial Eyes India 53.33% SRF 32.83% Uttam Sugar Mills 23.28%
Refnol Resins & Chem. 52.57% Uttam Galva Steels 32.19% Radaan Mediaworks 23.08%
Millennium Beer 51.75% JSW Steel 31.87% Media Video 22.98%
Hathway Bhawani Cable 51.00% Rama Phosphates 31.86% SAL Steel 22.95%
Zandu Pharmaceutical 50.76% Lokesh Machines 31.59% LN Polyesters 22.80%
Arvind Products 50.12% Essel Propack 31.16% UTV Software 22.76%
Tata Teleservices Maha. 49.70% Emmsons International 30.83% Clutch Auto 22.75%
Kirloskar Electric Co. 48.48% Tulip Star Hotels 30.42% South Asian Petrochem 22.75%
Kamat Hotels India 47.09% JD Orgochem 30.40% Balasore Alloys 22.72%
Plethico Pharma 46.97% Dolphin Offshore Ent. 30.07% Tulip Telecom 22.57%
Star Paper Mills 46.54% Bhuwalka Steel 30.00% India Cements Ltd 22.43%
JK Cement 45.58% Dr Agarwals Eye 30.00% Amar Remedies 22.37%
Hatsun Agro Product 45.46% Ganesh Housing Corp. 30.00% Kilburn Engineering 22.23%
Tuticorin Alkali 45.15% Ispat Industries 29.98% MIC Electronics 22.07%
Spentex Industries 44.52% IMP Powers 29.86% Omaxe 21.95%
Kingfisher Airlines 43.80% Ansal Housing & Const. 29.70% Alcobex Metals 21.88%
Euro Ceramics 43.68% Polar Pharma 29.57% STL Global 21.85%
Raasi Refractories 43.52% APW President Systems 29.17% Pyramid Saimira 21.72%
Wockhardt 43.11% Ansal Properties 29.11% Zensar Technologies 21.55%
Suryalata Spinning 41.95% Indokem 29.09% Ganesh Benzoplast 21.45%
Todays Writing Products 41.46% Panchmahal Steel 29.00% Pasupati Acrylon 21.26%
Haldyn Glass Gujarat 40.16% Sobha Developers 28.39% Expo Gas Containers 21.21%
HFCL Infotel 39.39% Time Technoplast 28.18% Alok Industries 21.06%
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Source: Company Data, Author’s calculations
COMPANIES
%Paid-up
Shares
COMPANIES
%Paid-up
Shares
COMPANIES
%Paid-up
Shares
Supreme Holdings 39.29% Solix Technologies 28.11% Kalpataru Power Trans. 20.92%
Aurobindo Pharma 38.97% Emami 27.89% Hotel Leelaventure 20.87%
Manali Petrochemical 38.29% Broadcast Initiatives 27.28% Fortis Healthcare 20.75%
Dharamsi Morarji Chem. 38.00% Indage Vintners 27.16% ETC Networks 20.33%
UB Engineering 37.81% Cranes Software Int. 27.00% Rajratan Global Wire 20.13%
ORG Informatics 37.27% Entegra 26.89% Murudeshwar Ceramics 20.08%
Oricon Enterprises 36.93% Jindal Drilling & Ind. 26.86% Tata Chemicals 20.02%
Mirc Electronics 36.82% Mukand 26.67% Amit Spinning 20.00%
Bell Ceramics 36.80% Refex Refrigerants 26.60% Srinivasa Shipping 20.00%
GEI Industrial Sys. 36.78% Photoquip India 26.21% SSPDL 20.00%
Videocon Industries 36.41% Sri Adhikari Brothers 26.04% Kriti Industries 19.95%
S.Kumars Nationwide 36.21% Regency Ceramics 26.03% Balaji Amines 19.85%
Bihar Sponge Iron 36.06% Simbhaoli Sugars 25.95% Blue Coast Hotels 19.81%
Shyam Telecom 19.52% Prime Focus 14.93% Lyka Labs 11.82%
Pantaloon Retail 19.49% Escorts Finance 14.91% Usha Martin 11.82%
Winsome Yarns 19.48% Suryachakra Power Corp. 14.91% Raj Rayon 11.75%
Shrenuj & Company 19.47% Sintex Industries 14.90% Prajay Engineers 11.66%
Ahlcon Parenterals 19.44% Great Offshore 14.88% Zee Entertainment 11.53%
Quintegra Solutions 19.42% Fluidomat 14.83% Ess Dee Aluminium 11.49%
Jyoti 19.37% Polar Industries 14.78% Tata Tea 11.32%
Deepak Spinners 19.33% Nikhil Adhesives 14.71% Gemini Communication 11.28%
Innocorp 18.98% Tata Power 14.59% Visaka Industries 11.24%
Raunaq Automotive 18.91% Vikash Metal & Power 14.54% Arvind International 11.22%
Karuturi Global 18.77% Kreb Biochemicals 14.53% Tata Consultancy Serv. 11.14%
Ahluwalia Contracts 18.76% Richa Industries 14.53% Bihar Tubes 11.09%
Gallantt Metal 18.64% Khandwala Securities 14.52% Torrent Power 11.07%
Software Technology Grps 18.59% LGS Global 14.49% Bilpower 11.05%
Mcleod Russel 18.47% Peninsula Land 14.36% Ritesh Properties 10.92%
Bombay Rayon 18.43% Gati 14.34% Gammon India 10.85%
Riga Sugar Company 18.36% Wintac 14.29% Diana Tea Co. 10.72%
Arvind Ltd 18.18% Dagger Forst Tools 14.28% Shreyas Intermediates 10.69%
Well Pack Papers 18.04% Elecon Engineering 14.27% Apollo Tyres 10.62%
Jasch Industries 17.65% Kale Consultants 13.82% Rajapalayam Mills 10.59%
Heritage Foods India 17.35% Wanbury 13.71% Premier Explosives 10.57%
Zee News 17.17% Jubilant Organosys 13.66% Tata Communications 10.53%
Bhushan Steel 17.01% Williamson Magor 13.56% Granules India 10.43%
ASM Technologies 17.00% Zicom Electronic S S 13.54% Value Industries 10.40%
PBA Infrastructure 16.99% Tata Steel 13.53% Nijjer Agro Foods 10.39%
Tamilnadu Petro. 16.93% Akruti City 13.34% Alps Industries 10.14%
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Source: Company Data, Author’s calculations
COMPANIES
%Paid-up
Shares
COMPANIES
%Paid-up
Shares
COMPANIES
%Paid-up
Shares
Reliance Chemotex Inds. 16.91% Integra Capital Manag. 13.34% Accentia Technologies 10.00%
Aurionpro Solutions 16.85% Sterling Biotech 13.32% Onward Technologies 9.83%
Wire & Wireless 16.84% McDowell Holdings 13.22% J Kumar Infraprojects 9.76%
Strides Arcolab 16.83% Reliance Communications 13.19% Supreme Industries 9.72%
Pioneer Embroideries 16.75% Lloyds Steel Inds. 13.13% Shree Ashtavinayaka CV 9.71%
Sky Industries 16.68% IG Petrochemicals 13.11% Spanco 9.69%
GI Engineering 16.64% Provogue India 12.98% DCM Shriram Inds. 9.53%
Ipca Laboratories 16.41% Rama Petrochemicals 12.98% Nirlon 9.51%
NOCIL 16.41% Rajvir Industries 12.95% Rainbow Denim 9.51%
BGIL Films 16.35% Marg Ltd. 12.78% Orient Press 9.50%
Reliance Infra 16.35% Cupid 12.72% HEG 9.47%
Transformers & Rectif. 16.33% C&C Construction 12.60% Dabur India 9.24%
Hindustan Motors 16.30% Lupin 12.60% Nagarjuna Construction 9.20%
Amrit Banaspati 16.28% Schrader Duncan 12.58% Bartronics India 9.17%
Alembic 16.10% Arshiya International 12.55% Eimco Elecon India 8.67%
Sutlej Textiles & Inds. 16.10% Sankhya Infotech 12.43% Ruchi Strips & Alloys 8.64%
Gujarat NRE Coke 15.96% Futura Polyesters 12.40% Lanco Infratech 8.53%
Saurashtra Cement 15.63% Motilal Oswal Fin 12.38% Shree Renuka Sugars 8.45%
Amforge Industries 15.60% Resurgere Mines 12.26% Raymond 8.31%
Helios & Matheson 15.58% Adhunik Metaliks 12.16% CHD Developers 8.25%
Vipul 15.48% Alchemist 12.07% Damodar Threads 8.22%
Jindal Worldwide 15.44% XL Telecom 12.05% Tata Motors 8.15%
Network 18 Media & I. 15.20% Godawari Power & Ispat 12.04% Aban Offshore 8.14%
Maytas Infra 15.14% Genesys International 12.01% Indage Restaurants 8.12%
Nova Petrochemicals 15.00% Thiru Arooran Sugars 11.97% Mahindra & Mahindra 8.09%
Asian Paints 14.98% Kemrock Inds. & Exports 11.89% Chowgule Steamships 7.99%
Nachmo Knitex 7.88% Bajaj Finserv 4.41% Pennar Industries 1.98%
Pradeep Metals 7.86% GVK Power & Infra. 4.37% Modison Metals 1.90%
Chambal Fert. & Chem. 7.72% LG Balakrishnan & Bros 4.28% CCL Products 1.87%
Mold Tek Technologies 7.60% Birla Ericsson Optical 4.17% Khaitan Electricals 1.84%
Simplex Infra 7.60% Gangotri Iron & Steel 4.15% Shree Bhawani Paper 1.73%
Godrej Consumer Products 7.58% Elpro International 4.05% IOL Netcom 1.72%
United Breweries Holdings 7.48% ISMT 4.03% ICSA India 1.71%
Jindal Saw 7.32% Reliance Capital 4.03% Aksh Optifibre 1.69%
Accel Transmatic 7.25% Mangalam Drugs 3.98% Jindal Steel & Power 1.65%
Premier Ltd. 7.24% Indian Metals 3.90% Kopran 1.64%
Subex 7.20% Bajaj Holdings & Inv. 3.82% Moser Baer India 1.56%
Dish TV India 7.17% Everonn Systems India 3.81% Television Eighteen 1.52%
Sahara One Media & Ent. 6.97% Taneja Aerospace 3.81% Sarda Energy & Minrls. 1.47%
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COMPANIES
%Paid-up
Shares
COMPANIES
%Paid-up
Shares
COMPANIES
%Paid-up
Shares
Zuari Industries 6.90% Andhra Pradesh Paper M. 3.77% Vardhman Polytex 1.46%
Gammon India Ltd. 6.86% Natco Pharma 3.74% Bajaj Electricals 1.45%
Sujana Metal Products 6.79% EIH 3.64% Goldstone Infratech 1.39%
Balaji Telefilms 6.59% Panoramic Universal 3.61% Pioneer Investcorp 1.25%
Vamshi Rubber 6.59% Multi Arc India 3.60% Punj Lloyd 1.20%
Silktex 6.56% Vishal Retail 3.51% Nakoda Textile Inds. 1.18%
Nicco Corpporation 6.52% Indian Hotels Company 3.46% Camlin Fine Chemicals 1.03%
Suryajyoti Spng. Mills 6.48% Logix Microsystems 3.44% Khaitan Chemicals 1.03%
Dishman Pharmaceuticals 6.44% Ballarpur Industries 3.38% Camlin Ltd. 1.00%
Nava Bharat Ventures 6.44% LGB Forge 3.36% Marsons Ltd. 0.93%
B.L. Kashyap & Sons 6.40% Shasun Chemicals 3.23% Crest Animation Studios 0.89%
PI Industries 6.37% PVP Ventures 3.22% Ramco Systems 0.85%
Crompton Greaves 6.22% Paramount Comm 3.20% Geodesic 0.82%
Ashapura Minechem 6.20% KLG Systel 3.18% HBL Power Systems 0.78%
Facor Alloys 6.20% Cambridge Technology 3.13% HCL Infosystems 0.77%
Ontrack Systems 6.20% Sujana Towers 3.12% Religare Enterprises 0.58%
Dr Reddys Laboratories 6.19% Neuland Labs. 3.10% Astra Microwave Prod. 0.56%
Oxford Industries 5.98% Ashima 3.00% Gillette India 0.49%
Navin Fluorine 5.83% Golden Tobacco 3.00% Sree Rayalaseema Alkl. 0.44%
CESC 5.74% Jai Balaji Industries 2.96% Priyadarshini Spinning 0.42%
Ramsarup Industries 5.70% Sanghvi Movers 2.95% Sun Pharmaceutical 0.42%
Upper Ganges Sugar1 5.69% Filatex India 2.91% Asian Electronics 0.40%
Four Soft 5.52% McNally Bharat 2.89% Maxwell Industries 0.40%
United Phosphorus 5.52% Oriental Carbon & Chem. 2.87% Kpit Cummins 0.38%
Setco Automotive 5.48% Mascon Global 2.73% First Leasing Co. 0.37%
Bharati Shipyard 5.44% Electrotherm India 2.62% Forbes & Company 0.37%
Hind Syntex 5.33% Rolta 2.58% Phoenix Mills 0.35%
MSK Projects India 5.33% Bajaj Auto 2.57% Ruchi Soya 0.29%
Walchandnagar Inds. 5.25% Marsons 2.57% MindTree 0.27%
Digjam 5.24% Ruchi Infrastructure 2.46% Astra Microwave Prod 0.24%
Jain Irrigation Systems 5.13% Emco 2.36% Century Textiles & Ind. 0.21%
Kavveri Telecom 5.09% Uflex 2.28% Comfort Intech 0.19%
Usher Agro 5.04% Upper Ganges Sugar2 2.25% DCW 0.16%
Godawari Power 4.92% PVR 2.17% JIK Industries 0.13%
Zylog Systems 4.86% Jaiprakash Associates 2.15% OCL India 0.09%
Hikal 4.72% Madras Cements 2.11% India Infoline Ltd. 0.05%
KEI Industries 4.59% Atlanta 2.05% JB Chemicals 0.04%
Kirloskar Oil Engines 4.55% Kajaria Ceramics 2.04% Kotak Mahindra Bank 0.01%
Mundra Port 4.51% Upper Ganges Sugar3 2.03% Great Eastern Shipping 0.01%
Source: Company Data, Author’s calculations
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E CONOMIC SOCIOLOGY
Consumerism in the Eyes of a
Rational Optimist
Suchismita Mondal Sarkar
Assistant Professor,
University of Burdwan,
West Bengal, India
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“Earth provides enough to satisfy everyman’s need but not
everyman’s greed.” -Mahatma Gandhi
When the global economic players are cheering
on India’s fostering economic growth with
increasing shopping mall as the symbol of this
growth, consumerism and consumer culture have become
central to ethical discussions of identity, post modernity
and culture as never before.
Economic expansion takes place through mass production
of more goods in a efficient manner. This increased
production needs to be consumed. When market comes to
the picture, country like India tops the list. Goods from
the western world has a ready market in India. When
different countries are having discussions over the core
issue of climate change and environmental pollution, our
focus is to the rapidly growing consumer class that appears
to enthusiastically welcoming the western way of
living.
This has unleashed the demons of pollution economy
wide. Pollution created in this process
can be of two types– one is the environmental
pollution resulting from the
manufacturing process, dumping of
consumer goods etc and the other is the
pollution of culture and mind. Here the
latter is the central point of discussion.
It results as the proliferation of consumer
goods- the culture and meanings
being ascribed to these goods by their
marketing agencies are injected (impinges)
into the consumer. A culture thus being created is
transformed that gradually occupies the mental space of
the consumer. Marketing agencies thus became an industry
producing culture.
Environmental pollution is a problem that can be
addressed by technical solutions and social restructuring
but pollution of mind and erosion of culture is rather
difficult to address. The problem has no technical fixes
nor any discourse of thinking about solutions.
Culture and Consumer Culture
A culture is a set of rules, people use to function in a
Pollution of mind
and erosion of
culture is rather
difficult to address
rather than the
environmental
pollution
society. A society is dominated and identified by its
culture – tangible and intangible or material and symbolic,
resources available to the members living in it.
Consumer culture therefore can be defined as a social
arrangement between culture and the resources that
members of the society have at their disposal are distributed.
Individual transforms into consumer and whatever
material resources she or he needs to function in a society
– status, prestige, esteem, love and salvation are all
available in the marketplace. Cultural meanings and
values get imbibed in material possession and eventually it
becomes easier to communicate information about
oneself through possessions and through deeds.
In consumer culture everything that we want from basic
needs (food, shelter) to entertainment, gossip etc. are
available through market. Culture continues to be produced
and reproduced through market.
From a Marxist perspective, it is a wage relation – the
consumer’s access to consumption is structured by distribution
of material and cultural resources (money and
taste), that is, it is determined by crucial ways of market
relations – wage relation and social
class. It is capitalist relations of production
that produces the consumer.
Capitalism requires a constantly
expanding consumer class for the mass
production of consumer goods to get
distributed in an efficient way. Consumer
culture is incompatible with political
regulation of consumption that suppresses
the market. So it does not arise
in a non-capitalist society.
Features of Consumer Culture
It is inherent in consumer culture that :
1) Consumption becomes the central focus of social life.
Values are dominated by a culture that encourages
consumption practices, more commodified and as a
society of choice and consumer sovereignty.
2) The culture is dictated by market relations of consumers
having resources at their disposal, who are free to
make choices and mindless consumption, which is
ideologically declared out of bounds to public intervention,
social and political authority.
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Globally, the 20% of the world’s people in the highestincome
countries account for 86% of total private
consumption expenditures — the poorest 20% a
minuscule 1.3%.
More specifically, the richest fifth:
Consume 45% of all meat and fish, the poorest fifth 5%
Consume 58% of total energy, the poorest fifth less
than 4%
Have 74% of all telephone lines, the poorest fifth 1.5%
Consume 84% of all paper, the poorest fifth 1.1%
Own 87% of the world’s vehicle fleet, the poorest fifth
less than 1%
Runaway growth in consumption in the past 50 years is
putting strains on the environment never before seen.
-Human Development Report 1998 (UNDP)
belief that economic growth advances the development of
mind, spirit and culture. Values are being redefined
according to the purpose they serve.
Today’s consumption is undermining the environmental
resource base. It is exacerbating inequalities. And the
dynamics of the consumption-poverty-inequality-environment
nexus are accelerating. If the trends continue
without change — not redistributing from high-income to
low-income consumers, not shifting from polluting to
cleaner goods and production technologies, not promoting
goods that empower poor producers, not shifting priority
from consumption for conspicuous display to meeting
basic needs — today’s problems of consumption and
human development will worsen. The real issue is not
consumption itself but its patterns and effects. Inequalities
in consumption are stark.
3) In consumer culture, possessions and goods signify
status, social identity and dictate the ways to make
social appearance, networks and social values.
Consumerism – An Iron Cage
In thinking about modernity and
modern capitalism, Max Weber spoke a
century ago about an iron cage.
Consumerism brings to mind a
different cage.
The ethos of limitless consumption
encourages us to regress, privatization
compels us to withdraw from our public
selves and force ourselves to get confined
to small enclaves where we deploy private resources
to turn what were once public goods such as garbage
collection, police protection, and schooling into private
commodities. To protect a few in midst of general insecurity,
to educate a few in the midst of societal ignorance
becomes increasingly difficult.
According to some psychologist by embracing this
freedom of market place in every aspects of our lives, the
things we value most – the relations that are core to
human existence are being threatened and becoming
increasingly difficult to achieve. The ‘consumption
maximum’ attitude strictly contrast the long standing
In wealthy
countries,
economic growth
rather than culture
advancement
continues to be a
central policy goal
The Paradox of Growth
Modern affluent societies are characterized by an increasing
hectic pace of living, growth oriented economic
policies and wasteful service economies. Economic
growth leads people to optimize the use
of time they spend, by increasing the
amount of goods consumed and decreasing
the amount of time spent on
with each.
In wealthy countries, economic
growth rather than culture advancement
continues to be a central policy
goal even though general welfare has
advanced to the point where most
people can satisfy their basic material
needs. This is paradoxical since the historical image of a
affluent society is one in which the satisfaction of basic
needs leads to individual and cultural development. The
increasing scarcity of time is probably the root cause of
this paradox. The scarcity of time is reflected in every
sphere of life from our food habits to entertainment.
People are more indulged towards fast food at restaurant
than cooking at home. Night clubs, Pizza huts and cafes
now resembles an affluent society.
Again a growing economy is defined by its consumption
pattern and expenditure. Expanding market implies
growing economy. But the question that arises is if this
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B OURGEOIS BOHEMIANS
growth is driven by market orientation rooted in the
culture of mindless consumption, with people doing well
enough to have discretionary income to spend, with
personal problems turning towards market for solutions,
then in the long run larger social problems may arise,
which may threaten our integrity.
In times of recession, people restrain from spending.
When people buy less, businesses need to produce less, so
they need fewer employees. So people lose their jobs and
then they too spend less and eventually more people lose
their jobs in this process. Some social scientists believe
that an economy based on consumerism is somehow an
offense against virtue. But what else, actually, could any
economy be based on? The “economy” means that the
goods and services are produced and consumed which
makes everyone better off. That production of things
people want is the source of all wealth and income and
our entire standard of living. It doesn’t come from heaven,
or “society,” or government.
We are employed to produce these goods. And if all
consumerism is stopped, we’d all be out of jobs. The
paradox lies here. This paradox is based on the proposition,
put forth in Keynesian economics, that many economic
downturns are demand based. Excess of anything,
including consumerism can be bad. But people have to
consume. It’s a question of balance.
Higher Education Engulfed in Consumerism
Recent trends have produced a job oriented consumer of
higher education. This ‘consumerist attitude’ has been a
great concern for many academics and non-academics.
The increasing reach of ideologies of consumerism and
commodification worries some. People experience
freedom by choosing what to consumer, at the same time,
consumerism forces everything to become a commodity
that must work to attract consumers so it can be judged
and then either purchased or rejected.
Faculty worry that the whole of the market logic is transferred
to the educational arena, resulting in constrained
freedom of expression and challenges to academic freedom.
The academic world is the only place where the
consumers eventually becomes the product and literally
does sell themselves.
The expanding attitude of consumerism has reached out
from the shopping malls and stock markets into the very
heart of the academy. It unchecked, this capitalist society
will consume the heart of knowledge and learning and
have in its place – memorization and passionless lectures.
Higher education was a service to society and society
sought to serve the academy in return. The senses of civic
duty, democracy and spirituality were the components of
education which were further considered as moral backbone
of society. But from its noble beginnings as instruction,
higher education has transformed into a training
ground for professions. Thus we are approaching towards
an era of educational consumerism.
Conclusion
India is changing rapidly with the world and we have no
idea about the changing scenario that will engulf our
culture and tradition. Light cannot be seen at the end of
the tunnel but the only hope is that some people are
asking questions against full-fledged consumerism and
are thinking of a reasonable approach to combine tradition,
culture with it and make consumerism unique in
India.
Thus, India should endeavour to evolve its own unique
consumer cultures that will not only produce thriving
economies but also offer people more meaningful and less
market based ways to develop a sense of self. It must adopt
the technologies and practices that will create a new
standard of consumerism so that the potential impact of
businesses would help to address climate and poverty
related problems as well as those that support traditional
consumerism in a more efficient, eco-friendly manner.
So we must believe to be optimistic about what can be
changed and not what can be eliminated or subtracted.
References and Additional Thinking
• Zavestosky Dr Stephen; 2007: “Consumerism in
India:A Faustian Bargain?”in ‘Issues in development
Management’ UGC DRS Publications of University of
Calcutta.
• Kaplan Jeffrey;2008: “The Gospel of Consumption”
published in “Orion” Magazine.
(The views expressed in the article are personal and do not
reflect the official policy or position of the organisation).
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A DIFFERENT PERSPECTIVE
ON THE US-INDIA NUCLEAR DEAL
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Peter Custers
Affiliated Researcher, International
Institute for Asian Studies (IIAS), Leiden,
Netherlands
Introduction
This essay discusses the hazardous and wasteful implications
of the US-India nuclear deal beyond its implications
for the nuclear arms’ race in the subcontinent. Most of the
key objections against the deal that have been put forward
by progressive opponents of the deal in India and internationally,
have addressed the fact that it legitimizes India’s
status as a nuclear weapons’ state, and that it will enable
India to expand its production of weapons’ grade plutonium.
Already, India is estimated to possess a sufficient
amount of plutonium for the manufacturing of at least a
hundred atomic bombs. Since India reportedly has agreed
to place only 14 out of its 22 civilian reactors under the
IAEA’s inspection regime, it is free to produce in the
remaining 8 reactors another 200
kilograms of weapons’ grade plutonium
per year 1 . Thus, fears that the controversial
deal will enhance the danger of a
nuclear conflagration in South Asia
appear to be well grounded, - even if we
leave aside all other interrelated objections
that have been raised.
In this essay, the spotlights will not be
put on India’s past and future plans for
production of weapons’ grade plutonium
and nuclear bombs, but on two other major questions.
For the US-India nuclear deal needs to be also and
fiercely questioned with regard to its ostensible aims, i.e.
the vast expansion in the production of nuclear energy.
Whereas a more than 10-fold increase in generation of
nuclear energy, as foreseen, may help to overcome India’s
rapidly growing energy needs, - the side-effects in terms of
generation of nuclear waste are so ponderous, that from
this perspective too, implementation of the deal needs to
be pre-empted. Moreover, as reported briefly in India’s
national press in September last, when the signing of the
deal was being debated, - there is a little discussed ‘reverse
The N-deal is
bound to result in
huge quantities
and extremely
dangerous waste
that can't be sold
on the market
side’ to the nuclear deal, being the US’s additional commercial
objectives relating to its arms’ exports. For the US
is poised to lobby aggressively, so as to capture a larger
share of India’s arms’ imports than it has held up until
now.
The conceptual approach proposed so as to address
these combined issues, is a holistic view on waste. In this
view, processes of manufacturing that result in military
commodities, i.e. in weaponry, basically need to be
analyzed as processes that result in wastage of economic
resources. This, for instance, is the case where economic
policymakers deciding to purchase armament systems do
not primarily have in mind security considerations, but
macro-economic stimulation of domestic demand for
goods. However, this, the production of ‘social waste’,
generally does not stand alone, but needs to be juxtaposed
with the generation of ‘non-commodity waste’ during the
same industrial processes. Whereas conventional economics
discusses these side-effects of industrial manufacturing
under the heading of ‘externalities’, - in this essay the term
non-commodity waste will be used, whenever reference
will be made to the ecologically harmful
by-products of industrial manufacturing
2 .
Whereas ‘social’ waste and ‘non-commodity’
waste are rarely juxtaposed in
public debate, - the US India nuclear
deal and its reverse side offer an occasion
to do precisely this. As the below
cited data on the generation of waste in
the nuclear production chain show, - the
US-India nuclear deal is bound to result
in huge quantities and extremely dangerous waste that
cannot be sold on the market, but needs to be put aside, at
great risks to humans and to our natural environment.
Again, the importation of expensive armament systems
entails the waste of vast economic resources that could be
used towards relieving India’s persistent mass poverty,
hence should be considered importation of social waste.
Moreover, the issues of ‘social’ and ‘non-commodity’
waste can also be posed in relation to the manufacturing
of weapons’ grade plutonium and atomic weapons, where
generation of the two given forms of waste occurs simultaneously
3 .
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The Nuclear Deal: Importation of Nuclear Tech-
nology and and Importation of US Armament
Systems
As starting point for my discussion I will take two newspaper
articles published in the Times of India on September
11 th last. One of these highlighted the business prospects
of the US-India nuclear deal via the sale of nuclear
production technology, and via the importation and the
construction of nuclear reactors in India. The second
article discussed the aspiration of the US in terms of
expanded exports of armament systems to India. To take
the article on plans for expansion of nuclear energy
production first, - it spoke very glowingly about the size of
business that will be generated, mentioning
a figure of 40 Billion US Dollars
worth of orders Indian and foreign
enterprises stand to receive, and hailing
the deal as a ‘project’ having a financial
size of Rupees 2.4 lakh crore. Under the
deal, a reported 24 light-water reactors
will be imported from abroad and
installed along India’s coasts (!). India
plans to build a further 12 indigenous
nuclear plants, consisting of pressurized
heavy water reactors. At no point in the
article are the implications of the
nuclear deal in terms of generation of
additional nuclear waste discussed 4 !
In another article published in the
Times of India on the very same day, the
secondary objectives of the US, which
traditionally is not a major seller of
military hardware to India, are described. The article
delineates the huge size of India’s overall arms’ imports. It
states that since the Kargil conflict, India has spent a
‘whopping’ $ 25 Billion on imports of weaponry. The
country is ‘poised’ to spend another $ 30 Billion on such
purchases over the next 5-6 years (!). Thus, the US is vying
to capture a whole series of arms’ orders which India
intends to place on the world market for arms. Indian
import plans reportedly include a $ 170 million plan for
the buying of anti-ship Harpoon missiles, a Rs 42,000
Crore project for the purchase of multi-role combat
aircraft, and purchases of 197 light utility and observation
India plans to
build a further
12 indigenous
nuclear plants,
consisting of
pressurized heavy
water reactors
helicopters worth another Rs 3,000 Crore. A deal mentioned
that has already been clinched, and has been sent
for approval to the US Congress, is the arms’ deal – described
as India’s ‘biggest ever’ with the US – for the
purchase of 8 Boeing reconnaissance aircraft, estimated
to cost no less than Rs 8,500 Crore. At no point in the
article is it explained that such lavish spending on arms’
imports represents a form of social waste, and that the
same financial resources could well be spent on alleviating
the massive poverty that still exists in India 5 .
Officially, of course, the US- India nuclear deal and the
listed plans to import armaments are no interconnected
issues. The arms’ purchases do not directly form part of
the agreement surrounding importation
of nuclear technology. And yet it is
probably correct to see the US’s hopes to
overtake other foreign suppliers of arms
to India as a reverse side of the nuclear
deal, as was indeed hinted at in the
article of the Times of India. In any case,
juxtaposition of the two issues enables us
to look more holistically at the wasteful
implications of the Indian government’s
behavior, than a focus on the US-India
nuclear deal alone would allow us to do.
Hence, below I am going to address
both the generation of nuclear waste
that will occur in consequence of the
nuclear deal, and India’s arms’ imports,
in order to show the full extent of waste
creation that is involved.
The Generation of Hazardous Waste in the
Nuclear Production Chain
Let’s take the issue of nuclear waste generation first. I do
not possess comprehensive data on the nuclear waste that
has been generated by nuclear production in India so far.
Nor am I in a position to give a precise assessment regarding
the waste that importation and construction of new
reactors will result in. However, the experience of nuclear
production worldwide is unequivocal: nuclear waste
emerges at each and every link in the nuclear production
chain, starting from the very first stage, i.e. that of uranium
mining and milling, and lasting up to the stage where
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I N PERSPECTIVE
nuclear fuel elements are treated in reprocessing facilities.
An important source for my own understanding of these
issues is the book ‘Nuclear Wastelands’, written by a group
of scientists led by the US-based Indian academician
Arjun Makhijani, which book primarily reviews waste
generation by nuclear-military production facilities 6 . From
this and other sources, I have selected three cases of waste
generation, namely: the waste tailings that emerge when
uranium is mined and milled; depreciated fuel elements
which themselves are a form of nuclear waste; and the
high-level waste that needs to be put aside when former
nuclear fuel elements are reprocessed.
Uranium mining is, of course, the very first stage in the
whole nuclear production chain. As
known, such mining is also undertaken in
India, and would likely be intensified in
consequence of the US-India nuclear
deal. When uranium ore is mined and
uranium is prepared and enriched,
towards employment as raw material for
making nuclear fuel elements, a truly
huge amount of hazardous material in
the form of mill tailings is left behind, -
tailings which do contain radioactive
substances and are therefore hazardous
for humans and for nature. Speaking in
volume terms, these tailings reportedly
constitute 95% of all the nuclear waste
that is generated in the nuclear production
chain. Among the radioactive
substances found in mill tailings are for
instance radium-226 and thorium-230,
which latter radioactive element has a half-life of 76
thousand years, meaning that it will take that many years
before half of the radioactivity contained in the thorium
will have decayed. In mining uranium and in creating the
tailings, capitalist entrepreneurs are not just burdening
our children and grand children with the consequences of
uranium extraction, but entire future generations, and
such for an almost indefinite period of time. The damaging
consequences of uranium mining have been recorded
well in the US, where nuclear production was historically
started. Here, tailing dams have turned into slurry after
downpours of rain. Between 1955 and 1977 a total of
Even microgram
quantities
of plutonium,
when inhaled
by humans, are
known to result in
fatal cancers
fifteen tailing dams have broken. In one such case, the
river Rio Puerco was flooded with 94 million gallons of
tailing liquids, resulting in contamination of a long stretch
of the river 7 .
Another stage in the nuclear production chain known to
generate dangerous waste, is the stage where nuclear
energy is generated in reactors. Surely, the production of
nuclear energy can be seen as a contribution to human
welfare, if purely looked at from the perspective of energy
generation. Yet the hazardous implications from employment
of the nuclear fuel rods in the reactors are multifarious.
A section of the rods needs to be taken out regularly,
as the nuclear fuel elements can be utilized for only three
years. Now in the parlance of economic
theory the fuel elements once taken out
are considered 'depreciated means of
production'. They are presumed to have
lost all the value that has been transferred
to the new commodity, the nuclear
energy. Yet the fuel elements undoubtedly
are a form of hazardous waste.
Speaking in quantitative terms, the size
of this waste seems small. Yet the
radioactivity contained in the spent fuel
elements is truly intense. The radioactive
elements present in this nuclear
waste include uranium, strontium-90,
caesium-137 and plutonium. Of these,
plutonium is entirely the outcome of
human production; as such it does not
exist in nature. It is known to be the very
most toxic substance on earth, its
half-life being exceedingly long. The half-life of plutonium-239
is 24,400 years, that of plutonium-242 as much as
380,000 years. Even micro-gram quantities of plutonium,
when inhaled by humans, are known to result in fatal
cancers 8 . Hence, the expansion in construction and
utilization of nuclear reactors worldwide is a reason for
grave concerns. Each additional nuclear reactor generates
spent nuclear fuel rods containing different forms of
high-level waste.
The third distinct stage in the chain of nuclear production
I wish to refer to, is the stage of reprocessing. For
decades, policymakers in the West have tried to make the
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It is worth
recalling the
fact that India
today heads the
list of Southern
importers of
armament systems
public believe that they had solved the above-sketched
issue of dangerous waste, i.e. the issue of spent fuel
elements. They did so by arguing that these fuel rods can
well be reprocessed, i.e. they may be treated chemically in
reprocessing facilities so as to allow for re-use of the
uranium and to pave the way for use of the fresh plutonium
for ´productive´ ends, towards the manufacturing of
new fuel elements. Yet it is at the stage of reprocessing
that problems really pile up. First, it is at this stage that
high-level waste comes into being as a distinct category of
waste, since the chemical treatment of the fuel rods does
not only help to separate out uranium and plutonium, but
also results in high-level waste that needs to be put aside.
This counts for uranium-236, to be
distinguished from uranium-235, incorporated
in the fuel elements. Uranium-236,
mind you, has a half-life of 24.2
million years. Again, there is the radioactive
element jodium-129 which has a
half-life of 15.7 million years. These are
time-scales which as humans we are
hardly able to imagine, but which make
the consequences of nuclear production
that much graver. The high-level waste
in liquid form put aside after chemical
treatment of the fuel rods is commonly
stored in tanks.
Now, the risks involved in such
storage can be visualized through the
accidents that have taken place in
nuclear-military production facilities in
both the US and the former Soviet
Union. The Hanford nuclear complex in the US is the
complex where the US used to manufacture its military
plutonium. Here, high-level waste in liquid form was
stored in 117 stainless steel tanks, each containing half a
million gallons of waste. In 1973, a leak was discovered
which had caused massive dissipation of radioactivity into
Hanford’s subsoil 9 . But the most dramatic example of an
accident with high level radioactive waste has been reported
from the former Soviet Union. In the Cheliabinsk
complex, a military-nuclear complex located in the Ural
mountains, a tank explosion occurred in 1957. The government
of the then USSR suppressed the news of the accident
in name of guarding ‘state secrets’, but Soviet scientists
unraveled the accident long before the Gorbachev
government instituted an enquiry. Just as in Hanford, the
high-level waste from the reprocessing in Cheliabinsk was
stored in stainless steel tanks, located in a canyon-shaped
area 8 meters under the soil´s surface. Yet the explosion in
Cheliabinsk‘s tanks resulted in a massive leakage of
radioactivity. A reported 22 million curies of radio-activity
were released, two million curies in the form of a plume
that reached a height of one kilometer above the Cheliabinsk
complex. The explosion and the releases of radioactivity
destroyed entire eco-systems in the surrounding
region. Villages had to be evacuated, rivers and lakes were
polluted, and the government had to take
draconian measures to contain the
danger of the accident for the region’s
ecology 10 .
Above I have simply summarized data
on selected aspects of nuclear waste
generation, focusing on waste tailings
from uranium mining and milling, on the
waste represented by spent nuclear fuel
elements, and on the high-level waste
that is put aside whenever nuclear fuel
rods are reprocessed. Surely, given the
risks they represent for humans and for
nature surrounding us, there is no way
one can belittle the occurrence of
multiple waste in the nuclear production
chain. Nor can one deny the validity of
posing the consequences of the US-
India nuclear deal in these terms.
India as Importer of Weapons Systems - The
Question of Disparate Exchange
I will now turn to the second form of waste I have spoken
of in the introduction to this essay, namely waste in the
social sense of the term. As said, here I will focus on the
reverse side of the US-India nuclear deal which is the US’s
eagerness to expand its arms’ sales to India. In this context
it is worth recalling the fact that India today heads the list
of Southern importers of armament systems. Whereas in
the past this position was held by the Middle Eastern oil
giant Saudi Arabia, - India has meanwhile displaced the
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latter country as leading Southern importer, along with
China. This may be illustrated with concrete figures.
According to a report brought out by the US–based
Congressional Research Service (CRS), in 2005 India
ranked first among developing nations weapons’ purchasers,
in terms of the market value of agreements signed to
import weaponry. Further, whereas the total value of
Southern arms’ imports in this year was $ 30 Billion, the
value of the agreements concluded by India alone was $ 5.4
Billion, meaning that India was set to swallow fully one
sixth of the total! 11 While these data could be biased, they
are in fact corroborated by data which have been compiled
by the respectable Stockholm based peace research
institute SIPRI. In its 2007 annual
report, SIPRI offers comprehensive
figures for the value of arms’ imports by
individual Southern states over a period
of 30 years. Again, India heads the list of
these totals. This of course does not
imply that India has been the leading
Southern importer in each and every
year. But it does signify that the accumulated
arms’ imports of India have
been so big over the last decade as to
make up for the comparatively ‘smaller’
size of arms’ imports in earlier decades
12 .
Now, the role which arms’ transfers
between North and South hold in the
world economy can be assessed from
either a Southern or a Northern perspective.
If looked at from a Southern
perspective, one has to reflect on India’s arms’ imports in
terms of disparate exchange. The term disparate exchange
expresses the fact that Southern economies, when importing
armament systems from the North, are losers. Whereas
they import military commodities which from a social
point of view should be considered waste, - the Northern
states which export the armaments are benefactors, for
they directly or indirectly transfer the arms in exchange
for raw materials, semi-finished goods and labor- intensive
commodities representing wealth. This is indeed a form of
international exchange which may be characterized as
disparate (as opposed to unequal) exchange, since there is
Today, when India
has emerged as a
leading Southern
arms’ importer,
the US is eager to
expand its arms’
sales to India
a qualitative difference between the commodities flowing
in parallel between Northern and Southern trade ‘partners’.
Although in certain cases the inter-linkages between
exported and imported goods are explicit (notably in case
of barter agreements where crude oil is exchanged against
weaponry), - more generally processes of disparate
exchange are less easy to pinpoint, i.e. are indirectly
interlinked 13 .
To highlight the imperialist nature of this trading
mechanism, it needs to be stated that the given trading
mechanism was historically instituted by the United
States. For when OPEC’s oil-exporting countries in the
1970s decided to take their fate in their own hands, by
insisting on the right to fix the international
price of crude oil, the US immediately
tried to take advantage of the
changing situation. It knew of course
that increased prices of oil would inter
alia result in additional dollar incomes
for members of OPEC 14 . Hence it
feverishly worked to channel such
Southern income towards additional
Southern imports of weapon systems
from the US and other Northern arms’
exporters, and with success 15 . Leading
oil exporters, such as Saudi Arabia and
Iran, in the seventies were easily
deluded into buying fighter planes and
other expensive weaponry. These
Middle Eastern countries right then
headed the list of Southern importers of
weapons’ systems. Today, when India
has emerged as a leading Southern arms’ importer, the
US is eager to expand its arms’ sales to India, at the
expense of the country’s traditional suppliers of arms 16 .
And whereas it needs to be assessed whether the exports
of social waste from the US towards India will be undertaken
at the expense of wealth belonging to India’s own
population, or rather at the expense of wealth belonging
to the people of India and other Southern states combined,
- the arms’ transfers are bound to represent further
cases of disparate exchange.
India’s massive imports of armament systems can,
however, also be analyzed from a Northern perspective.
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Here we need to highlight the fact that the hegemonic
power in the world system, ever since the days of British
imperialism, has used its leverage as dominant power to
export weaponry as a part of macro-economic policymaking.
This is true in particular for the presently tottering
hegemonic power, the US. Ever since the sixties of the
previous century, the US has used its exports of armament
systems as replacement mechanism, as supplement to
ensure that American armament corporations at all times
are supplied with orders sufficient in amount to protect
their production capacity and guarantee accumulation.
For instance, when the US government at the end of the
1980s needed to partly scale down the size of its orders
towards monopoly corporations based in the US military
sector, - it heavily pushed military corporations into
expanding their exports. It even employed the second
Gulf war staged in 1991 towards this end. Moreover, the
US’s Ministry of Defense, the Pentagon, itself embraces
the economic logic behind armament exports. This is
evident, for instance, from statements contained in its
2006 report to the US Congress, the Annual Industrial
Capability Report (AICR). As the
report states, ´Defense exports play an
important economic role in strengthening
the US defense industrial base’;
‘about 20% (sic) of US weapons systems
items are exported…’; and ’sales to
foreign customers have frequently been
critical to keeping entire production
lines open…’ 17 . Hence, it is difficult to
interpret these sales as necessitated by
the US’s ‘security’, when the US Pentagon
itself admits to the US Congress that the exports of
armament systems represent a leverage for macro-economic
policymaking. The combined historical evidence
for the past several decades indicates that exports play an
active role towards solving dilemmas in connection with
the US’s business cycle, driven as it largely is by military
allocations.
Conclusions: Juxtaposing Social Waste and
Non-Commodity Waste
Let me state my conclusions in brief. As suggested, the
US-India nuclear deal should be analyzed in terms of
In assessing the
implications of the
US-India nuclear
deal, the issue
of nuclear waste
surely needs to be
taken on board
wasteful implications which the deal is set to have in two
ways. If strictly looked at from a perspective of expanded
production of nuclear energy in India, as is the official
line of the Indian government, - the deal already needs to
be severely criticized. For it will undoubtedly result in
vastly increased generation of nuclear waste, which from
the standpoint of critical economic theory is to be considered
non-commodity waste. Above I have not presented
specific data on the waste which India’s own production of
nuclear energy has generated in the past, but have concentrated
on international data regarding the generation of
waste at three stages in the nuclear production chain, i.e.
the stage of uranium mining and milling, the stage of
production in nuclear reactors, and the stage of reprocessing
of nuclear fuel elements. These data unequivocally
bring out that in assessing the implications of the US-
India nuclear deal, the issue of nuclear waste needs to be
taken on board.
Yet if we are to assess the full extent of waste generation
implied by the US-India nuclear deal, we also need to
reflect on the reverse side of the deal. There needs to be,
it seems, greater awareness of the fact
that the US does not just intend to use
the deal to promote the export of
nuclear production technology towards
India. The US also is keenly interested
in greatly expanding its sales of armaments
to India, in view of the fact that
India is one of the global South’s
leading arms’ importers, along with
China. Here again, my data regarding
the loss of wealth implied by these deals
for India and the South are incomplete. Thus, further
research on Indian armament imports should bring out
how they express disparate exchange. They may lead to
loss of wealth for the people of India alone - or ultimate
lead to replication of disparate exchange via parallel
exports of conventional arms by India to other countries
of the global South. In any case, such research would have
to focus on the precise way in which foreign currency
towards payment of these imports is generated. In order
to make a holistic assessment of the US-India nuclear
deal and the mentioned arms’ deals, we need to juxtapose
‘non-commodity’ waste and ‘social’ waste.
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Endnotes and Additional Thinking
1
See e.g. Praful Bidwai, ‘Manmohan’s False Nuclear
Move’ (19 July, 2008 – www.cndp.org/; also Zia Mian
and M.V.Ramana, ‘Going MAD: Ten Years of the
Bomb in South Asia’’ (July 29, 2008 – www.cndp.org/;
2
A precursor of the concept of non-commodity waste is
the term ‘discommodities’ coined by the Marginalist
Jevons, but largely ignored by other economists of his
time and subsequently – see W.Stanley Jevons, The
Theory of Political Economy (Macmillan and Co.,
London, United Kingdom, 1879, p.62);
3
For a full discussion, see Peter Custers, Questioning
Globalized Militarism. Nuclear and Military Production
and Critical Economic Theory (Tulika Publishers,
New Delhi, India, 2007);
4
Srinivas Laxman, ‘N-Trade: It’s a $ 40 Billion Opportunity’
(Times of India, New Delhi, September 11, 2008,
p.15); for other estimates regarding the business prospects
of the deal, see J.Sri Raman, ‘How India’s ‘Waiver’
Has Won’ (September 9, 2008 – www.cndp.org/ );
5
Rajat Pandit, ‘In Defence, US Wants to be India’s
Partner No.1’ (Times of India, New Delhi,
September 11, 2008, p.13);
6
Arjun Makhijani, Howard Hu and Katherine Yih (eds.),
Nuclear Wastelands: A Global Guide to Nuclear
Weapons Production and its Health and Environmental
Effects (MIT Press, Cambridge, Massachusetts, USA,
1995);
7
Katherine Yih, Albert Donnay, Annalee Yassi, A.James
Ruttenber and Scott Saleska,
'Úranium Mining and Milling for Military Purposes' , in
Arjun Makhijani, Howard Hu and Katherine Yih
(1995), op.cit., p.121;
8
For details on the health and environmental hazards of
plutonium production and use, see notably Frank
Barnaby, Nuclear Legacy: Democracy in a Plutonium
Economy (Cornerhouse Briefing Paper No.2, Sturminster,
Newton, United Kingdom, November 1997);
9
See on the leakages of nuclear waste at the Hanford
complex, see for instance Arjun Makhijani and Scott
Saleska, 'The Production of Nuclear Weapons and
Environmental Hazards' (in Arjun Makhijani, Howard
Hu and Katherine Yih (1995), op.cit., p.44);
10
On the Cheliabinsk catastrophe, see for instance Zhores
Medvedev, Nuclear Disaster in the Urals (Vintage
Books, London, United Kingdom, 1980); also Arjun
Makhijani, Howard Hu and Katherine Yih (1995), op.
cit., p.335;
11
Richard Grimmett, ‘Conventional Arms Transfers to
Developing Nations, 1998-2005’ (Congressional
Research Service (CRS), The Library of Congress,
Washington, USA, October 23, 2006);
12
For Sipri´s most recent data, see Paul Holtom, Mark
Bromley and Pieter D.Wezeman, ´International Arms
Transfers´ (Chapter 7 of the SIPRI Yearbook 2008:
Armaments, Disarmament and International Security,
Stockholm, Sweden, 2008, p.293);
13
An exposition regarding the trading mechanism of
disparate exchange between North and South is stated
in Peter Custers (2007), op.cit., Part Three, Chapter
Nineteen: ´Unequal Exchange versus Disparate Exchange.
A Theoretical Comparison. Succession and
Coexistence of Two Imperialist Trading Mechanisms´
(p.309);
14
For the views of US State Department officials regarding
the implications of the historical price increases
decided upon by OPEC in 1973, see Pierre Terzian,
OPEC: The Inside Story (Zed Books, London, 1985);
15
See e.g. Anthony Sampson, The Arms Bazaar (Hodder
& Stoughton, London, 1977); and Russell Warren
Howe, Weapons. The Shattering Truth About the
International Game of Power, Money and Arms (Abacus,
London, 1980);
16
For India´s primary dependence on arms´ supplies from
Russia, see e.g. Paul Holtom, Mark Bromley and Pieter
D.Wezeman (2008), op.cit., p.300;
17
Office of the Undersecretary of Defence, Annual Industrial
Capability Report (A.I.C.R. - (US Pentagon,
Washington D.C., USA, February, 2006).
(This is the revised text of a lecture given at the Jawaharlal
Nehru University (JNU), New Delhi, on September the 17 th ,
2008. Peter Custers is the author of ‘Questioning Globalized
Militarism. Nuclear and Military Production and
Critical Economic Theory’ (Tulika Publishers, New Delhi,
India, 2007). The views expressed in the write-up are
personal and do not reflect the official policy or position of
the organisation)
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What Difference Does A
Revolution Make?
A Preliminary Contrast of
India And China
I. Commonalities
At the time of their casting off of colonialism—India gaining
independence from Britain in 1947, China putting an end to a
century of imperialist domination in 1949—the two largest
countries in Asia shared many common characteristics. Each
possessed an enormous continental landmass with a population
in the hundreds of millions, the most populous in the
world. In both the anti-colonial struggle extended over many
decades, with the forces that led to eventual victory having consolidated
by the 1920s. Each inherited a fractured territory,
with imperialist backed enemies forcing the diversion of
limited resources into military preparations and conflicts—
India with Pakistan, in three wars, and ongoing clashes
over Kashmir, China still colonized in Hong Kong
and Macao, divided from Taiwan, with open
warfare in Korea, and threatened spillover from
Vietnam. Both experienced extreme birthpains,
in the Chinese case the aftermath of
occupation and civil war, in the Indian-Pakistani,
death and dislocation in the population
exchange across their new border, and the
assassination of Mahatma Gandhi. Despite
their many obvious differences—China lacked
the communal and caste divisions of India, had
never been fully colonized, and could rely initially on assistance
from the Soviet Union—the two countries began their
new national stage in roughly similar shape.
It is in their economic and social profiles, especially, that the
two newly emerged nations most closely resembled each other.
Before the colonial era, they had been among the richest
societies in the world, but under the impact of occupation and
exploitation, had rapidly declined. Both had seen their traditional
economies undermined by cheap imported goods, and
their old system of classes restructured to fit the new global
order. In each country, a “feudal”
class prevailed in the
Robert Weil*
Robert Weil, Retired Lecturer
and Trade Union Organizer,
The University of California in
Santa Cruz, USA
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T HE ELEPHANT AND THE DRAGON
countryside, allied not only to the urban elites, but to comprador
elements tied to the imperialists. The majority of the
population in both was either poor peasants or landless
laborers. Each faced deep rural poverty, with a small and
oppressed urban working class. Demographics were abysmal.
Illiteracy and lack of medical care were the norm for the
working classes. In the 1940s, life expectancy in India was only
around 32, and in China barely three years longer. The
situation of women was especially dire, emerging from centuries
old traditional oppression, including such barbaric practices
as Indian sati and Chinese footbinding. Each faced
similar difficulties, therefore, in entering a newly independent
national stage.
II. Divergence
Yet within just a little over a quarter of a century, these two
nations had diverged onto sharply different paths, resulting in a
wide and lingering economic and social gap. This divergence
had begun even before liberation, in their differing methods of
struggle for national power. It would be easy, but simplistic, to
attribute these distinct approaches to the non-violence of
Mahatma Gandhi, and the revolutionary
violence of Mao Zedong. Certainly, the
Indian movement was unique in its utilization
of civil disobedience. But while
Gandhi also stressed the need for economic
and societal changes, notably in his
adoption of homespun and salt marches to
challenge the British monopoly, and his call
for an end to the oppression of untouchables
or dalits, nevertheless, in the last
analysis, the movement he led was a
struggle primarily for national independence, not social
revolution. Its outcome was the transfer of power to a rising
class of Indian bourgeoisie, under Jawaharlal Nehru. Though
there were quasi-socialistic aspects to the new India—national
planning, state enterprises, social equality as a major goal,
and recognition of socialism in the 1976 constitution—the
economy was from the beginning a mixed one, and capitalist
families such as the Tatas and Birlas, some of whom had been
prominent in the fight for independence, rose to dominant
economic positions.
Even more significantly, though the feudal role of princely
estates was ended by the Nehru government, the stranglehold
The struggle
led by Mao had
united movements
for national
liberation and
revolutionary
transformation
of large landlords over the rural areas was only partially and
unevenly reformed. It was recognized early on that land reform
was critical to an independent India, and measures were
introduced to stabilize and ameliorate the conditions of
tenantry, cap rents, limit the acreage that any one person could
own, and eliminate the intermediaries who often brutally
enforced the landholding system. These policies did bring
relief to some poorer tenants, but mainly benefited the rising
class of independent farmers, who had the resources to fully
utilize their holdings. Even these measures were only partly
successful due to wide variation from state to state, spotty
enforcement and rampant corruption, the ability to employ
“hidden tenancy” and bypass landholding limitations, and lack
of credit, forcing many to turn to moneylenders—often large
landholders—at exhorbitant interest. As a consequence,
though advances were made, especially in West Bengal, Punjab
and Kerala, in large parts of the country the system of tenantry
and landlessness continued with only partial—if any—significant
modification. In the nation as a whole, there was no
consistent land reform, or end to the sharp division of rural
classes, and hundreds of millions remained heavily exploited
and impoverished, especially among the
land poor, landless laborers, dalits and
adivasis. As a result, though segments of
the population gained new opportunities in
postcolonial India, and took advantage of
its democratic processes to advance their
interests, the independence movement was
not accompanied by revolutionary social
transformation—either before or after
1947. While gradual change brought
improvement for some, it did not put an
end to the institutional aspects of class exploitation and caste
oppression.
It is only against this background that the profoundly
different experience of the Chinese socialist revolution can be
understood. From the beginning, the struggle led by Mao had
united movements for national liberation and revolutionary
transformation. The Communist Party had an ideological
commitment to the fundamental alteration of class relationships.
But the specific form that this took was driven by
objective conditions. As shown since immemorial times, and as
failure of early efforts at urban based Communist revolution
had once again demonstrated, political change in China, in the
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P OLITICAL ECONOMY
final analysis, almost always rested on mobilization of the
peasantry as its mass base. Under conditions of semi-colonialism,
Chinese liberation from imperial domination could only
be achieved by again finding a means to tap this latent peasant
power. But this required addressing the primary demand of the
poor rural population, for land reform and an end to the
rule—political and social, as well as economic—of the landlords.
It was the recognition by Mao of this relationship of
national liberation to revolutionary transformation of the countryside,
and his linking of the Communist Party to uprisings
already beginning among the peasantry, that laid the basis for
eventual victory in 1949. From its earliest stages, therefore,
unlike in India, the struggle for independence in China was
tied to social revolution, to overthrow the class structure in the
rural areas, and by extension, the entire feudal, national
bourgeois and comprador alliance.
This transformation began as far back as the 1920s, in
regions under Communist control. But it was only after the
triumph of the revolution that land reform began to be implemented
nationwide, and gradually deepened until it had
completely remade the rural areas. Beginning with reduction
in rents and simple measures of cooperation,
during the Great Leap Forward at the
end of the 1950s, it advanced to the
creation of the communes, each of which
brought together many villages and tens of
thousands of peasants under a single
administrative authority. The commune
was first and foremost a unit of collective
agricultural production. But it was much
more. For it provided a comprehensive set
of benefits, including medical care—which
during the Cultural Revolution took the form of “barefoot
doctors,” who came from and served the rural population—
free schooling for all children, support in old age, and social
activities. Largescale collective organization allowed extensive
infrastructure and environmental projects, such as irrigation
works, fish ponds, opening of new land, and forestry. It also laid
the basis for small “sideline industries,” which provided
agricultural and consumer goods, and work in slow seasons.
Above all, the communes completely eliminated the old
landlord system, took the “sink or swim” pressure off individual
families, and allowed all peasants—men and women—a
high degree of equality in deciding the distribution of their
From its earliest
stages, therefore,
unlike in India,
the struggle for
independence in
China was tied to
social revolution
collective production, while providing an opportunity to share
in village level governance.
Much the same system was applied to the industrial working
class and to urban professionals. Each large danwei or work
unit provided not only guaranteed jobs, but medical clinics,
schools, old age pensions, recreational facilities and housing
for their employees, the so-called “iron rice bowl.” Workers
had a role in the governance of their factories, regarding
production policies and working conditions, rights that were
further strengthened during the Cultural Revolution, when
abusive use of power by many state and party officials, and
managers, was challenged. The outcome of these transformations
was that income distribution and provision of services
became much more equal, and this in turn resulted in a rapid
and dramatic improvement in demographics. While Indian life
expectancy in 1951 was 32.1, virtually unchanged since
independence, the rate in China rose to 40.3 by 1953, and such
gains continued. “’It is probable that the pre-1949 crude death
and infant mortality rate were approximately halved by 1957’”
(Judith Banister, China’s Changing Population, 63, in Robert
Weil, Red Cat, White Cat: China and the Contradictions of
“Market Socialism,” New York: Monthly
Review Press, 1996, 236). In the mid-1970s,
life expectancy in China reached 63.6 for
men and 66.3 for women, compared to an
average of only 49.4 in India. By 1980-81,
Chinese infant mortality fell to 56 per
1,000 live births, while the Indian level
remained at a high 122, and “while India
reduced its IMR from 160 before Independence
to 85 by 1989-90, China starting
from a higher initial level had already
reached this point two decades earlier, by 1970”
(Utsa Patnaik, “On Famine and Measuring ‘Famine Deaths,’”
in Sujata Patel, Jasodhara Bagchi, and Krishna Raj eds.,
Thinking Social Science in India: Essays in Honour of Alice
Thorner, New Delhi: Sage Publications, 2002) When literacy is
added in, China in 1981 had a “physical quality of life index” of
67 out of 100, with India at 44. In several categories,
the Chinese were equal to or above the “middle” countries
globally, escaping from “Third World” status. Though China
remained among the poorer nations, the level of wellbeing
of its working classes had been transformed by revolutionary
socialism.
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T HE ELEPHANT AND THE DRAGON
These gains came at a very high cost. A combination of
severe natural disasters, overly rigid implementation of
policies, exaggerated reporting of grain production and
excessive procurement during the Great Leap Forward led to
famine conditions in many parts of the country. While debate
continues over the scale of the losses and primary responsibility
for them, estimates run from several to 30 million “excess
deaths.” The loss of life during the 1966-76 Cultural Revolution
was much smaller, but the social disruption and violence
even more severe. The heavy cost of these and other campaigns
led by Mao must be weighed against the gains that they
achieved, and especially when compared with other countries,
such as India. The deaths that accompanied the Chinese
efforts to build a socialist society occurred mainly during a few
years of intense struggle. But they led to improvements—especially
in life expectancy and infant mortality—for hundreds of
millions. Similarly, while the movement of the rural population
to the cities was restricted, among the more striking results was
a virtually total absence of sprawling urban slums that are
ubiquitous across much of the global South. During the same
period, India avoided famine and the social turmoil found in
China. Amartya Sen has argued that
Indian democracy and a less collectivized
economy helped protect against such
losses. But he also noted “that compared
with China’s rapid increase in life expectancy
in the Mao era, the capitalist experiment
in India could be said to have caused
an extra four million deaths a year since
India’s independence.” As Sen put it,
“‘India seems to manage to fill its cupboard
with more skeletons every eight years than
China put there in its years of shame, 1958-61’” (Mobo Gao,
The Battle for China’s Past: Mao and the Cultural Revolution,
London: Pluto Press, 2008, 139, Sen quote from Antony C.
Black, “Black propaganda,” Guardian
Weekly, 2/24/00.) Indian democracy blunted class conflict, and
allowed for a flourishing of civil society and movements for
social change. But it left in place a system of rigid divisions of
class and caste, deep impoverishment and widespread malnutrition,
a chronic semi-famine in some areas. As a result, from
the 1940s-1970s, loss of life from the social conditions of
Indian capitalism exceeded several times over those of Chinese
socialism.
III. Convergence
Amartya Sen has
argued that Indian
democracy and a
less collectivized
economy
helped protect
against famines
Beginning around the 1970s, and especially from the 1990s on,
the paths of China and India began once again to converge, a
process continuing down to today. Despite the gains made for
the working classes by the time Mao died in 1976, the struggles
that had accompanied them left many Chinese weary of social
conflict and violence. There were also limits to what had been
achieved. Though the national GDP had expanded greatly,
average per capita income remained at a quite low level, only
$290 per year—even if still above the $240 in India—in part
due to a rapid rise in population, in turn promoted by the
improved health conditions. In the rural areas, some one-third
of communes were said to be flourishing, another third
managing at a moderate level, and the final third facing more
serious difficulties. The combination of these factors opened
the door once again to those members of the Chinese leadership
who had for years opposed the more radical policies of
Mao, and had used every period of setback to promote a very
different alternative path. After his death, these forces coalesced
behind Deng Xiaoping, who began a dismantling of the
collective socialist securities for the working classes, and
initiated a policy of ever more capitalistic
“reforms” and “opening up to the world.”
The attack began with the forced dismantling
of the communes—regardless of their
economic condition—and their replacement
by a system of individual “family
responsibility contracts” for the land. For a
few years, this led to improved incomes in
the countryside, as government subsidized
crop prices, new agricultural methods were
introduced, and farmers cannibalized the
former communal socialist accumulation. But these gains were
only temporary, and in the process, the collective basis for
rural life was shattered, with the rapid collapse of virtually free
health care, schools, old age security and other benefits, and
the dismantling of infrastructure and environmental projects.
As individual farmers increasingly faced the global market,
and a “scissors” opened up between costs of production and
prices for crops, their relative position declined, and today
much of the countryside is in crisis.
In the cities, a “market economy” was also introduced,
allowing small businesses to develop, while the door was
opened to foreign investment, especially in new Special
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P OLITICAL ECONOMY
Economic Zones in the southern and eastern coastal regions.
Once these forces were sufficiently developed, an assault was
made on the main stronghold of the working class in the urban
areas, State Owned Enterprises. Most of these were privatized
outright or semi-privatized by putting them in the hands of
managers, and party and state authorities, who treated them as
their personal property. All corporations were required to
operate on a profit basis, and tens of millions of workers were
dismissed, losing their right to social securities, and in many
cases even their housing. In their place, peasant migrants—
now numbering some 130 million—were drawn into the cities,
to labor under often brutal working conditions in construction
or export factories. These policies laid the basis for an explosive
expansion of the Chinese economy, which became “factory
to the world.” But in the process, China was transformed from
one of the most egalitarian countries in the world, into among
the most polarized. Today, a growing number of billionaires
live in extreme luxury, while a “new middle class” resemble
their peers in rich nations. For workers and peasants there have
been certain general gains—a wider variety of food and
clothing, and greater access to consumer goods, if they can
afford them. But the
cost has been exceedingly high, in the
loss of jobs and social securities, and
tens of millions now form an impoverished
“reserve army of labor.” After initially
narrowing, the urban/rural gap is widening,
and class polarization growing, reviving the
prerevolutionary alliance
of rich farmers, urban capitalists,
and compradors.
In India the changes during this period
were in a similar direction, if less dramatic. The Green
Revolution, which began in the 1960s, helped improve the
conditions of some at first, especially in Punjab, but this only
increased the uneven regional development and polarizing of
classes, as those who could afford the needed inputs gained the
main benefit. Today, the negative ecological and economic
effects of a high cost “greening” of farming have led to
increasingly nonviable consequences, with falling water tables
and rising debt. In much of the rest of the country, the historic
lack of adequate land reform continues, a main cause of vast
rural impoverishment. Despite some recent state efforts to
address it, the situation remains dire. “The number of utterly
poor people in India at present is about the same as the entire
population of the country in 1947 when India became independent
from Britain. The absolute landless and the near
landless (those with less than half an acre of land) make up
43% of rural households in India”—unlike in China, where
farmers still have a guaranteed right to land (Patralekha
Chatterjee, “Land Reform in India: Necessary but not Sufficient
to Fight Poverty,” Development and Cooperation, No. 2,
March/April 2002, 21-22). But as in the Chinese case, individual
Indian farmers now face the global economy on their own,
defenseless against the rising cost of inputs, competition from
cheap imports, and a lack of credit.
Like China, India saw an economic explosion as it discarded
many of its quasi-socialist remnants and turned toward “free
market” neoliberalism. But it is primarily those at the top who
have benefited the most, together with a new large middle class
of educated elite. In addition to developing industries and
natural resources—often driving the poor or indigenous off
their land—India has been able to exploit a huge stratum of
university graduates in high tech centers such as Bangalore,
and its English speakers as the outsourcing capital for U.S. and
Anglo service sectors. As in China,
however, this has led to highly uneven
development. Pockets of the rich and
well off, primarily in a few large
metropolises, are surrounded by vast
urban slums, and a countryside that in
many areas remains in deepest poverty,
driving tens of millions into the cities,
where they swell the ranks of the
informal sector and temporary hires
used to undercut and replace permanent
workers. This sharpening contradiction is starkly revealed
in Andhra Pradesh, where despite the rise of Bangalore,
agricultural conditions deteriorated so drastically that the state
is an epicenter of the suicides of farmers—though they have
their counterpart in Maharashtra, Punjab, Rajasthan, Kerala
and elsewhere. As the number of billionaires grows, so do the
ranks of the desperately impoverished, under an alliance of
rural rich, urban capitalists and compradors, similar to the
Chinese.
As the 21 st century opens, both China and India are reemerging
as global powers. The Chinese have taken the early lead.
World Bank figures for 2007 put GDP for China at some $3.28
Negative ecological
and economic
effects of a high
cost “greening” of
farming have led to
increasingly nonviable
reactions
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T HE ELEPHANT AND THE DRAGON
trillion, almost three times that of India at $1.17 trillion. The
gap in per capita income is only slightly less, $2,360 and $950,
respectively. Life expectancy in China is 72, that in India just
64. The Chinese literacy rate is around 91, the Indian only in
the 60s. Yet the uncontrolled growth in China has left it worse
off than India in other respects. The Chinese Gini index, a
measure of inequality, is now around 47—above the “danger
level”—while the Indian rate is more than ten points lower.
Terrible as the high incidence of farmer suicides in India
is—some 200,000 over the past decade or more—in China
about the same number of mainly rural residents have killed
themselves each year recently, with women in the majority.
This is a consequence not only of the desperation of many
Chinese farmers in the face of the global “free market,” but of
how much they have lost with elimination of former social
securities, and the return of a high degree of gender inequality.
The demand for greater transparency and democratic rights—
though not necessarily following Western or Indian patterns—
is widespread in China. These contrasts produce contradictory
attitudes toward the Chinese “model” in India—generally
divided along class lines. Some Indians, especially in the upper
and middle classes, look to the current
policies in China, with unrestrained
capitalist development tied to a still fairly
high degree of state control, as an
example to be followed. What they in
most cases forget, however, is that though
the rapid Chinese rise in recent years
results from many causes, it was the
“head start” provided by the socialist
revolution—in better health, education,
infrastructure development and social
egalitarianism—that laid the basis for this later advance.
Lacking a similar revolutionary transformation, Indian
economy lagged in most key economic and demographic
indicators already by the late 1970s, and this difference has
remained down to the present day.
Many in the Indian working classes and among oppressed
communities have not forgotten this lesson. For them, the
Chinese “model” is not its current capitalist market system, but
the socialist revolution that preceded it under the leadership of
Mao. In India today—as well as in Nepal, the Philippines, and
elsewhere—Maoist revolutionaries are a growing force, as they
try to carry out the social transformation that was never
Though Chinese
and Indian
economies have
little contact at
present, the future
may bring a
new unity
completed after 1947. But they are still active largely in more
remote regions, with their main base among the rural poor,
dalits and adivasis. Ironically, the current government of China
has no use for such revolutionaries, and rejects their claims to
“Maoism,” as if it were a copyrighted national brand. While
Chinese with a Maoist orientation are again growing in
strength, they are limited in their activism, unity, organization
and ties to the working classes—and they too have made little
efforts to develop links to the Indian followers of Mao. Whether
India and China further converge or diverge in the coming
period remains to be seen. Many political forces—Gandhian,
social democratic, “new left,” as well as Marxist and Maoist—
are competing for influence. In both nations the desperation of
hundreds of millions in the face of “globalization” is growing,
now heightened by the worldwide capitalist crisis. Though each
government has shown an ability to buffer some of the worst
effects of this collapse, and taken recent measures to ameliorate
the burdens on the working classes, in the longer run they
will not be able to escape the growing contradictions of world
capitalism. Already, in both China and India, protests against
ever widening polarization, impoverishment, corruption, land
thievery and ecological devastation are
growing in number, size and violence. For
the Chinese, who had a revolution and
then turned back to the capitalist road, it
would take a major reversal to once again
move toward socialism. India never had a
similar revolutionary socialist transformation,
but the forces to carry it out are
stronger now than ever. The Indian and
Chinese working classes and leftist forces
today increasingly face parallel conditions
under global capitalism led by an imperial U.S. Though they
have little contact at present, the future may bring a new unity,
as the contradictions of the world capitalist system deepen and
drive them more closely together.
(*He is the author of Red Cat, White Cat: China and the Contradictions
of "Market Socialism," and many articles and papers on
Chinese political economy, social conditions, and class relations.
He has been a lifelong activist in labor, civil rights, international
solidarity, environmental and peace movements. The views
expressed in the write-up are personal and do not reflect the
official policy or position of the organisation).
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U SA
The Obama Crossroads: Neo-Liberal
Coup or Responsible Government
When the U.S. Treasury gave away
$700 billion to Wall Street banks
with no strings attached in October
of 2008, the Obama team gave a green light. A
popular insurgence was soon silenced, with
public wrath directed instead at the U.S. auto
producers (and unions) who followed with a
request for $25 billion. The auto companies
ended up with a loan of about 1/50 th the amount
that went to Wall Street as a gift. The subtext
message was disturbing. Wall Street firms
produce nothing, no-one is required to explain
what they are doing with all the public money
they received, and no criteria of public benefit
are applied.
With the Obama team onside, rule by the
fast-money men is set to continue. The neartrillion
quick hand-out of citizen debt to the
bankers with no conditions has remained a
non-issue. Even the shift from buying Wall
Street assets to direct capital infusion has
raised no questions. Obama’s subsequent
appointments of his economic and financial
directors follow in line. Those now in charge of
the U.S. money-printing machine (alias the
world’s reserve currency) and of the financially
hollowed-out system that was once the U.S.
economy have not really changed. Even the
education cabinet post has been filled by what
his Bush predecessor says is “a kindred spirit”.
He (Arne Duncan) has enthusiastically
implemented the Bush school program in
Chicago - testing children instead of teaching
them, firing lots of teachers, pressuring
test-failures out of school, and degrading public
education with corporate-quiz mechanisms in
place of sound learning methods.
John McMurtry
University Professor Emeritus,
University of Guelph, Canada
Illustration : Shantanu Mitra
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C AN WE CHANGE?
The Number One Issue: Who Now Runs The Economy
and Finance
Obama’s new U.S. Treasury Secretary is Tim Geithner, a former
chief deputy of his Democrat predecessors at Treasury - Robert
Rubin (who presided in the first Clinton government and later
Citigroup over the “new financial instruments” that have
subsequently wrecked the U.S. and world economy), and Larry
Summers (who as Secretary of the Treasury in 1999 tore down
barriers between commercial and investment banks in the
deregulation frenzy that set up the Wall Street crash). Geithner
originally came from Kissinger and Associates - “a bipartisan
man” - before moving on from deputy at Treasury to head of the
New York Federal Bank Reserve. His main qualifying distinction
- not mentioned in press releases - has been as chair of a
central committee of the BIS (Bank of International Settlements),
a body of chief-executive international bankers which
has been the unseen point-man of neoliberalism over the last 25
years. The BIS first cut its teeth on collecting debt reparations
from Germany which seeded the Nazi Party - for which the BIS
later also stored stolen gold. In between these assignments,
Geithner served the then-collapsing IMF as director of Policy
Development and Review.
In short, Geithner is an international
money-man following in the tracks of what
has preceded him. Behind all the hoopla of
“Change We Need” and “The People’s
President” lies the same monetocracy.
Geithner assisted in the massive bank
giveaway and its sequel of another further 25
billion plus 300-billion credit to Citigroup, a
Rockefeller bank led by Rubin. Neither he
nor Summers, the new economic czar, lent
anything but support when the flood of public money into the
Wall Street hole more than doubled before Christmas from the
original $700 billion to $1.5 trillion with no more conditions than
before.
The biggest heist ever from the public treasury, some might
say an extortionate swindle, has been backed by the threat of
“give it over, or Americans won’t get credit”. No-one appears to
notice the fraudulent pretext on which it is based. Who needs
credit from the private banks when the public and government
already back them for any credit they have got? Why pour public
money into private-bank hands to lend money they do not have
and are not lending when they get it?
“Banking
institutions are
more dangerous
to our liberties
than standing
armies”, Jefferson
pragmatically said
More Dangerous to Our Liberties than Standing
Armies
Former Federal Reserve chief, Allen Greenspan, observes that
“sovereign credit and guarantees put in place during the crisis
[i.e., new government money to private banks] is now estimated
at seven trillion”. Yet after 1.5 trillion U.S. public dollars thrown
at the Wall Street hole, not one homeowner has been relieved of
bankruptcy proceedings, the banks do not lend to productive
enterprises or even themselves, and no-one tells anyone in
America what’s been done with all the public money.
The idea of a central public bank system controlling the
currency and credit constitutionally held by governments and
lending it for purposes that serve the public interest (e.g., social
infrastructure, housing, environment and education) is as old as
the modern state. But it has been dinned out of citizens’ minds.
In fact, the only democratically accountable and efficient
banking system is one in which skyrocketing non-productive
costs, unaccountable debt creations and pyramid schemes are
made impossible inside the law. Yet most are enslaved to a false
double dogma - first, that unaccountable big banks creating
compound-interest debts for everyone including governments
are economically necessary; and, second,
that they must be left free to leverage, mix
and repackage debt assets as they please
without the money to back the credit or
capital they allocate. Statesmen since
Thomas Jefferson have not been so foolish.
“Banking institutions are more dangerous to
our liberties than standing armies”, Jefferson
pragmatically observed. “Already they
have raised up a monied aristocracy that has
set the Government at defiance. The issuing
power [of credit] should be taken from the banks and restored to
the people to whom it properly belongs”.
Instead, the “monied aristocracy” and its servants are now
loaded with public cash even as their vast global pyramid
schemes have cratered. The consistent policy to prevent what
bankers themselves call “moral hazard” is to leave them to their
market fate where their plundering of the world with toxic
financial products has poisoned them. The responsible public
solution to “keep credit flowing” is for government to keep its
control over currency and credit issue to direct loans to public
and productive purposes. Let the banks lend money they can
back with 100% reserves, and manage as their private depositors
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USA
allow them to - what in fact the best economists have recommended
since the 1929 Crash.
Yet even conditions of public service by the banks loaded with
public cash have not surfaced to debate. Instead a Bush-Obama
transition has handed over the keys of the U.S. Treasury to the
very coterie of neoliberal money manipulators who have
hollowed out the country’s wealth and much of the world. As
long as they run the show, the people and the real economy
continue down the hole.
Eco-Economy and Social Justice in Reverse
Obama claims that he is bringing “fresh thinking” with Larry
Summers as chief of economic policy formation. If you think he
can lead a new program of productive economics, employment,
non-oil energy, and environmentally friendly manufacture - what
every sane person wants and what Obama hope promises - consider
the track record of his economics czar. Before becoming
Clinton’s second-term Secretary of the Treasury where he
mentored Geithner, Larry Summers had distinguished himself
as an outspoken neoliberal advocating the loot-and-pollute
globalization that has brought cumulative ecological as well as
financial catastrophe. In a leaked Memorandum
as Chief Economist of the World Bank,
Summers urged “more migration of the
dirty industries to the LDCs [Less Developed
Countries]” for three reasons (all his
words):
1) The measurements of the costs of health
impairing pollution depends on the
foregone earnings from increased
morbidity and mortality. - - - I think the
economic logic behind dumping a load of
toxic waste in the lowest wage country is impeccable and we
should face up to that.
2) I've always thought that under-populated countries in Africa
are vastly UNDER-polluted, their air quality is probably
vastly inefficiently low compared to Los Angeles or Mexico
City. - - [We should prefer] world welfare enhancing trade in
air pollution and waste.
3) The demand for a clean environment for aesthetic and health
reasons is likely to have very high income elasticity. - - - While
production is mobile the consumption of pretty air is a
non-tradable.
Summers then explains where he stands on “deregulation”
When banks failed
and credit dried
up, Roosevelt’s
administration
ploughed all the
public money into
public works
versus “moral and social concerns” in an epitome of neoliberal
life blindness: “The problem with the arguments against all of
these proposals for more pollution in LDCs (intrinsic rights to
certain goods, moral reasons, social concerns, lack of adequate
markets, etc.) is that it could be turned around and used against
every Bank proposal for liberalization.” Summers here lets the
cat out of the bag on what “liberalization” demands to be
sacrificed to it - “goods”, “moral reasons” and “social concerns”,
all the values Obama says he stands for.
After the memo became public, Brazil’s Secretary of the
Environment Jose Lutzenburger wrote back to Summers: “Your
reasoning is perfectly logical but totally insane...” Mr. Lutzenburger
was fired. Summers has become President Obama’s chief
economic adviser.
No Roots in Adam Smith or the New Deal
Adam Smith’s vision of the free market did not envisage exporting
toxic wastes to the poor to save rich polluters from cleaning
up their act. When the market’s “invisible hand” was briefly
annunciated by Smith, he was clear that the free market was only
in “tangible goods useful to mankind”. The neoliberal school
invokes Smith, but simply erases the
productive economy from its models where
only money coordinates count.
For them, the New Deal is an enemy.
When banks failed and credit dried up,
Roosevelt’s administration ploughed all the
public money into public works and productive
employment, not into banks’ coffers .
One New Deal program, the Works
Progress Administration (WPA), became
the largest employer in the nation financing
the arts as well as public infrastructures. The New Deal also
started old-age and unemployment insurance, loans to local
authorities for slum clearance, and guaranteed income to the
indigent - the latter program scrapped by Summers under
Clinton. Even now with promises of new major spending on
“infrastructures”, we may observe it is targeted to upgrade
highways, computers and airports rather than to build and
protect social and ecological life support systems.
The Turn to Responsible Government
The imperatives are clear. Return constitutional powers over
currency and credit to accountable public authority, and away
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C AN WE CHANGE?
from private banks free-riding on public cash and guarantees for
no productive or public goal. Let credit and the allocation of
capital flow in correspondence to productive function for what is
needed - that without which the life capacity of citizens is
reduced. Allocate new capital and interest charges to meet the
greatest economic chall enge in history - the conversion from
fossil to clean renewable fuels, and the re-tooling of manufacture
towards ecologically coherent industry, both of which massively
create jobs.
The eco-energy rescue of the economy with the money for it to
come from a responsible central public bank system is a conjuncture
made in heaven. It has become politically possible with Wall
Street’s corrupt collapse, and economically imperative with
America and the world facing a life-and-death policy crossroads.
Canada’s long-serving Prime Minister, MacKenzie King, was
no radical. But he realized that “once a nation parts with control
of its credit, it matters not who makes the laws - - -Privatized
money control is the single greatest threat to democratic
freedom”. Thus was born the public Bank of Canada in 1935
with statutory public functions of “regulating credit and currency”
and of “making loans and advances” to governments.
Since the Reagan-Mulroney turn, however, public banks and
government have been bent into service to the deregulating,
money-leveraging and casino speculations of the borderless
money party - all on the back of Canada’s social programs, its
manufacturing base, its integrity of ecology and resource
bases, and secure employment of citizens in good jobs and
life-serving vocations.
Presidential Brand Change in Place of Economic
Reform
Is Obama’s administration only a presidential brand change? Is
the same rule of money, waste, toxic commodities and foreign
occupations to continue? Observe closely Obama’s building of a
“new job-creating energy-efficient economy”. The image has
certainly changed, but the reality remains that a Washington-led
carcinogenic capitalism continues to cumulatively strip the earth
of its species and resources, impoverish life vocations and the
poor, and allocate public policy and wealth for decoupled money
multiplication, industrial agribusiness and armed forces with no
committed life function.
America’s President is where the buck stops, but the buck has
been passed on to the people who helped end the New Deal,
deregulated the financial sector, and broke the wheels of the
productive economy. Neoliberal religion still rules. In a lecture
at the University of Toronto a few years ago as Harvard’s
President, Larry Summers, the new chief of economic planning
for Obama, proclaimed his credo as “the essential truth” that all
“basic value including “literacy is linked to market growth”. This
is the ultimate neo-liberal equation - More Money-Value
Exchanges = More Market Growth = More Basic Values. The
social and ecological goods and resources on which every life
depends, the most basic values that exist, are simply blinkered
out. Since fresh air to breathe, stable climate cycles and life
spaces to live and work securely do not compute to this life-blind
economics, money-sequence and commodity growth continue to
depredate and destabilize human and ecological life systems
with no accountability to their requirements. Perpetually turning
leveraged money into more money for private money possessors
with no life standards is, in the end, the logic of a global cancer.
Obama’s First Crisis: Forgetting the Past
The most instructive moments in America’s history have been
forgotten - for example, the 1776 American Revolution itself
which Benjamin Franklin said was most of all to wrest back
control over the issuing of money from the private Bank of
England; Abraham Lincoln’s issue of “greenbacks” to go over
the head of the New York bankers’ demand of 17% compound
interest to fund the war for the Union; and FDR’s historic New
Deal which guaranteed minimum economic security and put
people back to work in rebuilding the real economy. Yet not even
the Depression has demanded the economic reset now required
to resolve the coinciding energy, environmental, employment
and financial crises confronting America and the world.
As with soaps, so with Presidents. Sales pitches metamorphize
reality into miracles with nothing in fact changed. We are
conditioned to the magical thinking - the pervasive images and
parables of super cleansers and cosmetics, new vehicles of
transfiguring power, aphrodisiac doorways to paradise,
redeeming graces for the rejected, and people who pretend to
care for us. Is the Obama presidency merely a macro variation
on the theme? Already many believe that Obama will save the
day without policies to do so, even Europeans gushing over his
hope of a climate solution. A deeper turn is required, as events
will show.
(The views expressed in the article are personal and do not reflect
the official policy or position of the organisation).
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POST- SOVIET CENTRAL ASIA:
Issues and Problems of
Security and Cooperation
Illustration : Shantanu Mitra
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R.G.Gidadhubli
Adjunct Professor and Former Director
Center for Central Eurasian Studies,
University of Mumbai, Mumbai
Five Central Asian States (CAS) –Kazakhstan, Kyrgyz
Republic, Tajikistan, Turkmenistan and Uzbekistan—became
sovereign and independent
countries in 1991 after the disintegration of the former Soviet
Union. Even though nearly two decades have passed since
their independence, they continue to face several problems of
security relating to social, political and economic developments,
which have been of great concern for their leaders.
This is in sharp contrast to the past when being part of the
superpower, the people of the Central Asian republics
enjoyed high degree of socio-economic and political security.
Hence when the Referendum was carried out in March 1991,
95 % of the electorate of these Central Asian republics voted
in favor of the preservation of the USSR. This was in contrast
to the people of the Baltic republics who
spearheaded the movement for autonomy
and ultimately separation from the USSR.
The Soviet Union did break-up and
Commonwealth of Independent States
(CIS) was formed excluding the three
Baltic States.
In the chaotic period that followed for
several years, each of the CAS had to find
its own security and path of development.
Even as independence was thrust on them,
protecting sovereignty, independence and territorial integrity
became the primary concern of the leaders of these states.
Turkmenistan was in favor of keeping its distance from the
CIS and favored neutrality status as its foreign policy.
Uzbekistan tried for several years to distance itself form
Russia moving closer to the USA for political and economic
gains. Tajikistan which experienced the worst fears of the
Soviet dissolution, was facing problems of security as it was
threatened by the civil war triggered by divisive elements of
regionalism, factionalism of various ethnic groups that got
support from external forces. Moreover, the spillover effects
of the developments in the neighboring state of Afghanistan
The CAS which
are richly
endowed with
energy & mineral
resources have
unique geographic
location
further aggravated security scenario in Tajikistan, which
sought the help of Russia to overcome it and retain its
independence and territorial integrity. The magnitude of the
problem was relatively less for Kazakhstan and Kyrgyz
Republic. A major part of the first decade of independence
was marked by economic crisis of unprecedented magnitude
marked by steep decline of over 40-50 % in the first decade in
Gross Domestic Product, industrial and agricultural production,
hyper inflation, unemployment and so on. Thus as
opined by some analysts in the 1990’s the impact of political
instability and economic crisis was felt by all the CAS even as
it varied from country to country, which covered all aspects
of life of the people affecting their security 1 . With improvement
in political and economic developments during the last
about a decade the magnitude of the problems has somewhat
reduced.
The CAS which are richly endowed with energy and
mineral resources have unique geographic location situated
in the southern underbelly of Russia and flanked by China on
the East. Hence the region has assumed geopolitical and
geo-economic dimension during the last two decades. Yet the
CAS felt a sudden ‘vacuum’ partly
because of the fact that these states were
by and large isolated from the rest of the
world during the Soviet era, Hence an
effort has been made in this paper to
analyze some of the security concerns and
to what extent the CAS have succeeded to
overcome them.
Political Security
In the post-Soviet era, the Central Asian
region has witnessed security threats caused by certain
socio-political forces and extremist organizations. The
former Russian president Vladimir Putin was candid in his
statement that Russia’s withdrawal from Central Asia after
the Soviet break-up created a socio-political vacuum, which
religious and terrorist organizations were trying to fill. Since
the communist ideology had lost its relevance for the newly
independent CAS, extremist elements took advantage of this
situation to push religious elements in these predominantly
Islamic countries. This was particularly evident in the
Fergana valley, which is being straddled by three states
namely, Uzbekistan, Tajikistan and Kyrgyz Republic has
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witnessed offensives from Islamic rebels in the 1990’s 2 . There
were clashes between secular and extremist forces in Uzbekistan
and hence the Uzbek president Islam Karimov
sought the help of international forces including the support
from Russia to deal with the Islamic Movement of Uzbekistan
(IMU) and Hizb-ul-Tahrir (HT), which are extremist
organizations. As opined by analysts their goal has been to
set up a caliphate that rejects the modern state. IMU has
merged with Islamic Movement of Turkistan (IMT). Russia
was also aware of the fact that the IMU had links with
Islamic extremist groups which had escalated conflicts in
Russia’s southern region of Chechnya.
Some analysts including Graham Fuller have attributed the
cause of extremism in Central Asia to political deprivation,
economic deterioration, corruption etc. Analyzing the bloody
clashes that engulfed Andijan city of Uzbekistan in 2005, S.
Akiner has argued that they were driven not by socio-economic
but by strong religious and political motivations
revealing the power struggle with secular forces in the
region 3 . Ramakant Dwivedi, on the basis of his detail study of
political developments in Central Asia has argued that
threats of extremism in Uzbekistan and
other CAS are due to religious extremism.
They have caused a major threat to
security and stability in Central Asia 4 .
While elements of religious extremism in
Central Asia can be traced to the 1950’s
and 1960’s, they were unable to pose a
threat to the mighty Soviet power. But a
large number of groups emerged in
Central Asia particularly in the 1990’s
with Islamic moorings with external
financial and political support affecting socio-political fabric
of the region. The leadership of the CAS and a major section
of intelligentsia educated with secular outlook have succeeded
to some extent in overcoming the security threats posed by
extremist groups 5 . In this regard they have received strong
support by Russia and China at a bilateral level and at
multilateral level through their association in regional organization
such as the Shanghai Cooperation Organization. Thus
while Islam per se is not a threat to the CAS but Islamisation
of politics on the line of IMT and HT are serious threats to
stability and development and modernization of Central
Asia. The security concerns do persist in the Central Asian
Between
Uzbekistan and
Tajik republic 86 %
of the border was
delimited by 2002
and disputes are
yet to be resolved
region and hence a comprehensive and sustained regional
cooperation of all the CAS is needed to counter these
threats.
Border Security
After the Soviet break-up, borders between the CAS have
often become sources of conflict and contention. In fact
under Stalin’s regime these Central Asian States came into
existence on the basis of his ‘Policy of Nationality’ but
borders were drawn rather artificially in the 1920’s when the
Soviet Union was formed and they were meant mainly for
administrative purposes. This is evident from the fact that in
many cases people of same ethnic community had to live on
either side of the border. For instance, Samarkand Oblast is
in Uzbekistan but people in Samarkand are mainly of Tajik
nationality. Similarly, Fergana Valley, where people of three
nationalities namely, Kyrgyz Republic, Tajik and Uzbek have
been living for generations but the valley has been spread
over these three states. Although in the aftermath of the
Soviet break-up, the leaders of the CAS decided not to
redraw the borders there has been a felt need by the CAS for
the delimitation and demarcation of
borders in the interest of border security.
Hence in 1999 Kyrgyz republic and
Uzbekistan undertook the task of demarcation
and over the next five years out of
1,400 km border only 290 km had been
fixed. Even now major part of the border
is yet to be demarcated. There are
contentions over 39 sections of the border
in the Batken Oblast which is a sensitive
area. Similarly, disagreements have
persisted in few other sections. Similarly, between Uzbekistan
and Tajik republic 86 % of the border was delimited by 2002
and disputes are yet to be resolved over four areas. Similarly,
Kazakhstan and Russia initiated the process of delimitation
work of the border in 2000.
Differences among the CAS on border issues could be
potential sources of conflict causing security threat for the
concerned states. In fact, conflicts have been occurring from
time to time due to illegal movement of population, drug
trafficking and so on. For instance, in April 2009 the Uzbek
authorities have erected a border signpost on disputed
territory near the Kyrgyz-Uzbek village of Chek, which has
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T URBULENT TIMES
alarmed residents caught up in a long-running dispute over
which the Kyrgyz Republic possesses the concerned territory.
Hence this may create tension between Uzbekistan and
Kyrgyz Republic. The agriculturally rich Fergana Valley has
been witnessing such migration, leading to interethnic
conflicts affecting the relations among the CAS. 6 While
efforts have been to intensify vigilance at border control
posts, infiltration and illegal migration has been going on by
mafia elements dealing with drug trafficking which has been
carried out on a large scale involving millions of dollars.
Hence cooperation at the regional and bilateral levels is
needed to overcome these conflicts.
Environmental Security
Environmental security has assumed importance in the
desert and semi-desert region of Central Asia and the life of
millions of people has been threatened due to deteriorating
conditions in some parts of this region. A major source of
security concern affecting the environment has been the
degradation of the Aral Sea. This is the fourth largest inland
sea in the world bordering Uzbekistan and Kazakhstan. The
two major rivers of the Central Asian
region namely Syr Darya and Amu Darya
are tributaries of the Aral Sea. For the
desert and semi-desert region of Central
Asia, these two rivers are the main source
of supply of water for sustaining the life of
millions of people including agriculture.
During the Soviet era these two rivers
were used for intensive irrigation for
cotton cultivation which was a major
source of income for the backward
republics of Central Asia. With the exploitation of these two
rivers for irrigation, the Aral Sea has been shrinking during
the last several decades. This is evident from the fact that
while in 1960 55 billion cubic meters of water was flowing into
the Aral Sea annually, but by the year 2000 only about 1-5
billion cubic meters of water was reaching the Sea. This
decline in water flowing into the Aral Sea, has caused drying
up of the sea by thousands of square kms. As pointed out by
Rama Sampathkumar, the Aral Sea has been shrinking
rapidly and turning into a ‘dry, contaminated, toxic slat pan.
The seriousness of the degradation can be visualized from
the fact that ecologists warned a few years back that it was
A major source of
security concern
affecting the
environment
has been the
degradation of
the Aral Sea
only about a quarter of its original size and at this rate of
shrinkage, it may cease to exist by 2020. The problem of
drying up was known and realized even during the Soviet era.
There was a bold proposal in the 1970’s to divert a Siberian
river and linking it up with the Central Asian rivers to help
irrigation and save the degradation of the Aral Sea. But apart
from technical complications, high economic cost involved
and likely adverse impact on the Siberian region might have
been responsible for not pursuing this Grand Project.
The process of drying up of the Aral Sea has resulted in
major climate changes and has caused several ecological
problems in the region. For instance, due to drying up of sea,
hundreds of tons of salt and sand are carried away by winds
over long distances affecting the ecological balance and
specifically flora and fauna. The Kara Kalpak region of
Uzbekistan is severely affected causing various ailments
including kidney trouble, gastric problems and respiratory
diseases for the inhabitants of the region reducing the life
expectancy as a whole 7 . Infant morality in the Kara Kalpak
oblast is very high. The incidence of esophageal cancer in this
region is reported to be seven times higher than in other
areas. The Uzbek president Islam Karimov
has opined that the Aral Sea shrinkage
has been a ‘global Disaster’ and hence
he has been seeking global help.
At the same time neglect of environment
by the authorities has been causing
health hazards in Central Asia not only by
the degradation of the Aral Sea, but also
due to pollution of the water of the two
main rivers Syr Darya and Amu Darya.
On this issue the United Nations Development
Program had carried out a detailed study and a report
was released in 2004 highlighting poor quality of water of the
two rivers which would lead to the deterioration of the health
of the people in the region. It was stated by the UNDP
specialist Sagimbayeava that about 50 % of the population in
Kazakhstan uses drinking water which did not meet the
international standard of salinity and hardness 8 . It appears
not much effort has been made by the Central Asian authorities
to improve the situation. In March 2009, Bruce Panner
reported the findings of studies carried out recently by some
Central Asian research institutes according to which the
situation has worsened. For instance, as observed by the
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deputy director of Kazakhstan's agency for Applied Ecology,
Malik Burlibaev, "the Syr Darya was so polluted that water
from it should not be used for drinking or for irrigation." and
that rice harvested in Kyzyl-Orda was so loaded with cancercausing
agents that it should not be eaten. The water of Syr
Darya contained high levels of copper, cadmium, and zinc.
Apart from the garbage, detergents and effluents thrown by
urban population, factories, plants, and mining operations
along the river present formidable environmental hazards to
the pollution of the Syr Darya. On the basis of an independent
study, Burlibaev has claimed that intestinal-cancer rates
of residents in Kyzyl-Orda region were the highest in Kazakhstan,
and that 90 % of nursing mothers in the province
were passing pesticides to their babies through their breast
milk. Further adding to the credibility of this study, Orazgul
Zhunusova, the head of the state's department for expertise
and control of the Aral-Syr Darya ecology has confirmed
Burlibaev's findings. In the UNDP report of 2004, there was
also a warning bell by experts that Lake Balkash the second
largest lake in Central Asia was also in danger of drying out if
the Kazakh authorities did not adopt better water-management
practices.
There is realization of this ecological
problem at the regional level as well as at
global level. For instance, at the meeting
of Central Asian Cooperation Organization
(CACO) held in 2002 in Tajikistan,
the matter was discussed by the heads of
the CAS for taking urgent steps to tackle
the problem. A declaration was passed to
appeal to the UN Commission on Sea for
help, since these states could not mobilize
resources on their own. In fact in the early 1990’s the World
Bank has carried out a detail study of the problem of Aral
Sea calling the attention of the CAS to conserve the sea and
prevent ecological disaster. But according to some analysts
political will and genuine cooperative spirit has been lacking
among the CAS to tackle this vital issue. The main solution
has been to reduce the use of water of the two rivers for
irrigation. But the agricultural lobby in Central Asia is
against such a proposal as it would affect their cotton production,
which has been one of the major sources of income for
farmers and hard currency earning of Uzbekistan.
The issue has remained highly sensitive and controversial
World Bank has
got the attention
of the CAS to
conserve the
sea and prevent
ecological disaster
in the region
which is evident from the fact that the summit meeting of the
heads of the five CAS members of the International Fund for
Saving the Aral Sea held in April 2009 ended in bitter
disagreements. The ‘Upstream States’ of Kyrgyz Republic
and Tajikistan facing energy shortage insist that they want to
go ahead in constructing dams and store and conserve water
for new hydropower projects. But this reduces water flowing
downstream affecting ‘Downstream States’ of both Kazakhstan
and Uzbekistan. There were strong differences among
the heads of CAS which was evident from angry reaction of
Uzbek president Islam Karimov. As reported by Anton Blua
there is a new dimension to the issue. Due to decline in water
levels the Aral Sea is split into two separate parts -- the
Northern and the Southern Aral Seas. While there was no
consensus among the leaders, the Kazakh government is keen
to initiate measures on its part and thus in 2005 a 13-km dike
was opened which has been replenishing water to the northern
part of the Aral Sea. This has helped in reducing the
drying up of Aral Sea and increasing surface of the Sea to
some extent. This is a positive development and with wider
regional cooperation and technical and financial support by
international institutions, the degradation
of the Aral Sea might be checked in the
near future. Hence lack of resources,
neglect by the authorities have contributed
to the environmental problems
created over the last few decades.
Besides the problems mentioned above
some parts of the Kyrgyz Republic have
been affected by hazardous nuclear
‘tailings’. During the Soviet era this
republic was an important producer of
uranium, which was used for defense needs also for industrial
purposes. As opined by Jyldyz Sydygalieva huge quantities of
nuclear waste had been buried in several places including in
the region of Mailu- Suu where there are 18 uranium ore
dumps, and at Kaji-Sai village, and also near Issuk Kul lake.
These nuclear tailings have polluted ground water and
atmosphere in these regions affecting flora and fauna. Some
efforts have been made by the Kyrgyz government by adopting
a national plan for preserving the environment building
storehouses for radioactive waste products. There is unanimity
among the experts in Central Asia that to prevent any
major catastrophic events, there is need for regional coopera-
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T URBULENT TIMES
tion among the CAS which should evolve a regional policy for
creating a ‘Nuclear Free Zone’.
Energy Security
The sharing of river water of Syr Darya and Amu Darya is also
linked to energy security. Tajikistan and Kyrgyz Republic are
the ‘Up Stream’ countries, which have abundance of water but
they are deficit in hydrocarbon resources. On the other hand,
Kazakhstan and Uzbekistan are ‘Down Stream’ countries,
which are rich in oil and natural gas and are major producers
and exporters of energy to global markets but face acute water
shortage. During the Soviet era this problem did not exist since
all decisions were made in Moscow with regard to the sharing
of water and energy by the CAS. In fact this is an ideal case
calling for interdependence and cooperation among these four
states for mutual benefit for sharing water and hydrocarbon
resources. In fact this interdependence has continued to some
extent by virtue of the fact that both Tajikistan and Kyrgyz
Republics have been importing oil and natural gas from
Kazakhstan and Uzbekistan. But they are economically less
developed as compared to other three CAS and have been
facing acute financial problems due to
which they are often been defaulter states.
For instance, in October 2001 when the
Kyrgyz government was unable to pay to
Uzbekistan the outstanding debt of about $
1.5 million for the supply of natural gas,
the Uzbek government suspended natural
gas deliveries which severely affected
several industrial enterprises in Chu Oblast
of Kyrgyz Republic In turn Kyrgyz government
threatened to cut down water supply
to Uzbekistan. With the intervention at the highest levels of
the presidents of the two states matter was temporarily
resolved. Similar problems have arisen between Kazakhstan
and Kyrgyz Republic. In 2002, Kazakhstan paid its water debt
to Kyrgyz Republic by supplying four lakh tons of coal and
power generating equipments worth $ 5.8 million. Thus during
the last about two decades there are on going conflicts of
interests among them. Both Kyrgyz Republic and Tajikistan
have proposed to solve their problem of energy security by
increasing the production of hydel power by utilizing the rivers
in their territory and reduce their dependence upon imported
energy. The Kyrgyz government has taken steps to privatize
CAS have the
benefit of the
Caspian Sea,
which is even
more important
for the energy
security of region
energy sector to attract private investment from abroad and
reduce dependence on Uzbekistan for energy supplies.
Similarly, Tajikistan proposed in 2005 to build the 4 th dam on
the Vaksh cascade to produce more electricity.
The problem of energy security persists even now which is
evident from the fact that at the April 2009 summit meeting of
the heads of the CAS, the Kyrgyz president Kurmanbek
Bakiev raised the issue of energy shortages in his state and his
decision to built new hydropower stations. As stated earlier
there was strong reaction on this by the Uzbek president, since
this will reduce water availability and will adversely affect
Uzbek agriculture 9 . Bruce Panner has opined that Uzbekistan
has been waging a campaign against the construction of large
hydropower stations in Kyrgyzstan (Kambar-Ata) and
Tajikistan (Roghun), where Soviet-era projects that were left
incomplete when the USSR was dissolved. Similarly disagreeing
with the contention of the Uzbek president, the president
of Tajikistan Emomali Rahmon has asserted in his address at
the summit meeting in April 2009 that water-energy projects
being built in Tajikistan will not harm the neighboring countries.
The World Bank and UNDP experts have time and again
contended during the last two decades that
solution to the energy and water problems
of Central Asia depended upon the
agreements and cooperation among the
concerned states. In full support to the
opinion of international experts, the
Kyrgyz president Bakiev has proposed
"The strategic issue that requires resolution
is the coordination of our timetables
of water release for irrigation and energy
needs and compensatory fuel supplies [to
Kyrgyzstan], and this is what should be the subject of international
cooperation among parties interested in using watersaving
technologies".
In addition to the hydel source of energy, the CAS have the
benefit of the Caspian Sea, which is even more important for
the energy security of the Central Asian region. The Caspian
Sea which borders two CAS namely Kazakhstan and Turkmenistan
apart from Russia, Azerbaijan and Iran has hydrocarbon
reserves estimated at about 300 billion barrels of oil.
During the last two decades the Caspian has emerged as one
of the major sources of hydrocarbon resources in the world.
Moreover, it has gained considerable geopolitical and geo-
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173

I NTERNATIONAL AFFAIRS
economic significance by virtue of the fact that it has attracted
the interest and involvement of major powers including the
USA, European Union, Russia, and China. India has also
been taking active interest but is not a major player. Both
Kazakhstan and Turkmenistan have immensely benefited with
huge inflow of petrodollars by the increasing demand for oil
and natural gas and unprecedented rise in international price
for oil during the last few years before the present global
financial crisis. At the same time the CAS have become the
victims of the on-going conflicts among the littoral states of
the Caspian Sea due to several issues involved. The member
states are unable to arrive at a consensus over several issues--
the legal status of the Caspian Sea; sharing of energy resources;
disputes over the ownership of oil-natural fields lying on
the borders of national sectors and so on. Due to on-going
differences there were threats of military conflict during the
1990’s. Moreover, there are also differences between Russia on
the one hand and the USA and the European Union countries
on the other, which have made huge investment in the energy
sector of Kazakhstan and Turkmenistan the Caspian region
over the issue of multiple-pipeline policy for the transportation
of oil to global markets. Apart from Baku-Tbilisi-Ceyhan
pipeline, the Western countries are interested in getting oil
and natural gas from Turkmenistan and Kazakhstan through
the trans-Caspian pipeline 10 . While these multiple pipelines
will bring in huge petrodollars to the CAS, the Great Game
which is being replayed in Central Asia will also cause security
concerns for the region.
Thus in lieu of conclusion it may be stated that during the last
two decades the CAS have substantially achieved political
stability and economic progress and have overcome the vacuum
and economic crisis after the Soviet disintegration. However,
they face many problems affecting their security such as
religious extremism, border disputes which have caused
concern for the leaders of the CAS. The rapid rate at which the
Aral Sea has been drying up causes serious environmental
threats affecting the lives of millions of people in Central Asia.
Similarly, conflicts with regard to the sharing of river waters for
irrigation and energy are often becoming acute with the
passage of time. While regional cooperation is urgently needed
to solve problems of security facing the CAS, efforts being
made by the leaders to arrive at agreements at bilateral and
regional levels have achieved limited success and have often
ended up on paper. It appears that often there is lack of
political will to implement major decisions due to vested
interests. Hence there is urgent need for effective regional
cooperation among the CAS to overcome security threats
facing the region as a whole.
Endnotes and Additional Thinking
1
Murat Shaikhutudinov “Regional and Global Security in the
21 st Century: Conceptual Approaches and Reality” in the
Journal Kazakhstan in Global Processes (In Russian)
Almaty . No 3 2008.
2
Tim Helelniak “The Changing Composition of Nationality
of the Central Asian Transcaucasian States” Post-Soviet
Geography and Economics. UK. Vol 38 no 6- 1997
3
Akiner S “Violence in Andijon” 13 th May 2005 “An Independent
Analysis”
4
Ramakant Dwivedi ‘ Threats of Religious Extremism in
Uzbekistan: An Analysis in the book Edited by K. Santhanam,
Abdusamant Khaydarov and Ramakant Dwivedi
“Contemporary Indo-Uzbek Perspectives on Bilateral and
Regional Issues. Published by India-Central Asia Foundation.
New Delhi 2009.
5
Kosichenko A. G “ Kazakhstan Model of Interethnic and
Inter-religious Cooperation” (In Russian) in the book
Modern Kazakhstan Strategy of Success Almaty 2008
6
Fredrick Starr “ Historical Perspectives of Cooperation in
Central Asia” in the Journal Kazakhstan in Global Processes.
(In Russian) Almaty No 3 2008
7
Antoine Blua “Kazakhstan: UN Report Highlights Poor
State of Water Resources”
Prague, 20 th January 2004 (RFE/RL)
8
Antoine Blua “Central Asian Leaders Fail to Overcome
Difference at Water Summit” 28 th April 2009 RFE/RL --
Central Asia
9
R.G.Gidadhubli “Uzbek Economic Development model: An
Appraisal” Dialogue Quarterly- A Journal of Astha Bharati
April –June 2002. New Delhi
10
R.G.Gidadhubli “Caspian Region:The Unending Conflicts”
In the book ‘Central Asia Since Independence’ Edited by K.
Warikoo and Mahavir Singh Maulana Abdul Kalam Azad
Institute of Asian Studies Kolkata. SHIPRA New Delhi
2004
(The views expressed in the write-up are personal and do not reflect
the official policy or position of the organisation)
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T URBULENT TIMES
AD
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M ICRO MACRO
The Shrinking
Rice Paddies
Of Kerala
Nikhil Raj and PA Azeez
Environmental Impact Assessment Division,
Sálim Ali Centre for Ornithology and Natural
History (SACON), Coimbatore
Kerala the southern most state of India is unique
in several aspects; the demography of the state,
especially in death rate and birth rate, apparently
follow a trend similar to some developed countries (www.
planningcommission.nic.in). The state is first in the
country in human development index (Pillai 2008),
literacy rate (90.9%) and sex ratio (1058 female: 1000
male, www.ibef.org). In the recent years the state is going
ahead in show casing its potentials as a destination for
(eco)tourism, information technology (IT), information
technology enabled services (ITES) and the like. However,
the predominantly agro based rural economy drags
back the financial system of the state. The state’s agriculture
sector contributes only 13.5% of the total state’s GDP
176 THE IIPM THINK TANK

R ICE BOWL
compared 54.4% for Punjab. Traditionally rice paddy has
been the prime crop in the rural Kerala and the customs
and culture of the state were intimately woven around rice
paddy cultivation. Other cash crops such as rubber, which
currently plays much greater economic role, came to Kerala
much later perhaps in the late eighteen century. However,
recent years have seen drastic changes in the rice
paddies in the state, both in quality and quantity. In this
paper we examine the issues related with declining rice
paddies of the state.
Rice Paddies of Kerala
Kerala is a narrow stretch of 38,864 Square Kilometer,
lying along the south western aspect of
the Western Ghats of Indian peninsula.
Its topography of undulating terrain
ranging in altitude from below sea level
to above 2000m set apart the state with
almost distinct three elevation zones (the
high ranges, the midlands and the costal
gradients) with varying agro ecological
settings. Comparing to other states of
India, the state of Kerala is endowed
with largest proportion of land area
under wetlands (Nayar and Nayar,
1997). The paddy cultivating wetlands
of the state are mainly located in the
costal plains and the midlands (Varghese
1970). Extensive rice fields, growing
specific cultivars (more than 600 in the
state), are seen in the costal region of
Kerala, along the coastal marshes and
the backwaters, lying almost at the sea level. The midland
region, with altitudes ranging up to 75 meters above mean
sea level, are made up primarily of flat-bottomed valleys
and undulating terrain with net work of streams, rivulets
and rivers. The highly fertile wetlands in this area make
good locations for rice paddies. The major paddy producing
areas of the state are Palakkad, Kuttanad and Kole
wetlands.
There are economical, socio-cultural and political
grounds to the rapid transformation of the ‘rice culture’ of
the sate. The factors at different levels during the mid 19 th
century and afterwards were persuaded the social set up
The major paddy
producing areas
of the Kerala
state are
Palakkad,
Kuttanad and
Kole wetlands
of the state hugely. The stage, during and immediately
after the formation of the Kerala state, was the period in
which left and socialist ideologies were getting deep
rooted in the state. This was accompanied by the “gulf
boom” arising from the export of human resources in the
seventies to the oil rich Middle East. In nineties, India was
liberalizing the trade and globalizing economy. The effect
of globalization was wide and pervasive forcing the
paradigm of development advocating the primacy of
market forces, further and further. All these developments
and their underlying ideological ramifications
brought drastic changes in the Kerala state that are
reflected in its social settings, environment, economy, and
culture.
Kerala had the world’s first democratically
elected communist government in
power in 1957. The communist government
conceived several new programs for
welfare of the state especially the under
privileged segments of the state, underdogs
of the erstwhile feudal landlords.
The land laws initiated or enacted in the
state during this period brought in
radical changes in the social structure
of the state. The Kerala Land Reform
Act (1971) abolished the feudal landholding
system leading to more equitable
distribution of arable land in the
state and disposition of higher equality
among the public at large. The redistribution
of land owner ship had revolutionised
the social setup of the state.
Nevertheless, it in turn split agricultural land to smaller
holdings, which in turn during the seventies reduced the
agricultural income (Mahesh 2000, Gopikuttan and
Kurup 2004). The seventies also experienced the ‘oil
boom’ in the Middle East countries and consequent high
demand of workforce in those nations. The decline in the
agriculture yield and the demand for workforce in the oil
economies attracted large scale migration of people from
Kerala. The ‘blue collar migration’ and the consequent
availability of surplus income again jeopardised the state’s
rice fields by ushering people towards ‘white collar’ jobs.
Globalisation and the exposure of the farmers to the
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177

M ICRO MACRO
global volatility of prices also
were happening next. These
changes placed the rice culture
of Kerala on an irreversible
momentum towards decline.
Rice Statistics
Since the middle of the last
century, the rice statistics of
the state shows a steep fall in
500
400
300
200
100
the annual production; during
0
1960s the state had a share of
2.5 % of the total rice produced
nationally, which
towards the late nineties came
to a low 0.79% (Thomas, 2002). The area under rice
cultivation of the state decreased drastically over the past
several decades (fig.1.). The decrement in the area under
rice paddy began during the late 70s, picked a faster pace
and it still continues further. The farmers of Kerala have
almost discarded rice cultivation for cash crops or left
their land fallow for years, for lack of justifiable economic
returns. In the state, the area under cash crops expanded
lakhs tonnes of rice per annum to feed 31,948,619 people.
However, it hardly produces 7.7 lakhs tonnes (Nair, 2004).
The major factors jeopardizing the rice culture are
apparently the changes in the socio cultural settings of the
state, urbanization and infrastructure development,
economic empowerment due to foreign remittance,
inadequate wetland conservation laws, and boom in the
real estate ventures.
during the last 20 years, while that of food crops plummeted
to just nine percent of the total cultivated area
(www.keralabiodiversity.org). Rice remains the staple
food in the state. Although radical changes have happened
in the state’s food habit, the primacy of rice (Agarwal,
2008) remains unchallenged. The state needs about 40
Lack of Interest in Agriculture
In general, during the last few decades people entering
agriculture as an occupation in rural Kerala has reduced
drastically. Only around 26% of the total rural population
in the state now goes for agriculture as a line of work (Raj
2003). Labor shortage, in-
Fig.2. Status of Rice and Other Cash Crop Cultivation in Kerala
creased labor charges, and
hikes in the cost of input are
900000
800000
direct detractive factors. The
growing apathy to cultivation of
700000
rice is an important thrust for
600000
farmers to gradually divert the
500000
paddy
coconut water logged rice fields to drier
400000
Rubber and perennial crops such as
300000
200000
coconut, areca nut or rubber.
100000
0
The state’s agriculture scenario
has under gone a drastic shift in
1985-86 2007-08
various aspects giving more
importance to the cash crops
Source: www.ecostatkerala.org
than the cultivation of cereals.
Area in hectare
Fig.1. Rice Statistics Of The State
Area in '000hectare
1000
900
800
700
600
1960-61
1963-64
1966-67
1969-70
1972-73
1975-76
1978-79
1981-82
1985-86
1988-89
1991-92
1994-95
1997-98
2000-01
2003-04
2006-07
178 THE IIPM THINK TANK

R ICE BOWL
The area under coconut
Fig.3. Production and Productivity of Rice
plantation and rubber along
with cashew, areca nut has
increased rapidly; the land
under rubber alone has been
increased to 45% during the
period (www.ecostatkerala.
org, Fig.2). During the
beginning of the new millennia
crops such as vanilla
diverted much of the farmer’s
attention from rice cultivation.
Keeping the wetland fallow
for a while, as a prelude to
3000
2500
2000
1500
1000
500
0
Production ('000 tonnes) Productivity (in kg)
diverting it for real estate ventures is also become a
common trend in the state. Thus annual production of rice
in the state shows a trend of decrease, although there is a
comparative hike in the productivity thanks to perhaps
new fertilizers, high yielding varieties and cropping
procedures (fig. 3).
It is reported that the agriculture
crops. The disparity in minimum support price (MSP) for
rice and other cereals is also obvious; MSP for wheat is
almost double the MSP for rice (www.ers.usda.gov). Rice
paddy provides several ecological services, to a great that
are derived from a wetland ecosystem. Recognizing such
monetized ecological services derived from rice paddy
system government need to offer more
laborers have also decreased in the state
or less satisfactory level of incentives. In
from 25.6% to 16.1% of the total during The agriculture approximate and crude monitory terms
1991-2001. There is also a fall of 12.2 to laborers have the value for the services for wetlands is
7.1 in the percentage of cultivators to decreased in the about US$ 15,000/- per hectare per
main workers during the same period
annum.
state from 25.6%
(Kerala state planning board 2004).
to 16.1% of the
However, still about 60 lakhs of people
Urbanization and Infrastructure
in the state directly depend on rice total between Development
cultivation (Harigovindan, 2007) 1991 and 2001 Urbanization in Kerala resembles that
including about three lakhs rice cultivators
(Suchitra, 2008).
Agriculture provides maximum opportunity to the local
labors especially women and it offers job consistency for
most part of the year. About 600 labor days are expected
for cropping one hectare of land (Rajendran, 2007). It is
also noted that Kerala’s agriculture workers are privileged
to have highest real wage rate compared to other states of
India, although this is a major reason for low return from
agriculture. The lack of government support for rice
cultivation also seems to be a factor for the loss of interest;
the incentive for rice production in the state is only Rs.
350/- per hectare, which is negligible compared to other
of some Asian countries, in that the
urban growths here always coexist with rural attributes.
The state’s major urban centres, Trivandrum, Cochin and
Calicut were growing with the small rural centres, of trade
and other related activities, skirting and associated with
these cities budding rapidly resulting in the state as a
whole blending more or less a single town ship. Agglomerations
or out growths were rarer in Kerala till 1981 while
later their number have been almost doubling every
decade (Eapen, 1999). The transformation of rural to
urban in Kerala usually happens by conversion of the rural
agriculture lands particularly the rice growing wetlands,
primarily because of the low market price for such water
1960-61
1963-64
1966-67
1969-70
1972-73
1975-76
1978-79
1981-82
1985-86
1988-89
1991-92
1994-95
1997-98
2000-01
2003-04
2006-07
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179

M ICRO MACRO
Fig .4. Population Density of the State
boardkerala.nic).
Road development is
900
800
700
600
500
400
single most critical
factor that opens up
any ecosystem or
traditional practices
for rapid changes.
Infrastructure
development demands
300
200
100
0
considerable
lands to be divested
from its former /
original use. The
1951 1961 1971 1981 1991 2001 high demand of
independent houses
Source: www.planningboardkerala.nic
logged lands and the prevailing market forces do not
appreciate the value of ecological services that such lands
provide the community.
Kerala has shown a consistent growth in population
density (Fig.4.). However in recent years it is showing a
trend of flattening and it has become
due to the breakdown of the erstwhile joint family system
also has lead considerable demand in diversion of lands,
and the first victim is the wetlands or rice paddy, because
of their low market price.
Growth of real estate business in the state was rapid
since late nineties. The declaration of the 8 th five year plan
during 1998 by the central government
lowest (9.1%) among the Indian states
that assured private support for ‘national
housing and habitat development
during the 1991-2001 periods. During The Kerala Land
this period, the average number of Reform Act acted policy’ gave it a further push. Significant
persons in each household in the State changes in the laws and regula-
towards abolishing
also has declined from 5.3 in 1991 to 4.7
tions, including the urban land (Ceiling
matrilineal system
in 2001 and the state has almost
and Regulation) act by the central
of joint family and
achieved a sub-replacement fertility
government and amendment to the
rate. Nevertheless, the population development of National Housing Bank (NHB) act
density of the state (819 people per nuclear families provided an attractive climate for
square kilometers) remains almost
three times the national average. The recent census shows
that 25% of the total population of the state comes under
urban category, much closer to the national statistics
(27.8%).
Urbanization always involve growth of infrastructure;
buildings, roads, communication facilities etc. In the case
of Kerala the road network particularly is growing in rapid
pace, although not much in its quality. The road density of
the state is 374.9 /100 Sq. Km; far ahead of the national
average of 74.9 Km/100 Sq. Km. The length of road per
one lakh population is also much higher than the national
average (462.6 Km against 259.2 Km, www.planning-
foreign investments further pushing up
the real estate growth (Joshi 2006). The rapid development
in retail, entertainment sectors, financial institutions,
information technology centers and the boom in the
tourism sector all enhanced the growth rate. More over
the Kerala Land Reform Act (1971) acted towards abolishing
matrilineal system of joint family and development
of nuclear families (Sushma, 1996). This resulted in the
growth of housing units without keeping pace with population
growth in the state. The statistics shows the state is
still having a high demand for houses; demand is always
doubling as the year passes (fig.5). Since the real estate
sector is believed to provide much higher annual return on
Density (per sq.km)
180 THE IIPM THINK TANK

R ICE BOWL
Fig.5. House Construction Trend in the State
Number in lakhs
18
16
14
12
10
8
6
4
2
investment, ranging 10-12%, compared to other investments
(Mahurkar and Senthil 2004), it attracts the resident
and non resident Keralites equally. It is also believed
to be a safe long term investment among all sections of the
society who has additional surplus income to save. Moreover,
it is highly lucrative for the middle
men and the promoters of real estate
ventures.
Foreign Remittance
The gulf boom happened in the later
half of the seventies paving way for the
flow of foreign remittances, essentially
for the purpose of expenditure of the
family members, of the migrants, left in
the sate. This brought in considerable
economical empowerment, especially of the lower middle
class. Currently it is reported that in the state about 27
persons per hundred households work abroad, making
Kerala one of the states in India having very high remittance
rate from abroad (Zachariah et al., 2000; Kannan &
Hari, 2002). Zachariah and Rajan (2004) has reported
35% rise in the total annual foreign remittance to Kerala
during the period 1999-2004. Recently it has been reported
that the total bank deposits in Kerala has crossed Rs
122000/- crores of which more than Rs 34000/- crores are
of non-resident Keralites. However the deposit to lending
ratio has declined by aboutfive percent during the period.
The funds flowing in
from the migrant
workers are not put
into any sustaining
productive ventures
and it largely goes to
constructing residential
buildings. The
high remittance from
abroad (more than
Rs. 24000 crores /
year) along with
rising disregard
towards environment,
ecology,
agriculture or
agriculture-based industries pushed the state to change its
physical terrain and setup, not to talk about its social and
value systems, as a whole. The state is increasingly becoming
a consumer state and in terms of food crops it is totally
dependent on imports. Pushapangadan (2003) observes
that the leading sources of growth in the
state are the services sector rather than
the conventional commodity producing
sectors.
The larger flow of foreign money is
promoting high degradation of ‘rice
culture’ in Kerala, and along with the
valuable wetland ecosystems, which
provides ample scenic beauty if nothing
else, and several invaluable ecological
services. As the remittance rate grows
up it pushes up the craze for more globalized life style, the
number of houses, consumer shops and vehicles on the
road increases, and every road junction grows like a
miniature city. Moreover as the surplus money is not put
into productive uses, it promote an incessantly consumer
society that relies exclusively on imports for its needs. The
rising demands for buildable lands detract the public to go
for an efficient use of their local resources, ecological
setup or agriculture, and instead they adopt the much
more lucrative step of selling out their holding to real
estate ventures or build hosing colonies or big shopping
plazas. Large shopping malls and auditorium are becom-
0
2001 2002 2003 2004 2005 2006 2007 2008
The gulf boom
happened in the
later half of the
seventies paving
way for the
flow of foreign
remittances
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M ICRO MACRO
ing quintessential trade marks of Keralites rural
centers recently.
Wetland Conservation Laws
The Kerala state practically lacks an effective act to
conserve the wetlands and its rice paddies from the
apocalyptic conversions. The Ramsar convention (International
convention on wetlands) had prioritized four
wetlands of the state, for conservation actions. However,
illegal transformation is not news even in such areas (Raj
and Azeez 2009). The Kerala Land Reform Act (1971)
had a direct negative impact on the rice culture of the
state (Mahesh 2000, Gopikuttan and Kurup 2004). It
enforced the ownership of the land
holdings to the tenants and had notable
advancement in socioeconomic empowerment
of the less privileged people.
However, as it promoted small land
holding, the huge gap between the investment
and return, most of the small land
holders stopped cropping rice. There
were laws and regulations for protecting
rice paddies of the state particularly
those in the Kuttanad region of Alappuzha
District right from 1952. At least
12 committees were formed to look into
the issues plaguing rice cultivation in
the state. Vaidyanathan committee
(1950), Central-State engineers committee
(1952), Mangalabhanu committee
(1965), M S Swaminathan committee
(2005) are some such committees.
However these committees are yet to make notable impact
on the state’s rice culture crisis.
Conversion of wetlands to house hold is a usual practice
in Kerala. Most of the agriculture belts of Palakkad have
got legally converted as housing plots prior to the Land
acquisition (amendment) bill, (2007). The new ‘Regulatory
Framework for Conservation of Wetlands (2008)’ by
the central government also does not affirm the future of
rice paddies, as it do deter filling up wetlands for other
uses. Aquaculture is considered as a sustainable proposition
in many costal rice paddies of the state. However,
recent trend of aquaculture in the midland rice paddies
For the last several
decades in Kerala
the area under
rice cultivation and
rice production
has shown a
consistent fall
have to be considered as threat for several obvious reasons.
The Kerala Conservation of Paddy Land and Wetland
Bill (2007) is a recent attempt to prevent paddy and other
wetland encroachment. The bill stress upon conservation
of rice paddies and dissuade fallowing cultivable lands in
the state. However, the bill apparently is not farmer
friendly for various reasons and most of the rice paddies
in the Malabar region are not covered by the bill. Moreover,
recent trend of growing political interference in
enforcement of the rules is also going to be a challenge to
rice paddies. It is claimed that the bill would prevent
conversion of Kerala’s agriculture wetland, about 22,000
hectares per annum. The states new farm
policies promoting organic farming, and
campaigns such as “every one to the
paddy fields” and “organic Kerala” are
optimistic endeavour to sustain the
fading rice culture and to relieve the
environment of many unsafe agrochemicals
and pesticides.
Conclusion
For the last several decades in Kerala
the area under rice cultivation and rice
production has shown more or less a
consistent fall. Framers divert their
arable land for cash crops, despite rice
being the staple food in the state and
the state almost fully depends upon its
import. The major factors that cause
depletion in the rice culture are related
with the socio cultural and economic changes in the state.
The disregard of the ecological services from the rice
paddies is another reason for the mass conversion of the
rice paddies. The gap between investment and production
made the cultivators away from rice cultivation, while the
high job opportunity and attractive wages shifted the
workforce to other lucrative construction works. The high
remittance from abroad boosted the real estate / construction
sector in the state weaning away the lands under rice
paddy and the labor force involved in cultivation and the
small land owners to real estate sector. Most of the
wetlands in the state are under threat from being trans-
182 THE IIPM THINK TANK

R ICE BOWL
formed in to built-up areas since the late 90s. No effective
and appropriate legal or administrative measures are
taken to protect the rice paddy in the state, or to protect
the wetland ecosystems. Rice paddy which is close to
wetland ecosystem serves the community and the environment
in the form of several ecological goods and services.
However these ecological services remains consistently
sidelined mainly because of the lack of appreciation by the
prevailing market forces. It is time that the authorities
give ample attention to pay for such services to the
farmers and those who maintain their rice paddy or
wetland under their ownership.
References and Additional Thinking
• Pillai, NV (2008) Infrastructure, growth and human development
in Kerala. Munich Personal RePEc Archive MPRA
Paper No. 7017
• Nayar, S and Nayar, N.M (1997). Wetlands In: The Natural
resources of Kerala. K.B. Thampi, N.M. Nayar and C.S.
Nayar (Ed.). WWF State office, Trivandrum.
• Varghese (1970) Agrarian change and economic consequences
land tenures in Kerala 1850-1960. Allied publishers
Bombay.
• Mahesh, R. 2000. Farm size – Productivity relation ship:
Some evidence from Kerala; KIED working paper, Kerala
Institute for Environment and Development, Thiruvananthapuram.
• Gopikuttan,G &Kurup, K.N.P. 2004. Paddy land conversion
in Kerala An inquiry into Ecological and Economic aspects
in a Midland Watershed Region. Centre for Development
Studies, Thiruvananthapuram
• Kannan, K P., &Hari, KS. 2002. Kerala’s gulf connection:
emigration, remittances and their macroeconomic impact
1972-2000 Centre for Development Studies Thiruvananthapuram.
• Thomas, PM (2002) Problems and prospects of paddy cultivation
in Kuttanad region: A Case Study of Ramankari
Village in Kuttanad Taluk. A Project of Kerala Research
Programme on Local Level Development (KRPLLD),
Thiruvananthapuram
• Agarwal, A (2008) Dissecting the Food Consumption Pattern
of Households in India. IDBI Gilts Limited
• Nair, 2004 Sharp fall in area under paddy The Hindu Business
line Kochi February 3 rd , 2004
• Raj, RM (2003). Patterns of social change among the migrant
farmers of Kannur district- a case study. Project report
submitted to Kerala Research Programme on Local
Development, Centre for Developmental Studies, Thiruvanandapuram
• Harigovindan (2007)‘Tharisakunna padangal durithamozhiyatha
karshakar’(in Malayalam) Mathrubhoomi Daily 28 th
November, 2005.
• Suchitra, M (2008) Who will grow food? Down to Earth,
September 2008
• Rajendran, K P (2007)The Law for Conserving Wetlandand
Agricultural Fields (Malayalam),Mathrubhoomi Daily, 22 nd
September, 2004.
• Eapen, M.(1999) Economic diversification in Kerala: A spatial
analysis Centre for Development Studies, Thiruvananthapuram.
• Joshi, H (2006) Identifying Asset Price Bubbles in the Housing
Market in India- Preliminary Evidence. Reserve Bank
of India Occasional Papers, 27(1&2).
• Sushama, P N (1996) Transition from high to replacementlevel
fertility in a Kerala
• Village, Health Transition Review 6, 1996, 115–136, Office
of Population Health and Nutrition, New Delhi.
• Mahurkar P,G Senthil (2004). Final Paper on Real estate
fund management Indian Perspective, Asian Real estate
Society AsRES conference.
• Zachariah, KC., Mathew, ET., Rajan, SI. (2000) Socio economic
and demographic consequences of migration in Kerala,
Centre for Development Studies Thiruvananthapuram
• Zachariah, KC, and I Rajan (2004).Gulf revisited economic
consequences of emigration from Kerala, emigration and
unemployment. Centre for Development Studies Thiruvananthapuram
• Raj, PPN and Azeez, PA (2009) Real Estate and Agricultural
Wetlands in Kerala Economic & Political Weekly,
XLIV:5, Pp. 63-66.
• K. Pushpangadan K (2003) Remittances, consumption and
economic growth in Kerala: 1980-2000. Centre for Development
Studies, Thiruvanathapuram
• Nair, 2004 Sharp fall in area under paddy The Hindu Business
line Kochi, February 3 rd , 2004
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organisation).
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