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THE<br />
INDIA ECONOMY REVIEW<br />
<strong>2007</strong><br />
<strong>Volume</strong> 4 | <strong>Quarterly</strong> <strong>Issue</strong>: 31st <strong>Dec</strong>ember <strong>2007</strong><br />
www.iipmthinktank.com<br />
www.gidf.org<br />
REIMAGINING INDIA:<br />
MORE MARKET,<br />
RETHINK<br />
EDIFY<br />
DELINEATE<br />
LESS GOVERNMENT<br />
INSIDE THIS ISSUE<br />
Development Agenda<br />
<strong>The</strong> Visible Hand<br />
Free Exchange<br />
India Re-examined<br />
Progress Within Limits<br />
<strong>The</strong> Other Path<br />
A New Beginning<br />
A N I I P M T H I N K T A N K<br />
&<br />
G R E A T I N D I A N D R E A M F O U N D A T I O N P R E S E N T A T I O N
THE GREAT INDIAN DREAM<br />
“Let us together dream of a country where poor are<br />
not just merely reduced to statistics but where there are<br />
no poor. Let there be a day when small children are<br />
taken to a poverty museum like science museum where<br />
they shiver at the plight of the way people used to live in<br />
the last millennium. Let this dream take the form of a<br />
revolution and as long as our dreams keep outweighing<br />
our memories, India would remain a young and dynamic<br />
nation on this path to global equality. And for this let the<br />
wait not be for eternity. Let us together achieve this in<br />
the next 25 years.”<br />
Prof. Arindam Chaudhuri<br />
<strong>The</strong> Great Indian Dream, 2003, Macmillan India,New Delhi<br />
“A Society where man is at the centre of all activities,<br />
a society where exploitation of man by man has been<br />
abolished, where he is cared for as an in a family, where<br />
“to each according to his need’ is practised, a society where<br />
non bureaucratic National Economic Planning is given<br />
due importance for sustainable optimum growth, where<br />
adequate social safety net is a reality and yet market’s<br />
advantages are fully taken care of for creativity and<br />
entrepreneurship, such a society can be truly described as<br />
humane society and the vision as “Humanism”.<br />
Dr. M K Chaudhuri<br />
<strong>The</strong> Great Indian Dream, 2003, Macmillan India,New Delhi<br />
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CREDITS<br />
Founder<br />
Dr. M. K. Chaudhuri<br />
Editor-in-Chief<br />
Arindam Chaudhuri<br />
Managing Editor<br />
Prasoon.S. Majumdar<br />
Deputy Editor<br />
M.N.V.V.K. Chaitanya<br />
Consulting Editor<br />
Prashanto Banerji<br />
Research Fellows<br />
Pathikrit Payne<br />
Sray Agarwal<br />
Akram Hoque<br />
Tanaya Bose<br />
Group Design Director<br />
Satyajit Datta<br />
Senior Designer<br />
Amit Sharma<br />
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Dinesh Chandelkar<br />
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Production Supervisors<br />
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Chief Marketing Advisor<br />
Amit Saxena<br />
Marketing & Sales<br />
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Additional <strong>Think</strong>ing<br />
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PARADIGM PRISM<br />
“<strong>The</strong>re is no knowledge, no light, no<br />
wisdom that you are in possession of, but<br />
what you have received it from some source.”<br />
Who we are?<br />
<strong>The</strong> <strong>IIPM</strong> <strong>Think</strong> Tank, an independent, India-centric research body, is inspired by<br />
Dr. M.K. Chaudhuri’s vision of India as an economic powerhouse in the 21st century; a modern<br />
nation state where poverty becomes history and the underprivileged are not consigned to<br />
the dustbin of amnesia. <strong>The</strong> national presence (across 7 nodes, New Delhi, Mumbai, Chennai,<br />
Pune, Bangalore, Hyderabad, & Ahmedabad) makes our understanding of the economy superior,<br />
where in many research fellows and scholars, embark on research assignments and network<br />
with global intelligentsia.<br />
What we believe?<br />
<strong>The</strong> <strong>IIPM</strong> <strong>Think</strong> Tank is wholly free of ideology and looks at the Indian developmental paradigms,<br />
purely modelled upon the basis of ‘objective reality’ by opting for prescriptive economics. We<br />
start with real-life problems, lay down solutions and examine them in real-life context (through<br />
G.I.D Foundation) and observe what we learn about people and other variables in the systems<br />
in India as we opine that there is much more to boundary between the humanity and the world<br />
of ideas. We passionately believe in the credo that we constantly seek to follow: rethink, edify<br />
and delineate. This enduring commitment has helped us foster and broaden the parameters of<br />
public policy debate and alternatives. Toward that goal, it strives to achieve greater involvement<br />
of the intelligent, concerned change agents (reform minded politicians, public servants, socially<br />
responsible firms and citizens) in questions of policy and the ideation. Furthermore, we ardently<br />
believe that the managers of tomorrow that are being groomed at <strong>IIPM</strong> today will play a decisive<br />
role in India’s renewed tryst with destiny.<br />
What we do?<br />
-Brigham Young<br />
As a premier ‘ideas organisation’, <strong>The</strong> <strong>IIPM</strong> <strong>Think</strong> Tank is committed to enhance public<br />
awareness of policy issues in economics and management and to engineer solutions that will<br />
fulfill the Great Indian Dream. By publishing the findings of its research, and through the active<br />
participation of its senior researchers in the media and policy, it aims to bring new knowledge<br />
to the attention of policy makers. Every year, <strong>The</strong> <strong>IIPM</strong> <strong>Think</strong> Tank commissions and publishes<br />
socio-economic three quarterly reviews and an annual review, on a wide range of policy<br />
issues including education, health, poverty, unemployment, agriculture, industry, services, FDI,<br />
external trade, infrastructure and environment. All these outputs meet the highest standards of<br />
scholarship, are accessible to a broad readership, and explore policy alternatives consistent<br />
with the philosophy of ours. <strong>The</strong> central theme of our issues are devoted to assess where the<br />
critical predicaments are, analysing what needs to be done to annul the element of development<br />
deterrents in the economy and offer concrete proposals on how to accelerate welfare<br />
everywhere towards achieving inclusive development. <strong>The</strong> India Economy Review is a small<br />
manifestation of that vision. More than 3,000 students (7 nodes of <strong>IIPM</strong>) have—and continue<br />
to—spent endless hours conducting primary and secondary research on strategic issues that<br />
confront India. This research is then analysed by many scholars across the 7 campuses. Brand<br />
new insights and policy recommendations that are provided by this core team are then crafted,<br />
honed and polished by member Economics Research Group (ERG). This massive effort is<br />
spearheaded and led by the renowned economist and management guru, Prof. Arindam<br />
Chaudhuri. We trust that the untiring efforts of <strong>The</strong> <strong>IIPM</strong> <strong>Think</strong> Tank are a modest, yet<br />
significant contribution to the policy reinvention that is poised to transform India.<br />
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THE FUTURE IS HERE<br />
“<strong>The</strong> great aim of education is not<br />
knowledge but action.”<br />
-Herbert Spencer<br />
Since its incorporation (1973), <strong>IIPM</strong> has been an institution with privileged traditions, in the<br />
diversity of its fraternity, its global outlook, its world class research and its commitment to alternative<br />
national economic planning process.<br />
It can be said, without much oversimplification that there are no ‘underdeveloped economies’.<br />
<strong>The</strong>re are only ‘under managed’ countries. Japan 140 years was ago was an underdeveloped<br />
country by every material measurement. But it very quickly produced management of great<br />
competence, indeed of excellence. <strong>The</strong> policy inference is that ‘management’ is the prime mover<br />
and ‘development’ is the consequence. At <strong>IIPM</strong>, every one considers that development is a matter<br />
of human energies rather than economic wealth. And the generation and direction of these human<br />
energies is the task of ‘management’. Accordingly, we formed <strong>The</strong> Great Indian Dream. Unlike<br />
any other dream, this is one dream which each one of us are determined to realise and that too in<br />
our own lifetimes. Each bit of cynicism and condemnation from pessimists makes us evolve even<br />
stronger and determined.<br />
All our endeavours and initiative is towards realisation of this dream, where in we produce<br />
committed ‘bare foot’ managers and entrepreneurs who are needed by nation, on an insistent<br />
basis. As an educational institute, we aim at initializing a three dimensional personality in <strong>IIPM</strong>ites,<br />
viz.<br />
Pursuit of knowledge in economics and management<br />
Commitment to economic, social, political and technological upliftment of masses and<br />
Cultivation of taste for literature, fine arts and etc.<br />
Economists often have limited access to the practical problems facing senior managers, while<br />
senior managers often lack the time and motivation to look beyond their own industry to the<br />
larger issues of the global economy. It has set before it the twin tasks: to reorient education and<br />
research towards the needs of both the private and public sectors and to establish the link between<br />
the National Economic Planning and the development of private enterprises in Indian economy.<br />
<strong>IIPM</strong> dares to look beyond, and understands that what we teach today, other adopt tomorrow.<br />
<strong>IIPM</strong>’s service output (education, research and consulting,) is a unique combination of two distinct<br />
disciplines: economics and management. Through this integration, <strong>IIPM</strong> helps guide business and<br />
policy leaders in shaping the Indian and global economy, bringing together the practical insights<br />
of industry with broader national and global perspectives.<br />
A hall mark of <strong>IIPM</strong> is that it is armed with the comparative advantage of engaging the<br />
committed, passionate and brightest management post graduates and undergraduates, who<br />
pursued the education at <strong>IIPM</strong> and subsequently joined it, to realise the dream. <strong>IIPM</strong> alumni, spread<br />
across the globe, holding crucial decision-making positions in the corporate sector, are bonded by<br />
the one ideology of making a positive difference, turning that ideology into a movement itself.<br />
<strong>The</strong> India Economy Review is another humble initiative towards the realisation of the same and<br />
more distinctly, engaging the broader publics and pertinent stakeholders.
FROM THE EDITOR’S DESK<br />
planning for competition, not by planning against competition<br />
Dear reader,<br />
After being shackled for nearly five<br />
decades, a <strong>size</strong>able class of ingenious private<br />
entrepreneurs have been fully liberated,<br />
at least in some economic spheres.<br />
<strong>The</strong>y are now exhibiting their true potential<br />
and international competitiveness as<br />
is reflected in the popular media. In this<br />
context, after perusing all those informative,<br />
yet disparate nuggets and given the<br />
fact that India boasts of a deep financial<br />
services sector, long standing and diversified<br />
private participation (relative to<br />
China, Brazil and other emerging economies),<br />
vibrant entrepreneurial class and<br />
Anglo-Saxon legal institutions, it may<br />
seem surprising that India still painfully<br />
needs a much more market-orientation<br />
across all levels. <strong>The</strong>re is still exists a robust<br />
economic reasoning which asserts<br />
that the state should disentangle all obstacles<br />
and disengage the past planning<br />
follies to release the creative, social and<br />
economic energies of the fast growing<br />
‘bottom millions’. Consider this: According<br />
to the Heritage Foundation’s Index of<br />
Economic Freedom (<strong>2007</strong>), India is only<br />
55.6 percent free. This score makes it the<br />
world’s 104th freest economy!<br />
In this issue of IER, many empirical<br />
research studies profess that, among<br />
other positive outcomes, economic freedom<br />
promotes national growth and poverty<br />
reduction. Furthermore, different<br />
research papers outline the processes and<br />
policy implications of business freedom,<br />
financial freedom and investment freedom<br />
in several areas, which specifically<br />
and importantly includes<br />
basic education,<br />
labour markets<br />
and financial markets.<br />
Unlike most other issues,<br />
IER this time<br />
covers not only business<br />
and economics,<br />
but also deals with<br />
important research<br />
submissions that falls<br />
outside the realm of traditional economics-<br />
such as intellectual property, ecology<br />
and environment, economic history and<br />
politics This issue, we have some original<br />
research and novel analysis about<br />
• Public governance, market, deprivation<br />
and the political system.<br />
• India’s growing ecological footprint<br />
• <strong>The</strong> international trade in higher education<br />
and implications for India.<br />
Prasoon.S.Majumdar<br />
Managing Editor<br />
M.N.V.V.K.Chaitanya<br />
Deputy Editor<br />
• Why poor parents are choosing ‘More<br />
Market, Less Government’ in education,<br />
and what we should do about it?<br />
• Accountable governance and pro-poor<br />
markets for poverty reduction<br />
• Reforms in the Indian banking sector<br />
and policy reversal<br />
• Economic freedom in India’s product<br />
and labour markets<br />
Above all, after reading all the opinions<br />
featured here in this issue, we at the<br />
<strong>IIPM</strong> <strong>Think</strong> Tank are of the firm opinion<br />
that, if we get a state that reflects more of<br />
what this country is actually about, India<br />
can indeed turn the century and its market--<br />
around, in the very near future. <strong>The</strong><br />
impressive response in areas that have<br />
been reformed in the recent past must<br />
give policymakers confidence that further<br />
liberalisation will eventually deliver additional<br />
growth dividends and foster the<br />
process of pulling millions of people out<br />
of poverty.<br />
Best,<br />
Prasoon.S.Majumdar<br />
M.N.V.V.K. Chaitanya
SEARCH, SIEVE, SCHEME...<br />
“Research is formalised curiosity. It is poking<br />
and prying with a purpose.”<br />
Zora Neale Hurston<br />
In economics, like in everyday existence, it is<br />
imperative to hear, perceive and consider what<br />
others have to say. Each issue of <strong>The</strong> IER brings<br />
together a selection of important contributions on a<br />
particular theme, authored by some of the brightest<br />
minds in different areas of Indian economics. <strong>The</strong><br />
provocation for publishing these issues arises from<br />
the fact that over the years economic journals have<br />
become copious, exclusive and expensive. Most of<br />
the journals and a good many of the books have gone<br />
beyond the cerebral and financial reach of general<br />
students and other scholars. It is for them that these<br />
issues are primarily being raised and debated here.<br />
Much about India is transparent enough. One does<br />
not require detailed criteria, cunning calibration or<br />
probing analysis to pinpoint India’s problems and<br />
recognise its antecedents. <strong>The</strong>re is in fact much that<br />
is perceptible about India. But not everything about<br />
India is even if simplistic is so simple. <strong>The</strong> learned<br />
reader would appreciate the fact that India is like an<br />
elephant that looms too large to be grasped within a<br />
distinct structure and paradigm the constituent parts<br />
of which would fail to reveal the entirety. Obviously and<br />
observably, no suggested solution to any protracted<br />
and complex socio-economic problem will satisfy<br />
all sides and stake-holders evenly. Consequently,<br />
there exists an enormous diversity in economic<br />
thinking and perspectives, as is also reflected in the<br />
viewpoints of different expert contributors in this<br />
issue. <strong>The</strong> intended outcome of this exercise is to<br />
facilitate the invention, improvement, deliberation<br />
and dissemination of innovation in economic thinking<br />
and national economic planning, insisting merely on<br />
well-grounded, open and unbiased debates, without<br />
predetermined outcomes. It is impossible to do justice<br />
to the entire field of Indian economics in a single<br />
issue. <strong>The</strong> topics selected for this issue are those<br />
which are of critical and immediate importance to<br />
India. Majority of them were freshly and exclusively<br />
written. Encapsulated, it is a constructive attempt<br />
aimed at helping India actualise its promises and<br />
potential. <strong>The</strong> editors hope that this issue of IER<br />
will proffer the reader a flavour of dynamism and<br />
excitement and persuade her/him to participate<br />
in the journey towards realising ‘<strong>The</strong> Great Indian<br />
Dream’. At the same time, it illuminates the terrible,<br />
practical problems of India and Bharat.<br />
HAPPY READING...<br />
ACKNOWLEDGEMENTS<br />
<strong>The</strong> <strong>IIPM</strong> <strong>Think</strong> Tank likes to thank all the internal faculty who have been instrumental in coordinating<br />
with many authors all across India and according their unstinted support. <strong>The</strong> assistance of Prof.<br />
R.Krishnan and Syed Ahmed (<strong>IIPM</strong> Chennai), Mr. Tareque Laskar (<strong>IIPM</strong> Bangalore), Mr. Sudipto<br />
Chatterjee (<strong>IIPM</strong> Ahmedabad), Prof.Jayanta Chakraborti and Ms. Bindiya Naik (<strong>IIPM</strong> Pune), has been<br />
more valuable than, perhaps, they realise. Ms. Vareen Gadhoke Ray at Planman Media, particularly, did<br />
all that it was possible to do for this issue of IER.
(F)ACT SHEET<br />
INDIA’S FUTURE: Redesigning Development Agenda<br />
Liberalism As <strong>The</strong> Basis Of Human Rights And Dignity<br />
Christopher LINGLE 12<br />
India’s Future – Knowledge And Learning<br />
Societies Or Mere Markets And State<br />
Lawrence Surendra 16<br />
State And Market Conundrum In <strong>The</strong> Indian<br />
Context –A Need For Debates<br />
Pradeep Banerjee 24<br />
Larger Market Role, Reduced Government Interventions–<br />
Is It A Misnomer?<br />
Anandajit Goswami 32<br />
THE VISIBLE HAND: Government’s Role<br />
Governance, Market, Deprivation And <strong>The</strong> Political System<br />
Amal Sanyal 36<br />
<strong>The</strong> Economics Of Social Unrest – Its Causes And Cure<br />
Nilanjan Banik 42<br />
More Market, Less Government: A Recipe For Disaster For <strong>The</strong><br />
Water Sector<br />
Shripad Dharmadikary 46<br />
Inclusive Growth In India: A Case Of Structural And Agrarian<br />
Challenges<br />
D.M. Diwakar 52<br />
Market Economy And <strong>The</strong> State Of Regional<br />
Disparities In India<br />
Anu Singh 62<br />
Accountable Governance And Pro-poor Markets For Effective<br />
Poverty Reduction<br />
Anindo Banerjee 68<br />
Food Security In India: <strong>Issue</strong>s And Implications<br />
Anajani Sinha 74<br />
FREE EXCHANGE: More Markets<br />
Why Poor Parents Are Choosing ‘More Market, Less Government’<br />
In Education, And What We Should Do About It?<br />
James Tooley 80<br />
International Trade In Higher Education: What Should India Do?<br />
Stephen P. Heyneman 86<br />
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ethink<br />
edify<br />
edify<br />
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rethink<br />
edify edify<br />
delineate<br />
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edify<br />
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edify<br />
edify<br />
delineate<br />
rethink<br />
rethink<br />
edify edify<br />
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rethink<br />
edify edify<br />
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edify edify<br />
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10 edify<br />
delineate<br />
delineate<br />
Water Resources In Gujarat And Role Of Water Markets In<br />
Breaking Gridlock In Water Scarcity – A Replicable Policy<br />
Prescription At National Level<br />
Jharna Pathak 94<br />
Commodity Futures: A Catalyst For Agricultural Development<br />
V. Shunmugam & D.G. Prasad 102<br />
Overseas Investment By Indian Firms: Recent Trends<br />
And Patterns<br />
Deepika Wadhwa 108<br />
Indian Banking Reforms And Policy Reversal: A Vicious Cycle<br />
Anurag Sharma 116<br />
Indian Corporate Bond Market: <strong>The</strong> Road Ahead<br />
Pramod K. Yadav & Ritesh Agarwal 132<br />
QUO VADIS: India Reexamined<br />
Just How Free Are India’s Labour And Product Markets?<br />
Paul Conway, Richard Herd & Sean Dougherty 138<br />
Going For Growth Through Economic Reforms: <strong>The</strong> Case Of India<br />
Rok Spruk 146<br />
India’s Unique Pattern Of Development: Quo vadis?<br />
Kalpana Kochhar 154<br />
PROGRESS WITHIN LIMITS: Environmental Economics<br />
India’s Growing Ecological Footprint: Exploring Past And<br />
Future Changes<br />
T R Manoharan 164<br />
A NEW BEGINNING: Law And Public Policy<br />
<strong>The</strong> First Sale Doctrine Before <strong>The</strong> U.S. Supreme Court:<br />
Intellectual Property Implications For India<br />
Shubha Ghosh 168<br />
SOTTO VOCE: Economic Exposition<br />
Liberty And Prohibition: A Governance Dilemma<br />
Ali Mehdi 172<br />
THE OTHER PATH: Reimagining India<br />
An Alternative Integrated Development Perspective For <strong>The</strong><br />
Peripheral Regions: <strong>The</strong> Case Of Barak Valley In Northeast India<br />
Baharul Islam 174<br />
THE ‘OTHER’ INDIA: Tenancy Reforms<br />
Tenancy Reforms in Orissa: A Critical Perspective<br />
Mrutyunjay Dash 182
CALL FOR PAPERS<br />
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Christopher LINGLE,<br />
Professor of Economic at<br />
Universidad Francisco<br />
Marroquin in Guatemala<br />
Liberalism As <strong>The</strong> Basis Of<br />
Human Rights And Dignity<br />
"Of all the varieties of virtues,<br />
liberalism is the most beloved."<br />
-Aristotle<br />
I<br />
dealism and an abiding concern<br />
for mankind tend to preoccupy<br />
young intellectuals throughout<br />
the world. Ironically, despite the successes<br />
in promoting human development,<br />
Liberalism remains relatively<br />
underappreciated by the youth in<br />
most countries.<br />
This problem is compounded in India<br />
by legal arrangements that make it<br />
impossible to form political organizations<br />
that identify with Liberal ideals.<br />
As it is, modifications to the preamble<br />
of the Constitution made during the<br />
Emergency specify that: “India is a<br />
sovereign, secular, socialist republic.”<br />
At the same time, an amendment<br />
was made to the relevant section in the<br />
Representation of the People Act, 1950<br />
to require all recognized and registered<br />
parties to swear to uphold the<br />
Constitution. <strong>The</strong> courts have ruled<br />
variously on whether or not the Preamble<br />
is to be deemed a part of the Constitution.<br />
<strong>The</strong> current view on this is<br />
that since all parties must stand for<br />
Socialism, no party can legally register<br />
to espouse Classical Liberalism as a<br />
political platform. Attempts to challenge<br />
this ban on political speech of<br />
Liberals languish in the court system.<br />
One might consider the level of outrage<br />
that would lead to a rapid hearing<br />
if socialist or communist parties were<br />
banned. And the strongest voice to remove<br />
such limits would almost certainly<br />
be led by Liberals! Another<br />
problem is that opponents of the Liberal<br />
view effectively create a veil of<br />
good intentions to obscure the obvious<br />
flaws and failings of Socialism. Meanwhile,<br />
critiques of Liberalism make the<br />
unfounded assertion that it offers few<br />
answers for solving social problems<br />
within the larger community.<br />
To counter this latter tactic, Liberals<br />
must make clear representations of the<br />
social benefits of Liberalism. One area<br />
that might be fruitful is to articulate<br />
the Liberal basis of the concept of socalled<br />
human rights. It turns out that<br />
Human rights did not formally appear<br />
12 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
in international law until 1948 when<br />
the Universal <strong>Dec</strong>laration of Human<br />
Rights (UDHR) was signed. This document<br />
enshrines principles of equality<br />
and justice, and the sanctity of a person’s<br />
rights regardless of their ethnicity,<br />
religion or gender. <strong>The</strong> first sentence<br />
of the 1948 <strong>Dec</strong>laration states<br />
that “inherent human dignity” should<br />
be recognized. As such, a balanced application<br />
of human rights principles<br />
would not impose social responsibilities<br />
that come into conflict with<br />
personal rights.<br />
But some attempts to curb assaults<br />
on the dignity of human beings have<br />
contributed to the continuing problems<br />
that offend a collective sense of justice.<br />
Indeed, many of the most vocal supporters<br />
of so-called human rights actually<br />
promote legal concepts that inadvertently<br />
support the sort of misconduct<br />
they wish to see ended. In particular,<br />
demands for human rights in terms of<br />
social or collective rights undermine<br />
the universality intended by the drafters<br />
of the UDHR. For example, government<br />
officials frequently engage in<br />
populist promises that define rights<br />
based on economic or social characteristics.<br />
In modern times, there has been<br />
an emergence of identity politics<br />
whereby leaders of group-based movements<br />
claim they represent the interests<br />
of groups defined by ethnicity,<br />
class, religion, gender, sexual orientation<br />
or other criteria.<br />
A focus on group “rights” divides<br />
communities into distinctive and separate<br />
political classes that are in conflict<br />
with the interests and rights of other<br />
groups. Demands for an assignment of<br />
rights as a matter of law tend to be<br />
based on a perception of some historical<br />
oppression or victimhood. In the<br />
first instance, assignment of particular<br />
rights contradicts a notion of universal<br />
rights wherein all humans possess<br />
equal rights regardless of differences<br />
race or ethnicity. And basing human<br />
rights upon collective concepts of<br />
“fundamental” social rights leads to<br />
zero or negative-sum policy outcomes<br />
with some groups benefiting and others<br />
losing. One common intrusion to<br />
individual liberties relating is the imposition<br />
of limits on the exercise of<br />
private property rights and the freedom<br />
of exchange. In this regard, the<br />
excesses of protectionism and unlawful<br />
expropriation are legendary. <strong>The</strong>re is<br />
an unfortunate tendency for few objections<br />
being raised when the assets of<br />
private corporations are nationalized.<br />
But this indifference overlooks the fact<br />
that acts that diminish economic<br />
freedoms provide the logic and mechanisms<br />
for reducing civic and political<br />
freedoms. Those wishing to support<br />
human rights should consider that<br />
rights and dignity of humans are best<br />
preserved through rigorous support for<br />
individual rights and the Rule of Law.<br />
As it is, proponents of collective or<br />
group rights that ignore the key role of<br />
individuals as bearers of rights guaranteed<br />
to autonomous humans undermine<br />
the Rule of Law.<br />
Indeed, the assertion of group rights<br />
over individual rights provided the basis<br />
for the injustices of apartheid in<br />
South Africa and genocide in other<br />
parts of the world. <strong>The</strong> assignment of<br />
group rights in the case of apartheid is<br />
a worst-case scenario of abuses arising<br />
from the violation of these generality<br />
conditions. But other extreme acts<br />
arising out of the exclusivity of ethnic<br />
nationalism had destructive consequences<br />
in the Balkans and plague<br />
other parts of the world.<br />
References to social or collective or<br />
group rights mask the fact that assignment<br />
of such rights may involve empowerment<br />
or possessions that require<br />
the action or aid of others. In the process<br />
of activating such group rights, the<br />
rights of other individuals will be violated<br />
by imposing obligation upon<br />
them. Rights that impose obligations<br />
necessarily attenuate the freedom of<br />
choice and action of others. In such an<br />
order, human beings are treated as objects<br />
or servants of the community<br />
Rights that impose obligations necessarily attenuate the<br />
freedom of choice and action of others. In such an order,<br />
human beings are treated as objects or servants of the<br />
community rather than valued as unique individuals<br />
rather than valued as unique individuals.<br />
Whereas the assignment and enforcement<br />
of individual rights encourages<br />
coordination and cooperation,<br />
collectivized rights involve conflict<br />
and require coercion. As it turns out,<br />
many of the countries that suffer most<br />
from communal violence and sectarianism<br />
are those that have imple<br />
mented policies that define rights of<br />
minorities. Clearly, this approach has<br />
not worked.<br />
A collectivistic approach to human<br />
THE INDIA ECONOMY REVIEW<br />
13
REIMAGINING INDIA<br />
rights as group rights also violates the<br />
generality requirement of jurisprudence<br />
associated with Kant’s categorical<br />
imperative. Under a Kantian system,<br />
justice is served when rights are<br />
applied generally without particular,<br />
arbitrary preferences for either individuals<br />
or groups.<br />
What is at stake is the choice of a<br />
system that serves as the means for attaining<br />
and measuring social justice.<br />
On the one hand, private property<br />
rights might be seen as essential for<br />
safeguarding most other civil rights.<br />
On the other hand, these rights might<br />
be the most effective incentive to inspire<br />
individual effort that may lead to<br />
general prosperity of the community.<br />
A focus on “social” or communitarian<br />
rights tends to lead to reliance<br />
upon a politicization of the economic<br />
position (income and wealth) of individuals<br />
in the community. Politicizing<br />
such outcomes in pursuit of a special<br />
sense of social justice is open to exploitation<br />
by special interest groups or<br />
power elites of other groups or specific<br />
individuals within the community.<br />
It also allows envy and politics to brew<br />
up a ghastly stew. Anchoring human<br />
rights to a (more or less inviolable)<br />
concept of private property reduces<br />
the number of politicized decisions affecting<br />
peoples’ lives. This would be<br />
less exploitative and also less arbitrary<br />
and probably more stable since community<br />
actions are justified by mutual<br />
consent and voluntary exchange among<br />
individuals. Despite well-intentioned<br />
attempts to create or promote a broad<br />
sense of community, democracy allows<br />
the interests of special groups to dominate<br />
the interests of the wider community.<br />
Mechanisms that rely upon<br />
For greater harmony in the future, political initiatives<br />
and the relentless expansion of restrictions and bureaucracy<br />
that contribute to dehumanization should be<br />
replaced by individual initiatives<br />
majority rule to determine the distribution<br />
of wealth or goods tends to reinforce<br />
an increased sense of collective<br />
identity as a means to avoid, to deflect<br />
or to harness as well as to direct<br />
the policies.<br />
In the end, politicization arising out<br />
of attempts to enforce collective rights<br />
can be seen as the principal cause of<br />
the powerlessness of individuals. Expansion<br />
in the nature and direction of<br />
state intervention replaces the rights<br />
of the individual, except as a member<br />
of a group.<br />
In the United States of America, increased<br />
political divisiveness has<br />
emerged as more collective action has<br />
been mandated. Despite emphasizing<br />
multi-cultural studies in American<br />
universities, one result has been demands<br />
for a restoration of “separate<br />
but equal” facilities for different<br />
groups. More troubling is what seems<br />
to be a growing intolerance of diversity<br />
due to resentment of members of<br />
groups who are perceived as recipients<br />
of preferential treatment. Members of<br />
groups identified as historical victimizers<br />
begin to imagine that they are<br />
being victimized and captive to an insubstantial<br />
logic of retribution. Certain<br />
members of the Hindu community in<br />
India are making such claims against<br />
the Muslim population.<br />
Defining human rights in collective<br />
or group terms invites an increased<br />
politicization of life outcomes, something<br />
to be avoided given India’s ethic<br />
and religious diversity. Unfortunately,<br />
populist politicians seldom search for<br />
private solutions to solve problems or<br />
conflicting interests in a private manner.<br />
For greater harmony in the future,<br />
political initiatives and the relentless<br />
expansion of restrictions and bureaucracy<br />
that contribute to dehumanization<br />
should be replaced by individual initiatives.<br />
As such, the best way serve<br />
humane ends is to ground the concept<br />
of human rights in a Liberal order<br />
where individual rights are protected<br />
within a Rule of Law.<br />
14 THE <strong>IIPM</strong> THINK TANK
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Lawrence Surendra,<br />
Planning Commission of India Chair in<br />
Economics, Department of Studies in<br />
Economics and Cooperation,<br />
University of Mysore<br />
India’s Future – Knowledge And Learning<br />
Societies Or Mere Markets And State<br />
"Economics is not a body of concrete<br />
wealth but an engine for<br />
the discovery of concrete truth."<br />
-Alfred Marshall<br />
<strong>The</strong> Central Statistical Organization<br />
in its estimate released on<br />
May 21, <strong>2007</strong>, estimated GDP at<br />
factor cost at 1999 – 2000 prices as<br />
Rs.28,482 billion. India’s GDP at factor<br />
cost increased from US$20 billion in<br />
1950-51 to US$828 billion in 2006-07.<br />
GDP at current market prices was estimated<br />
at US$912 billion in 2006-07. With<br />
increasing integration, share of merchandise<br />
trade (imports + exports) increased<br />
from 12.2 percent of GDP in 1950-51 to<br />
33.6 percent in 2006-07. Inclusion of<br />
services will increase this share further.<br />
As per the World Economic Outlook<br />
(April <strong>2007</strong>), India accounted for 6.3<br />
percent of global GDP measured in terms<br />
of Purchasing Power Parity (PPP) and<br />
1.3 percent export of goods and services.<br />
In terms of PPP, India’s GDP in 2006 was<br />
valued at around US$ four trillion, nearly<br />
five times the GDP valued at current<br />
nominal exchange rate.<br />
<strong>The</strong> figures in terms economic growth<br />
are impressive with the Finance Minister<br />
aiming for a growth rate of above 10 percent<br />
(around 12 percent) next year. Ambitious<br />
but very much in the realm of<br />
possibility, if the Finance Minister plays<br />
his hands well. For those who directly or<br />
indirectly benefit by this growth, especially<br />
the middle and upper middle classes,<br />
this is news to cheer and feel gratified,<br />
in the sense of feeling a sense of pleasure<br />
and comfort. <strong>The</strong> latter sense of gratification<br />
leads not only to the desire for<br />
greater and greater gratification but also<br />
leads to over-confidence and arrogance;<br />
signs of the latter are plenty and all it requires<br />
is to read the papers in the metros.<br />
This arrogance around a growing economy<br />
also leads to all kinds of fanciful assumptions<br />
about the role of state and<br />
markets and a kind of evangelical zeal<br />
about markets. For those who will benefit<br />
little or nothing by this growth and<br />
for the many who may even become or<br />
already are, victims of the rapid economic<br />
growth, they may still hope that there<br />
would be some protections for them and<br />
that they still remain constitutionally<br />
citizens of India with equal opportunities<br />
16 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
and rights. <strong>The</strong> fact that the economy<br />
and its growth happens within the framework<br />
of a solemnly constituted nation<br />
bound by constitutional obligations,<br />
could give the poor and disadvantaged<br />
reasons to hope and aspire for an inclusive<br />
growth, something that the Finance<br />
Minister has also recently been referring<br />
to and on more than one occasion. If inclusive<br />
growth is not to become a mantra<br />
but serious policy, then it has important<br />
implications for the future of India as we<br />
know it. <strong>The</strong> future of India as a nation,<br />
as an idea that has so important a place<br />
in the comity of nations globally, will<br />
critically depend on how economic policy<br />
in our country deals with India’s large<br />
scale mass poverty. That remains and<br />
will remain the Indian economy’s most<br />
central problem; how economic policy<br />
deals with it, will be what makes or breaks<br />
economic growth and political stability;<br />
in the ultimate analysis our ability to<br />
break the poverty trap is what will determine<br />
whether we pull through as a society<br />
or descend gradually into chaos and<br />
anarchy. This reality needs to be stated<br />
upfront before entering into any discussion<br />
about state and markets.<br />
<strong>The</strong> State And Economists<br />
Faster growth rates in the economy has<br />
led to calls for an entirely market based<br />
economic growth model and to even assume<br />
that, the state is and can no longer<br />
be the primum mobilum of development.<br />
If that is so, then how does one deal with<br />
the question of the state when it comes to<br />
thorny problems such as poverty alleviation,<br />
social exclusion and gross societal<br />
inequalities that are a drag on the overall<br />
development of a nation. Often there is a<br />
scare tactic that is mounted about the<br />
dangers of a dirigistic state and which the<br />
Indian state hardly is, especially after the<br />
reforms of the 1990s and from the VIII<br />
Plan onwards. Once, the distinction between<br />
accepting a role for the state in<br />
development and that of a dirigistic state<br />
is deliberately blurred, it is easier to<br />
equate the two and call all state involvement<br />
as dirigistic and then try to figure<br />
out in the push for market friendly economic<br />
reforms how to reduce the role of<br />
the state. This then becomes a false debate.<br />
More critical than raising false<br />
clashes between state and market in the<br />
new millennium, is whether the state in<br />
developing societies such as India has a<br />
developmental role, if so how does then<br />
one define it and shape it? <strong>The</strong>re is no<br />
point in putting questions arising out of<br />
the 19th century and early 20th century<br />
problems that developed states have gone<br />
through and more so when most states,<br />
including the Indian state in an age of<br />
globalization are bending over backwards<br />
to be market and corporate friendly.<br />
<strong>The</strong>re is nothing in our ‘karma’ that says,<br />
we have to go through the routes other<br />
societies have gone through. Pluralistic<br />
and sensible approaches to economic<br />
policy making and economic reform in<br />
particular requires a profound understanding<br />
that economic policy making<br />
especially in open and still vibrant democracies<br />
as ours, is related to good governance<br />
as a public good and multiplier<br />
of economic efficiency. Good governance<br />
in a society of diverse groups, interests<br />
and pulls and pressures is an art. In a developmental<br />
strategy sense, governance<br />
is central to economic policy. For this the<br />
state has a critical role in the management<br />
of the political economy of the large<br />
economies as ours and with such large<br />
and varied socio-economic problems,<br />
agro-eco systems and federal political<br />
structure. Good governance is an important<br />
and critical public good and for<br />
which the state cannot be seen as an adversary<br />
by the market. Undermining the<br />
state has serious consequences for markets<br />
as well. <strong>The</strong> State can very well be<br />
undermined from within the State by<br />
market forces. Instead of tired debates<br />
about state versus markets, what we need<br />
is serious debate on better policy and<br />
polity, involving state and markets.<br />
Once, the distinction between accepting a role for the<br />
state in development and that of a dirigistic state is deliberately<br />
blurred, it is easier to equate the two and call all<br />
state involvement as dirigistic<br />
Better policy and polity that works to the<br />
welfare of the nation as a whole than satisfy<br />
the greed of a few be it business<br />
or politicians.<br />
Economics and economic growth is<br />
part of the complexity of social systems<br />
and their inbuilt injustices, contradictions<br />
and handicaps. To think that the<br />
problems of economic growth can be unraveled<br />
without reference to the social<br />
system, would mean that when the social<br />
system starts unraveling itself, it will<br />
sweep in its wake, all traces of economics<br />
development. This is an issue that many<br />
economists have tried to skirt. It may be<br />
fashionable amidst the greed and individualism<br />
in the wake of the benefits<br />
brought to the leisure classes as a result<br />
THE INDIA ECONOMY REVIEW<br />
17
REIMAGINING INDIA<br />
of globalization, for media gurus to triumphantly<br />
embrace the market as the<br />
panacea for all our ills. But it requires<br />
some humility to recognize that economic<br />
policy making, doing economics and<br />
shaping public policy in the context of<br />
poor and developing societies as ours,<br />
requires also a deep sense of humanity.<br />
A central issue in discussing the role of<br />
the state and economic growth is the issue<br />
about balanced growth, to avoid<br />
growing disparities between states, between<br />
regions and between different sectors<br />
of the population. For example, one<br />
of the major points of criticism by market<br />
friendly economic reformers’ is that<br />
policy and theoretical approaches, based<br />
on ‘balanced growth’, has been the bane<br />
of earlier economic policy making. Sukhamoy<br />
Chakravarty one of our foremost<br />
economists and who engaged in policy<br />
with that deep sense of humanity, in dismissing<br />
the debate about ‘balanced and<br />
unbalanced growth’ as semantic, refers<br />
ence to discussions of trade as a major<br />
engine for growth and like Amartya Sen,<br />
he recognizes “cycles of optimism and<br />
pessimism in trade led growth”. As Sukhamoy<br />
Chakravarty says, “the point I<br />
am driving at is that it was not much due<br />
to the alleged doctrine of ‘market failures’<br />
in the sense indicated by fundamental<br />
theorems of welfare economics that<br />
policy-makers in both developed and developing<br />
countries agreed to a theory of<br />
state-directed industrialization, but from<br />
a growth perspective based on data on<br />
massive agrarian overpopulation in<br />
South and Eastern Europe. Obviously<br />
the extension of this argument to deal<br />
<strong>The</strong> need to forge the new consensus that Sukhamoy<br />
Chakravorty made a plea for in the 1980s is ironically<br />
even more relevant now in the end of the first decade of<br />
the new millennium<br />
to the problem of surplus labour as a<br />
more serious conceptual and policy issue<br />
to deal with, especially in rural areas.<br />
Economist of the intellectual caliber of<br />
Sukhamoy Chakravarty, in addressing<br />
such critical issues as that of surplus labour<br />
also dealt with the problem of the<br />
state. With regard to debate about the<br />
state he points to the compatibility or<br />
otherwise between the planning principle<br />
and the principle of comparative advantage.<br />
A dichotomy which he says has<br />
been misleadingly drawn. This has refer-<br />
with countries like India was done later,<br />
although it was present in a general way<br />
from the beginning”. So much for the arguments<br />
about socialist inspired penchant<br />
for state involvement in economic<br />
planning and growth. In connection with<br />
the extension of the argument on surplus<br />
labour to underdeveloped areas, he refers<br />
to the UN Expert Group Report of<br />
1951 on 'Measures for the Economic Development<br />
of Underdeveloped Areas.<br />
'Chakravarty says, “this report reflected<br />
the emergence of a ‘development consensus’<br />
which lasted for nearly twenty five<br />
years”. He then refers to the breakdown<br />
of the consensus – “more prominently in<br />
the 1980s, based on criticisms which were<br />
first voiced by a resurgent neo-classicism<br />
on the one hand, and a ‘radical critique’<br />
of the left on the other”. This he says<br />
does not imply a demise of the sub-discipline<br />
of ‘development economics’, but,<br />
“the need to forge a new consensus” (emphasis<br />
added). <strong>The</strong> need to forge the new<br />
consensus that Sukhamoy Chakravorty<br />
made a plea for in the 1980s is ironically<br />
even more relevant now in the end of the<br />
first decade of the new millennium.<br />
We must consider ourselves very fortunate,<br />
that our nation has been blessed<br />
with a whole number of good, intellectually<br />
honest economists. In the context of<br />
looking at the perspectives of economic<br />
theory and policy, there is much that we<br />
can glean from the insightful writings of<br />
economists like the late Sukhamoy<br />
Chakravarty, (who along with Amartya<br />
Sen) belongs to that unique class of intellectually<br />
honest economists who have not<br />
done their economics only to pander to<br />
the tunes of the times. Economists who<br />
always did their theoretical and practical<br />
policy work, not only standing above<br />
vested interest pulls and pushes but also<br />
with a deep sense of humanity unconcerned<br />
whether that got them applause<br />
from the galleries or not. Sukhamoy<br />
Chakravarty’s contributions in the context<br />
of the discussion on state and markets<br />
are several and relate to the role of<br />
knowledge, the significance of coordination<br />
failure and surplus labour, the need<br />
to go beyond ‘the market failure’ or stages<br />
of growth argument, the impact of<br />
economic organizations from the viewpoint<br />
of “ensuring creativity, growth and<br />
18 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
equity”, the interdependence between<br />
agriculture and industry and the dilemma<br />
between the need for widening the<br />
market and the prevention of the abuse<br />
of monopoly power.<br />
Especially with regard to the abuse of<br />
monopoly power, let us also for example<br />
and for a moment keep in view economists<br />
and others who act like petty salesmen<br />
for the Commerce Ministry concept<br />
of SEZs. <strong>The</strong>se economists, both within<br />
state institutions and belonging to dubious<br />
NGOs, who on the one hand are the<br />
loudest ones to run the State down while<br />
singing the paens of the market, are the<br />
same ones on the other hand who are encouraging<br />
the worst abuses of monopoly<br />
power and the dismantling of the constitutional<br />
state in the name of SEZs. <strong>The</strong>re<br />
can be no greater irony than this. SEZs<br />
are best described as state encouraged<br />
rapacity by market players who cannot<br />
function in a market more even handedly<br />
regulated by the state and by a state<br />
that stands by the Indian Constitution<br />
and its protections for the rights of all<br />
citizens, be they poor peasants or workers.<br />
Those professing an almost evangelistic<br />
deal to have “growth at any cost”<br />
are oblivious to the principle that any<br />
abuse of monopoly power by the state in<br />
the name of the market, is a sure recipe<br />
that can take any nation however great it<br />
may be, including India, down a vortex of<br />
social instability and violence. This is the<br />
reality that is stares before us not only in<br />
the aftermath of Nandigram but in places<br />
like Mangalore, where fraud and deception<br />
is sought to used to divest people<br />
of productive agricultural land and create<br />
social tension and conflict. Finance<br />
Minister Chidambaram’s note of caution<br />
at the recent Indian Economic Forum<br />
that growth cannot be only for the top<br />
ten percent is not only a welcome note of<br />
caution but also an indication that<br />
policy making at the highest level is<br />
recognizing the larger objectives of<br />
economic growth.<br />
Such caution seems absent at the Commerce<br />
Ministry and most statements that<br />
emanate from the Commerce Ministry,<br />
including that of the Commerce Secretary<br />
seems not only totally oblivious to<br />
ground realities but a very unbalanced<br />
approach to economic growth priorities.<br />
While it is a matter of very deep concern<br />
as regards the long term implications for<br />
India of the SEZ route to rapid economic<br />
growth, the fact is that the disastrous<br />
nature of its implementation could actually<br />
bring down the government and the<br />
Congress Party to which belongs Mr.<br />
Kamal Nath the Commerce Minister<br />
whose Ministry seems to be recklessly<br />
spearheading the SEZ concept. Though<br />
all this may not happen before huge economic<br />
and social costs have accrued to<br />
the nation in terms of not only the accentuated<br />
conflicts it is going to engender<br />
but also in terms of the loss of revenues<br />
in terms of the state and loss of income<br />
and livelihood for thousands of people.<br />
In a globalised world where sovereignty<br />
is also at stake, the Commerce Ministry<br />
can try to run rough shod over all other<br />
Ministries including the Finance Ministry.<br />
However, what such deepening fissures<br />
in economic governance shows is<br />
the possibilities that exist for sections of<br />
the market to use one instrumentality of<br />
state, in this case the Commerce Ministry,<br />
to undermine the state as a whole<br />
and thereby society, showing the hollowness<br />
of arguments pitting market versus<br />
the state. In the end the greed and rapacity<br />
of the market can take both state and<br />
market together down.<br />
<strong>The</strong> challenge for the academic as well<br />
as working economist, for any person<br />
concerned about and engaged with public<br />
policy, is how even in these circumstances<br />
to focus on long term issues for<br />
the country as a whole. In the Indian<br />
context, what seems in my mind and<br />
echoing Sukhamoy Chakravarty, a key<br />
issue that is of great relevance for the immediate<br />
and the long term, is “a proper<br />
formulation of the role of knowledge as<br />
A key issue that is of great relevance for the immediate<br />
and the long term is “a proper formulation of the role of<br />
knowledge as a productive factor” and “institutional arrangements<br />
necessary for transition to a ‘learning society’<br />
a productive factor” and “institutional<br />
arrangements necessary for transition to<br />
a ‘learning society’ ".<br />
Knowledge And <strong>The</strong> Learning<br />
Society<br />
Chakravarty refers to Simon Kuznets<br />
who was of the conclusion that in the final<br />
analysis, it was the growth of knowledge<br />
which was the most decisive characteristic<br />
of modern economic growth.<br />
Here Kuznets was not referring to technology<br />
alone but as Chakravarty puts it,<br />
“also of basic sciences which are increasingly<br />
having profound impacts on transformations<br />
in the sphere of production<br />
that are leading to changes in the international<br />
economy”. He warns us that a<br />
THE INDIA ECONOMY REVIEW<br />
19
REIMAGINING INDIA<br />
systematic underinvestment in science “is<br />
likely to be the result if the growth of science<br />
is left to competitive market forces”.<br />
He then refers to the “dilemma of ‘knowledge”,<br />
which he describes as that which,<br />
“pertains to the lack of compatibility between<br />
institutions which lead to the widest<br />
possible diffusion and utilization of<br />
knowledge and those which are particularly<br />
relevant for its creation in the very<br />
first instance”.<br />
If you need active, democratic, broader<br />
socially based, natural resource sustaining<br />
and future oriented policy, you<br />
need to create the intellectual environment<br />
for it. This then means better and<br />
more funding for research, in both the<br />
social sciences and natural sciences, especially<br />
in our universities. It is commendable<br />
that the 11th plan visualizes a<br />
massive investment in a whole new generation<br />
of advanced higher education<br />
institutions but existing universities do<br />
not adequately figure in the plan. <strong>The</strong><br />
Finance Minister allocating sums in his<br />
annual budget to Universities is also a<br />
good and welcome sign.<br />
<strong>The</strong> second theme that I would like to<br />
pick up and highlight from Sukhamoy<br />
Chakravarty’s prodigious output of his<br />
intellectual labour for economics and the<br />
country, is that relating to social learning,<br />
social innovation and questions regarding<br />
when do societies really become<br />
‘learning societies’. To a certain extent,<br />
in my view, it relates to the larger noninstitutional<br />
aspects of knowledge, unlike<br />
above where I partly referred to the<br />
institutional conditions for ‘knowledge’<br />
and ‘learning’. <strong>The</strong>re is also the other<br />
aspect of our ability to learn from other<br />
societies. In referring to the question of<br />
‘learning society’, we are dealing with<br />
broader questions of Human Resources<br />
Development and which are critical and<br />
particularly relevant where we stand today<br />
in our nation’s history. Knowledge in<br />
the perspective of Chakravarty needs to<br />
be seen as a public good. One could say,<br />
that in spite of all the middle class parlour<br />
talk and fashion for criticizing Nehruvian<br />
– Mahalanobis (N-M) strategy,<br />
it did give us a higher initial level of<br />
knowledge to start with. Chakravarty<br />
while objective and critical of the N-M<br />
strategy shows its validity and contribution<br />
also. On the second aspect, that of<br />
knowledge being widely shared, this is<br />
where we as a highly caste-ridden and<br />
hierarchical society, have had our problems<br />
and also by and large inherited so-<br />
<strong>The</strong>re is an extra-ordinarily rich harvest of ideas from<br />
Sukhamoy Chakravarty’s writings and how we can go<br />
beyond the dichotomies of market and state, to address<br />
urgent and needed tasks of creating ‘a learning society’<br />
cially serious failures also.<br />
Other than these broad based requirements<br />
and aspects related to creating a<br />
dynamic learning society, that can be<br />
self-sustaining and sustainable, in an<br />
economic, ecological and social sense,<br />
there are other related aspects. Some of<br />
this is related to problems such as technology,<br />
its adaptation, innovation, use<br />
and dissemination. Chakravarty is of the<br />
view that while TNCs do bring technology,<br />
we have to seriously consider whether<br />
it will in fact “lead to a significant<br />
accretion of technical knowledge appropriate<br />
to Indian conditions”. So the creation<br />
and promotion of the conditions for<br />
a learning society, is not just to import<br />
and imitate but also to adapt and contextualize.<br />
Chakravarty with reference to<br />
technology adaptation says how it is,<br />
“more appropriate to the factor endowments<br />
of developing countries deserve<br />
very close considerations”; then adds a<br />
very important qualifier, “it would be<br />
most inappropriate to leave questions of<br />
adaptation to technologists alone” and<br />
the overall macro-economic framework<br />
must be also made conducive to the process<br />
of adaptation. Finally, his other related<br />
and important point, that “given<br />
the contemporary trends in technology,<br />
it is important to allow for a theory of<br />
‘knowledge’ production and dissemination”.<br />
<strong>The</strong>re is an extra-ordinarily rich<br />
harvest of ideas and practical policy options<br />
from Sukhamoy Chakravarty’s writings<br />
and how we can go beyond the dichotomies<br />
of market and state, to address<br />
urgent and needed tasks of creating ‘a<br />
learning society’. Time and space does<br />
not allow us to go, into further discussion<br />
and elaboration in this area. In sum, one<br />
can only say that we need to see how to<br />
bring ‘knowledge’ and ‘learning’, as two<br />
very critical aspects of not just economic<br />
growth, but for economic, social and cultural<br />
progress in large and complex developing<br />
societies as ours. It would be a<br />
mockery and travesty to reduce such<br />
unique, rich and diverse societies as ours,<br />
to narrow and limited frameworks of<br />
‘state versus market’.<br />
Comparative Development And<br />
Governance<br />
<strong>The</strong> renowned, ecological and environ-<br />
20 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
mental economist, Herman Daly in his<br />
writings points to the current dilemmas<br />
of economic planning under globalization<br />
wherein comparative advantage has<br />
become absolute advantage, in a situation<br />
of greater integration of economies<br />
and the attempts by powerful countries<br />
to have absolute advantage as regards<br />
trade and investment. Sukhamoy Chakravarty,<br />
with great perspicacity already in<br />
the 1980s pointed to two necessary directions<br />
of theoretical efforts for development<br />
economics in developing countries.<br />
Firstly he had called for “a deeper study<br />
of economic organization from the point<br />
of view of ensuring creativity, growth and<br />
equity” and went on to add that “earlier<br />
discussion of the market versus the Plan<br />
was much too crude”. Secondly and<br />
which is very relevant to our discussion<br />
here, is that “we should possibly reorient<br />
the study of international economics<br />
from its preoccupation with problems of<br />
comparative advantage based on internationally-immobile<br />
primary factors,<br />
towards a study of processes based on<br />
internationalization of capital, changes<br />
in income distribution and the resulting<br />
variations in sectoral productivity levels<br />
which give rise to the emergence of a<br />
process of uneven world economic<br />
growth”. Sukhamoy Chakravarty’s reference<br />
to uneven growth on a world scale<br />
has much relevance even within our<br />
country, in the context of current economic<br />
growth patterns and growth models<br />
dependent and unleashed by globalization,<br />
which in turn are producing very<br />
uneven growth across the country. Thus,<br />
producing income inequalities not only<br />
between groups and individuals but also<br />
between states and regions as a whole<br />
and which has serious implications for<br />
national growth as a whole.<br />
Amartya Sen, similarly has argued (including<br />
in his joint book with Dreze),<br />
“that the success of liberalization and<br />
closer integration with the world economy<br />
may be severely impaired by India’s<br />
backwardness in basic education, elementary<br />
health care, gender inequality<br />
and limitations of land reforms”. He goes<br />
on to say, “While Manmohan Singh (previously<br />
as Finance Minister) did initiate<br />
the correction of governmental over-activity<br />
in some fields, the need to correct<br />
governmental under-activity in other areas<br />
has not really been addressed”. Amartya<br />
Sen’s states that Manmohan Singh,<br />
considered to be the architect of India’s<br />
economic reforms, “stood solidly for<br />
critical scrutiny of the empirical picture,<br />
rather than a large reliance on theory”<br />
and adds that “it would be in the tradition<br />
of his (Manmohan Singh’s) research<br />
to point out that the relevant picture includes<br />
– in the context of the east and<br />
south-east Asian success stories – not<br />
just an orientation towards exports but<br />
also widespread public efforts in basic<br />
education, public health care, female independence,<br />
land reforms, and other<br />
components of social infrastructure”.<br />
Amartya Sen points out that the South-<br />
East Asian and East Asian countries<br />
share conditions “that are particularly<br />
favourable to widespread participation<br />
of the population in economic change.<br />
<strong>The</strong> relevant features include high rates<br />
of literacy, a fair degree of female empowerment,<br />
and quite radical land reforms”.<br />
He then goes to ask the basic<br />
questions that many market-oriented<br />
economists have not had the courage or<br />
honesty to ask, or have even been deeply<br />
uncomfortable when faced with these<br />
questions. Amartya Sen asks, “Can we<br />
expect in India results similar to those<br />
that the more socially egalitarian countries<br />
have achieved, given that half of the<br />
Indian population (and two-thirds of the<br />
women) are still illiterate, that the female<br />
empowerment is very little achieved in<br />
most parts of India, that credit is very<br />
hard to secure by the rural poor, and that<br />
land reforms remain only partially and<br />
We need to seriously study ‘comparative development’<br />
between us and other economies especially in East and<br />
South East Asia to make the correct conclusions<br />
about the role of state and markets<br />
unevenly executed?”<br />
In the foregoing arguments that I have<br />
put forward buttressed by the views of<br />
eminent economists like Amartya Sen,<br />
the point I am emphasizing is that<br />
progress in economic development and<br />
growth cannot be achieved just by putting<br />
up the state against the market, both have<br />
a role and in many instances have even a<br />
synergetic role to play. I go further and<br />
advocate that we need to seriously study<br />
‘comparative development’ between us<br />
and other economies especially in East<br />
THE INDIA ECONOMY REVIEW<br />
21
REIMAGINING INDIA<br />
and South-East Asia to make the correct<br />
conclusions about the role of state and<br />
markets and to have the pragmatic approach<br />
to use both. Instead what we have<br />
today is simplistic journalistic comparisons<br />
to other economies and often to<br />
only advance the point that in other cases<br />
cited, they have been more market<br />
friendly than the Indian state has been.<br />
What one witnesses, especially in the<br />
popular press and in TV business programmes,<br />
are almost illiterate comparisons<br />
by journalists to other countries and<br />
societies in East and South-East Asia<br />
without any reference to their history or<br />
a deeper understanding of these societies.<br />
<strong>The</strong> comparisons are like frozen in<br />
time and are snapshots of the present<br />
without any reference to how they have<br />
come there. Unfortunately academics<br />
also, instead of making up for their lack<br />
of knowledge of Asian societies, in an<br />
incestuous manner quote these journalistic<br />
comparisons when for example there<br />
is opposition to the entry of TNCs to the<br />
retail trade or to the coercive attempts to<br />
deprive people of their land and force<br />
SEZs down the throat of unsuspecting<br />
citizens. In contrast what we seriously<br />
and urgently need is the building of institutional<br />
capacity to study comparative<br />
development between India and other<br />
developing countries especially in the<br />
Asia and Pacific region and focused on<br />
different aspects of economy, society,<br />
social policy and in general the shaping<br />
of public policy. In a sense the old institutional<br />
arrangements that exist in most<br />
of our universities in the form of area<br />
studies and associated centres and departments<br />
may have to be revisited and<br />
both existing capacity strengthened as<br />
well as new capacity created.<br />
An important dimension of generating<br />
knowledge on comparative development<br />
is to link with governance and understanding<br />
governance related issues. Keeping<br />
in line with what has been said earlier<br />
in this paper about the centrality of governance<br />
to ensure growth that can be socially,<br />
culturally and ecologically sustained,<br />
research and studies need to be<br />
done not only comparing India and Asian<br />
countries but also comparisons within<br />
India between regions and states. Keynes<br />
had held that, “the theory of economics<br />
does not furnish a body of settled conclusions<br />
immediately applicable to policy<br />
Unfortunately academics, instead of making up for their<br />
lack of knowledge of Asian societies, in an incestuous<br />
manner quote journalistic simplistic comparisons down the<br />
throat of unsuspecting citizens<br />
and it is a method rather than a doctrine,<br />
an apparatus of the mind, a technique of<br />
thinking”. Comparative development, in<br />
contemporary times, almost two decades<br />
after the emergence of globalization, is “a<br />
technique of thinking’. Keynes was only<br />
echoing Marshall who in his Principle of<br />
Economics had long ago held the view,<br />
“economics is not a body of concrete<br />
wealth but an engine for the discovery of<br />
concrete truth”. Economists and social<br />
scientists in our country have much work<br />
to do to study and learn from other societies<br />
and in order to ensure that economic<br />
progress and development in our country,<br />
means a full human life for all our citizens<br />
not a situation of vulgar wealth mocking<br />
the inhuman conditions of existence that<br />
is the day to day reality for a very large<br />
number of our citizens. Only then India<br />
will be truly and respected for its greatness<br />
and the extraordinary cultural and<br />
philosophical wealth that it possesses.<br />
Otherwise, we will continued to be seen<br />
as a nation of hypocrites (even if no one<br />
for politeness does not say this to our face)<br />
and no amount of nationalistic jingoism<br />
and fanatical cultural nationalism will<br />
change our image or the situation we are<br />
in as a nation. It is therefore time that<br />
middle class intelligentsia, academics and<br />
intellectuals in India came to grips with<br />
this reality than delude themselves with<br />
false images of greatness.<br />
References<br />
• Sukhamoy Chakravarty, ‘Writings on<br />
Development, with an Introduction by<br />
Mihir Rakshit’, Oxford University<br />
Press, Delhi, 1997<br />
• Dreze, Jean and Amartya Sen, ‘India:<br />
Economic Development and Social<br />
Opportunity’, Oxford University Press,<br />
Delhi, 1995<br />
• Dreze, Jean and Amartya Sen (eds),<br />
‘Indian Development: Regional Perspectives’,<br />
Oxford University Press,<br />
Delhi, 1996<br />
• Amartya Sen, ‘<strong>The</strong>ory and Practice of<br />
Development’, in ‘Indias economic Reforms<br />
and Development-Essays for<br />
Manmohan Singh’, Isher Judge Ahluwalia<br />
and I.M.D.Little (eds), Oxford<br />
University Press, 1998<br />
• Amaresh Bagchi, ‘Role of Planning and<br />
the Planning Commission in the New<br />
Indian Economy: case for a Review’,<br />
Economic and Political Weekly, Bombay,<br />
November 3, <strong>2007</strong>.<br />
22 THE <strong>IIPM</strong> THINK TANK
D A R E T O D R E A M : S T R A T E G I C A L L Y ! I N N O V A T I V E L Y !<br />
Strategicw w<br />
July-September <strong>2007</strong>, <strong>Volume</strong> 1 <strong>Issue</strong> 3<br />
Innovators<br />
www.iipm.edu<br />
w . i i p m p u b l i c a t i o n s . c o m<br />
Rs.100<br />
Radical knowledge<br />
Re-structuring<br />
INSIDE THIS ISSUE<br />
20 STRATEGIC CHOICES: ANEEL KARNANI<br />
PROFESSOR OF STRATEGY, UNIVERSITY OF MICHIGAN<br />
How Indian firms can make better strategic choices &<br />
execute them to achieve true competitive advantages<br />
32<br />
ILLUSION & REALITY: ANDREW LIKIERMAN<br />
DEAN, LONDON BUSINESS SCHOOL<br />
How the success of an organisation is not reflected by<br />
its sheer <strong>size</strong>; rather it’s linked to shareholders’ returns<br />
40<br />
PR AND COMMUNICATION SYSTEM: DAVID NORDFORS<br />
SEMIOR RESEARCH SCHOLAR, STANFORD UNIVERSITY<br />
How communicators & journalists are “attention workers”<br />
driving the “innovation communication system”<br />
48<br />
ENTREPRENEURSHIP: ELIZABETH R. THORNTON<br />
PROFESSOR OF ENTREPRENEURSHIP, BABSON COLLEGE<br />
Unveiling the rich<br />
secrets behind those<br />
unanticipated strategic<br />
master-strokes<br />
Explaining the risks and returns behind many<br />
entrepreneurial motives to start their own businesses<br />
56 INDIA’S PATH TO INNOVATION: DR. DAN STEINBOCK<br />
DIRECTOR, ICT RESEARCH INSTITUTE<br />
On how India’s future depends on the private sector<br />
players becoming the highly-active innovation drivers<br />
AN AN <strong>IIPM</strong> <strong>IIPM</strong> INTELLIGENCE UNIT UNIT PUBLICATION
Pradeep Banerjee,<br />
Independent Consultant,<br />
Bangalore<br />
State And Market Conundrum In <strong>The</strong> Indian<br />
Context – A Need For Debates<br />
"Freedom is hammered out on<br />
the anvil of discussion, dissent<br />
and debate."<br />
-Hubert H. Humphrey<br />
A<br />
concern about the economy is<br />
one that has many a participant.<br />
<strong>The</strong> concern is expressed<br />
in the many debates that refer<br />
to this concern and it does so in a myriad<br />
of ways. It ranges from the animated<br />
to the scholarly, from the simple to the<br />
complex, and from the informed to the<br />
expected. <strong>The</strong>se discussions, then, have<br />
moved out of the confines of the political<br />
class and the academicians. It has<br />
moved in to include members of the<br />
larger civil society. In a manner of<br />
speaking, the debates have become a<br />
part of the discourse of the many participants.<br />
A favoured point in discussions<br />
and debates about the economy is<br />
that about the market. <strong>The</strong>se debates<br />
and discussions are more about the manner<br />
that markets envelope the society,<br />
and also about the manner in which<br />
markets relate to the individual. In some<br />
ways markets have come to be associated<br />
with helping men in their ‘desire of bettering<br />
(their) condition’. 1 That is a probable<br />
reason based on which markets<br />
have almost assumed a proxy for the<br />
economy. Markets, then, are structures<br />
that hold the interest of many. <strong>The</strong> grip<br />
on the interest accrues from a recognition<br />
that markets and human societies<br />
have moved in tandem over long periods<br />
of time now. It is the ubiquitous presence<br />
of the market that makes it an immediate<br />
point of reference. Markets<br />
existed before economists adopted analytical<br />
tools to work on this ubiquitous<br />
item of every day occurrence. Markets<br />
have been analyzed to understand their<br />
dynamics. Markets have been identified<br />
at a spatial level that on immediate reckoning<br />
looms large as structural constructs.<br />
So there are global markets<br />
where the sheer <strong>size</strong> is at once baffling.<br />
And then there are country level markets<br />
that operate using methods and<br />
processes to draw lines of conventions<br />
and lines of practice to retain an identity<br />
that is independent of the global<br />
mind sweep. <strong>The</strong> hierarchy of markets<br />
includes local markets and these local<br />
markets themselves may be larger than<br />
24 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
what can be provided for in a cognitive<br />
mind set of an individual. <strong>The</strong> calibration<br />
of markets using hierarchy, however,<br />
as the defining attribute, does not quiet<br />
capture all that what make up for markets.<br />
Markets as constructs have evolved<br />
and have changed with time moving<br />
from points at which barter was entered<br />
into to places where the magnitude is at<br />
once large and complex. <strong>The</strong> pattern of<br />
thinking and arriving at explanations<br />
that have accompanied these transformations<br />
have similarly changed course.<br />
What causes them and why these are<br />
useful to transactions in society, therefore,<br />
remain important issues. And these<br />
have been so for some time now if we<br />
exclude the antiquity from the purview.<br />
Arriving At A Framework Handy<br />
Enough For A Debate<br />
<strong>The</strong> market is not an island floating in a<br />
sea of societal events. <strong>The</strong> market is<br />
probably more like an iceberg that has<br />
a ninth of it unseen. <strong>The</strong>se are not institutions<br />
that occur in relative isolation.<br />
Instead these occur when commerce<br />
clearly engages the society as an activity<br />
that a society needs to engage itself<br />
with. Accordingly, and for instance, ‘the<br />
“Spirit” of Capitalism’, in a manner that<br />
Weber approached the issue and elaborated<br />
upon it, probably has a lot to do<br />
with the issue of markets. Weber was of<br />
course concerned with commerce, and<br />
the manner in which this activity<br />
emerged from after being confined to<br />
ethical pits for a long time and particularly<br />
during the Middle Ages and up to<br />
the beginnings of the modern period. As<br />
regards markets, these were accepted as<br />
a part of commerce for these went alongside<br />
commerce. Weber was writing in<br />
the 1890s and he referred to the term<br />
‘economic order’ to which both the individual<br />
and the enterprise had to comply<br />
with. If the modern period is identified<br />
with a pervasiveness of the economic<br />
order and in which compliance comes in<br />
as given, it was not so earlier. ‘<strong>The</strong> capitalist<br />
spirit’ Weber wrote, ‘has had to<br />
prove itself in a hard struggle against a<br />
world of hostile forces.’ 2 On matters related<br />
to the establishment of commerce,<br />
then, we would need to go an earlier author.<br />
Adam Smith in his <strong>The</strong> Wealth of<br />
Nations wrote of the manner in which<br />
feudalism underwent erosion. <strong>The</strong> erosion<br />
had to do with the establishment<br />
and the consequent spread of commerce<br />
and manufacture. <strong>The</strong> observations of<br />
Smith are relevant in yet another manner.<br />
<strong>The</strong> spread of commerce and manufacture<br />
brought in certain fundamental<br />
changes in the society. And finally it<br />
brought in the first hints of the involvement<br />
of the ruling elite in this spread.<br />
<strong>The</strong> Chapter was entitled tellingly “How<br />
the Commerce of Towns Contributed to<br />
the Improvement of the Country”. In it<br />
Smith wrote, ‘commerce and manufactures<br />
gradually introduced order and<br />
good government, and with them, the<br />
liberty and security of individuals.’ 3 <strong>The</strong><br />
rationale for the coming in of peace over<br />
that of warfare that were carried on by<br />
manor lords between themselves was<br />
traced to the declining influence of these<br />
manor lords over the sovereign. <strong>The</strong> surplus<br />
could now be expended on manufactories<br />
that commerce helped deliver<br />
for consumption. And Smith, who was a<br />
votary for individual efforts, once again<br />
empha<strong>size</strong>d on the ‘desire of bettering<br />
(their) condition’. Smith wrote that, ‘<strong>The</strong><br />
natural efforts of every individual to better<br />
his own condition, when suffered to<br />
exert itself with freedom and security, is<br />
so powerful a principle, that it is alone,<br />
and without any assistance, not only capable<br />
of carrying on the society to wealth<br />
and prosperity, but of surmounting a<br />
hundred impertinent obstructions with<br />
which the folly of human laws too often<br />
encumber its operations.’ 4 Smith had his<br />
reservations about commerce and those<br />
who practiced it, and yet he was emphatic<br />
on the impact that commerce and<br />
manufacturing had on society. On the<br />
whole the impact was good. <strong>The</strong>re is a<br />
primacy of economics in his statement<br />
Markets have almost assumed a proxy for the economy.<br />
Markets, then are structures that hold the interest of many.<br />
<strong>The</strong> grip on the interest accrues from a recognition<br />
that markets and human societies have moved in<br />
tandem over long periods of time now<br />
for he points out that the momentum<br />
generated could surmount the hindrances<br />
to progress. It is of these and similar<br />
hindrances that the referencing by Weber<br />
highlighted.<br />
<strong>The</strong> intermixing of politics and economics<br />
was clearly seen by others too<br />
and the emerging viewpoint clarified<br />
that the expansion of economics went<br />
along with an expansion of the political<br />
landscape. Of the many who wrote on<br />
this issue, Adam Fergusson (1723-1816),<br />
THE INDIA ECONOMY REVIEW<br />
25
REIMAGINING INDIA<br />
yet another Scot and identified with the<br />
Scottish Enlightenment, was articulate<br />
on the issue. In his An Essay on the History<br />
of Civil Society (1767), Fergusson<br />
wrote that, ‘It has been found, that, except<br />
in a few singular cases, the commercial<br />
and political arts have advanced<br />
together.’ 5 Fergusson maintained that<br />
the incidence of commerce was quiet<br />
engaged with the ways of nations and<br />
pointed out that, ‘In some nations the<br />
spirit of commerce, intent on securing<br />
its profits, has led the way to political<br />
wisdom’. 6 <strong>The</strong> point that was being made<br />
by Fergusson was received well and the<br />
text of the Essay on the History of Civil<br />
Society ‘found many enthusiastic readers<br />
in London, where it went through<br />
seven editions in Fergusson’s lifetime.’ 7<br />
It was an endorsement of the general acceptance<br />
of these thoughts and explanations<br />
about the working of the economy.<br />
<strong>The</strong> schools of German Philosophy<br />
tors who debated on a host of areas that<br />
were at once connected with the enquiries<br />
that Smith and Fergusson were working<br />
on. <strong>The</strong> transition was clearly visible<br />
and so much so that until the seventeenth<br />
century, the term economy did<br />
not quiet signify much and that university<br />
chairs were set up for studies in ethics<br />
and not that for economics. Smith<br />
himself was appointed as a professor of<br />
moral philosophy in 1752 and published<br />
<strong>The</strong> <strong>The</strong>ory of the Moral Sentiments in<br />
1759, years earlier to <strong>The</strong> Wealth of Nations<br />
which was published in 1776. <strong>The</strong><br />
transition was notable enough and<br />
It was reasoned that if the interests of these contending<br />
actors (Commercial class and State) were so intense, the<br />
resultant interactions could well be inimical to either of<br />
them and could therefore be a source of stress in the<br />
society. Hence, came the idea of civil society<br />
would also remain indebted to Fergusson<br />
for the term civil society, a term that<br />
would also be used here in connection<br />
with the market and the State.<br />
<strong>The</strong> contributions of Smith and Fergusson<br />
were important. <strong>The</strong>y helped<br />
recognize the reasons for commerce and<br />
further enabled recognition of an additional<br />
two domains that were relevant to<br />
matters of manufactories and commerce.<br />
<strong>The</strong>se were those of markets and that of<br />
States. <strong>The</strong>re were many more contribu-<br />
Watson points out that when Smith died<br />
‘after a life of intellectual adventure and<br />
social prudence’, a local newspaper complained<br />
in its obituary (4 August 1790)<br />
that he had ‘converted his chair of moral<br />
philosophy at Glasgow University into<br />
one of trade and finance’.’ 8 And while<br />
earlier in Britain ‘men argued that human<br />
nature rather than the state should<br />
govern economics’, matters changed<br />
course and the role of the state became<br />
clearer so much so that, ‘We should not<br />
forget that state intervention in the<br />
eighteenth century was very important<br />
to economic development and Smith<br />
never disagreed with this.’ 9 <strong>The</strong> debates<br />
initiated by thinkers such as Smith and<br />
Fergusson, among the many others, had<br />
initiated major long term changes. And<br />
if the stage was set for expansion of commercial<br />
trade and manufactories, their<br />
momentum was quiet clearly induced by<br />
debates that took place during these periods.<br />
Changes during the next period of<br />
the nineteenth century and those thereafter<br />
are testimony to the expansion that<br />
had been achieved by these nations.<br />
<strong>The</strong> Third Actor – Inclusion Of<br />
<strong>The</strong> Civil Society As Part Of<br />
<strong>The</strong> Triad<br />
<strong>The</strong> growth of these economies brought<br />
into sharp focus a number of developments<br />
that claimed for attention. <strong>The</strong><br />
rise of the commercial class with its<br />
members quiet clearly interested in their<br />
private interests and that of the State<br />
could expectedly raise the requirements<br />
of boundaries determining their spheres<br />
of operation. It was reasoned that if the<br />
interests of these contending actors were<br />
so intense, as it appeared to be, the resultant<br />
interactions could well be inimical<br />
to either of them and could therefore<br />
be a source of stress in the society. It is<br />
as an outcome of this concern that the<br />
idea of civil society came to be articulated.<br />
If the term civil society has been<br />
an old one, it is with John Locke (1632-<br />
1704), the Scottish Enlightenment<br />
group, and Georg Hegel (1770-1831) that<br />
the term came to be positioned more<br />
firmly and done so in the contextual format<br />
that includes the State and the market.<br />
Seligman observes that ‘what stood<br />
26 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
at the core of all attempts to articulate<br />
a notion of civil society in that period,<br />
and since, has been the problematic relation<br />
between the private and the public;<br />
the individual and the social; public ethics<br />
and individual interests; and individual<br />
passions, and public concerns.’ 10<br />
<strong>The</strong> organization of society being an endeavor<br />
of immediate concern, the inclusion<br />
of civil society as a building block is<br />
as relevant and in this context plays a<br />
normative role. Civil society as a normative<br />
ideal emerged, as Seligman points<br />
out to ‘as the result of a crisis in social<br />
order and a breakdown of existing paradigms<br />
of the idea of order.’ 11 <strong>The</strong> stress<br />
points and crisis refers to that between<br />
the State and individual interests. <strong>The</strong><br />
role of civil society has been assessed in<br />
these contexts, and to discharge which<br />
role civil society ‘is most usefully thought<br />
as identifying a set of human capacities,<br />
moral and political.’ 12 This is an effective<br />
expression to hold on to for assessing<br />
the impact of civil society when<br />
functioning as a part of the triad formed<br />
by the State, the market and the<br />
civil society.<br />
Spread Of Markets, Influence<br />
Of States And <strong>The</strong> Colonial<br />
Period In India<br />
It is a point that is made that the state of<br />
the economy in the earlier part of the<br />
eighteenth century in India was not so<br />
different as compared to that in Britain<br />
and other European countries. It is observed<br />
that the ‘economies of India,<br />
China, and other Asian regions in the<br />
early eighteenth century were not so different<br />
– hardly less sophisticated than in<br />
Europe’ and that ‘the economies of Britain<br />
and Europe accelerated after 1750,<br />
quickly outstripping those of India, China,<br />
Japan and the rest of Asia.’ 13 <strong>The</strong><br />
stirrings of the early differences began<br />
at some time during the seventeenth and<br />
the eighteenth centuries. <strong>The</strong> case study<br />
of India is an illustration of what occurred<br />
as a response to the emergent<br />
State and interactions between the State,<br />
the market and the civil society.<br />
<strong>The</strong> pre-colonial history of India has<br />
a continuity that is easily segregated<br />
from that of the beginnings of the arrival<br />
of commercial class from Britain<br />
and other European nation states to India<br />
in search of markets. This early history<br />
of travelers, merchants and those of<br />
the East India Company officials are<br />
that of commercial interests in search of<br />
markets. In various ways the State in<br />
Britain and those in other nations too<br />
emerged as supporters that enabled a<br />
deepening of interests. It is, however,<br />
the cessation of the Company rule and<br />
the initiation of the colonial rule by the<br />
State in Britain that the changes came<br />
into much sharper focus. This is expected<br />
inasmuch as the rule by the colonial<br />
State was qualitatively different from<br />
that by commercial interests in the form<br />
of the Company supported though the<br />
Company was by the State. Accordingly,<br />
while the early stages, and that prior to<br />
the proclamation transferring power to<br />
the State of Britain of the territory of<br />
India, offers a fascinating story of the<br />
manner in which the commercial class<br />
established its presence in the country,<br />
it is the firming up of the relationships<br />
under the State that is of relevance here.<br />
<strong>The</strong> response of the civil society to the<br />
colonial State was at once sharp and often<br />
provocative. Dadabhai Naoroji, the<br />
forefront spokesperson of the economic<br />
drain theory and who estimated the<br />
drain to be to the extent of ‘30,000,000<br />
to 40,000,000 a year’ did not find any<br />
issues with the ‘operations of economic<br />
laws’ as a cause behind this sorry state<br />
of India. Instead, he identified the British<br />
State and its policies that were the<br />
cause. Writing in 1880, Dadabhai pointed<br />
out that, ‘It is not the pitiless operations<br />
of economic laws, but it is the<br />
thoughtless and pitiless action of the<br />
British policy; … in short, it is the pitiless<br />
perversion of economic laws by the<br />
sad bleeding to which India is subjected,<br />
that is destroying India.’ 14 <strong>The</strong> point<br />
Dadabhai Naoroji, the forefront spokesperson of the economic<br />
drain theory and who estimated the drain to be to<br />
the extent of ‘30,000,000 to 40,000,000 a year’ did not<br />
find any issues with the ‘operations of economic laws’ as a<br />
cause behind this sorry state of India<br />
about the overreach by the State was not<br />
restricted to identifying that it was the<br />
role of the State, and the manner in<br />
which the State denuded the economy<br />
causing, that were the reason for the severe<br />
handicap faced by the populace of<br />
the country over which the State presided.<br />
A further issue was raised, and it<br />
was about the operation and influence<br />
of the colonial State as against that of<br />
the pre-colonial State. Dadabhai pointed<br />
out that under the suzerainty of the<br />
THE INDIA ECONOMY REVIEW<br />
27
REIMAGINING INDIA<br />
‘native despot the people keep and enjoy<br />
what they produce, though at times they<br />
suffer some violence in the back. Under<br />
the British Indian despot the man is at<br />
peace, there is no violence; his substance<br />
is drained away, unseen, peaceably and<br />
subtly – he starves in peace, and peaceably<br />
perishes in peace, with law and order!”<br />
15 This was a clear recognition of<br />
the differences among the type of States,<br />
and it was a rendition of practices that<br />
each of these States had on the economy.<br />
Dadabhai, a civil society member, was<br />
elaborating on the overreach by the<br />
State and the manner in which its hegemony<br />
overshadowed the development<br />
of indigenous commercial class. <strong>The</strong> focus<br />
of the drain theory was not on the<br />
underdevelopment of the commercial<br />
class per se. <strong>The</strong> State and Commercial<br />
interest were locked into a symbiotic relationship<br />
such as to benefit the British<br />
economy. <strong>The</strong> loss to the peripheral<br />
economy was a consequence. <strong>The</strong> indigenous<br />
commercial class moved forward<br />
instead on a stunted road.<br />
If the State arose as a means to reduce<br />
the violence among interacting individuals<br />
and groups, the colonial State quiet<br />
well performed on this attribute of Statehood.<br />
Dadabhai clearly recognized this<br />
at the empirical level and wrote about<br />
this while elaborating on the arrival of a<br />
more peaceful time over that which prevailed<br />
earlier. <strong>The</strong> peaceful time that<br />
the Colonial State brought in augmented<br />
an increase in economic produce in the<br />
form of raw material that the colonizing<br />
economy required as inputs to its produce.<br />
<strong>The</strong> peripheral economy also provided<br />
the market that the Commercial<br />
interests of the class in that economy<br />
required. <strong>The</strong> peace that came in was<br />
required for the market and yet there<br />
was no getting away from the fact that<br />
the Colonial State while engaged in doing<br />
so was engendering growth of the<br />
markets for the colonizing State. Dadabhai<br />
wrote that, ‘<strong>The</strong>re is security of life<br />
and property in one sense or way, i.e.,<br />
the people are secure from any violence<br />
from each other or from Native despots.’<br />
And yet this did not secure the economy<br />
from the drain that the colonial State<br />
had established. Accordingly, ‘What is<br />
secure, and well secure, is that England<br />
is perfectly safe and secure …to carry<br />
away from India, and to eat up in India,<br />
<strong>The</strong> State and Commercial interest were locked into a<br />
symbiotic relationship such as to benefi t the British<br />
economy. <strong>The</strong> loss to the peripheral economy was a<br />
consequence. <strong>The</strong> indigenous commercial class moved<br />
forward instead on a stunted road<br />
her property at the present rate of<br />
30,000,000 to 40,000,000 a year.’ 16<br />
So clear were the State and Market<br />
relationship recognized that other members<br />
of the civil society too expressed<br />
their dissension with the practices that<br />
emerged out of this relationship. Writing<br />
in the Indian People on 27 th of February<br />
1903, Sachidanand Sinha, pointed out<br />
that the effective administration practiced<br />
during the governance of Lord<br />
Curzon was more an outcome necessitated<br />
by the requirements of commerce.<br />
‘Trade cannot thrive without efficient<br />
administration’, wrote Sinha and adding<br />
that the ‘latter is not worth attending to<br />
in the absence of profits of the former.’<br />
Consequently, it is ‘always with the assent<br />
and often to the dictates of the<br />
Chambers of Commerce (that) the Government<br />
of India is carried on’. 17<br />
This is not a place for arriving at exhaustive<br />
details of the manner in which<br />
the colonial State worked around to address<br />
the requirements of the markets.<br />
Suffice it note that the thesis of Sate and<br />
market reinforcing each other is quiet<br />
clearly observable during this period<br />
and that the members of the Indian civil<br />
society had been able to identify this<br />
relationship. It was recognition of this<br />
relationship that brought the civil society<br />
to debate about the relationship and<br />
so as to arrive at what was required to<br />
change the coordinates of the relationship.<br />
It was the cohesion of the civil society,<br />
which over the years gathered<br />
members of the commercial class that<br />
prompted the building of alternative<br />
viewpoints of the manner that the economy<br />
should function. <strong>The</strong> subsequent<br />
participation by political parties as a<br />
joint effort brought in the transition<br />
from the colonial State to a State that<br />
was part of the Indian scenario. This<br />
constitutes the second issue that merits<br />
recognition and it is that of the civil society<br />
playing an important role in influencing<br />
the changeover from the earlier<br />
State mode to that of yet another one.<br />
Post-Colonialism And <strong>The</strong><br />
Search For New Paradigms<br />
<strong>The</strong> triad of State, market and civil society<br />
as it were during the colonial pe-<br />
28 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
riod came in for significant changes after<br />
the colonial period came to their end. In<br />
the Indian instance, their build up were<br />
influenced by the colonial forces. <strong>The</strong><br />
market that was more local in the precolonial<br />
period was not quiet so at the<br />
start of the post-colonial period. <strong>The</strong>re<br />
was the availability of a market economy<br />
enabled to a significant degree by a network<br />
of railway connection. <strong>The</strong> availability<br />
of a market economy is an important<br />
distinction, for it helps to make a<br />
transition from where an economy is to<br />
where it wants to reach in a manner that<br />
is akin to a transformation of the economy.<br />
In the Indian instance, Jha points<br />
out that the country at the start of its<br />
post-colonial journey was, among other<br />
countries, the one that was ‘best placed<br />
to make a transition quickly because it<br />
was the only country with a fully developed<br />
national market economy.’ 18 And<br />
yet at the end of about six decades of<br />
economic management, the changes in<br />
the economy is seemingly short of that<br />
which can be viewed as one of transformation.<br />
<strong>The</strong> economic transformation<br />
of India, it is contended, ‘has run into<br />
difficulties because it has gone too slow’,<br />
leading to an outcome that Jha refers to<br />
as ‘the paradox of India’s slow transition’.<br />
19 <strong>The</strong> presence of markets at this<br />
point in time came along with the presence<br />
of the indigenous commercial class<br />
too. As regards the State and the civil<br />
society, the changes recorded by these<br />
two actors require further exploration.<br />
<strong>The</strong> explanation lies in the specific historical<br />
experiences that the State and<br />
civil society underwent in the country.<br />
<strong>The</strong> dimensions of the market are<br />
easier to discern; it is not so with that of<br />
the State and the civil society. <strong>The</strong> involvement<br />
of the civil society in the colonial<br />
period with the colonial State gave<br />
rise to an important development unique<br />
in its own way and quiet different from<br />
that which the European instances<br />
record. In this case, there was a formation<br />
of a ‘we’ that was distinctly different<br />
from the State. It was the norm that nationalist<br />
movements would recruit their<br />
support of interested parties from<br />
among the intending participants in<br />
their cause. <strong>The</strong> goal was the removal of<br />
the colonial State. Towards this, the participation<br />
that was sought was from an<br />
increasing number of participants and<br />
even from those who were not quiet covered<br />
by the colonial State. <strong>The</strong> practitioners<br />
of nationalism, in other words,<br />
were making a case of representing the<br />
indigenous populace in all their domains<br />
of practice, be it economic or be it otherwise.<br />
<strong>The</strong> change from a colonial State<br />
to a nation State was carried out under<br />
the controlling interest of nationalism.<br />
This led to the formation of a State that<br />
was different from the colonial State.<br />
Characterizing this State, Kaviraj points<br />
out that the ‘secret of the immense power<br />
of the nation-states was not the inheritance<br />
from colonialism but from their<br />
nationalist mobilization.’ 20 <strong>The</strong> range of<br />
activities that the State could now command<br />
over was large and it now had the<br />
advantage of being a representative<br />
State that could speak for all. Note that<br />
this was distinct from the European instances<br />
where attempts were consistently<br />
made to sustain different domains<br />
for the State, the market and the civil<br />
society. <strong>The</strong> contributions of theorists<br />
who tried to find solutions to the problem<br />
of one of the actors in an overreach<br />
situation over the other the other two,<br />
and covered in the earlier part of this<br />
essay, were directed to this end. In the<br />
evolving model that had emerged in a<br />
post-colonial State, the overreach by the<br />
State was at the cost of the civil society.<br />
An outcome of the influence of the nation State during<br />
the post colonial period, upon most matters that<br />
the nationalists had embedded their positions on in the<br />
colonial period, was that the State took on contingent<br />
responsibilities in a number of activities<br />
An outcome of the influence of the nation<br />
State during the post colonial period<br />
on most matters that the nationalists<br />
had embedded their positions on in<br />
the colonial period was that the State<br />
took on contingent responsibilities in a<br />
number of activities. This meant a<br />
squeezing of the markets that the commercial<br />
classes in the society would have<br />
endorsed targeting for their growth. A<br />
large spread of influence and an inclusive<br />
control over economic activities can<br />
THE INDIA ECONOMY REVIEW<br />
29
REIMAGINING INDIA<br />
mean a slow down in pushing the economic<br />
agenda. A lesser reliance on market<br />
forces of the type that emerges as<br />
with a market economy and coupled with<br />
an intensifying bureaucratization of<br />
processes can bring in a slow down making<br />
the transition that much more difficult<br />
to execute. Bhagwati points out to<br />
the overhang of the State leading to ‘the<br />
inability to trust the market when scarcities<br />
are acute and the tasks are challenging’.<br />
21 <strong>The</strong> impact of this overhang on<br />
the market had certain long term effects<br />
for the practices of the State in the economic<br />
sphere. A ‘combination of industrial<br />
licensing and controls at home with<br />
import and exchange controls externally,<br />
effectively cut off rigours of competition<br />
from all sources and made the creation<br />
of a rentier, as against an entrepreneurial,<br />
economy more likely.’ 22 An overhang<br />
of this type has an adverse impact on the<br />
creation of the market and on agents, or<br />
entrepreneurs, who constitute an important<br />
part of the market. <strong>The</strong> movement<br />
from early post-colonial period and into<br />
latter day envisages the highs and the<br />
lows of the State and its influence on the<br />
economy and the polity. This has not<br />
been a period of the routine; it has instead<br />
been a period that can be characterized<br />
by the term ‘change’.<strong>The</strong> economy<br />
progressed from early reaching of<br />
high notches as at the end of the early<br />
plans, to a leveling of the growth and<br />
whereby the economy was described as<br />
one that was inflicted by a Hindu rate of<br />
growth. <strong>The</strong> economy periodically recorded<br />
weaknesses in its ability to deliver<br />
as much as was demanded of it. In<br />
a manner of speaking the overstretched<br />
State which depended on large scale<br />
controls to be able to deliver the promises<br />
that were made now faced road<br />
blocks in its way forward. <strong>The</strong> liberaliza-<br />
<strong>The</strong> process of debate is augmentative. <strong>The</strong> need is to<br />
engage the State by the civil society. Debates are expected<br />
to enhance an understanding of the way that the intricate<br />
relationships between the triad of actors and also to help<br />
determine the way forward from the current relationship<br />
tion of the 1990s and thereafter, accordingly,<br />
focused on dismantling the economic<br />
controls that had been instituted<br />
during the course of the journey after<br />
independence. <strong>The</strong> growth rates that<br />
have been realized, and the prospects<br />
that have come to be expected, has<br />
prompted a re-look yet again at what<br />
could be the best solution for moving<br />
forward. <strong>The</strong> market has expectedly become<br />
an arena to be looked into with<br />
more than usual interest.<br />
Debates Are Contributive<br />
We started with the observation that the<br />
debate on the market has progressed<br />
beyond the confines of the few. It now<br />
includes the many instead, and this for<br />
the simple reason that the market concerns<br />
all. Markets, then, turn out to be<br />
constructs that are influenced by the<br />
manner in which economic activities are<br />
handled in society. Markets have that<br />
quality which encourages the many to<br />
arrive at answers about its construct.<br />
This happens because of the relationship<br />
that individuals have with the market.<br />
This is important because it also<br />
brings in the role of democracy and following<br />
the adoption of which there is an<br />
influence by members of society who opt<br />
for a political governance of the type<br />
that is shaped by this political mode of<br />
participation. It is about the influence<br />
that civil society has on the political terrain<br />
and also about the influence that<br />
civil society can have on that terrain.<br />
<strong>The</strong> influence that matters in the context<br />
that has been drawn out here is that on<br />
the State and Market relationship and it<br />
is here that the influence could be one<br />
of moving forward such that the outcome<br />
is that of consensual gain. <strong>The</strong><br />
political influence that leads to the<br />
putting up of a confrontationist barrier<br />
is of negative consequence. It is here<br />
that the process of debate is augmentative.<br />
<strong>The</strong> need is to engage the State by<br />
the civil society. <strong>The</strong> debates are expected<br />
to enhance an understanding of the<br />
way that the intricate relationships between<br />
the triad of actors, namely, the<br />
State, the market and the civil society<br />
works and also to help determine the<br />
way forward from the current status of<br />
existing relationship. A preponderant<br />
30 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
reliance on the market can be debilitative<br />
as much as one on the role of the<br />
State to work as the redeemer in view of<br />
its spread and involvement in a majority<br />
of human spheres of activities. A civil<br />
society that is built on representing sectional<br />
interests is yet again a handicap.<br />
<strong>The</strong> rationale for debates into and about<br />
the interacting relationships is expected<br />
to yield a better perspective about actions<br />
to be taken. In a maturing political<br />
economy, these debates are important<br />
given that ‘these debates form parts of<br />
a collective reflection on the nature of<br />
the conditions which political democracy<br />
requires to take root and flourish.’<br />
23<br />
<strong>The</strong> market, as it stands, is but a construct.<br />
Taken by itself the market could<br />
be amoral. It is constructed best, and<br />
functions so, when it is mediated by the<br />
State in terms of the coordinates set up<br />
by the civil society. To say so is not to<br />
reduce the entirety of the State, market<br />
and civil society complex as an outcome<br />
of an instrumentalist intervention.<br />
For doing so is not even a good<br />
theoretical exercise, leave alone a matter<br />
of practice.<br />
<strong>The</strong> State and market conundrum is<br />
an intricate issue and particularly so in<br />
an economy that has had a past of the<br />
type that India has. It is that debates<br />
would address complex body made up<br />
by the State, the market and the civil<br />
society the necessary enabling momentum<br />
to take those steps that would address<br />
needs of the society. That is why<br />
there is a need for debates. And as we<br />
have seen, there have been instances of<br />
such debates influencing the society.<br />
<strong>The</strong> Indian instance is not exempt<br />
from this.<br />
References<br />
1.<br />
Adam Smith in his ‘An Inquiry into<br />
the Nature and Causes of the Wealth<br />
of Nations’ pointed out that ‘an augmentation<br />
of fortune is the means by<br />
which the greater part of men propose<br />
and wish to better their conditions.’<br />
2.<br />
Weber, Max., ‘<strong>The</strong> Protestant Ethic<br />
and the “Spirit” of Capitalism and<br />
Other Writings’, Penguin Books, New<br />
York, 2002, p.15.<br />
3.<br />
Hirschman, A., ‘<strong>The</strong> Passions and the<br />
Interests – Political Arguments for<br />
Capitalism before Its Triumph’, Princeton<br />
University Press, Princeton,<br />
New Jersey, 1997, p.100.<br />
4.<br />
Ibid., p.103<br />
5.<br />
Ibid, p. 120.<br />
6<br />
. Ibid, p. 120.<br />
7.<br />
Watson, P., ‘Ideas – A History from<br />
Fire to Freud’, Widenfield & Nicolson,<br />
London, 2005, p.539.<br />
8.<br />
Ibid., p. 541. Watson herein refers to<br />
the work of Ian Simpson Ross, ‘<strong>The</strong><br />
Life of Adam Smith’, Oxford: <strong>The</strong> Oxford<br />
University Press, 1995.<br />
9.<br />
Ibid., p.541. In this elaboration,<br />
Watson refers to the work of Paul<br />
Langford, ‘A Polite and Commercial<br />
People’, Oxford University Press, Oxford,<br />
1989.<br />
10.<br />
Seligman, A., “Civil Society as Idea<br />
and Ideal”, in Chambers, S and Kymlicka,<br />
W’, (edited)., ‘Alternative Conceptions<br />
of Civil Society’, Princeton<br />
University Press, Princeton, 2002, pp.<br />
13-14.<br />
11.<br />
Ibid., p.14.<br />
12.<br />
Khilnani, S., “<strong>The</strong> development of<br />
civil society”, in Kaviraj, S and Khilnani,<br />
S, (edited)., ‘Civil Society – History<br />
and Possibilities’, Cambridge<br />
University Press, Foundation Books,<br />
2002, p. 25.<br />
13.<br />
Pomeranz, C., ‘<strong>The</strong> Great Divergence:<br />
China, Europe and the making of the<br />
Modern World Economy’, Princeton<br />
University Press, Princeton, 2000,<br />
quoted in Watson, P., Ibid.’ p.570.<br />
Also see Frank, Andre Gunder., Review<br />
of ‘<strong>The</strong> Great Divergence’, Journal<br />
of Asian Studies, at www.rrojasdatabank.org/agfrank/pomeranz.html,<br />
accessed on 19th November <strong>2007</strong>.<br />
14.<br />
Naoroji, Dadabhai., ‘Poverty and Un-<br />
British Rule in India’, p.216 and quoted<br />
in Chandra, B, Mukherjee, M,<br />
Mukherjee, A, Panikkar, K. N, and<br />
Mahajan, S., ‘India’s Struggle for Independence<br />
– 1857 – 1947, Penguin<br />
Books, 1991, New Delhi, p.97.<br />
15.<br />
Naoroji, Dadabhai., ‘Speeches’, p.389<br />
and quoted in Chandra, B et al., Op.<br />
cit., p.100.<br />
16.<br />
Naoroji, Dadabhai., ‘Poverty and Un-<br />
British Rule in India’, pp.224-25, Op.<br />
cit., p.99.<br />
17.<br />
Chandra, B et al., Op. cit., p.99.<br />
18.<br />
Jha, Prem Shankar., ‘<strong>The</strong> Perilous<br />
Road to the Market – <strong>The</strong> Political<br />
Economy of Reform in Russia, India<br />
and China’, Rupa and Company, New<br />
Delhi, 2002, p. 165.<br />
19<br />
. Ibid., p.165<br />
20.<br />
Kaviraj, S., “In Search of Civil Society”,<br />
in Kaviraj, S and Khilnani, S, (edited).,<br />
Op. cit., p. 314.<br />
21<br />
. Bhagwati, Jagdish., ‘India in Transition<br />
– Freeing the Economy’, Oxford<br />
University Press, New Delhi, 1994,<br />
page. 51.<br />
22<br />
. Ibid., p. 61.<br />
23<br />
.Kaviraj, S., “In Search of Civil<br />
Society”, in Kaviraj, Sudipta and<br />
Khilnani, Sunil, (edited)., Op. cit.,<br />
page. 323.<br />
THE INDIA ECONOMY REVIEW<br />
31
Anandajit Goswami,<br />
Associate Fellow, <strong>The</strong> Energy<br />
and Resources Institute (TERI),<br />
New Delhi<br />
Larger Market Role, Reduced<br />
Government Interventions – Is It A Misnomer?<br />
"Liberty is the only thing you<br />
cannot have unless you are<br />
willing to give it to others."<br />
-William Allen White<br />
<strong>The</strong> above title highlights some basic<br />
facets of the reformist changes that<br />
have taken place in India during<br />
the liberalization period. <strong>The</strong> “India Shining”<br />
campaign marked by stupendous<br />
growth rates of the economy owing to diversified<br />
market led reforms has created a notion<br />
of reimagination of India fraught by<br />
greater role of the market with less government<br />
intervention. But it is absolutely imperative<br />
to look onto other dimensions of<br />
the growth story before such a reimagination<br />
of India is well established. <strong>The</strong> following<br />
sections of this article would dwell upon<br />
some of those dimensions.<br />
<strong>The</strong> Growth Story<br />
We all know that the growth of the Indian<br />
economy has not followed the classical<br />
growth pattern as stated by many growth<br />
theorists like Solow where the growth of the<br />
economy starts from agriculture sector followed<br />
by its transmission to the manufacturing<br />
and services sector. In India’s case the<br />
larger part of the growth has been a result<br />
of service led growth. <strong>The</strong> growth in agriculture<br />
sector started with green revolution<br />
in Indian economy. <strong>The</strong>re after there has<br />
been a leap frogging jump in the growth pattern<br />
towards service sector during the period<br />
from 1990s till now without a subsequent<br />
growth in manufacturing sector. <strong>The</strong><br />
manufacturing growth has stagnated at the<br />
same time. According to recent estimates<br />
the share of service sector has increased to<br />
more than 50 percent of the GDP of the Indian<br />
economy whereas the sectoral share for<br />
agriculture in the GDP has dropped down<br />
to 16 percent. 1 Another factor that has contributed<br />
to the growth of Indian economy is<br />
the opening up of the economy through<br />
larger exports and imports. This has been<br />
evident in the double digit (close to 20 percent)<br />
growth rate in the export of principal<br />
commodities from India in the recent years.<br />
<strong>The</strong> trade policy (2004–2009) 2 of India also<br />
highlights the point of the growth of Indian<br />
economy by meeting export targets. Statistics<br />
show that our current account is in a<br />
deficit due to huge imports, which is balanced<br />
by capital account surplus. This has<br />
been triggered mainly by large amount of<br />
32 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
foreign institutional investments in the Indian<br />
economy. However at the back of all<br />
these shining stories, the cause for worry lies<br />
in another fact. Statistics show that although<br />
Indian GDP has grown at a rate of 7 percent<br />
– 8 percent and is hinting to touch a doubledigit<br />
figure of 10 percent 3 in recent times,<br />
the employment elasticity of the Indian<br />
economy has not grown proportionately<br />
with respect to the growth in GDP. Thus<br />
although income of the country has grown<br />
by one unit it has not increased the employment<br />
potential by one unit. Thus the growth<br />
has created inequality in the Indian economy<br />
which is a serious question at the backdrop<br />
of the service led growth. Studies also<br />
show that the sectoral inequality (Goswami<br />
A, Chakraborty P <strong>2007</strong>) across the Indian<br />
economy has also increased during the period<br />
of 1990–2003. So the question is in spite<br />
of market led reforms leading to growth in<br />
the economy why the growth has not been<br />
chanellised to tackle important developmental<br />
factors like growing inequality? <strong>The</strong><br />
next section highlights some of the factors<br />
which have contributed to this gloomy side<br />
of the India Shining Story.<br />
<strong>The</strong> Developmental Side<br />
<strong>The</strong> startling facts regarding development<br />
come with certain important numbers. Data<br />
shows that in spite of moving in a growth<br />
trajectory India’s ranking in Human Development<br />
Index is 126. 4 This is much lower<br />
than the rank, which many other developing<br />
countries with which India’s growth is being<br />
compared. Development has many dimensions<br />
like poverty, nutrition, fertility rates,<br />
mortality rates, access to safe water and<br />
sanitation. Statistics shows that although<br />
poverty rate (Head Count Ratio) in India is<br />
going down, the malnutrition index is going<br />
up. 5 <strong>The</strong> moot question is whether it is due<br />
to lack of access to public services and goods<br />
like safe water and sanitation or is it because<br />
of lifestyle changes. <strong>The</strong> infant mortality<br />
rates are still quite low in certain states like<br />
Orissa in India. <strong>The</strong> primary school drop<br />
out rates have not decreased to a large extent<br />
in some states and it has failed in some<br />
instances in Rajasthan largely due to institutional<br />
failures. <strong>The</strong> teacher attendances<br />
in primary schools have not improved in<br />
many rural parts of India. <strong>The</strong> mid–day<br />
meal programme has failed in some states<br />
like Rajasthan owing to corruption and governance<br />
failures. <strong>The</strong>se governance failures<br />
are reflected in the fact that according to the<br />
recent IFPRI report India stands out at 94<br />
in the Hunger Index and is below African<br />
countries like Burkina Faso, Zimbabwe<br />
whose ranks are 92 and 93 respectively. 6<br />
Some of the neighbouring countries of India<br />
like Srilanka (with a rank 69) are above India<br />
in the Hunger Index. Other than this, the<br />
Transparency International Report quotes<br />
India’s rank in corruption index as 74 7 that<br />
is quite dismal in comparison to many other<br />
growing developing countries like Taiwan.<br />
India has been very poor in implementation<br />
of contract also which is reflected in its position<br />
beyond 150 in the “Implementation of<br />
Contract Index”. 8 This shows that as a country<br />
we have been not been capable of implementing<br />
designed contracts. <strong>The</strong> next question<br />
is as a country, whether we have the<br />
economic freedom to implement contracts<br />
even in today’s context of booming GDP<br />
growth. As Prof. Amartya Sen brought out<br />
the concept of “Freedom for Development”,<br />
if on those lines one considers India’s development<br />
then the facts are not too striking.<br />
This is because India’s ranking in the “Economic<br />
Freedom Index” stands out at 104 9<br />
which is not an optimistic picture considering<br />
the growth and development of many<br />
other developing countries. Other than this,<br />
a World Bank report also shows that it takes<br />
much more time in opening and closing<br />
business in India in comparison to other<br />
countries of South Asia like Pakistan. This<br />
reduces the ranking of the country in the<br />
economic freedom index. According to a<br />
report 10 India ranked 69 in 2005 amongst<br />
141 countries by the rankings of “Economic<br />
Freedom of the World Report <strong>2007</strong>”. This<br />
index gives a relative picture of the countries<br />
in terms of how policies and institutions of<br />
countries stand out in economic freedom.<br />
Economic freedom according to this index<br />
includes indicators like “personal choice,<br />
voluntary exchange, freedom to compete<br />
and security of privately owned property”.<br />
Although India’s position has improved<br />
Statistics show that although GDP has grown at a rate of<br />
7-8% and is hinting to touch a double-digit fi gure of 10%<br />
in recent times, the employment elasticity of the Economy<br />
has not grown proportionately w.r.t. GDP growth<br />
from 89 (in 1990) to 69 (in 2005) in the ranking,<br />
it still leaves scope for lot of improvement.<br />
Domestic institutional structures will<br />
have a critical role to play in such upliftment<br />
of India’s ranking. <strong>The</strong> reason for highlighting<br />
these facts is that all the above-mentioned<br />
factors play a role towards the development<br />
of the country. A consideration of<br />
these factors is also important while moving<br />
in the service driven growth path of Indian<br />
economy. A large outcome of the index<br />
rankings of India is a result of the governance<br />
failures within the country. As the<br />
THE INDIA ECONOMY REVIEW<br />
33
REIMAGINING INDIA<br />
country grows it would be more important<br />
to build up institutions within India which<br />
are functional and proactive. <strong>The</strong> government<br />
has a very critical role to play in building<br />
up action oriented efficient institution<br />
structures and in implementing them. <strong>The</strong>se<br />
institutions have to facilitate the functioning<br />
of the market in an efficient way in certain<br />
segments of the economy to promote the<br />
growth of the Indian economy. This has to<br />
be facilitated by sound governance framework<br />
in Indian economy to address the developmental<br />
dimensions of India along its<br />
growth path. <strong>The</strong> next section briefly highlights<br />
the governance aspect.<br />
<strong>The</strong> Governance Aspect<br />
With regard to governance structure the<br />
important issue to ponder about is the role<br />
of the government market driven economy.<br />
In context of India, the role of government<br />
has to be efficient provisioning of public<br />
ment. This needs efficient functioning of<br />
the departments and the bodies associated<br />
with the basic infrastructure services. However<br />
the expenses for such provision of infrastructure<br />
and health care services should<br />
also be met through collection of taxes. <strong>The</strong><br />
tax collection policy has to be well targeted<br />
and progressive. This would mean that people<br />
with higher income would pay higher<br />
Market oriented growth is not a solution to the mitigation<br />
of this problem of conflicts. <strong>The</strong> role of a debating, progressive<br />
society holds the key towards this conflict resolution<br />
and for which government has to take a proactive role<br />
goods, services like safe, wider road networks,<br />
hospital services, water and sanitation<br />
services. In certain cases of such provisioning<br />
public private partnerships could be<br />
tried out in the form of concession, management<br />
contracts. <strong>The</strong> efficient functioning of<br />
these partnerships would again depend to a<br />
large extent on the nature and extent of implementation<br />
of such contracts, reduction of<br />
corruption in the process of awarding contracts.<br />
Efficient delivery of basic infrastructure<br />
services like safer roads, water and<br />
quality health care could tackle many of the<br />
developmental dimensions of the economy,<br />
which is lying at a dismal state at the mo-<br />
taxes for the provisioning of the infrastructure<br />
services for development. <strong>The</strong> key towards<br />
the success of this is the implementation<br />
mechanism which has to be monitored<br />
and reviewed from time to time. An accountability<br />
framework has to be brought in<br />
the governance structure for trickling down<br />
of growth of Indian economy towards development.<br />
This trickling down in simpler<br />
terms would mean provision of basic services<br />
like road, health care, water, information<br />
network to the rural areas of India.<br />
Along with that this would also mean provision<br />
of finance to the rural people for generation<br />
of economic activities and income<br />
for them.<br />
<strong>The</strong> growth of self-help groups and microfinance<br />
with favorable interest rate structure<br />
along with a reduction of intermediaries<br />
and informal lending could be one possible<br />
step in this direction. Larger penetration of<br />
banks, ATMs by allowing large number of<br />
players in banking segment could also be<br />
another step in this direction. However, this<br />
would need the support system of a governance<br />
framework, which would facilitate the<br />
efficient players to operate in the system.<br />
Market led growth thereby doesn’t necessarily<br />
mean a lesser government intervention as<br />
market led growth could often create a larger<br />
need for regulating the costs of growth so<br />
that growth could percolate and transit towards<br />
development of the society. Thus the<br />
importance of the government increases in<br />
that case with a change in its governance<br />
framework and operational structure. If this<br />
doesn’t happen then it could be termed as a<br />
failure of the governance framework, which<br />
could create disparities in the society<br />
through larger conflicts across sections of<br />
the society. <strong>The</strong> type and extent of these<br />
conflicts would vary from place to place and<br />
from region to region. <strong>The</strong>se could range<br />
from conflicts having their origin in caste<br />
discrimination (like the ones prevalent in<br />
Bihar) to conflicts, hatred originating from<br />
one section of the society, which has been<br />
deprived of the fruits of growth and development<br />
(like the ones in the North-Western<br />
parts of Andhra Pradesh, North-Eastern<br />
states of India). <strong>The</strong>re could be many other<br />
forms, but the two has been cited to bring<br />
out the role of the failure of governance<br />
framework in the development of a country<br />
even with the presence of a market driven<br />
growth. <strong>The</strong> caste driven conflict (ones in<br />
Bihar) could be because of corruption and<br />
the political system as well as an ineffective<br />
education system. <strong>The</strong> resource scarcity and<br />
developmental needs driven conflict (ones<br />
in Andhra Pradesh, North-Eastern states of<br />
India) could be because of a lack of governance<br />
framework to enable efficient distribution<br />
of resources between regions across<br />
India. Conflict resolution is an integral part<br />
of development of a country. It arises because<br />
of domestic failures and exists because<br />
of ineffective implementation of stated policies,<br />
contracts. Market oriented growth is<br />
not a solution to the mitigation of this problem<br />
of conflicts. <strong>The</strong> role of a debating, pro-<br />
34 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
gressive society holds the key towards this<br />
conflict resolution and for which government<br />
has to take a proactive role through an<br />
efficient functioning of the governance<br />
framework. However in this regard one<br />
should mention the role of an important arm<br />
of the governance framework of India viz.<br />
the Administrative Services. It is absolutely<br />
essential in India to create an accountability<br />
system for the civil servants of the country.<br />
Such accountability could be created by efficient<br />
reviewing and monitoring of the performance<br />
of the civil servants. <strong>The</strong> civil society<br />
has to take a proactive role in<br />
questioning the role of the civil servants of<br />
the country on a regular basis by monitoring<br />
of the performance of the civil servants,<br />
which has to be target oriented. One could<br />
also think of incorporation of efficient managers<br />
in different arms of governance of the<br />
country. <strong>The</strong> governance framework could<br />
be led by these managers and the research<br />
inputs for further direction for managers<br />
could come from civil society. <strong>The</strong>se are<br />
some of the roads, which have to be traversed<br />
in modification of the existing governance<br />
regime in India to translate the<br />
growth story of India into a larger developmental<br />
story also.<br />
Conclusion<br />
Thus it is clear from the above stated analysis<br />
that if India has to be reimagined it has<br />
to be done in a holistic way. Such a reimagination<br />
would include an efficient functioning<br />
of market along with an effective functioning<br />
of the government through reduction<br />
of corruption and rent seeking activities. It<br />
would also mean an effective governance<br />
framework which would mean government<br />
with a target oriented role towards reduction<br />
of corruption, hunger, death rates, school<br />
drop outs etc. It would also mean a proactive<br />
government, which contributes towards<br />
creation of a well debated progressive society<br />
through a reduction in conflicts across<br />
states of India. Thus given the paradigm of<br />
development in which India is moving, the<br />
time is apt to imagine future India with an<br />
efficient role of market in certain segments<br />
of the economy along with proactive, efficient,<br />
accountable government functioning<br />
to create a trickle down effect of the growth<br />
towards its development.<br />
End Notes<br />
1<br />
www.oecd.org/dataoecd/17/52/39452196.pdf<br />
2<br />
www.foreigntradepolicy.com/main_<br />
policy.htm<br />
3<br />
Emerging Structure of Indian Economy:<br />
Implications of Growing Inter -<br />
Sectoral Imbalances, T. S. Papola<br />
Director, Institute for Studies in Industrial<br />
Development, New Delhi, Presidential<br />
Address, 88 th Conference of <strong>The</strong> Indian<br />
Economic Association, Andhra<br />
University, Vishakhapatnam, <strong>Dec</strong>ember<br />
27-29, 2005; isidev.nic.in/pdf/presAdd_<br />
IEA05.pdf<br />
4<br />
http://hdr.undp.org/en/statistics/<br />
5<br />
Jha P & Negre M Indian Economy in the<br />
Era of Contemporary Globalisation:<br />
Some Core Elements of the Balance<br />
Sheet, www.macroscan.com/anl/may07/<br />
pdf/Indian_Economy.pdf<br />
6<br />
<strong>The</strong> Challenge of Hunger <strong>2007</strong> Global<br />
Hunger Index: Facts, determinants, and<br />
trends; Measures being taken to reduce<br />
acute undernourishment and chronic<br />
hunger, Bonn, October <strong>2007</strong>, published<br />
by Welt Hunger Hilfe, International Food<br />
Policy Research Institute, Concern<br />
7<br />
www.transparency.org/publications/gcr<br />
8<br />
www.adb.org/Documents/Fact_Sheets/<br />
IND.asp<br />
9<br />
www.heritage.org/research/ features/index/country.cfm?id=India<br />
- 15k -<br />
10<br />
“India ranks 69th in global economies<br />
freedom index”, 4 sep, <strong>2007</strong>, Economic<br />
Times. economictimes.indiatimes.com/<br />
articleshow/2337548.cms<br />
References<br />
• <strong>The</strong> Economic Times. economictimes.<br />
indiatimes.com/articleshow/2337548.cms;<br />
“India ranks 69 th in global economies<br />
freedom index”, 4 Sep, <strong>2007</strong>, accessed on<br />
1 st October <strong>2007</strong><br />
• Goswami, A. Chakraborty, P, Inequality<br />
in Indian Economy, Studies in Indian<br />
Economy, Vol. II/ edited by K. R. Gupta;<br />
New Delhi, Atlantic Pub., <strong>2007</strong><br />
• Jha P & Negre M Indian Economy in the<br />
Era of Contemporary Globalisation:<br />
Some Core Elements of the Balance<br />
Sheet , www.macroscan.com/anl/may07/<br />
pdf/Indian_Economy.pdf, accessed on 1 st<br />
Nov <strong>2007</strong><br />
• http://hdr.undp.org/en/statistics/ accessed<br />
on 30th October <strong>2007</strong><br />
• Welt Hunger Hilfe, International Food<br />
Policy Research Institute, Concern , <strong>The</strong><br />
Challenge of Hunger <strong>2007</strong> Global Hunger<br />
Index: Facts, determinants, and<br />
trends; Measures being taken to reduce<br />
acute undernourishment and chronic<br />
hunger, Bonn, October <strong>2007</strong>,<br />
• www.oecd.org/dataoecd/17/52/39452196.<br />
pdf accessed on 2 nd Nov <strong>2007</strong><br />
• www.foreigntradepolicy.com/main_policy.htm<br />
accessed on 2 nd Nov <strong>2007</strong><br />
• www.transparency.org/publications/gcr<br />
accessed on 2 nd Nov <strong>2007</strong><br />
• www.adb.org/Documents/Fact_Sheets/<br />
IND.asp accessed on 2 nd Nov <strong>2007</strong><br />
• www.heritage.org/research/ features/index/country.cfm?id=India<br />
- 15k – accessed<br />
on 2 nd Nov <strong>2007</strong><br />
THE INDIA ECONOMY REVIEW<br />
35
Amal Sanyal,<br />
Associate Professor,<br />
Lincoln University,<br />
Canterbury, New Zealand<br />
Governance, Market, Deprivation<br />
And <strong>The</strong> Political System<br />
"<strong>The</strong> care of human life and<br />
happiness, and not their destruction,<br />
is the first and only<br />
object of good government."<br />
-Thomas Jefferson<br />
A<br />
lot has changed in our economic<br />
institutions in the last<br />
two decades. <strong>The</strong>se changes<br />
have not made much impression on water,<br />
housing, healthcare and power for<br />
low income people, or on poverty. I<br />
strongly believe that these issues are<br />
similarly handled in pre- and post-reform<br />
and that this is a matter of the political<br />
system, which has not changed across the<br />
periods. To these issues it is extraneous<br />
if we have a globally integrated fullfledged<br />
market economy or an importsubstituting<br />
economy run by administered<br />
production and pricing. To address<br />
them properly we need governments to<br />
act pro-actively against deprivation. A<br />
necessary condition is to have governments<br />
formed with competent and<br />
public-minded persons. <strong>The</strong> present political<br />
system is not capable of producing<br />
such governments. We need a thorough<br />
political reform, not economic, to get<br />
such governments.<br />
I am not competent to discuss the political<br />
system or its reform possibilities.<br />
Given that this issue of the journal focuses<br />
on market reform, I explore if certain<br />
market reforms can play a catalytic<br />
role in reducing deprivation by either<br />
inducing change in the political system<br />
or in spite it. We can get such effects to<br />
a degree by ridding the government of a<br />
variety of governance tasks, i.e. by letting<br />
markets produce these services. My suggestions<br />
do not arise from an economist’s<br />
habit of preaching ‘market’ for the sake<br />
of the economy. Rather, it is a sort of<br />
preaching ‘market’ for the sake of the<br />
political system. I will focus entirely on<br />
market reforms in the provision of governance.<br />
Though I will mainly examine<br />
possible effects on the political system<br />
and deprivation, I will also elaborate on<br />
more general economic effects.<br />
<strong>The</strong> abstract notion of governance in<br />
practical terms involves production of<br />
services for individuals or communities.<br />
Depending on jurisdiction, central, state<br />
and local governments provide them.<br />
Principles are laid down by the legislature<br />
and production and delivery are<br />
36 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
managed by the executive. At the point<br />
of delivery it is handled by government<br />
offices and workers. Leaving aside defence,<br />
judicial service and policing, we<br />
are left with a bewildering variety of<br />
services that touch our everyday life.<br />
Need for them has appeared gradually<br />
with the evolution of governance and it<br />
was expedient for the government of the<br />
day to start producing them. But taking<br />
stock today, there is no strategic, technical<br />
or logistical reason why they can not<br />
be produced outside the government. On<br />
the other hand there is an important<br />
connection between these services and<br />
the political system. As I reason below<br />
their marketisation can improve our political<br />
system significantly. Further, for<br />
one class of services marketisation can<br />
directly alleviate deprivation, i.e. in spite<br />
of the political system.<br />
We expect three types of gain from<br />
these changes. More important are social<br />
and political. <strong>The</strong>re are of course<br />
economic benefits, though they come<br />
with adverse side effects which need to<br />
be addressed. In the social area, delegation<br />
can produce a significant dent on<br />
corruption. As long as government is the<br />
sole producer and provider, the delivery<br />
person can seek private money for service<br />
or speed. Replacing government by<br />
markets in governance can disable a<br />
large field of rent-seeking. Leaving that<br />
paid to police, bribes the public pays are<br />
to local, state and central government<br />
workers for governance services of this<br />
kind. <strong>The</strong>y can be mostly eliminated by<br />
moving them to the market and keeping<br />
the markets competitive. Improvement<br />
in the political system can come as a direct<br />
result of mitigation of corruption.<br />
Note that service at a government office<br />
can be as easily sped up by bribe as<br />
by show of political power. Those with<br />
right political affiliation easily jump<br />
service queues. Also, politicians reward<br />
people by getting their work done or<br />
sped up in return for vote or allegiance.<br />
This kind of favour is extremely valuable<br />
because certain services are indispensable<br />
for business, property, jobs, pension,<br />
healthcare, litigation, reputation or even<br />
freedom. Government workers who<br />
oblige politicians in this game expect reciprocation.<br />
Generally the return is<br />
through rewards related to their career—promotions,<br />
suitable placements<br />
and protection. This creates a second<br />
round effect on work culture as promotion<br />
gets detached from merit. It reinforces<br />
poor governance and allegiance<br />
to the political system.<br />
Through repeated feedback the nexus<br />
intensifies the corruption of politics. <strong>The</strong><br />
nexus itself becomes a stable feature<br />
rather than occasional. Given this stable<br />
relation, politics and political affiliation<br />
have emerged as the surest way of ‘getting<br />
things done’. Politics is now widely<br />
perceived as a tool for benefiting oneself<br />
rather than the community, country or<br />
nation. This image of politics leads to<br />
adverse selection in politics. Relatively<br />
competent people--- sure about their<br />
ability--- tend to stay away to avoid the<br />
stigma. At the same time those who have<br />
the taste and the ability to manipulate,<br />
subvert and criminalise tend to join politics.<br />
Obviously, we do not choose from<br />
among the best of Indians when we vote<br />
in elections. This leads to governments<br />
formed of the less competent and the<br />
corrupt. Reform that snaps the tie between<br />
politics and provision can have<br />
noticeable effect on the nature of our<br />
politics. We can also expect some direct<br />
effects on deprivation in spite of the<br />
apathy of the political system. Services<br />
like forestation, land recovery, bunding,<br />
dredging and de-silting of rivers, arid<br />
area programs etc. have direct impact on<br />
income and quality of life below and<br />
around the poverty line. <strong>The</strong>se services<br />
are under-produced in the present system<br />
and their production can be significantly<br />
increased by marketisation.<br />
On the economic side, we expect improvement<br />
in efficiency. Inefficiency of<br />
the present system shows as poor quality,<br />
Improvement of effi ciency would reduce cost and<br />
generate either taxpayers’ saving or release budgetary<br />
resource for worthwhile projects. <strong>The</strong>se overall gains<br />
will be attended with dislocation for some<br />
failure to deliver in time or to deliver at<br />
all. Cost far exceeds what is technically<br />
required. Part of the resources are<br />
drained through bureaucratic and political<br />
delay, inappropriate technology<br />
and overstaffing. Improvement of efficiency<br />
would reduce cost and generate<br />
either taxpayers’ saving or release budgetary<br />
resource for worthwhile projects.<br />
<strong>The</strong>se overall gains will be attended with<br />
dislocation for some. <strong>The</strong> most pronounced<br />
short run effect is that the government<br />
has to persuade some employees<br />
to retire. Some retirees would find<br />
employment in new outfits and others’<br />
retirement has to be financed from cost<br />
saving. If we go for this variant of reform,<br />
THE INDIA ECONOMY REVIEW<br />
37
REIMAGINING INDIA<br />
then the resource saving should be properly<br />
accounted and used strictly for alleviating<br />
adverse side effects.<br />
Model For delegation<br />
For ease of discussion I will arrange governance<br />
services into three groups. First<br />
are the services for individuals that are<br />
provided on demand. As far as the consumer<br />
is concerned, these are like any<br />
other private good that she or he uses<br />
exclusively. Getting a passport, a driving<br />
licence, a variety of registration, certification<br />
and so on are of this category. <strong>The</strong><br />
second group consists of services that are<br />
public goods by nature. Once produced<br />
and in place, any one can dip into their<br />
benefit and it is not possible to deny anyone<br />
access. Hence governance involves<br />
producing these services for whoever is<br />
interested and not for any one in particular.<br />
Examples are roads, bridges, street<br />
lighting and road maintenance and so<br />
on. People are quite aware of the usefulness<br />
of these services, but are prone to<br />
understate how much they would be willing<br />
to pay. <strong>The</strong> reason is so called ‘free<br />
riding’ – why pay if they can’t stop me<br />
from using it? <strong>The</strong> third group is a special<br />
class of public goods type services<br />
whose benefit most may not be aware of.<br />
Or, even if they are aware, most people<br />
put a low priority on them because the<br />
benefit appears distant and dispersed. I<br />
will call them pro-active governance<br />
services because the public may not generally<br />
press for them as they do for other<br />
public goods like roads or bridges. Some<br />
of these services may be directed at individuals<br />
but most are not directed to anyone<br />
in particular. When serving individuals,<br />
they produce large scale<br />
externality benefits. An example is a program<br />
of immunisation against a contagious<br />
disease. It saves an immunised<br />
person from the disease even as it reduces<br />
the chance of others getting it.<br />
More generally these services are not<br />
directed and are produced for the benefit<br />
of everyone at present and in the future.<br />
Examples are services like foresta-<br />
Services that are public goods by nature are thought to be an<br />
area where markets would fail to produce the right amount at<br />
the right cost even if markets are competitive to the hilt<br />
tion, dredging and cleaning of rivers,<br />
reforestation of hill sides, creating buffers<br />
at arid zones and so on.<br />
<strong>The</strong> three groups of services lend<br />
themselves to marketisation in different<br />
degrees and are amenable to different<br />
business models. <strong>The</strong>ir impact on corruption<br />
and the political system vary.<br />
Some have more impact on the political<br />
system while others have more<br />
positive and attending adverse side effects<br />
upon the economy.<br />
Individually Demanded Services<br />
Provision of an individually demanded<br />
service can be most easily transferred to<br />
markets. Unlike for public goods, its demand<br />
is easy to recognise. Because demand<br />
arises from the need of an individual<br />
who benefits from it alone, it can<br />
be priced. Also generally these services<br />
are not free under our present system.<br />
<strong>The</strong>y are either sold at a price or a fee is<br />
charged. <strong>The</strong>refore they can be sold like<br />
any item of consumption by private sellers.<br />
However, unlike a consumption item,<br />
some services are conditional on not only<br />
the price but also characteristics of the<br />
applicant or buyer. Suppose a registration<br />
service can not be sold to persons<br />
below 18 years. <strong>The</strong> selling organisation<br />
has to carry out the necessary verification.<br />
In fact part of the price accounts<br />
for the cost of verification of the applicant.<br />
Like clerks in government offices<br />
who currently provide these services,<br />
sellers are to be provided with relevant<br />
rules. <strong>The</strong>se rules should be made public,<br />
displayed prominently at service<br />
shops and should be mandated to be<br />
available on demand.<br />
What are the potential objections to<br />
this possibility? First, will the price remain<br />
reasonable? Yes, if firms are allowed<br />
to enter this business freely, their<br />
competition should keep price close to<br />
the cost of production and provision. In<br />
the present system government offices<br />
producing these services are over-staffed.<br />
It is easy to see that the cost of providing<br />
them would be significantly lower for private<br />
firms. <strong>The</strong> government often subsidises<br />
the price, which means that part of<br />
the true cost and whole of the cost of inefficiency<br />
of government offices is passed<br />
to the government budget for the tax<br />
payer to bear. Tax payers would be spared<br />
this in the suggested scenario. What if<br />
38 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
the market price turns out to be higher<br />
than what poorer applicants can bear? If<br />
the government means to help, sellers<br />
can be required to sell at lower price to<br />
some applicants and get the difference<br />
reimbursed by the government. Sellers<br />
will be required to verify an applicant’s<br />
claim to the subsidy as per guideline.<br />
What is the incentive of a seller to do the<br />
extra work rather than pass on to the next<br />
applicant? If a seller is not keen to service<br />
these applicants it will simply lose<br />
some business. Poorer buyers will move<br />
to other sellers.<br />
What do we gain by upsetting the<br />
present system? First, as I suggested<br />
above, is to reduce the space for rentseeking.<br />
It not only reduces the burden<br />
of bribes in an ordinary household’s<br />
budget, but cleans the environment of<br />
governance. As rent-seeking abates, the<br />
grip of politics on service provision too<br />
falls to that extent. <strong>The</strong> effect on political<br />
life can be easily appreciated. Second,<br />
resource spent on providing this<br />
item will come down close to what is necessary<br />
with present technology of provision<br />
and verification. This gain actually<br />
means saving of resources, which should<br />
be earmarked for supporting loss of government<br />
job and hardship. Private firms<br />
are also expected to innovate processes<br />
in order to increase profit margin. This<br />
would bring in improvement in speed<br />
and quality for service users.<br />
Universal Services Or Public<br />
Goods<br />
Services that are public goods by nature<br />
are thought to be an area where markets<br />
would fail to produce the right amount<br />
at the right cost even if markets are competitive<br />
to the hilt. Because people can<br />
not be excluded from such a service once<br />
it is produced, it is difficult to get them<br />
pay the right price -- that is price commensurate<br />
with the benefit. Knowing<br />
that the service is going to be available<br />
any way, no one would be too keen to pay<br />
the deserving price, however much someone<br />
needs it. If such a service were to be<br />
produced by private sellers, they would<br />
find much less than the true demand in<br />
the market. Production will be less than<br />
requirement. Because there is no way of<br />
getting the right price paid, these services<br />
are usually funded from taxes.<br />
However many services that are traditionally<br />
known as public goods have<br />
ceased to be really so. We now have technology<br />
to prevent using many of these<br />
services even when they are available to<br />
others. Toll gates at the ends of a bridge<br />
are now common. We also have toll gates<br />
at the end of newly-built highways. In<br />
many countries gates are operated electronically<br />
to prevent users from skipping<br />
the toll and employees from stealing toll<br />
money. We have the technology to separate<br />
payers and non-payers in much more<br />
complicated situation than the bridge or<br />
the highway example. In London any vehicle<br />
entering the central business district<br />
with many entry and exit points is<br />
automatically billed for entry in working<br />
hours. This is done without obstructing<br />
traffic flow. As soon as we have a lowcost<br />
way to exclude non-payers, the service<br />
becomes like a private good and we<br />
could be better off by delegating them to<br />
market operation. Several state governments<br />
have invited private firms to build<br />
roads and bridges and collect tolls for a<br />
stipulated number of years. A common<br />
uneasiness about marketisation of these<br />
services comes from the belief that tolls<br />
or similar fees are an encroachment on<br />
our private budgets. “Why should we pay<br />
for using roads and bridges at all?”—it is<br />
asked. <strong>The</strong> fact of the matter is that we<br />
pay and have always paid for similar services<br />
through taxes. Paying a road charge<br />
at the toll gate is definitely fairer than<br />
that because those who do not use a road<br />
do not have to pay.<br />
Much of this is happening in India as I<br />
remarked earlier. <strong>The</strong> point here is that<br />
this model can be extended over a larger<br />
variety of government services. Maintenance<br />
of public places, government offices<br />
and buildings, railway stations and<br />
property, tourist routes and spots, places<br />
Majority of the services that are traditionally known as<br />
public goods have ceased to be really so. We now have<br />
technology to prevent using many of these services<br />
even when they are available to others<br />
of historical interest and so on can be<br />
brought under this mode of operation.<br />
<strong>The</strong> basic toll-gate model of business of<br />
course requires adaptation depending on<br />
the service. Several imaginative improvisations<br />
are already in use in various<br />
countries. For example, in some instances<br />
the government may not want to<br />
charge individuals though it is possible.<br />
<strong>The</strong> government may decide to waive<br />
tolls along the road to a pilgrimage or<br />
not to charge visitors of historical and<br />
educational sites. In this case the government<br />
itself pays the bill to the business<br />
that produces the service. Users do ‘buy’<br />
THE INDIA ECONOMY REVIEW<br />
39
REIMAGINING INDIA<br />
entry tickets or toll stamps to keep account<br />
of the number of uses. But they buy<br />
it for free, and the bill is paid by the government.<br />
A useful improvement is to allow<br />
a market for these businesses, which<br />
lets an investor sell off, say a toll service,<br />
to a buyer with obligations and rights of<br />
the original contract. This facilitates entry<br />
and exit, allow firms to specialise in<br />
specific services by acquiring similar<br />
business in different places. Can we gain<br />
anything for the political system from<br />
marketisation of these services? Since<br />
these services are not individually demanded,<br />
there is no scope for bribes<br />
from individual buyers and hence no effect<br />
on the political system along the<br />
route discussed earlier. <strong>The</strong>se services<br />
however are a source of significant political<br />
corruption. Public goods are often<br />
gifted to a community before elections.<br />
Secondly when a sanctioned service gets<br />
delayed or stopped on the way it can be<br />
started or re-started only with lobbying.<br />
For urgent service local business or communities<br />
often collectively pay into party<br />
funds as part of lobbying. To stop these<br />
occurrences, of course marketisation<br />
alone is not enough. Whether a project<br />
or a service is taken up will continue to<br />
depend on the political system and hence<br />
on lobbying. But stoppage of work and<br />
allied corruption can be avoided to a<br />
large extent. Economic advantage of<br />
marketisation of these services merits<br />
separate mention. First, to match our<br />
current economic growth investment<br />
needed for infrastructure is beyond the<br />
government’s means. If the government<br />
insists on doing by itself the task will be<br />
either delayed or have to be done by borrowing.<br />
<strong>The</strong> cost of borrowing is raised<br />
from tax payers while in the suggested<br />
alternative it is substituted by toll paying<br />
users. Toll rates can be reduced as much<br />
as possible through competitive bids<br />
Pro-active services are particularly recommended for<br />
delegation to markets. While their impact on the political<br />
system could be marginal, they could help alleviate<br />
deprivation in spite of the political system<br />
from interested firms. Secondly, it is<br />
easier to assure quality of construction<br />
and subsequent maintenance under the<br />
market system. <strong>The</strong>y are to form part of<br />
the deal with the government who should<br />
enforce them strictly with penalty provisions.<br />
Because of the contractual nature<br />
of the obligation, there is no haziness<br />
about accountability when construction<br />
or maintenance is poor. This contrasts<br />
starkly with government provision, where<br />
it is nearly impossible to fi x responsibility<br />
for failure because of multiple agencies,<br />
hierarchical decisions and change<br />
of governments.<br />
Pro-active Services<br />
<strong>The</strong>se tasks are important and urgent<br />
but government organisations do a poor<br />
job. <strong>The</strong> primary reason is that assigned<br />
organisations do not have to face customers<br />
because there are no identifiable<br />
customers. Neither they nor the government<br />
or political parties are subject to<br />
any pressure for quantum, quality or<br />
speed. <strong>The</strong>se services are particularly<br />
recommended for delegation to markets.<br />
While their impact on the political<br />
system could be marginal, they could<br />
help alleviate deprivation in spite of the<br />
political system. At present markets for<br />
these services exist only in an odd, theoretical<br />
way. <strong>The</strong>re are no private buyers<br />
willing to pay. <strong>The</strong> government assumes<br />
a dual personality as both buyer and<br />
producer. It does not help because the<br />
government is only a buying agent, not<br />
a true buyer. It is expected to buy on behalf<br />
of a billion people who do not press<br />
for the services and billions more who<br />
are not even born. <strong>The</strong>re is no economic<br />
or political mechanism to keep the<br />
government interested. <strong>The</strong> result is too<br />
little production and poor quality.<br />
Whatever little is produced is produced<br />
indifferently. Inefficiency of government<br />
services is compounded here because of<br />
buyer apathy.<br />
Inviting private firms creates a group<br />
seriously interested in them--- as hotly<br />
interested as commercial firms are in<br />
their line of business. Firms specialising<br />
in these services take on the job of demand<br />
creation as part of their business<br />
agenda. <strong>The</strong>y produce media campaigns<br />
to generate public awareness of the urgency<br />
of the services and organise special<br />
interest groups that press on the<br />
political system. Some of these services<br />
40 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
like immunisation, social forestry, reforestation<br />
of hill sides or de-silting of waterways<br />
etc. have a direct impact on the<br />
livelihood and quality of life of the poor.<br />
By generating pressure from the demand<br />
side on the political system, marketisation<br />
can help to produce more of<br />
them and make a difference. We also<br />
gain from the supply side. Since producers<br />
are to make a profit at the end of the<br />
day, every rupee of taxpayer drawn into<br />
the work has to work efficiently. It may<br />
appear puzzling that there should be<br />
any scope for profit in these services. If<br />
the government were to do the job it is<br />
not expected to make a profit out of it.<br />
Taxpayers would then just pay for the<br />
cost. However that cost contains, as experience<br />
tells, not only the technically<br />
required cost but that of inappropriate<br />
technical and political choices, of bureaucratic<br />
delays, of coalition politics<br />
and above all of general inefficiency. For<br />
the same amount of money budgeted for<br />
a project, the suggested system promises<br />
to meet the stipulated quality and<br />
complete it in time with a profit to spare<br />
for the producers. In a sense the profit<br />
is hidden in the present system. It is enjoyed<br />
by bureaucrats and government<br />
workers not in cash but in kind. It takes<br />
the form of the luxury of slack work environment<br />
and unaccountability. It is<br />
this hidden profit that motivates private<br />
firms as much as it motivates some government<br />
workers to prefer jobs in these<br />
areas. <strong>The</strong> latter take it in kind while<br />
private business would convert it to cash<br />
profit. But the winner would be the public<br />
who would get more services, done in<br />
time at lower cost. To get this going we<br />
need to initiate a market-like environment<br />
by announcing that these services<br />
will be bought on the market. This will<br />
spawn an industry producing these services<br />
that will not only efficiently produce<br />
better quality service but also generate<br />
a demand side awareness to sustain the<br />
industry. United States, North Europe<br />
and Pacific countries like Japan, Australia<br />
and New Zealand have made big<br />
strides in the technology of environment<br />
protection and nurturing in the last decade.<br />
<strong>The</strong> business model generates ample<br />
incentive for cost-cutting, improvement<br />
of technology and research. A<br />
switch to this model could help us to<br />
make significant difference to the lives<br />
of lower income people and also reduce<br />
resource costs in the long run.
Nilanjan Banik,<br />
Associate Professor, Institute for<br />
Financial Management and<br />
Research (IFMR),Chennai<br />
<strong>The</strong> Economics Of Social Unrest –<br />
Its Causes And Cure<br />
"Injustice anywhere is a threat<br />
to justice everywhere."<br />
-Martin Luther King Jr.<br />
"Naxalite faction vows to avenge Nandigram<br />
killings"<br />
26 May <strong>2007</strong>, Times of India.<br />
Newspaper headlines, such as these,<br />
are not hard to find these days.<br />
<strong>The</strong> Naxalite movement takes its<br />
name from a peasant uprising which took<br />
place in May 1967 at Naxalbari – a place on<br />
the north-eastern tip of India situated in the<br />
state of West Bengal. Many believe that<br />
these fearsome Naxals are now in Nandigram.<br />
Although to a layman what is happening<br />
in Nandigram carries more political<br />
connotation there are some economics behind<br />
it. <strong>The</strong> purpose of this article is to examine<br />
the economics of social unrest.<br />
Nandigram is a case in point but the following<br />
arguments in general will have a broader<br />
implication for India as a whole. As is<br />
known, recently the Naxals have also expanded<br />
their area of operations (from their<br />
old pockets in West Bengal, Bihar and Andhra<br />
Pradesh in the 1970s) to new guerilla<br />
zones in other states like Orissa, Maharashtra,<br />
Chhattisgarh, Jharkhand, Madhya<br />
Pradesh and Uttar Pradesh. So what goes<br />
into making a militant? Actually, it is the<br />
socially deprived group of people who takes<br />
arm against the administration. Does the<br />
people are more socially deprived now than<br />
what they were before? We are considering<br />
the period before and after reforms. This<br />
benchmark is because of less militant activities<br />
during the period before reforms.<br />
Although there were few reforms during<br />
early 1980s, the all encompassing process<br />
of reforms started during 1991. We are defining<br />
reforms in terms of globalization and<br />
liberalization. Surprisingly, incidence of<br />
anti-government activities was less during<br />
the period before reforms. Surprising because<br />
then the average Indian in terms of<br />
economic well-being was worse off compared<br />
to what the people are now. For example,<br />
India’s GDP grew at an average rate<br />
of 3.5 percent until mid-1970s; it increased<br />
to 5.5 percent during the 1980s; and further<br />
to around six percent during the 1990s.<br />
During the last three years, Indian economy<br />
has recorded a growth rate of around nine<br />
percent per annum.<br />
42 THE <strong>IIPM</strong> THINK TANK
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Table 1: Poverty In India<br />
Population below Poverty Line (As per Expert Group Methodology) in India<br />
Sector 1973-74 1977-78 1983 1978-88 1993-94 1999-2000<br />
Population (Millions)<br />
Rural 261.3 264.3 252 231.9 244 193.2<br />
Urban 60 64.6 70.9 75.2 76.3 67<br />
Total 321.3 328.9 322.9 307.1 320.3 260.2<br />
Poverty Ratio (%)<br />
Rural 56.4 53.1 45.7 39.1 37.3 27.1<br />
Urban 49 45.2 40.8 38.2 32.4 23.6<br />
Total 54.9 51.3 44.5 38.9 36 26.1<br />
Source: Rural Development Statistics 2002-03, National Institute of Rural Development<br />
A reflection of this higher growth rate other hand, share of services sector in GDP<br />
also got reflected in terms of higher percapita<br />
income and lower poverty numbers. 1950-51 to 55 percent during 2006-<strong>2007</strong>.<br />
has increased from 29.80 percent during<br />
Measured in constant US 2005 dollars India’s<br />
per-capita GDP has increased from mained more or less constant at around 27<br />
<strong>The</strong> share of manufacturing sector has re-<br />
215 during 1975 to 293 during 1988 and further<br />
to 546 during 2005. Like wise, the pov-<br />
Now let us concentrate on the number of<br />
percent during post reforms era.<br />
erty number (measured in terms of head people who are earning their livelihood<br />
count ratio) has fallen from 42 percent during<br />
1987 to the present level of 26.1 percent. cent of the Indian population earns their<br />
from these three sectors. Around, 58.6 per-<br />
Measured by these numbers reforms have livelihood from agricultural and agricultural<br />
related allied activities compared to<br />
increased overall economic well-being.<br />
So where lie the problem? How can we less than 10 percent of the population earning<br />
their livelihood from organized services<br />
explain this anomaly of a rise in social unrest?<br />
<strong>The</strong> answer to this apparent puzzle lies sector (Table 4). What does it means? In<br />
in examining impact of reforms on income simple words, if the national income is Rs<br />
distribution. Reforms entail unequal payoff 100 then agricultural and allied activities<br />
to economic agents. People with more skill are contributing 18.5 percent of the national<br />
income, that is, Rs 18.5 compared to Rs<br />
stand to gain more compared to people with<br />
less skill sets (read, less productive people). 55 generated by the services sector. Income<br />
And this has resulted in more skewed income<br />
distribution (read, right skewed dentributing<br />
Rs 18.5 to 58.6 people (employed<br />
inequality becomes evident as it is like dissity<br />
function) leading to social unrest. <strong>The</strong> in agricultural sector) compared to distributing<br />
Rs 55 to less than 10 people (employed<br />
following two boxes will help us to analyze<br />
this scenario better.<br />
in organized service sector) or 23 people<br />
Looking at sectoral GDP share, we find (employed in both organized and unorganized<br />
service sector). What is more worrying<br />
that the share of agriculture has fallen from<br />
56.90 percent during 1950-51 to 18.5 percent<br />
during 2006-<strong>2007</strong> (Table 2). On the more as going by the latest data<br />
is that this inequality is going to increase<br />
agricultural<br />
sector is growing at an annual rate of 2.6<br />
percent compared to services growing at<br />
a rate of 11 percent. If the present trend<br />
continues, then share of agriculture in national<br />
income is to become a single digit<br />
number within the next 15 years<br />
– contributing more to inequality in<br />
income distribution.<br />
Table-2 complements Table-1 by throwing<br />
some more additional information. <strong>The</strong><br />
share of income generated by the agricultural<br />
sector is more volatile (measured by<br />
the variance of the growth rates) compared<br />
to manufacturing, services and overall GDP.<br />
Uncertainties associated with income have<br />
two specific outcomes: postponement of<br />
investment decision and migration. As is<br />
evident from Table-4 because of fluctuating<br />
agricultural income level of investment<br />
is also least in the agricultural sector. Postponement<br />
of investment decisions have<br />
bearing on future income and reduce future<br />
expected earning from the sector. This is<br />
one way to contribute to the burgeoning<br />
disparity in earnings across sectors. <strong>The</strong>re<br />
is another way and that has to do with migration.<br />
Uncertainty associated with volatile<br />
income leads to migration. As ‘expected’<br />
return in the urban sector (dominated by<br />
the services sector) is higher than ‘actual’<br />
return in the agricultural sector, migration<br />
happens. However, many migrating labors<br />
lack adequate skills for finding<br />
meaningful employment in the services<br />
sector. Consequently, these unemployed<br />
people find add to a higher skewed<br />
income distribution.<br />
Now let us examine why are the workers<br />
in the services sector, especially in the organized<br />
services sector, like, banking, telecommunication,<br />
teaching, medical, legal,<br />
etc., are making so much money relative to<br />
the agriculture workers. For that one has to<br />
THE INDIA ECONOMY REVIEW<br />
43
REIMAGINING INDIA<br />
Table 2: Reforms And Income Generation<br />
Components 1950-51 1960-61 1970-71 1980-81 1990-91 1995-96 2004-05 2006-07<br />
Agriculture and<br />
allied activities<br />
56.90 46.74 46.07 38.86 31.27 28.24 21.13 18.5<br />
(2.6%)!<br />
Industry 14.28 19.46 20.65 24.50 27.64 28.12 27.15 26.4<br />
(10.4%)<br />
Services 29.80 34.30 33.66 36.64 41.10 43.64 51.72 55<br />
(11%)<br />
Source: Reserve Bank of India (2006) and Central Statistical Organization (2006)<br />
examine the productivity data. <strong>The</strong> growth<br />
theory literature tells us that more productive<br />
countries tend to prosper more compared<br />
to the less productive ones. If market<br />
is determining the pay-off, same kind of<br />
argument holds true within a country but<br />
across its laborers. So it makes sense to look<br />
at labor productivity data in India. Figure 1<br />
gives a glimpse of sector wise labor productivity<br />
growth in India. Output per worker in<br />
the services sector grew at a rate of seven<br />
percent during 1993-99, compared to only<br />
2.7 percent during the previous decade. <strong>The</strong><br />
performance of the labor productivity in the<br />
manufacturing sector was more modest<br />
growing from 3.1 percent to 4.5 percent during<br />
the same period. Agriculture sector was<br />
the lagging sector, with output per worker<br />
rising only to 2.4 percent during 1993-99,<br />
compared to 1.5 percent during the previous<br />
decade. As wages are linked to productivity<br />
it is little surprising to figure out why<br />
people in the services sector making more<br />
money compared to the other sector.<br />
<strong>The</strong> fact that services is the fastest growing<br />
sector (that is, demand for skilled labors<br />
are always there) and requires only skilled<br />
labors (less in numbers in India); wage rate<br />
in the services sector is much higher than<br />
in the agricultural sector. <strong>The</strong> average per<br />
day return of agricultural worker varies between<br />
Rs 25 (read Indian Rupees; Rs 39.5<br />
is one US dollar) in States, like, Bihar, Mi-<br />
zoram, Manipur, Arunachal Pradesh, etc.<br />
to an average of around Rs 125 per day in<br />
States, like, Haryana, Punjab, Kerala,<br />
Tamil Nadu, Gujarat, etc. Although spatial<br />
inequalities exist for agricultural sector;<br />
income inequality becomes large considering<br />
inter-sector inequality, i.e. inequality<br />
between services and agricultural sectors.<br />
<strong>The</strong>se days the average salaries for a standard<br />
Business School graduates ranges between<br />
five lacs to seven lacs, per annum.<br />
Quite evidently these are much higher figures<br />
compared to an average agricultural<br />
earning. So what needs to be done? From<br />
the demand side perspective government is<br />
Table 3: Uncertainty In Agricultural Income<br />
spending money on schemes like, minimum<br />
rural employment guarantee<br />
scheme in 200 most<br />
backward districts in India<br />
with the objective of providing<br />
100 days of guaranteed<br />
unskilled wage employment<br />
to each rural<br />
household opting for it. <strong>The</strong>se schemes are<br />
to be spread to other districts as well. However,<br />
such demand management policies<br />
sometime can be self defeating. For instance,<br />
if these people are hired for building<br />
a road and the project never gets completed<br />
then the money allocated for the<br />
purpose will add on to inflation. A better<br />
1971-72 to<br />
1980-81<br />
way to address this problem associated with<br />
income inequality will be to address long<br />
term supply management policies. <strong>The</strong>re<br />
are two major problems. First has to do<br />
with skill formation. Workers can be trained<br />
giving vocational education. <strong>The</strong> experiences<br />
of some South-East Asian economies<br />
show that one reason these economies fared<br />
well on the distributional aspect of income<br />
1981-82 to<br />
1990-91<br />
1991-92 to<br />
2004-05<br />
GDP<br />
Growth (Mean) 3.16 5.64 5.83<br />
Coff. of Variation 137.75 39.05 31.84<br />
Agriculture and Allied Service<br />
Growth (Mean) 1.83 3.55 2.58<br />
Coff. of Variation 475.21 150.74 188.74<br />
Industry<br />
Growth (Mean) 4.05 7.11 5.81<br />
Coff. of Variation 88.91 28.22 51.85<br />
Services<br />
Growth (Mean) 4.42 6.72 7.78<br />
Coff. of Variation 34.03 17.16 23.04<br />
Source: National Account Statistics<br />
44 THE <strong>IIPM</strong> THINK TANK
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Figure 1: Sector Wise Factor Productivity<br />
Average Annual Percent Change<br />
7<br />
6<br />
5<br />
4<br />
3<br />
2<br />
1<br />
0<br />
Labor And Total Factor Productivity Growth In India<br />
Output Per Worker<br />
Total Factor Productivity<br />
1960-73 1973-83 1983-93 1993-99 1999-2004<br />
Source: Bosworth, Collins and Virmani (2006)<br />
Table 4: Capital Formation And Employment sion. A better provision<br />
of services<br />
Investment (as a % of 1993-94 1999-2000 2004-2005<br />
total investment)<br />
especially in the<br />
Agricultural and Allied 8.42 8.48 6.63<br />
education sector<br />
will usher in an<br />
Industry 50.09 51.44 54.06<br />
even income distribution.<br />
<strong>The</strong> sec-<br />
Services 41.19 40.08 39.31<br />
Employment Ratios (as a % of total employment)<br />
ond major problem<br />
Agricultural and Allied 60.39 56.70 58.60<br />
is associated with<br />
Industry 15.83 17.57 18.50<br />
volatile agricultural<br />
Services 23.78 25.73 22.90<br />
income. As we have<br />
Source: Reserve Bank of India (2006) and Central Statistical Organization (2006)<br />
seen volatile agricultural<br />
is because the governments put emphasis<br />
on vocational education. Growth in these<br />
economies is primarily driven by increase<br />
labor force participation. It would make<br />
sense to impart adequate training so that<br />
labors from countryside have necessary<br />
skills to find employment in the services<br />
and manufacturing sectors. Government<br />
expenditure should be directed towards<br />
sectors, like primary education, where social<br />
return is higher than the private return.<br />
For the sector, like higher education and<br />
also vocational education, government can<br />
encourage private participation. Private<br />
participation brings in accountability and<br />
hence efficiency in the way of service provi-<br />
output contributes to rural poverty<br />
affecting the distribution of income. It also<br />
leads to increase migration which in turn is<br />
contributing to inequality. A reason for<br />
volatility in agricultural production is because<br />
of lack of adequate infrastructure.<br />
Because of lack of cold storage facilities,<br />
irrigation system, dams and roads network<br />
connecting to market considerable portion<br />
of agricultural produce depends on weather.<br />
<strong>The</strong>re is a loss of agricultural output either<br />
because of flood or because of drought.<br />
<strong>The</strong>re are not enough man made tanks and<br />
canals which can store water during flood<br />
and supply water during drought.<br />
To reduce this volatility there is a need<br />
to build rural infrastructure. A proper<br />
infrastructural investment in rural sector,<br />
such as irrigation and drainage, storage,<br />
soil conservation, water management systems<br />
and road networks connecting the<br />
rural markets with their urban counterpart,<br />
is necessary to reduce this fluctuation<br />
in agricultural output. Demand management<br />
policies like introduction of crop<br />
insurance, futures trading in agricultural<br />
commodities and greater accessibility to<br />
credit will complement these supply side<br />
measures. None of these exists at this<br />
point of time. It’s a little wonder why the<br />
people in the country side feel deprived<br />
and with further reforms the level of desperation<br />
is growing. Finally, referring<br />
back to our issue about Nandigram what<br />
started the flare in Nandigram was lack of<br />
well defined property rights. Initially, it<br />
was the marginal farmers or share croppers<br />
(working on other’s lands) who were<br />
up in arms against the government. <strong>The</strong><br />
land owners were happy with the price<br />
offered by the government for acquiring<br />
their land. However, there exist no property<br />
rights which spell out how the money<br />
is going to get distributed from the land<br />
owners to these share croppers or the<br />
land less laborers. <strong>The</strong> seed of unrest<br />
could have been solved by addressing<br />
this issue.<br />
End Notes<br />
1 Bosworth, B., Collins, S. and Virmani,<br />
A. (2006), ‘Sources of growth in the Indian<br />
economy’, paper presented to the<br />
Indian Policy Forum, New Delhi, July.<br />
2 Bhanumurthy N. R. and A. Mitra<br />
(2004), ‘Economic growth, poverty, and<br />
inequality in Indian States in the prereform<br />
and reform periods’, Asian Development<br />
Review, Vol. 21, pp. 79-99.<br />
THE INDIA ECONOMY REVIEW<br />
45
Shripad Dharmadikary<br />
Manthan Adhyayan Kendra,<br />
Badwani, Madhya Pradesh<br />
More Market, Less Government<br />
A Recipe For Disaster For <strong>The</strong> Water Sector<br />
"We never know the worth of<br />
water till the well is dry."<br />
-Thomas Fuller<br />
An article published some time<br />
back argued that in Rajasthan,<br />
petrol was freely available<br />
to anyone who wanted it, while millions<br />
of people faced great difficulty in<br />
obtaining water, even though water is far<br />
more abundant in the state than petrol.<br />
This phenomenon was attributed by the<br />
author to the fact that while the management<br />
of water was entirely controlled by<br />
the government, the supply and management<br />
of petrol was by private players and<br />
operated on market principles. Since<br />
last 16 years, the call to harness the power<br />
of the market (and of private enterprise)<br />
for the better performance of<br />
various sectors of the economy has been<br />
growing stronger. In 1991, the introduction<br />
of the policies of Liberalisation,<br />
Privatisation and Globalisation (LPG)<br />
in the country initiated the process of<br />
the opening up of the financial sector on<br />
one hand, and on the other, the transformation<br />
of sectors hitherto owned and<br />
managed by the government or by other<br />
public agencies into market based operations<br />
and private ownership and<br />
management. While some of the important<br />
sectors where wide-ranging reforms<br />
were introduced included power, telcom<br />
and insurance, the process began later,<br />
and in a fragmented way for other sectors.<br />
<strong>The</strong> water sector can be put in the<br />
latter category.<br />
Water Markets In India<br />
It is not as if water markets or trade have<br />
not existed in India. In the British times,<br />
several large irrigation schemes were<br />
owned and operated privately, with the<br />
company selling water on a commercial<br />
basis. For example, the Orissa Canal<br />
Scheme, first proposed by Sir Arthur<br />
Cotton in 1858, was started in 1865, with<br />
the East India (Orissa) Irrigation and<br />
Canal Company (EIICC) financing the<br />
project and selling all the water to the<br />
Government, who in turn was to collect<br />
the water charges from farmers, and<br />
pass on the profits to the EIICC after<br />
deducting administrative expenses 1 . In<br />
many parts of the country, for example<br />
46 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
in North Gujarat, thriving groundwater<br />
markets exist, as farmers extract groundwater<br />
using tubewells and sell it primarily<br />
to other farmers for irrigation.<br />
<strong>The</strong> ‘tanker economy’ is very well established,<br />
with highly developed networks<br />
of tanker owners supplying water<br />
to industries, colonies, commercial establishments<br />
and even households on a<br />
regular or need-based basis. In cities<br />
like Ahemdabad, regular home delivery<br />
of bottled drinking water is a common<br />
feature. Last but not the least, the bottled<br />
water industry has become a thriving<br />
multi-crore rupees business. For all<br />
this, water remains largely in the public<br />
domain. <strong>The</strong> British experiments with<br />
private irrigation were not very successful<br />
and canal irrigation has been essentially<br />
a public sector endeavour in independent<br />
India. While groundwater is<br />
largely in the private domain, with the<br />
landowners having unrestricted right to<br />
pump out as much water as they want<br />
from their lands – it is largely operated<br />
on an individual and unorganised basis.<br />
Tankers and other supplies to households,<br />
colonies etc. operate more like<br />
informal markets. Even otherwise, these<br />
water markets have formed a small part<br />
of the huge water economy and even a<br />
smaller part of the vast water system.<br />
This is so for a good reason.<br />
Water As A Social Responsibility<br />
Water is a biological necessity for survival.<br />
Water is also the foundation of the<br />
livelihoods of millions of people – agriculture,<br />
fishing, dairying, cattle rearing<br />
being some of the occupations that depend<br />
critically on water. Water is a critical<br />
input into the development process,<br />
apart from the being an essential requirement<br />
for industry and manufacturing.<br />
Thus, water has a vital social significance<br />
apart from its commercial<br />
value. Indeed, water is a basic, fundamental<br />
human right. Due to all this, the<br />
production and provision of water has<br />
long been considered a social and moral<br />
responsibility of the community and the<br />
Government. This is all the more so in<br />
India - since the income and resource<br />
distribution in India is heavily skewed<br />
and iniquitous, and we have large sections<br />
of populations who cannot afford<br />
to bear the cost of even the minimum<br />
necessary supplies of water. This makes<br />
low-priced provision of water services<br />
essential. This is also the reason that<br />
the sector has been heavily subsidised,<br />
and has remained in the public domain<br />
till now.<br />
A New Regime<br />
In the last decade or so, it is being argued<br />
that the water sector must be operated<br />
on market based principles and the<br />
Government must change its role to only<br />
that of a regulator, with the private sector<br />
being allowed into the sector.<br />
Several reasons are being advanced<br />
for this. <strong>The</strong> many serious problems of<br />
the water sector and its abysmal performance<br />
in delivering services is being attributed<br />
primarily to the inefficiency and<br />
corruption of the government system –<br />
qualities that are believed to be largely<br />
inherent to public sector. <strong>The</strong> public sector<br />
is also generally considered as deficient<br />
in modern technology, lacking<br />
management skills and badly administered.<br />
Further, the lack of internal resource<br />
generation due to below-cost supply<br />
is leading to deficiency of resources<br />
with the Government to invest in the<br />
needs of the sector.<strong>The</strong> achievements of<br />
Tankers and other supplies to households, etc. operate<br />
more like informal markets. Even otherwise, these water<br />
markets have formed a small part of the huge water economy<br />
and even a smaller part of the vast water system<br />
the telcom sector, now operating on<br />
market based principles with a large<br />
number of private players is also being<br />
cited as evidence that these polices can<br />
improve access and service levels. Thus,<br />
“More Market, Less Government” is the<br />
mantra being advocated for the water<br />
sector also. As this approach gets translated<br />
into new policies, laws and programs,<br />
some important questions need<br />
to be answered – will this work? What<br />
will be the consequences of such an approach<br />
in the water sector? Is this the<br />
correct policy choice? In some ways, the<br />
cart has already been put before the<br />
horse. While these serious questions<br />
have not been fully debated, far-reaching<br />
transformations in the sector have<br />
already been set in motion.<br />
<strong>The</strong>se transformations can be seen as<br />
an extension of the LPG regime into the<br />
water sector. As with the initial set of<br />
reforms in 1991, the changes in the water<br />
sector are also being driven by the World<br />
Bank and other international financial<br />
a g e n c i e s l i k e t h e A s i a n D e ve l o p m e nt B<br />
ank. Water has been among the last of<br />
the sectors to be opened up to the reforms<br />
process; however, we just note this<br />
without going into the reasons for<br />
THE INDIA ECONOMY REVIEW<br />
47
REIMAGINING INDIA<br />
the same.<br />
<strong>The</strong> process to aggressively bring LPG<br />
policies into the water sector was initiated<br />
around the mid-1990s with a key<br />
knowledge activity. Around this time,<br />
the World Bank began a comprehensive<br />
and wide-ranging review of India’s water<br />
sector – called the India Water Resources<br />
Management Sector Review.<br />
<strong>The</strong> Water Sector Review 1998 was a<br />
“sector-wide program undertaken in<br />
partnership between the Government of<br />
India and the World Bank, also with<br />
contributions from the Governments of<br />
U.K., Denmark and the Netherlands.” 2<br />
<strong>The</strong> purpose was “collectively assessing<br />
and establishing a Reform Agenda and<br />
Action plan for India’s Water Sector.” 3<br />
In 1996, a series of missions visited<br />
India, and then the World Bank team,<br />
with inputs from the Government of India,<br />
and many consultants, finalised five<br />
specialists reports 4 , dealing with<br />
(1) Intersectoral Water Allocation,<br />
Planning and Management<br />
(2) Groundwater Regulation and<br />
Management<br />
(3) Irrigation<br />
(4) Rural Water Supply and Sanitation<br />
(5) Urban Water Supply & Sanitation<br />
A sixth report, synthesising all the<br />
above was also prepared 5 . <strong>The</strong>se were<br />
first published as World Bank reports in<br />
the year 1998.<br />
This Review identified two broad issues<br />
that needed to be addressed –<br />
“Mechanisms ....for integrated treatment<br />
of surface and groundwater... and<br />
for efficiently and equitably allocating<br />
scare water resources between competing<br />
uses...[that is, inter-sector allocations].<br />
Second, reforms to improve service<br />
delivery in the water sub-sectors<br />
(i.e. irrigation, urban water supply, rural<br />
water supply...)”.<br />
For both these broad objectives, the<br />
measures suggested consisted essentially<br />
of transforming the sector to operate<br />
on commercial and market basis, and<br />
the privatisation of various activities.<br />
This agenda is being rolled out through<br />
a number of different measures. <strong>The</strong> key<br />
One of the far reaching recommendations made by the<br />
World Bank was the introduction of tradable water rights<br />
or water entitlements. <strong>The</strong> idea is this – that all (or at least<br />
some) people have a defined water entitlement<br />
mechanism to further this approach has<br />
been a series of Water Sector Restructuring<br />
loans given by the World Bank to<br />
a number of states, for example in Madhya<br />
Pradesh, Maharashtra, Rajasthan<br />
etc. 6 <strong>The</strong> reforms package implemented<br />
through the conditionalities in these<br />
loans is often supported by other loans,<br />
grants and technical assistance from<br />
Asian Development Bank, or agencies<br />
like British Government’s development<br />
assistance agency DFID.<br />
<strong>The</strong> reforms processes have the following<br />
common elements:<br />
• Unbundling (separation of source,<br />
‘transmission’ and ‘distribution’)<br />
• Independent regulator to set tariffs<br />
and decide other issues<br />
• Steeply increasing tariffs, de-politicisation<br />
of tariffs<br />
• Full cost recovery<br />
• Elimination of subsidies<br />
Cutting off supplies for non-payment<br />
• Dismantling public / community supplies<br />
like public taps, stand posts<br />
• Retrenchment<br />
• Privatisation and PPPs<br />
• Allocation of water to highest value<br />
use through market mechanism<br />
<strong>The</strong> net result of these policies is the<br />
conversion of the sector into a market.<br />
Not only is the service provision within<br />
a sub-sector (for example irrigation) to<br />
be carried out on a commercial basis, on<br />
market principles, but the inter-sectoral<br />
allocation also is to be done through<br />
market mechanisms. What are the implications?<br />
Let us examine the inter-sectoral<br />
allocation in more detail.<br />
Tradable Water Rights For Inter-<br />
Sectoral Allocation<br />
One of the far reaching recommendations<br />
made by the World Bank in the<br />
Water Sector Review 1998 was the introduction<br />
of tradable water rights or water<br />
entitlements. <strong>The</strong> idea is this – that all<br />
(or at least some) people have a defined<br />
water entitlement. <strong>The</strong>re is also a<br />
developed market of such entitlements,<br />
in which these can be sold or bartered.<br />
<strong>The</strong> economic logic is that this trading<br />
will ensure that water is allocated to the<br />
highest value user – thus ensuring<br />
efficiency of use. This is being justified<br />
as an easy way (where political resistance<br />
will be least) of inter-sectoral<br />
allocations.<br />
<strong>The</strong> Water Sector Resources Stra<br />
tegy of the World Bank, adopted in<br />
2003, states 7 :<br />
“....those requiring additional resources<br />
(such as cities) will be ...able to meet<br />
48 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
their needs by acquiring the rights of<br />
those who are using water for low-value<br />
purposes.<br />
“....there are strong incentives for<br />
those using water for low-value purposes<br />
to voluntarily give up their rights,<br />
making reallocation politically attractive<br />
and practical.”<br />
<strong>The</strong> Water Sector Review 1998’s Report<br />
on Intersectoral Allocation gives<br />
the example of Chennai. It says 8 :<br />
“As in all parts of the world, the value<br />
of water for irrigated foodcrops is a fraction<br />
of the value for urban and domestic<br />
purposes. Rough calculations suggest<br />
that the value of water in irrigation in<br />
Tamil Nadu is less than Rs. 0.5/cubic<br />
meter. Even if Metrowater could pay several<br />
times this amount, it could obtain<br />
additional water….<br />
“<strong>The</strong> potential for voluntary inter-sectoral<br />
transfer of water to urban users<br />
from irrigation provide a promising low<br />
cost alternative...”<br />
Thus, the Bank argues that in a water<br />
market, the farmer would find it more<br />
profitable to sell his share of water to the<br />
city (or an industry, or a golf course)<br />
than to grow crops.<br />
One of the first ‘trials’ of this approach<br />
is taking place in Maharashtra. <strong>The</strong> Maharashtra<br />
Water Resources Regulatory<br />
Authority Act (MWRRA) 2005 came<br />
into force on 8th June 2005. Maharashtra<br />
soon became the first, and so far the<br />
only, state to set up the Water Resources<br />
Regulatory Authority - more or less<br />
on the lines of the regulatory commissions<br />
set up for electricity in various<br />
states - with objectives that include fi x-<br />
ing the rates for use of water for agriculture,<br />
industrial, drinking and other purposes<br />
and several related matters.<br />
Among the functions of the Authority is<br />
the mandate to develop a framework for<br />
trading in water entitlements. <strong>The</strong> Authority<br />
is to determine the distribution<br />
of entitlements between various users,<br />
and then these entitlements can be<br />
“transferred, bartered, bought or sold<br />
on annual or seasonal basis within a<br />
market system” 9 to be created by the Authority.<br />
<strong>The</strong> Authority has already begun<br />
the exercise of setting up entitlements in<br />
six irrigation projects in Maharashtra on<br />
a pilot basis, inlcuding tow major projects.<br />
Will such an exercise lead to a rational<br />
and efficient allocation of water?<br />
While the economic argument that water<br />
will be allocated to the highest valueadding<br />
user looks attractive, there are<br />
likely to be serious implications. For example,<br />
if a farmer finds it more profitable<br />
to sell his share of water to industry<br />
or a near by city – and this happens on a<br />
large scale, what are the implications for<br />
food security? What would happen to<br />
associated rural economic activity? For<br />
example, agricultural residues provide<br />
fodder for cattle, but if a farmer does not<br />
cultivate his land, what happens to the<br />
cattle? Another important question is<br />
related to the conversion of livelihood to<br />
cash. <strong>The</strong> farmer, by cultivating his land,<br />
gets the output in the form of grain,<br />
food, milk and some cash. By selling his<br />
water right, this is likely to be largely<br />
Market driven inter-sector allocation poses more serious<br />
broader concerns. Water is not just an economic commodity<br />
– it is essentially an ecological, natural entity, and<br />
water as an ecological system is vast and complex<br />
converted to cash. This has the danger<br />
of being spent on careless consumptive<br />
expenditure, or worse, on liquor and<br />
other addictions. More cash can also<br />
mean that women will have lesser<br />
control on the household income as cash<br />
is more likely to be controlled by<br />
the men.<br />
Apart from these individual-related<br />
issues, market driven inter-sector allocation<br />
poses even more serious broader<br />
concerns. First of all, water is not just an<br />
economic commodity – it is essentially<br />
an ecological, natural entity, and water<br />
as an ecological system is vast and complex.<br />
Water – and water bodies like rivers,<br />
lakes etc. – have many cultural, social<br />
and religious associations. Thus,<br />
there are many externalities associated<br />
with water, and it is simply not possible<br />
for market mechanisms to address these.<br />
Consider (as is happening in several<br />
places like Chennai) if a farmer wants to<br />
sell his groundwater to the city instead<br />
of farming. But unrestricted withdrawals<br />
by the farmer could affect the wells<br />
of the neighbouring farmers. Or, consider<br />
whether the waters of a river that<br />
THE INDIA ECONOMY REVIEW<br />
49
REIMAGINING INDIA<br />
has a religious ghat and temple could be<br />
sold for industrial or other purposes? In<br />
fact, this raises another serious issue –<br />
who would be entitled to sell such a<br />
right? For a market to operate there<br />
have to be tradable commodities and<br />
some understanding of ‘ownership’. But<br />
can what is essentially a community resource<br />
– like a river, lake or rainwater<br />
– can such an entity be subjected to a<br />
market regime?<br />
It is because of these very important<br />
externalities and social and human aspects<br />
that water, and in particular the<br />
sectoral allocation of water needs to be<br />
outside the market system. This is the<br />
reason why the priorities for allocation<br />
of water between sectors are prescribed<br />
by policy rather than left to the market.<br />
<strong>The</strong> Water Policy of the Government of<br />
India, approved in 2002, specifies in its<br />
Clause 5 that<br />
“In the planning and operation of systems,<br />
water allocation priorities should<br />
be broadly as follows:<br />
• Drinking water<br />
• Irrigation<br />
• Hydro-power<br />
• Ecology<br />
• Agro-industries and non-agricultural<br />
industries<br />
• Navigation and other uses.”<br />
Several states too have developed their<br />
own policies which also lay down these<br />
priorities. A market based inter-sectoral<br />
allocation of water is inherently in contradiction<br />
to the allocation based on<br />
criteria of social and environmental<br />
need and equity. This is all the more so<br />
in a country like India where there is<br />
vast inequity in the distribution of income<br />
and where conservation of ecology<br />
is not a luxury but rather a necessity as<br />
it supports the livelihoods of millions.<br />
Last, but not the least, is that by definition,<br />
a market based system allocates<br />
resources to those who have purchasing<br />
power. This not only means that the poor<br />
will be disadvantaged, but that there is<br />
a real danger of concentration of (water)<br />
recourses in the hands of the economically<br />
powerful. <strong>The</strong>re are very few places<br />
where such a market based allocation<br />
of water has been tried out. Chile is one<br />
such country where this system was put<br />
in place in the early 1980s. Indeed, the<br />
World Bank is using Chile as a model to<br />
justify the implementation of this in India.<br />
But the Bank’s own study (which it<br />
seems to have ignored) says 10 :<br />
“According to some reports, the establishment<br />
of tradable water rights in Chile<br />
has encouraged efficient agricultural use<br />
and increased agricultural productivity<br />
per unit of water… Recent reports indicate,<br />
however, that the model encountered<br />
problems as well as successes….<br />
Although benefits have accrued, significant<br />
negative impacts have been felt by<br />
farmers unfamiliar with legal processes<br />
or lacking the money to participate in<br />
markets for water (the poor). Significant<br />
conflicts have also emerged between different<br />
groups of users, and many social<br />
and environmental externalities have yet<br />
to be addressed….”<br />
And 11 :<br />
“<strong>The</strong> main disadvantage, or risk, of<br />
the new system is monopolisation of water<br />
rights. A couple of power companies<br />
and a single individual have been accused<br />
of accumulating some 70 percent<br />
of all water rights in Chile”<br />
This clearly shows how real the danger<br />
of the monopolisation of the resource<br />
are when it is left to market forces, as<br />
well as the inability of market forces to<br />
handle social, ecological and equity related<br />
externalities.<br />
Intra-Sector Marketisation<br />
<strong>The</strong> same issues come up in context of<br />
market based operations within a sector<br />
like bringing in private players for service<br />
delivery of irrigation or urban waters, or<br />
transforming these sectors into purely<br />
commercial operations. <strong>The</strong>re is massive<br />
evidence from all over the world that this<br />
has led to very serious impacts on the<br />
economically poor sections of the society.<br />
This is well documented and a subject<br />
in its own right, so we may only mention<br />
a few things here 12 .<br />
<strong>The</strong> reforms package of full cost recovery,<br />
elimination of subsidies, disconnections<br />
on non-payment (often due to unaffordability),<br />
privatisation and so on may<br />
remove ‘economic ‘distortions’ and lead<br />
to better financial sustainability – the two<br />
major arguments for the justification of<br />
reforms– but this is at the cost of social<br />
responsibility. Where this package has<br />
been implemented, tariffs have often shot<br />
up, and the poor have been disconnected<br />
as they have been unable to pay the high<br />
price for water. For example, in Guinea,<br />
on privatisation of the water supply, water<br />
rates shot up 6-7 times, and more than<br />
10,000 connections, one-third of the total,<br />
were disconnected due to non-payment.<br />
Access of the poor to water has<br />
been the first casualty in many cases of<br />
water sector privatisation and reforms.<br />
Farmers in India are already caught in<br />
a vicious economic pincer grip of rising<br />
prices of inputs and lack of commensurate<br />
prices for their products. Rising water<br />
tariffs in the irrigation sector – a sure<br />
consequence of marketisation - are like-<br />
50 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
ly to skew further the economics of agriculture<br />
that is already leading to large<br />
scale suicides of farmers. Moreover, it is<br />
likely to have a casacading effect on prices<br />
of essentials like foodgrains.<br />
In Indore, an Asian Development<br />
Bank (ADB) loan for Urban Water Supply<br />
has put a condition that all public<br />
standposts must be phased out and the<br />
city Municipal Corporation has taken an<br />
in-principle decision that this should be<br />
done unless the person (who happens to<br />
have a standpost in front of the house)<br />
agrees to pay the bills. <strong>The</strong> logic is that<br />
public stand posts are a source of leakage<br />
and do not yield revenue. Removing<br />
standposts certainly fits into the process<br />
of making the system more market oriented<br />
– no supply without payment – but<br />
impacts the poor very hard.<br />
Less Market, More Accountable<br />
Government<br />
It is difficult to escape the conclusion<br />
that the marketisation of the system can<br />
only be at the cost of social responsibility.<br />
‘More Market’ in the water sector is<br />
likely to hit hard the most vulnerable sections<br />
of the society, and those living on<br />
the margins are likely to be pushed out<br />
even from there. It is also likely to have a<br />
deleterious impact on livelihoods of<br />
farmers and a cascading effect on millions<br />
of other poor as food prices too<br />
could be affected. Further, the market<br />
cannot handle the many critically important<br />
externalities – social, ecological,<br />
cultural and religious- associated with<br />
water. Commodification and marketisation<br />
of water will also create the dangers<br />
of monopolistic control on this vital resource.<br />
Thus, the advocacy of ‘More<br />
Market’ in the water sector is a sure recipe<br />
for disaster. However, this does in any<br />
way mean, automatically, that business as<br />
usual is fine or that more ‘governmentas-usual’<br />
is the answer. For there is no<br />
denying that the myriad problems of the<br />
water sector – lack of access, inequity,<br />
deteriorating quality, destruction of environment,<br />
displacement due to dams<br />
etc. – are in many ways due to the gross<br />
inefficiency, corruption and mismanagement<br />
by the public agencies handling<br />
water resources. However, water, with its<br />
vital necessity for our very daily survival<br />
as well as its central role in livelihood,<br />
economy, society and culture has to be<br />
under public control. But this public control<br />
has to be really ‘public’ –that is, by<br />
the community at large and not just by<br />
the Government or bureaucratic agencies.<br />
What we need is an accountable,<br />
responsible, transparent and participatory<br />
system of managing water –<br />
Less Markets, More Accountable<br />
Public Systems.<br />
Endnotes<br />
1<br />
D’souza 2006 Page 128-129<br />
2<br />
World Bank 1999a Page ix<br />
3<br />
ibid<br />
4<br />
World Bank 1999b to 1999f<br />
5<br />
World Bank 1999a<br />
6<br />
Since water is primarily a state subject,<br />
the reforms have to take place at the<br />
state level.<br />
7<br />
World Bank 2004<br />
8<br />
World Bank 1999b Page 133-134<br />
9<br />
Maharashtra Water Resources Regulatory<br />
Authority Act (MWRRA)<br />
2005, Clause 11 (i)<br />
10<br />
World Bank 1999c Page 29<br />
11<br />
World Bank 1999d Page 108<br />
l2<br />
For more information, see for example<br />
Water: Private, Limited <strong>Issue</strong>s in Privatisation,<br />
Corporatisation and Commercialisation<br />
of Water Sector in India,<br />
Manthan Adhyayan Kendra 2006,<br />
available at www.manthan-india.org<br />
References<br />
• D’souza Rohan (2006): ‘Drowned and<br />
Dammed – Colonial Capitalism and<br />
flood control in Eastern India’, Oxford<br />
University Press, New Delhi.<br />
• Dwivedi Gaurav, Rehmat and Shripad<br />
Dharmadhikary (<strong>2007</strong>): ‘Water: Private,<br />
Limited’, Manthan Adhyayan<br />
Kendra, Badwani, Madhya Pradesh.<br />
• World Bank (1999a): ‘Initiating and<br />
Sustaining Water Sector Reforms: A<br />
Synthesis’, World Bank, Washington<br />
D.C. and Allied Publishers Limited,<br />
Mumbai.<br />
• World Bank (1999b): ‘Inter-Sectoral<br />
Water Allocation, Planning and Management’,<br />
World Bank, Washington<br />
D.C. and Allied Publishers Limited,<br />
Mumbai.<br />
• World Bank (1999c): ‘Groundwater<br />
Regulation and Management’, World<br />
Bank, Washington D.C. and Allied<br />
Publishers Limited, Mumbai.<br />
• World Bank (1999d): ‘<strong>The</strong> Irrigation<br />
Sector’, World Bank, Washington D.<br />
C. and Allied Publishers Limited,<br />
Mumbai.<br />
• World Bank (1999e): ‘Rural Water<br />
Supply and Sanitation’, World Bank,<br />
Washington D.C. and Allied Publishers<br />
Limited, Mumbai.<br />
• World Bank (1999f): ‘Urban Water<br />
Supply and Sanitation’, World Bank,<br />
Washington D.C. and Allied Publishers<br />
Limited, Mumbai.<br />
• World Bank (2004): ‘Water Resources<br />
Sector Strategy’, World Bank, Washington<br />
D.C.<br />
THE INDIA ECONOMY REVIEW<br />
51
D.M.Diwakar,<br />
Professor of Economics<br />
Giri Institute of Development Studies<br />
(GIDS), Lucknow<br />
Inclusive Growth In India: A Case Of<br />
Structural And Agrarian Challenges<br />
"To forget how to dig the<br />
earth and tend the soil is to<br />
forget ourselves."<br />
-Mahatma Gandhi<br />
Measures of economic reforms<br />
in India were expected to<br />
deliver goods and services to<br />
attain higher growth rate of the economy<br />
and provide better employability to accommodate<br />
underemployed, unemployed<br />
and marginalized sections of the<br />
society into mainstream of development.<br />
But realisations over the years have not<br />
been in conformity with the expectations.<br />
<strong>The</strong>re is common agreement<br />
among the experts across the board that<br />
economy has attained higher growth<br />
rates but reforms measures are yet to<br />
prove effective towards distributive justice<br />
with higher growth. Latest Human<br />
Development Report indicates further<br />
sliding down to the rank of 128. Indian<br />
agriculture irrespective of the <strong>size</strong> of<br />
holdings, which is mainstay for majority<br />
of the masses, has been experiencing<br />
worst forms of crises culminated and<br />
manifested in starvation and tragic suicides<br />
of its producers, who have been<br />
feeding the nation. Besides unregistered<br />
starvation in backward regions in absence<br />
of employment at least at subsistence<br />
level, even diversified and prosperous<br />
agriculture of Punjab, petty cotton<br />
growers of Maharashtra, Andhra and<br />
Karnataka are also not spared from this<br />
trap. Expert Group on agrarian crisis<br />
underlines suicides as a disturbing symptom<br />
of deep-rooted crises that Indian<br />
agriculture has been confronting. Broadly<br />
two dimensions of agrarian crises –<br />
low growth with declining productivity<br />
and high dependence of population on<br />
lower farm income have been the root<br />
causes. Reflecting a little further stagnation,<br />
increasing risk in production and<br />
marketing, collapse of the extension<br />
system, growing institutional vacuum,<br />
and the lack of alternative livelihood<br />
opportunities, etc., are inter alia main<br />
factors behind agrarian crisis (Radhakrishna,<br />
<strong>2007</strong>).<br />
Challenges of the syndrome of fatigue<br />
at the front of technology, institution,<br />
policy and governance (Narayanamoorthy,<br />
<strong>2007</strong>; Behera and Mishra, <strong>2007</strong>)<br />
have been debated at length. Mounting<br />
52 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
criticisms loaded with adverse results of<br />
reforms undermining human face compelled<br />
planners and policy makers to<br />
incorporate such policies that may appear<br />
addressing the crises and concerns<br />
of marginalisation. Hence the Eleventh<br />
Five Year Plan has been claimed to focus<br />
on faster inclusive growth (GOI, 2006)<br />
to address the issues of exclusions. This<br />
exercise is an attempt to underline challenges<br />
on the way to achieve the targets<br />
of inclusive growth. It is not possible to<br />
do justice with all the factors in one exercise<br />
and therefore, this exercise is intended<br />
to analyse a few important dimensions<br />
of agrarian challenges towards<br />
achieving the objectives of inclusive<br />
growth. This paper is divided in four<br />
parts. Part one examines growth performance<br />
of agricultural economy. Part two<br />
deals with indebtedness and credit markets<br />
and institutions. Part three concentrates<br />
on farmers despair and part four<br />
consolidates discussion and reflects on<br />
possible imperatives and options in<br />
this regard.<br />
1. <strong>Dec</strong>elerating Growth<br />
Share of the agricultural sector declined<br />
from 59.2 percent of Gross Domestic<br />
Product (GDP) in 1950-51 to 27.36 percent<br />
in 1999-2000, This figure has further<br />
fallen to 18.5 percent in 2006-07<br />
(Economic Survey, GOI, <strong>2007</strong>:1). Contribution<br />
of agriculture to GDP has been<br />
declining not only because the other sectors<br />
are growing fast but also because of<br />
continued neglect of this sector leading<br />
to decline in rural income. However,<br />
over 56.5 percent of the workforce and<br />
63.9 percent of the rural workforce – 39.8<br />
percent self employed and 24.1 percent<br />
agricultural labour are still directly dependent<br />
on this sector for their livelihood<br />
(National Sample Survey Organisation<br />
(NSSO), 61 st Round, 2006:27).<br />
Out of self-employed workforce majority<br />
of holdings are of marginal and small<br />
farmers. On an average, this sector grew<br />
at the rate of 2.54 percent during 1950-<br />
51 to 2003-04. During pre-Green Revolution<br />
(1950-51 to 1964-65) agriculture<br />
grew by 2.54 percent. Interestingly average<br />
growth rate in post -Green Revolution<br />
period until 1980 was only 2.05 percent,<br />
which was slightly lower than<br />
earlier period. Growth rate of agriculture<br />
in 1980s was the highest at 3.08 percent<br />
and later in last one decade (1993-<br />
94 to 2003-04) this sector suffered<br />
deceleration and grew only by 2.38 percent<br />
(Bhalla, 2005: p.2). During Ninth<br />
and Tenth Five Year Plan, agriculture<br />
grew only by 2 and 1.7 percent respectively<br />
(GOI, 2006:4).<br />
In pre–Green Revolution period<br />
growth rates of all principal crops, in<br />
terms of their area production and yield<br />
were 1.58, 3.15, 1.21 percent, food grains<br />
1.35, 2.82, 1.36 percent and non food<br />
grains 2.44, 3.74, 0.89 percent respectively.<br />
Post-Green Revolution data of<br />
growth rates suggest that area and production<br />
of all principal crops had lower<br />
rate of growth but yield registered higher<br />
rate of growth than that of pre-Green<br />
Revolution period. So far non-food<br />
grains are concerned, growth rates of<br />
area and production witnessed deceleration.<br />
However productivity registered<br />
increasing trend from 0.89 percent to<br />
1.59 percent. In case of food grains area<br />
declined, production registered lower<br />
rate of growth and yield rate increased.<br />
Statisticall, the comparison of 1980s<br />
with 1990s suggests that, in case of all<br />
principal crops, cultivable area increased<br />
in 1990s and production and productivity<br />
parameters registered deceleration.<br />
In the case of food grains, area declined,<br />
production and productivity encountered<br />
lower rate of growth than 1980s.<br />
So far non-food grains are concerned<br />
area, production and productivity indicated<br />
an increasing trend with deceleration,<br />
i.e., lower rate of growth than<br />
1980s. However there was an evidence<br />
of recovery in terms of area and productivity<br />
of food grains, and area production<br />
and productivity in non-food grains<br />
during 2000-01 to 2006-07. As a result,<br />
there was a sign of recovery in area production<br />
and productivity of all principal<br />
crops. However, in terms of the growth<br />
According to NSSO data, over 56.5% of the workforce<br />
and 63.9% of the rural workforce – 39.8% self employed<br />
and 24.1% agricultural labour are still directly dependent<br />
on agriculture sector for their livelihood<br />
rates of production it was still lower than<br />
the growth rates of the production of<br />
1980s (GOI, 2006a).<br />
Expansion of irrigation network, use<br />
of modern technology - HYV seeds,<br />
chemical fertilizer, pesticides combined<br />
- cropping pattern changed remarkably.<br />
Cropping intensity also improved to the<br />
level of 134 percent. But percentage coverage<br />
of food grains did not change significantly<br />
until 1980-81. Coverage of<br />
total cereals hardly changed and remained<br />
at the level of about 75 percent.<br />
THE INDIA ECONOMY REVIEW<br />
53
REIMAGINING INDIA<br />
During 1990-91 to 2000-01 it remained<br />
around 65 percent. Coverage of oil seeds,<br />
fruits and vegetables almost doubled and<br />
area under HYV increased from 1.2 percent<br />
of GCA to 41.17 percent. Paddy<br />
coverage of HYV has increased from<br />
0.56 percent in 1966-67 to 17.34 percent<br />
in 1998-99, wheat from 0.34 to 12.61 percent,<br />
jowar from 0.12 to 4.89 percent,<br />
bajra from 0.04 to 3.76 and maize 0.13 to<br />
1.89 percent of GCA. Important factors<br />
inter alia for such poor performance was<br />
continued neglect of agriculture towards<br />
structural inequity, prevailing non-development<br />
syndrome in infrastructure,<br />
lack of adequate budgetary allocation of<br />
resources for investment. Agricultural<br />
investment to GDP witnessed declining<br />
trend over the years. During 1985-86 it<br />
was 2.3 percent at 1993-94 prices, which<br />
declined to 1.6 percent in 1989-90 and<br />
continued to decline further to 1.4 percent<br />
in 1999-2000 and 1.3 percent in<br />
2003-04. Even at prices of 1999-2000 the<br />
level of investment in 2003-04 was 1.9<br />
percent and remained stagnated at 1.9<br />
percent only for three consecutive years,<br />
i.e., up to 2005-06 (GOI, 2006-07). This<br />
clearly indicated a decline in investment<br />
in real terms. Realisation at the level of<br />
the Planning Commission of the Government<br />
of India suggests that private<br />
investment cannot be sustained without<br />
sustained public investment. Thus, syndrome<br />
of non-development left this sector<br />
under performed. Much hope is<br />
pinned on Bharat Nirman Yojana to expand<br />
irrigation network. But the provision<br />
made under this scheme in the budget<br />
of current financial year does not<br />
appear consistent with targets. With this<br />
speed the target of covering additional<br />
10 million hectare under irrigation will<br />
take at least 17 years.<br />
Cost of cultivation increased significantly<br />
with the increasing use of modern<br />
technology across the states (Diwakar,<br />
<strong>2007</strong>). Variation in terms of percentage<br />
rate of change in cost of cultivation since<br />
1991 at least for a few major commodities<br />
suggests that lower range of the cost<br />
of cultivation for paddy increased from<br />
over 73 percent in 97-98 to<br />
117 percent in 2002-03 and<br />
about 173 percent in 2004-<br />
05. Upper range of cost increased<br />
by over 92 percent<br />
in 97-98 to about 149 percent<br />
in 2002-03 and 124 percent<br />
40% of the farmers did not like to continue with agriculture.<br />
About 27% were reluctant to continue in this occpation<br />
precisely because of non-viability. Interstate variations<br />
were even higher than that of all India fi gures<br />
in 2004-05. Lower range of cost of cultivation<br />
of wheat increased by 105 percent<br />
in 1997-98 compared to 1990-91, 132<br />
percent in 2002-03 and 170 percent by<br />
2004-05. Upper range of variation increased<br />
from 85 percent to 106 percent.<br />
Lower range of cost of cultivation for<br />
cotton increased by 149 percent in 97-98<br />
to 184 percent in 2002-03 and upper<br />
range by 235 and 167 percent respectively.<br />
Cost of cultivation for other crops<br />
can similarly worked out to assess the<br />
trend and variation of specific crop<br />
across the states. Difference in cost and<br />
price structure is another dimension for<br />
examination of the viability of the crops.<br />
For example, farm harvest price/cost of<br />
cultivating cotton ratio in 1997-98 in<br />
Haryana, was 0.8633 with respect to<br />
Desi and 0.9656 for American cotton<br />
and in Punjab 0.5515 and 0.6914 respectively.<br />
In Maharashtra price–cost ratio<br />
was 0.9452. Thus, farmers of these states<br />
were not in a position to recover even<br />
cost from the returns. In case of paddy<br />
Andhra Pradesh however, was getting<br />
Rs.445 price per quintal against cost of<br />
cultivation Rs.436.77. Escalating cost of<br />
production with poor returns from agriculture<br />
amidst uncertainty of monsoon,<br />
risk of crop failures, absence<br />
of effective insurance<br />
cover, and almost<br />
non-existence of extension<br />
services pushed farmers<br />
into unprecedented hardships.<br />
Terms of trade remained<br />
against agriculture<br />
even after termination of industrial protection<br />
and devaluation of rupee in 1991<br />
(Bhalla, 2005). Data also suggest that<br />
about 40 percent of the farmers did not<br />
like to continue with agriculture (NSSO,<br />
2005:59 th Round). About 27 percent were<br />
reluctant to continue in this occupation<br />
precisely because of non-viability. Interstate<br />
variations were even higher than<br />
that of all India figures. About 36 percent<br />
of the farmers of Bihar, West Bengal,<br />
34 percent of Orissa, 30 percent of<br />
Haryana and Jharkhand, 29 percent of<br />
Maharashtra, and even 28 percent of the<br />
farmers of Punjab – agriculturally one of<br />
the most developed regions and Kerala,<br />
one of the most developed states in terms<br />
of social development indicators of the<br />
country and Karnataka, and 30 percent<br />
farmers of Haryana did not like agricul-<br />
54 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
ture occupation. Encountering deceleration<br />
resulted into lower farm income<br />
and widening gap between agricultural<br />
and non-agricultural income. <strong>The</strong>refore<br />
major challenge is not simply to attain<br />
higher growth target in agriculture,<br />
which has been projected at 4 percent,<br />
but to include agricultural labourers and<br />
marginal and small farmers participating<br />
in the growth process effectively. In<br />
order to make them to participate in the<br />
growth process institutional, infrastructure<br />
and technological constraints need<br />
to be addressed on priority basis. This<br />
sector by and large is dependant on vagaries<br />
of monsoon and unprotected from<br />
the risks of crop failures despite expansion<br />
of significant network of irrigation.<br />
Rising cost of cultivation, embedded<br />
with insufficient infrastructure support<br />
and slowing down of employment and<br />
income, left farmers trapped in the syndrome<br />
of indebtedness and despair. Performance<br />
of agriculture remained dismal<br />
with some minor exceptions, thanks<br />
to the unpredictable monsoon and governmental<br />
indifference towards this sector.<br />
As a result, employment in rural<br />
sector grew at declining rate (Bhalla,<br />
2005). Data from NSS rounds suggest<br />
that there was significant decline in employment<br />
in primary sector for both<br />
males and females (NSSO, 60:506).<br />
Findings are supporting the apprehensions<br />
that National Rural Employment<br />
Guarantee Scheme with this speed cannot<br />
deliver the jobs to rural workforce,<br />
.as implementation reports from different<br />
states is adding frustrations only.<br />
Another disturbing factor is decelerating<br />
real wage rates in agriculture and nonagriculture<br />
(Sharma, 2005). But the<br />
question is whether these were substantial<br />
to offset the decelerating impacts of<br />
primary sector on the income of rural<br />
economy. <strong>Dec</strong>elerating growth rate suggests<br />
that this sector could not generate<br />
sufficient capital and investment even<br />
through private sector. Limited benefits<br />
of expansion of the post -Green Revolution<br />
technology could increase production<br />
and productivity but that also could<br />
not be sustained. Moreover, the gains<br />
could not be transferred significantly to<br />
the rural poor in particular and farm<br />
sector at large in general. Rather due to<br />
lack of effective infrastructure and extension<br />
services, modern technology<br />
added confusions in absence of effective<br />
extension services, increased cost of production,<br />
and created environmental<br />
complications and imbalances added<br />
with greater intensity of exploitation of<br />
poor farmers through usury network of<br />
non-institutional credit market in absence<br />
of effective institutional credit<br />
support.<br />
2. Indebtedness, Credit Markets<br />
And Institutions<br />
Rural indebtedness is an indicative of<br />
deficiency of rural income to carry out<br />
necessary activities for livelihood support.<br />
<strong>Dec</strong>elerating growth in agriculture<br />
and increasing income gap between agriculture<br />
and non-agriculture forced a<br />
great majority of farmers and agricultural<br />
labourers to borrow. Findings of<br />
the Royal Commission (which stated<br />
that 'farmers are born in debt, they live,<br />
die in debt and transfer debt liability to<br />
next generation') still hold good. <strong>The</strong><br />
worsening state of farmer's despair is a<br />
matter of serious social concern. In order<br />
to address the deficient need of the<br />
farmers many players – formal as well as<br />
informal - have been operating in the<br />
credit market. NSSO survey report suggests<br />
that about 48.6 percent of the farmers’<br />
households were indebted with an<br />
average outstanding loan amount of<br />
Rs.12,585. Out of indebted farmers<br />
households, 31.3 percent were from the<br />
category of landless and below marginal<br />
farmers, 29.8 percent were from marginal<br />
farmers and 18.8 percent from<br />
small farmers category. Thus, altogether<br />
80 percent of the indebted households<br />
were from the poorest lot in terms of<br />
land in possession. Prevalent rate of indebtedness<br />
of landless labour households<br />
of rural area were 45.3 percent,<br />
About 48.6% of the farmers’ households were indebted<br />
with an average outstanding loan amount of Rs. 12585.<br />
Altogether 80% of the indebted households were from the<br />
poorest lot in terms of land in possession<br />
who owed on an average Rs.6,121. With<br />
the increasing <strong>size</strong> of land in possession<br />
prevalent rate of indebtedness increased<br />
and so was the amount of loan. Considering<br />
per farmer loan amount by Monthly<br />
Per-capita Expenditure (MPCE), extent<br />
of indebtedness was higher in lower<br />
consumption bracket. With the increase<br />
in monthly per capita expenditure percentage<br />
of indebtedness decreased.<br />
However, amount of loan per farmer remained<br />
positive with the increasing<br />
monthly per capita expenditure. Indebtedness<br />
by social groups suggest that<br />
spread of indebtedness and loan amount<br />
THE INDIA ECONOMY REVIEW<br />
55
REIMAGINING INDIA<br />
was lowest in STs and second lowest in<br />
SCs. OBCs reported higher spread of<br />
indebtedness and amount of loan than<br />
SCs but lower spread and higher amount<br />
of loan than general category of<br />
social group.<br />
State wise distribution of farmers’ indebtedness<br />
suggests that Andhra<br />
Pradesh registered highest incidence of<br />
debts with 82 percent followed by Tamil<br />
Nadu (74.5 percent), Punjab (65.4 percent),<br />
Kerala (64.4 percent) and Karnataka<br />
(61.6 percent). Uttaranchal reported<br />
lowest percentage of farmers with<br />
loan. In terms of per farmer amount of<br />
loan, Punjab carried the highest burden<br />
of loan amount at Rs.41,576 followed by<br />
Kerala (33,907). Haryana stood at third<br />
with Rs.26,007 followed by Andhra<br />
Pradesh (Rs.23,965), Tamil Nadu<br />
(Rs.23,963), Rajasthan (Rs.18,372),<br />
Karnataka (Rs.18,135) and Maharashrtra<br />
(Rs.16,973). Among social groups of<br />
STs, per farmer loan amount was highest<br />
in Punjab (Rs.1,18,495), followed by<br />
Haryana (Rs.23,555), Tamil Nadu<br />
(Rs.21,023) and Andhra Pradesh<br />
(Rs.12,760). In case of SCs, per farmer<br />
loan amount was highest in Rajasthan<br />
(Rs.16,708) followed by Haryana<br />
(Rs.13,341), Kerala (Rs.13308), Tamil<br />
Nadu 12,786 and Andhra Pradesh<br />
(Rs.12,720). For OBCs per farmer loan<br />
amount was highest in Kerala<br />
(Rs.33,116), followed by Tamil Nadu<br />
(Rs.27,355), Haryana (Rs.26,226),<br />
Andhra Pradesh (Rs.23,697), and Rajasthan<br />
(Rs.22,009). In general category<br />
also per farmer loan amount was highest<br />
in Kerala (Rs.38,013) followed by<br />
Andhra Pradesh (Rs.37,802), Haryana<br />
(Rs.31,548), Gujarat, Karnataka and<br />
Tamil Nadu.<br />
Amount of loan taken was generally<br />
utilized for production and consumption<br />
purposes. Data suggest that 30.6 percent<br />
of loan amount was spent for capital expenditure<br />
in farm business followed by<br />
current capital expenditure (27.8 percent).<br />
Non-farm business consumed 6.7<br />
percent. Thus, altogether 65 percent<br />
loan amount was directly used for production<br />
purposes. Another 15 percent<br />
was spent for social development and<br />
remaining 20 percent was on marriage<br />
and other ceremonial occasions and on<br />
consumption expenditure. Medical<br />
treatment and other expenditure could<br />
eat significant proportion in some of<br />
Near landless and marginal households took 56.7 % and<br />
47.2 % of loan amount respectively from informal usury<br />
networks. State wise variations suggest that non-institutional<br />
share of loan fi nance was higher in many states<br />
the states.<br />
Rural credit market has both formal<br />
and informal players. Formal players are<br />
government, cooperatives, commercial<br />
banks, whereas informal credit market<br />
is run by and large by moneylenders - often<br />
farmer, traders including dealers of<br />
inputs, other professionals, friends and<br />
relatives, and others operate as moneylenders.<br />
NSS data suggest that commercial<br />
banks remained major player in providing<br />
credit to farmers (35.6 percent)<br />
followed by cooperatives (19.6 percent)<br />
and government (2.5 percent). Altogether<br />
57.7 percent of credit taken by farmers<br />
was provided through institutional arrangements.<br />
Remaining 42.3 percent<br />
credit market was controlled by informal<br />
players. <strong>The</strong>se players may be categorized<br />
in one bracket of moneylenders<br />
with a few individual exceptions. It is<br />
evident from data in reference that credit<br />
extended by cooperatives and commercial<br />
banks emerged positively directed<br />
towards increasing <strong>size</strong> of holdings<br />
whereas credit extended by moneylenders<br />
had inverse direction. Landless<br />
households took 47.3 percent loan from<br />
moneylenders alone. Adding extended<br />
informal usury network it came to 77<br />
percent. Near landless and marginal<br />
households took 56.7 percent and 47.2<br />
percent of loan amount respectively from<br />
informal usury networks. State wise<br />
variations suggest that non-institutional<br />
share of loan finance was higher in many<br />
states. Non-institutional finance controlled<br />
greater credit market to the tune<br />
of 68 percent in Andhra Pradesh followed<br />
by Rajasthan, Assam Bihar and<br />
Punjab. Although Maharashtra provided<br />
83 .8 percent credit through institutional<br />
sources farmers were not free from<br />
distress and suicides. This suggests that<br />
provision of institutional credit is although<br />
important it alone cannot be sufficient<br />
to rescue the farmers from the<br />
syndrome of despair.<br />
Flow of institutional credit amount to<br />
agriculture over the years increased<br />
many folds by cooperatives, commercial<br />
and regional rural banks in terms of<br />
short, medium and long terms loan. But<br />
the question of distributional aspects of<br />
credit remained to be addressed effectively.<br />
Total credit extended by cooperatives<br />
was to the tune of Rs.24.23 crore in<br />
1950-51 to Rs.15,957 crore in 1998-99<br />
56 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
and 33,174 crore by <strong>Dec</strong>ember 2006<br />
(GOI, <strong>2007</strong>:171). Credit volume extended<br />
by commercial banks and regional<br />
rural banks were even higher than cooperatives<br />
although initials were the same.<br />
<strong>The</strong>ir initial credit amount was to the<br />
tune of Rs.24.23 crore in 1950-51, which<br />
further got increased to Rs.36,860 crore<br />
in 1998-99 and in <strong>Dec</strong>ember 2006, it<br />
stands at 1, 16, 169 crores. Provisional<br />
estimates, projection and targets indicated<br />
increasing volume of credit. <strong>The</strong><br />
share of agriculture in total bank credit<br />
had steadily increased under the impulse<br />
of bank nationalization and reached 18<br />
percent towards the end of<br />
the 1980s. But thereafter,<br />
agriculture suffered severe<br />
neglect of institutional<br />
credit delivery mechanism<br />
in the post reform period.<br />
<strong>The</strong> achievement has been<br />
almost completely reversed<br />
and the agricultural credit share dipped<br />
to less than 10 percent in the late 90s – a<br />
ratio that had prevailed in the early<br />
1970s. Even the number of farm loan accounts<br />
with scheduled commercial banks<br />
has declined in absolute terms from<br />
27.74 million in March 1992 to 20.84 million<br />
in March 2003 (Shetty, Economic<br />
and Political Weekly, July 17, 2004).<br />
Similarly per hectare credit in rupees to<br />
agriculture in recent years increased<br />
from 1,940 in 1998-99 to 4,578 in 2003-<br />
04, but annual growth rate of per hectare<br />
credit to agriculture, which was 25.5<br />
percent in 1999-00 over previous year,<br />
slipped down to 14.2 percent in the year<br />
2000-01. After witnessing partially recovery<br />
(17.4 percent) in 2001-02, growth<br />
of per hectare credit registered lower<br />
rate ( at 14.1 percent) in 2002-03 (Lok<br />
Sabha.2005). This also partially explains<br />
as to why moneylenders were dominating<br />
the credit market, wherein appropriating<br />
surpluses through exorbitant interest<br />
rates (Bhalla, 2005:6).<br />
3. Farmers In Despair<br />
Vagaries of monsoon added with rising<br />
costs and uncertainty of access to reliable<br />
technology, market and public credit<br />
institutions amidst unprotected risks<br />
with non-profitable agriculture aggravated<br />
the syndrome of frustration among<br />
farmers across the states of India irrespective<br />
of level of development of agriculture.<br />
Initially anticipating<br />
better returns farmers invested<br />
capital mobilising<br />
through public and private<br />
institutions and stayed in<br />
production for couple of<br />
years to make their fortunes.<br />
Richer lots of farmers could stay<br />
for couple of years because of their staying<br />
power and relatively better access to<br />
credit and inputs even if they suffered<br />
losses. Unfortunately many of them specially<br />
farmers from smaller farm <strong>size</strong><br />
could not sustain growing burden of<br />
loans from moneylenders, traders, dealers<br />
of inputs for many years. Because of<br />
loss of face before the community consequent<br />
upon mounting burden of debts,<br />
failures of credit, insurance and procurement<br />
delivery mechanisms and agencies,<br />
they were forced to commit suicides.<br />
Various studies and reports have been<br />
conducted on this serious problem. Indira<br />
Gandhi Institute Of Development<br />
Research (IGIDR) has brought a comprehensive<br />
study on suicides of farmers<br />
(Mishra 2006:41) for the government of<br />
Maharashtra. Study found various reasons<br />
for suicides. About 86.5 percent<br />
suicides were because of indebtedness,<br />
73.9 percent for deteriorating economic<br />
status, and 40.5 percent because of crop<br />
failures. Loss of face in community (because<br />
of non-payment of loan, inability<br />
to marry their marriageable sisters and<br />
daughters, etc.), were the other reasons.<br />
About 91 percent of suicides were committed<br />
by males. As per police records,<br />
number of suicides in Maharashtra in<br />
2004 alone was 4147. Study reported that<br />
number of suicides increased from 11866<br />
to 14729 between 1995 to 2004.Study<br />
suggests that suicides in females registered<br />
decline after 1999. Another study<br />
<strong>The</strong> central issue of farmers’ suicides is the debt trap.<br />
Small and marginal farmers are not eligible for availing<br />
institutional credit and crop insurance. Thus, they land at<br />
the doorsteps of the usurious moneylenders<br />
(Mohanty, 2005) revealed that cash crop<br />
growers, small and marginal farmers of<br />
Amaravati and Yavatmal districts were<br />
trapped in debt anticipating better returns<br />
from cultivation and committed<br />
suicides.<br />
Kisan Sabha estimates that more than<br />
5,000 farmers committed suicide in<br />
Andhra Pradesh since 1998, more than<br />
3000 committed suicide in Maharashtra,<br />
about 1,000 farmers committed suicide<br />
in Punjab from 1998 to the present, and<br />
about 5,000 committed suicide in Karnataka<br />
over the same period. It is estimated<br />
that 488 farmers committed sui-<br />
THE INDIA ECONOMY REVIEW<br />
57
REIMAGINING INDIA<br />
cide in Wayanad District in Kerala<br />
between 2001 and 2005.” (People’s Democracy,<br />
Vol.30, No. 09, Feb 26, 2006).<br />
Another study (Ridyasagar, and Sunianchandra,<br />
2003) argued that “<strong>The</strong> central<br />
issue of farmers’ suicides is the debt trap.<br />
Small and marginal farmers, especially<br />
those, who lease in land from others, are<br />
not eligible for availing institutional<br />
credit and crop insurance. Thus, they<br />
land at the doorsteps of the usurious<br />
moneylenders. This debt trap is tightening<br />
because of the drastic shifts in the<br />
cropping pattern that is market driven.”<br />
Seeds, fertilizer and pesticide dealers<br />
are at the centre of a growing controversy<br />
in Andhra Pradesh. <strong>The</strong>y are the<br />
new moneylenders to a peasantry<br />
strapped for credit. “<strong>The</strong> banks have<br />
given no loans in the past seven years,”<br />
says Malla Reddy, General Secretary of<br />
the Andhra Pradesh Ryuthu Sangham<br />
(APRS). “So many farmers are forced to<br />
depend on sources like these for credit.<br />
<strong>The</strong> same man advises them on what to<br />
buy and then sets the rates for the purchase.”<br />
With the seed dealers charging<br />
hefty interest rates on their credit sales,<br />
the problem gets more acute. <strong>The</strong> series<br />
of reports filed by P. Sainath which appeared<br />
in the Hindu and India Together<br />
is indeed an eye opener. <strong>The</strong> <strong>Dec</strong>can<br />
Herald dated August 11, 2005 reported<br />
that Movement Against State Repression<br />
(MASR) claims that about 40000<br />
farmers committed suicides in Punjab<br />
alone since 1988 whereas state government<br />
admitted only 2116 cases. Rising<br />
cost of cultivation, lack of market security,<br />
exorbitant rate of interests charged<br />
by moneylenders, dishonouring contracts<br />
etc. were inter alia a few important<br />
reasons. After 1996 loan amounts increased<br />
four times but public institutions’<br />
share was merely 20 percent. Despande<br />
and Prabhu (2005) found that<br />
most of the suicides were driven by debt.<br />
Delivery mechanism of institutional<br />
credit and its defined connivance with<br />
local middle men and functionaries often<br />
hatches conspiracy to confiscate the<br />
land of the poor marginal and small<br />
farmers and forcing them to<br />
commit suicide. Suicide<br />
committed by Manasa Ram<br />
of Maraucha Ishwari Singh<br />
Village (Suratganj Block in<br />
Barabanki district of Uttar<br />
Pradesh) is an example of<br />
Near landless and marginal households took 56.7 % and<br />
47.2 % of loan amount respectively from informal usury<br />
networks. State wise variations suggest that non-institutional<br />
share of loan fi nance was higher in many states<br />
many such cases. However, efforts of social<br />
activists foiled this conspiracy and<br />
the confiscation got cancelled later. Tenant<br />
farmers have seldom access to institutional<br />
credit in absence of ownership<br />
of land as collateral security and therefore<br />
they are forced to be trapped in<br />
usurious exploitative network. <strong>The</strong>y often<br />
sell their crops at pre-decided tied<br />
price to the input dealers or at best at<br />
farm harvest price to petty traders.<br />
Kisan Sabha deliberated upon this serious<br />
crisis and noted: “While every such<br />
death is a tragic individual reality for<br />
grieving families and loved ones, there<br />
are important common features to the<br />
farmers’ suicides. <strong>The</strong>se farmers invested<br />
heavily in inputs – biological inputs,<br />
electricity, machinery, and other components<br />
of fixed and variable costs. <strong>The</strong>se<br />
costs have risen sharply in the period of<br />
liberalisation, and are especially onerous<br />
when the farmer invests in seeds<br />
produced by private companies, particularly<br />
multinational corporations. <strong>The</strong><br />
farmers were often the victims of plain<br />
cheating – they were sold spurious seed<br />
and other inputs by unscrupulous traders.<br />
Since 1991, farmers have had to witness<br />
the massive withdrawal of the formal<br />
sector credit from the<br />
countryside, and have had<br />
to borrow from the informal<br />
sector at usurious rates<br />
of interest for their production<br />
and consumption<br />
needs. Finally, when they<br />
reaped a harvest, neo liberalism<br />
and the new trade regime robbed<br />
them of prices that could even cover<br />
their costs, let alone earn them a livelihood.<br />
Where the output itself is destroyed<br />
by pest, disease or natural disaster,<br />
the farmer was un-indemnified by<br />
any system of insurance, and inadequately<br />
compensated, if at all, by the<br />
state. It is the stark reality that, for many<br />
in our society and in such a situation,<br />
suicide appears as the alternative of last<br />
resort” (People’s Democracy, vol.30, no.<br />
09, Feb 26, 2006). Market driven farm<br />
diversification, not necessarily designed<br />
differently but for the interests of corporate<br />
sectors, exploited farm land, thereby<br />
undermining ecological and fertility<br />
balance. Globalisation and new trade<br />
regime has made farmers condition vulnerable<br />
and exposed to uncertainty<br />
58 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
(Vidyasagar and Chandra, 2003, CSD,<br />
NIRD). <strong>The</strong>re is every possibility of<br />
worsening condition of poor farmers<br />
further with the emphasis on investment<br />
through corporate contract farming.<br />
Unless means of production is reoriented<br />
in favour of producers and meaningful<br />
employment and employability of<br />
poor cultivators are ensured through<br />
public sector initiatives for infrastructure<br />
development and input and output<br />
markets are regulated in the interest of<br />
producers it will be difficult to rescue<br />
farmers from the syndrome of distress<br />
and despair leading towards suicides.<br />
4. Policy Imperatives And Options<br />
We have discussed a few dimensions of<br />
agrarian crises rooted in the syndrome<br />
of decelerating growth of agriculture<br />
amidst rising costs and inadequate infrastructure<br />
leading to deficient employment<br />
and income for the livelihood of<br />
rural workers specially small and marginal<br />
cultivators and agricultural labourers.<br />
It emerged from the analysis that<br />
decelerating growth with inadequate infrastructure,<br />
technological support and<br />
institutional arrangements forced majority<br />
of the peasants in the debt trap. Majority<br />
of indebted households were from<br />
the poorest lot in terms of <strong>size</strong> of land<br />
possession and monthly per capita consumption<br />
expenditure. However, rate of<br />
indebtedness and amount of loan was<br />
directly related with increasing <strong>size</strong> of<br />
land possession and households with<br />
higher MPCE. Contrary to belief major<br />
amount of loan utilized were for capital<br />
expenditure and current expenditure of<br />
farm and non-farm business instead of<br />
consumption purposes. However, significant<br />
amount of loan was spent on essential<br />
consumption expenditure, marriage<br />
and other ceremonial occasions<br />
also. Expenditure on education and<br />
health was the least. So far sources of<br />
loan were concerned with formal sector<br />
- commercial bank remained the major<br />
player followed by cooperative societies.<br />
Moneylender was yet significantly present<br />
in the rural borrowing market and<br />
other informal sources, i.e., traders,<br />
friends and relatives, professionals and<br />
others were not different than moneylenders<br />
with a few individual exceptions.<br />
Institutional credit remained favourable<br />
for increasing <strong>size</strong> of land possessions<br />
but mostly in poor states. Banks remained<br />
effective after nationalisation<br />
until 1980s but its performance declined<br />
significantly in late 90s. Per hectare<br />
credit to agriculture was also declined.<br />
Analysis suggests that the geneses of indebtedness<br />
were rooted in continued<br />
neglect of agriculture resulted in decelerated<br />
growth syndrome. <strong>Dec</strong>lining investment<br />
and inadequate infrastructure<br />
acted as a drag on institutional and technological<br />
transformation and modernisation<br />
with ecological balance. Poor support<br />
system for technological transfer<br />
and updating, credit, input, insurance<br />
and marketing with dependence on vagaries<br />
of monsoon resulted in crop failures<br />
and lower returns leading to misery,<br />
distress and despair.<br />
In this sort of syndrome, cultivators<br />
were often not in a position to repay the<br />
loan(s). <strong>The</strong>y hardly sustained the loss<br />
<strong>The</strong> central issue of farmers’ suicides is the debt trap.<br />
Small and marginal farmers are not eligible for availing<br />
institutional credit and crop insurance. Thus, they land at<br />
the doorsteps of the usurious moneylenders<br />
of face before the community and committed<br />
suicides. Thus, most of the unfortunate<br />
suicides were debt driven. Credit<br />
needs have been grown considerably<br />
over the time following commercialisation<br />
and modernization. However, average<br />
household borrowing in rural India<br />
has not been excessive. Inadequacy of<br />
institutional credit delivery network,<br />
poor performance of credit cooperatives,<br />
regional rural banks, and commercial<br />
banks, to meet their farm lending<br />
targets, and high cost of rural banking,<br />
etc., have aggravated further (Radhakrishna,<br />
<strong>2007</strong>). Consecutive failures<br />
of governance (in terms of effective policies<br />
and their effectual implementation)<br />
were witnessed. Instead of correcting<br />
aforesaid those lapses the economy has<br />
been moving in a different direction in<br />
the interest of the rich and corporate<br />
sectors with a faster pace of reforms. Interestingly<br />
despite symptoms of all the<br />
negative indications against the poor,<br />
contradictory policies for reforms have<br />
been put in place with a lip service to the<br />
poor. Unless poor producers are brought<br />
in the mainstream of production, control<br />
over the means of production and distribution<br />
on sustainable basis this process<br />
of marginalization, distress and despair,<br />
which has emerged out sharply in the era<br />
of reforms and globalisation of markets,<br />
may not be checked. Lowering the rate<br />
of interest on institutional loans and<br />
Right to Work may have positive effects<br />
subject to effective implementation<br />
THE INDIA ECONOMY REVIEW<br />
59
REIMAGINING INDIA<br />
which is always doubtful. However, Right<br />
to Work on ad hoc basis cannot be continued<br />
for long. Sustainable employment<br />
generation led growth process for poor<br />
producers need to be put in place. This<br />
needs stronger and active role of State,<br />
which has been narrowing down during<br />
reform process. State has compromised<br />
with anti-poor development players. Unskilled<br />
labour force has hardly any space<br />
in the reform led labour market. Meaningful<br />
employment for skilled and unskilled<br />
workforce and initiatives to create<br />
institutions and opportunities to<br />
speed up skill transformation to enter<br />
into the job market is the prime tasks<br />
which market can seldom perform for<br />
poor having no purchasing power. And<br />
civil society cannot rest in peace if the<br />
idle hands do not get employment.<br />
<strong>The</strong>refore, pro-poor activism of civil<br />
society and effective mobilisation and<br />
resistance of peasants and social activists<br />
have become an imperative for all<br />
peace loving people to create pressure<br />
upon the state to perform pro-poor role<br />
inorder to achieve growth, with<br />
meaningful employment and actionable<br />
social justice.<br />
Reference<br />
• Behera, B. and Mishra, P., (<strong>2007</strong>): Acceleration<br />
of Agricultural Growth in<br />
India: Suggestive Policy Framework,<br />
Economic and Political Weekly, vol.<br />
42, No. 42. October 20-26.<br />
•. Bhalla, G.S., (2005): <strong>The</strong> State of the<br />
Indian Farmers, G. Parthasarathi Memorial<br />
Lecture in 88th Annual Conference<br />
of the Indian Economic Association,<br />
<strong>Dec</strong>ember 28, 2005.<br />
• Despande, R.S., and Prabhu, Nagesh,<br />
(2005): Farmers Distress – Proof beyond<br />
Questions, Economic and Political<br />
Weekly, Vol.40, No. 44 and 45, November<br />
4.<br />
• Diwakar, D.M., (<strong>2007</strong>): Contours of<br />
Agrarian Crises in India, Uttar<br />
Pradesh-Uttaranchal Economic Association<br />
(UPUEA) Economic Journal,<br />
Annual Conference Number.<br />
• Government of India (2006): Towards<br />
Faster and More Inclusive Growth: An<br />
Approach to the 11th Five Year Plan,<br />
Planning Commission, New Delhi, November<br />
2006.<br />
• Government of India (2006a): Agriculture<br />
at a Glance 2006, Ministry of Agriculture,<br />
New Delhi.<br />
• Government of India (<strong>2007</strong>): Economic<br />
Survey, Ministry of Finance, New<br />
Delhi.<br />
• Lok Sabha Starred Question No. 611,<br />
dated on 09.05.2005.<br />
• Mishra, Srijit, (2006): Farmers’ Suicide<br />
in Maharashtra, Economic and Political<br />
Weekly,Vol.41,No. 16, April 22-28,<br />
pp. 1538-45,see also, Suicide Mortality<br />
Rates across States of India, in the<br />
same issue p. 1567.<br />
• Mohanty, B.B., (2005): We are Like the<br />
Living Dead: Farmer Suicides in Maharashtra,<br />
Western India, Journal of<br />
Peasant Studies, Vol.32, No.2, April,<br />
pp. 243-276.<br />
• Narayanamoorthy, A., (<strong>2007</strong>): <strong>Dec</strong>eleration<br />
in Agricultural Growth: Technology<br />
Fatigue or Policy Fatigue? Economic<br />
and Political Weekly, Vol.42,<br />
No.25, June 23.<br />
• National Sample Survey Organisation<br />
(2005): Indebtedness of Farmer Households<br />
in India, NSS Report No. 498,<br />
59 th Round, January-<strong>Dec</strong>ember 2003.<br />
• National Sample Survey Organisation<br />
(NSSO) (2006): Employment and Unemployment<br />
Situation in India, 2004-<br />
05, Report No. 515 -I<br />
• People’s Democracy, Vol.30, No. 09,<br />
February 26 th , 2006.<br />
• Rao, Nageswara, <strong>The</strong> Hindu, September<br />
11, 2005.<br />
• Radhakrishna, R. (<strong>2007</strong>): Expert Group<br />
Report on Agrarian Crisis<br />
in India, Government of India,<br />
New Delhi.<br />
• RBI’s Basic Statistical Returns of<br />
Scheduled Commercial Banks in India,<br />
various <strong>Issue</strong>s.<br />
• Sharma, H.R., (2005): Recent Trends<br />
in Wage Earnings of Agricultural Labourers<br />
State Level Analysis for Different<br />
Social Groups, Arth Vijnana,<br />
Vol. XLVII, Nos. 3-4, September-<strong>Dec</strong>ember,<br />
pp. 329-344.<br />
• Shetty, S.L. (2004): Distributional <strong>Issue</strong>s<br />
in Bank Credit, Multi-pronged<br />
Strategy for Correcting Past Neglect,<br />
Economic and Political Weekly, Vol.<br />
Xxxix, no. 29, July 17.<br />
•Sainath,P.,IndiaTogether, accessible at<br />
http://indiatogether.com/agriculture/<br />
suicides.htm; Sainath, P. (<strong>2007</strong>): Farming-<br />
it ‘s what they do, <strong>The</strong> Hindu, May<br />
24, <strong>2007</strong>, p.11; Suicides are about the<br />
living, not dead, <strong>The</strong> Hindu, May 21,<br />
<strong>2007</strong>, p.p.13.; Vidarbha: Packaging an<br />
anniversary, <strong>The</strong> Hindu, August 31,<br />
<strong>2007</strong>; it’s official: distress up, suicides<br />
appalling, India Together, 22 November<br />
2006, courtesy <strong>The</strong> Hindu, p.11;<br />
When farmers die, India Together,<br />
http://www.indiatogether.org/2004/<br />
june/psa-farmdie.htm<br />
• Vidyasagar, R. and Sunianchandra, K.,<br />
(2003): Study on Farmers’ Suicides<br />
in Andhra Pradesh and Karnataka,<br />
CSD, National Institute of Rural<br />
Development.<br />
60 THE <strong>IIPM</strong> THINK TANK
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O UTREACH • OUTPERFORM • OUTSHINE
Anu Singh,<br />
Professor of Economics, Alliance<br />
Business Academy, Bangalore<br />
Market Economy And <strong>The</strong> State Of Regional<br />
Disparities In India<br />
"By definition, a government<br />
has no conscience. Sometimes<br />
it has a policy, but<br />
nothing more."<br />
-Albert Camus<br />
Economic and social regional<br />
disparities in India among different<br />
segments of the society<br />
have been the major force behind adopting<br />
planning process in India. With the<br />
establishment of planning commission<br />
in March 1950, India launched the process<br />
of state led ‘growth with social justice’<br />
its prime concern of over all development<br />
of India and of all its states. <strong>The</strong><br />
first three decades of planned development<br />
involves massive investments in<br />
backward regions, moreover various<br />
public policies encouraged private investments<br />
in regions which are not very<br />
economically sound. Capital and other<br />
subsidies were seen as the best way of<br />
addressing regional imbalance through<br />
capital formation as well as income and<br />
employment generation. It’s considered<br />
to be the responsibility of the government,<br />
in promoting balanced development<br />
in which all states should get opportunity<br />
to develop evenly through<br />
direct investment in public sector units.<br />
In spite of these commendable efforts<br />
and policy interventions, considerable<br />
level of regional disparities remained at<br />
the end of the Seventies. <strong>The</strong> accelerated<br />
economic growth since the early<br />
Eighties appears to have aggravated regional<br />
disparities. In 1991 after the balance<br />
of payment crises Indian government<br />
followed the policy regime of<br />
Liberalization, Privatization and Globalization<br />
(LPG), which resulted in a<br />
tremendous increase in GDP and per<br />
capita Income. India today is the fourth<br />
largest economy, in the world in Purchasing<br />
Power Parity (PPP) dollars, after<br />
the US, China and Japan, and has<br />
the third largest GDP in the entire continent<br />
of Asia. It is also the second largest<br />
among emerging nations. India is<br />
also one of the select three markets in<br />
the world which proffers high prospects<br />
for growth and earning potential in<br />
practically all areas of business. <strong>The</strong> reforms<br />
generated results are quite commendable<br />
at all India level and demonstrated<br />
very great picture of our nation.<br />
But the question is whether these<br />
62 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
achievements like increase in GDP, per<br />
capita income, foreign direct investment<br />
and foreign exchange reserves are sufficient<br />
conditions for the over all development<br />
of the nation and its nationals.<br />
<strong>The</strong>se on-going economic reforms with<br />
stabilization and deregulation policies<br />
as their central pieces seem to have further<br />
widened the regional disparities.<br />
<strong>The</strong> impact of globalization and privatization<br />
is not uniform across economies<br />
and also across different sections of the<br />
population within an economy. Market<br />
economy is not meant for the equal distribution<br />
of wealth, it is an uneven process<br />
with unequal distribution of benefits<br />
and losses, both across the countries and<br />
within a country across different income<br />
groups: the rich get richer and everyone<br />
else gets poorer, many absolutely and<br />
the rest in relation to the rapidly growing<br />
wealth of the rich. It has distorted<br />
investment priorities, for wealth gets directed<br />
into areas wherein it will earn the<br />
largest profit and not into spaces that<br />
most people really need (accordingly,<br />
public health, education and other basic<br />
social services receive little attention).<br />
II. Analyzing Growth Across<br />
Select Indian States<br />
Economic reforms among other things,<br />
implied that private sector would be the<br />
principal engine of economic growth.<br />
Most of the restrictions on private investment<br />
have been removed. Mounting<br />
debt burden of the government has imposed<br />
a cap on public investment. As a<br />
result, while there was significant increase<br />
in the quantum of private investment,<br />
there was a sharp fall in the public<br />
investment over the last decade. This<br />
has created even more imbalance among<br />
different states throughout India.<br />
For studying the effects of LPG on<br />
regional growth and regional imbalances<br />
among different states we have<br />
taken indicators which have direct<br />
bearing on social and economic development<br />
of the nation or region. <strong>The</strong><br />
scope of our analysis in this article is<br />
restricted to a comparative analysis of<br />
the eight major States in respect to few<br />
key parameters which have an intrinsic<br />
bearing on social, human and economic<br />
development. For the purpose of this<br />
article, we have divided these states<br />
into two groups; forward and backward.<br />
Forward states category consists<br />
of Andhra Pradesh, Karnataka Maharashtra,<br />
and Tamil Nadu, the backward<br />
states group comprises of Bihar, Madhya<br />
Pradesh, Orissa, Rajasthan and<br />
Uttar Pradesh. <strong>The</strong> parameters taken<br />
to analyze the situation are per capita<br />
income, percentage share of poor and<br />
per capita consumption expenditure.<br />
In order to analyze the nature of the<br />
private players or the market mechanism<br />
we have collected cumulative figures of<br />
total cases of foreign direct investments<br />
done in these states. <strong>The</strong> most important<br />
indicator of the economic development<br />
of a society is the Per-capita Annual Income<br />
(PCI) generated by it. PCI is an<br />
indicator of the level of economic development<br />
and it measures the inequality<br />
in the income distribution among different<br />
regions. Per capita Gross State Domestic<br />
Product (GSDP) as a percentage<br />
of per capita GDP of the country for forward<br />
and backward group of States are<br />
presented in the Table-1. It shows the<br />
growth in per capita incomes of the two<br />
groups of States over the last two and<br />
half decades, especially from 1991. All<br />
the States in the forward group, have<br />
improved their relative position over the<br />
last two and half decades. One important<br />
point is worth mentioning is that the<br />
Per capita incomes of the three states in<br />
the forward group category except Maharashtra<br />
were below the national aver-<br />
Table 1: Per-capita GSDP As A Percentage Of GDP<br />
States 1981-82 1990-91 1999-2000 2005-2006<br />
Forward Group<br />
Andhra Pradesh 87.4 92.5 97.9 101.9<br />
Karnataka 92.8 95.4 105.8 106.1<br />
Maharashtra 143 144.7 147.4 144.2<br />
Tamil Nadu 92.8 100 122.3 116.5<br />
Backward Group<br />
Bihar 58.8 53.5 36.4 30.6<br />
Madhya Pradesh 80.8 78.1 78.2 60.8<br />
Orissa 75 66.9 66.7 NA<br />
Rajasthan 76.6 79.3 85.1 69.5<br />
Uttar Pradesh 75.8 70.6 59.4 51.6<br />
All India 100 100 100 100<br />
Source: http://mospi.nic.in/<br />
THE INDIA ECONOMY REVIEW<br />
63
REIMAGINING INDIA<br />
age in the eighties, but by the year 2005,<br />
all have gone above the national average.<br />
This is basically due to the increasing<br />
share of private investment in these<br />
states and in stark contrast, states in the<br />
backward group experienced relative<br />
deterioration in terms of per capita income<br />
and this specific deterioration was<br />
more marked after the reforms. Table-1<br />
also shows the degree of disparity in per<br />
capita income among these states,<br />
wherein Bihar and Uttar Pradesh have<br />
the greatest degree of disparity, in comparison<br />
to the forward states. <strong>The</strong> differences<br />
in per capita income between<br />
forward and backward states were minimum<br />
in 1980-81 and maximum in<br />
2005-2006.<br />
Percentage Of Poor<br />
<strong>The</strong> percentage of poverty is worth to<br />
discuss while analyzing regional disparities<br />
in India. <strong>The</strong> overall percentage of<br />
poverty has decreased from 51.3 percent<br />
in 1977-78 to 38.9 in 1987-88 and reached<br />
to the level of 36.0% in 1993-94. Now in<br />
2004-05 fewer Indians were living in<br />
poverty than in 1999-2000, with official<br />
data showing poverty declined by 4.3 per<br />
cent during this period. Poverty in India<br />
has declined to 21.8 per cent in 2004-05<br />
from 26.1 per cent in 1999-2000.While<br />
there has been great progress in reducing<br />
poverty, it has been far from even,<br />
and these data masks large regional differences.<br />
Based on NSS data, Orissa was<br />
the poorest state with 39.9 per cent of<br />
people living below poverty line followed<br />
by Jharkhand (34.8 per cent) and Bihar<br />
(32.5 per cent). Poverty levels were low<br />
in Chandigarh (3.8 per cent people living<br />
below poverty line), Jammu and<br />
Kashmir (4.2 per cent) and Punjab<br />
(5.2 percent).<br />
Among the other major states, percentage<br />
of people living below poverty<br />
line was 15 per cent in Assam, 12.5 per<br />
cent in Gujarat, 9.9 per cent in Haryana,<br />
17.4 per cent in Karnataka, 11.4 per cent<br />
in Kerala, 32.4 per cent in Madhya<br />
Pradesh, 17.5 per cent in Rajasthan, 17.8<br />
per cent in Tamil Nadu and 20.6 per cent<br />
in West Bengal. National trends in poverty<br />
reduction have been dominated by<br />
rapid growth in Forward states only<br />
other regions have seen little or no<br />
change. This is clearly presented in Table-2<br />
which is showing the<br />
percentage of poverty share<br />
among different states of<br />
India. <strong>The</strong> main beneficiaries<br />
of the overall decline in<br />
poverty in the country have<br />
been the fast growing States<br />
in the forward group. In<br />
contrast, the share of the poor in the<br />
States in the backward group has gone<br />
up significantly. As the table indicates,<br />
Table-2 Percentage Share Of Poor<br />
each one of the States in this group has<br />
now increasing share of poor from 1980s<br />
to 2000. <strong>The</strong>se show that economic<br />
growth of forward states is more than<br />
the backward states due to market<br />
mechanism.<br />
Average Monthly Per-capita<br />
Consumption Expenditure<br />
After 15 years of reforms Average<br />
Monthly Per Capita consumption Expenditure<br />
among different states is still<br />
showing wide disparities. For the forward<br />
states, it seems the formula of more<br />
market and less government<br />
is working well, but<br />
for poor states it is working<br />
in opposite direction,<br />
where government gives<br />
incentives to establish industries<br />
in these backward<br />
states, industrialist are<br />
only interested in profit maximization.<br />
All the states in the forward categories<br />
have PCCE more than Rs.1000, whereas<br />
States 1983-84 1987-88 1993-94 1999-2000<br />
Forward Group<br />
Andhra Pradesh 5.1 5.22 4.81 4.57<br />
Karnataka 4.64 5.17 4.88 4.01<br />
Maharashtra 9.01 9.65 9.53 8.76<br />
Tamil Nadu 8.05 7.53 6.31 5.01<br />
Backward Group<br />
Bihar 14.31 13.71 15.4 16.36<br />
Madhya Pradesh 8.61 8.61 9.32 11.47<br />
Orissa 5.62 5.4 5.01 6.5<br />
Rajasthan 3.93 4.65 4.01 3.14<br />
Uttar Pradesh 17.24 17.47 18.87 20.36<br />
All India 100 100 100 100<br />
Source: Planning Commission, Government of India.<br />
64 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
all the states in backward categories are<br />
having PCCE which is less than Rs.1000.<br />
<strong>The</strong> lowest among them is Bihar with<br />
only Rs.696.27 and highest PCCE is<br />
earned in Uttar Pradesh (Rs.964.02). In<br />
comparison to backward states, the lowest<br />
PCCE stands at Rs.1018.55 and highest<br />
at Rs.1148.27 (Maharashtra).<br />
Total Cases Of Foreign Direct<br />
Investment<br />
FDI influences growth by increasing total<br />
factor productivity and, more generally,<br />
the efficiency of resource use in the<br />
recipient economy. Technology transfers<br />
through FDI generate positive externalities<br />
in the host country. FDI contributes<br />
to export growth, productivity<br />
growth and finance for balance of payments;<br />
it supports increase in national<br />
income. FDI increases employment and<br />
contributes to economic growth. FDI<br />
has increased manifold over the past two<br />
decades. FDI brings private overseas<br />
funds into the country for investments.<br />
Under the new Industrial Policy Resolution<br />
the industrial policy reforms have<br />
substantially reduced the industrial licensing<br />
requirements, removed restrictions<br />
on expansion and facilitated easy<br />
access to foreign technology and foreign<br />
direct investment. Foreign Direct Investment<br />
in India is allowed on automatic<br />
route in almost all sectors. Table-<br />
3 will help us in explaining the much<br />
widening of regional imbalance<br />
throughout India. As it is evident from<br />
the table, the cumulative numbers of<br />
FDI cases are lowest in the state of Bihar(27),<br />
followed by Orissa (91) and<br />
highest in the state of Maharashtra with<br />
3743 and seconded only by Karnataka,<br />
with 2147 cases. That means the total<br />
Table-3 Total Cases Of FDI In Select States Of India<br />
Total Cases of FDI<br />
States Aug 1991-<strong>Dec</strong> 2004<br />
Forward Group Number Investment in Rs Cr<br />
Andhra Pradesh 1026 11634.44<br />
Karnataka 2147 19096.39<br />
Maharashtra 3743 37107.79<br />
Tamil Nadu 2066 22651.29<br />
Total FG 90489.91<br />
Backward Group<br />
Bihar 27 739.71<br />
Madhya Pradesh 170 9271<br />
Orissa 91 8229.31<br />
Rajasthan 241 2911.21<br />
Uttar Pradesh 536 4836.56<br />
Total BG 25987.79<br />
Source: http://eaindustry.nic.in/handbk0305/chap143.pdf<br />
gap between the highest and the lowest regions of the country. This has enabled<br />
is almost 3716 cases and this depicts the the developed regions to achieve accelerated<br />
economic growth during the<br />
clear case of wide regional inequalities.<br />
Again, the total investment in aforementioned<br />
backward states is only 28.7% of which were unable to attract any signifi-<br />
1990s. Backward regions of the country,<br />
the forward states. Ever since reforms cant private, experienced decelerated<br />
started, a great majority of FDI is directed<br />
only into select states which al-<br />
<strong>The</strong> issue of regional balance has been<br />
economic growth during this period.<br />
ready had good standard of living. <strong>The</strong> an integral component of almost every<br />
flow of private investment, both domestic<br />
and foreign, has been extremely bining<br />
and a strategy of State-led industri-<br />
Five Year Plan. <strong>The</strong> adoption of planased<br />
in favour of the more developed alization, with Plans and policies designed<br />
to facilitate more investments in<br />
the relatively backward areas were intended<br />
to lead to a more balanced<br />
growth in the country. It was expected<br />
that, over time, inter-state disparities<br />
would be minimized. An analysis of<br />
these trends, especially the more recent<br />
trends (after 1991), leads to the inevitable<br />
inference that, regional disparities<br />
still persist and in some indicators it has<br />
widened more especially after reform<br />
THE INDIA ECONOMY REVIEW<br />
65
REIMAGINING INDIA<br />
period. Also, there are others parameters<br />
like number of bank branches<br />
and credit deposit ratio which are showing<br />
the same trend of accentuating<br />
inequality.<br />
Policy Payoffs!<br />
Thus, it is clear from the above discussion<br />
that mere free market forces and<br />
mechanisms will not help in improving<br />
the overall condition of Indian economy.<br />
Government has to work side by side and<br />
even equally with the private sector, in<br />
addition to the policy incentives aimed<br />
at private bodies for attracting the requisite<br />
investments in backward regions.<br />
But as reflected in the data, they did not<br />
work properly because of other reasons<br />
like poor social capital and weak economic<br />
conditions in backward states.<br />
<strong>The</strong>re is, arguably, a greater need for<br />
higher levels of investment in social<br />
services and infrastructure, specifically<br />
in relatively backward states as compared<br />
to the more developed counterparts.<br />
<strong>The</strong> state governments of the<br />
backward regions tend to be fiscally<br />
weaker and are therefore unable to find<br />
enough resources to meet the huge investment<br />
requirements needed to catch<br />
up. <strong>The</strong>refore, if possible government<br />
should concentrate in developing backward<br />
regions and let private bodies concentrate<br />
on forward states and areas. In<br />
addition to this macro policy approach,<br />
there are several other direct and indirect<br />
measures which the state can think<br />
over. It will require Herculean tasks on<br />
the part of the Centre and the leadership<br />
in the concerned regions to ensure that<br />
the gap does not widen further.<br />
In order to reap the maximum benefits<br />
from FDI, there is a need to establish a<br />
transparent, broad and effective enabling<br />
policy environment for investment<br />
and to direct these capital flows into the<br />
areas where it is required most.<br />
References<br />
• http://planningcommission.nic.in/<br />
midterm/english-pdf/chapter-18.<br />
pdf<br />
• http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/81450.pdf<br />
• http://www.iht.com/articles/<strong>2007</strong>/04/19/news/fdi.php<br />
• http://www.mospi.nic.in/mospi_<br />
nsso_rept_pubn.htm<br />
• http://www.nyu.edu/projects/ollman/docs/china_speech2_content.<br />
php<br />
• http://www.rba.gov.au/PublicationsAndResearch/Conferences/2002/<br />
kishore.pdf<br />
• http://www.rediff.com/money/<strong>2007</strong>/mar/21poor.htm<br />
Our Weapons of Mass Instruction<br />
66 THE <strong>IIPM</strong> THINK TANK
THE GREAT INDIAN DREAM<br />
“Many ideas grow better when transplanted into another<br />
mind than in the one where they sprang up.”<br />
-Oliver Wendell Holmes<br />
When Great Indian Dream got released in August 2003, it created<br />
scores of academic debates and ideological dissent among<br />
many leaders. After inquiring into fallacies in national economic<br />
planning, specifically resource mobilisation strategies, it proffers<br />
an alternate plan, reconciling key social developmental imperatives,<br />
economic challenges and political constraints. <strong>The</strong> futuristic<br />
and unconventional economic wisdom inherent in it has been<br />
gaining a lot of acceptance and appreciation from many thought<br />
leaders in all walks of life. Accrediting their three decade old research<br />
at <strong>IIPM</strong>, the authors’ talk of potential growth rates over<br />
14%, since then. <strong>The</strong>ir observations were disregarded. But nowadays,<br />
every national and international think-tank, including the PM<br />
talks about a 10%. <strong>The</strong> Election Commission took a leaf out of<br />
this book and ordered enquiry into the rigging process in West<br />
Bengal. Many politicians were defamed and intelligentsia was<br />
provoked. Veteran lawyer, Ram Jethmalani used it for his campaigns<br />
in opposition to Atal Bihari Vajpayee. As on <strong>Dec</strong>ember<br />
2005, the tax component is almost 55 per cent in petrol and for<br />
diesel, the tax component in the price is almost 34 per cent, in line<br />
with the resource mobilisation strategies of the authors. It is indeed<br />
very assuring to find that in the last two years as it hit book stands,<br />
tolerant of a few minor deviations, the compelling socioecononomic<br />
recommendations mentioned in it remain convincingly<br />
well-founded. <strong>The</strong> ideology integral to this book has turned<br />
into a movement called ‘GID Foundation’ (GIDF), stirring a social<br />
revolution, as it supports developmental initiatives in more than<br />
2000 villages across 12 states and supporting an estimated 25,<br />
00,000 people residing primarily in the remote/backward areas.<br />
Effectual ideas relating to all social sectors are featured in the<br />
book are being executed to restore pride to the ‘betrayed India’.<br />
Reminds one about Sigmund Freud’s associable observation:<br />
‘Thought is action in rehearsal’.
Anindo Banerjee,<br />
Head, Programme Initiatives, Praxis -<br />
Institute for Participatory Practices,<br />
Patna<br />
Accountable Governance And Pro-poor Markets<br />
For Effective Poverty Reduction<br />
"Adam Smith, the father of modern economics,<br />
is often cited as arguing for the “invisible hand”<br />
and free markets: fi rms, in the pursuit of profi ts,<br />
are led, as if by an invisible hand, to do what is<br />
best for the world. But unlike his followers, Adam<br />
Smith was aware of some of the limitations of<br />
free markets, and research since then has further<br />
clarifi ed why free markets, by themselves, often<br />
do not lead to what is best. As I put it in my<br />
new book, Making Globalization Work, the<br />
reason that the invisible hand often seems invisible<br />
is that it is often not there."<br />
ALTMAN Daniel, Managing Globalization.<br />
In: Q & A with Joseph E. Stiglitz,<br />
Columbia University and <strong>The</strong> International<br />
Herald Tribune (IHT),<br />
October 11, 2006<br />
In the month of October, when<br />
over twenty five thousand landless<br />
agricultural labourers hailing<br />
from various dalit 1 and tribal communities<br />
of India marched to New Delhi<br />
to press for their land rights and succeeded<br />
in securing a vital policy decision<br />
towards constitution of a highpowered<br />
‘National Land Reforms<br />
Council’ headed by the Prime Minister,<br />
they heralded a historic assertion<br />
against increasing market-led appropriation<br />
of vital resources like land,<br />
water, mines and forests. Given that<br />
the last two decades have witnessed<br />
countless instances of dispossession of<br />
the poor in developing economies<br />
from critical life-support systems,<br />
mostly at the behest of market-forces<br />
actively aided by agencies of the State,<br />
the issues concerning the role and obligations<br />
of market forces and agencies<br />
of the State towards poverty reduction<br />
need to be examined cautiously, with<br />
an eye on the impacts of contemporary<br />
trends and policies on the well-being<br />
of poor communities.<br />
Markets And <strong>The</strong> Poor<br />
<strong>The</strong> experiences of several African<br />
governments during the eighties and<br />
the nineties relating to policies aimed<br />
at overcoming acute fiscal imbalances<br />
are a good pointer to the potential impact<br />
of ungoverned market forces on<br />
critical sectors such as agriculture.<br />
Measures administered to this effect<br />
on the advice of international financial<br />
institutions like the World Bank included<br />
withdrawal of the public sector<br />
from sectors like agriculture, de-control<br />
of prices, reduction of farm subsidies<br />
and increased privatization. <strong>The</strong><br />
outcomes were equally radical: the<br />
drastic steps immediately affected<br />
over seventy percent of the poor in the<br />
region by drastically suppressing food<br />
production. A recently concluded evaluation<br />
2 of World Bank’s role in African<br />
agriculture attributed the crisis to the<br />
68 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
inability of market forces to step in<br />
and jump-start agricultural growth.<br />
According to Professor Jeffery Sachs<br />
of Columbia University, “<strong>The</strong> whole<br />
thing was based on the idea that if you<br />
take away the government for the poorest<br />
of the poor, markets will somehow<br />
solve the problems, but markets can’t<br />
step in and won’t step in when people<br />
have nothing. And if you take away<br />
help, you leave them to die.” 3<br />
<strong>The</strong> example of sub-Saharan Africa<br />
clearly illustrates the criticality of the<br />
role of a pro-poor ‘welfare state’ in<br />
safeguarding the survival needs of the<br />
poorest of the poor, who do not offer<br />
any investment incentives to profitseeking<br />
market forces.<br />
According to the United Nations-<br />
Millennium Development Goals<br />
(MDGs) report of <strong>2007</strong>, the share of<br />
the poorest fifth of populations in developing<br />
regions in national consumption<br />
decreased from 4.6 to 3.9 percent<br />
between 1990 and 2004. Widening income<br />
inequality is of particular concern<br />
in Eastern Asia, where the share<br />
of consumption among the poorest<br />
people declined dramatically during<br />
this period. Inequality is the highest in<br />
Latin America, the Caribbean and in<br />
sub-Saharan Africa, where the poorest<br />
fifth of the people account for only<br />
about three percent of national income,<br />
despite increased involvement<br />
of market forces in local economies.<br />
Internationally, 46 countries of the<br />
world have become poorer today than<br />
they were in 1990, according to Human<br />
Development Report 2004.<br />
Nearly 1300 million people live in<br />
absolute poverty, earning less than one<br />
dollar a day, while about 3000 million<br />
people, more than a half of the world’s million people are officially registered<br />
population live on less than two dollars as unemployed, besides an additional<br />
a day. According to the International 700 million underemployed people.<br />
Labour Organization (ILO), over 120 Instances of poverty, which often are<br />
Growing Inequality In <strong>The</strong> World<br />
Share Of Poorest Quintile In National Consumption,<br />
1990 And 2004 (Percentage)<br />
Latin America & the Caribbean<br />
2.8<br />
2.7<br />
3.4<br />
1990<br />
3.4<br />
2004<br />
Eastern Asia<br />
7.1<br />
4.5<br />
Western Asia<br />
5.9<br />
5.4<br />
South-Eastern Asia<br />
6.2<br />
6.1<br />
CIS<br />
7.9<br />
6.2<br />
Northern Africa<br />
6.2<br />
6.3<br />
Southern Africa<br />
7.2<br />
6.7<br />
Transition Countries Of South-Eastern Europe<br />
8.3<br />
7.8<br />
Developing Regions<br />
4.6<br />
3.9<br />
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0<br />
Source: UN MDG Report <strong>2007</strong><br />
THE INDIA ECONOMY REVIEW<br />
69
REIMAGINING INDIA<br />
a complex interplay of social, political<br />
and economic factors, can be addressed<br />
only by interventions that hit<br />
hard at the root causes of inequalities,<br />
rather than by the quirks of unregulated<br />
markets that by design are tailored<br />
to suit the conditions of the rich<br />
and the powerful. Given the enormous<br />
amounts of power, influence and resources<br />
that the latter tend to have at<br />
their disposal, often catalyzed by increasing<br />
overlap of political and business<br />
interests in most modern economies,<br />
the only chance for the poorest<br />
people rests on systems of governance<br />
that can be held to account and at least<br />
be subjected to a floor test of popularity<br />
based on electoral performance of<br />
alternative political ideologies.<br />
<strong>The</strong> message of the poorest people<br />
is loud and clear: governments must<br />
protect them from the vagaries of market!<br />
<strong>The</strong>ir verdict has been communicated<br />
clearly on many an occasion,<br />
evident in the electoral defeat of the<br />
‘India Shining’ campaign in India. <strong>The</strong><br />
resurrection of the ‘Aam Aadmi’ (i.e.<br />
the ‘common man’) as a reference<br />
point of current development policies,<br />
at least rhetorically, has been compelled<br />
by lessons learnt from many of<br />
these recent trends. Yet, the poorest of<br />
the poor in countries like India continue<br />
to face unprecedented challenges<br />
to their existence. <strong>The</strong> markets are<br />
pushing them hard to extinction, by<br />
encroaching upon some of their commonest<br />
avenues of survival, notably<br />
retail trade, artisan-crafts, common<br />
property resources and most alarmingly,<br />
agriculture.<br />
One needs to delve into the basic<br />
Food grain off-take through the PDS declined from 17<br />
million tonnes per year in the early nineties to 12 million<br />
tonnes per year around the end of the decade, endangering<br />
the food security of millions of the poor<br />
character and orientation of markets<br />
to assess their potential role in poverty<br />
reduction. Markets operate on the<br />
laws of supply and demand, and thereby<br />
play a role in fixation of prices and<br />
wages. <strong>The</strong>oretically speaking, the<br />
price of a product or service is directly<br />
proportional to the rarity of its supply,<br />
its quality, the cost of production, and<br />
inversely proportional to the bargaining<br />
power of the buyer and degree of<br />
regulation of unfair practices. For<br />
markets to be favourable entities for<br />
the poor (when participating in markets<br />
as sellers), the latter ought to be<br />
able to vie with competing forces towards<br />
suppressing the cost of production,<br />
acquiring greater market share to<br />
limit the range of suppliers and towards<br />
investing adequately in optimizing<br />
the quality of the product. Such<br />
possibilities are likely to be highly infeasible,<br />
given their limited economic<br />
abilities. Similarly, as buyers of products<br />
or users of services, their bargaining<br />
power is often limited on account<br />
of their limited ability to promise continuity<br />
as buyers or users, limited creditworthiness<br />
and lack of effective<br />
mechanisms to hold sellers/service<br />
providers accountable. Profit-seeking<br />
markets are more likely to serve clients<br />
that can offer greater economic returns<br />
to producers and therefore are<br />
likely to exclude the poor. <strong>The</strong> only<br />
ways to offset this fundamental likelihood<br />
of exclusion is to either regulate<br />
the markets in order that the poor are<br />
compulsorily served on pro bono terms<br />
as a principle of policy, or to create<br />
alternative providers that by mandate<br />
serve the poor. This necessitates a<br />
role for a pro-poor welfare state<br />
or non-profit organizations in<br />
serving the needs and interests of<br />
the poor.<br />
India was one of the fastest growing<br />
economies in the world during the<br />
nineties. <strong>The</strong> decade also witnessed an<br />
unprecedented scale of entry of market<br />
forces in various sectors of the<br />
economy. Yet, despite a significant<br />
spurt in macroeconomic growth, the<br />
rate of reduction of rural poverty in<br />
India was halted during the 1990s. Estimates<br />
show that the incidence of poverty,<br />
which between 1972-1973 and<br />
1989-1990 fell from 55.4 percent to<br />
34.3 percent in rural India, never went<br />
below the 1989-90 level in subsequent<br />
70 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
NSSO rounds undertaken up to 1997<br />
(Please refer to the diagram) iv . Though<br />
the rate of decline of rural poverty<br />
picked up again during the subsequent<br />
years (from 1999-2004), the rate of<br />
GDP growth was in fact less during<br />
this phase than during 1993–1999. <strong>The</strong><br />
average per-capita expenditure in rural<br />
areas was not even ten percent<br />
higher in 1999-2000 than in 1993-1994,<br />
and rural poverty actually went up in<br />
some of the poorer states, such as Assam<br />
and Orissa. Also, food grain offtake<br />
through the public distribution<br />
system declined from 17 million tonnes<br />
per year in the early nineties to 12 million<br />
tonnes per year around the end of<br />
the decade 5 , endangering the food security<br />
of millions of the poor in the<br />
country at the time when the GDP<br />
growth was unprecedented.<br />
<strong>The</strong> State vis-à-vis <strong>The</strong> Poor<br />
<strong>The</strong> Eleventh Five-Year Plan of India<br />
underscores the challenge of providing<br />
employment to 70 million additional<br />
people by 2011-12. It is also a well-established<br />
fact that the incidence of<br />
It is a well-established fact that the incidence of unemployment<br />
is substantially higher in the ‘below poverty line’<br />
category, and particularly high amongst the Scheduled<br />
Castes (SCs) and Scheduled Tribes(STs)<br />
unemployment is substantially higher<br />
in the ‘Below Poverty Line’ category,<br />
and particularly high amongst the<br />
scheduled castes and tribes therein (as<br />
indicated by successive National Sample<br />
Surveys). A critical question therefore<br />
is: what strategies and preparedness<br />
does the State have to meet this<br />
challenge, which is important to be addressed<br />
to prevent the nation’s slide<br />
into anarchy? Do markets provide a<br />
Trends In <strong>The</strong> Poverty Ratio (1972 - 1997)<br />
60<br />
55<br />
55.36<br />
Rural<br />
Urban<br />
50<br />
50.6<br />
45<br />
40<br />
35<br />
30<br />
45.67<br />
45.31<br />
40.5<br />
38.81<br />
35.65<br />
34.29<br />
39.23 39.06<br />
36.6<br />
34.3<br />
36.2<br />
33.4<br />
43.47<br />
36.43<br />
33.73<br />
32.76<br />
41.02<br />
36.66<br />
33.5<br />
30.51<br />
37.15<br />
35.78<br />
29.99<br />
25<br />
28.04<br />
Oct 72-Sep 73<br />
Jul 77- Jun 78<br />
Jan 83- <strong>Dec</strong> 83<br />
Jul 86-Jun 87<br />
Jul 87-Jun 88<br />
Jul 88-Jun 89<br />
Jul 89-Jun 90<br />
Jul 90-Jun 91<br />
Jan 92-<strong>Dec</strong> 92<br />
Jun 93-Jun 94<br />
Jul 94-Jun 95<br />
Jul 95-Jun 96<br />
Jan 97-<strong>Dec</strong> 97<br />
Percent Population<br />
(Source: "<strong>The</strong> Poverty Puzzle" by C.P. Chandrasekhar and Jayati Ghosh, Macroscon, Feb. 22, 2000)<br />
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REIMAGINING INDIA<br />
solution, or do they further endanger<br />
the chances of survival of the poor?<br />
Can democratic governments be allowed<br />
to forego their duties towards a<br />
majority of their trustees who vote<br />
them into power?<br />
Of late, various governments in India<br />
have been offering unprecedented<br />
incentives to the private sector with an<br />
eye on macro-economic growth. For<br />
instance, policies relating to establishment<br />
of Special Economic Zones<br />
(SEZs) include significant supports to<br />
private entrepreneurs in the form of<br />
facilitation of land acquisition, tax rebates<br />
and friendlier administrative<br />
mechanisms, amongst others. However,<br />
many of the provisions jeopardize<br />
the long-term interests of the poor in<br />
many ways and the much-touted objective<br />
of inclusive growth hasn’t come<br />
into effect. For instance, one of the<br />
largest Special Economic Zones in India<br />
proposed to be set up by Reliance<br />
Industries Limited in Maharashtra<br />
across three tehsils of Raigad district<br />
threatens to displace nearly 35,000<br />
farmers based over 25,000 hectares of<br />
agricultural land. <strong>The</strong> threat to the<br />
livelihoods of the farmers likely to lose<br />
ownership of land are sought to be offset<br />
merely by providing monetary compensation<br />
without any thoughts about<br />
the limited livelihood-choices available<br />
to them, consequent pressure on<br />
limited urban infrastructure, or the<br />
implications for a large number of nonowner<br />
dependents of farmland, e.g.<br />
sharecroppers or wage labourers.<br />
In similar developments across the<br />
country, as many as 396 SEZs have<br />
been accorded formal clearance by the<br />
government (by October <strong>2007</strong>), of<br />
which 149 have already been notified.<br />
When households displaced by SEZs<br />
or big projects migrate to cities, their<br />
survival becomes even more arduous,<br />
thanks to modern urban policies that<br />
increasingly shut out spaces from the<br />
reach of the poor. <strong>The</strong> commonest<br />
Markets, unless regulated with a pro-poor orientation, can<br />
eliminate the poor rather than contributing to poverty<br />
reduction, given the inherent tendencies of supply-side<br />
domination and profi t maximization<br />
coping avenues for the poor, e.g. participation<br />
in retail trade, accessing<br />
state-run basic services, or opting for<br />
low-investment livelihoods (e.g. rag<br />
picking or plying rickshaws) are made<br />
increasingly inaccessible by policies<br />
that allow entry of big business houses<br />
in retail trade, enhance the cost<br />
of basic services by allowing their<br />
privatization, or block public spaces<br />
for the poor.<br />
Another area of concern relates to<br />
increasing privatization of common<br />
property resources in the country,<br />
bearing life-threatening implications<br />
for a large number of poor communities.<br />
<strong>The</strong> operations of mining companies<br />
in various forest-rich areas of<br />
states like Chhattisgarh and Jharkhand<br />
have destroyed the age-old forestbased<br />
livelihoods of many tribal families.<br />
In Orissa, the state government<br />
has already committed several rivers<br />
and reservoirs for use by industry for<br />
water-intensive activities. In Chhattisgarh<br />
too, industries have been permitted<br />
to draw water from rivers like Kelo<br />
and Sheonath. Kelo, a tributary of Mahanadi<br />
river, happens to be an important<br />
source of livelihood for over sixty<br />
village communities settled alongside<br />
its 98 kilometer long stretch across<br />
Raigarh district of Chhattisgarh,<br />
whose lives have been badly affected<br />
due to severe decline in the stock of<br />
river water. During a People’s Tribunal<br />
held in Kolkata in January <strong>2007</strong>, Santwana<br />
Dey – an elderly woman hailing<br />
from a farmer household based in Bejiberia<br />
village of Singur where the<br />
Government of West Bengal acquired<br />
land for handing over to Tata Motors<br />
in lieu of promises of jobs in a car factory<br />
and offers of monetary compensation,<br />
raised a fundamental issue: ‘no<br />
one can dictate what should my family<br />
do for a living; we have a right to pursue<br />
occupations that we are capable of and<br />
cannot be forced to work in a car factory,<br />
which we have no inkling about!’<br />
Santwana’s straightforward assertion<br />
in the Tribunal underscored a legiti-<br />
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mate contention of millions of marginalized<br />
citizens of the country – regarding<br />
their right to work, and<br />
particularly the right to avail of work<br />
of a suitable and gainful nature, in<br />
keeping with the directive of the constitution<br />
of India (Article 41; Directive<br />
Principles of State Policy) calling upon<br />
the State to make effective provisions,<br />
within the limits of its economic capacity<br />
and development, for securing<br />
the right to work. In a country where<br />
the rate of growth of the <strong>size</strong> of labour<br />
force exceeds the rate of growth of employment,<br />
and where over ninety percent<br />
of the workforce is employed in<br />
the unorganized sector, the challenge<br />
of creating gainful employment opportunities<br />
for a large segment of socially<br />
and economically disadvantaged citizens<br />
remains the greatest trial of relevance<br />
of our welfare state. <strong>The</strong> performance<br />
of the State with respect to<br />
its duties towards the poorest of the<br />
poor people might have been inadequate<br />
and often inefficient, but it has<br />
undoubtedly been critical. No other<br />
agency has the scale and depth of presence<br />
amongst the poor like agencies of<br />
the State. <strong>The</strong>re are important policies<br />
favouring affirmative action for the<br />
socially marginalized, employment<br />
guarantees, relief from disasters, decentralized<br />
governance, right to information,<br />
provisions against atrocities<br />
and social security benefits for especially-challenged<br />
people and affordable<br />
basic services. However, bureaucracies<br />
managing a State’s performance<br />
have often failed to administer the<br />
pro-poor provisions effectively and<br />
have eluded any kind of accountability<br />
to the people. In many states, they<br />
have also undermined the status and<br />
potential of Panchayati Raj institutions<br />
by assuming sweeping powers over decisions<br />
relating to local development.<br />
Holding functionaries of the State accountable<br />
is the greatest need of the<br />
hour, not reducing the role of<br />
the State.<br />
<strong>The</strong> Way Forward<br />
For poverty reduction to be effective<br />
and viable in the long run, the State<br />
needs to play a far more efficient and<br />
accountable role than it is today, without<br />
withdrawing itself from the obligation<br />
of poverty reduction. Markets can<br />
be made a supportive channel towards<br />
creation of more development opportunities<br />
for the people, through regulations<br />
that bring about a level playing<br />
field. A two-pronged strategy, where<br />
the State assumes full responsibility<br />
for efficient and accountable delivery<br />
of crucial basic services and entitlements,<br />
and also enables poor communities<br />
to effectively engage with markets<br />
can significantly contribute to the<br />
wellbeing of the poor. Facilitating<br />
meaningful participation of the poor<br />
in contemporary markets would call<br />
for support towards value addition and<br />
sale of economic products of the poor;<br />
storage of goods; establishment of efficient<br />
institutions for managing procurements,<br />
forward movements and<br />
linkages; price control and equitable<br />
incentives, amongst other things. Local<br />
institutions of governance need to<br />
be freed from the control of bureaucracy<br />
and capacitated to play an effective<br />
regulatory role towards safeguarding<br />
the strategic needs of the poor,<br />
based on principles of equity and<br />
social justice.<br />
Markets, unless regulated with a<br />
pro-poor orientation, can eliminate<br />
the poor rather than contributing to<br />
poverty reduction, given the inherent<br />
tendencies of supply-side domination<br />
and profit maximization. <strong>The</strong> poor<br />
have little say in the functioning of<br />
market forces, but have some stake and<br />
control in the governments they elect.<br />
<strong>The</strong> only way in which the poor can<br />
safeguard their interests in a market is<br />
by electing pro-poor governments that<br />
eliminate anti-poor market forces and<br />
regulate supplies of essential goods<br />
and services in order that they remain<br />
accessible and affordable to the poor.<br />
Good governance is the right of every<br />
citizen, and ensuring the same through<br />
effective mechanisms of accountability<br />
of government functionaries is the<br />
greatest need of the hour.<br />
End Notes<br />
1<br />
‘Dalit’ literally means ‘oppressed’<br />
and refers to socially marginalized<br />
communities living in India.<br />
2<br />
Evaluation undertaken by <strong>The</strong> Independent<br />
Evaluation Group of the<br />
World Bank, titled “Assessment<br />
of the Bank’s assistance to agricultural<br />
development in Sub-Saharan<br />
Africa during FY 1991-06”<br />
3<br />
Ref. report titled ‘World Bank Neglects<br />
African Farming, Study Says’,<br />
published in the New York<br />
Times, October 15 <strong>2007</strong><br />
4<br />
Ref. ‘<strong>The</strong> Poverty Puzzle’ by C.P.<br />
Chandrasekhar and Jayati Ghosh,<br />
Macroscan, February 22, 2000<br />
5<br />
Ref. ‘Hunger amidst Plenty’ by Jean<br />
Drèze, India Together, <strong>Dec</strong>ember 3,<br />
<strong>2007</strong><br />
THE INDIA ECONOMY REVIEW<br />
73
Anjani Sinha<br />
Managing Director & CEO,<br />
National Spot Exchange Limited,<br />
Mumbai<br />
Food Security In India:<br />
<strong>Issue</strong>s And Implications<br />
"annam na nindyat. tadvratam."<br />
(Do not look down upon anna. That is<br />
the inviolable discipline of life for the one<br />
who knows.)<br />
"annam na paricaksita. tadvratam."<br />
(Do not neglect anna. That is the<br />
inviolable discipline of life for the one<br />
who knows.)<br />
"annam bahu kurvita. tadvratam."<br />
(Multiply anna many-fold. Ensure an<br />
abundance of food all around. That is the<br />
inviolable discipline of life for the one<br />
who knows.)<br />
-<strong>The</strong> Taittiriyopanisad<br />
1. Concept<br />
Food Security refers to the scenario in<br />
which every citizen of the country has access<br />
to sufficient and affordable good<br />
quality food. <strong>The</strong> concept has evolved<br />
during the last three decades to include<br />
not only food availability, but also economic<br />
access to food and biological absorption<br />
of food in the body. It is considered<br />
in terms of availability of foods, its<br />
quality, its accessibility and affordability<br />
for general mass. Thus we can say that<br />
there are four pillars of food secu<br />
rity - Availability, Affordability, Accessi<br />
bility and Quality of food in terms of<br />
balanced diet.<br />
2. Objectives And Focus<br />
2.1 India’s food security policy has a<br />
laudable objective to ensure availability<br />
of food grains to common mass at an affordable<br />
price. It has enabled the poor to<br />
have access to food where none existed.<br />
When India got Independence, the then<br />
Prime Minister Late Sri Jawaharlal Nehru<br />
said, “Everything else can wait but<br />
not agriculture.”<br />
2.2 Historically, India’s food security<br />
policy has focused essentially on growth<br />
in agriculture production, fixing minimum<br />
support price for procurement and maintaining<br />
buffer stocks of rice and wheat to<br />
ensure food security.<br />
3. Concerns<br />
3.1 As a matter of fact, concern on<br />
food security has always haunted the<br />
scholars and policy makers right from<br />
Malthusian <strong>The</strong>ory way back in eighteenth<br />
century. This is mainly because of limited<br />
and declining natural resources and ever<br />
increasing population.<br />
3.2 Recently, Government of India<br />
has taken a policy decision to allocate Rs.<br />
48.82 billion for National Food Security<br />
Mission (NFSM). <strong>The</strong> primary objective<br />
is to raise the production of rice, wheat<br />
and pulses during the 11 th Five-Year Plan<br />
period (<strong>2007</strong>-12) and ensure food security<br />
in the country. Assuming requirement of<br />
175 kg cereals and 11 kg of pulses per<br />
capita per annum, India needs 265 million<br />
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Per-capita Per Day Availability Of Foodgrains<br />
In India Since 1971<br />
Period Cereals Pulses Food Grains<br />
1971-1975 393 44 437<br />
1981-1985 417 39 456<br />
1991-1995 445 37 482<br />
2001-2005 414 32 446<br />
Projected Growth Rate And Demand For<br />
Various Food Commodities Towards 2011-12<br />
Food Item<br />
Projected<br />
Growth<br />
Rate (%)<br />
tons of cereals production and 17 million<br />
tons of pulses production by the end of<br />
2050. Achieving this level of production is<br />
not a big task as India currently produces<br />
around 210 million tons of food grains.<br />
But, it needs a serious planning and<br />
effective implementation.<br />
3.3 Adequate per capita availability of<br />
food is a function of food production on<br />
one hand, and growth in population and<br />
purchasing power, on the other. Nature of<br />
food security varies across population categories<br />
and geography. Food production<br />
is the result of interaction of human being’s<br />
crop production technique and management<br />
of the natural resources such as<br />
Demand:<br />
Million<br />
Tonnes<br />
Food grains 2.21 251.7<br />
Milk and milk products 3.18 100.39<br />
Meat 4.65 5.36<br />
Eggs: Billion 4.62 35.77<br />
Fish 4.58 5.91<br />
Oilseeds 2.94 49.2#<br />
Vegetables 2.51 92.93<br />
Fresh Fruits 3.46 29.43<br />
Sugar and gur 1.88 22.49<br />
# Assume 40% dependence on import for edible oil<br />
Source: NACP–ICAR In House Estimates<br />
Note: Projected demand includes export in the same ratio as n the base scenario<br />
2003-04 for foodgrains and in 2004-05 for others.<br />
land, water, weather and climatic<br />
condition. <strong>The</strong> guiding<br />
principle should be optimal<br />
utilization of scarce<br />
resources. Thus it is important<br />
to know the natural<br />
Resources, understand the<br />
level of technology utilization,<br />
and understand effect<br />
of modern production technology<br />
on the natural resources,<br />
limitation of total<br />
efforts towards production<br />
increase and understanding<br />
of the scope of overall utilization<br />
of scientific knowledge<br />
in our present agriculture.<br />
It is also important<br />
that natural resources<br />
should continue to be available<br />
without deterioration<br />
over a long period of time.<br />
3.4 <strong>The</strong> natural resources,<br />
which we have, are limited<br />
especially land and<br />
water. Fertility of land is<br />
declining. Soil health has<br />
been declining because of excessive usage<br />
of fertilizer and pesticide. Organic contents<br />
and microenvironment of the soil has<br />
undergone noticeable changes impacting<br />
productivity. <strong>The</strong>re is change in weather<br />
pattern and climatic condition. Frequency<br />
of erratic rain, floods and droughts has<br />
increased considerably.<br />
3.5 Level of technology utilization in<br />
Indian agriculture is highly uneven and<br />
biased to certain pockets of the county.<br />
Green revolution helped India to transform<br />
itself from food deficit to food surplus<br />
country. But unfortunately, green<br />
Revolution has not percolated across all<br />
the states. Application of modern production<br />
techniques is still limited to some<br />
pockets, like the states of Punjab and<br />
Haryana. High variation in production<br />
and productivity in different states is the<br />
result of varying level of technology integration<br />
in our agriculture production.<br />
3.6 <strong>The</strong> long term sustainability of<br />
agriculture and consistent growth in production<br />
and productivity matching with<br />
population growth is a big question mark.<br />
It has been noticed that in various parts of<br />
Punjab and Haryana, water level has gone<br />
down to such levels that water extraction<br />
has become economically unviable. Nitrogen<br />
contents of water has increased, there<br />
is presence of pesticides residue in drinking<br />
water. Heavy and unscientific method<br />
of fertilizer application has taken a toll on<br />
the soil quality. <strong>The</strong>re is adverse impact on<br />
the local microclimate because of intensive<br />
agriculture and similar crop cycle over<br />
a long period of time. Higher contents of<br />
fertilizer and pesticides in ground water<br />
not only affect productivity, but it also severely<br />
affects the food quality. Situation<br />
Food production is the result of interaction of human being’s<br />
crop production technique and management of the<br />
natural resources. <strong>The</strong> guiding principle must be<br />
optimal utilization of scarce resources<br />
demands to take corrective as well as preventive<br />
actions to maintain agriculture<br />
growth sustainable in the long run.<br />
3.7 In India average per capita land<br />
holding is less than 0.16 hectare. Average<br />
farm holding with farmers is 1.6 acre. Now<br />
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let us take the case of a typical farmer. His<br />
crop production decision is guided by his<br />
immediate needs. <strong>The</strong> decisions of seeds<br />
selection, fertilizer, pesticides etc are<br />
based on his own feeling or fellow farmers’<br />
advice that may be scientific or unscientific.<br />
Crop cycle is decided not on the basis<br />
of scientific procedure but the personal<br />
requirements of the farmer. Hence, the<br />
concern is how to transform sustenance<br />
agriculture into agri-business.<br />
4. Strategy To Combat<br />
<strong>The</strong> Concerns<br />
4.1 Though the Government and<br />
different agencies have done commendable<br />
job to transform India from food<br />
starved to food surplus nation, still due<br />
to lack of effective extension services,<br />
the impact in a number of States has<br />
been less than desirable levels. <strong>The</strong><br />
States of UP, Bihar and West Bengal<br />
cities, service industry has penetrated in<br />
our day to day life in such a manner, that<br />
we are dependent upon one or the other<br />
service provider for our daily needs. Examples<br />
are newspaper vendor, milk supplier,<br />
etc. without whom the daily routine<br />
does not start in cities. But, in agriculture,<br />
it is not so. A farmer does sowing, irrigation,<br />
pesticide treatment, harvesting and<br />
marketing of produce – all activities himself.<br />
He knows agriculture very well, but<br />
his knowledge is confined to old techniques.<br />
He does not get any professional<br />
training to use modern techniques. In<br />
most cases, he is dependent upon the vendor<br />
only for advisory services also. For<br />
example, he asks the pesticide vendor how<br />
much quantity of pesticide he should use<br />
to treat his farms. <strong>The</strong>re are cases where<br />
only one liter of pesticide is sufficient, if<br />
properly applied, but, the pesticide vendor<br />
sells a 5 liters container advising him to<br />
Crop cycle is decided not on the basis of scientifi c procedure<br />
but the personal requirements of the farmer.<br />
Hence, the concern is how to transform sustenance<br />
agriculture into agri-business<br />
have very fertile land, but productivity is<br />
lower than the national average. Here<br />
lies the potential to be tapped. Major<br />
constraints in these areas are limited use<br />
of modern agriculture production technique<br />
by farmers in absence of effective<br />
extension activities. <strong>The</strong> productivity of<br />
rice and wheat grown in these areas is<br />
quite low. Hence, by focusing on these<br />
states, we can achieve remarkable success<br />
in ensuring food security.<br />
4.2 Another strategy to ensure food<br />
security is launching of professional commercial<br />
services at village levels to provide<br />
various agri solutions to the farmers. In<br />
apply the same frequently, because the<br />
main interest of the vendor could be to sell<br />
pesticide. If there is a service agency locally<br />
available, which is run by a qualified<br />
agriculture graduate, and he provides an<br />
end to end solution for pesticide treatment<br />
at a fee, the farmer may save money because<br />
of reduction in input cost, yield may<br />
improve because of non application of excessive<br />
pesticide and still the agriculture<br />
graduate can run the service unit in a profitable<br />
manner. We can apply this theory<br />
for all activities associated with agriculture-sowing,<br />
harvesting, processing and<br />
so on. A well qualified professional having<br />
expertise in mangoes can provide excellent<br />
services in mango growing area about<br />
plucking of mangoes scientifically, identifying<br />
such mangoes which are totally matured.<br />
This will give confidence to the<br />
marginal farmer that he himself is the<br />
owner of his land, he himself is in possession<br />
of his land, though he is a marginal<br />
farmer who otherwise cannot buy new machines<br />
and agricultural equipments as it is<br />
not viable for marginal holding, still he can<br />
avail all the modern facilities at his doorstep.<br />
Hence, the second mantra for ensuring<br />
food security in Indian context, considering<br />
the fragmented holding and<br />
marginal farmers, is organizing extensive<br />
application of professional but commercial<br />
services at farm level in the form of either<br />
independent small ventures run by agriculture<br />
graduates or by big corporate<br />
launching such service on a large scale.<br />
4.3 Nature has bestowed us with<br />
enough resources. <strong>The</strong> Ganges belt is so<br />
fertile that it can feed wheat to the entire<br />
world, if it is utilized properly. Similarly,<br />
soil in other area is most ideal for cotton<br />
production. In order to ensure comprehensive<br />
and sustained growth, what is important<br />
is to have a national level unbiased<br />
scientific crop planning, based on agro<br />
climatic conditions, soil type, soil condition,<br />
method of available irrigation, potential<br />
of irrigation, infrastructure requirement,<br />
existence of infrastructure,<br />
suitability of various crops to be grown in<br />
that area, seed variety selection, fertilizer<br />
dosage determination, application of pesticides<br />
and plant nutrient, crop monitoring,<br />
scientific method of problem identification<br />
and suitable solution, food habits in<br />
the area. India is divided in 15-agro climatic<br />
zones. Each zone has got its own<br />
potential and limitation. Crop production<br />
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planning based on the resources availability<br />
in these zones is required to be done to<br />
use the resources judiciously. Planning<br />
should be based on scientific study coupled<br />
with commercial planning, with farmers’<br />
interest in mind. If his land is suitable<br />
for a specific cash crop, which will give<br />
him better return on investment, he should<br />
be induced to do so, even if it means he has<br />
to buy food grains from the market. Under<br />
this planning, the country as a whole has<br />
to evaluate, which crop we should produce<br />
here and which crop we should import, so<br />
that overall return on agriculture improves.<br />
Similarly, if water is deficient in an<br />
area, farmers should not cultivate sugarcane<br />
there. Instead of thinking in terms<br />
of quintals per hectare, we have to start<br />
thinking in terms of Rupees per hectare.<br />
This will be the real transformation of sustenance<br />
agriculture into agri business.<br />
Hence, the third mantra is national level<br />
integrated crop planning, with focus on<br />
farmers’ return on investment.<br />
4.4 Information is key to success. Authentic<br />
and timely information reduces<br />
uncertainty in business. India is one of the<br />
leading countries in respect of Information<br />
technology. But, if we look at Indian<br />
agriculture or even information relating<br />
to Indian agriculture, we do not find IT<br />
application working anywhere. We know<br />
from USDA data what is happening in US,<br />
but we do not know what is happening in<br />
our own villages. Authentic information<br />
can be generated only if we have robust<br />
information system coupled with robust<br />
connectivity backbone upto village level.<br />
For this purpose, if the entire agricultural<br />
land in the country is mapped on computer<br />
software and latest technology for database<br />
designing and data mining is used,<br />
it will prove to be the most powerful tool<br />
to help agriculture. If the village level representative<br />
is required to feed data on<br />
daily basis regarding sowing, crop pattern,<br />
harvesting on daily basis relating to all<br />
land holding in his area and all such data<br />
travels to a central server, where it is processed<br />
to generate consolidated reports, we<br />
will get the most valuable information<br />
about Indian agriculture on daily basis.<br />
This information will be most useful for<br />
the farmers also, because they will know<br />
in how much area, onion is already sown<br />
and so, whether he should do onion cultivation<br />
or shift to some other crop. Today,<br />
if price of a commodity is higher in a year,<br />
lot of farmers will cultivate the same commodity<br />
next year, which leads to glut; fall<br />
in price and resultant loss. A number of<br />
companies will be interested to buy data,<br />
because their business is connected with<br />
agriculture and hence, the entire venture<br />
can be run in a profitable manner. Looking<br />
at the outstanding success of telecom<br />
revolution in our country, it is not a difficult<br />
target. Hence, the forth important<br />
strategy should be to develop real time<br />
database system to track agriculture after<br />
mapping each and every land holding cultivated<br />
in our country.<br />
4.5 <strong>The</strong> area under cultivation in our<br />
country is consistently under pressure. Urbanization,<br />
industrialization, housing for<br />
increasing population are taking a toll on<br />
the land under cultivation. But, still India<br />
has a lot of barren and wasteful land, which<br />
is not under cultivation. Such land is wasteful<br />
due to variety of reasons. Somewhere<br />
land is not fit for agriculture because it is<br />
full of stones and hilly layers. Somewhere<br />
it is not cultivable because of poor rainfall<br />
and lack of irrigation facilities. If through<br />
comprehensive planning we can convert at<br />
least a part of such wasteful land into agriculture<br />
land, it will ease the food security<br />
threat. In Rajasthan, agriculture has<br />
progressed very well after creating irrigation<br />
facilities through canalization. In<br />
Kutch area, similar wonders have been<br />
achieved by using Narmada water through<br />
canalization. Similarly, area covered with<br />
stony layers not fit for agriculture can be<br />
developed for poultry. Hence, the next<br />
In Rajasthan, agriculture has progressed very well after<br />
creating irrigation facilities through canalization. In Kutch<br />
area, similar wonders have been achieved by using<br />
Narmada water through canalization<br />
strategy for solving food security problem<br />
should be to convert wasteful land into agriculture<br />
wherever possible.<br />
4.6 If land resources are limited and<br />
population is continuously increasing, fundamentally<br />
there will always be a mismatch<br />
in the long run. <strong>The</strong> production of food<br />
grains has a degree of inelasticity in the<br />
long run because of long crop period and<br />
seasonality factors. Compared to that, in<br />
the same area production of fruits and vegetables<br />
can be increased manifold by using<br />
better techniques, multi-layer cropping,<br />
THE INDIA ECONOMY REVIEW<br />
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REIMAGINING INDIA<br />
etc. <strong>The</strong> idea is to increase production of<br />
fruits and vegetables manifold if production<br />
of food grains cannot be increased<br />
significantly. Human food habits also keep<br />
on changing, with change in socio economic<br />
factors. If fruits and vegetables are<br />
commercially within reach of lower middle<br />
class people, it will ease the pressure<br />
on cereals. However, this will also need<br />
good investment in rural infrastructure,<br />
cold chain, transportation and<br />
marketing support.<br />
4.7 In order to ensure food security,<br />
another important strategy should be to<br />
strengthen marketing infrastructure and<br />
make the farming more remunerative. If<br />
production increases, but marketing infrastructure<br />
is not strong to tackle load of<br />
increased production, it will be a big disaster.<br />
In case of absence of strong marketing<br />
infrastructure, increase in production<br />
will lead to glut at arrival centers, which<br />
means unremunerative prices to the farmers<br />
and in such case, increase in production<br />
cannot be sustained. <strong>The</strong> solution lies<br />
in improving marketing efficiency by reducing<br />
cost of intermediation and bringing<br />
in price transparency. This can be achieved<br />
through developing electronic spot markets<br />
with facilities for deliveries at various<br />
arrival centers and developing a robust<br />
structured market, which can be relied<br />
upon by buyers located anywhere in the<br />
country for sourcing deliveries. <strong>The</strong> Exchange<br />
will, guarantee payment to the sellers<br />
against deliveries and delivery of quality<br />
certified material to the buyers. Hence,<br />
electronic national level spot exchange is<br />
the next strategy to ensure food security.<br />
4.8 Now, we have Warehousing Development<br />
and Regulation Act in place.<br />
This will certainly promote investment in<br />
rural infrastructure in terms of warehousing,<br />
cold storage, etc. We know that around<br />
Futures market has helped in discovering correct price<br />
levels and improving farmers’ realization. In Uttar Pradesh,<br />
Mentha farmers are now getting Rs.500 per kg; while<br />
earlier they were getting only Rs.300-350 per kg<br />
15% of total production goes as post harvest<br />
losses. Even bringing the storage loss<br />
to 5% will have large effects on our food<br />
security. However, marketability of warehouses<br />
is also crucial, because it is a capital<br />
intensive project and unless people use it,<br />
private investment in rural warehouses will<br />
not be viable in a big way. Marketability of<br />
warehouses means a platform, where warehouse<br />
receipts can be negotiated. If a<br />
farmer or trader knows that by keeping<br />
goods in a designated warehouse, he can<br />
sell his produce on a national level electronic<br />
platform, he will certainly choose to<br />
keep his produce in such designated scientific<br />
rural warehouses. But, for this purpose<br />
national level electronic spot exchange<br />
has to come up, where warehouse<br />
receipts representing quality certified farm<br />
produce can be traded. This will create a<br />
business model for institutional investors<br />
for creating rural infrastructure. In absence<br />
of this, we may find big shopping<br />
malls coming up in cities, but creating<br />
warehouses and cold storage in rural area<br />
may not be achieved, unless we also have<br />
a viable business model enhancing marketability<br />
of warehouses at national level.<br />
Hence, strengthening rural infrastructure<br />
and linking them to modern market is next<br />
strategy to ensure food security.<br />
4.9 Futures market has helped in discovering<br />
correct price levels for various<br />
commodities and hence improving farmers’<br />
realization. In U.P., Mentha farmers<br />
are now getting Rs.500 per kg; while earlier<br />
they were getting only Rs. 300- 350 per<br />
kg. As a result, area under cultivation has<br />
doubled. Production has also increased<br />
from 18000 MT to 32000 MT per annum.<br />
But, futures market will be more helpful<br />
to the farmers, if there is also an electronic<br />
spot market, so that farmers can use<br />
futures market for price discovery and spot<br />
market for price realization. For developing<br />
electronic spot market, the most important<br />
requirement is amendment in<br />
APMC law and recognition of the concept<br />
of E Trading, E Markets or Electronic<br />
Spot Exchanges under the APMC Act.<br />
Presently, the scenario is that sale and purchase<br />
of farm produce outside the principal<br />
yard and sub yard is illegal. A farmer<br />
is not allowed to sell more than head load<br />
to a person not holding APMC license,<br />
otherwise the buyer can be prosecuted.<br />
Futures markets and spot markets will<br />
help ensure food security by making farming<br />
remunerative and improving farmers’<br />
realization thereby strengthening rural<br />
economy. Hence, amendment in APMC<br />
Act, promoting alternative marketing<br />
channels, recognizing E Trading and E<br />
Market as national level platforms, giving<br />
the farmers a choice to sell wherever he<br />
desires, are important steps towards ensuring<br />
food security. In order to ensure<br />
food security, we have to make farming<br />
remunerative and attractive. Developing<br />
alternative channels for marketing of agriculture<br />
produce and giving freedom to<br />
farmers to sell wherever they get the highest<br />
price is key to achieve this goal.<br />
78 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
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Why Poor Parents Are Choosing ‘More Market, Less<br />
Government’ In Education And What We Should Do About It?<br />
"Freedom necessarily means<br />
that many things will be done<br />
which we do not like. Our<br />
faith in freedom does not rest<br />
on the foreseeable results in<br />
particular circumstances but<br />
in the belief that it will, on<br />
balance, release more forces<br />
for the good than the bad."<br />
-Friedrich Hayek<br />
I’ve moved to India because something<br />
extraordinary is happening<br />
in education, and I want to be a<br />
part of it. Most excitingly, it concerns<br />
the education of the less well-off in society,<br />
rather than the rich. <strong>The</strong> accepted<br />
wisdom says that the poor need<br />
governments to provide their education<br />
– in most developing countries,<br />
governments supplemented by hefty<br />
international aid. But government<br />
education for the poor in India isn’t<br />
working well. Visiting a government<br />
school for the poor here is not an edifying<br />
experience. Where there should<br />
be ten teachers, you’ll often only find<br />
two or three present. <strong>The</strong>y won’t all be<br />
teaching either. Children– bright-eyed,<br />
eager young children – will often be<br />
seating on the floor, doing nothing.<br />
Nor will there be sanitation facilities<br />
in many schools. I know one government<br />
school in the slums behind the<br />
Charminar in Hyderabad where the<br />
children have an arrangement to use a<br />
neighbour’s toilet, and avail themselves<br />
of drinking water from him too. In another,<br />
they have to wait until they get<br />
home (which sometimes stops them<br />
coming to school altogether). In a<br />
third, a well-known foundation has<br />
provided computers and a television to<br />
transform teaching. <strong>The</strong> television is<br />
in the headteacher’s office, still in its<br />
box; the computers are in a locked<br />
room. Reason: the school has no electricity.<br />
This too is commonplace. I’m<br />
not the only one to feel that the poor<br />
deserve much more than what government<br />
education apparently has to offer.<br />
It would all be deeply depressing if it<br />
wasn’t for the fact that the poor, in<br />
huge numbers, are already embracing<br />
an alternative. Private schools are blossoming<br />
in the slums and low-income<br />
areas of urban India, and in rural India<br />
too. <strong>The</strong>se low-cost private schools are<br />
run by entrepreneurs from the communities.<br />
Perhaps a woman has started a<br />
nursery, then been persuaded to extend<br />
it further when parents report<br />
that their children are happy with her.<br />
80 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
Or a husband and wife team starts a<br />
school as a joint business, seeing the<br />
success of other schools in the neighbourhood.<br />
Visit these schools, and<br />
you’ll find the vast majority of teachers<br />
present and teaching, and a vibrant atmosphere<br />
of learning taking place.<br />
And the market for these schools seems<br />
huge: I first discovered for myself these<br />
low cost private schools in poor areas<br />
of the Old City of Hyderabad a few<br />
years back. From the roof of one, I<br />
could see five or six other private<br />
schools, all vying for the same customers.<br />
‘More Market, Less Government’<br />
in education already seemed to be the<br />
impulse of poor parents across India.<br />
How many schools are there? What<br />
proportion of children are they serving?<br />
How good are these low cost private<br />
schools? What is their business<br />
model – and does it have implications<br />
for the way the sector can be enhanced?<br />
<strong>The</strong>se were the questions that leapt out<br />
at me when I first found these schools<br />
for myself. I procured funding from<br />
the John Templeton Foundation to<br />
conduct detailed research – in India,<br />
and also in Nigeria, Ghana, Kenya and<br />
China, for the phenomenon of low cost<br />
private schools turns out to be something<br />
that is widespread across the developing<br />
world. My research teams<br />
explored selected, officially designated<br />
‘poor’ areas, such as slums and shanty<br />
towns in metropolitan cities in these<br />
countries, and poor areas in the rural<br />
hinterlands surrounding these cities.<br />
<strong>The</strong>y researched remote villages in impoverished<br />
North-West China, and<br />
rural communities in south India. <strong>The</strong><br />
teams combed these poor areas, going<br />
down every alleyway in the slums, visiting<br />
every settlement in the rural areas,<br />
asking of people on market stalls and<br />
in the streets, to find where the poor<br />
were being educated. <strong>The</strong>y found large<br />
numbers of schools – 918 in the ‘notified’<br />
slums of three zones of Hyderabad,<br />
India, for instance.<br />
What the research teams found<br />
points to an extraordinary grassroots<br />
educational revolution that is taking<br />
place – in India and across the developing<br />
world. In poor urban areas surveyed,<br />
a large majority of school children<br />
were found to be in ‘budget’<br />
private schools. For instance, in the<br />
slums of Hyderabad, India, 65 percent<br />
of schoolchildren were in private unaided<br />
schools. <strong>The</strong>se schools charge<br />
very low fees, affordable to parents on<br />
poverty-line and minimum-wages. In<br />
Hyderabad, mean monthly fees at 4th<br />
grade were Rs.78.17 ($1.74) in unrecognized<br />
and Rs.102.55 ($2.28) in recognized<br />
private schools in the slums –<br />
about 4.2 percent and 5.5 percent<br />
respectively of the monthly wage for a<br />
breadwinner on a typical minimum<br />
wage of about Rs.78/-per day (Government<br />
of India, 2005, assuming 24 working<br />
days per month).<br />
Private schools for the poor are not<br />
just an urban phenomenon either. In<br />
the deprived district of Mahbubnagar,<br />
in Andhra Pradesh, I found around<br />
three-fifths of schools were government,<br />
only a tiny number private aided,<br />
and well over a third were private unaided.<br />
But breaking these figures into<br />
schools in the small towns and rural<br />
areas proper, I could see that small<br />
town Andhra Pradesh is rather similar<br />
to the metropolitan areas: Just as in<br />
urban Hyderabad, the vast majority of<br />
schools – nearly two-thirds – were private<br />
unaided in the small towns of<br />
Mahbubnagar. In the rural areas proper,<br />
however, government schools were<br />
in a majority – around fourth-fifths,<br />
with private unaided schools making<br />
up the remaining fifth. Development<br />
experts who are aware of the existence<br />
of this low cost private sector appear<br />
uniformly to worry about their low<br />
quality: <strong>The</strong> Oxfam Education Report,<br />
for instance, notes that private schools<br />
for the poor are of ‘inferior quality’,<br />
offering ‘a low-quality service’ that will<br />
In Hyderabad, mean monthly fees at 4th grade were<br />
Rs. 78.17 ($1.74) in unrecognized and Rs.102.55 ($2.28)<br />
in recognized private schools in the slums – about 4.2<br />
percent and 5.5 percent respectively of the monthly wage<br />
for a breadwinner on a typical minimum wage<br />
‘restrict children’s future opportunities.’<br />
(Watkins, 2000, p. 230). Nambissan<br />
(2003) notes that in Calcutta, ‘the<br />
mushrooming of privately managed<br />
unregulated pre-primary and primary<br />
schools… can have only deleterious<br />
consequences for the spread of education<br />
in general and among the poor in<br />
particular’ (p. 52), for the quality of the<br />
private schools is ‘often suspect’ (p. 15,<br />
footnote 25). Significantly, such concerns<br />
about low quality of private provision<br />
must be read in the context of<br />
THE INDIA ECONOMY REVIEW<br />
81
REIMAGINING INDIA<br />
the reported low standard of government<br />
provision. <strong>The</strong> Oxfam Education<br />
Report prefaces the remarks quoted<br />
above with the observation that ‘there<br />
is no doubting the appalling standard<br />
of provision in public education systems’<br />
(Watkins, 2000, p. 230). Indeed,<br />
the low quality of government schools<br />
for the poor is one reason given for the<br />
‘mushrooming’ of the private schools:<br />
Venkatanarayana (2004) notes that the<br />
‘failure of public school in terms of<br />
meeting parents’ expectations/aspirations’<br />
has led to a ‘growing demand’ for<br />
private schools in rural Andhra<br />
Pradesh, India (p. 40).<br />
Are the low cost private schools as<br />
bad as the development experts think?<br />
I looked at the issue of quality in detail.<br />
My researchers tested around<br />
24,000 children in the global sample,<br />
taken from stratified random samples<br />
of schools within these poor communities.<br />
Children were tested in key curriculum<br />
subjects, and questionnaires<br />
given to children, their parents, teachers<br />
and school managers, and IQ tests<br />
to children and their teachers, to elicit<br />
data to control for a wide range of<br />
background variables, including peergroup<br />
variables. <strong>The</strong> results from Delhi<br />
were typical. In mathematics, mean<br />
scores of children in government<br />
schools were 24.5 percent, while those<br />
in private unrecognised schools were<br />
42.1 percent and private recognised<br />
were 43.9 percent. That is, children in<br />
unrecognised private schools achieved<br />
nearly 18 percentage points higher in<br />
Low cost private schools are accountable to the parents –<br />
who can withdraw their children if they’re not satisfi ed; the<br />
entrepreneurs knows this, and knows he or she will feel<br />
the pinch for each parents who doesn’t pay fees, so<br />
makes sure things go well within the school<br />
maths than children in government<br />
schools (a 72 percent advantage!),<br />
while children in recognised private<br />
schools were over 19 percentage points<br />
higher than children in government<br />
schools (a 79 percent advantage). In<br />
English, the performance difference<br />
was much greater (children in unrecognised<br />
schools gaining 35 percentage<br />
points higher, while children in recognised<br />
schools were 41 percentage<br />
points higher). However, these differences<br />
might be expected, given that<br />
government schools are not providing<br />
what parents want, English medium.<br />
(On the other hand, they might not be<br />
expected, given an oft-repeated criticism<br />
that private schools are Englishmedium<br />
in name only, that this is just<br />
another way they pull the wool over ignorant<br />
poor parents’ eyes. What we<br />
found showed that the private schools<br />
were in fact getting their children to a<br />
much higher English standard than<br />
what children might pick up in the environment,<br />
through radio, television<br />
and advertisements, for instance –<br />
which is perhaps what the tests were<br />
measuring for children in government<br />
schools). But in any case, if more private<br />
schools are English medium, this<br />
might lead us to expect that government<br />
schools would be superior in<br />
achievement in Hindi: the opposite was<br />
true. Children in private unrecognised<br />
schools achieved on average 22 percentage<br />
points higher than children in<br />
government schools (an 83 percent advantage).<br />
In recognised private schools,<br />
children scored on average 24 percentage<br />
points higher (an 89 percent advantage.)<br />
Controlling for relevant background<br />
variables, the differences<br />
between government and private<br />
schools were reduced but still hugely<br />
significant: In Hyderabad, for instance,<br />
a child attending a private unrecognised<br />
school would be predicted to<br />
gain 16.1 percentage points higher in<br />
mathematics than the same child attending<br />
a government school. In a private<br />
recognised school, the difference<br />
in scores would be 17.3 percentage<br />
points. In English, the advantages<br />
would be even greater –16.9 percentage<br />
points higher in an unrecognised<br />
school, and 18.9 percentage points in a<br />
recognised school. In Urdu, after controlling<br />
for the background variables,<br />
there turned out to be no statistically<br />
significant difference between government<br />
and either type of private school.<br />
More market, less government in education<br />
– this appears to be how poor<br />
parents see the way forward. And they<br />
are doing it for a good reason – the low<br />
cost private schools are better than the<br />
government alternative. Presumably<br />
they’re better because they’re accountable<br />
to the parents – who can withdraw<br />
their children if they’re not satisfied;<br />
the entrepreneurs knows this, and<br />
knows he or she will feel the pinch for<br />
each parents who doesn’t pay fees, so<br />
keeps a close eye on his teachers and<br />
makes sure things go well within the<br />
82 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
school. Better, however, but perhaps<br />
not good enough. For whatever the advantages<br />
of the low cost private schools<br />
that I’ve outlined above, clearly their<br />
quality could be improved – and noone<br />
acknowledges this more, in my experience,<br />
than the private school entrepreneurs<br />
themselves. <strong>The</strong>y are hungry<br />
for new ideas in curriculum and pedagogy.<br />
<strong>The</strong>y are hungry for investment<br />
in infrastructure and technology. But<br />
this is where something rather exciting<br />
opens up for us. We can see the low<br />
cost private education sector as a new<br />
frontier for investment. <strong>The</strong> key relevant<br />
finding of my research is that the<br />
vast majority of the private schools in<br />
the poor areas are run as businesses,<br />
not charities, dependent more or less<br />
entirely on fee income and, very importantly,<br />
making a reasonable profit.<br />
In Hyderabad for instance, 91 percent<br />
unrecognized and 82 percent recognized<br />
private schools were entirely dependent<br />
on student fee income, receiving<br />
no outside funding at all. Profit<br />
margins, my research showed, could be<br />
in the region of 20-40 percent of fee<br />
income. Because the private schools<br />
for the poor are run as businesses, this<br />
provides at least three ways forward for<br />
investors to help in improving quality<br />
– each of which is prompted by the observation<br />
that school proprietors are<br />
hungry for improvement and innovation.<br />
Why? Because whatever the critics<br />
of private schools for the poor may<br />
claim, many care about children’s education.<br />
On its own, this might be<br />
enough for some to invest. But, the<br />
power of the market means that it’s<br />
coupled with another major incentive:<br />
proprietors know that they are in an<br />
increasingly competitive market. <strong>The</strong>y<br />
need parents to know that their school<br />
is special, to maintain or increase market<br />
share. If school improvements seem<br />
to have demonstrably better outcomes,<br />
they’ll want them for their schools.<br />
So we can, first, help school proprietors<br />
improve their infrastructure<br />
through providing loans, through existing<br />
or purpose-created non-banking<br />
finance organizations. Typical projects<br />
would include refurbishing or building<br />
new classrooms and buying land. Second,<br />
investors can conduct research<br />
and development to find out what works<br />
to improve desired curriculum and<br />
pedagogical outcomes in low cost education.<br />
Investors can then partner with<br />
local entrepreneurs to ensure that the<br />
improved methods are made available,<br />
suitably packaged, at a price acceptable<br />
to school entrepreneurs.<br />
And this leads to a third exciting<br />
possibility. In '<strong>The</strong> Fortune at the Bottom<br />
of the Pyramid', Prof. C.K. Prahalad<br />
challenges the ‘dominant assumption’<br />
that the poor are not bothered<br />
about brand-names: ‘On the contrary’,<br />
his findings suggest, ‘the poor are very<br />
brand-conscious’ (2005, p. 13). In private<br />
education, brand names could be<br />
important to help solve the genuine<br />
information problem that exists – and<br />
this provides a third major opportunity<br />
for investors to enter the education<br />
market. How can poor parents<br />
judge if one private school in their<br />
community is better than another, and<br />
that it is adequately serving the educational<br />
needs of their children? Typically,<br />
my research showed parents using<br />
a variety of informal methods, such<br />
as visiting several schools to see how<br />
committed teachers and the proprietor<br />
appear. Or they talk to friends, comparing<br />
notes about how frequently exercise<br />
books are marked and homework<br />
checked. Importantly, I found<br />
that if parents choose one private<br />
school, but subsequently discover that<br />
another seems better, they have little<br />
In private education, brand names could be important to<br />
help solve the genuine information problem that exists –<br />
and this provides a third major opportunity for investors to<br />
enter the education market<br />
hesitation in moving their child to<br />
where they think they will get a better<br />
education. And school proprietors<br />
know all of this, so make sure teachers<br />
turn up and teach, and invest any surpluses<br />
in school improvement, to ensure<br />
parental satisfaction. So there is<br />
an information problem, but there are<br />
ways around it.<br />
However, in other markets, brand<br />
names provide a safer way of overcoming<br />
parallel information asymmetries.<br />
Buying into trusted brands would be<br />
one way of overcoming the information<br />
problem too, for poor parents wanting<br />
THE INDIA ECONOMY REVIEW<br />
83
REIMAGINING INDIA<br />
the best education for their children.<br />
One possibility would be for investors<br />
to assist expansion-minded proprietors<br />
accessing loan capital. Or it could involve<br />
creating a specialised education<br />
investment fund, to provide equity to<br />
education companies that run chains<br />
of budget private schools. Suitable exit<br />
strategies could be worked out for the<br />
investment fund, perhaps by giving advice<br />
on how to list on local stock markets,<br />
or to get other investors on board.<br />
A further possibility could involve investors<br />
engaging in a joint venture with<br />
local educational entrepreneurs to set<br />
up a chain themselves. Investment in<br />
initial R&D would be required, to create<br />
the standards for a demonstrable<br />
and truly replicable model of private<br />
education for the poor. But here’s the<br />
rub: although it is possible to envisage<br />
creating chains of private schools here<br />
in India as things stand now, the regulatory<br />
environment certainly doesn’t<br />
make life easy for investors and innovators.<br />
<strong>The</strong> problem is profit. It all<br />
seems to go back to the Unnikrishnan<br />
Supreme Court Judgement of 1993<br />
(Unnikrishnan vs. State of Andhra<br />
Pradesh., 1993, in Padala Rama Reddi<br />
(1993) <strong>The</strong> Andhra Pradesh Education<br />
Code, Hyderabad, pp. 399-400). <strong>The</strong><br />
judgement reads: ‘Education has never<br />
been commerce in this country. Making<br />
it one is opposed to the ethos, tradition<br />
and sensibilities of this nation.’<br />
Moreover, ‘Commercialisation of education<br />
cannot and should not be permitted<br />
… Both in the light of our tradition<br />
and from the standpoint of interest<br />
of general public, commercialisation is<br />
positively harmful, it is opposed to<br />
public policy.’<br />
It’s hard to read these statements<br />
now in the light of the activities of successful<br />
businesses such as NIIT and<br />
Aptech and think that they make much<br />
Although it is possible to envisage creating chains of private<br />
schools here in India as things stand now, the regulatory<br />
environment certainly doesn’t make life easy for investors<br />
and innovators.<strong>The</strong> problem is profi t<br />
sense. <strong>The</strong>se certainly are commercial<br />
companies, and their business is clearly<br />
education. So they seem to show<br />
that, in point of fact, there is a very fine<br />
Indian ethos and tradition of the ‘business<br />
of education’. Usefully, the Unnikrishnan<br />
judgement was partially<br />
revoked in 2002. In the Supreme Court<br />
on October 31 st 2002 (TMA Pai Foundation<br />
versus State of Karnataka), it<br />
was pointed out that it is ‘no secret that<br />
the examination results at all levels of<br />
unaided private schools, notwithstanding<br />
the stringent regulations of the governmental<br />
authorities, are far superior<br />
to the results of the government-maintained<br />
schools’ (Para 61, p. 40). So<br />
clearly, the judgement said, Unni<br />
Krishnan needs reconsideration if it is<br />
having a dampening effect on private<br />
education entrepreneurs. However,<br />
did this reconsideration mean that Unnikrishnan’s<br />
rejection of profit is also<br />
superseded? It is not clear to me. <strong>The</strong><br />
new judgement reads: in ‘setting up a<br />
reasonable fee structure, the element<br />
of profiteering is not as yet accepted in<br />
Indian conditions’ (Para. 53, p. 34).<br />
However, ‘Reasonable surplus to meet<br />
cost of expansion and augmentation of<br />
facilities does not, however amount to<br />
profiteering’ (p. 128). Does this allow<br />
for-profit education? Or not? It seems<br />
that it may still be a grey area – and<br />
grey areas like this can breed corruption<br />
and inefficiency. To make matters<br />
worse, the sentiments behind Unnikrishnan<br />
are there in the regulations<br />
of the examination boards. <strong>The</strong> CBSE<br />
for instance says that only schools that<br />
are run ‘as a community service and<br />
not as a business’ are able to be affiliated<br />
to the board. And they are there<br />
in many state regulations too, that only<br />
allow schools to be registered if they<br />
are run by non-profit educational societies<br />
or trusts, but not by companies.<br />
All this means that if investors want<br />
to invest in education, it’s not straightforward.<br />
Of course it’s possible. Forprofit<br />
companies can contract with<br />
educational societies and trusts to provide<br />
management and educational inputs.<br />
But these means are cumbersome,<br />
open to regulatory risk, and in<br />
any case obtuse: for the regulations<br />
want to protect us from something that<br />
in other areas of our lives seems whol-<br />
84 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
ly desirable. <strong>The</strong> profit motive is accepted<br />
as beneficial in most areas of<br />
our lives, in spurring innovation, improving<br />
quality and extending access.<br />
For instance, would anyone deny that<br />
the mobile phone revolution has accomplished<br />
each of these, and that<br />
profit was a key factor underlying each?<br />
<strong>The</strong> same could be true of the delivery<br />
of education – the profit motive could<br />
spur new methods of learning, which<br />
improve learner outcomes, and help<br />
reach those who currently don’t have<br />
access to quality education. Allowing<br />
the profit motive into education – and<br />
hence allowing masses of investment<br />
into this area – would be wholly beneficial<br />
to education in India. If only India<br />
could break away from this regulatory<br />
morass, then the future could be golden.<br />
If the entrepreneurial spirit that<br />
Indians daily show in the field of education<br />
could be harnessed, rather than<br />
damped down (as it is by current regulations),<br />
then the emerging chains of<br />
private schools, including low cost<br />
schools, funded by investment from<br />
within India and overseas, could have<br />
an extraordinary impact. And this impact<br />
could be felt not only in India but<br />
on the rest of the world too. American<br />
brand names like McDonald’s and<br />
Starbucks are predominant in the current<br />
wave of globalisation. In the next<br />
wave, there could be the educational<br />
equivalents of these chains – offering<br />
standardised delivery of high quality<br />
educational experiences – emanating<br />
from India to take on the rest of the<br />
world. I find that prospect pretty exciting.<br />
Which is why, as I say, I’ve come to<br />
India to see if I can be a part of this<br />
educational revolution.<br />
References<br />
• Nambissan, Geetha, B. (2003) Educational<br />
deprivation and primary school<br />
provision: a study of providers in the<br />
city of Calcutta, IDS Working Paper<br />
187, (Brighton, Institute of Development<br />
Studies).<br />
• Prahalad, C.K. (2005) <strong>The</strong> Fortune at<br />
the Bottom of the Pyramid, Wharton<br />
School Publishing, Upper Saddle<br />
River, NJ.<br />
• Tooley, James, Dixon, Pauline and<br />
Gomathi, S.V., (<strong>2007</strong>) Private Schools<br />
and the Millennium Development<br />
Goal of Universal Primary Education:<br />
A census and comparative survey in<br />
Hyderabad, India, Oxford Review of<br />
Education 33(5).<br />
• Tooley, James and Dixon, Pauline,<br />
(2006) ‘De Facto’ Privatisation of<br />
Education and the Poor: Implications<br />
of a Study from sub-Saharan Africa<br />
and India, Compare 36(4), 443-462<br />
• Tooley, James (2006), Backing the<br />
Wrong Horse: How Private Schools<br />
Are Good for the Poor, <strong>The</strong> Freeman,<br />
May, 8-13.<br />
• Tooley, James (2005) Private schools<br />
for the poor, Education Next: A Journal<br />
of Opinion and Research, Fall,<br />
Vol. 5 (4), 22-32.<br />
• Venkatanarayana, M. (2004) Educational<br />
Deprivation of Children in A.<br />
P: Levels and Trends, Disparities and<br />
Associate Factors, Working Paper<br />
362, Centre for Development Studies<br />
(www.cds.edu), August.<br />
• Watkins, K. (2000), <strong>The</strong> Oxfam Education<br />
Report. (Oxford, Oxfam in<br />
Great Britain).<br />
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THE INDIA ECONOMY REVIEW<br />
85
Stephen P. Heyneman,<br />
Professor, International Education Policy,<br />
Vanderbilt University, Nashville, Tennessee<br />
International Trade in Higher Education:<br />
What Should India Do?<br />
"Higher education should be left to private enterprise<br />
and for meeting national requirements<br />
whether in the various industries, technical arts,<br />
belles-letters or fi ne arts. <strong>The</strong> State Universities<br />
should be purely examining bodies, self-supporting<br />
through the fees charged for examinations.<br />
Universities will look after the whole of the fi eld<br />
of education and will prepare and approve<br />
courses of studies in the various departments<br />
of education. No private school should be run<br />
without the previous sanction of the respective<br />
Universities. University charters should be<br />
given liberally to any body of persons of proved<br />
worth and integrity, it being always understood<br />
that the Universities will not cost the State anything<br />
except that it will bear the cost of running<br />
a Central Education Department.<strong>The</strong> foregoing<br />
scheme does not absolve the State from running<br />
such seminaries as may be required for supplying<br />
State needs."<br />
-Mahatma Gandhi, Harijan,<br />
2 October 1937<br />
At independence, India had<br />
twenty universities; today<br />
there are 348. From a rate of<br />
attendance of less than one percent,<br />
today it is 12 percent. Between 1990<br />
and 2000 the number of students in<br />
higher education grew by 113 percent.<br />
Providers are diverse. Approximately<br />
one third of the students attend nongovernment<br />
institutions and 63 percent<br />
attend institutions financed by state<br />
governments. Of the world’s most famous<br />
scientists and economists, many<br />
received their training in India. Indian<br />
higher education appears healthy. But<br />
according to some estimates India<br />
needs at least 150 new universities. Although<br />
enrollment (12 percent) is<br />
higher than at any time in India’s history,<br />
it is less than any OECD country<br />
and has even fallen behind that of China<br />
(with 16 percent). Less then 2 percent<br />
of the students in India have an<br />
opportunity to attend any of the top<br />
universities sponsored by the national<br />
government. Only $US 406 is spent/<br />
year on the typical university student<br />
in India. This includes expenditures<br />
for electronic libraries, books, research<br />
laboratories, physical infrastructure,<br />
and salaries. <strong>The</strong> typical student in<br />
China has seven times more resources<br />
at his disposal. <strong>The</strong> typical student in<br />
Malaysia has 30 times more resources<br />
available, and a student in Canada has<br />
37 times more resources available.<br />
Though overall growth in the last ten<br />
years has been rapid, universities with<br />
advanced research programs grew by<br />
only 51 percent; in the Russian Federation<br />
they grew by 113 percent, in<br />
China by 167 percent and in Malaysia<br />
by 200 percent. Though foreign universities<br />
are higher in cost, 160,000 students<br />
leave India each year seeking<br />
higher education elsewhere. Over<br />
5,000 Indian students arrive annually<br />
to study in the U.S., where the price of<br />
attending universities is higher than<br />
anywhere in the world. <strong>The</strong>y do this<br />
because they cannot find a university<br />
in India comparable in quality.<br />
86 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
Figure I: Ranking Of Asian Universities By Size Of Bandwidth<br />
Rank Multi-Disciplinary Schools Internet Bandwidth per student (kbps) Overall Rank 2000<br />
1 Sun Yat-sen University (Taiwan) 33.53 20<br />
2 Kyungpock National University 27.76 35<br />
3 Chungnam National Unviersity 20.84 50<br />
4 Australian National University 19.58 8<br />
5 Taiwan Normal University 19.02 37<br />
6 Seoul national University 17.14 4<br />
7 Tsing Hua University(Taiwan)* 14.77 18<br />
8 Chonnam National University 14.77 1<br />
9 Tohcku University (Japan) 13.52 34<br />
10 Tianjin University (China) 11.84 2<br />
11 National University of Singapore 11.54 46<br />
12 University of Wollongong 10.81 54<br />
13 University of Adelaide 7.1 5<br />
14 Nagoya University 6.92 45<br />
15 Central University (Taiwan)* 6.88 26<br />
16 Nagoya University 6.58 11<br />
17 Central University (Taiwan)* 6.12 24<br />
18 University of Melbourne 6.06 9<br />
19 Kasetsart University 5.56 63<br />
20 Chao Toung University (Taiwan)* 5.5 28<br />
21 Monash University 5.14 30<br />
22 Chonbuk National University 5 43<br />
23 Taiwan University* 4.1 12<br />
24 Pusan National Unviersity 3.99 39<br />
25 City University of Hong Kong 3.9 27<br />
26 Hckkaido University 3.81 19<br />
27 Southeast University (China) 3.56 60<br />
28 Chung Hsing University (Taiwan)* 3.35 65<br />
29 Keio University* 3.24 22<br />
30 Hanyang University 3.16 38<br />
31 University of Western Australia 2.89 23<br />
32 Sungkyunkwan U niversity 2.83 33<br />
33 Ewha Womans University 2.46 32<br />
34 Macquarie University 2.32 56<br />
35 Ritsumeikan University 2.18 67<br />
36 Waseda University 2.13 29<br />
37 Chinese University of Hong Kong 2.1 6<br />
THE INDIA ECONOMY REVIEW<br />
87
REIMAGINING INDIA<br />
Figure I: Ranking Of Asian Universities By Size Of Bandwidth (Contd.)<br />
Rank Multi-Disciplinary Schools Internet bandwidth per student (kbps) Over all Rank 2000<br />
38 University of Hong Kong 2.05 3<br />
39 Korew University 2.04 414<br />
40 Cheng Kung University (Taiwan)* 1.6 16<br />
Although there are many famous Indian<br />
scientists and economists, they<br />
often teach in foreign universities.<br />
<strong>The</strong>y do this because universities in<br />
India cannot offer comparable research<br />
facilities, programs with comparable<br />
innovation, or comparable<br />
levels of remuneration. When one<br />
ranks a nation by the number of citations<br />
to its published scientific literature,<br />
citations from India in 2005<br />
ranked number 21, accounting for only<br />
1.1 percent share of the total. <strong>The</strong> scarcity<br />
of world class faculty in Indian<br />
Figure II. Asia Week: Multi-Disiplinary Ranking: Top<br />
77 Universities in Asia<br />
Country Number (Percentage) Highes Rank<br />
Korea 13(16.9) 4<br />
Japan 11(14.9) 1<br />
Australia 10(13.0) 8<br />
Taiwan 10(13.0) 12<br />
Thailand 5(6.5) 51<br />
Philippines 4(5.2) 48<br />
New Zealand 4(5.2) 21<br />
Indonesia 4(5.2) 61<br />
Hong Kong 4(5.2) 3<br />
China 4(5.2) 42<br />
Malaysia 3(3.9) 47<br />
India 2(2.6) 40<br />
Bangladesh 1(1.3) 64<br />
Singapore 1(1.3) 5<br />
Sri Lanka 1(1.3) 77<br />
Source: www.asiaweek.com/features/universities2000/school/<br />
multi.overall.html<br />
universities is one explanation for the<br />
fact that of the applications for patents<br />
India accounted for only 0.5 percent.,<br />
and of the ‘capacity to innovate’ in<br />
2005 India ranked 50. No Indian university<br />
appears in the ranking of world<br />
universities; and no university appears<br />
in the top ranked universities in Asia<br />
in terms of what is now considered a<br />
sine qua non of university quality:<br />
bandwidth (Please refer Figure -I). Of<br />
the top ranked 77 universities within<br />
Asia, the highest university in India<br />
only ranked number 40. Only two universities<br />
were even considered (See<br />
Figure-II). It is unfortunate but nevertheless<br />
it is fair to characterize universities<br />
in India as being ‘asleep’, while<br />
universities in other countries quickly<br />
pass by.<br />
In Medieval Europe it is said that<br />
plagues were accompanied by numerous<br />
theories of ‘what went wrong’.<br />
Some attributed impending catastrophe<br />
to insufficient piety. If citizens repent<br />
they said, their futures would<br />
brighten. <strong>The</strong> problems of Indian higher<br />
education are similarly accompanied<br />
by theories of ‘what went wrong’.<br />
Some theories hold that international<br />
evidence to the contrary is irrelevant<br />
and that there is nothing wrong. Others<br />
suggest that the problems can only<br />
be solved if India does more of what it<br />
has done in the past --- finance higher<br />
education largely from public tax resources,<br />
control prices, limit providers<br />
and forbid foreign competition. And<br />
then there are some theories which<br />
point to the unmitigated success of India’s<br />
entry into telecommunications.<br />
When allowed in, foreign providers<br />
quickly rejuvenated India’s ancient telecommunications<br />
sector thus making<br />
it possible for entrepreneurial spinoffs,<br />
which spurred India into high<br />
economic growth and a decline in poverty.<br />
Why couldn’t international competition<br />
not jump start the Indian<br />
higher education sector as it has other<br />
88 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
Figure III: Pros And Cons For Opening India To International Trade In Education<br />
Cons<br />
Loss of public good character<br />
Only serves individual needs<br />
Rewards universitites independent<br />
of the broad public good<br />
Weakens public funding<br />
Eclipses the public sector by the<br />
private sector quality<br />
Pros<br />
Increased efficiency, quality and choice<br />
Consistent with human rights<br />
Breaks the monopoly of having low quality universities define what whould be learned<br />
Strengthens public funding because it would strengthen public confidence through increased<br />
accountability<br />
Strengthens the public sector due to competition<br />
sectors? <strong>The</strong>re are two paths in Indian<br />
higher education policy: to continue to<br />
protect it or to open it up to international<br />
competition with all of the impending<br />
implications. <strong>The</strong> answer will<br />
determine India’s future. So what<br />
should India do? One problem is that<br />
the arguments for and against opening<br />
India to higher education trade is generally<br />
made by two divergent groups of<br />
stakeholders. Macro-economists generally<br />
favor international competition;<br />
education policy officials generally do<br />
not. It might be useful to place each of<br />
their arguments on the table and analyze<br />
them one by one (Please do refer<br />
Figures- III and IV).<br />
Higher Education As A Public<br />
Good<br />
Those who oppose international trade<br />
in higher education will argue that<br />
higher education is a public good and<br />
that opening up India to international<br />
providers would threaten the maintenance<br />
of the public interest. Those who<br />
favor international trade will point out<br />
that overtly sectarian or philosophically<br />
dangerous providers can be controlled<br />
through the accreditation process.<br />
Further, they will argue that<br />
competition stimulates efficiency, wider<br />
choice, and higher quality (as it does<br />
in many sectors). In their view these<br />
characteristics are part of public interest.<br />
Is it in the public interest, they<br />
ask, to allow access only to low quality,<br />
inefficient and a narrow choice of professional<br />
programs?<br />
Figure IV: Pros And Cons (Contd.)<br />
Cons<br />
Leads to “Knowledge Capitalism”<br />
Trade Related Aspects of Intellectual<br />
Property Rights (TRIPS) would exclude<br />
low income scholars by maintaining<br />
high prices for curriculum<br />
materials<br />
Since knowledge is public good, reforms<br />
in education finance with decrease<br />
access to public good<br />
Threatens the “Social contract” in<br />
which the present generation finances<br />
future generations<br />
Trade jeopardizes human rights because<br />
it contradicts national commitments<br />
supporting free education<br />
Individual Vs. Social Needs<br />
Those who oppose say that international<br />
trade would serve only the needs<br />
of the individual and that service to the<br />
community, a natural part of higher<br />
education, would be lost if trade barriers<br />
were liberalized. Those who favor<br />
point out that at present human rights<br />
are being abrogated. All individuals<br />
have the right to education they might<br />
say, and if one individual wishes to<br />
study in a field provided by a foreign<br />
university, what right do we have as a<br />
Pros<br />
Leads of the strengthening of non-resourced<br />
subjects through cross-faculty<br />
resource transfer<br />
Adhering to TRIPS would increse access<br />
to high quality products by insuring incomes<br />
from their sale. Hence it would<br />
increase supply, the choice of products,<br />
and lower the real price<br />
Public goods are never free. Reforms in<br />
education finance will increase the income<br />
to public and private producers.<br />
Hence, it will increase the supply and access<br />
to a public good.<br />
Strengthens the social contract by increasing<br />
access, quality and equity<br />
(through cross-subsidization)<br />
Trade would increase human rights by<br />
allowing access to education where it is<br />
currently denied of unavailable<br />
THE INDIA ECONOMY REVIEW<br />
89
REIMAGINING INDIA<br />
democracy to limit that access to education?<br />
<strong>The</strong> same might be true to<br />
textbooks, foreign faculty, internet<br />
facilities and the like. Limitation of<br />
education trade itself is an abrogation<br />
of human rights.<br />
Universities Would Be Rewarded<br />
Independent Of <strong>The</strong> Public<br />
Good.<br />
Those who oppose would say that universities<br />
should be rewarded for their<br />
research and teaching independent of<br />
their abilities to generate revenue; if<br />
foreign competition were allowed then<br />
Indian universities would have to follow<br />
commercial rather than intellectual<br />
incentives. Those who favor say<br />
that competition is necessary to break<br />
what is now a monopoly. If only low<br />
quality institutions are available, there<br />
is little incentive to imp<br />
rove. Instead of being a threat to intellectual<br />
incentives, foreign comp<br />
etition may be an essential ingredient<br />
to stimulate it.<br />
International Education Trade<br />
Would Weaken <strong>The</strong> Case For<br />
Public Funding<br />
Those who oppose would point out<br />
that public funding is essential for university<br />
development and if foreign<br />
competition were allowed the case for<br />
more public resources would weaken.<br />
‘Let the private sector provide the facilities’,<br />
the politicians might say, ‘Now<br />
we can allocate resources to problems<br />
other than higher education’. Those<br />
who favor argue the opposite. <strong>The</strong>y say<br />
that foreign competition would<br />
strengthen the case for public funding,<br />
not weaken it. It would strengthen the<br />
Up for consideration should be changes in the entire legal<br />
structure, which would allow the creation of endowments<br />
often from the overseas diaspora (something China has<br />
mastered) and a new tax regime which encourages donations<br />
and gifts to education from both citizens and firms<br />
case because it would increase public<br />
confidence in the higher education<br />
sector because of increased accountability.<br />
Why should the public allocate<br />
additional resources to a sector crippled<br />
by low quality and inefficiency?<br />
Wouldn’t the public be more likely to<br />
allocate resources to a sector in which<br />
it had more confidence? And wouldn’t<br />
open competition help stimulate the<br />
supply response in which they could be<br />
more confident?<br />
Public Wector Quality Would<br />
Be Eclipsed By Private Sector<br />
Quality<br />
If foreign competition were allowed,<br />
what India now thinks of higher quality<br />
would be eclipsed by foreign private<br />
providers. Imagine Oxford in Madras,<br />
or Harvard in Bangalore? For economic<br />
reasons, there is little likelihood that<br />
a high quality provider will open a<br />
multi-faculty university. Most would<br />
open programs highly specific to vocations<br />
such as engineering or business.<br />
However narrow the presence of international<br />
providers would strengthen<br />
the quality of current universities because<br />
of the competition. <strong>The</strong>y would<br />
be more likely to study the syllabi,<br />
student services, faculty productivity<br />
and other indicators of quality if there<br />
is competition than if there is not.<br />
Those who argue for international<br />
trade would say that it is essential for<br />
maintaining the quality of the current<br />
public universities.<br />
International Trade Leads To<br />
‘Knowledge Capitalism’<br />
Critics argue that trade in education<br />
would result in having knowledge pursued<br />
if it results in remuneration and<br />
ignored if it does not. <strong>The</strong>y ask if it is<br />
right for professors to be better rewarded<br />
by virtue of the fact that their<br />
subject is in higher market demand.<br />
<strong>The</strong>y ask what will happen to the pursuit<br />
of truth if it is subject to a price.<br />
Others respond by pointing to the fact<br />
that knowledge can not be immune<br />
from its market value. <strong>The</strong>re is no hiding<br />
the fact that the demand to study<br />
history is less than the demand for<br />
commerce. However, competition need<br />
not lead to a diminishment of history<br />
or other non-revenue producing subject.<br />
<strong>The</strong> major managerial challenge<br />
in any university is how to cross-subsidize<br />
faculties, or transfer resources<br />
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within the institution to support under<br />
resourced but important subjects.<br />
Without cross-subsidization, a university<br />
cannot successfully compete.<br />
Hence they would argue that international<br />
trade and the success of mastering<br />
the modern art of university administration<br />
is the key ingredient<br />
preventing ‘academic capitalism’.<br />
Trade Related Aspects Of<br />
Intellectual Property Rights<br />
(TRIPS) Excludes Low-Income<br />
scholars from successfully<br />
marketing their own curricula<br />
Critics worry that international trade<br />
in education would lower access to local<br />
curricula; international property<br />
rights agreements would protect the<br />
privileged and freeze-out those who<br />
have not yet broken into the market.<br />
<strong>The</strong>y imagine that there will be an avalanche<br />
of foreign books, guidelines,<br />
and syllabi entering India, making it<br />
difficult for local students to be educated<br />
with local materials. Those who<br />
favor open trade say that adhering to<br />
agreements on intellectual property<br />
would increase access to high quality<br />
pedagogical materials because it would<br />
insure income from their sale. In turn<br />
this would increase the incentive to<br />
write new curricula, and would lead to<br />
greater supply, wider choice, and lower<br />
real prices. In their vision, Indian producers<br />
of curricula would compete successfully,<br />
placing the Indian student<br />
consumer at a distinct advantage over<br />
a circumstance in which there would<br />
be no competition.<br />
Privatization Of Education<br />
Finance Will <strong>Dec</strong>rease Access<br />
To A Public Good<br />
Critics argue that international trade<br />
in education will lead to privatization,<br />
meaning that it will lead to an increase<br />
in the proportion of higher education<br />
finance from sources other than government.<br />
<strong>The</strong>y say that the higher the<br />
privatization the lower the access to a<br />
public good. <strong>The</strong>y say that privatization<br />
helps exclude the poor since they<br />
are the ones who least can afford it.<br />
Those who argue in favor of trade<br />
point out that no public good is ‘free’.<br />
<strong>The</strong>y believe that reforms in education<br />
finance will increase the revenue<br />
for both public and private educational<br />
providers; hence, it will increase<br />
the supply and will increase access to<br />
a public good. Recent international<br />
research on stratification and higher<br />
education suggests that higher education<br />
expansion reduces inequality;<br />
greater privatization is associated<br />
with higher levels of expansion and<br />
higher levels of social equity. <strong>The</strong> opposite<br />
is also true: control of expansion<br />
is associated with<br />
a monopoly of state financing,<br />
and hence with greater inequality<br />
of access.<br />
Trade Threatens <strong>The</strong> ‘social<br />
Contract’ Between Generations<br />
If trade leads to greater privatization<br />
(higher portions of the university<br />
budget from sources other than government),<br />
students will have to pay<br />
tuition. To do that they will have to rely<br />
on the generosity of their families,<br />
<strong>The</strong> problem is that the arguments for and against<br />
opening India to higher education trade are generally made<br />
by two divergent groups of stakeholders. Macro-economists<br />
generally favor international competition;<br />
education policy offi cials generally do not<br />
hence the present generation is expected<br />
to finance the education of future<br />
generations; and the social contract is<br />
broken. Proponents of more open trade<br />
counter with a question and a statement.<br />
<strong>The</strong> question is: when did it become<br />
true that the present generation<br />
should not sacrifice to help pay for a<br />
future generation? Isn’t that how generations<br />
have been organized since the<br />
beginning? Also, for those who cannot<br />
afford the tuition there would be scholarship<br />
aid. <strong>The</strong>refore with tuition there<br />
would be more equity, and more equity<br />
would help to strengthen the social<br />
contract between generations.<br />
Trade Jeopardizes Human<br />
Rights Because It Contradicts<br />
National Commitments For<br />
Free Education<br />
Critics point to the <strong>Dec</strong>laration of Human<br />
Rights and other legal contracts<br />
associated with the United Nations to<br />
suggest that if higher education is not<br />
THE INDIA ECONOMY REVIEW<br />
91
REIMAGINING INDIA<br />
free of private cost it constitutes an<br />
abrogation of human rights. Those who<br />
favor open trade point out that the UN<br />
statements on education apply to mandatory<br />
education but not necessarily<br />
all education. But they also say that<br />
trade would increase human rights because<br />
it would allow access to education<br />
when currently denied, unavailable,<br />
or too costly.<br />
Trade Will Lead To Education<br />
Corruption<br />
Trade leads to greater privatization,<br />
and greater privatization leads to a decline<br />
in professionalism. <strong>The</strong> profit<br />
motive is behind corruption; hence<br />
trade will lead to greater corruption<br />
of education. Proponents of open<br />
trade acknowledge the fact that education<br />
corruption is becoming more<br />
common and is a serious problem.<br />
But they point out that it occurs in<br />
local systems without any education<br />
trade. <strong>The</strong>y also point to recent evidence<br />
suggesting that having international<br />
providers in local education<br />
markets puts a break on corruption.<br />
Students tend to demand an institution<br />
free of corruption and may frequent<br />
international higher education providers<br />
in part because they adhere to<br />
standards of professional conduct in<br />
the foreign nation where they are accredited.<br />
When international providers<br />
of higher education services offer programs<br />
free of corruption local universities<br />
will have to respond with an environment<br />
similarly corruption-free.<br />
Three Universal Ambitions For<br />
Higher Education And A Universal<br />
Dilemma<br />
Today virtually every country has three<br />
ambitions for higher education. First<br />
is the demand for greater access. And<br />
in every country the portion of the age<br />
cohort with access to post secondary<br />
education of some kind is on the<br />
increase.<br />
Second is the ambition to improve<br />
quality. Over the last decade there has<br />
been a revolution in the criteria that<br />
help define quality. Higher education<br />
If foreign competition were allowed, what India now thinks<br />
of higher quality would be eclipsed by foreign private providers.<br />
Imagine Oxford in Madras, or Harvard in Bangalore?<br />
quality now requires electronic modernity<br />
in classrooms, dormitories, libraries,<br />
science laboratories, study halls.<br />
Students are often older, work part<br />
time, and live far away from campus.<br />
High quality syllabi are no longer<br />
based on textbooks but on the most upto-date<br />
information from print and<br />
electronic sources. Students in a modern<br />
university need to have access to<br />
curricular information wherever they<br />
live or travel. Classroom instruction<br />
has changed. Class time is no longer<br />
devoted to providing information for<br />
students; instead it is devoted to the<br />
analysis of information absorbed prior<br />
to class. <strong>The</strong> internet and other forms<br />
of electronic information have changed<br />
the academic library and enhanced its<br />
quality. <strong>The</strong>re is less need for faculty<br />
or students to visit the physical place.<br />
A high quality academic library used<br />
to be defined by the quantity of its<br />
‘holdings’; now it is defined by the<br />
quantity of its access to information.<br />
<strong>The</strong> difference is enormous. Every<br />
high quality academic library has<br />
enough money to join exclusive ‘information<br />
networks’ where holdings are<br />
shared with one another, for a fee.<br />
Networks of academic libraries are<br />
trans-national, and cover university<br />
libraries in Europe, Asia and North<br />
America. Access to information<br />
is what separates the excellent libraries<br />
from the mediocre. All acad<br />
emic services, both teaching and<br />
bibliographic, are delivered through<br />
broadband facilities. Universities with<br />
low bandwidth cannot compete in<br />
quality with universities with<br />
large bandwidth. A third common ambition<br />
is to improve equity, that is, to<br />
offer scholarships and fellowships to<br />
the able students from impoverished<br />
families or from disadvantaged regions.<br />
First class universities will have<br />
enough resources to offer about one<br />
third of the students’ scholarships or<br />
fellowships from their own resources.<br />
Taken together, all three ambitions are<br />
expensive and there are few countries<br />
where all three can be financed out of<br />
public resources alone. With the increase<br />
in student numbers and with<br />
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rising expectations for improvements<br />
in quality and in equity, public resources<br />
are insufficient. <strong>The</strong> scarcity of public<br />
resources is likely to be permanent<br />
and this poses a dilemma: how can<br />
higher education successfully finance<br />
its own objectives, including the<br />
traditional objectives for serving the<br />
public good?<br />
Summary<br />
Many university managers welcome<br />
the freedom to compete and lobby governments<br />
into changing legislation to<br />
make it possible. No rector or university<br />
president who has visited universities<br />
in other countries is unaware of<br />
the responsibilities and privileges of<br />
university managers in less restrictive<br />
environments. Public authorities in India<br />
should not just allow foreign universities<br />
into the country and neglect<br />
to significantly reform the legal environment<br />
in which Indian universities<br />
are asked to operate. That would neither<br />
be fair nor intelligent. Up for consideration<br />
should be changes in the<br />
entire legal structure which would allow<br />
the creation of endowments often<br />
from the overseas Diaspora (something<br />
China has mastered) and a new tax regime<br />
which encourages donations and<br />
gifts to education from both citizens<br />
and firms. Great universities, even<br />
public universities, need not depend on<br />
government financial allocation, but<br />
rather generate their own revenues<br />
though careful management. It is important<br />
to remember that new university<br />
management is the key to success.<br />
Old management styles will likely fail.<br />
<strong>The</strong>re are thirty programs offering<br />
PhD degrees in university management<br />
in the United States of America, with<br />
one (Vanderbilt University) which offers<br />
a doctorate in university advancement<br />
(how to raise money). Shouldn’t<br />
similar programs be available in India?<br />
But in essence India has no choice but<br />
to invite competition into higher education.<br />
No university can be competitive<br />
today unless it has access to its<br />
own resources. <strong>The</strong> best universities<br />
have to be wise in the re-allocation of<br />
the resources they raise to help preserve<br />
their public good function. To be<br />
sure, institutions will differ in how successful<br />
they are in financing their own<br />
objectives. Some are slow because they<br />
may not recognize that to be of high<br />
quality, all universities have to take<br />
finance and management into their<br />
own hands.<br />
Some could see this ‘privatization’<br />
trend as being reprehensible, and will<br />
want to call for more piety and a return<br />
to traditional sources of finance, i.e.,<br />
from greater allocations of public expenditures<br />
at the expense of other public<br />
priorities. But others see this trend<br />
as no more than a long overdue professionalization<br />
of higher education in<br />
the legitimate pursuit of excellence.<br />
<strong>The</strong>y do not see this as a threat or as<br />
‘copying of the West’, but rather as a<br />
successful model without geographic<br />
origin in which all higher education<br />
systems must participate in order to<br />
address what is now a universal dilemma<br />
of public resource inadequacy and<br />
high public demand for quality.<br />
References<br />
• Agarwal, Pawan 2006 (May). “Higher<br />
Education in India: <strong>The</strong> Need for<br />
Change,” Working Paper Number<br />
179, ICRIER, New Delhi.<br />
• 2006 (November 11th ) “Higher<br />
Education Policy: Many Contradictions,”<br />
Economic and Political<br />
Weekly. pp. 4645 – 8.<br />
• Heyneman, SP. 1980 “Investment in<br />
Education in India: Unecon<br />
omic?” World Development No. 4 p.<br />
145 – 63<br />
• 1997 “Economics of Education: Disappointments<br />
and Potential,” pp. 25<br />
– 51 in Economics of Human Behaviour<br />
edited by T. Lakshmanasamy<br />
Mumbai: Allied Publishers Ltd.<br />
• 2001 “<strong>The</strong> Growing International<br />
Market for Education Goods and<br />
Services,” International Journal of<br />
Education Development Vol. 21 No.<br />
4 (July), pp. 345 – 61.<br />
• 2006 “Global <strong>Issue</strong>s in Higher Education”<br />
2006 eJournal USA Washington<br />
D.C.: U.S. Department of<br />
State. http://usinfo.state.gov/journals/journals.htm.<br />
• Heyneman, S.P., Anderson, K. H.<br />
and Nuraliyeva, Nazym. 2008 “<strong>The</strong><br />
Cost of Corruption in Higher Education,”<br />
2008 Comparative Education<br />
Review (forthcoming)<br />
• Yossi, Shavit, Arum, Richard and<br />
Gamoran, Adam (eds.) <strong>2007</strong> Stratification<br />
in Higher Education: A<br />
Comparative Study. Stanford, California:<br />
Stanford University Press<br />
• Tilak, Jandhyala B.G. 2005 (<strong>Dec</strong>ember<br />
2 nd .) “Higher Education: A<br />
Public Good or a Commodity for<br />
Trade: Commitment to Higher Education<br />
or Commitment of Higher<br />
Education to Trade?” Barcelona<br />
(Spain): Second Nobel Laureates<br />
Meeting. Global University Network<br />
for Innovation.<br />
THE INDIA ECONOMY REVIEW<br />
93
Jharna Pathak<br />
Assistant Professor,<br />
Gujarat Institute of Development<br />
Research, Ahmedabad<br />
Water Resources In Gujarat And Role Of Water Markets In Breaking Gridlock In<br />
Water Scarcity – A Replicable Policy Prescription At National Level<br />
"Whiskey is for drinkin'; water<br />
is for fi ghtin'."<br />
-Mark Twain<br />
Conferences like Paris <strong>Dec</strong>laration<br />
(1998), Millennium Development<br />
Goals (2000), Vision 21:<br />
Water for People (2003); and water policies<br />
like National Water Policy (1987 and<br />
2002) and Gujarat 2010 emphasises on access<br />
to hygienic conditions, safe water and<br />
sanitation as fundamental rights to be<br />
achieved for all citizens of Gujarat.<br />
As far as availability of water resources<br />
are concerned, Gujarat can be divided into<br />
three dependent hydro-geological units,<br />
namely South, North Gujarat, Saurashtra<br />
and Kachchh. South Gujarat is better<br />
placed in terms of water resource potential<br />
than other three regions. According to the<br />
available statistics, Gujarat state has experienced<br />
rising population on one hand<br />
(from 19 million in 1951 to 60 million in<br />
2001) and the declining water resources on<br />
the other hand. As a result, the state has<br />
experienced a consistent decline in per<br />
capita availability of water, from more than<br />
2000 cubic meters in 1951 to about 1200<br />
cubic meter at present (Government of<br />
Gujarat, 1999). It has been estimated that<br />
the per capita availability will decline to<br />
910 cubic meters in 2010 and to 800 cubic<br />
meters in 2025 (Patel, 1998). <strong>The</strong> corresponding<br />
figures for India are much higher,<br />
150 cubic meters in 2010 and 1500 cubic<br />
meters in 2025. Let us examine different<br />
components of the total water resource<br />
carefully like groundwater and surface<br />
water resource.<br />
a. Surface Water<br />
As regard to surface water resources, regional<br />
inequalities are high across the regions<br />
(Table-1). <strong>The</strong> table shows that south<br />
Gujarat has 54 percent of the total surface<br />
water potential and 78 percent of the total<br />
utilisable surface water potential of the<br />
state. <strong>The</strong>se percentages are much lower<br />
in the other regions. This is mainly because<br />
of the high rainfall (upto 2000 mm)<br />
and the large number of perennial rivers<br />
in South Gujarat. Saurashtra and Kachchh<br />
have 71 and 97 rivers respectively, but except<br />
for two major rivers, Bhadar and<br />
Shetrunji, all the rivers are small and more<br />
or less seasonal. In the case of South Gu-<br />
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Table 1: Region-wise Potential And Development Of Surface Water<br />
In Gujarat<br />
Details<br />
South<br />
Gujarat<br />
North<br />
Gujarat<br />
Saurashtra Kachchh Total<br />
the state during 1984, 1991, and 1997 is<br />
evident in figure 1. Figure 1 shows that the<br />
potential has declined from 20 thousand<br />
mcm per year in 1984 to 16 thousand mcm<br />
Regional Details<br />
per year in 1997, implying about 21 percent<br />
No. Of Districts 7 5 6 1 19<br />
decline. Though there has been a small<br />
increase during 1991-97 (11.16 percent increase)<br />
due to the consecutive good sea-<br />
Area sq. kms 47557 38478 64337 45612 195984<br />
% Area Of State (24%) (20%) (33%) (23%) (100%)<br />
sons, the potential is still much less than<br />
No. Of Rivers 11 6 71 97 185<br />
the same in 1984. <strong>The</strong> same trend is observed<br />
among the districts also; also the<br />
Surface Water Potential<br />
Available Mm3 17510 7940 4550 2430 32430<br />
districts show a decline in the time period<br />
(%) (54%) (25%) (14%) (7%) (100%)<br />
1984-97 (except Amreli, which shows marginal<br />
Utilisable Mm3 13900 2000 1500 400 17800<br />
increase) (Please do refer Figure-2).<br />
(%) (78%) (12%) (8%) (2%) (100%) All except four districts show some increase<br />
Source: NWRD, 1991<br />
in the potential during 1991-97,<br />
jarat, there are 17 rivers and most of them<br />
are perennial. Irrigation increases productivity,<br />
stability and sustainability (Vaidyanathan<br />
(1999); Dhawan (1995). <strong>The</strong> foremost<br />
issue is the availability of irrigation<br />
potential, its creation and utilization. Ultimate<br />
Irrigation Potential (UIP) corresponds<br />
to the gross area that could theoretically<br />
be irrigated in a year on the basis<br />
of the assumed cropping pattern and the<br />
given probability of rainfall. Pushing the<br />
irrigation potential to the ultimate level<br />
resources in the state. This along with second<br />
committee on Estimation of Groundwater<br />
Resources and Irrigation Potential<br />
in 1991 and the third Committee in 1997<br />
throws light on the changing status of<br />
groundwater in the state.<br />
About 90 percent of the groundwater is<br />
used for irrigation in agriculture. <strong>The</strong>re<br />
are two types of groundwater schemes:<br />
government tubewells and private tubewells.<br />
<strong>The</strong> total groundwater potential in<br />
thanks to good rainfall (GoG 1999).<br />
Government of Gujarat (1999) in their<br />
study showed the ranges of increase and<br />
decline in groundwater potential across<br />
the different talukas of districts in the<br />
state. <strong>The</strong>y stated that talukas that experienced<br />
the highest declines in groundwater<br />
potential are from North Gujarat<br />
as well as Saurashtra and Kachchh<br />
regions.<br />
Utilisable groundwater resource is equal<br />
to the total groundwater resources<br />
available may be unsustainable in some<br />
cases. Gujarat has utilized its created potential<br />
with almost full utilization (Table-<br />
Table 2: Ultimate Irrigation Potential and<br />
Utilisation (‘000 ha)<br />
minus the provision<br />
for domestic, industrial and<br />
other uses (15 percent of the<br />
2). In as much as most of the available<br />
water resources have been almost fully<br />
exploited, special attention needs to be<br />
paid to management and maximization of<br />
utilization of the available resources.<br />
Details<br />
Utilised Irrigation Potential<br />
Potential created (97-98)<br />
Potential utilised (97-98)<br />
% of potential created to<br />
utilised irrigation potential<br />
Gujarat<br />
6103<br />
3379<br />
3097<br />
55.37<br />
India<br />
139893<br />
92742<br />
82740<br />
66.29<br />
total resources). As seen from<br />
Figure-3, that the total utilisable<br />
groundwater resources<br />
for the state is also declining.<br />
<strong>The</strong> total utilisable water resources<br />
in fact follow a similar<br />
b. Groundwater Resources<br />
Government of Gujarat has started estimating<br />
groundwater resources systematically<br />
since 1984 when the first technical<br />
group was set up to estimate the resources<br />
% of potential utilised to<br />
potential created<br />
Potential used to Utilised<br />
irrigation potential<br />
Gross irrigated area (98-99)<br />
91.65<br />
50.75<br />
3379<br />
89.19<br />
59.13<br />
73007<br />
trend as that of total water resources.<br />
Government of Gujarat<br />
(1999) shows that 76 percent<br />
of the total talukas in the<br />
state register a decrease in utilisable<br />
as well as the irrigation potential of the Source: Department of Agriculture, Government of Gujarat<br />
groundwater resources<br />
THE INDIA ECONOMY REVIEW<br />
95
REIMAGINING INDIA<br />
Figure-1: Total Groundwater Reserves<br />
Total Groundwater Reserves (mcm/yr)<br />
21000<br />
16000<br />
11000<br />
6000<br />
1000<br />
-4000<br />
Ahmedabad<br />
Amreli<br />
Banaskantha<br />
Baroda<br />
Bhavnagar<br />
Bharuch<br />
Valsad<br />
Dangs<br />
Districts<br />
Source: Narmada and Water Resource Department, 1984, 1991 and 1997<br />
Gandhinagar<br />
Jamnagar<br />
Junagadh<br />
Kheda<br />
Kutch<br />
1984 1991 1997<br />
Panchmahals<br />
Rajkot<br />
Sabarkantha<br />
Surat<br />
Surendranagar<br />
Mehsana<br />
Gujarat<br />
Figure-2: Bar Graph Showing Absolute Percent Change In Groundwater Reserves In Gujarat<br />
Percentage Change in Groundwater<br />
Reserves (%)<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
-20<br />
-40<br />
-60<br />
Ahmedabad<br />
Amreli<br />
Banaskantha<br />
Baroda<br />
Bhavnagar<br />
Bharuch<br />
Valsad<br />
Districts<br />
Dangs<br />
Gandhinagar<br />
Jamnagar<br />
Junagadh<br />
Kheda<br />
Kutch<br />
Panchmahals<br />
1984-1991 1991-1997 1984-1997<br />
Rajkot<br />
Sabarkantha<br />
Surat<br />
Surendranagar<br />
Mehsana<br />
Gujarat<br />
Source: Narmada and Water Resource Department, 1984, 1991 and 1997<br />
in the period 1984-97. For most of the talukas<br />
the decrease has been 25-50 percent<br />
(Government of Gujarat 1999).<br />
Figure 4 showed data relating to the levels<br />
of development of groundwater in districts<br />
of Gujarat during 1984, 1991 and<br />
1997. <strong>The</strong> average level of development<br />
shows a jump from 31 percent in 1984 to<br />
76 percent in 1997, implying an increase of<br />
more than 145 percent during the period.<br />
<strong>The</strong> state as a whole thus falls into “grey”<br />
category which is a serious situation indeed.<br />
This is evident from Map 1.<br />
In short, the long term trends do not indicate<br />
any improvement in the quality<br />
of groundwater in the state. In fact,<br />
they showed negative trends indicating<br />
worsening of the quality of groundwater<br />
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Figure-3: Bar Graph Showing Percentage Change In Utilisable Groundwater Reserves In Gujarat<br />
Percentage Change in total utilisable<br />
groundwater (%)<br />
90<br />
70<br />
50<br />
30<br />
10<br />
-10<br />
-30<br />
-50<br />
Ahmedabad<br />
Amreli<br />
Banaskantha<br />
Baroda<br />
Bhavnagar<br />
Bharuch<br />
Valsad<br />
Dangs<br />
1984-1991<br />
Districts<br />
Gandhinagar<br />
Jamnagar<br />
Junagadh<br />
Kheda<br />
Kutch<br />
Panchmahals<br />
Rajkot<br />
Sabarkantha<br />
Surat<br />
1991-1997 1984-1997<br />
Surendranagar<br />
Mehsana<br />
Gujarat<br />
Source: Narmada and Water Resource Department, 1984, 1991 and 1997<br />
over time.<br />
Government of Gujarat (1999) has projected<br />
the demand and supply of water<br />
resources in the state for 2010 and 2025.<br />
Table 3 is evident of the fact that in the<br />
year 2010 as well as in 2025, South Gujarat<br />
will be the surplus region for water while<br />
North Gujarat, Saurashtra and Kachchh<br />
will be water deficient region. <strong>The</strong> shortage<br />
is expected to increase in both the regions<br />
from 35 percent in 2010 to 83 percent<br />
in 2025 in the case of North Gujarat. This<br />
growth in demand has not been matched<br />
by an increase in supply. <strong>The</strong> problem is<br />
compounded by pollution of water, which<br />
has reduced its suitability for various uses.<br />
At the same time, in traditionally water<br />
intensive sectors of the economy such as<br />
agriculture, costs of irrigation have increased<br />
significantly. Under these circumstances,<br />
it is more important than ever<br />
before to use water efficiently. It is also<br />
necessary to anticipate and address intersectoral<br />
conflicts over allocation and use<br />
of water. <strong>The</strong> standard approach so far has<br />
been to advocate reform of water pricing<br />
across sectors to reflect the scarcity value<br />
of water. This advocacy is based on theoretical<br />
and empirical evidence on the need<br />
and desirability of such reforms including<br />
willing-to-pay studies. Nevertheless, major<br />
users of water (particularly of irrigation<br />
water) have resisted these reforms so far.<br />
Water Markets<br />
In this context, economic theory tells us<br />
that markets increase economic efficiency<br />
by allocating resources to their most valuable<br />
uses. In other words, if certain conditions<br />
are met, markets provide the correct<br />
incentives and lead to efficient resource<br />
use. <strong>The</strong>refore, one way to change the incentives<br />
so that water users support the<br />
reallocation of water and to achieving a<br />
more efficient allocation of water is<br />
through water markets. <strong>The</strong>se allow water<br />
users to buy and sell water, thus changing<br />
the whole incentive structure and breaking<br />
the logjam of water pricing reforms – when<br />
water users can gain from reallocation,<br />
they would be willing to sell water or pay a<br />
higher price for new supplies. This paper<br />
explores the role of water markets, particularly<br />
in the context of India’s water supply<br />
and sanitation sector.<br />
Apart from water markets there already<br />
In Gujarat, the per capita availability will decline to 910<br />
cubic meters in 2010 and to 800 cubic meters in 2025.<br />
<strong>The</strong> corresponding fi gures for India are much higher, 150<br />
cubic meters in 2010 and 1500 cubic meters in 2025<br />
exist numerous non-market mechanisms<br />
for allocating water in most countries.<br />
<strong>The</strong>se usufructuary rights to water have<br />
evolved either explicitly through laws and<br />
regulations or implicitly through conventions.<br />
<strong>The</strong>se water rights are generally<br />
based on one of three systems: first-come,<br />
first-served allocation (also known as<br />
prior appropriation rights), allocation<br />
based on proximity to flows (or riparian<br />
THE INDIA ECONOMY REVIEW<br />
97
Ahmedabad<br />
Amreli<br />
Banaskantha<br />
Baroda<br />
Bhavnagar<br />
Bharuch<br />
Vaksad<br />
Dangs<br />
Gandhinagar<br />
Jamnagar<br />
Junagadh<br />
Kheda<br />
Kutch<br />
Panchmahals<br />
Rajkot<br />
Sabarkantha<br />
Surat<br />
Surendranagar<br />
Mehsana<br />
Gujarat<br />
REIMAGINING INDIA<br />
rights) and public allocation (Sampath<br />
1992, Holden and Thobani 1996, Haddad<br />
2000). Whereas queuing for water is the<br />
basic approach of the prior appropriation<br />
doctrine, the location of one’s land determines<br />
water rights under the riparian doctrine.<br />
Under this approach whoever owns<br />
land along (above) the water has the right<br />
to ownership/reasonable use of the water.<br />
Finally, public allocation involves publicly<br />
administered distribution of water. “Under<br />
this system, public authorities decide<br />
how to allocate water using guidelines or<br />
laws establishing priorities and often specify<br />
the uses to which the water can be put.”<br />
(Holden and Thobani op. cit. p. 2) Most<br />
developing countries follow variants of the<br />
last approach where essentially the rights<br />
are allocated free – though there may be<br />
a charge for water use (typically based on<br />
the amount of irrigated area), the water<br />
rights themselves are obtained without<br />
charge. <strong>The</strong> track record, however, of administered<br />
systems of water allocation has<br />
not been impressive - across different systems<br />
and states in India, governments,<br />
however experience shortage of funds to<br />
carry out necessary R&R works of the<br />
system. At many places, canals were laid<br />
at uneven level and structures were in bad<br />
shape, which results in frequent breaching<br />
of canals. Consequently, reliability of water<br />
at scheduled time was not taken care<br />
off. Given these problems, Rosegrant and<br />
Binswanger (1994) have suggested that<br />
there may be a better way to achieve efficient<br />
allocation of water by changing incentives<br />
so that users support the efforts<br />
to reallocate water. <strong>The</strong>y argue that if water<br />
markets are established where water is<br />
scarce, then users can buy and sell water<br />
or pay a higher price for new supplies.<br />
While this is well known, the important<br />
point to note here is that none of these<br />
systems fulfil the conditions for well-defined<br />
property rights to water, which in<br />
turn are essential for water markets to exist.<br />
In this context, the question could well<br />
be asked, “Why not use administered efficiency-based<br />
pricing of water as an intermediate<br />
policy between managed quantity<br />
allocation and water markets?” <strong>The</strong>re<br />
are three reasons why water markets could<br />
be preferred to administer efficiency pricing<br />
(i.e., pricing marginal units of water at<br />
their marginal cost). First is the reduction<br />
in information costs – whereas it is theoretically<br />
possible to devise and implement<br />
a system of administered prices which<br />
would lead to efficient allocation of water,<br />
the information requirements are demanding<br />
and may require experimentation<br />
by trial and error. Second and perhaps<br />
more important, if the value of prevailing<br />
usufructuary water rights (formal or informal)<br />
has already been capitalised into<br />
the value of irrigated land, then imposition<br />
of administered pricing is perceived<br />
by right holders as expropriation of those<br />
rights. In effect, this would result in a<br />
capital loss for irrigated farms. This could<br />
explain the strong resistance by these<br />
groups to establishing administered efficiency<br />
prices. Finally, the administrative<br />
solution presumes “far-seeing,incorrupti<br />
Figure-4: Bar And Line Graph Showing In Level Of Groundwater Development<br />
200<br />
150<br />
Level of development (%)<br />
100<br />
50<br />
0<br />
Source: Narmada and Water Resource Department, 1984, 1991 and 1997<br />
Districts<br />
1984 1991 1997<br />
98 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
Map-1: Ground Water Categorisation<br />
Source: NWR and WSD, Government of Gujarat<br />
ble,influence-free” administrative bodies<br />
that are able to design and implement the<br />
‘correct’ prices. In practice, this may often<br />
not be the case: these bodies could be captured<br />
by interest groups or they may be<br />
short-sighted and unable to estimate future<br />
demand, or they may be unable to set<br />
and collect appropriate water charges.<br />
Advocates of administrative approaches,<br />
however, often ignore these problems focusing<br />
at the same time on imperfections<br />
of markets that supposedly reduce the efficacy<br />
of market-based solutions! In effect,<br />
if two second best states are being compared<br />
it may be difficult to order them.<br />
<strong>The</strong> numerous informal water markets<br />
existing in North Gujarat (tubewell companies)<br />
and South Gujarat (illegal water<br />
lifting from canal) suggest that water users<br />
will buy and sell water even if it is illegal or<br />
discouraged by the government.<br />
Even though water markets are believed<br />
to change incentives for water user and<br />
improve water allocation, there are number<br />
of constraints that may prevent introduction<br />
of water markets. For formal water<br />
markets to work, one key component is for<br />
users to have some type of water right or<br />
use right they can buy or sell. This may<br />
create a serious problem not only because<br />
water rights may be difficult to establish,<br />
but also because public water agencies feel<br />
they will lose a great deal of power if they<br />
allocate water rights to users. If water users<br />
have rights, this means that system operators<br />
have the responsibility to deliver<br />
water to the users more or less when the<br />
users want it. In contrast, if a government<br />
agency holds the water rights, they can dictate<br />
farmers the conditions under which<br />
they will receive water including in some<br />
cases, necessary side payments from farmers.<br />
If water rights are made tradable, this<br />
creates an even greater dilemma for government<br />
agencies. To prevent losing control<br />
over tradable water rights, Comision<br />
Nacional del Agua in Mexico and some of<br />
the water districts of western United States<br />
limit trading among water districts. A water<br />
user must obtain special government<br />
approval to sell water outside the jurisdiction<br />
and any profits from the sale must accrue<br />
to district and not the seller. This, of<br />
course, discourages interdistrict trading,<br />
but reduces the chance that trades will<br />
have third party effect. Such instances of<br />
formal water markets in India are non-existent.<br />
Experience of Mexico, Chile, United<br />
States, France, where water markets<br />
exist in one form or the other, assists in<br />
understanding organisational problems of<br />
water trading through market. First is the<br />
resistance to water trading between or<br />
among district or jurisdiction. Second is<br />
the problem of establishing water rights<br />
and giving the users more control over water.<br />
Other problems which raise the transaction<br />
cost of water trading include legal<br />
challenges by third parties who feel they<br />
In the formal water markets water rights may be very diffi<br />
cult to establish. What's more, public water agencies feel<br />
that they will lose a great deal of power if they allocate<br />
water rights/user rights to users<br />
might be damaged by a transfer, the lack<br />
of sufficient infrastructure to transfer water<br />
among potential buyers, and lack of an<br />
effective means for verifying and enforcing<br />
water rights.<br />
Establishing Water Markets<br />
Before we determine whether there is a<br />
need of reducing transaction cost and<br />
methods to do so, there is a need to understand<br />
the past experience of markets for<br />
allocating water resource. This is done<br />
with the assumption that if a country has<br />
experience with water markets, then it is<br />
THE INDIA ECONOMY REVIEW<br />
99
REIMAGINING INDIA<br />
Table-3: Details Of Availability And Requirement Of Water Resources In Gujarat<br />
Details<br />
Availability Of<br />
Water (mcm)<br />
Requirement Of<br />
Water (mcm)<br />
Surplus (mcm)<br />
Deficit Of Water Resources<br />
(mcm)<br />
As Per <strong>The</strong> Year 2010<br />
South Gujarat 24750 14390 10360 -<br />
Saurashtra & Kachchh 9740 13100 - 3360 (34.49)<br />
North Gujarat 10400 17400 - 7000 (67.31)<br />
Total 44890 44890 10360 10360<br />
As Per <strong>The</strong> Year 2025<br />
South Gujarat 28187 15500 12687 -<br />
Saurashtra & Kachchh 10170 14440 - 4269 (41.97)<br />
North Gujarat 10212 18630 - 8418 (82.43)<br />
Total 48570 48570 12687 12687<br />
Source: NWR and WSD, Government of Gujarat<br />
Note: figures in parentheses indicate the percentage shortage<br />
likely that water will be one of the goods<br />
that can be allocated using market forces.<br />
At least in the case of markets for irrigation<br />
water it appears that both formal and<br />
informal systems of water system are at<br />
work. In India, other than recent intervention<br />
in Maharashtra, there is a dearth of<br />
the experience of the formal market systems.<br />
But numerous countries experience<br />
with water markets are wide ranging, with<br />
most of the formal water markets in North<br />
and South America. For example in several<br />
areas of Chile, the legalisation of water<br />
trading and recording of water use<br />
rights were sufficient to foster an active<br />
formal water markets with relatively low<br />
transaction costs. <strong>The</strong> combination of effective<br />
water user association and well developed<br />
irrigation infrastructure allowed<br />
these farmers to easily trade water<br />
throughout the system including trades<br />
with the urban section (Hearne 1995).<br />
Garrido (1997) shows the economic gains,<br />
when trading is restricted to an individual<br />
water district. In contrast, if trades are allowed<br />
among communities that are subject<br />
to different supply constraints and drought<br />
conditions, the gains from trade can be<br />
substantial. As per his estimates, inter<br />
community trading results in 50 percent<br />
gain. In their analysis of selected water<br />
markets in Chile, Hearne and Easter<br />
(1997) found trading both within and between<br />
sectors. For permanent transactions,<br />
they felt the importance of well defined<br />
water use rights.<br />
In the case of informal markets in Asia,<br />
Shah (1993) finds that in areas with dependable<br />
groundwater recharge, the selling<br />
of tubewell water has benefited a wide<br />
range of farmers by allowing them to increase<br />
crop production and income.<br />
Groundwater markets play a major role in<br />
boosting agricultural production and returns<br />
to farmers from crop production.<br />
Saleth (1997) estimates that 20 percent of<br />
14 million pump sets are likely to be involved<br />
in water trading. This means that<br />
water markets are providing water for<br />
about 6 million hectares or 15 percent of<br />
the total area irrigated by groundwater. In<br />
Pakistan, 21 percent of the total area irrigated<br />
is from groundwater. Meinzen-Dick<br />
(1997) found that water markets increased<br />
the availability of water and the reliability<br />
of supplies. Study by Pathak (<strong>2007</strong>) showed<br />
that with greater water supplies and reliability,<br />
yield and returns increased for those<br />
who purchased water particularly for those<br />
who also had access to canal water. However,<br />
the highest yields and income was<br />
still found among farmers who owned<br />
tubewells and had access to canal water.<br />
Even though groundwater markets appear<br />
to be growing rapidly and providing a more<br />
assured source of water to many farmers,<br />
a number of concerns have been raised<br />
about the performance of informal water<br />
markets. Some of the problems are the<br />
following:<br />
• high water demand and declining<br />
groundwater level.<br />
• water rights are not well defined.<br />
• lead to over drafting of aquifers whichcauses<br />
decline in groundwater supplies.<br />
• potential for monopoly pricing and discrimination.<br />
Conclusion<br />
This paper shows that water markets have<br />
100 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
been in operation in many parts of the<br />
world including India. Although informal<br />
water markets have been in existence for<br />
decades, formal markets with clearly assigned,<br />
private and transferable water<br />
rights are of relatively recent origin. In<br />
Chile, Western USA and Australia, where<br />
there are developed formal water markets,<br />
there have been significant gains from water<br />
trading, particularly from trades between<br />
agricultural and urban users as water<br />
gets reallocated to more productive<br />
uses. In many instances, water trading has<br />
alleviated water shortages. International<br />
experience also shows that formal and developed<br />
water markets strengthen the incentives<br />
for conservation and more efficient<br />
use of water. For example, farmers<br />
have responded by switching to water-saving<br />
technologies and high-value, less water<br />
intensive crops. <strong>The</strong> Indian experience<br />
with water markets has been positive, although<br />
there have been only limited gains<br />
as markets have remained informal, localised<br />
and primitive. Thus, while these markets<br />
have led to some efficiency gains and<br />
have expanded the scope for many resource-poor<br />
farmers to access irrigation,<br />
inter-sectoral water transfers have not<br />
taken place so far. <strong>The</strong> current challenge<br />
in India is therefore to establish formal<br />
water markets, which will expand the scope<br />
of trading and make inter-sectoral water<br />
transfers possible. Further, since formal<br />
water markets have a legal basis, effective<br />
regulation can be designed to address the<br />
issue of ecological sustainability. <strong>The</strong>se<br />
markets will be of significant relevance to<br />
the urban sector, which has been suffering<br />
from acute shortages of water, but has not<br />
been able to access informal markets. A<br />
formal water market has the potential to<br />
provide low cost solutions to augmentation<br />
of water supply relatively quickly. With respect<br />
to further steps, it is desirable to<br />
make an indepth analysis on various important<br />
questions like<br />
• What are the legitimate users that need<br />
to be protected in water transaction?<br />
• Should third parties have to take into<br />
account the economic losses caused by<br />
not allowing the transfer?<br />
References<br />
• Dhawan, B.D. (1995), “Groundwater<br />
depletion, Land Degradation and Irrigated<br />
Agriculture in India. New Delhi:<br />
Commonwealth Publishers<br />
• Easter, K. William, Ariel Dinar and<br />
Mark W. Rosegrant. 1998. “Water Markets:<br />
Transaction Costs and Institutional<br />
Options,” in K.W. Easter et al. (eds.),<br />
Markets for Water: Potential and<br />
• Performance, Kluwer, Dordrecht, <strong>The</strong><br />
Netherlands.<br />
• Shah, Tushaar. 1993. Groundwater Market<br />
and Irrigation Development, Mumbai,<br />
Oxford University Press.<br />
• Hearne R., 1995. <strong>The</strong> Market Allocation<br />
of Natural Resources: Transaction<br />
of Water Use in Chile. Ph.D Dissertation,<br />
Department of Applied Economics,<br />
University of Minnesota.<br />
• Garrido, (1997). An Economic Analysis<br />
of Water Markets within the Spanish<br />
Agricultural Sector: Can they Provide<br />
Substantial Benefits? In K.W. Easter et<br />
al. (eds.), Markets for Water: Potential<br />
and Performance, Kluwer, Dordrecht,<br />
<strong>The</strong> Netherlands.<br />
• Government of India. (2002): “National<br />
Water Policy”, Ministry of Water Resources,<br />
New Delhi, India<br />
• Government of India. (1987): “National<br />
Water Policy”, Ministry of Water Resources,<br />
New Delhi, India<br />
• Government of Gujarat. (1999): “White<br />
Paper on Water Policy”, Ministry of<br />
Water Resources, Government of Gujarat,<br />
Gujarat.<br />
• Haddad, Brent M. 2000. Rivers of<br />
Gold: Designing Markets to Allocate<br />
Water in California, Island Press,<br />
Washington, DC.<br />
• Hearne and Easter (1997). <strong>The</strong> Economic<br />
and Financial Gains from Water<br />
Markets in Chile. In K.W. Easter et al.<br />
(eds.), Markets for Water: Potential and<br />
Performance, Kluwer, Dordrecht, <strong>The</strong><br />
Netherlands.<br />
• Holden, Paul and Mateen Thobani.<br />
1996. “Tradable Water Rights: A Property<br />
Rights Approach to Resolving Water<br />
Shortages and Promoting Investment”,<br />
Policy Research Working Paper<br />
-1627, World Bank, Washington, DC.<br />
• Meinzen-Dick (1997) Groundwater<br />
Markets in Pakistan: Institutional Development<br />
and Productivity Impacts. In<br />
K.W. Easter et al. (eds.), Markets for<br />
Water: Potential and Performance, Kluwer,<br />
Dordrecht, <strong>The</strong> Netherlands.<br />
• Pathak Jharna (<strong>2007</strong>). Irrigation Management<br />
Transfer: Problems and Policies.<br />
A Ph.D thesis submitted to Gujarat<br />
University.<br />
• Rosegrant, Mark W. and Hans P. Binswanger.<br />
1994. “Markets in Tradable<br />
Water Rights: Potential for Efficiency<br />
Gains in Developing Country Water<br />
Resource Allocation,” World Development,<br />
22(11): 1613-1625.<br />
• Sampath, R.K. 1992. “<strong>Issue</strong>s in Irrigation<br />
Pricing in Developing Countries”,<br />
World Development, 20(7): 967-977.<br />
• Vaidyanathan, A. (1999). Water Resource<br />
Management: Institutions and<br />
Irrigation Development in India. New<br />
Delhi: Oxford University Press.<br />
THE INDIA ECONOMY REVIEW<br />
101
V. Shunmugam D.G. Prasad<br />
Chief Economist<br />
Economist<br />
Multi Commodity Exchange Of India Ltd., Mumbai<br />
Commodity Futures: A Catalyst For<br />
Agricultural Development<br />
“Everything else can wait but<br />
not agriculture.”<br />
-Pandit Jawaharlal Nehru<br />
Historically, India has been considered<br />
an agrarian society;<br />
the fact that the basics of our<br />
culture and lifestyle have been derived<br />
from it stands testimony to our historical<br />
dependence on agriculture. Of late, the<br />
relative share of agriculture during early<br />
1990s declined significantly due to its<br />
sagging growth and leaping progress in<br />
the other sectors. Currently, services<br />
sector had become the largest contributor<br />
to the GDP and the agriculture sector<br />
had become the least contributor<br />
with its share of below 20 percent. <strong>The</strong><br />
reality is India cannot afford to neglect<br />
the agriculture sector and back pedal on<br />
reforms related to this sector with about<br />
two thirds of its population still directly<br />
or indirectly dependent on it, especially<br />
with apparent imbalances in the commodities<br />
economy making the policy<br />
choices narrow for the decision makers.<br />
At this point in time the high agricultural<br />
commodities prices combined with<br />
poor supply chain efficiency in the country<br />
affecting all sections of the society<br />
especially with the common man bearing<br />
the brunt of it. Despite the reports<br />
of high commodity prices at the retail<br />
end, farmers today are still complaining<br />
about stagnant prices at the market they<br />
sell. This could lead to the risk of many<br />
shifting their profession, often abandoning<br />
farming activities.<br />
Agrarian Challenges<br />
At the current situation of limited availability<br />
of resources, the country, indeed,<br />
requires a paradigm change from increase<br />
in production to improvement in<br />
the input-use efficiency, to enhance our<br />
competency in the agriculture sector.<br />
Given the current constraints of poor<br />
realization from agriculture and hence<br />
their poor investment in technology and<br />
lack of investment in infrastructure<br />
leading to the operation of a vicious cycle<br />
in the farming sector. This is not to<br />
say that those who command resources<br />
for example the large landholders were<br />
able to overcome the operation of this<br />
vicious cycle with their sheer bargaining<br />
102<br />
THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
power and reinvestment of profits back<br />
into farming. However, a large chunk of<br />
medium, small, and marginal farmers<br />
are still to come out of the clutches of<br />
the operation of this vicious cycle. Hence<br />
the need of the hour is to provide market<br />
based solutions to these farmers that<br />
could address the problems associated<br />
with inefficient and opaque markets;<br />
poor infrastructure including input supply<br />
systems, low credibility among the<br />
lending institutions, poor infrastructure<br />
especially in terms of transportation,<br />
warehouses, standardization and quality<br />
testing facilities, low value addition and<br />
a rather weak agricultural extension system,<br />
among others. Though there are<br />
production related issues that would<br />
need to be addressed, we believe it could<br />
be effectively tackled by equipping the<br />
farmers through market based empowerment.<br />
Remedies for these challenges<br />
can be approached by classifying them<br />
into two broad categories — marketing<br />
system ills and infrastructure challenges.<br />
As for addressing the infrastructure<br />
challenges, increased private investment<br />
could well be the answer, at least for<br />
overcoming them partially in commercially<br />
profitable areas. However, in the<br />
current marketing system wherein a<br />
large number of middlemen are involved<br />
in the supply chain, prices are largely<br />
determined by traders with immediate<br />
consideration to their profits. This eventually<br />
leads to lesser returns on agriculture<br />
making private investments in agriculture<br />
least remunerative.<br />
<strong>The</strong> current marketing system in the<br />
country leads to large price spreads suppressing<br />
the prices of commodities actually<br />
offered to the producers while inflating<br />
the prices that the end consumers<br />
are made to pay which often has no relation<br />
to the value addition that the products<br />
had undergone. This could be attributable<br />
to lack of transparency in the<br />
market and an inefficient price discovery<br />
mechanism. Farmers in most of the rural<br />
areas arrive at the market uninformed<br />
of the market situation due to lack of effective/reliable<br />
market information dissemination<br />
systems. Adding to their<br />
woes, farmers more often take sowing<br />
decisions based on the prevailing prices<br />
(unaware of the future price directions),<br />
which would most often prove them<br />
wrong. Thus, remunerative prices for<br />
their produce remain ever elusive to<br />
farmers and remain a major cause of the<br />
current stagnation in agricultural<br />
growth. In other words, the lack of motivational<br />
factor i.e. dwindling returns<br />
to labor and investment is the key reason<br />
for this stagnancy. Increased profits<br />
would be possible only if farmers were<br />
provided fair prices that are reflective of<br />
their supply and demand.<br />
Reforms On Anvil: Move towards<br />
Market Based Mechanism<br />
In a perfect market, price is determined<br />
by the forces of demand and supply (fundamentals).<br />
Frequent changes in the<br />
fundamentals lead to increased price<br />
volatility. In order to make the agriculture<br />
sector more vibrant the Indian Government<br />
allowed national online futures<br />
trading in commodities during 2003.<br />
<strong>The</strong> objective was to ensure stabilization<br />
of prices of agricultural products and<br />
provide farmers with alternative markets<br />
that could equip them in taking the right<br />
decisions in sowing, harvesting, and selling<br />
of the right crop at the right market<br />
value at the right time. Emergence of<br />
futures trading in this context, following<br />
the Government’s initiative, which serves<br />
the above needs is of great significance<br />
as a remedy to the ills in the existing<br />
marketing system.<br />
<strong>The</strong> Advent Of Futures Trading<br />
Introduction of national online commodity<br />
derivatives trading would remain<br />
the most significant development in the<br />
history of Indian commodity markets as<br />
the earlier exchanges remained regional<br />
Existence of the three national exchanges had brought in<br />
revolutionary changes in the Indian commodity markets<br />
by bringing in spatial integration and temporal price discovery<br />
for commodities at the national level.<br />
both in terms of their participation and<br />
products. Currently, there are three national<br />
exchanges, and twenty two regional<br />
exchanges that are operating in the<br />
country. Existence of the three national<br />
exchanges had brought in revolutionary<br />
changes in the Indian commodity markets<br />
by bringing in spatial integration<br />
and temporal price discovery for commodities<br />
at the national level.<br />
Undoubtedly, the revival of commodity<br />
futures trading in India has led to a<br />
reduction in daily price volatility of various<br />
commodities in the domestic spot<br />
markets. Table - I provides a comparative<br />
account of price volatility of three<br />
select agri-commodities in the spot markets<br />
before and after the introduction of<br />
futures trading at the Multi Commodity<br />
THE INDIA ECONOMY REVIEW<br />
103
REIMAGINING INDIA<br />
Table I: Volatility Of Spot Prices<br />
Commodity<br />
Pre MCX futures<br />
(Percentage)<br />
Exchange of India Ltd. (MCX), the<br />
country’s No. 1 commodity derivatives<br />
exchange (in <strong>2007</strong>) located in Mumbai.<br />
It was found that there has been a<br />
marked reduction in daily price volatility<br />
in all these three commodities. <strong>The</strong><br />
finding corroborates that the resurrection<br />
of futures trading has indeed contributed<br />
to increased stability in agricultural<br />
markets, which in turn has helped<br />
Indian farmers receive a stable income<br />
besides making efficient sell/store decisions.<br />
Availability of future price signals<br />
also reduced the pre and post harvest<br />
differences in prices avoiding the rush of<br />
arrivals immediately post-harvest.<br />
<strong>The</strong> Drive Behind And <strong>The</strong><br />
Benefits Of Futures Markets<br />
Virtually all agricultural commodities<br />
in India have a long supply chain with a<br />
number of middlemen performing the<br />
roles and functions of the brokers, commission<br />
agents, processors, wholesalers,<br />
retailers, etc., and thus making their<br />
marketing costlier that their production<br />
at times. In almost all the cases, the middlemen-levied<br />
charges do not really mirror<br />
the true value of the economic function<br />
they perform in taking a given<br />
commodity from farm gate to the consumer’s<br />
plate. Thus the existing markets<br />
Post MCX futures<br />
(Percentage)<br />
Wheat 4.80 3.49<br />
Tur 1.47 2.4<br />
Urad 2.58 1.8<br />
Source: Delhi Wholesale Market, CMIE, www.cmie.com/database/services<br />
Note: Daily prices were considered.<br />
Post futures period include inception of specific contracts on MCX platform<br />
till June 2006 and corresponding period before inception of futures contracts<br />
was considered for pre-futures.<br />
had a biased marketing<br />
system offering the producer<br />
the lowest while<br />
charging the consumer<br />
the highest. Obviously,<br />
such an undesirable system<br />
cannot continue for<br />
ever and the stakeholders<br />
would look for a way out<br />
— an efficient market<br />
that enables everybody to<br />
participate in a price discovery mechanism<br />
that is fully transparent and yet is<br />
capable of bringing the cost of the value<br />
chain down to the minimum. Here is<br />
where the birth of futures exchanges<br />
proved out to be the panacea for many<br />
of the above ills faced by the physical<br />
markets. <strong>The</strong>se exchanges performed<br />
the function of advance price discovery,<br />
increasing the efficiency of the markets<br />
by helping them streamline prices to reflect<br />
on the commodity fundamentals<br />
rather than reflecting the profit making<br />
initiatives of the private players in the<br />
value chain. That apart, commodity exchanges<br />
also facilitate private participation<br />
in the market related infrastructure<br />
investments. <strong>The</strong> exchanges’ efforts in<br />
providing effective collateral management,<br />
improved warehousing for<br />
agri-products, widening the network of<br />
quality certification and product standardization<br />
agencies, and providing better<br />
logistics solutions have already<br />
brought in the much needed efficiencies<br />
in the ecosystem.<br />
Commodity Exchanges As Catalysts<br />
Of Agricultural Marketing<br />
Infrastructure Development<br />
MCX took various initiatives to launch<br />
two major infrastructure projects — Na-<br />
tional Spot Exchange Ltd. (NSEL) and<br />
National Bulk Handling Corporation<br />
Ltd. (NBHC). NSEL would provide a<br />
national-level electronic platform for<br />
spot trading in agricultural commodities<br />
by integrating all the physical markets<br />
into a common national market. This<br />
initiative is meant to empower rural India<br />
to usher in the next Green Revolution<br />
by harnessing technology. <strong>The</strong> effective<br />
co-existence of the spot and<br />
futures markets in the ecosystem will<br />
surely help in coming up with fair price<br />
discovery empowering Indian farmers in<br />
several ways, including leading them to<br />
the use of improved technology, thus,<br />
catalyzing rapid growth in agricultural<br />
production. Services that NBHC – the<br />
delivery arm of MCX extend include<br />
warehousing and bulk handling of agricultural<br />
commodities by managing a<br />
chain of accredited warehouses across<br />
the country, grading and assaying, quality<br />
systems for storage and protection,<br />
offloading and disposal services, demating<br />
of warehouse receipts, etc. In a nutshell,<br />
NBHC’s existence is slowly leading<br />
to awareness in the ecosystem regarding<br />
futures trading, collateral management<br />
systems, warehouse receipt financing,<br />
quality and standards, etc., leading to an<br />
overall improvement in the ecosystem.<br />
Thus, commodity exchanges are the seed<br />
sown to provide a new direction to agricultural<br />
productivity and returns to agriproducts<br />
by improving the marketing<br />
systems of the country with participatory<br />
efforts from all the stakeholders in the<br />
system. Exchanges ensured sustained<br />
and increased returns to agricultural<br />
products through transparent and participatory<br />
price discovery process. Besides,<br />
they also create an environment<br />
104<br />
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MORE MARKETS, LESS GOVERNMENT<br />
where farmers have a choice — many options<br />
of selling their commodities such<br />
as spot markets and futures markets.<br />
Also, as futures trading is done at the<br />
national level in an electronic format,<br />
integration of banks and institutional<br />
traders on the commodities marketplace<br />
creates several institutional options for<br />
farmers. Thus, with the introduction of<br />
national online commodity exchanges,<br />
the seed for democratic reforms in market<br />
in its process and its infrastructure<br />
has been sown and only time and appropriate<br />
nurturing by supporting policies<br />
can tell us how far these could go.<br />
<strong>The</strong> Global Impact Of Domestic<br />
Commexes<br />
<strong>The</strong> establishment of national commodity<br />
exchanges in India is creating a nearperfect<br />
market situation, with a much<br />
wider participation from the market<br />
ecosystem during local and global market<br />
timings. Feeling the necessity for<br />
aligning themselves with the international<br />
markets in globally traded commodities<br />
where there are international<br />
linkages, the domestic commodity exchanges<br />
make use of maximum possible<br />
hours of operation unlike their equity<br />
counterparts in the country by bridging<br />
the time zones of Tokyo and New York<br />
while passing on the price signals to the<br />
European markets. In fact, given the<br />
country’s potential share in global supply<br />
and demand, India has the potential<br />
to become the price-setter in about seventeen<br />
commodities and thus, emerge as<br />
a dominant player in the global markets.<br />
Of late, with the constant strengthening<br />
of the futures market, India has started<br />
emitting price signals to linked global<br />
markets in those commodities having<br />
international linkages. In commodities<br />
such as gold, of which India is the world’s<br />
largest importer and consumer, and<br />
chana, of which the country is the largest<br />
producer/consumer,India, with the<br />
emergence of futures markets, is slowly<br />
gaining the rightful place in the world<br />
markets by setting the prices. <strong>The</strong> prices<br />
disseminated by Indian exchanges have<br />
become increasingly acceptable to the<br />
business and farmer communities as<br />
they are discovered after assimilating<br />
the information available to<br />
the participants.<br />
<strong>The</strong> Global Commodity Arena<br />
And MCX’s Role<br />
MCX has made its mark in the global<br />
commodities exchange industry by becoming<br />
the largest silver exchange (in<br />
terms of the number of contracts traded),<br />
the second largest in natural gas,<br />
the third largest bullion exchange after<br />
NYMEX & TOCOM, and also the third<br />
largest exchange in crude oil among the<br />
top 10 commodity derivatives exchanges<br />
in the world in <strong>2007</strong> with only retail, and<br />
corporate participation and without<br />
products other than futures on its platform.<br />
<strong>The</strong> Exchange believes that as India<br />
becomes a truly global economy, it<br />
would offer greater potential in commodities,<br />
as regulatory and market impediments<br />
that prevent building up of<br />
volumes in the exchanges would get dissolved<br />
and the exchanges would be left<br />
to their own to prove their mettle. <strong>The</strong><br />
price correlation in the globally traded<br />
commodities indicates that the prices<br />
discovered in the MCX had more than<br />
90 percent correlation with their international<br />
benchmarks suggesting that the<br />
prices moved in tandem with the international<br />
markets, following a right combination<br />
of domestic and international<br />
Given India's potential share in global supply and demand,<br />
India has the potential to become the price-setter in about<br />
seventeen commodities and thus, emerge as a dominant<br />
player in the global markets<br />
fundamentals. This makes the domestic<br />
online exchanges a cost-effective better<br />
alternative to the domestic participants<br />
particularly for the SME companies,<br />
with enough liquidity as found in the International<br />
benchmark exchanges. However,<br />
the potential in other commodities<br />
and for reaching out to the end-users is<br />
yet to be harnessed, pending various<br />
regulatory reforms.<br />
<strong>The</strong> Road Ahead<br />
<strong>The</strong> proposed amendments to the Forward<br />
Contracts Regulation Act is likely<br />
to originate a slew of changes in the<br />
THE INDIA ECONOMY REVIEW<br />
105
REIMAGINING INDIA<br />
commodity derivatives ecosystem. Firstly,<br />
the functional autonomy of the Forward<br />
Markets Commission (FMC) – the<br />
regulator for the commodity markets, as<br />
proposed in the FCRA would make it<br />
more vibrant in the eyes of the market<br />
participants and policy makers and other<br />
regulators such as RBI and SEBI.<br />
This could help facilitate entry of other<br />
participants such as banks and mutual<br />
funds as their regulators namely RBI<br />
and SEBI respectively develop confidence<br />
in the functioning and regulation<br />
of the markets. Further, new products<br />
such as options will offer the stakeholders<br />
(least risk appetite) with one more<br />
instrument for risk management. This<br />
could be more suited to farmers participation<br />
as they are less risk-hungry and<br />
could help them overcome the liquidity<br />
problems that they would otherwise face<br />
in the futures instrument in meeting the<br />
daily MTM margin requirements. <strong>The</strong><br />
entry of banks, MFs and foreign institutional<br />
investors (FIIs) would enhance<br />
the liquidity and professionalism in the<br />
markets and thereby bolstering the efficiency<br />
of the Indian commodity markets,<br />
which is essentially needed at a time<br />
when the country’s market is being<br />
opened to traders and investors from<br />
across the borders. Perhaps, with banks<br />
allowed it could even facilitate farmer’s<br />
participation helping them overcome the<br />
present hurdles in their participation.<br />
<strong>The</strong> permission to launch index-based<br />
instruments following the amendment to<br />
FCRA would open the doors for exchanges<br />
to come out with derivatives<br />
such as index linked futures and options,<br />
sector based derivatives, and weather<br />
derivatives. While rocketing in the current<br />
high-growth trajectory, the domestic<br />
exchanges have also effectively adopted<br />
global best practices from the<br />
<strong>The</strong> permission to launch index-based instruments would<br />
open the doors for exchanges to come out with derivatives<br />
such as index linked futures and options, sector based<br />
derivatives, and weather derivatives<br />
benchmark exchanges to leap forward<br />
and attain higher levels of efficiency and<br />
trading volumes. In turn, these efficient<br />
marketplaces with right products and<br />
participation are likely to transform the<br />
economy’s competitiveness and help<br />
raise the global competitiveness of Indian<br />
products and services This would<br />
help India to become an efficient global<br />
manufacturing hub and shore up its performance<br />
on the external trade front.<br />
Given all the positive effects of the futures<br />
exchanges to the economy and the<br />
markets, the growth in the commodities<br />
sector has been unsupported unlike its<br />
financial derivatives counterpart.<br />
All in all, one must acknowledge that<br />
given the current trend in globalization<br />
of economies, competitiveness would<br />
remain a major factor affecting the performance<br />
of many of these economies<br />
and may even determine their survival<br />
in a more liberalized trade environment.<br />
As production determines part of the<br />
costs of the product or a service so is<br />
its marketing cost. <strong>The</strong> more efficiently<br />
commodities are marketed in an<br />
economy could solve a part of the<br />
problem that India is facing in moving<br />
up the ladder in its trading competitiveness.<br />
As goods and services becomes<br />
cheaper due to reduced cost of<br />
marketing it, such as through reduced<br />
wastages through quality production,<br />
standardization and grading, and scientific<br />
storage, paying the intermediary<br />
the right value for the services that<br />
he renders to the marketing of the<br />
commodity. Increased marketing efficiency<br />
coupled with increased production<br />
efficiency is likely to help India remain<br />
competitive. For increased market<br />
efficiency, it is necessary that there are<br />
efficient futures markets that help the<br />
producers and value chain players take<br />
effective production and marketing decisions<br />
to reduce the cost of marketing.<br />
Hence no one can deny that efficient<br />
markets are as much important as like<br />
the efficient industries or the agricultural<br />
production systems that would efficiently<br />
produce primary or the processed<br />
products to help our economy<br />
remain competitive and there is no other<br />
alternative to the commodity derivatives<br />
trading that can bring about necessary<br />
efficiency in the existing<br />
market ecosystem.<br />
106<br />
THE <strong>IIPM</strong> THINK TANK
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Research Scholar,<br />
Centre for Economic Studies<br />
and Planning, Jawaharlal<br />
Nehru University, New Delhi<br />
Overseas Investment By Indian Firms:<br />
Recent Trends and Patterns<br />
"Today, one of the engines powering the remarkable<br />
growth in India is entrepreneurship. After<br />
being shackled for a number of decades, the<br />
wings of India's large class of talented private<br />
entrepreneurs have been fully freed. After a few<br />
tentative fl utters in the early 1990s, they are<br />
now showing their true worth. Many indigenous<br />
start-ups are becoming global success stories<br />
and Indian business has done unexpectedly<br />
well in the last decade and a half – largely as a<br />
result of more effi cient use of resources, men<br />
and machines."<br />
-Kamal Nath<br />
Minister of Commerce & Industry at<br />
United States-India Business Council<br />
(USIBC) Annual Summit, June 27, <strong>2007</strong><br />
1. Introduction<br />
Last two decades have witnessed liberalisation<br />
and globalisation of many developing<br />
economies across the world.<br />
One of the key outcomes of this process<br />
has been enhanced mobility of capital<br />
across different countries. This has resulted<br />
in a significant increase in the<br />
outward Foreign Direct Investment<br />
(FDI) flows not only from the developed<br />
countries but also from several developing<br />
and transition economies, especially<br />
since the early 1990s. <strong>The</strong> value of<br />
outward FDI flows from the developing<br />
and transition economies increased<br />
from $ 12 billion in 1990 to $193 billion<br />
in 2006 (which accounted for about 16<br />
percent of the world total outward FDI<br />
flows). Likewise, the value of the outward<br />
FDI stock of developing and transition<br />
economies went up from only $146<br />
billion in 1990 to $881 billion in 2000,<br />
reaching $1.7 trillion in 2006 (14 percent<br />
of the world total outward FDI stock).<br />
In case of India too, the FDI outflows<br />
have assumed significant proportions<br />
(in absolute terms) only since the early<br />
1990s. India’s total outward FDI stock<br />
rose from $124 million in 1990 to (almost)<br />
$13 billion in 2006; still it was<br />
ranked only 16th among the developing<br />
countries in terms of the total outward<br />
FDI stock. Likewise, India’s outward<br />
FDI flows increased from a meagre $6<br />
million in 1990 to $9.7 billion in 2006. 1<br />
India’s ranking in the Outward FDI<br />
Performance Index (of UNCTAD) has<br />
improved over these years, from 82 in<br />
1990 to 56 in 2006. <strong>The</strong> ‘internationalization’<br />
of Indian firms is also reflected<br />
in the growing number of Indian companies<br />
investing abroad, which has increased<br />
from 187 in the early 1990s to<br />
1700 by the early years of the present<br />
decade. 2<br />
In this backdrop, the present paper<br />
deals with some of the important aspects<br />
of overseas investment by Indian<br />
firms over the last decade. <strong>The</strong> second<br />
section of the paper presents a brief account<br />
of the changing policy framework<br />
in India with regard to outward FDI.<br />
108 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
<strong>The</strong> third section discusses the geographical<br />
and sectoral patterns of outward<br />
FDI flows from India. <strong>The</strong> fourth<br />
section highlights some of the overseas<br />
Mergers & Acquisitions (M&As) made<br />
by Indian firms. <strong>The</strong> fifth section discusses<br />
their likely motives and the factors<br />
driving overseas investments. <strong>The</strong><br />
paper ends with concluding remarks on<br />
some policy implications of the recent<br />
surge in outward FDI from India.<br />
2. <strong>The</strong> Policy Framework<br />
<strong>The</strong> policy guidelines for outward FDI<br />
from the country have evolved over the<br />
last few decades. <strong>The</strong> evolution of India’s<br />
overseas investment policy can be<br />
traced back to 1969, when the guidelines<br />
for overseas direct investment were issued<br />
by the Government of India for the<br />
first time. <strong>The</strong>se guidelines had defined<br />
the extent of participation of Indian<br />
companies in projects abroad. Indian<br />
companies were permitted minority<br />
participation in ‘turnkey projects’ involving<br />
no cash remittances. Subsequently,<br />
these guidelines were revised<br />
in 1978 and 1986, in the pre-reform era.<br />
<strong>The</strong> main objective of outward investment<br />
policy during this era was to encourage<br />
outward investments by Indian<br />
companies as means of promoting exports<br />
of Indian capital goods, technology<br />
and consultancy services. 3<br />
However, since the onset of economic<br />
reforms in India, overseas investment<br />
policy has undergone a structural<br />
change; with the last five years witnessing<br />
a clear thrust in policy towards promotion<br />
of greater investment opportunities<br />
for Indian firms. <strong>The</strong> stated<br />
objectives of this structural change in<br />
the overseas investment policy regime<br />
were: to help promote exports from the<br />
country, strengthen its economic linkages<br />
with other countries, provide Indian<br />
firms the access to new markets<br />
and technologies, and increase the global<br />
competitiveness of Indian firms. India’s<br />
overseas investment policy was first<br />
liberalised in 1992, which marked the<br />
introduction of an Automatic Route for<br />
overseas investments and allowed cash<br />
remittances for the first time with restrictions<br />
on the total value of investments.<br />
<strong>The</strong> total value of overseas investment<br />
by an Indian firm was<br />
restricted to $2 million in a block of<br />
three years, with a cash component of<br />
only $0.5 million. In 1995, the upper<br />
limit for automatic approval was raised<br />
to $4 million; and, the Reserve Bank of<br />
India (RBI) was given the authority for<br />
approval of overseas investment proposals<br />
worth up to $15 million, 4 while overseas<br />
investments worth more than $15<br />
million were still considered and approved<br />
by the Ministry of Finance. <strong>The</strong><br />
introduction of Foreign Exchange Management<br />
Act (FEMA), in 2000, brought<br />
in further changes in the policy relating<br />
to investments abroad. <strong>The</strong> limit for<br />
overseas investment was raised to $50<br />
million annually, without any condition<br />
relating to repatriation of a part of the<br />
declared profits. In March 2002, the upper<br />
limit for automatic approval was<br />
further increased to $100 million annually,<br />
of which 50 percent could be funded<br />
in foreign exchange from any authorized<br />
dealer (i.e. a bank authorized by<br />
RBI to deal in foreign exchange or<br />
foreign securities). 5<br />
Since 2003, however, the policy regime<br />
for overseas investment has been<br />
liberalized significantly. In 2003, Indian<br />
firms were allowed to make overseas<br />
investment (annually) of up to 100 percent<br />
of their net worth under the automatic<br />
approval route. This limit was<br />
enhanced later to 200 percent in 2005<br />
and 300 percent in <strong>2007</strong>. 6 In March<br />
2006, RBI also paved the way for proprietary/<br />
unregistered partnership firms<br />
to set up joint ventures or wholly owned<br />
subsidiaries abroad. Recently, the upper<br />
limit for total overseas investment of an<br />
Indian party in all its joint ventures and/<br />
or Wholly Owned Subsidiaries abroad<br />
has been enhanced to, not exceeding<br />
400 percent of its net worth. 7<br />
As regards the implications of these<br />
policy changes in India, Nayyar (<strong>2007</strong>) 8<br />
observes that the liberalization of the<br />
overseas investment policy regime,<br />
India’s total outward FDI stock rose from $ 124<br />
million in 1990 to (almost) $ 13 billion in 2006.<br />
Still, it was ranked only 16 th among the developing<br />
countries in terms of the total outward FDI stock<br />
along with reforms in the financial sector<br />
particularly those since early 2000s,<br />
have enhanced Indian firms’ access to<br />
capital from both domestic and international<br />
financial markets. For instance,<br />
in April 2003, banks in India were permitted<br />
to provide credit and non-credit<br />
facilities to Indian Joint Ventures or<br />
Wholly Owned Subsidiaries abroad<br />
worth up to 10 percent of their unimpaired<br />
capital funds. This limit was further<br />
raised to 20 percent in November<br />
THE INDIA ECONOMY REVIEW<br />
109
REIMAGINING INDIA<br />
2006. Besides, India has also entered<br />
into Bilateral Investment Promotion<br />
and Protection Agreements (BIPAs)<br />
with a number of countries to promote<br />
and protect foreign investment on a reciprocal<br />
basis. All these policy changes<br />
have resulted in an environment conducive<br />
to a rapid expansion of outward<br />
FDI flows from the country.<br />
3. Overseas Investment: Geographical<br />
And Sectoral Patterns<br />
India’s outward FDI has steadily increased<br />
since 1996, both in terms of<br />
number of approvals and value. Indian<br />
investment abroad has gone up from $<br />
557 million (290 approvals) in the financial<br />
year 1996-97 to $2855 million (1395<br />
approvals) in the financial year 2005-06,<br />
representing an increase of 513 percent<br />
in terms of value of investments and 380<br />
percent in terms of the number of approvals<br />
given. In the financial year<br />
2006-07 (for the period April-October<br />
2006), actual FDI outflows stood at $<br />
3320 million as compared to $ 2109 million<br />
in the corresponding period of<br />
2005-06. 9 Before we move on to a discussion<br />
of geographical and sectoral<br />
patterns of FDI outflows from India, we<br />
must pay attention to some of the limitations<br />
of the statistics on FDI outflows:<br />
these statistics relate only to approvals<br />
rather than actual FDI outflows; the<br />
FDI outflow statistics do not include investment<br />
financed by borrowing in international<br />
financial markets through<br />
special purpose vehicles (SPVs); moreover,<br />
the data on sectoral distribution of<br />
outward FDI are not disaggregated<br />
enough 10 . Nonetheless, even the currently<br />
available statistics on outward<br />
FDI from India provide valuable<br />
insights.<br />
3.1 Geographical Patterns<br />
Until mid-1980s, much of the outward<br />
Indian investment abroad has gone up from $557 million<br />
(290 approvals) in the financial year 1996-97 to $2855<br />
million (1395 approvals) in 2005-06, representing an<br />
increase of 513% in terms of value of investments and<br />
380% in terms of the no. of approvals given<br />
FDI from India was concentrated primarily<br />
in a few developing regions of<br />
Africa (Kenya and Nigeria), Southeast<br />
Asia (Malaysia, Indonesia, and Singapore)<br />
and South Asia (Sri Lanka and<br />
Nepal) 11 . In fact, in the 1980s, India had<br />
emerged as the third largest foreign direct<br />
investor among the developing<br />
countries after Hong Kong and Singapore.<br />
12 <strong>The</strong> geographical pattern of Indian<br />
outward FDI underwent noticeable<br />
changes since early 1990s, when the<br />
outward FDI flows from India (in some<br />
of the sectors, such as software and<br />
pharmaceuticals) started shifting towards<br />
the developed regions, mainly<br />
North America and European Union.<br />
Over the period from April 1996 to<br />
October 2006, the largest recipient of<br />
India’s FDI was Russia with total Indian<br />
outward FDI of $ 2831 million, which<br />
was followed by USA at $ 2768 million,<br />
Mauritius at $ 2151 million, and UK at<br />
$ 2150 million (see Table 1). More recently,<br />
in 2006-07 (during the period<br />
April-October 2006), the top three destinations<br />
of India’s outward FDI were<br />
UK, Netherlands and Mauritius. In<br />
2006-07, India became the second-biggest<br />
source of outward FDI flows to UK.<br />
While most of the investments in USA<br />
and UK have been in IT services and<br />
pharmaceuticals, those in the Russian<br />
Federation and Sudan have been mainly<br />
in oil exploration. 13 A sizable chunk<br />
of Indian outward FDI has been going<br />
to the tax havens or offshore financial<br />
centres, like Mauritius (10 percent),<br />
British Virgin Islands (4.5 percent), and<br />
Bermuda (3 percent). In fact, it has been<br />
observed that the double taxation avoidance<br />
treaty between India and Mauritius<br />
(and other such tax haven countries)<br />
has encouraged Indian firms to ‘round<br />
trip’ investment through Mauritius (and<br />
other tax haven countries) to take advantage<br />
of the tax benefits enjoyed by<br />
overseas investors. 14 Thus, the geographical<br />
spread of Indian outward FDI<br />
has expanded over the last decade,<br />
with a shift towards the developed<br />
countries.<br />
3.2 Sectoral Patterns<br />
It has been highlighted by several ob-<br />
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servers [see, for instance, Kumar (1995)<br />
& Pradhan (<strong>2007</strong>) 15 ] that the bulk of<br />
India’s outward FDI during 1970s and<br />
1980s was in the manufacturing sector,<br />
primarily in light engineering, pharmaceuticals,<br />
chemicals and textiles. Along<br />
with the increasing geographical diversification<br />
of outward FDI from the<br />
country, a sectoral diversification (towards<br />
services) also started taking place<br />
in the early 1990s. Although in case of<br />
certain services like, communication<br />
and software, broadcasting and publishing,<br />
engineering and construction, and<br />
hotels and restaurants, outward FDI<br />
from India has been rising; manufacturing<br />
sector still accounts for a major<br />
chunk of total outward FDI from India.<br />
Table-2 presents the sectoral composition<br />
of outward FDI flows from India<br />
during the period from April 1999 to<br />
October 2006. In this period, the largest<br />
amount approved for overseas investment<br />
was in the manufacturing sector<br />
(at $11093 million) followed by non-financial<br />
services sector (including software<br />
development), trading sector and<br />
other activities (see Table-2). Over this<br />
A sizable chunk of Indian outward FDI has been<br />
going to the tax havens or offshore financial<br />
centres like Mauritius (10 percent), British Virgin<br />
Islands (4.5 percent), and Bermuda (3 percent)<br />
period, the share of manufacturing sector<br />
was 53 percent while that of non-financial<br />
services was 33 percent and that<br />
of trading was 5 percent. An almost<br />
similar pattern emerges for the period<br />
Table 1: Geographical Distribution Of Approved Outward FDI Flows From India<br />
(Top 15 Destinations)(Million $ )<br />
Rank Country April 1996 to<br />
March 2002<br />
2002-03 2003-04 2004-05 2005-06 2006-07 * Total Share<br />
(in%)<br />
1 Russia 1748.7 0.2 1.4 1076.2 1.2 3.0 2830.6 12.78<br />
2 USA 1540.8 185.3 207.1 251.4 270.3 313.4 2768.3 12.50<br />
3 Mauritius 618.3 133.4 175.6 149.4 332.7 741.4 2150.7 9.71<br />
4 U.K 410.6 34.5 138.5 71.9 158.3 1335.9 2149.6 9.71<br />
5 Netherlands 157.9 15.9 30.2 30.7 284.6 1005.5 1524.8 6.89<br />
6 Singapore 153.0 46.8 15.9 239.3 200.5 499.5 1154.9 5.22<br />
7 Sudan - 750.0 162.0 51.5 63.0 118.1 1144.7 5.17<br />
8 British Virgin Island 776.5 3.3 4.9 131.4 29.5 39.0 984.7 4.45<br />
9 Cyprus 1.9 - 0.0 1.9 13.4 701.6 718.8 3.25<br />
10 Hong Kong 445.1 14.8 16.2 73.6 88.8 41.5 679.9 3.07<br />
11 Bermuda 232.6 29.0 142.5 221.3 2.6 627.9 2.84<br />
12 UAE 110.2 12.6 32.1 41.9 141.0 205.3 543.0 2.45<br />
13 Australia 7.0 95.0 92.9 158.8 75.3 95.2 524.1 2.37<br />
14 Brazil 13.0 5.2 5.0 17.2 420.1 6.7 467.2 2.11<br />
15 Canada 5.6 2.3 0.7 0.8 3.5 397.8 410.7 1.85<br />
Total Outward Investment<br />
7543.1 1472.1 1450.9 2804.0 2859.1 6003.9 22142.9<br />
All Developed Countries<br />
(Share in%)<br />
All Developing<br />
Countries (Share in%)<br />
2608.8<br />
(35)<br />
4934.2<br />
(65)<br />
396.6<br />
(27)<br />
1075.5<br />
(73)<br />
774.0<br />
(53)<br />
676.9<br />
(47)<br />
799.6<br />
(29)<br />
2004.3<br />
(71)<br />
1015.4<br />
(36)<br />
1843.6<br />
(64)<br />
Source: Compiled from data given in the website of Department of Economic Affairs, Ministry of Finance, Government of India.<br />
Note: * April-October 2006.<br />
4073.9<br />
(68)<br />
1929.8<br />
(32)<br />
9668.4<br />
(44)<br />
12474.4<br />
(56)<br />
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111
REIMAGINING INDIA<br />
2006-07 (April-October 2006), with the<br />
largest amount of India’s outward FDI<br />
going to the manufacturing sector at<br />
$2403 million (40 percent)<br />
followed by financial and nonfinancial<br />
services sector (37 percent),<br />
other activities (16 percent) and trading<br />
sector (7 percent), respectively. Although<br />
there has been a decline in the<br />
share of manufacturing sector in India’s<br />
total outward FDI, it still accounts for<br />
While most of the investments from developing<br />
|countries are into other developing countries and in<br />
the service sector, outward FDI from India in the<br />
recent years has been primarily in the developed<br />
countries and in the manufacturing sector<br />
more than half of the outflows of FDI<br />
from the country. In terms of its geographical<br />
and sectoral diversification of<br />
outward FDI, India presents two sharp<br />
contrasts with other developing countries.<br />
While most of the investments<br />
vice sector, outward FDI from India in<br />
the recent years has been primarily in<br />
the developed countries and in the manufacturing<br />
sector. 16<br />
4. Modes Of Outward FDI<br />
From India<br />
In the period preceding 1990s, most of<br />
the outward FDI from India was in the<br />
form of greenfield investments for establishing<br />
new joint ventures or subsidiaries<br />
overseas. Since late 1990s, however,<br />
most of the outward FDI from the<br />
country has been through Mergers and<br />
Acquisitions (M&As) abroad, which was<br />
possibly due to the fact that greater risks<br />
and time could be associated with<br />
greenfield investments abroad. We may<br />
also note here that India’s overseas in-<br />
from developing countries are into other<br />
developing countries and in the servestment<br />
was traditionally led by a small<br />
group of family-owned large business<br />
conglomerates, like Tatas, Birlas,<br />
Thapars etc., which focused mainly on<br />
the neighbouring developing countries.<br />
Since 1990s, there has been an emergence<br />
of a large number of non familyowned<br />
as well as small and medium<br />
<strong>size</strong>d Indian firms, which have chosen<br />
outward investment as an important<br />
strategy for ‘internationalization’. 17<br />
As mentioned above, the expansion of<br />
outward FDI from India over the last<br />
decade has been led mainly by M&As<br />
abroad. Indian companies have marked<br />
their presence in several industries –<br />
software and IT services, pharmaceuticals,<br />
biotechnology, automotives, hotels<br />
and hospitality, and other consumer<br />
products. Although a significant part of<br />
the Indian outward FDI stock is still in<br />
manufacturing, overseas investment in<br />
software and IT services (for instance,<br />
those by Infosys, TCS and Wipro) has<br />
grown rapidly. Pharmaceuticals companies<br />
such as Dr. Reddy’s and Ranbaxy<br />
Table 2: Sectoral Distribution Of Approved Outward FDI Flows From India (Million $)<br />
Year<br />
Manufacturing<br />
Financial services<br />
Non- financial<br />
services<br />
Trading<br />
Others<br />
Total<br />
OFDI<br />
Value<br />
Share<br />
(in%)<br />
Value<br />
Share<br />
(in%)<br />
Value<br />
Share<br />
(in%)<br />
Value<br />
Share<br />
(in%)<br />
Value<br />
Share<br />
(in%)<br />
1999-00 548.8 31.2 4.3 0.2 1143.5 65.1 58.3 3.3 2.3 0.1 1757.2<br />
2000-01 370.7 26.8 16.6 1.2 876.5 63.4 89.2 6.5 29.1 2.1 1382.1<br />
2001-02 2210.9 73.1 48.6 1.6 565.5 18.7 139.2 4.6 61.3 2.0 3025.5<br />
2002-03 1056.7 71.9 1.8 0.1 280.2 19.1 69.9 4.8 61.7 4.2 1470.3<br />
2003-04 765.6 52.8 35.1 2.4 438.8 30.3 76.9 5.3 134.1 9.2 1450.5<br />
2004-05 2026.4 72.3 9.2 0.3 548.2 19.5 69.1 2.5 151.3 5.4 2804.2<br />
2005-06 1711.1 59.9 167.7 5.9 707.4 24.8 134.3 4.7 134.3 4.7 2854.8<br />
2006-07* 2402.8 39.8 5.8 0.1 2250.0 37.3 390.8 6.5 985.6 16.3 6035.0<br />
Total 11093.1 53.4 289.1 1.4 6810.1 32.8 1027.7 4.9 1559.7 7.5 20779.7<br />
Source: Same as Table 1 above. Note: * April-October 2006.<br />
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Table 3: Cross-Border Mergers And Acquisitions By Indian Firms<br />
Year Purchases Sales<br />
No. of deals Value No. of deals<br />
Value<br />
(Million $)<br />
2000 55 910 111 1219<br />
2001 35 2195 84 1037<br />
2002 35 270 66 1698<br />
2003 57 1362 83 949<br />
2004 64 863 80 1760<br />
2005 91 2649 126 4210<br />
2006 133 4740 163 6716<br />
Source: FDI Database, UNCTAD<br />
have also made <strong>size</strong>able overseas investments.<br />
Large Indian companies in industries<br />
such as steel and chemicals<br />
have also begun to ‘internationalize’ by<br />
acquiring upstream companies, for instance,<br />
in countries like, Australia and<br />
Canada. 18 In the energy sector, India’s<br />
State-owned groups, such as ONGC<br />
Videsh, Indian Oil Corporation and Oil<br />
India, have acquired stakes abroad in<br />
exploration, refining and retailing.<br />
Table 3 presents a snapshot of Indian<br />
firms’ purchases and sales in the form of<br />
cross-border Mergers and Acquisitions.<br />
It shows that the number of Indian companies<br />
investing abroad has been steadily<br />
rising and in some of the years, the<br />
value of outbound deals was more than<br />
the value of in-bound deals.<br />
Presently, systematic information on<br />
cross-border M&As by Indian companies<br />
is not available from any government<br />
agency. <strong>The</strong>refore, in this paper,<br />
we rely mainly upon a study on Indian<br />
Acquisitions Abroad by MAPE Advisory<br />
Group 19 and refer to some other<br />
sources as well. According to the said<br />
study, Indian companies acquired 244<br />
foreign companies over the period 1st<br />
January 2000 to 31st March 2006.<br />
Table 4 shows the sectoral distribution<br />
of the 244 acquisitions by Indian<br />
companies covered by the MAPE study.<br />
<strong>The</strong> software and business process outsourcing<br />
industry saw the largest deal<br />
count, followed by pharmaceuticals and<br />
automotive. In terms of the value of the<br />
acquisitions, however, Manufacturing<br />
sector dominated with more than 40<br />
percent of the acquisitions in industries<br />
such as pharmaceuticals, automotive,<br />
consumer goods, chemicals, fertilizers<br />
and metals; whereas software and business<br />
process outsourcing accounted for<br />
almost 30 percent of the total value of<br />
acquisitions during this period. <strong>The</strong><br />
largest number of Indian acquisitions<br />
was in North America and Europe accounting<br />
for (approximately) 34 percent<br />
and 40 percent of the total, respectively.<br />
This reiterates the fact that Indian companies<br />
are investing more in the developed<br />
economies. <strong>The</strong> MAPE Study<br />
also reports that a certain degree of<br />
concentration can be found among the<br />
Indian firms that made these acquisitions<br />
abroad. Out of the 244 deals, 163<br />
deals involved Indian companies which<br />
have made more than one acquisition<br />
abroad. For instance, ONGC made a<br />
total of 9 acquisitions and Ranbaxy has<br />
made 8. <strong>The</strong> other main players include<br />
United Phosphorous, Bharat Forge, Dr<br />
Reddy’s, Tatas, HCL Tech, Mahindra &<br />
Mahindra and Nicholas Piramal,<br />
among others.<br />
This outbound M&As activity by Indian<br />
firms has continued to increase.<br />
<strong>The</strong> year <strong>2007</strong> has already witnessed<br />
two major acquisitions of Tata-Corus<br />
and Hindalco-Novelis. <strong>The</strong> former acquisition<br />
by Tata Steel was worth over<br />
$12 billion, which has been the largest<br />
acquisition ever by an Indian company;<br />
whereas the latter by Aditya Birla<br />
Group’s Hindalco Industries was worth<br />
$6 billion.<br />
5. Driving Factors And Motives<br />
For Overseas Investment<br />
<strong>The</strong> recent wave of outward FDI from<br />
India has been boosted by both domestic<br />
and international factors. In some<br />
In some industries such as pharmaceuticals, import substituting<br />
industrialization regime (of the pre-1990s era) had<br />
encouraged local technology and skill development and<br />
also created capacities and abilities in Indian firms which<br />
enabled them to become cost competitive globally<br />
cases, industry specific factors have also<br />
favoured the outward FDI. As regards<br />
the domestic factors, the policy regime<br />
on outward FDI from India has been<br />
liberalized significantly since 2003; a<br />
liberalised investment regime has provided<br />
Indian firms with easy access to<br />
cheap credit from both domestic and<br />
THE INDIA ECONOMY REVIEW<br />
113
REIMAGINING INDIA<br />
Table 4: Acquisitions Abroad By Indian Firms<br />
(From January 2000 To March 2006)<br />
Sector Value (Million $) Number Of Deals<br />
Automotives 427.3 24<br />
Chemicals & Fertilizers 655.2 17<br />
Consumer 668.5 10<br />
Pharmaceuticals/ Healthcare 1,604.2 50<br />
Software / BPO 1,115.4 82<br />
Metals & Mining 970.5 11<br />
Oil & Gas 1,587.0 13<br />
Other 1,525.8 37<br />
Total 8,553.8 244<br />
Source: MAPE Advisory Group, 2006<br />
international market; and a booming<br />
stock market too has had a favourable<br />
impact on their capacity to invest. On<br />
the international front, a changing economic<br />
environment has left many small<br />
to medium-<strong>size</strong>d manufacturing companies<br />
in the developed economies (such<br />
as, USA and Europe) vulnerable for acquisitions,<br />
as their prevailing business<br />
model could no longer be cost<br />
competitive. At the industry level, the<br />
lowering of trade barriers and entry of<br />
multinational firms has increased competition<br />
in the Indian market; which has<br />
compelled many Indian companies to<br />
look overseas for their growth. In this<br />
new competitive environment, the strategy<br />
of ‘internationalization’ has become<br />
vital for many firms. Secondly, as Nagaraj<br />
(2006) argues, in some industries<br />
such as, pharmaceuticals, import substituting<br />
industrialization regime (of the<br />
pre-1990s era) had encouraged local<br />
technology and skill development and<br />
also created capacities and abilities in<br />
Indian firms, which enabled them to become<br />
cost competitive globally. He<br />
In their overseas investments, Indian firms must try to<br />
focus more on resource-seeking activities like exploration<br />
and development of mineral and energy resources. China,<br />
in order to sustain its rapid growth, has invested the most<br />
in exploration of oil fi elds and industrial raw materials<br />
opines that the international competitiveness<br />
of Indian firms in the pharmaceuticals<br />
sector is attributable, to some<br />
extent, to the Patents Act of 1970 that<br />
did not allow ‘product patents’ but allowed<br />
only ‘process patents’ and thus<br />
facilitated the possibilities of ‘reverse<br />
engineering’. Indian firms at present see<br />
an opportunity to produce a large number<br />
of drugs that are going off patent in<br />
the developed countries. Moreover, getting<br />
access to specialised R&D of firms<br />
in developed nations is also one of the<br />
important reasons for Indian firms’ investments<br />
abroad in sectors like<br />
pharmaceuticals. <strong>The</strong> World Investment<br />
Report 2006 identifies four specific motives,<br />
for which firms look abroad, viz.<br />
market-seeking (i.e. looking for new<br />
customers), efficiency-seeking (i.e. reducing<br />
the costs), resources-seeking (i.e.<br />
accessing key factor inputs), or created/<br />
strategic-asset-seeking (i.e. such as<br />
technology, brands, distribution networks,<br />
R&D facilities and managerial<br />
competences).<br />
As regards the Indian firms, the key<br />
motives for their cross-border M&As<br />
have been gaining market access and<br />
acquiring new technologies and competencies.<br />
For instance, the acquisition of<br />
the Anglo-Dutch company, Corus, by<br />
Tata Steel (for more than $12 billion)<br />
seems driven by this kind of a strategy.<br />
<strong>The</strong> key motive of Tata Steel could have<br />
been to gain access to European markets;<br />
since Corus, which controls about<br />
50 percent of the UK steel market (in<br />
volume terms), is likely to offer Tata<br />
Steel a direct gateway into the European<br />
markets (where Tata Steel did not<br />
have a presence until now). It would also<br />
provide Tata Steel the access to advanced<br />
technology of Corus. This acquisition<br />
has made Tata Steel the 5th<br />
largest steel producer in the world.<br />
Thus, the main motive of Indian firms<br />
has been getting access to large markets<br />
and acquiring new technologies, and in<br />
several industries, acquisition of firms<br />
in the developed countries seems to offer<br />
the Indian firms not only better technology<br />
but also a <strong>size</strong>able market.<br />
6. Conclusion<br />
Thus, the strategy of ‘internationalization’<br />
being adopted by Indian firms<br />
seems to have been driven by a host of<br />
114 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
factors, such as, a liberalized policy regime<br />
and growing competitive pressures<br />
in the domestic market, among others.<br />
As the Indian firms look out for other<br />
markets and better technologies, the<br />
firms in the developed countries seem<br />
to have offered both in case of several<br />
industries. However, there is a clear<br />
need for precaution in this regard, since<br />
Indian firms borrowing from the global<br />
financial markets for the overseas acquisitions<br />
get exposed to the volatilities of<br />
the global financial markets. In fact,<br />
some of the major acquisitions by Indian<br />
firms in the recent years have been predominantly<br />
financed by debt from the<br />
global financial markets. <strong>The</strong>re is also a<br />
strong need to reorient the motives of<br />
the overseas acquisitions by Indian firms<br />
towards the long-term development of<br />
the country. In their overseas investments,<br />
Indian firms should try to focus<br />
more on resource-seeking activities,<br />
such as exploration and development of<br />
mineral and energy resources (the acquisition<br />
of Sakhalin Oil fields in Russia<br />
by ONGC is an example of this). We<br />
may note here that China, in order to<br />
sustain its rapid growth, has invested<br />
the most in exploration of oil fields and<br />
industrial raw materials. However, it<br />
would be interesting to see how the recent<br />
weakening of Dollar influences<br />
policies governing overseas investment<br />
as well as the capacities of Indian firms<br />
in this regard.<br />
End Notes<br />
1<br />
<strong>The</strong>se results have been computed<br />
from the UNCTAD FDI database accessed<br />
from .<br />
2<br />
UNCTAD (2006) ‘World Investment<br />
Report 2006–FDI from Developing<br />
and Transition Economies: Implications<br />
for Development’.<br />
3<br />
As has been argued by Kumar, Nagesh<br />
(1995) ‘Industrialization, Liberalization<br />
and Two Way Flows of Foreign<br />
Direct Investments: <strong>The</strong> Case of India’,<br />
Discussion Paper Series, No.<br />
9504, INTECH- <strong>The</strong> United Nations<br />
University, Netherlands.<br />
4<br />
In 1995, the task of supervision of<br />
overseas investments was transferred<br />
from Ministry of Commerce, Govt.<br />
of India to the Reserve Bank of India<br />
(RBI). This was intended to provide<br />
a single window system for overseas<br />
investment approvals.<br />
5<br />
Gopinath, Shyamala (<strong>2007</strong>) ‘Overseas<br />
Investments by Indian companies<br />
- Evolution of Policy and Trends,’<br />
Key note address at the International<br />
Conference on Indian cross-border<br />
presence/acquisitions, Mumbai, January<br />
19.<br />
6<br />
As per the Annual Policy Statement<br />
for the Year <strong>2007</strong>-08 by Dr. Y. Venugopal<br />
Reddy, Governor, Reserve<br />
Bank of India, May 14, <strong>2007</strong>.<br />
7<br />
“RBI further liberalises Forex Rules’,<br />
RBI Press Release, September<br />
<strong>2007</strong>.<br />
8<br />
Nayyar, Deepak (<strong>2007</strong>) ‘<strong>The</strong> Internationalization<br />
of Firms from India:<br />
Investment, Mergers and Acquisitions’<br />
, SLPTMD Working Paper Series,<br />
No. 004, Department of International<br />
Development, University<br />
of Oxford.<br />
9<br />
As has been reported by the Department<br />
of Economic Affairs, Ministry<br />
of Finance, Government of India.<br />
10<br />
<strong>The</strong>se limitations have been pointed<br />
out by several analysts, for instance,<br />
Nayyar (<strong>2007</strong>).<br />
11<br />
As has been observed by Nagesh Kumar<br />
(1995).<br />
12<br />
Lall, S. (1983) <strong>The</strong> New Multinationals:<br />
<strong>The</strong> Spread of Third World Enterprises,<br />
New York: John Wiley<br />
13<br />
As reported by UNCTAD in World<br />
Investment Report 2006.<br />
14<br />
UNCTAD (2004) ‘India’s Outward<br />
FDI: A Giant Awakening?’,<br />
UNCTAD/DITE/IIAB/2004/1,<br />
20th October.<br />
15<br />
Pradhan, J. P. (<strong>2007</strong>) ‘Growth of Indian<br />
Multinationals in the World<br />
Economy: Implications for Development’,<br />
Working Paper, No. <strong>2007</strong>/04,<br />
ISID, New Delhi.<br />
16<br />
Nagaraj, R. (2006) ‘Indian Investments<br />
Abroad: What Explains the<br />
Boom?, Economic and Political<br />
Weekly, Vol. XLI, No. 46, pp.<br />
4716-4718.<br />
17<br />
Pradhan, J. P. (2005) ‘Outward Foreign<br />
Direct Investment from India:<br />
Recent Trends and Patterns’, Working<br />
Paper, No. 153, Gujarat<br />
Institute of Development Research,<br />
Ahmedabad.<br />
18<br />
As reported by UNCTAD in World<br />
Investment Report 2006.<br />
19<br />
MAPE Advisory Group ( 2006)<br />
“India Inc Going Abroad: Indian<br />
Companies’ Foreign Acquisitions’,<br />
background paper for the Seminar<br />
hosted by the IIM Calcutta on<br />
India Inc Going Abroad - Investing<br />
and Managing Internationally,<br />
Bangalore, April 19. <strong>The</strong>re are two<br />
other studies on acquisitions abroad<br />
by Indian firms. First is by FICCI<br />
in 2006 and, the second is by CMIE<br />
in <strong>2007</strong>.<br />
THE INDIA ECONOMY REVIEW<br />
115
Anurag Sharma<br />
Research Fellow,<br />
Faculty of Business and Economics,<br />
Monash University, Melbourne<br />
Indian Banking Reforms and Policy<br />
Reversal: A Vicious Cycle<br />
"In sovereignty there are no gradations. <strong>The</strong>re<br />
may be limited royalty, there may be limited<br />
consulship; but there can be no limited government.<br />
<strong>The</strong>re must, in every society, be some<br />
power or other, from which there is no appeal,<br />
which admits no restrictions, which pervades the<br />
whole mass of the community, regulates and<br />
adjusts all subordination, enacts laws or repeals<br />
them, erects or annuls judicatures, extends or<br />
contracts privileges, exempt itself from question<br />
or control, and bounded only by physical<br />
necessity.<br />
By this power, wherever it subsists, all legislation<br />
and jurisdiction is animated and maintained.<br />
From this all legal rights are emanations, which,<br />
whether equitably or not, may be legally recalled.<br />
It is not infallible, for it may do wrong; but it is<br />
irresistible, for it can be resisted only by rebellion,<br />
by an act which makes it questionable, what shall<br />
be thenceforward the supreme power."<br />
-Samuel Johnson<br />
1. Introduction<br />
In the first decade following India’s independence<br />
in 1947, the banking sector<br />
was characterized by low reserve requirements<br />
and no control on interest<br />
rates (Demetriades and Luintel, 1996).<br />
Acting pursuant to its policy of directed<br />
and concessional lending to priority<br />
sectors (agriculture, exports, small<br />
scale industry) the government assumed<br />
control of the financial sector in the<br />
1960’s by nationalizing the major banks.<br />
Liquidity requirements were raised and<br />
interest rates on lending and deposits<br />
controlled and these became a major<br />
source of inefficiencies in the banking<br />
sector, through out the 1970’s and<br />
1980’s. Concessional lending to priority<br />
sectors with weak regulatory and supervision<br />
framework led to a high incidence<br />
of Non Performing Assets (NPA)<br />
in the banking sector. In 1992-93 NPA<br />
amounted to 24 percent of the total assets<br />
of public sector banks. <strong>The</strong> government<br />
began a gradual process of financial<br />
sector reforms in the mid 1980’s.<br />
Even though the pace of reform increased<br />
following the 1991 financial<br />
crisis, they remain incomplete. Demetriades<br />
and Luintel (1996) examine the<br />
effect of various types of banking controls<br />
on financial deepening in India<br />
and conclude these controls (with the<br />
exception of the lending rate ceiling)<br />
are having a negative impact on financial<br />
deepening and thus adversely affecting<br />
economic growth.<br />
<strong>The</strong> Indian economy has experienced<br />
more than a decade of economic reform<br />
following the 1991 financial crisis. <strong>The</strong><br />
present paper focuses on a critical analysis<br />
of the reforms process with emphasis<br />
on the banking sector, to highlight<br />
those inefficiencies which can contribute<br />
to “policy reversal” by the government.<br />
Policy reversal can be described<br />
as a situation in which government policies<br />
of sound fiscal management or<br />
financial restructuring adversely affect<br />
the banking sector (due to underlying<br />
inefficiencies) so that the government<br />
is forced to revive the banking sector by<br />
116 THE <strong>IIPM</strong> THINK TANK
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using policies such as recapitalization<br />
of public sector banks, honouring contingent<br />
and reserve of not less than Rs.500000<br />
and b) Satisfy the Reserve Bank of In-<br />
the SBI and its seven independently<br />
capitalized subsidiaries. <strong>The</strong> govern-<br />
liabilities or explicit bail-out dia (RBI) that its affairs are not ment of India is the major share holder<br />
packages that serve to undermine its<br />
initial efforts and adversely affect the<br />
government exchequer. This paper provides<br />
a brief overview of the evolution<br />
of the banking sector in India. Particular<br />
conducted in a manner detrimental to<br />
the interests of depositors.<br />
Scheduled commercial banks are further<br />
split into Public Sector Banks<br />
(PSB), private sector banks, foreign<br />
in these banks. Prior to 1991, PSBs accounted<br />
for about 90% of all deposits<br />
assets and credit in the economy. Private<br />
sector banks are classified as old<br />
and new private sector banks. <strong>The</strong>re are<br />
emphasis is placed on the possibility<br />
of policy reversal. <strong>The</strong> outline of the<br />
paper is as follows: Section-1 describes<br />
Concessional lending to priority sectors with weak regulatory<br />
and supervision framework led to a high incidence of<br />
the structure of the banking sector in<br />
India and its main characteristics in the Non Performing Assets (NPA) in the banking sector. In<br />
pre-1991 period. Section-2 outlines the 1992-93 NPA amounted to 24 percent of the total assets<br />
causes and impact of the 1991 financial<br />
of public sector banks<br />
crisis focussing on the changes in exchange<br />
rate regime. Section-3 critically banks and Regional Rural Banks 23 old private sector banks. Eight private<br />
analyses the banking sector reforms after<br />
1991 and summarizes current inefficiencies<br />
in the banking sector emphasizing<br />
high transaction costs and<br />
presence of the contingent liabilities.<br />
Section-4 discusses the relevance of<br />
policy reversals in India and cites some<br />
examples. Section-5 contains the policy<br />
conclusions and other impertaives.<br />
2. Banking Sector In India<br />
Banks in India are classified under the<br />
broad categories of scheduled and nonscheduled.<br />
Scheduled banks consist of<br />
(RRB).<br />
Public sector banks consist of nationalized<br />
banks and State Bank of India<br />
(SBI) group of banks. In 1969 the Indian<br />
government nationalized existing<br />
large private sector banks under its<br />
policy of assisting India’s planned development<br />
strategy by mobilizing financial<br />
resources to strategically important<br />
sectors. Fourteen banks were nationalized<br />
in 1969 and six in 1980. <strong>The</strong> Punjab<br />
National Bank was merged with the<br />
New Bank of India in 1993 thereby reducing<br />
the total count of national<br />
sector banks opened for business<br />
after 1991 and are classified as new private<br />
sector banks. Currently there are<br />
42 foreign banks in India, although<br />
their share in the holdings of banking<br />
sector assets remains negligible due to<br />
strict regulatory and entry requirements.<br />
RRB’s operate exclusively in<br />
Figure 1: Banking Structure In<br />
India<br />
Reserve Bank of India<br />
Scheduled Commercial bank (SCB) and<br />
banks to nineteen. <strong>The</strong><br />
Banks in India<br />
Financial Institutions<br />
scheduled cooperative banks. Non SBI group comprises<br />
Scheduled Banks comprise banks that<br />
are not included in the Second Schedule<br />
of the Banking Regulation Act of<br />
Scheduled Banks<br />
Non-Scheduled Banks<br />
1965 and thus do not satisfy the following<br />
conditions: a)<br />
have paidup<br />
Scheduled Commercial Banks<br />
Scheduled Co-operative Banks<br />
capital Public Sector Banks Private Sector Banks Foreign Banks Regional Rural<br />
Banks<br />
Nationalized Banks<br />
SBI Group<br />
Old Private Sector Banks<br />
New Private Sector Banks<br />
THE INDIA ECONOMY REVIEW<br />
117
REIMAGINING INDIA<br />
rural areas to provide credit to small<br />
farmers and entrepreneurs. <strong>The</strong>re are<br />
currently 196 RRB’s accounting for<br />
four percent of the total assets of scheduled<br />
commercial banks. India also has<br />
specialized financial institutions under<br />
the following categories: big industry,<br />
investment and credit guarantee, exim<br />
trade, capital market, agriculture and<br />
housing development. <strong>The</strong>ir geographic<br />
reach is classified as all India, statelevel<br />
and other institutions. All-India<br />
financial institutions include (a) development<br />
banks (i.e., Industrial Development<br />
Bank of India, Industrial Credit<br />
and Investment Corporation of India,<br />
Small Industrial Development Bank,<br />
Industrial Investment Bank of India,<br />
and Industrial Finance Corporation of<br />
India); (b) specialized financial institutions<br />
(such as, Export Import Bank of<br />
India, Technology Development and<br />
Information Company of India); (c) investment<br />
institutions (i.e., Unit Trust of<br />
India (UTI), Life Insurance Corporation<br />
of India, General Insurance Corporation<br />
and subsidiaries); and (d) refinance<br />
institutions (i.e., National Bank<br />
for Agriculture and Rural Development<br />
(NABARD) and National Housing<br />
Bank). <strong>The</strong> role of these financial institutions<br />
is to promote economic development<br />
in various sectors of the economy.<br />
State level institutions include<br />
state financial corporations and state<br />
industrial development corporations.<br />
Other institutions consist of the Export<br />
Credit and Guarantee Corporation of<br />
India and Deposit Insurance<br />
and Credit Guarantee Corporation.(S<br />
hirai,2002).<br />
2.1 Pre-reform Period<br />
<strong>The</strong> banking system in India prior to<br />
1991 was highly regulated and inefficient.<br />
<strong>The</strong> most significant of these distortions<br />
were:<br />
• <strong>The</strong> existence of high levels of Cash<br />
Reserve Ratio (CRR) and Statuary<br />
Liquidity Ratio (SLR): CRR is a requirement<br />
on banks to hold a certain<br />
amount of deposits in the form of deposits<br />
to RBI. It is calculated as a<br />
percentage of reserve liabilities<br />
which are defined as a difference between<br />
all liabilities exempted from<br />
the SLR requirement and net time<br />
and demand deposits. <strong>The</strong> CRR rose<br />
from around 15 percent in 1960-70 to<br />
its upper legal limit of 15 percent in<br />
Banking reforms started in the second half of the 1980’s<br />
but was only seriously implemented after the 1991 financial<br />
crisis. <strong>The</strong> role of foreign and private sector banks<br />
remained negligible due to restricted entry regulations and<br />
strict branch licensing policies<br />
1991. <strong>The</strong> high value of CRR led to<br />
low profitability for banks and higher<br />
spreads. <strong>The</strong> RBI uses CRR as a<br />
tool for monetary intervention in the<br />
economy; e.g. the RBI increased<br />
CRR in August 1993 in order to sterilize<br />
capital inflows (Shirai, 2002).<br />
SLR is a liquidity requirement 1 for<br />
banks to hold a certain amount of<br />
deposits in the form of government<br />
and eligible securities. <strong>The</strong> upper legal<br />
limit of SLR is 40 percent. SLR<br />
increased from 25 percent in 1970 to<br />
38.5 percent in 1991. Hence for some<br />
time periods overall reserve requirements<br />
exceeded 50 percent.<br />
• Prior to 1991, Indian interest rates<br />
were administered by government.<br />
<strong>The</strong>se included lending and deposits<br />
rates including rates on saving deposits.<br />
<strong>The</strong> administration of rates<br />
was politically motivated and adversely<br />
affected bank balance sheets.<br />
Joshi and Little (1996) report the average<br />
return on assets in the second<br />
half of the 1980’s was just<br />
0.15 percent.<br />
• Directed and Concessional Lending:<br />
<strong>The</strong> state pursued a policy of allocation<br />
of financial resources to the socalled<br />
“priority sectors”. <strong>The</strong>se included<br />
agriculture, small scale<br />
industries, small business and selfemployed<br />
persons. Thus policy set<br />
quantitative loan targets 2 on banks<br />
and was a major reason behind the<br />
NPA of public sector banks. At the<br />
beginning of 1992-93 NPA amounted<br />
to 24 percent of total credit. 3<br />
• Lack of competition in the banking<br />
sector: <strong>The</strong> role of foreign and private<br />
sector banks remained negligible<br />
due to restricted entry<br />
regulations and strict branch<br />
licensing policies.<br />
<strong>The</strong>se government policies were the<br />
main cause of deteriorating bank performances<br />
and diminished banks’ incentive<br />
to operate efficiently. <strong>The</strong>re was<br />
lack of a proper regulation and supervision<br />
mechanism, which allowed banks<br />
to take high risks. This situation was<br />
worsened by the presence of implicit<br />
118<br />
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Table 1: Progress Of Commercial Banking In India<br />
Jun-69 <strong>Dec</strong>-80 Mar-91 Mar-95 Mar-99<br />
No. of SCB 73.0 154.0 272.0 281.0 297.0<br />
Per capita Deposit (Rs.) 88.0 738.0 2368.0 4242.0 8247.0<br />
Per capita Credit (Rs.) 68.0 457.0 1434.0 2320.0 4705.0<br />
Share of Priority Sector advances<br />
in Total Non-food credit of 15.0 40.3 39.2 35.8 35.9<br />
SCB(%)<br />
Deposits (% of National Income)<br />
15.5 36.0 48.1 46.4 48.7<br />
Total Assets (Rs. Billion) 68.4 710.8 3275.2 5215.4 11516.2<br />
Source: RBI (2003a)<br />
government guarantees i.e. the<br />
existence of contingent liabilities in<br />
the system.<br />
<strong>The</strong> reform process in the banking<br />
sector started in the second half of the<br />
1980’s but was only seriously implemented<br />
after the 1991 financial crisis.<br />
Table-1 summarizes salient aspects of<br />
the progress of the commercial banking<br />
sector in India. <strong>The</strong> evolution of the financial<br />
crisis of 1991 and its impact<br />
on the Indian economy is now<br />
briefly outlined 4 .<br />
3. Financial Crisis In India<br />
Prior to 1991 some important financial<br />
characteristics of the Indian economy<br />
can be summarized as follows:<br />
• Restrictive Capital Controls: Direct<br />
Investment was restricted. Capital<br />
inflows mainly consisted of foreign<br />
aid, commercial borrowings and Non<br />
Resident Indian (NRI) deposits. Indian<br />
companies were not allowed to<br />
hold foreign equities. <strong>The</strong> foreign<br />
portfolio investment was mainly directed<br />
toward a small number of public<br />
sector bond issues.<br />
• High fiscal deficits: Fiscal deficits<br />
were consistently high (combined<br />
gross fiscal deficit of state and central<br />
government rose by 20 and 24<br />
percent respectively in 1990 and<br />
1991) and mainly financed by borrowings<br />
and financial repression<br />
rather than monetization (Jha and<br />
Sharma (2004)). As a result the inflation<br />
rate did not reach extremely high<br />
levels and was at a par with India’s<br />
trading partners.<br />
• Pegged Exchange Rate: <strong>The</strong> exchange<br />
rate was officially pegged to<br />
a basket of currencies. However the<br />
trade-weighted nominal exchange<br />
rate depreciated steadily relative to<br />
the US$ in the latter half of the<br />
1980’s leading to small frequent devaluations.<br />
<strong>The</strong> rate of nominal depreciation<br />
was faster than the relative<br />
inflation differential leading to falls<br />
in the real exchange rate.<br />
• Trade: <strong>The</strong> government strategy was<br />
highly interventionist since independence<br />
and consisted of import<br />
substitution, complex industrial licensing<br />
requirements and public<br />
ownership of heavy industry. In the<br />
second half of the 1980’s, the emphasis<br />
shifted from import substitution<br />
to export-led growth. <strong>The</strong> government<br />
began a process of gradual liberalization<br />
of trade, investment, and<br />
financial markets. Export growth<br />
was rapid due to real depreciation of<br />
the rupee. However the value of<br />
imports increased at a faster rate<br />
(mainly in the petroleum sector)<br />
because of the easing of<br />
quantitative restrictions.<br />
India’s credit rating was downgraded and outfl ows were<br />
quick. As the forex reserves declined, economy was on<br />
the brink of default by January 1991. One of the major<br />
policy shifts in response to the financial crisis was the<br />
change in exchange rate management<br />
3.1 1991 Financial Crisis<br />
• Due to a widening gap between exports<br />
and imports and downturn of<br />
capital flows the current account<br />
deficit grew steadily and was financed<br />
by external borrowings and<br />
remittances of NRI making the<br />
economy extremely vulnerable to external<br />
shocks. External debt was $69<br />
billion in 1990-91 compared with $35<br />
billion in 1984-85.<br />
• Shocks: <strong>The</strong> first external shock was<br />
the sharp increase in world oil prices<br />
due to the Gulf War increasing the<br />
value of petroleum imports from $2<br />
THE INDIA ECONOMY REVIEW<br />
119
REIMAGINING INDIA<br />
Table 2: Cost Of Banks’ Rescue (Rs.Billion)<br />
in terms of a foreign currency<br />
and commits to<br />
1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 2001-2002<br />
trade in unlimited<br />
Capital Infusion 57.0 52.9 8.5 15.1 27.0 4.0 18.0<br />
amounts at that rate.<br />
Cumulative Infusion 97.0* 149.9 158.4 173.5 200.5 204.5 222.5 Normally the exchange<br />
*: Includes Rs.40 billion injected prior to 1993<br />
rate is allowed to vary<br />
billion to $5.7 billion which was quite<br />
high compared to 5 percent increase<br />
in non-oil imports. Exports were also<br />
adversely affected due to the impact<br />
of the Gulf war on India’s trading<br />
partners. For example, growth of India’s<br />
single largest trading partner,<br />
the US, fell from 3.9 percent in 1989<br />
to -1 percent in 1991. This led to a<br />
sharp deterioration in the trade account.<br />
<strong>The</strong> Gulf crisis also resulted<br />
in a decline in non resident workers’<br />
remittances to India.<br />
Apart from these external factors,<br />
political uncertainty in India in 1990<br />
and 1991 led to a fall in investor confidence<br />
further widening current account<br />
imbalances and causing a loss in reserves.<br />
India’s credit rating was downgraded<br />
by credit rating agencies leading<br />
to difficulties in commercial bank financing.<br />
<strong>The</strong> outflows from the economy<br />
were quick and as the forex reserves<br />
declined, the economy was on the brink<br />
of default by January 1991. One of the<br />
major policy shifts in response to the<br />
financial crisis was a change in exchange<br />
rate management. <strong>The</strong> next section<br />
briefly outlines exchange rate policy<br />
changes from 1970 to the present.<br />
3.2. Exchange Rate Regime<br />
In India<br />
With the collapse of the Bretton Woods<br />
arrangement in 1973 most developed<br />
economies switched from a fixed exchange<br />
rate to a flexible exchange rate<br />
regime. Under a fixed exchange rate<br />
regime the central bank announces the<br />
buying and selling rates of its currency<br />
within a narrow band.<br />
One major drawback of a fixed exchange<br />
rate regime in economies with<br />
perfect capital mobility is that monetary<br />
stabilization policy becomes ineffective<br />
(Obstfeld, 1995). For example if a government<br />
attempts to increase money<br />
supply by open market purchase of domestic<br />
bonds, households will find<br />
themselves holding more money than<br />
they desire. Since interest rate parity<br />
condition holds, household will sell<br />
their excess money holdings to the central<br />
bank for foreign currency at the<br />
fixed exchange rate and invest abroad<br />
to buy the desired amount of bonds.<br />
Such a mechanism will keep interest<br />
rates unchanged and leave the government<br />
with more bonds on the cost of<br />
forex reserves. One option for government<br />
will then be to refuse to buy the<br />
excess money supply and allow the currency<br />
Table 3: Comparison Of Central Government Holdings By Major<br />
Indian Banks After Public <strong>Issue</strong><br />
to depreciate.<br />
In spite of its drawbacks a fixed exchange<br />
rate regime is preferred in some<br />
Bank Name Date of Public <strong>Issue</strong> Government Percentage<br />
holding after public<br />
developing economies especially those<br />
with limited capital mobility. This is<br />
issue (%) as of 2001<br />
due to the following perceptions: a) A<br />
State Bank of India <strong>Dec</strong>ember 1993 66.34<br />
fixed exchange rate regime removes exchange<br />
rate uncertainty thereby retain-<br />
Sate Bank of Bikaner November 1997 75.00<br />
State Bank of Baroda <strong>Dec</strong>ember 1996 66.88<br />
ing investor confidence and macroeconomic<br />
stability; b) <strong>The</strong> export import<br />
State Bank of Travancore<br />
January 1998 76.00<br />
industry can be protected from huge<br />
Bank of India February 1997 77.00<br />
swings in exchange rates by keeping it<br />
Corporation Bank October 1997 66.33<br />
stable and c) If the currency is pegged<br />
Oriental Bank October 1994 66.48<br />
to a low inflation currency it helps keep<br />
Dena Bank <strong>Dec</strong>ember 1996 71.00<br />
domestic inflation low. For example, a<br />
120 THE <strong>IIPM</strong> THINK TANK
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Figure 2: Pre- reform Exchange Rate Variability<br />
government running a very high deficit<br />
will be reluctant to adopt an expansionary<br />
monetary policy because of its ineffectiveness<br />
in a fixed rate regime.<br />
Macroeconomic stability is a priority<br />
for any economy and all governments<br />
(irrespective of exchange rate regime)<br />
tend to intervene in the forex markets<br />
in order to influence the exchange rate.<br />
<strong>The</strong> government can take direct or indirect<br />
measures to counter exchange<br />
rate movements. Direct measures involve<br />
trading in the forex market. <strong>The</strong><br />
government uses its foreign exchange<br />
reserves to affect demand and supply in<br />
the forex market. For example, if domestic<br />
currency is depreciating the government<br />
will buy excess money supply<br />
by selling forex reserves to stabilize<br />
supply demand imbalances. <strong>The</strong> government<br />
can further offset this contractionary<br />
effect in domestic money supply<br />
by a simultaneous and equal purchase<br />
of domestic currency bonds. Such intervention<br />
is called “sterilized intervention”<br />
and is preferred by most governments.<br />
Such direct measures of<br />
intervention are complemented by some<br />
indirect measures like trade and interest<br />
rate restrictions to affect the demand<br />
and supply of foreign currency.<br />
For example, variable interest rates will<br />
affect the capacity of importers. One<br />
example is an interest rate surcharge on<br />
import finance: In order to curb imports<br />
and retain forex reserves, the RBI<br />
increased the interest rate surcharge on<br />
import finance from 15 percent to 25<br />
percent in January 1996.<br />
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MORE MARKETS, LESS GOVERNMENT<br />
in 2004. <strong>The</strong> general perception is that<br />
if the government reduces SLR the reduced<br />
demand for government bonds<br />
will lead to a rise in interest rates the<br />
government has to pay bond holders.<br />
This may adversely affect the fiscal<br />
deficit. However, banks have continued<br />
to invest around 40 percent of their deposits<br />
in government securities in spite<br />
of the reduction in SLR. This is essentially<br />
because government bonds are<br />
considered to be a risk-free investment<br />
for banks.<br />
Interest rates were deregulated in<br />
1992 leading to complete liberalization<br />
of all term deposit and lending rates,<br />
except for savings deposit rates which<br />
remain controlled. <strong>The</strong> RBI has also<br />
begun using the bank rate (the rate at<br />
which RBI lends to commercial banks<br />
Table 4: Regulatory Framework Of Indian Banking Sector<br />
Variable 1992-93 2000-01 2001-02 2002-03<br />
Capital to Risk-weighted Assets<br />
Ratio (%)<br />
Domestic banks with international<br />
4 9 9 9<br />
business<br />
Foreign banks 8 9 9 9<br />
Non-performing assets<br />
(period overdue)<br />
Sub-standard assets 4 Q 2 Q 180 days 180<br />
days*<br />
Doubtful Assets<br />
period for which remained substandard<br />
24 M 18 M 18 M 18 M@<br />
Provisioning requirements (%)<br />
Standard Assets - 0.25 0.25 0.25<br />
Sub-standard assets 10 10 10 10<br />
Doubtful Assets (unsecured portion)<br />
100 100 100 100<br />
Loss assets 100 100 100 100<br />
Source: RBI (2003d)<br />
M: Month ; Q: Quarter<br />
by rediscounting bills or eligible paper)<br />
as a reference rate for influencing the<br />
direction of interest rates in the economy<br />
(Bhide et al., 2001). <strong>The</strong> flexibility<br />
to set lending rates led the banks to use<br />
this measure to offset the cost involved<br />
in concessional lending to priority<br />
sectors. During the reform period the<br />
ceiling of 40 percent on domestic banks<br />
and 33 percent on foreign banks for priority<br />
sector lending remained but banks<br />
were allowed to set the lending rates<br />
and more profitable sectors like the<br />
software industry and venture capital<br />
were included in the definition of priority<br />
sectors. <strong>The</strong> government relaxed the<br />
norms for entry in the banking sector in<br />
<strong>The</strong> deregulation of interest rates is also incomplete. Interest<br />
rates on saving deposits and other saving schemes<br />
such as National Savings Certifi cates, public provident<br />
funds etc. remain regulated. Such rigidities reduce the<br />
effectiveness of the transmission of monetary policy<br />
order to increase competitiveness. For<br />
example the ceiling of voting rights of<br />
an individual shareholder was increased<br />
from 1 to 10 percent in 1994. <strong>The</strong> relaxed<br />
guidelines led to the entry of 8<br />
private sector banks and 26 new foreign<br />
banks in the Indian banking sector.<br />
In response to the Narsimhan Committee<br />
recommendations, the government<br />
gradually started to privatize PSB.<br />
<strong>The</strong>se banks were accumulating large<br />
amounts of NPA due to the pre-reform<br />
regulated regime. <strong>The</strong>y made an aggregate<br />
loss of Rs.35 billion and almost<br />
half of the public sector banks had negative<br />
net worth. Realizing the importance<br />
of recapitalization, the government<br />
spent in the range of 0.02 to 0.7<br />
percent of GDP each year to wipe off<br />
accumulated NPA (Table 2). This<br />
helped the banks clean up their balance<br />
sheets and make public issues of equity.<br />
As Table 3 shows, the central government<br />
still continues to hold a large<br />
share of holdings in major state-owned<br />
banks. 6 Adoption of regulatory and supervision<br />
norms: Strengthening of the<br />
regulatory and supervisory framework<br />
of the banking sector remains a key element<br />
of financial sector reform. <strong>The</strong><br />
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REIMAGINING INDIA<br />
policy focus is on streamlining banking<br />
operations, upgrading risk management<br />
systems and enhancing the level of bank<br />
compliance with accounting standards<br />
and operationalizing consolidated accounting<br />
practices (RBI, 2003b). However,<br />
progress in this direction has been<br />
gradual. <strong>The</strong> RBI notes: “Within the<br />
process of convergence with best practices,<br />
finetuning is undertaken keeping<br />
in view the country specific circumstances.”<br />
(RBI, 2003c). For example,<br />
NPA have been defined as loans in<br />
which interest has remained unpaid for<br />
four quarters in 1992-93. This period<br />
was shortened to three quarters in<br />
1993-94 and two quarters in 1994-95.<br />
<strong>The</strong> central bank now plans to further<br />
shorten the period (in March 2004) to<br />
match the international norm of one<br />
quarter. Thus NPA were underestimated<br />
by Indian accounting standards. <strong>The</strong><br />
main reason behind such a policy was<br />
the political lobbying of borrowers. A<br />
summary of some aspects of the regulatory<br />
framework used by the RBI is given<br />
in Table 4.<br />
<strong>The</strong> financial sector reform process<br />
in India can be described as a graduated<br />
approach in the direction of liberalization.<br />
Figure 5 plots major banking<br />
indicators for the pre-reform and postreform<br />
period. <strong>The</strong>re are still some<br />
weaknesses in the financial sector<br />
which contribute to its inefficiencies.<br />
Though reduced from 40 percent to 25<br />
percent, the SLR has remained at high<br />
levels. Moreover, bank investment in<br />
government bonds and securities is still<br />
around 40 percent of their assets (Bhattacharya<br />
and Patel, 2003). This is because<br />
interest rates paid by the government<br />
are more market based due to the<br />
auction mechanism of its securities such<br />
as Treasury Bills; and also because<br />
banks prefer to invest in government<br />
securities as they are relatively risk free<br />
and more liquid. Banks are reluctant to<br />
take risks in alternative markets because<br />
of stricter prudential norms and<br />
accounting standards. <strong>The</strong> high investment<br />
in government securities is convenient<br />
for government which is running<br />
high fiscal deficits. However, when<br />
economic growth accelerates, high SLR<br />
can adversely affect the credit formation<br />
role of banks. Banks will be reluctant<br />
to lay off their securities in order<br />
to satisfy increased dem-and for credit.<br />
<strong>The</strong> CRR also remains higher than its<br />
Table 5: Non Performing Assets 0f Commercial Banking Sector: 1997-2003<br />
Year Public Sector Old Private New Private Foreign Banks<br />
Banks Sector Banks Sector Banks in India<br />
1997 17.80 10.70 2.60 4.30<br />
1998 16.00 10.90 3.50 6.40<br />
1999 15.90 13.10 6.20 7.60<br />
2000 14.00 10.80 4.10 7.00<br />
2001 12.40 11.10 5.10 6.80<br />
2002 11.09 11.01 8.86 5.38<br />
2003 9.36 8.90 7.64 5.22<br />
Definition: Gross NPA/Gross Advances (%)<br />
statuary minimum of three percent.<br />
<strong>The</strong> deregulation in interest rates is<br />
also incomplete. Interest rates on saving<br />
deposits and other saving schemes<br />
such as National Savings Certificates,<br />
public provident funds etc. remain regulated.<br />
7 Such rigidities reduce the effectiveness<br />
of the transmission of monetary<br />
policy (Sharma, 2004). <strong>The</strong><br />
lending rate for advances of over<br />
Rs.200000 was subjected to a ceiling of<br />
16.5 percent in 1987-88. This was eventually<br />
removed in 1994. <strong>The</strong> Prime<br />
Lending Rate (PLR) was set as a floor<br />
rate and banks are now free to set lending<br />
rates without any upper restriction.<br />
<strong>The</strong> lending rates though, officially<br />
flexible, are affected by public sector<br />
banks which are the dominant players<br />
in the banking sector. <strong>The</strong>se banks offer<br />
rates below the PLR because of their<br />
advantage in market share and quality<br />
of borrowers. <strong>The</strong>refore other banks’<br />
lending rates do not diverge much from<br />
the rates set by PSB thereby making<br />
PLR ineffective. <strong>The</strong> banks still have to<br />
make some loans based totally on the<br />
political agenda of the government. For<br />
example banks are forced to provide<br />
concessional loans to individuals or<br />
firms belonging to scheduled caste or<br />
scheduled tribes.<br />
4.1 High Transaction Costs<br />
One of the major concerns of the banking<br />
sector is the high transaction costs<br />
involved in the lending operations of<br />
banks. Transaction costs are particularly<br />
high in rural sector areas which<br />
are one of the priority sectors defined<br />
by government. Puhazhendhi (1995)<br />
estimated the transaction costs of lending<br />
to the rural poor in India. He con-<br />
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sidered two major commercial banks,<br />
one regional rural bank and one private<br />
commercial bank from the southern<br />
states of Tamil Nadu and Kerala. <strong>The</strong><br />
estimated transaction cost was 3.68 percent<br />
of the loan amount if the loan was<br />
delivered through a direct lending<br />
channel. <strong>The</strong> literature on micro-credit<br />
(see (Ghatak, 2000) and (de Aghion<br />
and Gollier, 2000)) argues that group<br />
lending to the poor through Non-Governmental<br />
Organization (NGO) and<br />
Self Help Group (SHG) may be an efficient<br />
method of credit delivery system.<br />
In 1991, the RBI initiated the policy of<br />
encouraging direct linkages between<br />
the banks and NGO and SHG due to<br />
the presence of high transaction costs.<br />
Puhazhendhi (1995) estimated the financial<br />
intermediation of NGO and<br />
SHG reduced transaction costs by between<br />
21 and 41 percent relative to the<br />
direct lending channel. In spite of these<br />
efforts transaction costs remain high<br />
even after a decade of reform. <strong>The</strong> estimated<br />
opportunity cost of existing<br />
high transaction costs in India is<br />
still high. 8<br />
Though heading in the right direction,<br />
prudential norms are yet to reach<br />
global standards. <strong>The</strong> pace of restructuring<br />
nationalized banks through privatization<br />
is slow. This is mainly because<br />
nationalized banks’ balance<br />
sheets are weak due to accumulated<br />
NPA over the past three decades. <strong>The</strong><br />
government needs to clean up balance<br />
sheets by recapitalization and other<br />
measures in order to make these banks<br />
more attractive to investors. Given recent<br />
trends on the magnitude of NPA<br />
(Table 5) the cost of restructuring appears<br />
to be very high, particularly since<br />
it is already running very high deficits.<br />
Such liabilities on the government to<br />
revive the banking sector (contingent<br />
liabilitie000s), are significant in the<br />
case of India. <strong>The</strong> impact of contingent<br />
liabilities is now examined.<br />
4.2. Contingent Liabilities<br />
<strong>The</strong> financial sector in transition and<br />
developing economies is characterized<br />
by poor regulatory and enforcement<br />
systems, and inadequate disclosure of<br />
information which may lead to a high<br />
incidence of NPA. When the banking<br />
sector is in stress, out of legal obligation<br />
or political compulsion the central government<br />
has to rescue the banks. Such<br />
public financing by government represents<br />
its contingent liabilities and can<br />
potentially lead to a large increase in<br />
public debt. Because of their uncertain<br />
nature these contingent liabilities are<br />
unbudgeted and, hence, are hidden fiscal<br />
risks. Contingent liabilities are also<br />
important because the government cannot<br />
achieve its long-run objective of a<br />
sound fiscal system without addressing<br />
the problem. Explicit contingent liabilities<br />
are specific obligations which the<br />
government has to settle under a contract<br />
or a law. <strong>The</strong>se include obligations<br />
issued to state governments and public<br />
sector banks, etc. <strong>The</strong> government can<br />
foresee such guarantees and includes<br />
them in its budget constraint. 9<br />
However, contingent liabilities or implicit<br />
liabilities are uncertain and their<br />
realization is dependent on the probability<br />
of particular events. Sometimes,<br />
these events could be totally exogenous<br />
to government policy, e.g., an earthquake<br />
or any other natural disaster.<br />
Most of the time, these liabilities are a<br />
result of government policy. One interesting<br />
example is a guarantee extended<br />
by government to foreign creditors of<br />
domestic banks. <strong>The</strong>se guarantees may<br />
lead to moral hazard problems in the<br />
banking sector as banks may take high<br />
risks, eventually leading to default on<br />
foreign loanswww, and pressure on the<br />
government to bail them out because of<br />
It is argued that under current ineffi ciencies in the banking<br />
sector, any efforts by government to ensure macroeconomic<br />
stabilization or restructuring will involve an offsetting<br />
effect, adversely affecting the initial policy objectives,<br />
which will transmit mainly through the financial sector<br />
public expectations or political compulsion<br />
(For a detailed model see (Sharma,<br />
2004)). One relevant case study in this<br />
regard is the crisis in the UTI mutual<br />
fund discussed in section 5.<br />
Contingent implicit liabilities are<br />
normally calculated after the event occurs,<br />
as they are dependent on the probability<br />
of the triggering event, the actual<br />
loss and the amount government<br />
pays to bail out the system. (Polackova,<br />
1999) notes the financial systems represent<br />
the most serious contingent implicit<br />
liability. For example the cost of<br />
resolving past banking crises varies<br />
from around 1 percent of GDP (Thailand<br />
1983-87) to around 55 percent of<br />
GDP (Argentina 1980-82) depending<br />
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127
REIMAGINING INDIA<br />
can subsequently cause what can be<br />
termed a “policy reversal” by government.<br />
Such policy reversals can arise<br />
under several conditions some of which<br />
are:<br />
• Suppose government is running high<br />
deficits and implements a tight monetary<br />
policy by increasing interest<br />
rates. Due to the inflexibility of the<br />
banking sector in passing on interest<br />
higher incidence of NPA in balance<br />
sheets. This may force the government<br />
to revive the banking sector<br />
through measures like recapitalization<br />
which will be a direct burden on<br />
government budget. As discussed<br />
earlier, the cost of reviving banks is<br />
very high in the case of India. <strong>The</strong><br />
government indeed began a partial<br />
privatization of banks as part of its<br />
economic reform process initially<br />
providing Rs.40 billion from 1991-92<br />
to 1992-93 to 19 nationalized banks.<br />
Subsequently, the government has<br />
spent around Rs.164.5 billion at a<br />
rate of between 0.02 and 0.7 percent<br />
of GDP each year from 1993-99.<br />
Though there was a decline in NPA<br />
from 17.8 percent in 1997 to 11.4 percent<br />
in 2002 they are still very high.<br />
• A second reason for policy reversal is<br />
the existence of weak regulatory and<br />
supervisory framework in the Indian<br />
Banking sector. <strong>The</strong> UTI mutual<br />
funds crisis is an example of this (See<br />
Appendix A.1).<br />
<strong>The</strong> government began a partial privatization of banks,<br />
initially providing Rs.40 billion from 1991-92 to 1992-93<br />
to 19 nationalized banks. Subsequently, ithas spent<br />
around Rs.164.5 billion at a rate of between 0.02 and 0.7<br />
percent of GDP each year from 1993-99<br />
on the state of the financial system.<br />
Standard and Poor’s (Polackova, 1999)<br />
estimate the fiscal cost of a future<br />
banking crisis in India will be around<br />
15 percent of GDP. This is so high because<br />
of the persistent inefficiencies in<br />
the banking system even after a decade<br />
of financial reform (Bhattacharya and<br />
Patel, 2003). Bhattacharya and Patel<br />
(2003) put the estimate of government<br />
guarantees in India as around 12 percent<br />
of GDP. Hence government guarantees<br />
are a crucial part of analysis of<br />
a financial sector especially in developing<br />
economies.<br />
<strong>The</strong> overview of the reform process<br />
brings up the question of policy reversal<br />
which is covered in the next section.<br />
5. Policy Reversal<br />
Most of the financial reforms in the Indian<br />
economy were guided by “.... objectives<br />
of increasing operational efficacy<br />
of monetary policy....” (RBI, 1997,<br />
page I-9). It is argued that under current<br />
inefficiencies (especially high NPA<br />
and the large share of government ownership)<br />
in the banking sector, any efforts<br />
by government to ensure macroeconomic<br />
stabilization (say reduction<br />
in fiscal deficit) or restructuring will<br />
involve an offsetting effect, adversely<br />
affecting the initial policy objectives,<br />
which will transmit mainly through the<br />
financial sector. This offsetting effect<br />
rates rise this will lead to banking<br />
stress. This inflexibility arises mainly<br />
because of the government’s policy<br />
of directed and concessional lending<br />
to priority sectors. Because of a regulated<br />
interest rate regime, the banks<br />
cannot adjust their deposit rates<br />
much, say in the, area of savings deposits.<br />
Thus stress in the banking<br />
sector will be directly reflected in a<br />
6. Conclusion<br />
<strong>The</strong> present paper has reviewed the financial<br />
sector reform process in India<br />
focussing on the banking sector. It can<br />
be safely concluded that financial sector<br />
reform in India is incomplete. <strong>The</strong><br />
banking sector remains inefficient because<br />
of several factors viz. high reserves<br />
and liquidity requirements, a<br />
poor regulatory and supervisory framework,<br />
the presence of implicit government<br />
guarantees, high transaction costs<br />
etc. <strong>The</strong>se inefficiencies can adversely<br />
affect the long-term policy objectives<br />
of a sound fiscal system and can even<br />
lead to policy reversals.<br />
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APPENDIX<br />
A.1 UTI Crisis<br />
<strong>The</strong> section is compiled from the www.<br />
rediff.com archives. UTI mutual fund<br />
commenced operation on July 1964. It<br />
was established by the central government<br />
to channel community savings into<br />
productive uses in order to speed up industrial<br />
growth. To quote then Finance<br />
Minister T.T. Krishnamachari “the trust<br />
would be open to any person or institutions<br />
to purchase the units offered by the<br />
trust. However, this institution as we see<br />
it, is intended to cater to the needs of individual<br />
investors, and even among them<br />
as far as possible, to those whose means<br />
are small.” <strong>The</strong> main objective of the<br />
UTI was to invest retail savings in the<br />
capital market and pass the benefits back<br />
to small investors. UTI had a monopoly<br />
in the funds industry until 1986. Subsequently,<br />
PSBs sponsored funds entered<br />
the market and in 1993 there were 8 mutual<br />
funds. After 1993 private sector mutual<br />
funds were allowed. <strong>The</strong> funds industry<br />
has grown at a compounded<br />
average rate of 27 percent from an asset<br />
base of Rs.250 million in 1964 to its current<br />
<strong>size</strong> of Rs.900 billion. <strong>The</strong> share of<br />
UTI is around Rs.600 billion. UTI invests<br />
about a quarter of this through the<br />
US-64 fund, India’s largest, and accounts<br />
for about 15 percent of the domestic mutual<br />
fund industry’s assets in a year. <strong>The</strong><br />
mutual funds (particularly UTI) are very<br />
popular among small investors and became<br />
even more attractive in 1996 when<br />
the mutual fund dividend returned by<br />
equity-oriented schemes was exempted<br />
from tax. In mid 2002, the UTI bank decided<br />
to skip a dividend for its flagship<br />
US-64 scheme for the year 2001-02. This<br />
was because the NAV of the scheme had<br />
eroded sharply and was much lower than<br />
its face value of Rs.10. On 1st August,<br />
2002 the NAV of US-64 was Rs.5.80.<br />
This was the first time the UTI had<br />
skipped paying a dividend for the US-64<br />
scheme, since its inception in 1964. <strong>The</strong><br />
UTI Board decided to skip a dividend as<br />
the government had been providing budgetary<br />
support to unit holders, to bridge<br />
the gap between the NAV and repurchase<br />
price of 2001. In the period January-June<br />
2002 the SEBI reported that the UTI had<br />
redemption/repurchase to the tune of<br />
over Rs.63 billion against a mobilization<br />
of just Rs.6.3 billion. All the Minimum<br />
Income Plan (MIP) schemes of the UTI<br />
showed negative reserves on 30 June<br />
2002. According to a report by SEBI, 35<br />
out of 63 schemes (whose unaudited results<br />
were available) had negative reserves.<br />
For the MIP schemes, negative<br />
reserves totalled up to Rs.30 billion.<br />
MIP97(III) had egative reserves of<br />
Rs.2.6 billion and MIP97(IV) had negative<br />
reserves of Rs.2.5 billion. For the<br />
three years between 1999 and 2002, UTI<br />
consistently lost market share in terms of<br />
net assets. On 31 March 1999, UTI had<br />
a 77 percent market share with assets at<br />
Rs.531.45 billion out of total Rs.681.93<br />
billion. <strong>The</strong>se figures dropped dramatically<br />
over the following years and on 30<br />
June 2002 the market share of UTI was<br />
46 percent with assets amounting to<br />
Rs.463.96 billion out of total Rs.1007.03<br />
billion. UTI’s investments make up 11<br />
percent of the value of all stocks traded<br />
on the Bombay Stock Exchange.<br />
<strong>The</strong> collapse of UTI began in 1999.<br />
<strong>The</strong> UTI mutual fund scheme was ailing,<br />
the government had issued a Special Securities<br />
Scheme for Rs.33 billion by taking<br />
over a large percentage of public sector<br />
scrips which had a considerably lower<br />
book value. <strong>The</strong> government continued<br />
to pay interest of 11.2 percent to the trust<br />
until 2002. UTI had not paid any dividend<br />
to the government until then. However,<br />
things did not turn out as planned<br />
and due to harsh market conditions, especially<br />
with the tech meltdown, US- 64<br />
holdings fell by Rs.10 billion during January<br />
to November 2001. <strong>The</strong> problem<br />
was aggravated because unlike most open<br />
ended schemes US-64 did not declare its<br />
NAV on a daily basis. In 2001-02, the<br />
government provided a cash support of<br />
Rs.3 billion to US-64 following the sudden<br />
freezing of sale and repurchase of<br />
units on 2nd July 2001. In 2002, the central<br />
government doled out Rs.5 billion<br />
and promised another Rs.5 billion for the<br />
US-64 scheme to meet the difference between<br />
its net assets value and the administered<br />
repurchase price. <strong>The</strong> government<br />
planned to work out a tax concession<br />
package to enthuse investors to remain<br />
with the scheme after May 2003. A committee<br />
was set up to investigate the matter<br />
and make recommendations. <strong>The</strong><br />
committee revealed certain weaknesses<br />
in investments made by UTI.<br />
<strong>The</strong>se were:<br />
• Bad investments, including in firms it<br />
had been warned against investing in<br />
by its own internal advisory team. For<br />
example, UTI lost Rs 328 million investing<br />
in an Internet company against<br />
the advice of their own<br />
research department.<br />
• All 19 individual investment decisions<br />
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129
REIMAGINING INDIA<br />
of the trust were imprudent and turned<br />
out to be in error.<br />
Apart from these investment inconsistencies,<br />
the stock scam in 2001 revealed<br />
the unhealthy nexus among the UTI (and<br />
possibly other mutual funds as well), local<br />
operators and promoters/corporates.<br />
It was believed the UTI mutual fund was<br />
the backbone of purchases in the infotech<br />
sector supported by the infamous operator<br />
Ketan Parikh. <strong>The</strong> tech meltdown of<br />
2001 resulted in sharp redemption for the<br />
scheme in early 2002. In mid 2002, the<br />
UTI decided to skip a dividend for its<br />
flagship US-64 scheme for the 2001-2002<br />
year. This was because the Net Asset<br />
Value (NAV) of the scheme has eroded<br />
sharply and was much lower than the face<br />
value of Rs.10. On 1st August 2002, the<br />
NAV of US-64 was only Rs.5.80. <strong>The</strong><br />
RBI was reported as contemplating a repurchase<br />
arrangement with UTI. This<br />
behavior of the RBI was an attempt to<br />
insulate the guilds market from the UTI<br />
crisis which was already having an impact<br />
on the equity market. Even some commercial<br />
banks such as the Bank of India,<br />
and State Bank of India started extending<br />
loans against UTI’s US-64 scheme<br />
at a steep discount. However, many<br />
other banks adopted a wait and<br />
watch policy.<br />
<strong>The</strong> Finance inister, Yashwant Sinha<br />
was initially reluctant to provide any sort<br />
of government support to UTI. In a press<br />
conference he was quoted as saying, “We<br />
cannot go on spending government money<br />
for bailouts. A budgetary support is<br />
not a desirable option at the moment.”<br />
However this policy could not be sustained.<br />
A majority of public sector banks<br />
rejected the proposal of buying stocks<br />
held under its flagship US-64 scheme.<br />
However, these banks were willing to extend<br />
clean loans to UTI for a short period,<br />
provided the central government gave<br />
a “comfort letter” ensuring timely payment<br />
of the interest and principal amount.<br />
However, the finance minister was not<br />
keen on providing a “sovereign guarantee”<br />
to public sector banks in lieu of loans<br />
extended to UTI. <strong>The</strong> chairman of UTI,<br />
Mr. M. Damodaran was quoted as saying<br />
that “<strong>The</strong>re were problems on two fronts<br />
- liquidity and solvency. <strong>The</strong> liquidity can<br />
be taken care of by the banks line of<br />
credit. But, to address the solvency issue,<br />
the government will have to step in at the<br />
second stage, if the market does not pick<br />
up by that time- That is, the government<br />
will have to bail out UTI.” M. Damodaran<br />
said that, in the wake of a problem<br />
regarding the solvency issue, if the government<br />
was not forthcoming with funding,<br />
UTI would dump its illiquid stocks<br />
in the market.<br />
A report by global consultancy firm<br />
Mckinsey declared that UTI may need<br />
$500 million to stay solvent. Mckinsey<br />
argued that, given the high fiscal deficit,<br />
recapitalization from government funds<br />
would not be easy. Also, funds raised<br />
from the capital market would not be sufficient.<br />
After a series of meetings between<br />
UTI chairman, M. Damodaran and Secretary<br />
of the Department of Economic<br />
Affairs and later with Finance Minister<br />
Y. Sinha, the government decided to provide<br />
cash assistance to UTI of Rs.5 billion.<br />
Officials said the liabilities to the<br />
center would be provided for either in the<br />
budget or the final supplementary demand<br />
for grants and will be in the nature<br />
of a contingent liability on the government.<br />
Financial analysts began suggesting<br />
the government would have to bail<br />
out the country’s largest mutual fund operator<br />
for another year. In the light of a<br />
negative reserve of about Rs.37 billion<br />
and payment obligation for about Rs.9<br />
billion for two of its MIP schemes maturing<br />
2002 UTI had demanded around<br />
Rs.50 billion. <strong>The</strong> Cabinet Committee<br />
on Economic Affairs chaired by the<br />
Prime minister, Mr. A. B. Vajpayee, approved<br />
a bailout package of over Rs.145<br />
billion for UTI to meet the liabilities on<br />
its flagship US-64 and assured return<br />
schemes. <strong>The</strong> government also considered<br />
some tax concessions for US-64 unit<br />
holders so as to create a market, reduce<br />
redemption and keep up investment in<br />
the scheme. <strong>The</strong> Finance Minister also<br />
asserted there would be no budgetary<br />
impact as a result of the package, although<br />
it would add to the fiscal burden<br />
and contribute to public debt. <strong>The</strong> UTI<br />
case provides an interesting and important<br />
example of policy reversal in the face<br />
of financial crisis.<br />
End Notes<br />
1<br />
“Under section 24 (b) of the Banking<br />
Regulation Act, 1949, every bank is<br />
required to maintain at the close of<br />
business every day, a minimum proportion<br />
of their Net Demand and Time<br />
Liabilities as liquid assets in the form<br />
of cash, gold and un-encumbered approved<br />
securities. <strong>The</strong> ratio of liquid<br />
assets to demand and time liabilities is<br />
known as Statutory Liquidity Ratio<br />
(SLR). Present SLR is 25 percent. <strong>The</strong><br />
RBI is empowered to increase the SLR<br />
up to 40 percent” (RBI Glossary).<br />
2<br />
In 1974, banks were required to direct<br />
33 percent of their net bank credit at<br />
concessional fixed interest rates to priority<br />
sectors. This was raised gradu-<br />
130 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
ally to 40 percent in 1980.<br />
3<br />
NPA have been defined as those loans<br />
for which interest has remained unpaid<br />
for four quarters in 1992-93.<br />
4<br />
For a detailed analysis on financial crisis<br />
see Joshi and Little (1996), Cerra<br />
and Saxena (2002), Kapila and Kapila<br />
(1996) and Rangrajan (1991) among<br />
others.<br />
5<br />
For example (Kohli, 2001) reports the<br />
dates of indirect intervention done by<br />
RBI as October 1995, January and July<br />
1996, November 1997 and January,<br />
June and August 1998.<br />
6<br />
<strong>The</strong> 1998 committee on banking sector<br />
reforms recommended the minimum<br />
shareholding by the government<br />
or RBI equity in nationalized bank<br />
should be brought down to 33 percent.<br />
7<br />
In fact, few allies in the newly formed<br />
United Progressive Alliance (UPA)<br />
government are demanding a rise in<br />
the interest rates on various provident<br />
fund schemes.<br />
8<br />
To quote RBI Governor Y.V.<br />
Reddy:“<strong>The</strong> transaction costs are a<br />
drag on the economy and it is time to<br />
put emphasis on their reduction which<br />
can facilitate the growth of GDP by 2<br />
to 3 percent. (November 3, 2003, http://<br />
www.rediff.com/money/2003/nov/<br />
03cred10.htm)<br />
9<br />
Australian and New Zealand governments<br />
currently report such liabilities<br />
in their balance sheets.<br />
References<br />
• Bhattacharya, S. and U. R. Patel<br />
(2003). Reform Strategies in the<br />
Indian Financial Sector. In Conference<br />
on India’s and China’s Experience<br />
with Reform and Growth, New<br />
Delhi. International Monetary Fund<br />
and National Council of Applied<br />
Economic Research.<br />
• Bhide, M. G., A. Prasad, and S. Ghosh<br />
(2001). Emerging Challenges in Indian<br />
Banking. CREDPR Working Paper<br />
103.<br />
• Cerra, V. and S. C. Saxena (2002).<br />
What Caused the 1991 Currency Crisis<br />
in India? IMF Staff Papers 49.<br />
• de Aghion, B. A. and C. Gollier (2000).<br />
Peer Group Formation in an Adverse<br />
Selection Model. Economic Journal<br />
110, 632–43.<br />
• Demetriades, P. O. and K. B. Luintel<br />
(1996). Financial Development, Economic<br />
Growth and Banking Sector<br />
Controls: Evidence from India. <strong>The</strong><br />
Economic Journal 106, 359–374.<br />
• Ghatak, M. (2000). Screening by the<br />
Company you Keep: Joint Liability<br />
Lending and the Peer Selection Effect.<br />
Economic Journal 110, 601–31.<br />
• ha, R. and A. Sharma (2004). Structural<br />
Breaks, Unit Roots and Cointegration:<br />
A Further<br />
• Test of the Sustainability of the Indian<br />
Fiscal Deficit. Public Finance Review<br />
32.<br />
• Joshi, V. and I. M. D. Little (1996). India’s<br />
Economic Reforms: 1991-2001.<br />
Oxford: Claredon Press.<br />
• Kapila, R. and U. Kapila (1996). Understanding<br />
India’s Economic Reforms.<br />
New Delhi: Acedamic Foundation.<br />
• Kohli, R. (2001). Aspects of Exchange<br />
Rate Behavior and Management in<br />
India 1993-98. Economic and Political<br />
Weekly January 29.<br />
• Obstfeld, M. (1995). <strong>The</strong> Mirage of<br />
Fixed Exchange Rates. NBER Working<br />
Paper No. 5191.<br />
• Polackova, H. (1999). Contingent Government<br />
Liabilities: A Hidden Fiscal<br />
Risk. Finance and Development 36.<br />
• Puhazhendhi, V. (1995). Transaction<br />
Costs of Lending to the Rural Poor:<br />
Non-Governmental Organizations<br />
and Self-Help Groups of the Poor as<br />
Intermediaries for Banks in India.<br />
Banking with the Poor (BWTP) network.<br />
• Rangrajan, C. (1991). Recent Monetary<br />
Policy Measures and the Balance<br />
of Payments. Reserve Bank of India<br />
Bulletin July.<br />
• RBI (1990-2003b). Report on Currency<br />
and Finance.<br />
• RBI (1993-2003a). Trend and Progress<br />
in Banking in India.<br />
• RBI (1993-2003c). Reserve Bank of<br />
India Bulletin.<br />
• RBI (1997). Report on Currency and<br />
Finance.<br />
• RBI (2003d). Reserve Bank of India<br />
Annual Report.<br />
• Saez, L. (2001). Banking Reform in<br />
India and China. International Journal<br />
of Finance and Economics 6, 235–44.<br />
• Saggar, M. (1999). Some <strong>Issue</strong>s Relating<br />
to Exchange Rate Policy in India in<br />
the Post Liberalization Period. Ph. D.<br />
Dissertation, Indira Gandhi Institute<br />
of Development Research (IGIDR),<br />
Mumbai, India.<br />
• Sharma, A. (2004) Fiscal Deficits,<br />
Banking Crises And Adjustment Policy<br />
In A Semi-Open Economy Ph. D<br />
Dissertation, Australian National University,<br />
Canberra, Australia<br />
• Shirai, S. (2002). Banking Sector Reforms<br />
in India and China: Does India’s<br />
Experience Offer Lessons for China’s<br />
Future Reform Agenda. JBIC Discussion<br />
Paper No.2.<br />
THE INDIA ECONOMY REVIEW<br />
131
REIMAGINING INDIA<br />
Figure 3: Post-reform Exchange Rate Variability<br />
Prior to 1991, the exchange rate regime<br />
in India, was pegged to a currency <strong>The</strong> plots show the nominal exchange<br />
the currency.<br />
basket. Hence India had a fixed rate rate remained almost stable during the<br />
regime. Figure 1 plots the exchange rate two decades of the 1970’s and 1980’s.<br />
and its annual change, for rupee from <strong>The</strong> rate of change moved in a band of<br />
1970 to 1990. A positive change +/- 6 percent in the 1970’s except for<br />
indicates depreciation and a negative<br />
change indicates appreciation of percent due to the oil price<br />
1979 when the rupee depreciated by 10<br />
shock.<br />
During the 1991 financial crisis, faced<br />
with very low forex reserves the government<br />
floated the rupee, though the<br />
transition was gradual. Between 1991-<br />
93 there was a dual exchange rate regime<br />
and the rupee was subsequently<br />
floated in early 1993. International experience<br />
has shown exchange rate variability<br />
increases with a change to a<br />
more flexible rate regime. This has not<br />
been the case for India even after a decade<br />
of a floating rate regime as evident<br />
from the Figure 2 which plots the real<br />
effective exchange rate for the rupee<br />
from 1993-2002. This is essentially because<br />
a stable exchange rate remains an<br />
important objective of government exchange<br />
rate policy. Saggar (1999) notes<br />
the RBI’s intervention (measured by<br />
changes in foreign reserves) has in fact<br />
increased in the post 1993 period.<br />
<strong>The</strong> central bank has used both direct<br />
and indirect methods of market<br />
intervention. 5 <strong>The</strong> main objective of<br />
government policy is to keep the exchange<br />
rate aligned with the fundamentals<br />
of the economy like inflation. Thus<br />
the exchange rate depreciated by 1.5<br />
percent in September 1997 and the<br />
speed of depreciation was moderated<br />
by intervention sales by the RBI. In the<br />
central banks’ own words “...the conduct<br />
of exchange rate policy was guided<br />
by the need to maintain a delicate balance<br />
between the considerations of external<br />
competitiveness and price stability”<br />
(RBI, 1997, page I-9). This is also<br />
confirmed by analyzing the standard<br />
deviation of the rate of change in exchange<br />
rates, a measure of variability<br />
of the exchange rate. <strong>The</strong> standard deviation<br />
was 4.7 from 1970-80, 4.6 from<br />
1980-90 and 4.7 from 1993-2003. This<br />
122 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
Figure 4: Trends In Major Macroeconomic Indicators (1970-99)<br />
evidence clearly indicates that although<br />
the rupee has been floated, the government<br />
plays an important role in influencing<br />
demand and supply of forex reserves<br />
and thereby the exchange rate.<br />
4. Post-1991 Banking Reforms<br />
Financial sector reform was launched<br />
in 1991, based on the recommendation<br />
of the Narsimhan Committee (1991)<br />
that was set up by the government. <strong>The</strong><br />
1991 financial reforms were based on<br />
five fundamentals: Strengthening prudential<br />
norms and market discipline,<br />
appropriate adoption of international<br />
benchmarks, management of organiza-<br />
THE INDIA ECONOMY REVIEW<br />
123
REIMAGINING INDIA<br />
Figure 5: Trends In Major Banking Variables (1970-99)<br />
tional change and consolidation, technological<br />
upgrading and human resource<br />
development. Figure-3 compares<br />
major macroeconomic variables in the<br />
pre-reform and post-reform period.<br />
<strong>The</strong> banking sector reforms specifically<br />
included the following measures:<br />
<strong>The</strong> RBI reduced the CRR from 15<br />
percent in 1991 to 5.75 percent in November<br />
2001. <strong>The</strong> cash reserve ratio<br />
was further reduced to 4.5 percent in<br />
May 2004, although it remains higher<br />
than its statuary minimum level of 3<br />
percent. <strong>The</strong> SLR has been reduced<br />
from 38.5 percent in 1991 to 25 percent<br />
124 THE <strong>IIPM</strong> THINK TANK
Pramod K.Yadav Ritesh Agarwal<br />
Doctoral Students, Indian Institute of Management (IIM)-Ahmedabad<br />
Indian Corporate Bond Market:<br />
<strong>The</strong> Road Ahead<br />
"In the age of globalization, where vast amounts<br />
of capital can be moved across the world with<br />
a mere computer keystroke, functioning bond<br />
markets are more important than ever. So is<br />
having a group of infl uential, globally known<br />
bond buyers who can alert the government if its<br />
policies are roiling markets, either by dumping<br />
its debt or speaking out. It's incredibly important<br />
that India's government and central bank continue<br />
to nurture the market's growth. India needs<br />
to take advantage of the favorable economic<br />
climate to strengthen regulation, improve transparency<br />
and bolster liquidity. It also needs to act<br />
faster to increase foreign investors' ability to move<br />
funds here. were put to productive use here.<br />
investor and business confi dence...India is<br />
stepping up efforts to do just that. For all China's<br />
advantages, bonds are one important area where<br />
India is ahead. It means markets here in Mumbai<br />
are likely to have their own Bill Gross before<br />
Shanghai does."<br />
William Pesek Jr.,<br />
International Herald Tribune,(IHT),<br />
October 11, 2004<br />
<strong>The</strong> Corporate Debt Market in<br />
India is underdeveloped, both in<br />
terms of the market participation<br />
and efficient price discovery; and the<br />
volume of fixed income securities is very<br />
small as compared to equity market.<br />
Most of the big Indian Corporate still<br />
seek bank finance and retained earnings<br />
to fulfill their funding requirements. Primary<br />
corporate debt market is dominated<br />
by non-banking finance companies and<br />
the total corporate debt market is a minuscule<br />
2 percent of the total debt market.<br />
Over the years, Indian firms have<br />
relied more on the equity market, retained<br />
earnings and bank loans to fulfill<br />
the funding requirements. To make the<br />
matter worse, the secondary market in<br />
corporate bonds has also not picked up<br />
as desired. Securities Exchange Board of<br />
India (SEBI) and the stock exchanges did<br />
realize the need of corporate bond and<br />
introduced various regulations to provide<br />
an impetus to the bond market; however<br />
none of the regulations or norm could<br />
yield the desired results. <strong>The</strong> debt market<br />
in India is broadly classified as government<br />
securities market and corporate<br />
securities market. <strong>The</strong> Indian debt market<br />
is highly skewed towards government<br />
securities market. Total outstanding debt<br />
of India has increased over the years and<br />
was around 36 percent of the GDP in<br />
2004-way below the mature financial<br />
markets (IMF,2004). <strong>The</strong> current government<br />
bond segment resulting from<br />
persistently high fiscal deficits and regulatory<br />
requirement in India is about 40<br />
percent of the GDP –at par with the well<br />
functioning financial markets. Nearly 90<br />
percent of the bonds issued in India are<br />
government bonds. <strong>The</strong> enormous <strong>size</strong> of<br />
the government bond market is not surprising<br />
considering the persistent high<br />
fiscal deficit and consequentially high<br />
public sector borrowings. Mandatory requirement<br />
on the part of banks to invest<br />
through statutory liquidity reserve<br />
(SLR,currently at 25 percent) compounds<br />
the problem. Perceived risk free nature<br />
132 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
of the government bonds leads banks to<br />
include even greater percentage of government<br />
bonds in their portfolio than the<br />
prescribed SRL of 25 percent. Government<br />
and Reserve Bank of India introduced<br />
many structural changes to improve<br />
transparency in the market<br />
dealings, method of primary auctions, allowing<br />
Primary Dealers, borrowings at<br />
market determined rates, and creating<br />
technology platforms like NDS to recognize<br />
the institutional characteristics of<br />
the market. <strong>The</strong> same kind of impetus<br />
has been lacking in the Indian corporate<br />
bond markets and as a result of this, major<br />
source of corporate funding is all but<br />
non-existent.<br />
<strong>The</strong> corporate bond market, in the<br />
sense of raising debt through public issuance<br />
in capital market, is shadowed by<br />
growing equity market and government<br />
bond market and was less than 2 percent<br />
of Indian GDP in 2004 compared to 50<br />
percent in Singapore,68 percent in South<br />
Korea, and 143 percent in USA (IMF,<br />
2004). A well developed corporate bond<br />
market facilitates the firms operating in<br />
the economy to devise their optimum for Indian debt capital markets”,<br />
capital structure and investors to have (Nov,<strong>2007</strong>), predicts that Indian bond<br />
better spectrum of asset classes to 160<br />
hedge and diversify their fixed income<br />
risks. <strong>The</strong> share of corporate<br />
140<br />
Government Debt<br />
bonds in the total bond issued has 120<br />
also decreased from 34 percent in<br />
Corporate Debt<br />
100<br />
1999-00 to a 29 percent in 2003-<br />
80<br />
04. <strong>The</strong> weak status of corporate<br />
bond market was mainly due to 60<br />
dominance of government securities<br />
and structure of the market<br />
itself where government was borrowing<br />
at pre-decided coupon<br />
rates from a group of investors<br />
such as banks. <strong>The</strong> public sector<br />
Debt As Percentage Of GDP<br />
40<br />
20<br />
undertakings (PSUs) have persistently<br />
overshadowed the private sector bond issuance<br />
over the years. Corporate debt<br />
can be raised either by private placement<br />
or public issue. Private placement is preferred<br />
owing to the regulatory processes,<br />
higher cost associated with public issuance,<br />
and enormous hurdles in public issues<br />
process in the form of various types<br />
of disclosure, registration requisites etc<br />
(NSE, 2005).<strong>The</strong>se reasons have also incentivized<br />
the corporate to raise debt<br />
from abroad because of lesser listing and<br />
disclosure requirements, lower cost, and<br />
better liquidity in secondary market.<br />
Debt raised abroad increased around two<br />
and a half times from 2001 to 2005 equivalent<br />
to 60 percent of corporate issuance<br />
in domestic debt market (NSE, 2005).<br />
<strong>The</strong> latest report by the Goldman Sachs<br />
titled, “ Bonding the BRICs: Big chance<br />
0<br />
market is going to grow fourfold and<br />
reach to the level of $1.5 trillion by 2016.<br />
It also reports that the corporate bond<br />
market will annually grow by around 28<br />
percent from $100 billion to $575 billion<br />
in 2016.Such a high benchmark (required<br />
growth of 28 percent) when contrasted<br />
with almost non-existent growth rate of<br />
the corporate bond market (historically)<br />
raises a big concern for policy makers and<br />
According to Goldman Sachs, Indian bond market is going<br />
to grow fourfold and reach to the level of $1.5 trillion by<br />
2016. <strong>The</strong> corporate bond market will annually grow by<br />
around 28 % from $100 billion to $575 billion in 2016<br />
India<br />
China<br />
Korea<br />
Malaysia<br />
Singapore<br />
USA<br />
market participants equally. A robust<br />
policy framework together with a performance<br />
based regulatory approach is<br />
urgently required to push the market to a<br />
higher growth and market friendly frontier.<br />
<strong>The</strong> booming economy, growing<br />
populations, and rising household income<br />
are exerting huge demand for infrastructure<br />
services. <strong>The</strong> inability to meet such<br />
a fast growing demand has become more<br />
visible in recent past and evident by congestion<br />
on the roads, airports, ports, frequent<br />
electricity cut etc. <strong>The</strong>re is no way<br />
India can take its infrastructure requirement<br />
for granted if it aims to<br />
traverse the sustainable growth trajectory.<br />
<strong>The</strong> government officials estimate<br />
the infrastructure requirement<br />
of about $500 billion in next five<br />
years. It is also expected that about 40<br />
percent of the fund will be infused by<br />
the private sector. Considering the<br />
long term irreversible nature of infrastructure<br />
investment and short to<br />
medium term liabilities of banks, long<br />
term financing in the form of debt is<br />
widely accepted as the most appropri-<br />
THE INDIA ECONOMY REVIEW<br />
133
REIMAGINING INDIA<br />
External Commercial Borrowings<br />
Year<br />
ate financing approach. However current<br />
shallow status of Indian bond market<br />
does not seem to be geared to meet the<br />
target capital requirement. <strong>The</strong> inability<br />
to meet the financing requirement of infrastructure<br />
leads to a lower output and<br />
hence a shortfall in the welfare and GDP<br />
and other various dominos effects.<br />
<strong>The</strong> demand for corporate debt can be<br />
gauged by the fact that Indian corporate<br />
papers are in huge demand in overseas<br />
market in the form of external commercial<br />
borrowings (ECBs). In <strong>2007</strong> itself,<br />
the net ECB inflow in the country was<br />
about $16 billion and RBI had to tighten<br />
the norms on ECB borrowing in order to<br />
keep inflation and rupee-dollar exchange<br />
rate in check.<br />
ECB Gross<br />
inflow<br />
<strong>The</strong> experience of US and other developed<br />
countries clearly indicates that the<br />
corporate bond market played an important<br />
role in the development of the economy<br />
as a whole. During the last few years,<br />
DFI’s access to long-term funds has dwindled<br />
and they cannot meet the demand<br />
for term funds of industry and infrastructure<br />
sectors when investment activity is<br />
all set to pick up from the present low<br />
levels. Moreover, as the demand term<br />
debt increases significantly to finance<br />
ECB outflow<br />
(imputed)<br />
Net ECB<br />
inflow<br />
high level of investments, excessive dependence<br />
on banks will hit the creditworthy<br />
borrowers, as they would end up<br />
paying up more than what they would<br />
have to pay if they decide to raise funds<br />
from the market directly.<br />
DEMAND SIDE<br />
<strong>The</strong> corporate bond market in India is<br />
underdeveloped owing to the limitations/<br />
reluctance of the various market<br />
participants:-<br />
Corporate – <strong>The</strong> cash credit system of<br />
banks operates in effect like a loan in<br />
perpetuity, many corporates prefer it to<br />
bond financing where the amount has to<br />
be returned on a specific date. Moreover,<br />
they are either riding on the current equity<br />
boom in the economy or relying<br />
more on retained earnings.<br />
Foreign Institutional Investors are<br />
major players in the equities market.<br />
However, there exists a ceiling on their<br />
investment in the debt market (currently<br />
there is a ceiling of $1.5 billion on investment<br />
in corporate debt), they are present<br />
only in a limited way in the bond<br />
market.<br />
Pension Funds And <strong>The</strong> Insurance<br />
Sector could spurt the market activities<br />
but the absence of pension funds and low<br />
insurance penetration has meant limited<br />
demand for long-term bonds.<br />
Gross inflow<br />
on ECB<br />
2002 2687 4272 -1585<br />
2003 3514 5206 -1692 827<br />
2004 5228 8153 -2925 1714<br />
2005 9084 3890 5194 3856<br />
2006 14547 11824 2723 5463<br />
<strong>2007</strong> 21291 5207 16084 6744<br />
SOURCE - RBI<br />
Households too are almost completely<br />
absent from the market, due to the lack<br />
of an efficient legal system, and unhappy<br />
experience with debenture trustees.<br />
SUPPLY SIDE<br />
• Public Placement – <strong>The</strong>re are a lot<br />
many regulations related to disclosure<br />
and filing of the norms which adds to<br />
the overall costs of issuing the bonds.<br />
Corporate prefer private placements<br />
owing to less hassles and almost non<br />
existent disclosure norms. Though the<br />
government has limited the private<br />
placement partners to 50 in case of<br />
private placement, corporate has<br />
sought a way out because the partners<br />
can issue the debt issued to them to<br />
new partners.<br />
• Illiquidity – A large part of the market<br />
does not mark-to-market the corporate<br />
bond portfolio. As a result, once any<br />
bond goes into the books, it does not<br />
come out. This takes away liquidity<br />
from the market.<br />
• Trading is concentrated in AAA – rated<br />
bonds, as they are the safest and<br />
most liquid. A large part of the market,<br />
including insurance companies, provident<br />
funds and banks, has restrictions<br />
on private sector paper. Thus the<br />
bonds of public sector units are much<br />
more liquid than private sector<br />
bonds.<br />
Benefits Of Efficient Market For<br />
Market Participants<br />
Corporate<br />
• Availability of long term funds – An<br />
efficient bond market gives the freedom<br />
to issue long term debt. This is<br />
particularly important for India where<br />
there is a large requirement of infra-<br />
134 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
structure financing which involves long<br />
term loans. A well-functioning corporate<br />
bond market allows firms to tailor<br />
their asset and liability profiles and<br />
hence allows them to raise long-term<br />
funds to invest in ventures that have a<br />
long-term payoff.<br />
• Reduced fund costs – <strong>The</strong> corporate<br />
may borrow directly from the investors<br />
eliminating the intermediaries like<br />
banks which will reduce their overall<br />
cost of funds.<br />
<strong>The</strong> Financial System<br />
• <strong>The</strong> net interest margin of Indian banks<br />
has increased from about 225 basis points<br />
to 400 basis points during the last 10 years<br />
leading to a high cost of commercial borrowing.<br />
<strong>The</strong> high cost of commercial borrowing<br />
has prompted the big corporate<br />
to borrow from overseas markets however<br />
smaller companies are bound to borrow<br />
at high rates from the banks. <strong>The</strong><br />
high cost of borrowing is also evident<br />
from low credit-deposit ratio of Indian<br />
banks which is a almost 50 percent to that<br />
Credit-Deposit Ratio Of Indian Banks<br />
140<br />
120<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
130<br />
114<br />
101<br />
92 90<br />
83 81 80 79<br />
61 61<br />
53<br />
China<br />
UK<br />
Source -RBI & McKinsey<br />
Malaysia<br />
US<br />
Korea<br />
Thailand<br />
Japan<br />
Brazil<br />
Singapore<br />
India<br />
Czech Rep<br />
Turkey<br />
of China. <strong>The</strong> corporate bond market can rating agencies, a wide range of corporate<br />
exert a competitive pressure on commercial<br />
banks in the matter of lending to priing<br />
sophisticated credit analysis, an op-<br />
debt securities and derivatives demandvate<br />
business and thus help improve the portunity to make private placements,<br />
efficiency of the capital market as a whole. and efficient procedures for corporate.<br />
A well developed corporate bond market<br />
would lead to a reduction in the systemic Investors<br />
risk and probability of crisis. This is because<br />
the presence of such an environ-<br />
is also essential for the investors because<br />
A well developed corporate bond market<br />
ment is associated with greater accounting<br />
transparency, a large community of safe way of investment but also helps<br />
it not only provides them an alternate and<br />
professional financial analysts, respected them diversify their risks.<br />
Leading Rates In India<br />
SOURCE - RBI<br />
Average5 Year<br />
Deposit Rates Average<br />
Lending<br />
Rates<br />
Spread(%)<br />
1997-98 11.75 14.00 2.25<br />
1998-99 11.00 12.50 1.50<br />
1999-00 10.25 12.25 2.00<br />
2000-01 9.75 11.50 1.75<br />
2001-02 8.25 11.50 3.25<br />
2002-03 5.88 11.13 5.25<br />
2003-04 5.38 10.63 5.25<br />
2004-05 6.00 10.50 4.50<br />
2005-06 6.63 10.50 3.88<br />
2006-07 7.25 11.25 4.00<br />
Developing <strong>The</strong> Corporate Bond<br />
Market<br />
Increasing Market Participation<br />
By Widening <strong>The</strong> Investor Base<br />
Banks – At present, banks’ loan portfolios<br />
are not treated at par with their investment<br />
portfolio. <strong>The</strong> investment<br />
portfolio (banks’ investments in corporate<br />
bonds) has to be marked to market<br />
where as the same constraint is not there<br />
in the case of a loan extended to the same<br />
corporate. Hence there is incentive for<br />
the bank to extend loans to the corporate<br />
instead of investing in corporate bonds.<br />
Banks’ investments in corporate bonds<br />
need to be encouraged especially by<br />
THE INDIA ECONOMY REVIEW<br />
135
REIMAGINING INDIA<br />
bringing in changes in the prudential<br />
regulatory mechanism which treats loans<br />
portfolio on par with investment portfolio.<br />
Moreover, Co-operative banks are<br />
permitted to invest only a small part of<br />
their deposits in bonds issued by PSUs<br />
and only scheduled co-operative banks<br />
are allowed to invest in private sector<br />
bonds. Allowing all co-operatives banks<br />
to invest in high quality corporate bonds<br />
would be helpful as cooperative banks<br />
have large deposits.<br />
FIIs – <strong>The</strong> investment limits of FII in<br />
corporate bonds should be increased<br />
because FIIs are a major investor class<br />
and can bring volumes to the corporate<br />
bond markets. Though the limit was<br />
hiked recently to USD 1.5 billion, still<br />
this is too small for big players taking any<br />
active interest in this market<br />
meaningfully.<br />
Provident Funds And Pension<br />
Funds – <strong>The</strong>se should be allowed to<br />
invest on the basis of rating rather than<br />
in terms of category of issuers. This may<br />
encourage these funds to invest in high<br />
quality corporate bonds. Currently, these<br />
funds are allowed to invest only up to 10<br />
percent of the accruals in a year in private<br />
corporate bonds and 40 percent of the<br />
corpus can be invested in bonds issued by<br />
public sector undertakings. As the Risk<br />
profile of a large number of the PSUs<br />
established by the state governments is<br />
not materially different from that of several<br />
private corporate sector companies.<br />
ECB in India has increased during the last fi ve years.<br />
This is an indication that Indian corporate want to raise<br />
debt... which is not easily available in the market owing to<br />
regulatory issues and high cost of borrowing<br />
Hence, investment that rating quality as<br />
indicated by the recognized rating companies<br />
should become the main criteria<br />
for investment in corporate bonds and<br />
not category of bonds in terms of issuers.<br />
Thus the guidelines issued to PFs and<br />
EPFs need not discriminate between<br />
State Govt. PSUs and private corporate<br />
sector entities. To encourage small investors,<br />
the bond market structure should<br />
emulate the equity market structure and<br />
retail investors should be able to buy and<br />
sell bonds without any restriction on the<br />
minimum market lot. Currently an investor<br />
can buy even one share in the equity<br />
market.<br />
Increasing Market Participation<br />
By Widening <strong>The</strong> <strong>Issue</strong>r Base<br />
<strong>The</strong> <strong>Issue</strong>r base can be increased primarily<br />
by reviewing the current guidelines<br />
for issuance, disclosure and listing of corporate<br />
bonds. <strong>The</strong> current regulations<br />
and guidelines should be made less stringent<br />
so that it would become easier for<br />
the companies to issue bonds. On the flip<br />
side, regulations are needed to promote<br />
the volume and liquidity in the primary<br />
market apart from increased issuance.<br />
Currently banks are allowed to issue<br />
bonds of maturities over five years only<br />
for financing infrastructure sector. Since<br />
banks are one of the leading issuers of<br />
bonds, they should be allowed to issue<br />
bonds of maturities over five years subject<br />
to their asset liability matching norms.<br />
<strong>The</strong> development of an interest rate derivatives<br />
markets is a major prerequisite<br />
to facilitate this.<br />
Banks are one of the major issuers of<br />
bonds to augment their tier-II capital and<br />
these bonds are in turn subscribed to by<br />
other banks (cross holdings). This reduces<br />
the overall volume and liquidity in the<br />
market. Regulatory caps should be fixed<br />
for such cross investments so that other<br />
participants are given an opportunity to<br />
subscribe to these bonds.<br />
Market Makers<br />
Market makers provide exit options to<br />
investors to buy or sell bonds whenever<br />
desired by the investors. <strong>The</strong> market<br />
making in corporate bonds is necessary<br />
as the market is in a nascent stage and it<br />
would require the psychological comfort<br />
in the beginning. Investment banks that<br />
help corporate to raise money from the<br />
market can possibly be roped in to market<br />
making in the bonds which they have<br />
helped in issuance.<br />
Listing Norms To Be Eased And<br />
Enhancing Liquidity<br />
As mentioned earlier, External Commercial<br />
Borrowing in India has increased<br />
during the last five years which is an indication<br />
that Indian corporate want to<br />
raise debt which is not easily available in<br />
the market owing to regulatory issues<br />
and high cost of borrowing. <strong>The</strong>re is less<br />
issuance of corporate debt in the first<br />
place and secondly disclosure and documentation<br />
norms deter the corporate to<br />
issue debt publicly. Thus, the corporate<br />
debt market is dominated by private<br />
placements. For listed entities, norms<br />
can be made simpler; they should be allowed<br />
an abridged version of disclosure;<br />
whereas unlisted companies issuing<br />
136 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
bonds to institutional investors and<br />
QIBs, rating should form the basis for<br />
placement. However, companies which<br />
are not listed and which are opting for<br />
the private placement mode should be<br />
subjected to stringent disclosure norms.<br />
Privately placed bonds should be mandatorily<br />
listed within seven days from the<br />
date of allotment, as is the case with public<br />
issues. <strong>The</strong> practice of suspension of<br />
trading/delisting of securities in case of<br />
non compliance with listing norms by an<br />
issuer needs to be replaced by heavy penalties<br />
on the promoters and directors of<br />
the erring company. Debenture trusties<br />
should be made more responsible and<br />
accountable. <strong>The</strong>y also should ensure<br />
that important information such as rating<br />
downgrades should be disseminated<br />
to the investors.<br />
Trade Reporting System<br />
<strong>The</strong>re should be a mechanism to capture<br />
all the information relating to trades in<br />
corporate bonds, disseminate the same<br />
and maintaining a database of trade history.<br />
Regulators should direct the market<br />
participants to report all the transactions<br />
done by them to the trade<br />
reporting system.<br />
Trading, Clearing And Settling<br />
Mechanism<br />
Anonymous screen based order matching<br />
trading systems should be adopted in<br />
order to improve the transparency and<br />
efficiency in the corporate bond transactions.<br />
However, multiple trading platforms<br />
may also impact the liquidity adversely.<br />
Moreover, novation and<br />
multilateral netting should form the<br />
backbone for risk mitigation and enhancement<br />
of liquidity.<br />
Development Of Derivative<br />
Market<br />
Derivative market is essential for hedging<br />
interest rate risk. Though interest<br />
rate swaps and forward rate agreements<br />
exist in India, there is a need for advanced<br />
derivative instruments for better<br />
price discovery and hedging. RBI has<br />
already initiated certain steps and<br />
formed committees to formulate<br />
a framework for some advanced<br />
derivative instruments.<br />
Price Distorting <strong>Issue</strong>s<br />
Stamp duty is a levied by the State<br />
Governments and RBI should reduce the<br />
stamp duty and rationalize it<br />
between different states. Tax Deducted<br />
at Source (TDS) also distorts the pricing<br />
of bonds. TDS on interest income from<br />
corporate bonds is not uniformly<br />
applicable to all the investors. While insurance<br />
companies and mutual funds are<br />
exempt from the provisions of TDS, all<br />
other market players are subject to it in<br />
respect of interest paid on corporate<br />
bonds. An automated computerized<br />
trading system and a meaningful price<br />
discovery process cannot be introduced<br />
because of the differing TDS treatment<br />
for different market player. <strong>The</strong>refore it<br />
is desirable to have a uniformTDS rule<br />
for all the market players.<br />
<strong>The</strong> shut period (for reckoning the registered<br />
owner of the bond for payment of<br />
coupons) is very long and may be brought<br />
on par with that for the government securities,<br />
which is one day. It is also necessary<br />
to standardize the day count conventions.<br />
Currently the day count<br />
conventions in the market differ depending<br />
upon the nature of the<br />
instruments and the nature of<br />
the transaction.<br />
References<br />
• Sharma, V. K. and Sinha, Chandan.<br />
<strong>The</strong> Corporate Debt Market in India<br />
(2006). Bank for International Settlements,<br />
Paper No. 26<br />
• Stone, M. Corporate Debt Restructuring<br />
in East Asia: Some Lessons from<br />
International Experience (1998). International<br />
Monetary Fund<br />
PPAA/98/13<br />
• Mohan, R. 'Recent Trends in the Indian<br />
Debt Market and Current Initiatives'<br />
(2006)<br />
• Bose, S and Coondoo, D. A Study of the<br />
Indian Corporate Bond Market (2003).<br />
Social Science Research Network.<br />
• Kar , S and Khasnobis, B.G. <strong>The</strong> Corporate<br />
Debt Market-A Firm-Level<br />
Panel Study for India. Research Paper<br />
No. 2006/50, UNU-WIDER World<br />
Institute for Development Economics<br />
Research<br />
• Reddy, Y.V. '<strong>Issue</strong>s and challenges in<br />
the development of the debt market in<br />
India' (2003). BIS Paper No.11, Bank<br />
for International Settlements<br />
• '<strong>The</strong> Indian Bond Market, Current<br />
Situations and Developments' (2006),<br />
Keio University.<br />
• India’s Capital Market (<strong>2007</strong>), Deutsche<br />
Bank<br />
• "Bonding the BRICs: A big chance for<br />
India’s Debt Capital Market"(<strong>2007</strong>),<br />
Goldman Sachs<br />
• IMF Global Financial Stability Report,<br />
September <strong>2007</strong><br />
• IMF Global Financial Stability Report,<br />
April <strong>2007</strong><br />
• NSE Debt RoundUp, October <strong>2007</strong><br />
• "India on fire", <strong>The</strong> Economist; February<br />
1st <strong>2007</strong><br />
THE INDIA ECONOMY REVIEW<br />
137
Paul Conway Richard Herd<br />
Sean Dougherty<br />
Organisation For Economic Co-operation And Development (OECD), Paris<br />
Just How Free Are India's Labour<br />
And Product Markets?<br />
"Freedom in economic arrangements<br />
is itself a component<br />
of freedom broadly understood,<br />
so economic<br />
freedom is an end in itself ...<br />
Economic freedom is also an<br />
indispensable means toward<br />
the achievement of political<br />
freedom."<br />
-Milton Friedman<br />
1. Since the mid 1980s India has undergone<br />
a profound shift in economic management<br />
as successive reforms have<br />
progressively moved the economy towards<br />
a market-based system. State intervention<br />
and control over economic<br />
activity has been reduced significantly<br />
and the role of private-sector entrepreneurship<br />
increased. Overall, reform has<br />
had a major beneficial impact on the<br />
economy. Annual growth in GDP per<br />
capita has accelerated from just 1¼ per<br />
cent in the three decades after Independence<br />
to 7½ per cent currently, a<br />
rate of growth that will double average<br />
income in a decade. <strong>The</strong> sustainable<br />
growth rate of the economy is currently<br />
estimated to be 8½ per cent and India<br />
is now the fourth largest economy in the<br />
world when measured using the most<br />
up-to-date purchasing power parities.<br />
Increased economic growth has helped<br />
reduce poverty, which has begun to fall<br />
in absolute terms.<br />
2. In general, areas of the Indian business<br />
sector that have been opened to<br />
private sector involvement have responded<br />
well. In service sectors where<br />
government regulation has either been<br />
eased significantly or was less burdensome<br />
to start with, such as insurance,<br />
asset management and information<br />
technology, output has grown rapidly<br />
with exports of information technology<br />
enabled services being particularly<br />
strong and a key component of India’s<br />
economic transformation. In some of<br />
the former fully government-owned infrastructure<br />
sectors, such as telecommunications<br />
and domestic civil aviation,<br />
opening to the private sector has produced<br />
exemplary results and growth has<br />
been phenomenal. <strong>The</strong> market shares<br />
of new entrants in both these sectors are<br />
now over 75% while consumer choice<br />
has expanded and prices have fallen.<br />
3. Notwithstanding these and other success<br />
stories, government regulation is<br />
still excessively restrictive and acts as a<br />
barrier to private sector involvement in<br />
a number of areas. In this article we<br />
draw on the OECD’s first Economic<br />
138 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
Survey of India, which was released in<br />
October <strong>2007</strong>, to briefly assess two areas<br />
in which regulation could be made<br />
more supportive of competition and private<br />
sector involvement: the business<br />
environment in markets for goods and<br />
services (henceforth referred to as the<br />
product market) and labour markets.<br />
This work is based on field work in<br />
twenty one states that has enabled us to<br />
construct cross-state indicators of regulation<br />
in product and labour markets.<br />
<strong>The</strong>re are other areas where government<br />
interference is also high, such as<br />
the financial and energy sectors, and<br />
areas where large subsidies are paid.<br />
Our views on these areas can be found<br />
in the Survey.<br />
Despite Liberalisation, Product<br />
Market Regulation Could<br />
Still Do More To Support<br />
Competition<br />
Figure 1. Product Market Regulations: An International Comparison<br />
Australia<br />
UK<br />
Iceland<br />
US<br />
Ireland<br />
Denmark<br />
New Zealand<br />
Canada<br />
Sweden<br />
Luxembourg<br />
Japan<br />
Finland<br />
Belgium<br />
Netherlands<br />
Austria<br />
Slovak R.<br />
Germany<br />
Norway<br />
Korea<br />
Portugal<br />
Spain<br />
Switzerland<br />
Grance<br />
Czech R.<br />
Greece<br />
Italy<br />
Brazil<br />
Hungary<br />
Mexico<br />
Chile<br />
Turkey<br />
Poland<br />
INDIA<br />
number of barriers that do limit private<br />
sector involvement and competition in<br />
markets.<br />
PSEs for 14 % of GDP, rising to 22 % of the non-agricultural<br />
business sector and an even higher share of activity<br />
in the formal sector of the economy. Many of the sectors<br />
in which they operate are inherently competitive<br />
OECD<br />
Average<br />
0 1 2 3<br />
<strong>The</strong> indicator score runs from 0-6 from least to most restrictive of competition<br />
4. Overall, product market regulation in<br />
India restricts completion to a greater<br />
extent than in all OECD countries and<br />
both Brazil and Chile (Figure 1). This<br />
is despite some aspects of India’s regulatory<br />
framework in product markets<br />
being comparable with best practice in<br />
OECD countries. For example, formal<br />
legal barriers to market entry have been<br />
removed in almost all sectors and there<br />
is minimal government interference in<br />
the conduct of private sector firms<br />
through, for example, price controls and<br />
special voting rights (notwithstanding<br />
restrictions on the voting rights of private<br />
shareholders in government-owned<br />
banks). <strong>The</strong>re are, however, still a<br />
<strong>The</strong> Public Enterprise Sector Is<br />
Large And Distorts Competition<br />
5. A high level of government involvement<br />
in commercial activity is one important<br />
reason why India’s business<br />
environment is less supportive of competition<br />
in comparison to other countries.<br />
Overall, public enterprises account<br />
for 14% of GDP, rising to 22% of<br />
the non-agricultural business sector and<br />
an even higher share of activity in the<br />
formal sector of the economy. Many of<br />
the sectors in which public sector enterprises<br />
(PSEs) operate are inherently<br />
competitive.<br />
6. PSEs have a negative effect on the<br />
business environment for a number of<br />
reasons. First and foremost, because<br />
government plays the dual role of major<br />
market player and policy maker (and<br />
sometimes regulator in infrastructure<br />
sectors), there is often no clear separation<br />
between the ownership function<br />
and other functions that influence market<br />
conditions. For example, PSEs are<br />
often required to fulfil social and public<br />
policy obligations with their governance<br />
adversely affected by political interference<br />
and the use of civil servants as directors.<br />
Moreover, in many states the<br />
strategic commercial choices of PSEs<br />
often have to be cleared by the state assembly.<br />
Finally, the procurement poli-<br />
THE INDIA ECONOMY REVIEW<br />
139
REIMAGINING INDIA<br />
Figure 2. Distribution Of Rates Of Return Of Public Sector Enterprises<br />
Rate of Return (%)<br />
50<br />
40<br />
30<br />
20<br />
10<br />
0<br />
-10<br />
-20<br />
-30<br />
-40<br />
PrivateSector Listed Firms<br />
PSEs (Centre)<br />
PSEs (State)<br />
-50<br />
0 10 20 30 40 50 60 70 80 90<br />
Percentile<br />
cies of the central and state governments<br />
often favour PSEs. Because they<br />
dominate some markets, political interference<br />
in the operation of PSEs also<br />
adversely influences overall market conditions.<br />
7. <strong>The</strong>re have been some attempts to<br />
commercialise the activities of central<br />
PSEs through, for example, the Navratna<br />
and Mini-Ratna concepts and<br />
the introduction of higher limits for investments<br />
that do not need to be cleared<br />
by parliament. <strong>The</strong> proportion of loss<br />
significant variation across states (Table<br />
1). With a large tail of unprofitable<br />
firms, the total losses of loss-making<br />
central and state PSEs amounted to almost<br />
1% of GDP in 2005.<br />
8. <strong>The</strong>re are a number of ways in which<br />
the corporate governance of the PSEs<br />
could be improved to ensure a level<br />
playing field and government neutrality<br />
in its dealings with the private sector<br />
and thereby increase competition. <strong>The</strong><br />
centre and state governments need to<br />
transparently unbundle the commercial<br />
<strong>The</strong> financial health of the state-owned PSEs is, on average,<br />
poor and worse than that of the central enterprises.<br />
<strong>The</strong> total losses of loss-making central and state PSEs<br />
amounted to almost 1% of GDP in 2005<br />
making central enterprises has been reduced<br />
but, even so, the return earned by<br />
the median PSE was only 3% in 2005<br />
(after subsidies) against 10% in the private<br />
sector (Figure 2). <strong>The</strong> financial<br />
health of the state-owned PSEs is, on<br />
average, poor and worse than that of the<br />
central enterprises, although there is<br />
and promotional/policy roles of the<br />
PSEs. Moving towards a more centralised<br />
model of PSE management would<br />
be a large step in this direction. Currently,<br />
at the centre, responsibility for<br />
the PSEs rests primarily with the line<br />
ministry while the Department of Public<br />
Enterprises plays a coordinating role<br />
and elaborates the overall<br />
ownership policy. This decentralised<br />
model was predominant<br />
in OECD countries before<br />
the first wave of public<br />
sector reforms during the<br />
1970s. With the shift from<br />
industry-specific policies to<br />
more framework-oriented<br />
and market liberalisation<br />
policies, the main advantage<br />
of this approach of allowing a<br />
more activist industrial policy<br />
has now vanished.<br />
9. A more centralised approach,<br />
where PSEs are put<br />
under the responsibility of an investment<br />
agency, would achieve a clearer<br />
separation between policy and commercial<br />
functions and distance PSEs from<br />
political control. It would also facilitate<br />
a more unified and consistent ownership<br />
policy, simplify the often elaborate<br />
committee structures that currently supervise<br />
and control PSEs, and ensure<br />
equitable treatment of non-state shareholders.<br />
Care would be needed to ensure<br />
that centralising the ownership<br />
function of the PSEs did not entail the<br />
creation of additional layers of control<br />
or bureaucracy within government. Ultimately,<br />
the structure of the public administration<br />
needs to be reorganised to<br />
be more consistent with a modern-day<br />
focus on general framework conditions<br />
instead of the current “command and<br />
control” approach. This will entail a<br />
significant consolidation and reduction<br />
in the number of ministries and departments<br />
in both the central and state<br />
governments.<br />
10. In addition to a more centralised approach,<br />
the way in which any remaining<br />
140 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
Table 1. Performance Of State-Level PSEs<br />
Number<br />
of<br />
PSEs<br />
Proportion<br />
of loss making<br />
PSEs<br />
Losses of<br />
loss making<br />
PSEs<br />
Proportion of capital<br />
in 'non-working'<br />
PSEs<br />
Proportion of<br />
PSEs with negative<br />
net worth<br />
Rate of Return on<br />
Capital<br />
% % SGDP % % medium average<br />
Andhra Pradesh 54 15 -0.06 2.3 14.8 5.6 10.0<br />
Assam 43 77 -3.47 1.6 20.9 -3.3 -16.4<br />
Bihar 54 70 -1.38 13.0 11.1 -2.5 -7.7<br />
Chhattisgarh 11 36 -0.02 0.0 9.1 5.1 4.6<br />
Delhi 11 45 -4.21 0.0 9.1 3.6 -27.8<br />
Goa 16 63 -0.57 0.0 0.0 -0.1 -11.0<br />
Gujarat 51 39 -0.38 50.5 17.6 2.2 -8.9<br />
Haryana 29 59 -0.05 1.4 13.8 5.5 5.0<br />
Himachal<br />
21 62 -0.50 27.8 23.8 3.3 5.7<br />
Pradesh<br />
Jharkhand 6 17 -0.15 0.0 0.0 33.6 43.1<br />
Karnataka 82 41 -0.28 1.5 7.3 3.6 31.2<br />
Kerala 114 61 -0.39 1.1 14.0 1.7 -15.3<br />
Madhya Pradesh 42 33 -0.13 3.8 14.3 1.3 2.2<br />
Maharashtra 82 68 -0.38 3.2 20.7 -0.3 -4.6<br />
Orissa 69 70 -0.28 1.1 21.7 -1.3 -35.0<br />
Punjab 57 44 -0.23 0.3 15.8 -1.2 -12.0<br />
Rajasthan 24 38 -0.06 0.1 20.8 7.4 20.6<br />
Tamil Nadu 68 53 -0.14 0.6 29.4 2.4 -1.6<br />
Uttar Pradesh 94 62 -0.94 51.1 17.0 -1.0 -29.9<br />
Uttaranchal 25 60 -0.32 47.7 12.0 -2.3 -16.4<br />
West Bengal 86 72 -0.50 0.8 44.2 1.4 -45.2<br />
Source: OECD Analysis Of Data From <strong>The</strong> Comptroller and Auditor General<br />
obligations and responsibilities that<br />
PSEs are required to undertake in terms<br />
of public services should be clearly mandated<br />
by laws or regulations. <strong>The</strong>se obligations<br />
and responsibilities should<br />
also be disclosed to the general public<br />
and the related costs should be covered<br />
by government in a transparent manner.<br />
PSEs should be exposed to competitive<br />
conditions in access to finance. Finally,<br />
preferential procurement policies<br />
should be ended at the state level, following<br />
plans by central government to<br />
do so in 2008.<br />
11. Once these steps have been taken,<br />
the privatisation programme needs to<br />
be revitalised, especially in the competitive<br />
sectors of the economy. To date,<br />
privatisation has been slow and involved<br />
only partial sales which, according to<br />
international evidence, are less effective<br />
in raising productivity and profitability<br />
than full sales to the private sector,<br />
as control stays with the<br />
government. 1 Going forward, mixed<br />
sales that transfer control to the private<br />
sector and combine strategic investors<br />
with public share offerings, have the<br />
potential advantages of developing<br />
strong corporate governance structures<br />
and introducing new management and<br />
technology into the company. For PSEs<br />
operating in network sectors in which<br />
there are monopoly elements, the regulatory<br />
environment needs to be made<br />
consistent with private ownership and<br />
competition with independent regulators<br />
in place as part of the privatisation<br />
process. <strong>The</strong> worst performing and<br />
THE INDIA ECONOMY REVIEW<br />
141
REIMAGINING INDIA<br />
Figure 3. Product Market Regulation And Average Labour Productivity<br />
120<br />
Average labour productivity, 1994 -2004<br />
100<br />
80<br />
60<br />
40<br />
20<br />
0<br />
0.5<br />
Goa<br />
Uttaranchal<br />
Delhi<br />
Correlation coefficient= -0.51<br />
t-statistic= -2.56<br />
Haryana<br />
Punjab<br />
Maharashtra<br />
Gujarat<br />
Tamil Nadu<br />
Jharkhand<br />
Kerala<br />
Assam Himachal Pradesh<br />
Madhya Pradesh<br />
Karnataka<br />
Andhra Pradesh<br />
Rajasthan<br />
Chhattisgarh<br />
Uttar Pradesh<br />
Orissa<br />
Bihar<br />
West Bengal<br />
1 1.5 2 2.5 3<br />
Product Market Regulation Indicator Score<br />
1. Reflecting data constraints, labour productivity in Chhattisgarh, Jharkhand & Uttaranchal is measured as the average over 2002-03 period.<br />
Figure 4. An International Comparison Of Employment Protection<br />
Legislation<br />
Australia<br />
United Kingdom<br />
Switzerland<br />
Canada<br />
Brazil<br />
Denmark<br />
Austria<br />
Ireland<br />
New Zealand<br />
Belgium<br />
Italy<br />
Hungary<br />
Finland<br />
Poland<br />
China<br />
Norway<br />
Mexico<br />
Chile<br />
EU 15<br />
Korea<br />
Australia<br />
Greece<br />
Japan<br />
France<br />
Slovak Republic<br />
Turkey<br />
Luxemburg<br />
Netherlands<br />
Germany<br />
Sweden<br />
Spain<br />
India<br />
Czech Republic<br />
Portugal<br />
OECD<br />
average<br />
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0<br />
4.5<br />
142 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
Figure 5. Net Employment Across Different Types Of Workers And Firms<br />
Net Employment (annual % change)<br />
20<br />
15<br />
10<br />
5<br />
0<br />
-5<br />
-10<br />
-15<br />
“non-working” PSEs need to be restructured<br />
to the point where they can be<br />
wound up.<br />
Inefficient Government Procedures,<br />
Particularly In Some Of<br />
<strong>The</strong> States, Act As A Barrier To<br />
Competition<br />
12. Administrative barriers to entrepreneurship<br />
are also high in India and another<br />
reason why the regulatory environment<br />
is less supportive of<br />
competition than in other countries. In<br />
many state governments, departments<br />
operate in “silos” with minimal information<br />
flows between them. Given a<br />
lack of coordination, administrative<br />
procedures often duplicate the same<br />
function across a number of departments,<br />
leaving firms and citizens in a<br />
complex maze of regulations and administrative<br />
requirements that can be<br />
repetitive, non-transparent, and sometimes<br />
contradictory. This increases<br />
compliance costs, especially for small<br />
firms, and discourages firm expansion,<br />
reducing competition and productivity.<br />
Large Small Overall<br />
All employees Workers Contract Supervisors Others<br />
Overly complex administrative procedures<br />
also increase the discretion of<br />
government staff, thereby facilitating<br />
corruption. In Transparency International’s<br />
Corruption Perceptions Index,<br />
India ranks 70 out of 163 countries in<br />
2006.<br />
13. A number of initiatives for simplifying<br />
red tape have been introduced by<br />
the central and state governments, with<br />
varying degrees of success. For example,<br />
some states have introduced “onestop<br />
shops” for providing information<br />
and, in some cases, applying for licenses<br />
and notifications. In some cases, a<br />
system of “deemed clearance” under<br />
which licenses are issued automatically<br />
if the licensing office does not act by the<br />
end of the statutory response period,<br />
have also been introduced. Some of the<br />
state governments have tried improving<br />
the interface with the private sector by<br />
simplifying and consolidating various<br />
application forms and registers and introducing<br />
self-inspection regimes. Information<br />
and communications technology<br />
(ICT) has also been<br />
successfully integrated into some administrative<br />
procedures.<br />
14. A key element in all efforts to simplify<br />
and improve government bureaucracy<br />
is that administrative processes are<br />
reengineered from the ground up. For<br />
example, one-stop shops need to be implemented<br />
along with other reforms<br />
geared towards cutting red tape. Otherwise<br />
they run the risk of simply adding<br />
another layer of bureaucracy to the<br />
approval process. Alternatively, using<br />
ICT to simply automate existing inefficient<br />
processes or disseminate information<br />
will only produce a limited payoff.<br />
At present, India has no centralised oversight body<br />
charged with reviewing regulatory proposals, using Regulatory<br />
Impact Analysis, to ensure that the costs of administrative<br />
burdens do not outweigh the benefi ts<br />
15. A crucial aspect of reengineering<br />
administrative processes, especially<br />
within some of the state governments,<br />
is improving the coordination of regulatory<br />
functions across government departments.<br />
This is complex and time<br />
consuming and requires a “whole of<br />
government” approach to institutional<br />
change. Indeed, the OECD experience<br />
has been that regulatory reform will often<br />
fail if left entirely to ministries. At<br />
present, India has no centralised oversight<br />
body charged with reviewing regulatory<br />
proposals, using Regulatory Impact<br />
Analysis, to ensure that the costs<br />
of administrative burdens do not outweigh<br />
the benefits. One advantage of<br />
THE INDIA ECONOMY REVIEW<br />
143
REIMAGINING INDIA<br />
centralised oversight bodies is that they<br />
promote a consistent and systematic<br />
method of reform across the entire administration.<br />
Ideally, its objectives<br />
should be outlined as part of an explicit<br />
regulatory policy which generally<br />
helps countries make greater reform<br />
progress. 2<br />
States That Have Liberalised<br />
More Than Others Are Reaping<br />
<strong>The</strong> Benefits<br />
16. With state governments having control<br />
over certain aspects of regulatory<br />
policy and responsibility for enforcement,<br />
there are significant differences<br />
in the business environment across<br />
states as shown by our indicators. <strong>The</strong>se<br />
differences have an important bearing<br />
on economic performance. Labour productivity<br />
is higher in states with a regulatory<br />
environment that is more supportive<br />
of competition (Figure 3). <strong>The</strong>re<br />
are a number of reasons for this. First,<br />
virtually all of India’s foreign direct investment<br />
flows to the relatively more<br />
liberal states and domestic investment<br />
also appears to be higher, boosting state<br />
productivity. Second, in states with excessively<br />
restrictive administrative burdens<br />
firms are more likely to remain<br />
informal so as to avoid government administrative<br />
requirements. However,<br />
informal sector firms are usually much<br />
smaller with lower capital intensity and<br />
much less productive than formal sector<br />
enterprises.<br />
A Further Rationalisation And<br />
Reduction Of Restrictions On<br />
Foreign Is Trade Needed<br />
17. As recently as the beginning of this<br />
decade, India’s tariffs were the highest<br />
<strong>The</strong>re is a considerable gap between the standard tariff<br />
rates and the actual revenue raised from tariffs. Such gaps<br />
are indicative of special concessions to certain products or<br />
industries and distort the allocation of resources<br />
in the world and among the most discriminatory.<br />
Significant reforms to liberalise<br />
foreign trade have been undertaking<br />
since then and average tariffs<br />
are scheduled to reach the average<br />
level in ASEAN countries in the near<br />
future. Despite the fears of domestic<br />
producers, the manufacturing sector<br />
has profited from this policy shift and<br />
has been growing as fast as the service<br />
sector since 2003. Manufacturing exports<br />
have also started to grow rapidly,<br />
outpacing most other Asian countries<br />
in the first half of this decade. However,<br />
more could be done to liberalise<br />
foreign trade. Tariffs in ASEAN countries<br />
are still high in relation to those<br />
in developed countries. Moreover,<br />
there is a considerable gap in India between<br />
the standard tariff rates and the<br />
actual revenue raised from tariffs. Such<br />
gaps are indicative of special concessions<br />
granted to favour certain products<br />
or industries and distort the allocation<br />
of resources and lower<br />
productivity. Cross-country evidence<br />
has found that openness to global markets<br />
acts as an important stimulus to<br />
growth and ongoing reductions and rationalisation<br />
of the tariff structure in<br />
India would pay dividends.<br />
Labour Market Regulation Is<br />
Also Excessively Restrictive<br />
18. <strong>The</strong> dichotomy between formal and<br />
informal businesses is in part caused by<br />
labour market regulation, which is another<br />
key area in which restrictive government<br />
intervention imposes high<br />
economic costs. <strong>The</strong> strictness of employment<br />
regulation varies across different<br />
segments of the Indian labour<br />
market according to the <strong>size</strong> of firms<br />
and the type of employment contract.<br />
According to the OECD’s indicators of<br />
employment protection legislation<br />
(EPL), larger firms employing workers<br />
on regular contracts are subject to EPL<br />
that is more restrictive than in all but<br />
two OECD countries. For smaller<br />
firms, the extent of employment protection<br />
is similar to that in the OECD<br />
144 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
area. Very small businesses in the unorganised<br />
sector are subject to few labour<br />
regulations. Across different<br />
types of employment contact, EPL for<br />
temporary or contract employees is just<br />
above the OECD average. Allowing<br />
employees to carry out “non core” work<br />
on temporary agency contracts has<br />
been a main area of recent labour reform.<br />
19. <strong>The</strong>se differences in employment<br />
regulations are mirrored in recent development<br />
in labour markets. While<br />
employment growth has been strong<br />
over recent years, net gains in employment<br />
have been occurring almost exclusively<br />
in the unorganised part of the<br />
economy, which is not subject to restrictive<br />
labour market regulation. In<br />
the organised sector, employment has<br />
actually fallen. <strong>The</strong> detrimental impact<br />
of excessively restrictive EPL can also<br />
be clearly seen across types of employment<br />
contract; while contract employment<br />
has grown, regular employment<br />
has shrunk (Figure 5). This bias towards<br />
contract employment is only<br />
evident in larger firms, which bear the<br />
brunt of India’s restrictive EPL. Employment<br />
in smaller firms has been increasing<br />
for both contract and regular<br />
workers.<br />
20. It is often argued in India that strict<br />
EPL is not particularly harmful because<br />
firms find ways to circumvent the<br />
legislation. One way of avoiding difficulties<br />
with the labour laws is to stay<br />
small. Indeed, almost 90% of manufacturing<br />
firms employ less than ten people,<br />
a much larger share than in all<br />
OECD countries and China. However,<br />
most of these firms produce far below<br />
minimum efficient scale and are in the<br />
informal sector, the least productive<br />
segment of India’s business sector.<br />
Large firms, faced with high implicit<br />
employment costs, substitute capital<br />
for labour. Thus, restrictive EPL also<br />
effectively negates one of India’s key<br />
comparative advantages of relatively<br />
low-cost labour.<br />
21. Overall, labour market policy in India<br />
is ineffective at protecting employment;<br />
job destruction is lower in areas<br />
of the labour market not subject to the<br />
most restrictive of India’s labour market<br />
regulations. It has also resulted in<br />
a number of unintended consequences<br />
that have been accentuated as product<br />
markets have became more competitive.<br />
With newcomers to the labour<br />
market being pushed into lower-paid<br />
informal employment, economic<br />
growth has not been as inclusive as it<br />
could have been. Our indicators suggest<br />
that some states have introduced a<br />
degree of reform into labour markets.<br />
As yet, these reforms have been at the<br />
margin but, nonetheless, they do appear<br />
to be having some impact on labour<br />
markets. <strong>The</strong> share of labour income<br />
has stabilised in reforming states<br />
whereas it continues to fall in more restrictive<br />
states. Liberalisation also appears<br />
to be positively related to the<br />
extent of job turnover. Even if there is<br />
currently little evidence of employment<br />
gains in the most liberal states, higher<br />
job turnover improves a person’s chances<br />
of finding a job that matches their<br />
skills. To improve the functioning of<br />
the labour market as the labour force<br />
grows over the next decade comprehensive<br />
labour reform is needed to better<br />
protect all workers, lower the costs of<br />
employment adjustment, and help address<br />
the distortions that have<br />
emerged.<br />
Reforms Need To Be Ongoing If<br />
Government Is To Achieve Its<br />
Growth Target<br />
22. An important key to improving India’s<br />
economic performance further is to<br />
change policies at both the central and<br />
state government level that result in high<br />
levels of government interference in markets<br />
and restrict competition. Relative to<br />
recent history, the government has already<br />
moved significantly in this direction.<br />
However, this article has touched on<br />
areas in which less government intervention<br />
would increase the extent to which<br />
market forces are able to operate and<br />
result in more efficient outcomes. Reform<br />
in these key areas would yield enormous<br />
benefit for the Indian economy.<br />
Indeed, it is difficult to envisage government<br />
achieving its GDP growth target of<br />
10% in 2011 without further reform in<br />
these and other areas outlined in detail<br />
in the recent OECD Economic Survey of<br />
India. <strong>The</strong> impressive response of the<br />
Indian economy in areas that have been<br />
reformed in the past should give policymakers<br />
confidence that further liberalisation<br />
will deliver additional growth<br />
dividends and foster the process of pulling<br />
millions of people out of poverty.<br />
End Notes<br />
1<br />
OECD (2003b), Privatising stateowned<br />
enterprises: an overview of<br />
policies and practices in OECD countries,<br />
OECD, Paris.<br />
2<br />
OECD (2002), Regulatory policies in<br />
OECD countries: From interventionism<br />
to regulatory governance,<br />
OECD, Paris.<br />
THE INDIA ECONOMY REVIEW<br />
145
Rok SPRUK<br />
International Economist,<br />
Slovenia<br />
Going For Growth Through<br />
Economic Reforms: <strong>The</strong> Case Of India<br />
"A more innovative economy tends to devote<br />
more resources to investing of all kinds--in new<br />
employees and customers as well as new offi ce<br />
and factory space. And although this may come<br />
about through a shift of resources from the<br />
consumer-goods sector, it also comes through<br />
the recruitment of new participants to the labor<br />
force. Also, the resulting increase of employeeengagement<br />
serves to lower quit rates and,<br />
hence, to make possible a reduction of the<br />
“natural” unemployment rate. Thus, high dynamism<br />
tends to bring a pervasive prosperity to<br />
the economy on top of the productivity advances<br />
and all the self-realization going on. True,<br />
that may not be pronounced every month or<br />
year. Just as the creative artist does not create<br />
all the time, but rather in episodes and breaks,<br />
so the dynamic economy has heightened highfrequency<br />
volatility and may go through wide<br />
swings. Perhaps this volatility is not only normal<br />
but also productive from the point of view of<br />
creativity and, ultimately, achievement."<br />
-Edmund S. Phelps,<br />
Nobel Laureate in Economics, 2006<br />
<strong>The</strong> purpose of this article is to<br />
highlight some of the increasingly<br />
important issues regarding<br />
India’s economic prospects. In recent<br />
years, the operating capacity of India’s<br />
high-growing economy has been reflected<br />
by a surge in real GDP growth and a slight<br />
downturn in inflation pressures. By the<br />
end of <strong>2007</strong>, India’s GDP is estimated to<br />
rise by 8.9 percent and 8.4 percent in 2008<br />
while consumer price index increased by<br />
6.2 percent in <strong>2007</strong> and is expected to decrease<br />
to a mere 4.4 percent rate of overall<br />
price increase. 2 Growth estimates differ<br />
respectively subject to different<br />
methodological evolution of the real GDP<br />
growth measurement. It also depends on<br />
how the engines of growth are estimated,<br />
especially the importance of those factors<br />
in driving growth. <strong>The</strong>re are, in an academic<br />
economic literature, two main economic<br />
paradigms regarding the philosophy,<br />
theory and policy perspective of<br />
economic growth. Keynesian economic<br />
analysis supports the view that the aggregate<br />
demand 3 is a primary source of economic<br />
growth, claiming that an increase<br />
in the government spending per unit of<br />
output, increases investment activity and<br />
drives growth onto a stable trajectory.<br />
Keynesian emulation of the evolution of<br />
economic growth is based on false assertions.<br />
For example, Keynesian interpretation<br />
of economic growth neglects the<br />
impact of aggregate demand on inflation.<br />
As public spending and fiscal outlays increase,<br />
there is a growing probability of<br />
higher inflation. In the short-run, such<br />
policy features boost the economic activity<br />
through an expansionary monetary<br />
incentive, but in the long-run, the negative<br />
impact of government spending surpasses<br />
the short-run effect of government<br />
spending subject to a persistent inflationary<br />
pressures, falling growth rates and<br />
tight grip on capital markets. Notably,<br />
when government spending increases<br />
whereas fiscal expenditure is anchored in<br />
budget deficit, government borrowing reduces<br />
the supply of available monetary<br />
means and thus, increases the interest<br />
rate balance which investors have to bear.<br />
146 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
<strong>The</strong> answer to the question what impedes<br />
the investment is government spending<br />
and consequently budget deficit, but not<br />
only the budget deficit. Claiming that<br />
‘catch-up’ effects, when a country with<br />
low GDP per capita is catching-up countries<br />
with higher GDP per capita, allow an<br />
expansionary fiscal policy cannot be justified<br />
on empirical grounds and experience<br />
nevertheless. Empirically, high government<br />
spending reduces the operating capacity<br />
of the economic growth due to high<br />
tax burden and expanded public sector<br />
activities. It is crucial for a high-growing<br />
‘catch-up’ economy to reduce government<br />
spending and thus lay a solid foundation<br />
of growth. On the other side, contemporary<br />
growth theory empha<strong>size</strong>s the quality<br />
of growth engines such as the quality<br />
of institutions and means of productivity<br />
as determinants of economic growth.<br />
Neoclassical growth theory supports low<br />
government spending, low taxation of<br />
productive behavior, emphasis on price<br />
stability and solid free market institutions,<br />
the enforcement of private property rights<br />
and the rule of law. <strong>The</strong> latter is essential<br />
to macroeconomic stability. For decades,<br />
economists have questioned the impact of<br />
government spending on economic<br />
growth. <strong>The</strong> Keynesian controversy began<br />
in 1930s when John Maynard Keynes<br />
wrote a voluminous book on the theory of<br />
employment, interest and money. Keynes<br />
argued that economy’s growth capacity<br />
can be boosted by injecting more purchasing<br />
power into the economy. Keynesians<br />
argued that government could reverse the<br />
economic downturn by borrowing more<br />
money from the private sector to help end<br />
the recession or depression and then return<br />
the money in all sorts of public incentive<br />
programs such as tax rebates. Keynesians<br />
supported high government<br />
spending because they believed that inflation<br />
was resulted from too much economic<br />
growth. <strong>The</strong> Keynesian economic analysis<br />
and doctrine became a corner-stone<br />
between 1930 and 1970. <strong>The</strong> overall impact<br />
of Keynesian economics bluntly diminished<br />
when the reality has shown that<br />
there is no long-run trade-off between<br />
inflation and unemployment; an assertion<br />
which was postulated into the famous<br />
Phillips curve. <strong>The</strong> economies which were<br />
operating under staunch Keynesian economic<br />
policy have faced significant economic<br />
downturns such as multi-year recessions<br />
and even economic depression.<br />
In 1991, Sweden slid into economic recession,<br />
facing high unemployment and rampant<br />
inflation. In Finland, where Keynesian<br />
economic policy dominated the<br />
public policy course from 1945 onwards,<br />
at the beginning of 1990s, economic<br />
growth turned into a decline in GDP,<br />
while inflation and unemployment grew<br />
severely. Numerous other countries faced<br />
the same experience of mistaken Keynesian<br />
economic policy.<br />
One of the fundamental questions<br />
which transition economies, such as India,<br />
face is what the optimal goals of economic<br />
policy are. In addition, what are<br />
important and empirically relevant areas<br />
demanding competitive economic reforms<br />
as a guarantee of sustainable long-term<br />
growth of real GDP and standards of living.<br />
In this article, I entail empirical studies<br />
into economic policy and attempt to<br />
suggest the reform agenda that would<br />
boost India’s competitiveness in terms of<br />
sound market economy with sustainable<br />
economic growth, price stability and freemarket<br />
institutions.<br />
<strong>The</strong> Empirics Of Growth<br />
Government spending and consumption<br />
is inversely related to the economic<br />
growth. 4 Higher government spending<br />
correlates with higher tax burden while<br />
higher taxes on productive behavior such<br />
as entrepreneurship, saving and investment,<br />
labor supply and innovation impede<br />
growth performance. On the other hand,<br />
the share of government spending positively<br />
relates to the share of public investment<br />
in the GDP. <strong>The</strong> quality and productivity<br />
of investment highly differs whether<br />
Public investment is directed via political decisions and its<br />
time preference rates of politicians on the electoral basis is<br />
subject to the realization of promises which is oftenly<br />
negatively related to growth prospects<br />
it is conducted in the private sector or on<br />
behalf of public sector. <strong>The</strong> reason why<br />
resources invested by private investors are<br />
normally more efficient than investment<br />
in the public sector is the fact that risktaking<br />
plays more powerful role in the<br />
private sector. Private investors bear the<br />
information and investment resources efficiently<br />
because of the motives such as<br />
higher productivity perspective and competitive<br />
pressures in the market economy.<br />
<strong>The</strong> investment conducted by the managers<br />
in public sector is subject to political<br />
pressures while politicians do not pursue<br />
the same goals as private investors. Public<br />
investment is directed via political decisions<br />
and its time preference rates of<br />
politicians on the electoral basis is subject<br />
THE INDIA ECONOMY REVIEW<br />
147
REIMAGINING INDIA<br />
Taxes, Corruption And Structural<br />
Defect<br />
Tax system is a powerful weapon in the<br />
hands of economic policymakers. Tax system<br />
is a major source of funding where<br />
political parties and government planners<br />
collect money and slice a fraction of the<br />
GDP for government spending and consumption.<br />
Currently India levies moderate<br />
tax rates on corporate and individual<br />
income. By <strong>2007</strong>, top personal and corporate<br />
income tax rates were 33 percent plus<br />
10 percent surcharge. Other taxes includto<br />
the realization of promises which is oftenly<br />
negatively related to growth prospects<br />
and economic performance. Political<br />
preference for expansionary welfare<br />
state demand greater involvement of government<br />
into the economic structure and<br />
thus political pressures reduce the scope<br />
of growth potentials. Every economic<br />
theory agrees that the long-term engine<br />
of growth is capital creation which means<br />
savings and investment. <strong>The</strong> share of government<br />
in the economy is equally important.<br />
<strong>The</strong> following picture known as the<br />
Rahn Curve shows the empirical relationship<br />
between economic growth and government<br />
spending.<br />
Output<br />
performance<br />
RAHN CURVE<br />
Goverment apending<br />
as a share of the GDP<br />
Source: Brimelow (1993), Mitchell (2005)<br />
Picture-1: Rahn Curve<br />
An Empirical Perspective On <strong>The</strong><br />
Trade-Off Between Government<br />
Size And Economic Growth<br />
Extensive public sector involves several<br />
macroeconomically important costs. Every<br />
single per unit increase in government<br />
<strong>size</strong> reduces potential unit of output added<br />
to the gross domestic product. <strong>The</strong><br />
costs associated with government spending<br />
are huge. First, government spending<br />
requires the collection of funds of spending.<br />
Costly choices mean an inevitable<br />
adverse consequence such as reducing the<br />
<strong>size</strong> of investment which is an important<br />
component of the GDP. Second, the effi-<br />
ciency of investment is determined by the<br />
efficiency of allocation of resources. In<br />
this respect, expanded public sector hinders<br />
private sector activities subject to the<br />
fact that resources are scarce; the foremost<br />
basic corner-stone of economics.<br />
Third, government spending supports<br />
backward regulation and intervention,<br />
displacing the competitiveness of product<br />
markets and interfering growth performance.<br />
Phillips and Shen (2003) showed<br />
that the overall impact of a 10 percent decrease<br />
of state-owned enterprises in China<br />
boosted the regional growth of GDP<br />
by 1.14 percent. 5 <strong>The</strong> case of China shows<br />
that costs involved in government spending<br />
include economically undesirable<br />
choices and decisions. In addition, high<br />
level of government intervention through<br />
regulatory agencies protecting existing<br />
monopoly or oligopoly structures stimulates<br />
market distortions by discouraging<br />
productive behavior. <strong>The</strong> reason why government<br />
spending is wasteful and burdensome<br />
at some point, as demonstrated by<br />
the Rahn Curve, is that additional spending<br />
empowers the <strong>size</strong> of government and<br />
also because spending outlays boost the<br />
misallocation of resources due to asymmetric<br />
information.<br />
A valuable lesson for Indian policymakers<br />
is to learn the lessons associated with<br />
government spending from other countries<br />
where decades of output growth and<br />
rising productivity returned a comparatively<br />
high GDP per capita and sound<br />
economic performance and also an experience<br />
with economic setbacks and downturns<br />
caused by the mistakes in economic<br />
policy. Bassanini and Scarpetta (2001)<br />
showed that an increase in one percentage<br />
point in tax pressure – two thirds of what<br />
was observed over the past decade in the<br />
OECD sample – could be associated with<br />
a direct reduction of about 0.3 percent in<br />
output per capita. If the investment effect<br />
is taken into account, the overall reduction<br />
would be 0,6-0.7 percent. 6 Tanzi and<br />
Schuknecht (1996) compared the <strong>size</strong> of<br />
government and growth performance in<br />
selected industrial countries, concluding<br />
that average 5-year growth was higher in<br />
countries with small governments. <strong>The</strong><br />
investigation showed that countries with<br />
small governments observed lower actual<br />
unemployment rate, lower rate of shadow<br />
economy and also exhibited more regulatory<br />
efficiency, higher innovation levels<br />
and a well functioning non-distortionary<br />
labor markets. 7 Another argument in favor<br />
of lower government <strong>size</strong> and spending<br />
as a core economic reform is the wellobserved<br />
fact that the reduction in public<br />
spending as a share of the GDP is positively<br />
related to the growth of total factor<br />
productivity. <strong>Dec</strong>ades of mismanaged<br />
economic policy led to an obscure increase<br />
in the <strong>size</strong> of state-owned enterprises<br />
carrying out some major deficiencies<br />
and the failure in the allocation of<br />
resources which caused a decline in the<br />
overall competitiveness of the economy.<br />
148 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
ed dividend tax, property tax and tax on<br />
insurance contracts. 8 India’s tax system<br />
demands a radical change towards a reduction<br />
in taxation of productive behavior<br />
such as labor supply and investment nevertheless.<br />
<strong>The</strong> demand and supply of labor<br />
is elastic which supports the thesis<br />
that labor supply is highly sensitive and<br />
responsive to tax rates. 9 Recent highlights<br />
in empirical investigation of the behavior<br />
of labor supply has shown that labor supply<br />
responds dramatically to lower tax<br />
rates on work whereas productivity has<br />
been soaring due to cutting taxes on productive<br />
activity. India’s particular competitive<br />
advantage in terms of tax system<br />
could be innovative; public products such<br />
as internationally competitive territorial<br />
tax system, a model in which Indian provinces<br />
could compete to attract inflows of<br />
direct investment on the international basis.<br />
A strong argument in favor of open<br />
territorial tax competition is that it is rational<br />
to expect lower tax rates on productive<br />
behavior and thus adversely positive<br />
effects on output and productivity growth.<br />
Recent research evidence by Djankov,<br />
Ganser, McLiesh, Ramalho and Schleifer<br />
(<strong>2007</strong>) has shown consistent and large<br />
adverse effect of corporate taxation on<br />
investment and entrepreneurship. According<br />
to authors’ calculations, a 10 percentage<br />
point increase in the effective<br />
corporate tax rate reduces the investment<br />
to GDP ratio by about 2 percentage<br />
points. 10 Alternatively, India could consider<br />
a possible move in a direction of<br />
abolishing the corporate tax due to its effect<br />
on capital creation and entrepreneurial<br />
activity. Also, India should consider a<br />
fundamental tax refom in a pro-growth<br />
direction. Practically, India may switch its<br />
taxation regime from income tax to consumption-based<br />
tax. In case of cutting-off<br />
income taxes and alternatively adopting<br />
taxes on consumption, higher savings<br />
would dramatically boost the productivity<br />
and living standards. <strong>The</strong> encouragement<br />
of competitiveness deserves a concrete<br />
treatment of pro-growth tax and economic<br />
policy proposals that could boost output<br />
performance. A significant amount of<br />
empirical evidence suggests that the reduction<br />
in corporate and individual taxation<br />
boosts the operating capacity of the<br />
economy in going for growth as well as<br />
private initiative in fighting India’s structural<br />
weaknesses and human capital creation<br />
which is, by any means, an essential<br />
ingredient of growth in an economy with<br />
astonishing growth potentials. 11<br />
Despite a moderately free fiscal and<br />
public consumption , 12 India’s structural<br />
defects are mostly subject to an inefficient<br />
administrative environment, weak property<br />
rights, government involvement in<br />
the financial sector and widespread perception<br />
of corruption. For instance, India<br />
ranks 72nd out of 188 countries included<br />
in Transparency International’s Corruption<br />
Perception Index. 13 A spiral of structural<br />
deficiencies contributes to the hindering<br />
of India’s growth sustainability and<br />
international macroeconomic and microeconomic<br />
competitiveness. Corruption is<br />
a huge cost reflecting the governance of<br />
institutions enforcing private property<br />
rights, the rule of law and competitive<br />
framework of the economy and individual<br />
interaction. Noteworthy, tax complexity<br />
and high costs of tax compliance contribute<br />
a significant fraction to the legal<br />
and illegal level of corruption. In European<br />
Union, pressures for harmful tax<br />
harmonization 14 aim to expand the scope<br />
Research evidence shows a consistent and large adverse<br />
effect of corporate tax on investment and entrepreneurship.<br />
A 10% point increase in the effective corporate tax<br />
rate reduces the investment to GDP ratio by about 2%<br />
of government bureaucracy in tax collection.<br />
Tax rebates, exemptions, loopholes<br />
and numerous deductions contribute to<br />
the rise of hidden corruption within legal<br />
limits. Fighting against corruption requires<br />
an active approach codified by the<br />
enforcement of competitive law, deregulated<br />
product markets and the elimination<br />
of government involvement in financial<br />
sector and any other sector in the economy.<br />
Of course, in economic theory and<br />
practice there are externalities and market<br />
failures which excuse the role of government<br />
in certain areas. But such approach<br />
would be needed under<br />
cost-benefit analysis, clearly defined competitive<br />
rules and under the absence of<br />
government coercion and political intervention.<br />
Anti-corruption legislation and<br />
THE INDIA ECONOMY REVIEW<br />
149
REIMAGINING INDIA<br />
policy enforcement can significantly reduce<br />
persistence of corruption as a major<br />
structural backlash of an economy in<br />
transition such as India. However, tax<br />
competition, competitive and secure contractual<br />
law, deregulation, private ownership,<br />
strong protection of property rights<br />
and other components of political stability<br />
and economic prosperity are the guiding<br />
swords in fighting against corruption 15<br />
as an obstacle to long-term growth and<br />
stability.<br />
brightest reform concepts and case studies<br />
of the macroeconomic and structural<br />
reforms. I suggest learning from two small<br />
countries, Ireland and Iceland.<br />
Ireland dramatically changed its fiscal<br />
policy over the past 20 years. Once a bastion<br />
of poverty, now became the second<br />
wealthiest economy in the European Union<br />
according to real GDP per capita,<br />
after Luxemburg. Ireland’s reform agenda<br />
included a supply-side package of policy<br />
inputs. For example, top individual income<br />
tax rates was slashed from 65 percent<br />
to 42 percent and the corporate tax<br />
rate was reduced<br />
to 12.5 percent<br />
and was made flat. Low Taxes,<br />
Tax competition<br />
In 1980s, unemployment<br />
was se-<br />
Sound regulation<br />
vere at a doubledigit<br />
rate and government spending<br />
consumed more than 52 percent of total<br />
output. Consequently, growth rates were<br />
rachitic and high tax rates discouraged<br />
the creation of productive behavior. Ireland<br />
quickly became the “sick-man-of-<br />
An increase in one percentage point in tax pressure – two<br />
thirds of what was observed over the past decade in the<br />
OECD sample – could be associated with a direct reduction<br />
of about 0.3 percent in output per capita<br />
Europe”. In early 1990s, Irish policymakers<br />
decided to embrace supply-side<br />
economic policy, deregulate product markets,<br />
cut the <strong>size</strong> of government and slash<br />
the expenditures. After decades of low<br />
output, overall government spending was<br />
reduced from 52.3 percent in 1986 to 37.7<br />
percent in 1996. Free trade, rigorous tax<br />
cuts and productive education policies<br />
turned the incredible emulation of the<br />
Irish hare into the Celtic Tiger .16 <strong>The</strong>re is<br />
an interesting comparison between Ireland<br />
and Slovenia as a case study between<br />
the supply-side success and Keynesian<br />
failure. Using the data from Penn World<br />
Tables 17 , by the end of 1990, Slovenia and<br />
Ireland had the same real GDP per capita<br />
after inflation, using current prices as<br />
a comparison measure. Throughout the<br />
1990s, Slovenia’s output grew at low rates,<br />
recovering from economic depression in<br />
transition while having high taxes, high<br />
fraction of government ownership and<br />
weak institutions, while Irish economy<br />
International Lessons For India<br />
<strong>The</strong> growth experience of countries from<br />
around the world offers a useful guideline<br />
in learning from the world’s best and<br />
Picture No.2: Dynamic Engines Of Growth<br />
Sophisticated<br />
Infrastructure<br />
Cost and prices,<br />
Environment of<br />
the firm<br />
Quality of the<br />
Labor Supply<br />
SUSTAINABLE<br />
GROWTH<br />
Human Capital<br />
Source: Forfas, author’s own projections<br />
Business<br />
Performance<br />
Productivity<br />
Performance<br />
Innovation,<br />
Competitiveness,<br />
Entrepreneurship<br />
TARGET<br />
ESSENTIALS<br />
Property Rights,<br />
Rule-of-Law<br />
Free Markets<br />
I<br />
N<br />
P<br />
U<br />
T<br />
S<br />
150 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
grew at robust annual rates, with free<br />
markets, established rule-of-law and protected<br />
private property rights. Using time<br />
difference calculation as a measure, today’s<br />
time gap between Slovenia and Ireland<br />
is approximately 40 years 18 Iceland’s<br />
recovery from decades of interrupted<br />
Keynesian economic policy lasted from<br />
than Icelandic policymakers estimated.<br />
Until late 1980s, Icelandic economy was<br />
marred by government ownership, periods<br />
of high inflation when oil shocks, tight<br />
labor markets and devaluation bias caused<br />
a spiral of inflationary pressures. 19 In<br />
1990, Icelandic policymakers reduced the<br />
corporate tax rate from 50 percent to 33<br />
percent by the mid 1990s. In 2003, the<br />
rate was further slashed to 18 percent.<br />
<strong>The</strong> effect of supply-side tax reform was<br />
a pure theoretical assertion of the Laffer<br />
curve whereby lower tax rates increased<br />
revenue from taxes as a share of the GDP<br />
respectively. According to Iceland’s Ministry<br />
of Finance, in 1985 when corporate<br />
tax rate was 50 percent, the share of corporate<br />
tax revenue in the GDP was 0.9<br />
percent. In 2003, when the corporate tax<br />
rate was 18 percent, corporate tax revenue<br />
in the share of the GDP jumped to 1.5<br />
percent. 20 Thus, during the period of a<br />
continued reduction of corporate tax rate,<br />
overall revenue from corporate tax increased<br />
by 67 percent. Noteworthy, the<br />
restructuring of Iceland’s economy was<br />
primarily based on privatization of nationalized<br />
enterprises and assets, strong<br />
fiscal management and responsible leadership<br />
on the part of labor unions and<br />
employers. Now, Iceland is one of the<br />
wealthiest countries in the world. In 2006,<br />
according to World Bank, 21 Iceland’s<br />
gross national income per capita was<br />
$50,580 per capita as measured by Atlas<br />
method and $36,560 per capita in terms<br />
of purchasing power parity.<br />
India: High-Growing Tiger Or An<br />
Economic Laggard?<br />
In this article I highlighted the prospects<br />
of the economic reforms in India. After a<br />
detailed study of the data and empirical<br />
work, I concluded the research and put it<br />
in a written and hopefully understandable<br />
form. India is an economy in transition<br />
currently facing high output growth rates<br />
and enviable economic perspective in the<br />
future. Growth is expected to remain<br />
steady over years in the future. However,<br />
substantial change in global environment<br />
demand a significant infusion of economic<br />
reforms to boost the productive behavior,<br />
economic growth while ‘rules-ratherthan-discretion’<br />
monetary policy is<br />
essential to the pursuit of price stability<br />
instead of discretionary price controls and<br />
market regulation that harm competitive<br />
forces in the market. In the international<br />
arena, India is frequently associated with<br />
high-growing East Asian phenomena besides<br />
China. 22 By 2040, China will reach<br />
$123 trillion USD which is equal to three<br />
times of global output by the end of<br />
2000. 23 Growth estimates for India suggest<br />
a relatively lower but steady-state<br />
growth rate mainly because of political<br />
constraints and structural costs such as<br />
widespread perception of corruption, government<br />
intervention and ownership of<br />
enterprises and harmful regulation of the<br />
economy through obscure administrative<br />
code, fiercely uncompetitive investment<br />
environment marred by red-tape, complexity<br />
hostile to foreign direct investors,<br />
trade protectionism and weak enforcement<br />
of private property rights. <strong>The</strong>se<br />
particular politically-installed disadvantages<br />
may hamper India’s long-term economic<br />
performance and impede growth<br />
prospects respectively. Relying on neoclassical<br />
growth theory and strong growth<br />
foundations such as free and deregulated<br />
product markets, liberalized labor market,<br />
the protection of private property,<br />
trade liberalization to the fullest possible<br />
extent, an independent judicial system,<br />
the rule of law and market institutions<br />
would, by experience and empirical<br />
premise, significantly boost India’s economic<br />
potentials and growth perspectives.<br />
Deregulated product and labor markets, protection of<br />
private property, trade liberalization to the fullest possible<br />
extent, an independent judicial system and the rule of law<br />
would signifi cantly boost India’s economic potential<br />
A growing burden of taxes, corruption<br />
and government <strong>size</strong> and spending would,<br />
contrary to popular assertions, impede<br />
India’s economic performance and its<br />
prospects as a global economic powerhouse<br />
in the 21st century.<br />
End Notes<br />
1<br />
See: Edmund S. Phelps, Dynamic<br />
Capitalism, Opinion Journal, Tuesday,<br />
October 10, 2006<br />
http://www.opinionjournal.com/editorial/feature.html?id=110009068<br />
2<br />
See: World Economic Outlook, International<br />
Monetary Fund, October<br />
<strong>2007</strong>, Washington D.C.<br />
http://www.imf.org/external/pubs/ft/<br />
weo/<strong>2007</strong>/02/index.htm<br />
THE INDIA ECONOMY REVIEW<br />
151
REIMAGINING INDIA<br />
3<br />
Aggregate demand is an investment<br />
driven by government spending<br />
4<br />
Robert Barro: Economic Growth in a<br />
Cross Section of Countries, <strong>Quarterly</strong><br />
Journal of Economics, Vol. 106, p.<br />
407-43, May, 1991<br />
http://ideas.repec.org/a/tpr/qjecon/<br />
v106y1991i2p407-43.html<br />
5<br />
Kerk Phillips, Kunrong Shen: What<br />
Effect does the Size of the State-<br />
Owned Sector Have on Regional<br />
Growth in China, Birgham Young<br />
University, Economics Working Papers,<br />
April 2003<br />
http://papers.ssrn.com/sol3/papers.<br />
cfm?abstract_id=395890<br />
6<br />
Andrea Bassanini, Stefano Scarpetta:<br />
<strong>The</strong> Driving Forces of Economic<br />
Growth: Panel Data Evidence for the<br />
OECD Countries, Organization for<br />
Economic Cooperation and Development,<br />
Economic Studies No.33, February<br />
2001<br />
http://www.oecd.org/dataoecd/26/2/18450995.pdf<br />
7<br />
Vito Tanzi,. Ludger Schuknecht: Reforming<br />
Government in Industrial<br />
Countries, International Monetary<br />
Fund Finance & Development, September<br />
1996<br />
http://www.imf.org/external/pubs/ft/<br />
fandd/1996/09/pdf/tanzi.pdf<br />
8<br />
Index of Economic Freedom <strong>2007</strong> –<br />
India, Heritage Foundation http://<br />
www.heritage.org/research/features/<br />
index/country.cfm?id=India<br />
9<br />
Edward Prescott: <strong>The</strong> Elasticity of the<br />
Labor Supply and the Consequences<br />
for Tax Policy, Federal Reserve Bank<br />
of Minneapolis, February 2005<br />
http://www.minneapolisfed.org/research/prescott/papers/Labor<br />
Supply.pdf<br />
10<br />
Simoen Djankov, Tim Ganser, Caralee<br />
McLiesh, Rita Ramalho, Andrei<br />
Schleifer: <strong>The</strong> Effect of Corporate<br />
Taxes on Investment and Entrepreneurship,<br />
Public Economics Program<br />
Meeting <strong>2007</strong>, National Bureau of<br />
Economic Research<br />
http://www.nber.org/confer/<strong>2007</strong>/<br />
pef07/shleifer.pdf<br />
11<br />
Hiroko Oura, Wild or Tamed? India’s<br />
Potential Growth Rate, International<br />
Monetary Fund, Working Paper No.<br />
07/224, September <strong>2007</strong><br />
http://www.imf.org/external/pubs/cat/<br />
longres.cfm?sk=21326.0<br />
12<br />
According to Heritage Foundation’s<br />
annual Index of Economic Freedom<br />
(<strong>2007</strong>), India is 84,8 percent free in fiscal<br />
terms and 89 percent free in terms<br />
of freedom from government<br />
http://www.heritage.org/research/features/index/country<strong>File</strong>s/pdfs/India.<br />
pdf<br />
13<br />
Transparency International: Corruption<br />
Perception Index, <strong>2007</strong><br />
http://www.transparency.org/policy_<br />
research/surveys_indices/cpi<br />
14<br />
Peter van de Hoek: Tax Harmonization<br />
and Competition in the European<br />
Union, eJournal of Tax Research,<br />
2003<br />
http://www.austlii.edu.au/au/journals/<br />
eJTR/2003/2.html#Heading50<br />
15<br />
A detailed investigation of corruption<br />
and its effect on growth and economic<br />
performance was conducted by:<br />
Paolo Mauro: Corruption and Growth,<br />
<strong>The</strong> <strong>Quarterly</strong> Journal of Economics,<br />
vol. 110, <strong>Issue</strong> 3, p. 681-712, 1995<br />
http://econpapers.repec.org/article/<br />
tprqjecon/v_3A110_3Ay_3A1995_<br />
3Ai_3A3_3Ap_3A681-712.htm<br />
16<br />
Brendan Walsh: <strong>The</strong> Source of Wealth<br />
in Small States. Small States as Financial<br />
Centers: <strong>The</strong> Case of Ireland, A<br />
presentation at the conference Small<br />
States as Financial Centers, University<br />
of Iceland, Reykjavik, Friday 14<br />
<strong>Dec</strong>ember, <strong>2007</strong><br />
http://www.skattamal.is/smallstates/<br />
Walsh.SmallStates.14.09.07.ppt<br />
17<br />
Penn World Table<br />
http://pwt.econ.upenn.edu/php_site/<br />
pwt_index.php<br />
18<br />
Author’s own calculations<br />
19<br />
Már Guðmundsson, Palle S. Andersen:<br />
Inflation and disinflation in Iceland,<br />
BIS Working Paper No.52, Bank for<br />
International Settlements, June 1998<br />
http://ideas.repec.org/p/bis/biswps/52.<br />
html<br />
20<br />
Ministry of Finance, Iceland, »Principal<br />
Tax Rates«, July 2006<br />
http://eng.fjarmalaraduneyti.is/media/<br />
Taxes/Principal_tax_rates_2006.pdf.<br />
21<br />
World Bank, GNI per capita 2006, Atlas<br />
method and PPP, World Development<br />
Indicators database, July 1<br />
2006<br />
http://siteresources.worldbank.org/<br />
DATASTATISTICS/Resources/<br />
GNIPC.pdf<br />
22<br />
Srinivasan (2004)<br />
23<br />
Robert W. Fogel: Capitalism and Democracy<br />
in 2040: Forecasts and Speculations,<br />
NBER Working Paper No.<br />
13184, National Bureau of Economic<br />
Research, June <strong>2007</strong>; http://www.nber.<br />
org/papers/w13184<br />
References<br />
• Barro, Robert J. (1991), Economic<br />
Growth in a Cross Section of Countries,<br />
<strong>Quarterly</strong> Journal of Economics,<br />
Vol. 106, p. 407-43<br />
http://ideas.repec.org/a/tpr/qjecon/<br />
152 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
v106y1991i2p407-43.html<br />
• Bassanini, Andrea, Scarpetta Stefano<br />
(2001), <strong>The</strong> Driving Forces of Economic<br />
Growth: Panel Data Evidence<br />
for the OECD Countries, Organization<br />
for Economic Cooperation and<br />
Development, Economic Studies<br />
No.33. http://www.oecd.org/dataoecd/26/2/18450995.pdf<br />
• Bergström, Friderik, Gidehag, Robert<br />
(2004), EU vs. USA, Timbro<br />
http://www.timbro.se/bokhandel/<br />
pdf/9175665646.pdf<br />
• Brimelow, Peter (1993), Why the Deficit<br />
is the Wrong Number, Forbes<br />
• Corruption Perception Index <strong>2007</strong>,<br />
Transparency International<br />
http://www.transparency.org/policy_<br />
research/surveys_indices/cpi<br />
• Djankov, Simeon, Ganser, Tim, McLiesh,<br />
Caralee, Ramalho, Rita, Schleifer,<br />
Andrei (<strong>2007</strong>): <strong>The</strong> Effect of Corporate<br />
Taxes on Investment and<br />
Entrepreneurship, Public Economics<br />
Program Meeting <strong>2007</strong>, National Bureau<br />
of Economic Research<br />
http://www.nber.org/confer/<strong>2007</strong>/<br />
pef07/shleifer.pdf<br />
• Fogel, Robert W (<strong>2007</strong>): Capitalism<br />
and Democracy in 2040: Forecasts<br />
and Speculations, NBER Working<br />
Paper No. 13184, National Bureau of<br />
Economic Research<br />
http://www.nber.org/papers/w13184<br />
• Guðmundsson, Már, Andersen, Palle<br />
S. (1998): Inflation and disinflation in<br />
Iceland, BIS Working Paper No.52,<br />
Bank for International Settlements<br />
http://ideas.repec.org/p/bis/biswps/52.<br />
html<br />
• Index of Economic Freedom <strong>2007</strong><br />
http://www.heritage.org/index<br />
• Mauro, Paulo (1995): Corruption and<br />
Growth, <strong>The</strong> <strong>Quarterly</strong> Journal of<br />
Economics, vol. 110, <strong>Issue</strong> 3, p. 681-<br />
712<br />
http://econpapers.repec.org/article/<br />
tprqjecon/v_3A110_3Ay_3A1995_<br />
3Ai_3A3_3Ap_3A681-712.htm<br />
• Ministry of Finance, Iceland, »Principal<br />
Tax Rates«, July 2006<br />
http://eng.fjarmalaraduneyti.is/media/<br />
Taxes/Principal_tax_rates_2006.pdf.<br />
• Mitchell, Daniel J. (2005), <strong>The</strong> Impact<br />
of Government Spending, Heritage<br />
Backgrounder #1831, Heritage Foundation<br />
http://www.heritage.org/Research/<br />
Budget/bg1831.cfm<br />
• Oura, Hiroko (<strong>2007</strong>), Wild or Tamed?<br />
India’s Potential Growth Rate, International<br />
Monetary Fund, Working<br />
Paper No. 07/224<br />
http://www.imf.org/external/pubs/cat/<br />
longres.cfm?sk=21326.0<br />
• Penn World Table<br />
http://pwt.econ.upenn.edu/php_site/<br />
pwt_index.php<br />
• Phelps, Edmund S. (2006), Dynamic<br />
Capitalism, Opinion Journal, Tuesday,<br />
October 10, 2006<br />
http://www.opinionjournal.com/editorial/feature.html?id=110009068<br />
• Phillips, Kerk, Shen, Kunrong (2003):<br />
What Effect does the Size of the State-<br />
Owned Sector Have on Regional<br />
Growth in China, Birgham Young<br />
University, Economics Working Papers<br />
http://papers.ssrn.com/sol3/papers.<br />
cfm?abstract_id=395890<br />
• Prescott, Edward (2005): <strong>The</strong> Elasticity<br />
of the Labor Supply and the Consequences<br />
for Tax Policy, Federal Reserve<br />
Bank of Minneapolis<br />
http://www.minneapolisfed.org/research/prescott/papers/LaborSupply.<br />
pdf<br />
• Srinivasan, T.N. (2004), China and India:<br />
Economic Performance, Competition<br />
and Cooperation. An Update,<br />
WTO Accession, Policy Reform and<br />
Poverty, World Trade Organization<br />
http://www.econ.yale.edu/~srinivas/<br />
C&I%20Economic%20Performance<br />
%20Update.pdf<br />
• Tanzi, Vito, Schuknecht, Ludger<br />
(1996): Reforming Government in Industrial<br />
Countries, International<br />
Monetary Fund Finance & Development<br />
http://www.imf.org/external/pubs/ft/<br />
fandd/1996/09/pdf/tanzi.pdf<br />
• van de Hoek, Peter (2003): Tax Harmonization<br />
and Competition in the<br />
European Union, eJournal of Tax Research<br />
http://www.austlii.edu.au/au/journals/<br />
eJTR/2003/2.html#Heading50<br />
• Walsh, Brendan (<strong>2007</strong>): <strong>The</strong> Source of<br />
Wealth in Small States. Small States<br />
as Financial Centers: <strong>The</strong> Case of Ireland,<br />
A presentation at the conference<br />
Small States as Financial Centers,<br />
University of Iceland, Reykjavik<br />
http://www.skattamal.is/smallstates/<br />
Walsh.SmallStates.14.09.07.ppt<br />
• World Bank, GNI per capita 2006, Atlas<br />
method and PPP, World Development<br />
Indicators database, July 1<br />
2006<br />
http://siteresources.worldbank.org/<br />
DATASTATISTICS/Resources/<br />
GNIPC.pdf<br />
• World Economic Outlook, International<br />
Monetary Fund, October <strong>2007</strong>,<br />
Washington D.C.<br />
http://www.imf.org/external/pubs/ft/<br />
weo/<strong>2007</strong>/02/index.htm<br />
THE INDIA ECONOMY REVIEW<br />
153
Kalpana Kochhar,<br />
Senior Advisor, Asia and<br />
Pacific Department,<br />
International Monetary Fund,<br />
Washington D.C.<br />
India’s Unique Pattern Of<br />
Development: Quo vadis? 1<br />
"If I were asked under what<br />
sky the human mind has<br />
most fully developed some of<br />
its choicest gifts, has most<br />
deeply pondered on the greatest<br />
problems of life, and has<br />
found solutions, I should point<br />
to India."<br />
-Max Muller<br />
Introduction<br />
Much has been written about India’s ongoing<br />
demographic transition and the<br />
dividend from the rise in working age<br />
population that is expected to continue<br />
well into this century. But, of course, this<br />
dividend will only be realized if the 13 million<br />
or so people that will enter the labor<br />
force each year for the next four decades<br />
can be gainfully employed. Has India specialized<br />
in labor intensive as one would<br />
expect in a labor abundant country? And,<br />
if not, how will India be able to foster<br />
growth in labor-intensive manufacturing<br />
going forward so that jobs can be provided<br />
for India’s vast and growing pool of lowskilled<br />
labor?<br />
We start with an examination of how<br />
India’s policies since independence have<br />
influenced its pattern of development.<br />
<strong>The</strong>n we ask whether the wide-ranging<br />
reforms beginning in the 1980s and accelerating<br />
in the 1990s changed this pattern<br />
of specialization. Finally, we look at the<br />
way India’s states have developed to consider<br />
what the future might look like?<br />
What were the main elements of India’s<br />
development strategy in the first three and<br />
a half decades since Independence? A<br />
simplified view of the main aspects include:<br />
(i) the emphasis on self-sufficiency,<br />
which led to the creation of industries producing<br />
capital goods and extensive trade<br />
restrictions; (ii) the combination of heavy<br />
public sector involvement in production<br />
being reserved only for the public sector<br />
and controlled private sector involvement<br />
to take account of the fact that India was<br />
capital poor. Licenses were required for<br />
investment, capacity expansion, production,<br />
and imports, while foreign exchange,<br />
credit allocation, and even prices were<br />
controlled; (iii) avoidance of undue concentration<br />
of economic power through the<br />
Monopoly and Restrictive Trade Practices<br />
act (MRTP)—which imposed severe<br />
constraints on expansion by large firms<br />
and groups, and the Foreign Exchange<br />
Regulation Act (FERA); (iv) geographically<br />
balanced development with investment<br />
directed towards underdeveloped<br />
areas, even if these areas were not near<br />
154 THE <strong>IIPM</strong> THINK TANK
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Table 1. Sectoral Shares In Value-Added And Employment<br />
Value Added As Percent Of GDP<br />
Employment In Sector As Percent Of<br />
Total Employment<br />
(1) (2) (3) (4) (5) (6) (7)<br />
Agriculture Manufacturing Industry Services Agriculture Industry Services<br />
1980<br />
India 38.9 16.3 24.5 36.6 68.1 13.9 18.6<br />
Brazil 11.0 33.5 43.8 45.2 29.3 24.7 46.1<br />
China 30.1 40.5 48.5 21.4 68.7 18.2 11.7<br />
Indonesia 24.0 13.0 41.7 34.3 55.9 13.2 30.2<br />
Korea 15.1 28.6 40.5 44.4 34.0 29.0 37.0<br />
Malaysia 22.6 21.6 41.0 36.3 37.2 24.1 38.7<br />
Mexico 9.0 22.3 33.6 57.4 23.5 26.5 49.0<br />
Thailand 23.2 21.5 28.7 48.1 70.8 10.3 18.9<br />
Turkey 26.4 14.3 22.2 51.4 43.0 34.9 22.1<br />
Low income 36.4 14.8 24.4 39.2 74.6 8.7 16.5<br />
Lower middle income 21.5 29.1 41.7 36.8 64.0 18.5 16.4<br />
2000<br />
India 24.6 15.9 26.6 48.8 59.3 18.2 22.4<br />
Brazil 7.3 17.1 28.0 64.7 24.2 19.3 56.5<br />
China 16.4 34.7 50.2 33.4 46.9 23.0 29.9<br />
Indonesia 17.2 24.9 46.1 36.7 45.3 17.3 37.3<br />
Korea 4.3 26.1 36.2 59.5 10.9 28.0 61.0<br />
Malaysia 8.8 32.6 50.7 40.5 18.4 32.2 49.5<br />
Mexico 4.2 20.3 28.0 67.8 17.5 26.9 55.2<br />
Thailand 9.0 33.6 42.0 49.0 48.8 19.0 32.2<br />
Turkey 15.4 15.7 25.3 59.4 34.5 24.5 40.9<br />
Low Income 27.3 14.1 26.6 46.1 64.5 12.3 23.2<br />
Lower Middle Income 12.5 24.2 38.3 49.1 43.2 18.5 38.3<br />
Sources: World Bank, World Development Indicators 2005, except Korea, OECD-Structural Analysis Database, and India, National Accounts Statistics, Indiastat.com.<br />
Notes: For the low income, and lower middle income groups as classified by the World Bank, we report the respective averages. Employment shares are reported for the years indicated,<br />
except India (1983), Brazil (1981 and 1999), and Turkey (1982). Employment shares for the low-income group for 2000 are estimates.<br />
markets or even if scale was inefficiently<br />
small; (v) encouraging labor-intensive<br />
manufacture in the private sector, by giving<br />
significant benefits to small-scale firms<br />
(tax concessions, preferential access to<br />
subsidized credit, preferential treatment<br />
in procurement by the government, and<br />
reserving some goods for exclusive production<br />
by the small-scale sector); (vi)<br />
significant protections for labor, especially<br />
in large firms, through the Industrial<br />
Disputes Act (1947), which in 1982 was<br />
tightened to make it compulsory for firms<br />
with 100 or more workers to seek the permission<br />
of the relevant government to dismiss<br />
workers; (vii) relatively more resources<br />
spent on higher education than on<br />
primary education.<br />
Economic Development<br />
Circa 1980<br />
Next, we examine the legacy of this web<br />
of policies on the pattern of development.<br />
In Table 1, we present the share of output<br />
in the different sectors in India in 1981<br />
and compare it with that in a number of<br />
developing and developed countries. At<br />
a little over 16 percent of GDP, India’s<br />
THE INDIA ECONOMY REVIEW<br />
155
REIMAGINING INDIA<br />
Table 2. India In <strong>The</strong> Cross Section: Share Of Manufacturing And Services, Early 1980s<br />
Share Of Output (1981) Share Of Employment (1983)<br />
Manufacturing Services Industry Services<br />
(1) (2) (3) (4) (5) (6) (7) (8)<br />
Log GDP Per-capita 15.37 21.58 36.27** 27.81 26.76 22.09 66.5** 67.20**<br />
(14.58) (13.75) (17.01) (17.79) (20.8) (20.8) (29.07) (30.07)<br />
Log GDP Per-capita -0.73 -1.09 -1.95* -1.46 -1.17 -0.92 -3.15* -3.19*<br />
(0.88) (0.83) (1.03) (1.08) (1.2) (1.2) (1.71) (1.76)<br />
India Indicator 4.58*** 2.33 -6.50*** -3.55** -0.260 0.560 -7.41** -7.53**<br />
(1.25) (1.76) (1.3) (1.61) (2.52) (2.82) (3.27) (3.63)<br />
Control for country <strong>size</strong> No Yes No Yes No Yes No Yes<br />
Observations 101 101 122 122 44 44 43 43<br />
Notes: Robust standard errors are reported in parentheses.<br />
***represents significance at 1 percent, **represents significance at 5 percent, *represents significance at 10 percent levels.<br />
Country <strong>size</strong> is measured by area in square kilometers.<br />
share in manufacturing seems low, especially<br />
when compared with a number of<br />
East Asian countries and China.<br />
But from the work of Kuznets and<br />
Chenery, we know that the manufacturing<br />
share varies with the level of development,<br />
rising and then falling off once a<br />
country approaches a high level of income.<br />
So we examine whether India’s<br />
share of manufacturing is too low after<br />
correcting for its level of income and its<br />
square (to account for non-linearities) 2 .<br />
Correcting only for income, India is a<br />
positive outlier among countries in its<br />
share of value added in manufacturing in<br />
1981 (Table 2). Its share significantly exceeds<br />
the norm by 4.6 percentage points<br />
(see Table 2, column 1). After correcting<br />
for country <strong>size</strong>, the coefficient on the<br />
India indicator declines to 2.3 percentage<br />
points in 1981 which is not statistically<br />
significant (column 2). When we compare<br />
the shares of industrial sector employment<br />
in total employment across countries,<br />
India is again not an outlier (Table<br />
2, columns 5 and 6) 3 .<br />
What were the characteristics of industry<br />
in 1980? <strong>The</strong> first industry characteristic<br />
we examine is labor intensity, for<br />
which we use as a proxy the share of wages<br />
in value added for the industry in a<br />
country from the UNIDO database, averaged<br />
across a broad group of developing<br />
countries. For each country, we calculate<br />
Compared with countries at a similar level of development<br />
and <strong>size</strong>, in 1981 India had approximately the normal<br />
share of output and employment in manufacturing. Output<br />
in services was below the norm, as was employment.<br />
the ratio of value added in industries with<br />
above-median labor-intensity to the value<br />
added in industries with below-median<br />
labor-intensity. If Indian manufacturing<br />
generated relatively more value added in<br />
labor intensive industries in 1981, then in<br />
a cross-country regression of this ratio<br />
against log per capita GDP, its square,<br />
and an indicator for India, the India indicator<br />
should be positive and significant.<br />
However, the coefficient is insignificant<br />
suggesting that India does not have more<br />
value added coming out of labor intensive<br />
industries.<br />
<strong>The</strong> second characteristic we examined<br />
is skill intensity. We used data from South<br />
Africa contains on 45 sectors and five<br />
primary factors of production—capital<br />
plus four categories of labor: highly<br />
skilled, skilled, unskilled, and informal<br />
sector. We use the share of remuneration<br />
of the highly skilled and skilled categories<br />
of workers in total value as a proxy<br />
for the skill intensity of an industry. 4 If<br />
Indian manufacturing generated relatively<br />
less value added in skill intensive<br />
industries in 1981, then in a cross-country<br />
regression of this ratio against log per<br />
capita GDP, its square, and an indicator<br />
for India, the India indicator should be<br />
negative and significant. What we find is<br />
striking—even by 1981, India specialized<br />
more than the average country in skillintensive<br />
industries.<br />
A third characteristic we examine is<br />
156 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
diversification. Imbs and Wacziarg (2003)<br />
show that in the course of development,<br />
countries first diversify within manufacturing,<br />
producing many things, and then<br />
after a certain level of income, start specializing,<br />
producing fewer things. Technically,<br />
the relationship between the concentration<br />
of value added across<br />
industries (the Gini coefficient or the<br />
Herfindahl index), and income is U-<br />
shaped, with the turning point occurring<br />
at about US$10,000 per capita. Given that<br />
India has more of a presence in skill-intensive<br />
industries, the presumption would<br />
be that it has specialized in more areas<br />
than the typical developing country, and<br />
hence it should exhibit a more diverse<br />
pattern of production. When we examine<br />
the concentration of Indian industry compared<br />
to the average country pattern, we<br />
indeed find that India is significantly<br />
more diversified (less concentrated) in<br />
terms of the distribution of value-added<br />
across industries.<br />
To summarize, compared with countries<br />
at a similar level of development and<br />
<strong>size</strong>, in 1981 India had approximately the<br />
normal share of output and employment<br />
in manufacturing. Output in services was<br />
below the norm, as was employment in<br />
services. Output and employment were<br />
about average in labor intensive manufacturing<br />
industries and above the norm in<br />
skill intensive industries. And finally, Indian<br />
manufacturing was significantly<br />
more diversified both in terms of output<br />
and employment than countries of comparable<br />
income and <strong>size</strong>. <strong>The</strong> paradox of<br />
Indian manufacturing in the early 1980s<br />
is thus that of a labor-rich, capital-poor<br />
economy using too little of the former. 5<br />
<strong>The</strong> reason, most likely, was policy. <strong>The</strong><br />
large investment in tertiary education for<br />
a country of its per capita income resulted<br />
in the plentiful availability of highly<br />
skilled, cheap labor. In addition, labor<br />
laws afforded much less protection to<br />
skilled labor. <strong>The</strong>se factors are likely to<br />
have contributed to India generating<br />
relatively greater value added and employment<br />
in skill-intensive industries as<br />
compared to the typical poor country.<br />
Reforms Of <strong>The</strong> 1980s And 1990s<br />
<strong>The</strong> key features of reforms in the<br />
1980s—characterized as “pro business”<br />
in orientation were (i) the liberalization<br />
of capital goods and intermediate input<br />
imports; (ii) the extension of export incentives<br />
through the tax system, and more<br />
liberal access to credit and foreign exchange;<br />
(iii) the significant relaxation of<br />
industrial licensing requirements through<br />
direct “delicensing” of some industries<br />
and through “broad banding”, which permitted<br />
firms in some industries to switch<br />
production between similar product lines;<br />
(iv) the decontrol of administered prices<br />
of key intermediate inputs.<br />
<strong>The</strong> reforms of the 1990s—characterized<br />
as “pro-market” in orientation—included<br />
(i) the abolition of industrial licensing<br />
and the narrowing of the scope<br />
of public sector monopolies to a much<br />
smaller number of industries; (ii) the liberalization<br />
of inward foreign direct and<br />
portfolio investment; (iii) the sweeping<br />
liberalization of trade which included the<br />
elimination of import licensing and the<br />
progressive reduction of non-tariff barriers;<br />
(iv) financial sector liberalization,<br />
including the removal of controls on capital<br />
issues, freer entry for domestic, and<br />
foreign, private banks and the opening up<br />
Between 1980 and 2002, India’s share of services in<br />
value added exploded from 37 percent to 49 percent. Its<br />
share of manufacturing in value-added remained<br />
broadly unchanged at 16 percent<br />
of the insurance sector; (v) and the liberalization<br />
of investment in important services,<br />
such as telecommunications. Areas<br />
that remained largely untouched by reforms<br />
in the 1990s were the labor market;<br />
small-scale reservations (where there has<br />
been some movement only in the last 4-5<br />
years); privatization both of non-financial<br />
enterprises and of banks; and further agricultural<br />
sector reforms.<br />
Economic Development After<br />
Reforms<br />
How have these twenty years of slow but<br />
steady reforms affected the pattern of<br />
development, if at all? Let us look again<br />
at the variables discussed above—sectoral<br />
shares, factor intensities, and diversification,<br />
between the early 1980s and<br />
early 2000s. <strong>The</strong> traditional perspective<br />
of Kuznets or Chenery would predict a<br />
THE INDIA ECONOMY REVIEW<br />
157
REIMAGINING INDIA<br />
Table 3: India In <strong>The</strong> Cross Section: Shares Of Mfg. & Services, 2000<br />
Panel A<br />
Share Of Output<br />
Share Of Employment<br />
Manufacturing Services Industry Services<br />
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii)<br />
Log GDP Per-capita 13.18** 15.41** 10.88 8.01 51.79*** 52.4*** 38.99 39.69**<br />
(6.41) (6.38) (10.34) (10.3) (11.28) (11.23) (23.91) (23.83)<br />
Log GDP Per-capita 2 -0.61 -0.72* -0.19 -0.04 -2.67*** -2.71*** -1.49 -1.54<br />
(0.12) (0.38) (0.6) (0.6) (0.62) (0.63) (1.31) (1.3)<br />
India Indicator 2.4** 0.26 -0.05 3.77** 0.56 1.13 -17.22*** -16.57***<br />
(0.73) (1.11) (1.17) (1.46) (1.17) (1.36) (3.03) (3.78)<br />
Control For Size No Yes No Yes No Yes No Yes<br />
Observations 149 149 156 156 76 76 74 74<br />
Panel B<br />
Change In Share Of output (1981-2000)<br />
Change In Share Of Employment<br />
Manufacturing Services Industry Services<br />
(i) (ii) (iii) (iv)<br />
Log Initial GDP Per-Capita -1.19*** 3.96*** -3.37*** 2.91**<br />
(0.66) (0.77) (0.92) (1.39)<br />
Average Annual growth rate 0.7** 0.41 0.47 -0.18<br />
(0.33) (0.53) (0.6) (0.64)<br />
India Indicator -2.56* 9.86*** 1.7 0.94<br />
(1.37) (1.63) (2.05) (3.59)<br />
Observations 93 116 39 38<br />
Notes: Robust standard errors are reported in parentheses<br />
***represents significance at 1%, **represents significance at 5%, *represents significance at 5%, *represents significance at 10%<br />
Country <strong>size</strong> is measured by area in square killometers.<br />
rapid increase in the share of manufacturing,<br />
a decline in agriculture and an<br />
uncertain or modest effect on services.<br />
However, between 1980 and 2002, India’s<br />
share of services in value added exploded<br />
from 37 percent to 49 percent. Its share<br />
of manufacturing in value added remained<br />
broadly unchanged at 16 percent,<br />
while the decline in agriculture mirrored<br />
the performance of services. 6 <strong>The</strong> corresponding<br />
numbers for employment were<br />
19 percent to 22 percent and 14 percent<br />
to 18 percent (Table 1).<br />
Is this evolution in sectoral shares unusual<br />
when compared with that of other<br />
countries? In Table 3, columns 1 and 2,<br />
panel A, we see that the coefficient of the<br />
India indicator is still positive but smaller<br />
than in the corresponding specification<br />
for 1981. 7 Furthermore, in the regressions<br />
using the change in the share of<br />
manufacturing value-added to overall<br />
growth (column 1, Panel B), the India indicator<br />
is negative. Thus, the data suggest<br />
a relative slowing in manufacturing<br />
growth.<br />
In contrast, the performance of services<br />
over this period has been unusual.<br />
India’s share in services is a significant 3.8<br />
percent higher than in other countries in<br />
2000 (Table 3, panel A, column 4). This<br />
is broadly confirmed in the change regressions<br />
(panel B), where India records<br />
an increase in the <strong>size</strong> of the services sector<br />
that is 10 percentage points of GDP<br />
greater than that of the average country.<br />
What happened to labor, skill intensity<br />
and diversification in manufacturing after<br />
the reforms? In Figure 1, we plot the evolution<br />
in the share of output generated in<br />
labor-intensive relative to non labor-intensive<br />
industries for India and a selected<br />
158 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
Figure 1. Value-Added Share of Labor Intensive Industries<br />
Ratio of value added<br />
1<br />
8<br />
6<br />
4<br />
Ratio of value added in above median labor intensive intensive sectors to below median sectors<br />
7.5 8 7.5 9 9.5<br />
CHN IND IDN KOR MYS<br />
Sources: Authors’ calculations; UNIDO 3-digit industrial statistics database (2003).<br />
Notes: <strong>The</strong> sample for all countries includes observations from 1981 to 1996. <strong>The</strong> classification of above and below<br />
median labor-intensive sectors is given in Table 3. CHN stands for China, IND for India, IDN for Indonesia, KOR for<br />
Korea, and MYS for Malaysia.<br />
Figure 2. Value-Added Share Of Skill Intensive Industries<br />
Ratio of value added<br />
2.5<br />
2<br />
1.5<br />
1<br />
0.5<br />
Ratio of value added in above median skill intensive sectors to below median sectors<br />
7.5 8 7.5 9 9.5<br />
CHN IND IDN KOR MYS<br />
Sources: Authors’ calculations; UNIDO 3-digit industrial statistics database (2003).<br />
Notes: <strong>The</strong> sample for all countries includes observations from 1981 to 1996. <strong>The</strong> classification of above and below<br />
median skill intensive sectors is given in Table 3. CHN stands for China, IND for India, IDN for Indonesia, KOR for<br />
Korea, and MYS for Malaysia.<br />
group of comparator countries. India’s<br />
share is decreasing, when that of many of<br />
the other countries is either increasing, or<br />
decreasing at much higher levels of income.<br />
In Figure 2, we plot the evolution<br />
in the relative share of output generated<br />
in skill-intensive industries for India and<br />
a selected group of comparator countries.<br />
Again, it is striking that India’s share in<br />
skill-intensive manufacturing, which was<br />
already high in 1980 despite its lower<br />
level of per capita income, has been increasing;<br />
it is at levels reached by Malaysia<br />
or Korea at much higher levels of per<br />
capita income. <strong>The</strong>se developments are<br />
not affected by the fact that our data so<br />
far have been limited to the registered<br />
manufacturing sector in India. Indeed,<br />
when we trace the evolution of labor- and<br />
skill-intensive products in the informal<br />
sector, we see the same pattern (Figure<br />
3). Finally, we find that India continues to<br />
be an outlier in 2000 on both measures of<br />
diversification. Indeed, when we compare<br />
the change in diversification between<br />
1980 and 2000, we find that India is again<br />
an outlier, implying that the pace of diversification<br />
in India after 1980 has been<br />
greater than that for the average country<br />
(see Figure 4).<br />
In sum, the evidence suggests that<br />
many of the unique features of India’s<br />
development that were apparent in 1981<br />
have not changed, despite the reforms.<br />
This continuity of trends may be explained<br />
partly by the fact that the reforms<br />
have not been completed. For example,<br />
labor markets remain untouched and<br />
education expenditure is still skewed. But<br />
part of the explanation may well rest with<br />
the fact that in India, the policy distortions<br />
created organizational capabilities<br />
and human capital that led to hysteresis<br />
in growth paths. <strong>The</strong> growth experience<br />
of the Indian states offers some support<br />
to this view.<br />
Development At <strong>The</strong> State Level<br />
Are these patterns repeated in India’s<br />
states and are there differences between<br />
the fast growing and the laggard states?<br />
We find that in the fast-growing Indian<br />
states, the share of manufacturing has<br />
remained constant or declined. Where<br />
there has been an increase—in Andhra<br />
Pradesh, Gujarat, and Haryana—it has<br />
occurred in capital- and skill-intensive<br />
industries (In Gujarat, the share of the<br />
textile industry declined a lot, while that<br />
of the petrochemical industry rose substantially;<br />
similarly, in Andhra Pradesh<br />
THE INDIA ECONOMY REVIEW<br />
159
REIMAGINING INDIA<br />
Figure 3. Value-Added Shares In Unregistered Manufacturing<br />
3.0<br />
2.5<br />
2.0<br />
1.5<br />
1.0<br />
0.5<br />
Share of High Labor Intensity Industries<br />
Share of High Skill Intensity Industries<br />
0.0<br />
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000<br />
Source: Authors’ calculations; data on unregistered manufacturing are from the Central Statistical Organization,<br />
Government of India.<br />
Notes: <strong>The</strong> share of high labor (skill) intensity industries is the ratio of value added in sectors with above-median labor<br />
(skill) intensity to that in sectors with below-median labor (skill) intensity. <strong>The</strong> relevant sector classification is given in<br />
Table 3.<br />
Figure 4. Diversification In Indian Manufacturing<br />
Herfindahl Index<br />
.12<br />
.1<br />
.08<br />
.06<br />
Herfindahl Index based on value added<br />
7.5 8 7.5 9 9.5<br />
CHN IND IDN KOR MYS<br />
Sources: Authors’ calculations; UNIDO 3-digit industrial statistics database (2003).<br />
Notes: <strong>The</strong> sample for all countries includes observations from 1981 to 1996. CHN stands for China, IND<br />
for India, IDN for Indonesia, KOR for Korea, and MYS for Malaysia. For each country, the Herfindahl<br />
Index measures concentration in the value added across sectors; the lower the index, the lower the concentration,<br />
or the higher the diversification.<br />
the decline in the share of food, beverages,<br />
tobacco, textiles, and paper related<br />
industries was matched by a significant<br />
increase in the share of basic metals and<br />
alloys). Interestingly, neither the fast nor<br />
the slow growing states increased their<br />
share of value added in labor intensive<br />
industries.<br />
By contrast, nearly all states in India<br />
have seen a uniform shift toward services<br />
but there is a noteworthy difference between<br />
services that are predominantly in<br />
the public sector and those that are in the<br />
private sector. In Figure 5, we find a neg-<br />
ative correlation between the change in<br />
share of services that are performed<br />
mostly by the public sector (such as electricity,<br />
public administration, railways,<br />
and other community services) and the<br />
average annual state growth. In other<br />
words, the share of public sector services<br />
including administration is growing in the<br />
laggard states, while the share of private<br />
sector services is growing in the fast-moving<br />
states.<br />
Armed with all this, let us turn to the<br />
question of where India may be headed?<br />
It would appear that the fast growing peninsular<br />
states are starting to resemble<br />
more developed countries in their specialization,<br />
while the slow growing hinterland<br />
states, with their still rapidly growing,<br />
less well-educated, populations are<br />
falling behind. Visaria and Visaria (2003)<br />
suggest that 60 percent of the expected<br />
620 million addition to the Indian population<br />
between now and 2051 will be in Bihar,<br />
Madhya Pradesh, Rajasthan and Uttar<br />
Pradesh; only 22 percent will be in the<br />
fast growing states of Kerala, Tamil Nadu,<br />
Andhra Pradesh, Karnataka, and Maharashtra.<br />
Such trends could create immense<br />
economic and political strains between<br />
Indian states.<br />
It may well be that the slow growing<br />
states will have to follow a more traditional<br />
path of growth, focusing on laborintensive<br />
manufacturing. But for that<br />
further reform is needed—in particular,<br />
more flexible labor laws and an improvement<br />
of infrastructure, especially vis-à-vis<br />
the states in the hinterland so that these<br />
industries can be internationally costcompetitive—to<br />
revitalize labor-intensive<br />
manufacturing. But the archaic labor laws<br />
have strong organized constituencies, in<br />
particular, labor unions tied to political<br />
160 THE <strong>IIPM</strong> THINK TANK
MORE MARKETS, LESS GOVERNMENT<br />
Figure 5. Public Services And States’ Growth<br />
Change in share of Public Services in<br />
NSDP 1980-2000 (%)<br />
20<br />
15<br />
10<br />
Change in share of Public Services in NSDP 1980-2000<br />
JK<br />
BH OR<br />
MP<br />
MN<br />
RJ<br />
HP<br />
pervisory skilled workers are affordable<br />
only if they are used very economically<br />
relative to the use of unskilled labor – if,<br />
for example, firms have scale. 9 Here<br />
again, the fast moving states where the<br />
business and political climate is more<br />
conducive to scale have an advantage. In<br />
5<br />
sum, the fast-growing states could absorb<br />
AS UP<br />
KL GJ MH AP KK TN<br />
the more mobile skilled labor from the<br />
0<br />
PJ<br />
HY<br />
WB slow moving states leading to a further<br />
hollowing out of prospects there. <strong>The</strong><br />
-5<br />
DL<br />
obvious solution is not to impede the<br />
1 2 3 4<br />
Average Annual Growth of NSDP per capita 1980-2000 (%)<br />
5 growth of the fast-movers but to enhance<br />
the availability of the resource in scarce<br />
Source: Authors’ calculations; data on unregistered manufacturing are from the Central Statistical Organization, Government<br />
of India.<br />
supply. Although the earlier emphasis on<br />
Notes: <strong>The</strong> share of high labor (skill) intensity industries is the ratio of value added in sectors with above-median labor<br />
(skill) intensity to that in sectors with below-median labor (skill) intensity. <strong>The</strong> relevant sector classification is given in funding tertiary education at the expense<br />
Table 3.<br />
of primary education may<br />
Code State Code State Code State<br />
have been an aberration,<br />
AP Andhra Pradesh JK Jammu & Kashmir OR Orissa<br />
India may now have too<br />
little tertiary education of<br />
AS Assam KK Karnataka PJ Punjab<br />
the right kind at this juncture.<br />
<strong>The</strong>re are serious<br />
BH Bihar KL Kerala RJ Rajasthan<br />
DL Delhi MH Maharashtra TN Tamil Nadu<br />
doubts about the quality<br />
GJ Gujarat MN Manipur TP Tripura<br />
of education received by<br />
HP Himachal Pradesh MP Madhya Pradesh UP Uttar Pradesh<br />
the large number of graduates<br />
HY Haryana NG Nagaland WB West Bengal<br />
emerging from uni-<br />
versity every year. <strong>The</strong><br />
parties, backing them. Given the way Indian<br />
industry has specialized, the costs of<br />
these laws are not experienced by incumbents,<br />
and the political leadership, or will,<br />
to amend them has not emerged. 8<br />
Even if serious reforms were undertaken<br />
in the laggard states, competition<br />
from the more advanced states will not<br />
make it easy for them to grow. First, laggard<br />
states are typically distant from<br />
ports and airports. Transportation costs<br />
will come down as infrastructure is built<br />
up, but it is unclear whether the improvements<br />
will help them out-compete the<br />
fast-growing peninsular states where<br />
many of the initial large-scale infrastructure<br />
projects are being undertaken, and<br />
where ancillary infrastructure exists.<br />
Second, even labor-intensive unskilled<br />
manufacturing—should it pick up—requires<br />
a skilled supervisory and managerial<br />
force. Despite the large numbers of<br />
graduates emerging from universities in<br />
India, the number of graduates with the<br />
skills to work in industry or the service<br />
sector is relatively limited. With the immense<br />
demand for skilled workers in the<br />
export-oriented services industry, wages<br />
of skilled workers have been going up<br />
very fast. Given the extremely competitive<br />
situation in (typically tradable) labor-intensive<br />
industries, highly paid su-<br />
number of high-quality institutions is<br />
still very small, and thus, India needs to<br />
remove the barriers to starting new institutions,<br />
as well as encourage foreign direct<br />
investment here. In short, from a<br />
policy perspective, the irony is that in<br />
order to promote unskilled labor-intensive<br />
activities in the future, a great deal<br />
of attention may need to be paid in fostering<br />
the supply of skilled labor.<br />
<strong>The</strong> changes since the early 1980s have<br />
unleashed tremendous economic opportunities,<br />
but also divergence between<br />
states. From uniformly mediocre economic<br />
performance, India has evolved<br />
into a conglomeration of states with per-<br />
TP<br />
THE INDIA ECONOMY REVIEW<br />
161
REIMAGINING INDIA<br />
formance more related to the capabilities<br />
of individual states and the opportunities<br />
they create. It is possible that the laggard<br />
states would do what it takes to utilize<br />
their vast pools of underemployed lowcost<br />
labor to attract investment in laborintensive<br />
manufacturing and agri-business.<br />
<strong>The</strong>y would thereby catch up with<br />
the leading states in India. <strong>The</strong> revival of<br />
manufacturing growth since 2004, albeit<br />
still concentrated in skill-intensive<br />
and capital-intensive industries, offers<br />
hope for this scenario.<br />
End Notes<br />
1<br />
This paper is based upon Kochhar et<br />
al. (2006)<br />
2<br />
Of course, other factors also affect<br />
sectoral shares (see, for example,<br />
Chenery and Taylor (1968)), but our<br />
intent here is primarily to see whether<br />
India is an outlier after controlling for<br />
obvious factors, rather than to do an<br />
exhaustive study of the sectoral composition<br />
of growth per se. Also, we<br />
report results for the largest sample of<br />
countries, though the results are qualitatively<br />
similar, when not specifically<br />
noted, for a smaller cross-section restricted<br />
to non-OECD countries.<br />
3<br />
Comparable cross-country data on<br />
employment shares are not available<br />
separately for the manufacturing sector,<br />
only for industry (manufacturing,<br />
mining, and core infrastructure sectors),<br />
and services. Thus the analysis<br />
of employment shares is conducted for<br />
industry and services .<br />
4<br />
<strong>The</strong> choice of South Africa was dictated<br />
primarily by data availability.<br />
Our results are robust to alternative<br />
definitions of skill intensity, including<br />
restricting the definition to the highly<br />
skilled category and defining skill intensity<br />
in terms of share of remuneration<br />
in output rather than value added.<br />
We also checked the correlation of our<br />
measures of skill intensity with that<br />
compiled for the U.S. by Rajan and<br />
Wulf (2004). It is 0.66, for the highly<br />
skilled category, and 0.5 when skill<br />
intensity includes highly skilled and<br />
skilled workers.<br />
5<br />
It may well be, of course, that India’s<br />
labor-intensive production was concentrated<br />
in the unregistered sector,<br />
for which we do not have comparable<br />
data from other countries. To the extent<br />
that firms in the unregistered sector<br />
have inefficiently small scale, total<br />
production would still be smaller and<br />
less competitive than it could be without<br />
the spectrum of regulations. Also,<br />
unregistered labor-intensive production<br />
has been falling considerably over<br />
time, suggesting that this explanation<br />
for India’s lack of concentration in labor-intensive<br />
manufacturing is less<br />
applicable today.<br />
6<br />
This development contradicts the<br />
Kuznets-Chenery hypothesis. Kongsamut,<br />
Rebelo, and Xie (2001), however,<br />
argued based on an analysis of<br />
123 countries over the period 1970-89<br />
that the share of services rises with<br />
development more than anticipated by<br />
the Kuznets-Chenery view.<br />
7<br />
However, we find that industry (that<br />
is, manufacturing, mining and core<br />
infrastructure industries) was a significant<br />
negative outlier in 2000, possibly<br />
related to the much worse than<br />
average performance of India’s infrastructure<br />
sector.<br />
8<br />
In other words, most commentators<br />
look to existing firms to see if labor<br />
laws are a problem. But existing firms<br />
have adapted to these laws, as suggested<br />
both by their pattern of specialization<br />
and their scale. <strong>The</strong> more<br />
pertinent question is whether new<br />
firms are kept from entering because<br />
of the laws. <strong>The</strong> pattern of specialization<br />
in India suggest they are.<br />
9<br />
Alternatively, the wages on unskilled<br />
labor may fall, but wages in agriculture<br />
may place a floor here.<br />
References<br />
• Chenery, H.B., 1960, Patterns of industrial<br />
growth, American Economic<br />
Review Vol. 57, 415-26, and L.J. Taylor,<br />
1968, Development patterns:<br />
among countries and over time, Review<br />
of Economics and Statistics, Vol.<br />
50, 391-416.<br />
• Imbs, J., and R. Wacziarg, 2003, Stages<br />
of development, <strong>The</strong> American<br />
Economic Review, March, Vol. 93,<br />
No. 1.<br />
• Kochhar, Kalpana, Utsav Kumar, Raghuram<br />
Rajan, Arvind Subramanian,<br />
Ioannis Tokatlidis, “India’s Pattern of<br />
Development: What Happened, What<br />
Follows?” Journal of Monetary Economics,<br />
Vol 53(5), July 2006<br />
• Kongsamut, P., S. Rebelo, and D. Xie,<br />
2001, Beyond balanced growth, IMF<br />
Working Paper 01/85 (Washington:<br />
International Monetary Fund).<br />
• Visaria, L., and P. Visaria, 2003, Long<br />
term population projections for major<br />
states, 1991-2101, Economic and Political<br />
Weekly, November.<br />
• Rajan, R. and J.Wulf, 2004, Are perks<br />
purely managerial excess? NBER<br />
Working Paper No. 10494 (Cambridge,<br />
Massachusetts : National Bureau of<br />
Economic Research).<br />
162 THE <strong>IIPM</strong> THINK TANK
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BUSINESS AND<br />
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T.R.Manoharan,<br />
Senior Coordinator, Forest Programme,<br />
WWF-India,New Delhi<br />
India’s Growing Ecological Footprint: Exploring<br />
Past And Future Changes<br />
"<strong>The</strong>re is enough for everybody’s<br />
need, but not enough<br />
for anybody’s greed."<br />
-Mahatma Gandhi<br />
Introduction<br />
A high economic growth is essential for<br />
India to ensure improved living conditions<br />
of its citizens, which majorly consists of<br />
poor and marginalized sections. <strong>The</strong> nation<br />
possesses only 2.2 per cent of the land<br />
mass but home to 16 per cent of world<br />
population and 27 percent of world’s poor.<br />
Despite its low per capita income, India is<br />
presently the world’s tenth largest economy<br />
in terms of GDP. <strong>The</strong> economy is<br />
growing at 7 to 8 per cent per annum since<br />
2003 and is targeted to grow at 9 per cent<br />
or above during <strong>2007</strong>-12 (Planning Commission,<br />
2006; World Bank, <strong>2007</strong>). To<br />
achieve this target, increased use of bioresources-<br />
both within the country and<br />
elsewhere is inevitable.<br />
Available estimates show that humanity’s<br />
ecological footprint (demand on ecosystems)<br />
has exceeded the bio-capacity of<br />
the planet by late 1980s and the over shoot<br />
is accumulating ever since. It is pointed<br />
out that world is following unsustainable<br />
path of development and the growing ecological<br />
debt is a major factor. Presently,<br />
we are using 30 percent more resources<br />
than the planet can regenerate (In other<br />
words, 1.3 planets). <strong>The</strong> global footprint<br />
network estimates ecological debt day for<br />
every year to create awareness on how humanity’s<br />
consumption patterns are depleting<br />
the planets bio-resources . In <strong>2007</strong>,<br />
the ecological debt day was October 6. By<br />
that day the humanity has consumed total<br />
amount of new resources that the planet<br />
can produce this year. Ecological debt day<br />
marks the day when we begin to live beyond<br />
our ecological means. If we continue<br />
the current path of development, the<br />
ecological debt day will come earlier in<br />
every year. Several options are available<br />
now to minimize the risk of accumulated<br />
ecological debt (WWF, 2006; UNEP,<br />
<strong>2007</strong>). India, being one of the fastest<br />
growing economies in the world with more<br />
than one billion people, can play a crucial<br />
role to address this global challenge. It is<br />
possible to minimize the ecological footprint<br />
of the nation while continuing higher<br />
economic growth and efforts to attain<br />
high human development.<br />
164 THE <strong>IIPM</strong> THINK TANK
ENVIRONMENTAL ECONOMICS<br />
Table-1: India’s Economic Growth<br />
Plan<br />
Period<br />
Real Income<br />
Plan<br />
Target<br />
Use Of Natural Resources<br />
India is rich in terms of natural resource<br />
endowments and biodiversity. <strong>The</strong> nation<br />
is one of the 12 mega biodiversity countries<br />
in the world. More than 45000 flora<br />
and 77000 species of fauna are recorded.<br />
<strong>The</strong> natural ecosystem include 16 types of<br />
forests 5 types of grass lands, 27,403 wetland<br />
units (both inland and coastal) including<br />
lakes, swamps, tanks and reservoirs,<br />
tidal mudflats, mangroves, estuaries,<br />
lagoons, coral reefs, sand beach (Verma<br />
et. al, <strong>2007</strong>). <strong>The</strong>se resources provide a<br />
flow of environmental (ecosystem) services<br />
required for production/economic<br />
development. However, the depletion and<br />
degradation of natural resources pose a<br />
serious threat to the sustained flow of<br />
these ecosystem services. <strong>The</strong> uncertainty<br />
of quality and quantity of such services<br />
has not been suitably factored into the development<br />
models. Forest is the second<br />
largest land use in India next to agriculture.<br />
<strong>The</strong> latest assessment of forest survey<br />
of India in 2003 estimated about 67.8 million<br />
hectares of forest cover in the country<br />
Actual<br />
Growth<br />
Sectoral Growth Rate<br />
Agriculture Industry Services<br />
First Plan 1951-56 2.1 3.6 2.9 5.9 3.7<br />
Second Plan 1956-61 4.5 3.9 3.2 6.4 4.6<br />
Third Plan 1961-66 5.6 2.3 -0.5 6.8 5.0<br />
Fourth Plan 1969-74 5.7 3.2 2.6 3.7 4.0<br />
Fifth Plan 1974-79 4.4 4.8 3.4 6.3 5.5<br />
Sixth Plan 1980-85 5.2 5.7 5.5 6.2 5.4<br />
Seventh Plan 1985-90 5.0 6.0 3.4 7.5 7.4<br />
Eighth Plan 1992-97 5.6 6.8 3.9 8.0 7.9<br />
Ninth Plan 1997-02 6.5 5.5 2.1 4.6 8.1<br />
Tenth Plan 2002-07 8.0 7.2* 1.7 8.3 9.0<br />
Eleventh Plan <strong>2007</strong>-12 9.0 - 4.1* 10.5* 9.9*<br />
* projected.<br />
Sources: Planning Commission, Govt. of India & http://www.indiastat.com<br />
which is 20.64 percent of the total geographical<br />
area (FSI, 2005). It shows a marginal<br />
increase in the total forest cover, but<br />
the loss of 2.6 million ha of dense forests<br />
when compared to previous assessment in<br />
2001. <strong>The</strong> nation is targeted to achieve 33<br />
per cent of its area under forest and tree<br />
cover by 2012. <strong>The</strong> per capita availability<br />
of land in India has declined from 0.91 ha<br />
to 0.33 ha between 1950 and 2001.<strong>The</strong> per<br />
capita availability of farm land declined<br />
from 0.64 ha to 0.25 ha during the same<br />
period. India occupies 4 per cent of world’s<br />
water resources which are depleting fast.<br />
In 1947, the per capita availability of fresh<br />
water in India was 5150 cu.m but it reduced<br />
to 2200 cu.m in 2000. It is projected<br />
that in 2017, the same will become 1600<br />
cu.m. resulting water stress in many places.<br />
<strong>The</strong> melting of glaziers in Himalayas and<br />
other climate change related issues can<br />
lead to irreversible changes in ecosystems.<br />
India is said to be particularly vulnerable<br />
due to these effects.<br />
While there is overall decline in India’s<br />
bio-capacity, its use has increased faster<br />
to meet the growing needs of development.<br />
Electricity generation in India has<br />
increased from 6 billion KWH to 556 billion<br />
KWH between 1951 and 2001. <strong>The</strong><br />
coal production has increased from 32<br />
million tonnes to 332 million tones between<br />
1951 and 2001. In 2006, the production<br />
was 670 million tones. In order to<br />
meet the growing demand for energy, the<br />
production is targeted to increase to 670<br />
million tones by 2012. In addition to domestic<br />
production, 40-50 million tones of<br />
superior coal is required to be imported<br />
during the 11 th plan period. Crude oil imports<br />
increased from six million tones to<br />
78 million tones between 1961 and 2001<br />
(Table-2).<br />
Ecological Footprint<br />
An ecological footprint measures people’s<br />
demand on nature and compares human<br />
consumption of natural resources with the<br />
Earth’s ecological capacity (bio-capacity)<br />
to regenerate them. A country’s ecological<br />
Available estimates show that humanity’s ecological footprint<br />
has exceeded the bio-capacity of the planet by late<br />
1980s. Presently, we are using 30 percent more<br />
resources than the planet can regenerate<br />
footprint is the total area required to produce<br />
the food and fibre that it consumes,<br />
absorb its waste, and provide space for its<br />
infrastructure. People consume resources<br />
and ecological services all over the world,<br />
so their footprint is the sum of these areas,<br />
wherever they are on the planet. Ecologi-<br />
THE INDIA ECONOMY REVIEW<br />
165
PROGRESS WITHIN LIMITS<br />
Table-2: Changes In Select Indicators Of India’s Bio Capacity And Its Use<br />
Per capita Availability Of:<br />
Year Population<br />
(million)<br />
Land<br />
(ha)<br />
Farm<br />
Land<br />
(ha)<br />
Forest<br />
Area<br />
(ha)<br />
Population<br />
Density<br />
(per<br />
q.km)<br />
Energy<br />
generated<br />
(Billion<br />
KWH)<br />
Crude<br />
Oil<br />
Imports<br />
(Millon<br />
Tonnes)<br />
Imports Of<br />
Petroleum<br />
(Million<br />
tonnes)<br />
Production<br />
Of Coal<br />
(Million<br />
tonnes)<br />
Export (US$<br />
Million)<br />
(including<br />
re-exports)<br />
Import<br />
(US$<br />
Million)<br />
1951 361.1 110 0.91 0.64 0.113 6.6 3.1 32.3 1490 1852<br />
1961 439.2 134 0.75 0.50 0.124 20.1 6 2.5 55.2 1381 2281<br />
1971 548.2 167 0.60 0.41 0.115 61.2 11.7 1.1 76.3 2153 2443<br />
1981 683.3 208 0.48 0.36 0.099 129.2 16.2 7.3 119 8704 15174<br />
1991 846.3 257 0.39 0.30 0.081 289.4 20.7 8.7 225.5 17865 19411<br />
2001 1028.7 313 0.30 0.25 0.074 554.5 78.7 7.0 332.6 43827 51413<br />
Source: Ministry of Environment and Forests,Government of India (Various Reports).<br />
cal footprints enable people to take personal<br />
or collective actions in support of a<br />
world where humanity lives within the<br />
means of one planet (WWF, 2006; Global<br />
footprint network). <strong>The</strong> available estimates<br />
show that India’s ecological footprint<br />
per person (0.8 global hectares) is<br />
lower than the world average (2.2 global<br />
hectares) but it is much higher than the<br />
nations' biocapacity and this has placed<br />
India in the list of “ecological deficit”<br />
countries. <strong>The</strong> Living Planet Report -<br />
2006 ranked India as the third largest<br />
footprint country followed by United<br />
States and China. “India’s total ecological<br />
footprint is likely to increase due to the<br />
twin pressures from population and consumption<br />
patterns unless suitable actions<br />
are taken. In 2002, the humanity’s per person<br />
footprint was 2.2 global hectares (gha)<br />
whereas the bio capacity per person was<br />
1.8 gha. India’s footprint was 0.8 gha<br />
which is lower than world average but<br />
lower than the nation’s biocapacity (04<br />
gha). Between 1975 and 2003, India’s foot<br />
print per person has increased faster (16<br />
percent) than that of the world (14 percent)<br />
but much lower than many other economies.<br />
<strong>The</strong> ecological footprint estimates<br />
indicate that India’s bio-capacity is not<br />
sufficient to meet the needs of the nations'<br />
growing population. In other words, future<br />
development in India is also dependant<br />
on the use of natural resources of<br />
other countries. Globalization makes it<br />
possible to use these resources legally and<br />
openly. <strong>The</strong> nation has committed to conservation<br />
of natural resources and biodiversity<br />
and implemented several policy<br />
and legal measures. It is also party to<br />
many Multilateral Environmental Agreements<br />
(MEAs) such as Convention on<br />
Biological Diversity (CBD), CITES, Montreal<br />
Table-2: Changes In Select Indicators Of India’s Bio Capacity And Its Use<br />
Protocol. In practice,<br />
Country Ecological<br />
Footprint<br />
(Demand)<br />
Biocapacity<br />
(Supply)<br />
(gha. Per<br />
Ecol. Footprint –<br />
Biocapacity =Ecological<br />
Reserve Or<br />
Footprint<br />
Change Per<br />
Person (%)<br />
Biocapacity<br />
Change Per<br />
Person (%)<br />
these measures have regulated<br />
or prohibited consumptive<br />
use (extraction) of natural resources<br />
in India. However,<br />
(gha. Per Person) Ecological Deficit (-) 1975-2003 1975-2003<br />
Person) 2003 2003 gha. Per Person)2003<br />
this gives economic opportunities<br />
for many biodiversity<br />
India 0.8 0.4 -0.4 16 -23<br />
China 1.6 0.8 -0.9 82 -3<br />
rich countries where such resources<br />
Brazil<br />
South Africa<br />
USA<br />
Indonesia<br />
World<br />
Source: WWF (2006)<br />
2.1<br />
2.3<br />
9.6<br />
1.1<br />
2.2<br />
9.9<br />
2.0<br />
4.7<br />
1.0<br />
1.8<br />
7.8<br />
-0.3<br />
-4.8<br />
-0.1<br />
-0.45<br />
30<br />
-13<br />
38<br />
36<br />
14<br />
-27<br />
-23<br />
-20<br />
-20<br />
-25<br />
are abundant. For<br />
example, felling of timber is<br />
prohibited, wood in log forms<br />
cannot be exported from India<br />
with a view to safeguard<br />
our remaining forests. But,<br />
166 THE <strong>IIPM</strong> THINK TANK
ENVIRONMENTAL ECONOMICS<br />
we permit imports from all over the world<br />
including those originated from rainforests/<br />
worlds critical eco-regions. <strong>The</strong>re<br />
are several restrictions for land in India for<br />
establishing plantations, but enough land<br />
is offered for Indian companies in many<br />
countries in order to attract investment<br />
and creating employment opportunities in<br />
those countries. <strong>The</strong> proponents of trade<br />
liberalization may argue that this is the<br />
principle of trade and here the comparative<br />
advantage is the natural resources<br />
(mineral/ timber). <strong>The</strong>oretically, there is<br />
no inherent conflict between trade and<br />
environment (Ripetto,1994). <strong>The</strong>y admit<br />
that environmental issues are negative externalities<br />
and the same can be internalized<br />
through appropriate policies such as<br />
“Polluter Pays Principle” (PPP). But, the<br />
environmentalists are concerned about<br />
the depletion of these resources due to<br />
unsustainable extraction. If they are unable<br />
to influence the countries that permit<br />
extraction of such resources, they can request/lobbey<br />
for impose regulation of the<br />
products and services in the leading markets<br />
it reaches/ importing countries. Such<br />
regulations can be in the form of certification,<br />
labeling or other environmental<br />
standards. This in turn can be challenged<br />
by the affected countries as environmental<br />
non-tariff barriers are targeted to distort<br />
their international trade. <strong>The</strong>refore, these<br />
measures are applied voluntarily in most<br />
cases. <strong>The</strong> success of these measures is<br />
dependant on the ability to develop techniques<br />
or approaches for sustainable use<br />
of these resources with the active participation<br />
of all stake holders. Forest Stewardship<br />
Council (FSC) certification is an<br />
example for sustainable and resourceful<br />
usage of timber and other forest products.<br />
Presently, in India, these novel approaches<br />
are yet to gain popularity.<br />
What Options Are Available?<br />
Several options are available to minimize<br />
the ecological footprint and enhance the<br />
bio-capacity. This include appropriate<br />
population policy enabling slowing down<br />
the population growth and providing incentives<br />
for those opting for fewer children.<br />
Promotion of policies and programmes<br />
that can influence changes in<br />
consumption patterns at all levels. It is<br />
recgonised that people living below subsistence<br />
need to increase their consumption<br />
to reach out of poverty, others can<br />
reduce consumption and lavish life style.<br />
<strong>The</strong> quantity of resources used in the production<br />
of goods and services can be reduced.<br />
This can be achieved through energy<br />
efficiency; minimizing waste;<br />
increasing recycling and reuse, use of fuel<br />
efficient transportation systems; reduction<br />
in transportation of goods and services;<br />
technical innovation; Technologies<br />
need to be promoted to increase productivity.<br />
Biocapacity can be enhanced<br />
through implementation of environmentally<br />
sound land management, effective<br />
use of marginal lands, promotion of agricultural<br />
technologies; protecting soil from<br />
erosion. Several options, including carbon<br />
markets are available for prevention<br />
and mitigation of climate change issues.<br />
Inappropriate use of chemicals can degrade<br />
ecosystems and loss of biodiversity.<br />
To address this, organic farming need to<br />
be promoted. Business and Industry<br />
should adopt environmentally credible<br />
procurement policies to minimize their<br />
footprint. For this, several voluntary certification<br />
schemes, such as forest certification<br />
are available. <strong>The</strong> approach to the<br />
11 th plan has rightly suggested that environmental<br />
issues cannot be addressed by<br />
slowing economic growth in India. Rather,<br />
high economic growth can provide the<br />
resources to prevent and deal with environmental<br />
issues.<br />
References<br />
• FSI (2005) State of forest report-2003,<br />
Forest survey of India, Dehra Dun<br />
• Haripriya Gundimeda, Sanjeev Sanyal,<br />
Rajiv Sinha and Pavan Sukhdev<br />
(2005) Estimating the value of<br />
agricultural cropland and pastureland<br />
in India, Green Accounting for<br />
Indian States Project-(GIST),<br />
(monograph-)Chennai<br />
• Ripetto, R (1994) Trade and Sustainable<br />
Development, United Nations Environment<br />
Programme, Nairobi<br />
• Planning Commission (2006) Towards<br />
more faster and more inclusive growth-<br />
An approach to the 11 th Five Year Plan,<br />
Planning Commission, Govt. of India<br />
• (1998) Looking Back to <strong>Think</strong> Ahead-<br />
Green India-2047, Tata Energy Research<br />
Institute, New Delhi.<br />
• UNEP (<strong>2007</strong>) Global Environment<br />
Outlook-4, Environment and Development,<br />
United Nations Environment<br />
Programme, Nairobi.<br />
• Verma, D D, S Arora and R K Rai<br />
(Eds) (<strong>2007</strong>); 'Perspectives on biodiversity-<br />
A vision for mega diverse countries',<br />
Ministry of Environment and<br />
Forests (MoEF), Government of India,<br />
New Delhi.<br />
• WWF (2006) Living Planet Report-<br />
2006, WWF-International, Gland<br />
• World Bank (<strong>2007</strong>) Strengthening Institutions<br />
for Sustainable Growth,<br />
Country environment analysis for India,<br />
<strong>The</strong> World Bank (India Country<br />
Office), New Delhi.<br />
THE INDIA ECONOMY REVIEW<br />
167
Shubha Ghosh<br />
Professor of Law<br />
SMU Dedman School of Law<br />
Dallas, Texas USA<br />
<strong>The</strong> First Sale Doctrine Before <strong>The</strong> U.S. Supreme Court:<br />
Intellectual Property Implications For India<br />
"Bad laws are the worst sort<br />
of tyranny."<br />
-Edmund Burke<br />
<strong>The</strong> United States Supreme<br />
Court will be hearing oral arguments<br />
in a case called Quanta<br />
Computers v. LG Electronics in<br />
January, 2008. At issue in the case is<br />
the status of the first sale doctrine in<br />
light of recent decisions by the United<br />
States Court of Appeals for the Federal<br />
Circuit, the intermediate appeals court<br />
for the review of claims under patent<br />
law. <strong>The</strong> Federal Circuit has created a<br />
doctrine called the conditional sale<br />
doctrine which allows patent owners to<br />
impose conditions on the sale of license<br />
of a patented invention which limits the<br />
application of the first sale doctrine.<br />
<strong>The</strong> following is a summary of an argument<br />
from a brief that I submitted on<br />
behalf of the American Antitrust Institute<br />
that supports Quanta’s position in<br />
the case. Although resolving issues of<br />
U.S. law, the outcome of this case has<br />
important implications for the development<br />
of intellectual property law globally<br />
and in India.<br />
For over a century and a half, the first<br />
sale doctrine (also known as the exhaustion<br />
doctrine) has provided certainty<br />
for users, manufacturers and<br />
other business entities in the distribution<br />
of goods and services protected by<br />
intellectual property law. Patent and<br />
copyright law grants to inventors and<br />
authors limited rights to control the distribution<br />
of the products of their creativity.<br />
However, the first sale doctrine<br />
creates a bright-line rule that ensures<br />
that purchasers of these works can further<br />
transfer these items to third parties<br />
without the interference of the original<br />
intellectual property owners. In this<br />
way, the first sale promotes an active<br />
and vibrant marketplace for works created<br />
through the benefit of patent and<br />
copyright and therefore is integral to<br />
the goals of innovation and competition<br />
that are at the foundation of the system<br />
of intellectual property rights. <strong>The</strong><br />
doctrine of conditional sale, as articulated<br />
and applied by the United States<br />
168 THE <strong>IIPM</strong> THINK TANK
LAW AND PUBLIC POLICY<br />
Court of Appeals for the Federal circuit,<br />
allows patent owners to circumvent<br />
the first sale doctrine and undermine<br />
its beneficial policies, and is inconsistent<br />
with this Court’s precedent.<br />
Given the intangibility and nonrivalrous<br />
characteristic of intellectual property<br />
rights, formal legal titling systems<br />
cannot readily be created to ensure that<br />
such works can be transferred without<br />
being at the sufferance of the original<br />
patent or copyright owner. <strong>The</strong> first<br />
sale doctrine serves the function of a<br />
formal legal titling system for intellectual<br />
property. Under the first sale doctrine,<br />
a patent or copyright owner exhausts<br />
her distribution right upon the<br />
first sale of the protected work thereby<br />
allowing subsequent purchasers to further<br />
transfer the work. <strong>The</strong> doctrine<br />
requires that the intellectual property<br />
owner obtain its consideration in the<br />
first sale (or license to sell), before allowing<br />
the distribution of a product<br />
embodying its intellectual property into<br />
the stream of commerce. In this way, it<br />
allows for active and vibrant markets<br />
for works of art, for novels, for movies,<br />
for innovative gadgets containing patented<br />
inventions, and for technology<br />
itself. <strong>The</strong> doctrine provides the legal<br />
foundation for primary markets, for<br />
secondary markets for rentals of these<br />
types of works, and for credit markets<br />
in which copyright and patents can<br />
serve as security interests. Absent the<br />
first sale doctrine, business people engaged<br />
in the buying and selling of works<br />
that are either directly protected by intellectual<br />
property or contain components<br />
protected by intellectual property<br />
may be required to compensate the<br />
original intellectual property owner<br />
whenever a transfer of interest in the<br />
work occurs. And purchasers of such<br />
works would always take title subject to<br />
the claims of the original intellectual<br />
property owner, perhaps unaware of<br />
such claims. Such actual or potential<br />
interference from the original creator<br />
would only serve to raise transaction<br />
costs and to create impediments to free<br />
and open markets.<br />
Starting with its decision in Mallinckrodt,<br />
Inc. v. Medipart, Inc., 976 F.2d<br />
700 (Fed. Cir. 1992), the Federal Circuit<br />
has misconstrued this Court’s precedent<br />
to permit a patent owner that<br />
“conditions” the sale of a patented invention<br />
to sue subsequent purchasers<br />
who violate the condition for patent infringement.<br />
<strong>The</strong> Federal Circuit’s justification<br />
for the conditional sale doctrine<br />
rests on a misunderstanding of the<br />
relationship between the transfer of<br />
works protected by intellectual property<br />
rights and conditions attendant in<br />
contracts that accompany such a transfer.<br />
While purporting to rely on contract<br />
principles, the Federal Circuit has<br />
converted restrictions ancillary to the<br />
transfer of a patented invention from<br />
contractual rights, subject to the scrutiny<br />
under relevant contract, antitrust,<br />
and patent law, to intellectual property<br />
rights enforceable through a claim for<br />
patent infringement, with its attendant<br />
panoply of remedies and potential immunity<br />
from antitrust scrutiny. Because<br />
the Federal Circuit’s conditional sale<br />
doctrine allows a patent owner to expand<br />
the reach of its patent grant and<br />
disrupt free and open markets, it should<br />
be reversed.<br />
In the case at bar, respondent’s licensee<br />
has sold an article that “embodies<br />
essential features” of the patented<br />
invention and “has destined the article<br />
to be finished by the purchaser in conformity<br />
to the patent.” Respondent<br />
acquired a large patent portfolio of<br />
technologies used in the manufacture<br />
of computer chips. After a dispute with<br />
Intel, the chip manufacturer, respondent<br />
entered into a complex licensing<br />
agreement with Intel that allowed Intel<br />
to use the technology in the construction<br />
and sale of chips. <strong>The</strong>se chips in<br />
turn were sold to petitioners and incorporated<br />
as components in computer<br />
hardware systems. <strong>The</strong> LG-Intel license<br />
agreement contained a proviso<br />
that no license was granted to any third<br />
party to combine the chips with non-<br />
Intel products, and that Intel was re-<br />
<strong>The</strong> first sale doctrine creates a bright-line rule that ensures<br />
that purchasers of the creative works can further<br />
transfer these items to third parties without the interference<br />
of the original intellectual property owners<br />
quired to and did provide notice of this<br />
limitation to petitioners. See LG Electronics,<br />
Inc. v. Bizcom Electronics, Inc.,<br />
453 F.3d 1364, 1368 (Fed. Cir. 2006).<br />
But the license agreement also stipulated<br />
that it would not “limit or alter the<br />
effect of patent exhaustion that otherwise<br />
would apply when” the chips were<br />
sold, the notice received by petitioners<br />
was apparently sent after many of the<br />
sales had already occurred, and the<br />
chips had no other reasonable use. See<br />
THE INDIA ECONOMY REVIEW<br />
169
A NEW BEGINNING<br />
Brief for Petitioners 2, 8-9. Now, respondent<br />
seeks to enforce its patent<br />
rights against the petitioners based on<br />
their alleged violation of “conditions”<br />
placed on the original agreement with<br />
Intel. <strong>The</strong> first sale doctrine was designed<br />
to prohibit precisely this type of<br />
reach-through by the patent owner to<br />
enforce its patent rights. Under this<br />
Court’s precedents, once the petitioners<br />
purchased products embodying essential<br />
features of the patented invention<br />
in an authorized sale, respondent’s<br />
patent rights were exhausted. If the<br />
conditions placed in the license with<br />
Intel are consistent with contract law,<br />
antitrust law, and the patent misuse<br />
doctrine, then any violations can be enforced<br />
against Intel as contract claims<br />
(or possibly against the petitioners as<br />
third party contract claims), rather than<br />
patent infringement claims with the attendant<br />
remedies of injunctive relief,<br />
treble damages, and attorneys’ fees.<br />
Such a result is consistent with the need<br />
for certainty and competitiveness of not<br />
only this market transaction, but also<br />
the wide ranges of market transactions<br />
that rest on intellectual property. In<br />
eBay Inc. v. Mercexchange, L.L.C., 126<br />
S.Ct. 1837 (2006), a plurality of the<br />
Court was concerned about the development<br />
of an industry “in which firms<br />
use patents not as a basis for producing<br />
and selling goods but, instead, primarily<br />
for obtaining licensing fees”, and the<br />
potentially harmful effects of injunctive<br />
relief “[w]hen the patented invention is<br />
but a small component of the product<br />
the companies seek to produce….” Id.<br />
at 1842 (Kennedy, J., concurring). <strong>The</strong><br />
In future cases, Indian High Courts could look to procompetition<br />
decisions in the United States, such as eBay<br />
and perhaps Quanta, to recognize that the need for competition<br />
balances the need for intellectual property rights<br />
first sale doctrine plays a role in preventing<br />
similar market disruption, as<br />
here, when a non-manufacturing patentee<br />
seeks to control the manufacture of<br />
end products in which the patented item<br />
is but a small component.<br />
<strong>The</strong> United States Supreme Court’s<br />
resolution of the Quanta case has implications<br />
globally. By abrogating the<br />
conditional sale doctrine, the Court will<br />
be affirming the bedrock principle of<br />
the first sale doctrine. More importantly,<br />
it will be recognizing competitive<br />
values in intellectual property law.<br />
Such a result is imperative for countries<br />
like India that are reforming intellectual<br />
property law and institutions. As<br />
the recent dispute brought by Novartis<br />
over the patentability of Gleevak shows,<br />
intellectual property norms are still being<br />
debated locally. <strong>The</strong> Quanta case<br />
shows that these norms are global. If<br />
the first sale doctrine is affirmed, then<br />
competition becomes an important normative<br />
goal for the design of intellectual<br />
property systems. India will have<br />
a strong position in asserting the values<br />
of competition as a limit on patent and<br />
other intellectual property rights.<br />
More subtly, if the Supreme Court<br />
strikes down the conditional sale doctrine,<br />
the Court will be placing some<br />
limits on the power of the Federal Circuit,<br />
the specialized patent appellate<br />
court in the United States. <strong>The</strong> Court<br />
will be implicitly saying that despite its<br />
expertise in patent law, the Federal Circuit<br />
cannot alter through the creation<br />
of new rules, like the conditional sale<br />
doctrine, that counter established principles<br />
of competition law and policy,<br />
like the first sale doctrine. In the Novartis<br />
dispute, the High Court of Chennai<br />
deferred to the Indian patent office<br />
and left open the standard for innovation<br />
in the pharmaceutical industry. In<br />
future cases, Indian High Courts could<br />
look to pro-competition decisions in the<br />
United States, such as eBay and perhaps<br />
Quanta, to recognize that the need for<br />
competition balances the need for intellectual<br />
property rights. As discussion<br />
in this essay suggests, intellectual property<br />
rights and competition together are<br />
both important for innovation.<br />
In conclusion, a business dispute over<br />
a patent license is the basis for the dispute<br />
in Quanta. But at stake is a bedrock<br />
principle of law, the first sale doctrine,<br />
and the relationship between<br />
competition norms and intellectual<br />
property law. <strong>The</strong> Supreme Court’s<br />
decision in the case should be closely<br />
watched for what it implies for international<br />
intellectual property law.<br />
170 THE <strong>IIPM</strong> THINK TANK
Ali Mehdi,<br />
Research Associate,<br />
Indian Council for Research on International<br />
Economic Relations (ICRIER), New Delhi<br />
Liberty And Prohibition:<br />
A Governance Dilemma<br />
"I don't make jokes. I just<br />
watch the government and<br />
report the facts."<br />
-Will Rogers<br />
<strong>The</strong> Excise department of the<br />
Delhi government is, self-professedly,<br />
the second largest<br />
revenue earning department of the<br />
state. It generated Rs. 6190 crores as<br />
liquor revenue between 1994-95 and<br />
2004-05, while targeting an all-time<br />
high of Rs.900 crores for 2005-06. <strong>The</strong><br />
department’s website boasts that the<br />
success of the government is reflected<br />
in its ever-increasing revenue collection<br />
through liquor sales, which<br />
reached 15.3 crore bottles in 2002-03<br />
from 6.4 crore bottles in 1994-95. Most<br />
of the retail liquor trade in Delhi is<br />
done by four government agencies---<br />
Delhi Tourism and Transportation<br />
Development Corporation (DTTDC),<br />
<strong>The</strong> Delhi State Civil Supplies Corporation<br />
(DSCSC), Delhi State Industrial<br />
Development Corporation<br />
(DSIDC) and Delhi Consumer Co-operative<br />
Wholesale Store Limited (DC-<br />
CWS) through 309 shops. Private entrepreneurs<br />
hold 95 shops, and two<br />
L-53 licenses for retail sale through<br />
departmental stores for “off-site” consumption<br />
have been granted.<br />
Within the same Delhi government,<br />
there is the Directorate of Prohibition<br />
which vows by Article 47 of the Constitution<br />
and Mahatma gandhi, the Father<br />
of the Nation, claiming that<br />
“drinking in the society has ominous<br />
implications and weakens the entire<br />
social structure by disrupting the institution<br />
of the family and the country<br />
and also distorts the priorities of the<br />
development process.” While the Excise<br />
department is committed to “making<br />
safe liquor available to the consumers,”<br />
the Directorate of Prohibition<br />
tries “to promote healthy living among<br />
the citizens of Delhi by educating them<br />
regarding the ill effects of liquor and<br />
drug abuse and on the damage caused<br />
by the substances of abuse to the society<br />
and to the physical, psychological,<br />
social, economic and occupational life<br />
of an individual.”<br />
Starting as a cell in the Directorate<br />
of Information & Publicity in 1978-79,<br />
172 THE <strong>IIPM</strong> THINK TANK
SOTTO VOCE<br />
the Directorate of Prohibition has<br />
been organizing fairs/melas, nukkar<br />
nataks, magic programmes, short films,<br />
and propaganda through kiosks,<br />
hoardings, backlit pillars, banners, bus<br />
back panels/queue shelters, computer<br />
animation display systems, seminars<br />
and conferences, personality development<br />
programmes, adventure activities,<br />
youth camps in collaboration with<br />
voluntary organizations. It has a staff<br />
of 21 employees (2005), a budget allocation<br />
of Rs. 1.7 crores for 2006-07,<br />
and has spent almost Rs. 8 crores in 7<br />
years (between 1997-98 and 2004-05).<br />
73.4 percent of the expenditure went as<br />
‘other charges', 10.2 percent into salaries,<br />
6.9 percent into strengthening of<br />
the department, and 9.1 percent in actual<br />
advertisement & publicity. All this<br />
to convey the message, which is mentioned<br />
as the last point in the Do’s &<br />
Don’ts list of the Excise department:<br />
“Consumption of liquor is injurious to<br />
health.” According to a survey conducted<br />
in 2002 by the Evaluation Unit<br />
of Planning department, 92 percent of<br />
those who consumed liquor were aware<br />
of its ill-effects, while 30 percent had<br />
reduced consumption due to Directorate’s<br />
publicity, doctor’s advise, social<br />
compulsion and financial difficulties.<br />
Starting with the name of the Directorate<br />
itself, there is no more “Prohibition”<br />
(as it refers officially to a restriction<br />
or ban on manufacture, import,<br />
export and sale of liquor) in Delhi. Appraisal<br />
of the Annual Plan 2004-05 by<br />
Planning department says that the<br />
functional utility and role of departments/undertakings<br />
like the Directorate<br />
of Prohibition needs to be assessed<br />
in view of “the changed scenario.” At<br />
a time when liquor sector has been liberalized<br />
by the state government,<br />
where is the moral/technical justification<br />
for Directorate of Prohibition?<br />
Alcohol consumption has increased<br />
over the years, but who is reaping the<br />
benefits of it? <strong>The</strong> government itself,<br />
through its Excise department and infact,<br />
more than the so-called “liquor<br />
mafia.” <strong>The</strong> government should think<br />
clear and decide what it needs: revenues<br />
or Gandhigiri?<br />
More importantly, by the Directorate’s<br />
own admission, in course of addressing<br />
the reasons for alcohol intake,<br />
the will power of the consumer, love<br />
and affection by people close to him/<br />
her, motivate a consumer to reduce/<br />
give up alcohol consumption (Annual<br />
Report 2001-2002). Is the Directorate<br />
capable of any of these? By all measures,<br />
not in the least. Institutionally,<br />
de-addiction centers would be more<br />
helpful. But the Directorate has none.<br />
If information dissemination is the<br />
aim, civil society does take care of that,<br />
and newspapers do publish newer research<br />
on health issues as well as on<br />
While the Excise department is committed to “making safe<br />
liquor available to the consumers,” the Directorate of Prohibition<br />
tries “to promote healthy living among the citizens<br />
of Delhi by educating the ill effects of liquor!<br />
alcohol consumption (<strong>The</strong> Times of<br />
India, New Delhi, <strong>Dec</strong>ember 29, 2006).<br />
And they are probably much more effective<br />
owing to their wide reach. If the<br />
government still insists, it could either<br />
remould the Directorate to the status<br />
of a cell within Directorate of Information<br />
& Publicity. This in my opinion,<br />
makes good economic sense. Alternatively,<br />
it can outsource publicity to an<br />
ad vertising agency, as it has undertaken<br />
in the case of ‘India Shining’<br />
campaign. People will vote in its favour.<br />
Widening the debate, and with<br />
far-reaching consequences, let us ask<br />
if the government, especially in a pluralistic<br />
country like India, should be<br />
involved with moral issues of either individual<br />
or social import? Claiming<br />
that alcohol consumption “weakens<br />
the entire social structure” and “distorts<br />
the priorities of the development<br />
process” is too far-fetched to be discussed<br />
seriously. <strong>The</strong> moral argument<br />
touches upon individual and community<br />
rights, and the freedom that is or<br />
should be available to them. As a<br />
staunch advocate of individual choice,<br />
I am in favour of letting the individuals<br />
decide for themselves, without making<br />
value-judgments or taking subjective<br />
decisions, to the extent that their actions<br />
do not hurt others or the system.<br />
Making drunk driving illegal is fine,<br />
but the invasion of moral spaces in a<br />
secular state like India is extremely<br />
‘disenchanting.’<br />
THE INDIA ECONOMY REVIEW<br />
173
Baharul Islam<br />
Chairman & CEO, South Asia Development<br />
Gateway, & Member, High Power Committee on<br />
International Cooperation,<br />
Government of Mizoram<br />
An Alternative Integrated Development Perspective For <strong>The</strong><br />
Peripheral Regions: <strong>The</strong> Case Of Barak Valley In Northeast India<br />
"Make no little plans; they<br />
have no magic to stir men's<br />
blood...Make big plans, aim<br />
high in hope and work."<br />
-Daniel H. Burnham<br />
Background<br />
It is a legitimate desire for any region like<br />
Barak Valley in Assam (specifically Cachar,<br />
Karimganj & Hailakandi districts) to<br />
mobilize its intellectual resources and<br />
technical expertise including those in the<br />
diasporas, to plan for growth, equity and<br />
economic development. At the dawn of the<br />
third millennium various regions and communities<br />
around the world have weathered<br />
the storm of economic and social crises<br />
that have been the order of the day ever<br />
since the mid seventies. However, due<br />
many reasons, social, political and economic,<br />
Barak Valley region doesn’t have<br />
any such perspective plan. Sons and daughters<br />
of the valley who hold various high<br />
professional positions in India and abroad<br />
often feel a deep urge to work for the development<br />
of the area but in the absence<br />
of any institutional civil society platform,<br />
such desires remain isolated. Looking<br />
ahead into the coming century, it is with<br />
great optimism that some groups of people<br />
from the valley have started to think of<br />
breaking down the developmental processes<br />
into discrete but technically feasible<br />
objectives, the pronouncements-cum-mission<br />
objectives of an integrated socio-economic<br />
development plan for the valley.<br />
<strong>The</strong> South Asia Development Gateway<br />
early <strong>2007</strong>, undertook a mission to incorporate<br />
an Integrated Development Plan<br />
(IDP) for this region. It is to elaborate,<br />
propose and initiate such an exercise within<br />
the civil society and research platforms<br />
such as India Economy Review (IER), I<br />
take this opportunity to put forward some<br />
of the potential plans that we can put together<br />
to develop the region. A sweeping<br />
look at the objectives of various national<br />
plans like Vision 2020 around the world<br />
may give a critical insight into how such<br />
plans are formulated nationally in the strategic<br />
sense: they were measured against<br />
the background of the present situation,<br />
and strategies were designed to attain the<br />
national goals. Despite its constraints,<br />
Barak Valley has a lot more opportunities<br />
than we usually bother to decipher and<br />
indeed, rapid economic growth can only<br />
be achieved if our aspiration gap incites a<br />
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proper management of our technical, financial<br />
and human resources. True, these<br />
resources alone would not suffice, and as<br />
such we have to be very vigilant on those<br />
necessary institutional reforms without<br />
which the transformation of these resources<br />
into socio-economic development<br />
achievements will not be attained.<br />
Development Paradigm<br />
Development is all about people, how they<br />
live their daily lives, how they attain selfrealization<br />
and how they improve on their<br />
living standards. <strong>The</strong> preliminary work<br />
from which an Integrated Regional Development<br />
Plan emanates is through discussions<br />
at all levels of society, the plan can<br />
therefore validly be said to represent the<br />
aspirations of the local people. This article<br />
covers some of those critical developmental<br />
sectors for Barak Valley that are capable<br />
of showing the most leverage on our<br />
endeavor to improve our position on the<br />
collective income ladder. It is diagnosed<br />
that agriculture, which is presently the<br />
dominant activity in our economy, will<br />
need continuous appraisal of the existing<br />
farming systems and technologies. Effective<br />
research and development within the<br />
framework of local agricultural activities<br />
will enhance productivity and improve on<br />
the quality of farm output. As a corollary<br />
to improvements in farming, a proper marketing<br />
strategy for farm output is needed<br />
to translate these into income. In view of<br />
the subsumed financial resources for this<br />
strategy, it is prescribed that new institutional<br />
arrangements be forged to improve<br />
on financing agribusiness activity through<br />
the establishment of specialized financial<br />
institutions. Although industrial activity<br />
is, as yet, at an early stage of development<br />
in our area, or almost absent in general, it<br />
is common knowledge that this type of<br />
activity has a great leverage on income and<br />
social status in the development process.<br />
Rapid industrialization is perceived to signify<br />
an increase in the population of industrial<br />
units, a quality improvement in output<br />
as well as a geographical expansion of the<br />
market for industrial output.<br />
Looking at the constraints of these specific<br />
objectives, we recommend the adoption<br />
of improved monetary and fiscal<br />
policies that will enhance the mobilization<br />
of savings and facilitate their transfer to<br />
this sector, the targeting of industries<br />
whose technologies are easily assimilated<br />
by the present workforce, the designing of<br />
policies and building of institutions at local<br />
level that will reduce the mortality rate<br />
of the start-ups and spin-offs for all direct<br />
investments and a spatial distribution of<br />
industry in order to curb the rural-urban<br />
drift. Strategies for the main productive<br />
sectors, namely Agriculture and Industry,<br />
have been well articulated with strategies<br />
for the service industries in various states<br />
and regions of the country. Smaller areas,<br />
for instance Guna district in Madhya<br />
Pradesh, have also put in place such perspective<br />
plan but with so much intellectual<br />
and technical expertise belonging to<br />
Barak Valley, no such plan has been<br />
formed till date. <strong>The</strong> financial sector,<br />
transport sectors as well as the energy and<br />
industry sectors, have been examined in<br />
light of the ultimate objective of such a<br />
plan, namely the transformation of the<br />
Barak Valley into a prosperous region by<br />
the end of the first quarter of the this century.<br />
In an integrated development plan<br />
for the area, the social sectors should be<br />
given the prominence they deserve.<br />
Health, Education and other Social services<br />
form essential pillars of Human Capital<br />
development. Without a coherent and<br />
consistent Human Resource Development<br />
(HRD) strategy, “a decent standard of living<br />
for one and all” as aspired by the people<br />
of the valley today would not be attained.<br />
Finally, perhaps a word of caution<br />
will help dissipate some concerns that people<br />
here and there, may evoke on important<br />
matters not featuring in the document.<br />
<strong>The</strong> idea of presenting a possible<br />
integrated development plan for Barak<br />
Valley is a specific developmental perspective<br />
and as such constitutional and other<br />
legal matters are best dealt with outside<br />
such a document that proposes to be blue<br />
print for guiding economic and social<br />
policy formulation, implementation and<br />
Resources alone would not suffi ce, and we have to be<br />
vigilant on the necessary institutional reforms, without<br />
which the transformation of these resources into socioeconomic<br />
development achievements will not be attained<br />
monitoring. Implementation strategies do<br />
not also feature in this document but are<br />
already under discussion as to the optimal<br />
strategies and monitoring arrangements.<br />
In order to pilot such an district level integrated<br />
plan, Karimganj district administration<br />
in collaboration with the South<br />
Asia Development Gateway has formed a<br />
District Level Integrated Development<br />
Committee under the Chairmanship of<br />
the local Deputy Commissioner (Collector)<br />
and an expert from the UN Economic<br />
Commission for Asia (Bangkok) will<br />
visit the district in late <strong>Dec</strong>ember, <strong>2007</strong> to<br />
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REIMAGINING INDIA<br />
have a detailed consultation with the stakeholders.<br />
Barak Valley Contexts<br />
An Integrated Development Plan for any<br />
area comprises three inter-related documents,<br />
namely:<br />
(1) A Policy Framework Paper (PFP)<br />
that spells out the strategic thrust, the<br />
strategy content and the budgetary and<br />
institutional framework within which various<br />
projects and programmes will configure,<br />
explicitly linking the region to the<br />
national Vision 2020;<br />
(2) <strong>The</strong> Operational Framework of the<br />
area Development Strategy which takes<br />
the form of a Medium Term Expenditure<br />
Framework (MTEF). <strong>The</strong> MTEF is linked<br />
to the Macroeconomic Growth Strategy<br />
through the PFP, the latter reflecting the<br />
objectives of national Vision 2020; and,<br />
(3) <strong>The</strong> Action Plan for the target area,<br />
which highlights the Implementation Strategy,<br />
the Participatory Plan and the organizational<br />
setting within which strategic<br />
action is implemented, monitored and<br />
evaluated.<br />
<strong>The</strong> integrated development plan, as opposed<br />
to the state or country level plans, is<br />
intended to be a comprehensive “local development<br />
framework” that links macroeconomic<br />
growth with poverty reduction<br />
strategies. <strong>The</strong> objective of the plan is to<br />
ensure greater focus on poverty reduction<br />
through generating employment avenues<br />
and renewed emphasis on faster job-sector<br />
growth within the valley outside the traditional<br />
‘government job syndrome’ that ails<br />
the mindset of the potential workforce in<br />
the valley. It is essentially a prerequisite<br />
for sustainable development efforts in the<br />
valley to change that mindset and build an<br />
‘employable workforce’ out of the thousands<br />
of ‘degree-holding but unemployable’<br />
manpower that exist today in the<br />
region.<br />
<strong>The</strong> integrated development plan is to<br />
serve as the first building block for opera-<br />
<strong>The</strong> integrated development plan serve as the first building<br />
block for operationalizing an overall development mission<br />
that is locale-specifi c, based on the aspirations of the local<br />
people and don't follow the ‘trickle-down approach<br />
tionalizing an overall development mission<br />
that is locale-specific, based on the aspirations<br />
of the local people and do not necessarily<br />
follow the ‘trickle-down residual<br />
flow approach’ of development. All the<br />
proposed development projects and programmes<br />
financed by government, international<br />
development partners, NGOs,<br />
civil society will be implemented within<br />
this framework of the plan. <strong>The</strong> rationale<br />
is to move away from the prevailing peacemeal<br />
project approach in the development<br />
process and to give a road-map for the region<br />
that will be a reference point in formulating<br />
programmes/projects to ensure<br />
maximum impact and focus on priorities.<br />
It essentially calls for a more efficient use<br />
of local (in country) and external resources<br />
in support of the ultimate goal of economic<br />
development. <strong>The</strong> essential feature<br />
of the Barak Valley Integrated Development<br />
Plan is that it is locally owned implying<br />
that it reflects the needs of the people<br />
whose interests are being attended.<br />
An important element of the process is<br />
monitoring and evaluation. This entails<br />
the establishment of benchmarks of performance<br />
indicators by all the sectors in<br />
the implementation of the plan which will<br />
facilitate the measurement of progress towards<br />
the achievement of targets.<br />
Targets And Programme Areas<br />
In line with the international development<br />
goals, a Barak Valley Integrated Development<br />
Plan (BVIDP) will be in tandem with<br />
national and international efforts towards<br />
the achievement of poverty reduction targets,<br />
such as:<br />
• A reduction by one-half of the unemployed<br />
population in the valley.<br />
• Enforced Universal “employable lifeskill”<br />
Education in<br />
• Equality and empowerment of women<br />
by eliminating gender disparities<br />
• Access through the primary health care<br />
system, to reproductive health services<br />
for all people of appropriate ages as<br />
soon as possible<br />
• <strong>The</strong> implementation of a regional strategy<br />
for sustainable development so as to<br />
ensure that current trends in the loss of<br />
environmental resources are effectively<br />
reversed<br />
• Creation of economic opportunities for<br />
the poor in order to substantially reduce<br />
income and food poverty and the general<br />
feeling of insecurity related to food<br />
176 THE <strong>IIPM</strong> THINK TANK
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and income poverty; and,<br />
• Development of a full fledged participatory<br />
government based on the consent<br />
of the citizenry and a strong social-audit<br />
system.<br />
<strong>The</strong> programme areas in the BVIDP<br />
will include macroeconomic growth strategy,<br />
income generating activities, re-distributive<br />
activities, social service delivery,<br />
food security, improving public resource<br />
management, creation of an accounting<br />
framework for poverty reduction interventions,<br />
improving participation in local decision<br />
making, coordination and monitoring<br />
and information, education and<br />
communication.<br />
Integrated Development Plan<br />
Process(es)<br />
Orissa and Madhya Pradesh were among<br />
the few Indian states that reiterated its<br />
commitment to a region-specific Integrated<br />
Development Plan process thus acknowledging<br />
the truism that growth and<br />
pro-poor policies have to focus on the<br />
needs and circumstances of the particular<br />
area. South Asia Development Gateway,<br />
as indicated earlier, initiated the formulation<br />
of such plans in the Northeastern region<br />
starting with Mizoram (state level)<br />
and Karimganj (District level) in Assam.<br />
It was agreed that in view of the multi sectoral<br />
nature of development, a task force<br />
or core committee be formed consisting of<br />
all key decision makers at the highest level<br />
in government sectors and donor representatives.<br />
A technical working group<br />
comprising the concerned departments<br />
was also constituted where necessary. This<br />
group held several consultations and subsequently<br />
United Nations Economic &<br />
Social Commission for Asia and the Pacific<br />
(UNESCAP), Bangkok agreed that<br />
it will assist the pilot programme in the<br />
target levels to develop the Integrated Development<br />
Plans. Accordingly, a senior<br />
UN Regional Advisor will visit the areas.<br />
An expert review of all relevant development<br />
data and surveys will be conducted<br />
first and a draft outline of the plan will be<br />
prepared which will be used as a basis for<br />
starting the process.<br />
Though the Government of Assam was<br />
approached at the very beginning of the<br />
exercise in <strong>Dec</strong>ember 2006, there was no<br />
positive response from the government<br />
departments and even the special requests<br />
from a central minister were found missing<br />
in the secretariat. In the mean time, states<br />
like Mizoram and autonomous regions<br />
like Bodoland shown tremendous interest<br />
in cooperating with international agencies<br />
to develop such plans. <strong>The</strong> Chief Minister<br />
of Mizoram, himself chairs the High Power<br />
Committee formed for this purpose.<br />
However, in the District of Karimganj, the<br />
Deputy Commissioner and specially the<br />
Additional Deputy Commissioner (Development)<br />
took special interest in formulating<br />
such a plan. In a recently conducted<br />
meeting, Prof.S. P. Parashar, the Director<br />
of IIM, Indore, has agreed to help the district<br />
in formalizing such a development<br />
plan and implement it, after following the<br />
Guna (Madhya Pradesh) model.<br />
Ongoing Activities<br />
Ongoing activities include a review of the<br />
objectives and strategies of the integrated<br />
development programme with a view to<br />
identifying tangible activities for achieving<br />
the said objectives. <strong>The</strong>se objectives have<br />
been identified during the participatory<br />
process. <strong>The</strong> programme is being designed<br />
to address cross cutting issues such as gender<br />
and environment. In addition, performance<br />
indicators and benchmarks are<br />
being developed for each of the objectives.<br />
Some of the major areas of activities are<br />
outlined below.<br />
Agriculture And Natural<br />
Resources<br />
Agricultural and Natural Resources<br />
(ANR) is the dominant sector in Barak<br />
Valley’s economy, employing the majority<br />
of the total work force. Notwithstanding,<br />
ANR continues to lag behind in productivity<br />
and modernization and is still characterized<br />
by an undiversified primary agricultural<br />
system. It is also conditioned by a<br />
seemingly unbreakable cycle of erratic inadequate<br />
input supplies, inappropriate<br />
technology, low output and productivity<br />
Agricultural and Natural Resources continues to lag behind<br />
in productivity and modernization and is still characterized<br />
by an undiversifi ed primary agricultural system<br />
growth, low incomes and an acute inability<br />
to generate savings for investment.<br />
While some of the constraints are exogenous,<br />
many are occasioned by human deficiencies<br />
and failures. ANR continues to<br />
lack a local policy focus and the political<br />
will necessary to transform the sector.<br />
Progress into next two decades will call for<br />
substantial improvements in the sector’s<br />
output and linkage to the sectors. In particular,<br />
overall productivity will have to<br />
improve significantly.<br />
Improvements in the ANR sector therefore<br />
call for serious examination and setting<br />
of projects that are both realistic and<br />
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REIMAGINING INDIA<br />
attainable in the medium to long term.<br />
<strong>The</strong>se improvements also require an unfailing<br />
commitment and dedication to the<br />
pursuit of the objectives to ensure balanced<br />
growth and an equitable distribution<br />
of incomes. <strong>The</strong> more important objectives<br />
for the sector are, among others,<br />
to:<br />
1. Increase ANR output of both domestic<br />
and exports produce in order to ensure<br />
food security and generate earnings of<br />
foreign exchange to finance other aspects<br />
of the development process.<br />
2. Create employment and generate income<br />
for the majority of the rural population<br />
who are largely dependent on<br />
ANR.<br />
3. Diversify the ANR base to facilitate the<br />
production of a wider range of food and<br />
export produce in order to reduce the<br />
fluctuations and uncertainties associated<br />
with rural household incomes and<br />
export earnings.<br />
4. Formulate a post-flood recovery plan<br />
when devastating floods coming late in<br />
the year (like in <strong>2007</strong>) destroy the crop<br />
in that particular year.<br />
5. Provide effective linkages between ANR<br />
and other sectors of the economy such<br />
that developments in the non-agricultural<br />
sectors, particularly manufacturing<br />
and tourism are founded on a firm<br />
and diversified ANR base capable of<br />
progressively releasing both labour and<br />
financial resources to other sectors of<br />
the economy.<br />
6. Create a sustainable and balanced mix<br />
between rain-fed and irrigated agriculture,<br />
thus ensuring an optimal use of<br />
natural resources of surface and ground<br />
water, animal, aqua-culture and crop<br />
production as well as between chemical<br />
and organic inputs and the use of agricultural<br />
by-products. Improvements in<br />
ANR productivity require a conscious<br />
evaluation of strategies to pursue the<br />
desired objectives. <strong>The</strong> strategies to be<br />
employed will necessarily have focus on<br />
the constraints and opportunities in the<br />
ANR sector.<br />
Industry And Infrastructure<br />
<strong>The</strong> long term aspiration of the people of<br />
the Barak Valley is perceived to achieve a<br />
solid infrastructural base for industrial<br />
Effective linkages between ANR and other sectors<br />
ensure that developments in the non-agricultural sectors,<br />
particularly manufacturing and tourism are founded on<br />
a firm and diversifi ed ANR base<br />
development that would permit the<br />
processing of major primary products by<br />
the year 2020. At present, the industrial<br />
sector is very much limited. <strong>The</strong> following<br />
manufacturing sub-sector will be relied<br />
upon to achieve that objective:<br />
1. Energy<br />
<strong>The</strong> importance of this sector in the realisation<br />
of the objectives of any Integrated<br />
Development Plan cannot be overemphasised.<br />
<strong>The</strong> prime objective for this sector<br />
is to overcome the existing bottlenecks and<br />
to ensure a reliable and adequate supply of<br />
energy, both conventional and renewable,<br />
at affordable prices.<br />
2. Manufacturing<br />
Consistent with the objectives of improving<br />
the income status of the people,<br />
the manufacturing sector will undergo<br />
substantial re-orientation aimed at increasing<br />
and diversifying industrial output.<br />
Specifically, this means realizing a net increase<br />
in the number of industrial units,<br />
greater diversification of industry, greater<br />
employment opportunities and capturing<br />
an established and growing export market.<br />
In this regard, priority will be given to a<br />
smoother technology transfer mechanism,<br />
the encouragement of adaptive research in<br />
production and process technologies and<br />
accelerated training and development of<br />
our human resources. By the next decade,<br />
the share of industry should rise through<br />
the provision of institutional support services<br />
and targeted incentives. A manufacturing<br />
base supplying both the domestic<br />
and export markets will be established in<br />
order to reduce the overt dependence on<br />
Agriculture and Trade. Again, on an unfortunate<br />
note, repeated efforts to establish<br />
a specialized rural technology transfer<br />
institute have been impeded by the Govt.<br />
of Assam. Even after ensuring external<br />
funding and a positive response from the<br />
Govt of India, the state government discouraged<br />
and responded negatively to our<br />
proposal. Though the Cachar district administration<br />
identified suitable land for the<br />
institute and the union minister for heavy<br />
industries personally spoke and written to<br />
the Chief Minister of Assam, the concerned<br />
department refused to give ‘no<br />
objection’ to the project on the pretext that<br />
‘there is no financial liability’ upon the<br />
state government! To overcome this felt<br />
undercurrent of apathy towards the development<br />
of Barak Valley, there is a proposal<br />
to establish a national institute of<br />
manufacturing excellence in Barak Valley,<br />
which inturn will help catalyze the growth<br />
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of manufacturing industries in the valley<br />
and train many young people for employment<br />
in this sector.<br />
3. Transport<br />
<strong>The</strong> railway, airport and road and waterway<br />
network will play a crucial role as providers<br />
of efficient infrastructural services.<br />
<strong>The</strong> river port in the valley will be upgraded<br />
and rendered more efficient and competitive<br />
in order to cater adequately for<br />
transhipment needs to countries in the<br />
sub-region. With supporting road and rail<br />
links, the transformation of the border<br />
posts with Bangladesh into a regional trade<br />
‘Freeport’ should herald major investment<br />
opportunities in our local businesses. It is<br />
envisaged that such investments will be effected<br />
through joint-ventures with private<br />
sector partners in a bid to involve operators<br />
in the transformation process. Consequently,<br />
there will be created a local international<br />
trade promotion agency which<br />
will offer an unrivalled fiscal and regulatory<br />
regime as well as infrastructural facilities<br />
in order to accelerate the growth of<br />
our industrial development arena. <strong>The</strong> upgrading<br />
and expansion of the airport is a<br />
major component of the “Barak Valley<br />
Gateway” strategy. <strong>The</strong> multi-modal transport<br />
initiative subsumed in this initiative<br />
is the valley’s spearhead strategy to play a<br />
crucial role in international trade with<br />
neighbouring countries. In this regard,<br />
facilities at the airport will be upgraded<br />
and modernized, security improved to international<br />
standards to handle an increased<br />
passenger and cargo traffic with<br />
an eye to serving as a transit point for East<br />
Asia. <strong>The</strong> development of inland road and<br />
water-way transport networks will focus on<br />
improving connections to regional trading<br />
centres, while offering logistic services<br />
(storage and communications) .<br />
Human Resource Development<br />
<strong>The</strong> developments envisaged under an Integrated<br />
Development Plan can hardly be<br />
realized unless supported by a deliberate<br />
policy of investing in those human capital<br />
resources required to produce, organise,<br />
mobilize and manage the development<br />
processes that will be indispensable in the<br />
21st Century. <strong>The</strong> Education and Health<br />
sectors therefore have a central place in<br />
the plan. Since independence, Barak valley’s<br />
educational institutional growth have<br />
been default focused on the development<br />
of human resources in the white collar and<br />
peripheral services sector to the detriment<br />
of the advanced and ‘employable’ areas of<br />
Science, Technology, Agriculture and Industry,<br />
particularly the Manufacturing<br />
sector. This focus has created a market<br />
failure, resulting in the creation of a huge<br />
backlog of unemployed human capital, a<br />
dependence on government jobs by the<br />
products of the education systems in the<br />
valley. Unlike some states in south India<br />
like Kerala, we failed to create an export<br />
market for local manpower with the result<br />
that no firm foundation has been laid over<br />
the past decades to provide for sustainable<br />
training and placement of our youths in<br />
the foreign job market. Consequently, in<br />
formulating the Integrated Development<br />
Plan, a proper diagnosis of the available<br />
programmes and skills is needed to redesign<br />
and incorporate new curriculum in<br />
our local institutions that will ensure a capable<br />
human resource base for local and<br />
international market. Objectives for education<br />
include increasing the accessibility<br />
of technical and skill based education to<br />
all the school-age population, a diversification<br />
of institutions to favor vocational and<br />
skilled based training, encouragement of<br />
entrepreneurship skills as a corner-stone<br />
of education and an overall enrichment of<br />
curricula and other extracurricular activities.<br />
Health and Social Welfare<br />
Considering the present inadequacies and<br />
mindful of the constraints faced by the<br />
economy, the provision of adequate, effective<br />
and affordable health care for all is<br />
Notwithstanding the the private sector's role in region’s<br />
future socio-economic development, public sector institutions<br />
have a critical role to play in the delivery of support<br />
infrastructural and social services<br />
one of the long term objective for the<br />
health sector. Intermediate objectives for<br />
the health sector are to provide better infrastructure<br />
for Referral Hospitals and<br />
health facilities. Plans are proposed to establish<br />
a South Asian Research Institute<br />
for Medical Sciences (SARIMS) in Karimganj<br />
– the first medical college for the<br />
border district. Simultaneously, the facility<br />
to produce trained staff for health sector<br />
across East Asia and the establishment<br />
THE INDIA ECONOMY REVIEW<br />
179
REIMAGINING INDIA<br />
of efficient procurement arrangements for<br />
the trained staff in health sector should<br />
complete the array of institutional reforms<br />
to ensure effective and efficient health<br />
services. Improvements in ancillary services<br />
will focus on the management of<br />
health data and enhancing research into<br />
paramedical services such as traditional<br />
healing methods.<br />
Housing Amenities<br />
As a consequence of the more recent and<br />
prevailing demographic trends, rapid urbanization<br />
and concentration of the urban<br />
population, the demand for decent housing<br />
is increasingly elusive to satisfy. <strong>The</strong><br />
long term objectives of housing sector will<br />
aim at increasing production of decent<br />
housing stock on a more regular basis. A<br />
review of the existing housing schemes like<br />
Indira Awas Yojana (Indira Housing Plan)<br />
is a study in decentralization and institutionalization<br />
of corruption upto the grassroots<br />
level. Contrary to this and to effectively<br />
address the problems posed by<br />
pressing demography and rapid urbanization,<br />
particular attention will be focused<br />
on the need for specialized housing finance<br />
institutions such as housing banks<br />
and housing co-operatives. Improving<br />
housing development capabilities is a prerequisite<br />
for providing a decent standing<br />
of living.<br />
<strong>The</strong> Way Forward<br />
<strong>The</strong> foregoing discussion highlights the<br />
potential implications of a proposed Integrated<br />
Development Plan for the Barak<br />
Valley that will be piloted in Karimganj<br />
district. <strong>The</strong> South Asia Development<br />
Gateway has discussed this plan on various<br />
platforms and consultations to determine<br />
the readiness of the stakeholders<br />
with a view to project a road map leading<br />
to the structure of a development strategy<br />
for the area. <strong>The</strong> outcome of these consultations<br />
were largely encouraging and<br />
attracted valuable inputs which were as<br />
well enlisted. <strong>The</strong> approach taken in the<br />
formulation of the strategy is participatory<br />
since all stakeholders will be provided<br />
the opportunity to contribute to the<br />
fundamental design of the strategy based<br />
on the guidelines provided.<br />
On a concluding note, it will not be out<br />
of place to mention that among many<br />
promises of the digital revolution is the<br />
potential to strengthen democracy and<br />
make governments more responsive to<br />
Institutional performance is a critical factor, not only<br />
in the design and implementation of development<br />
programs, but also in the effective realization of any<br />
development policy goals and targets<br />
the needs of the citizens. This Integrated<br />
Development Plan includes the use of<br />
information and communication technologies<br />
to transform the way Government<br />
conducts its business, which includes:<br />
Providing greater access to<br />
government information; Promoting<br />
civic engagement by enabling public to<br />
interact with government officials; Making<br />
government more accountable by<br />
making its operations more transparent<br />
and thus reducing the opportunities for<br />
corruption; Providing development opportunities,<br />
especially benefiting rural<br />
and traditional underserved communi-<br />
ties. Let us now dream to establish “<strong>The</strong><br />
Barak Valley Incorporated” as the Integrated<br />
Development Plan aims at a fullfledged<br />
private sector that is responsible<br />
to the development needs of this area and<br />
that can play an active role in the domestic<br />
economy. Government will ensure<br />
that market mechanism function smoothly<br />
within a free market and a stable macro-economic<br />
environment. On the external<br />
front, the maintenance of a steady<br />
exchange rate between the valley and major<br />
foreign trade agencies as well as the<br />
implementation of agreements signed<br />
with international financial institutions<br />
will ensure a more positive insertion of<br />
the economy into the international<br />
scene.<br />
Over the last decade, it has become<br />
clear that an internally consistent set of<br />
economic and financial policies is a necessary<br />
but not sufficient condition for<br />
growth and development. Institution performance<br />
is a critical factor, not only in<br />
the design and implementation to development<br />
programs, but also in the effective<br />
realization of any development policy<br />
goals and targets. Integrated<br />
Development Plan integrates institutional<br />
capacities as a key factor of production<br />
and sets as an objective the correction of<br />
institutional failures in order to accelerate<br />
the implementation of development<br />
programs. Notwithstanding the lead role<br />
of the private sector in region’s future<br />
socio-economic development, public sector<br />
institutions have a critical role to play<br />
in the delivery of support infrastructural<br />
and social services to buttress the development<br />
efforts of the private sector. It is<br />
therefore envisaged that the plan shall<br />
refer to parastatals on one hand and the<br />
bureaucracy on the other hand.<br />
180 THE <strong>IIPM</strong> THINK TANK
THE OTHER PATH<br />
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Mrutyunjay Dash<br />
Professor of Economics and<br />
Business Environment,<br />
Asian School of Business<br />
Management,Bhubaneswar<br />
Tenancy Reforms in Orissa:<br />
A Critical Perspective<br />
"He who owns the soil, owns<br />
up to the sky."<br />
- Douglas Gerrold<br />
I. Introduction<br />
Orissa is primarily an agrarian economy.<br />
Agriculture is the state’s dominant sector<br />
with a contribution of nearly 28.13 percent<br />
to net state domestic product during 2001-<br />
2002. Agriculture alone provides direct<br />
and indirect employment to around 65<br />
percent of the total workforce of the state<br />
as per 2001 provisional Census. Nearly 87<br />
percent of total population lives in rural<br />
areas. It has remained as an agriculturally<br />
backward state of India with high incidence<br />
of concealed tenancy. Though tenancy<br />
is legally prohibited in the state, it is<br />
observed in large scale across the length<br />
and breadth of Orissa. <strong>The</strong> Orissa Land<br />
Reforms Committee, 1980, has brought to<br />
the limelight the existence of a vast number<br />
of tenants, mostly unrecorded sharecroppers,<br />
in the rural areas of Orissa. Neither<br />
these tenants have opted for the legal provision<br />
of applying to the revenue officers<br />
for obtaining ryoti right nor the latter, empowered<br />
to initiate action to confer ownership<br />
rights on tenants, have shown any<br />
interest in this regard. Adam Smith (1969)<br />
has rightly remarked that a person, who<br />
has no property rights over land, can have<br />
no other interest except eating as much<br />
and labouring as little as possible, since<br />
the fruit of his hard labour is expropriated<br />
by the proprietor. Psychological feelings of<br />
non-ownership coupled with insecurity<br />
kill their efficiency, enthusiasm and physical<br />
ability. Besides, social distinctions between<br />
landowner and agricultural labourer<br />
deaden the interest and the zeal of the<br />
latter. This is why land reforms in general<br />
and tenurial reforms in particular have to<br />
be assigned the top-most priority in bringing<br />
about the transformation of agricultural<br />
sector so as to make it vibrant, dynamic<br />
and more productive. However, lack<br />
of proper implementation of tenancy reform<br />
measures, prevalence of large scale<br />
concealed tenancy with oral leases, absence<br />
of rent receipts, ignorance of the<br />
legal provisions of tenancy legislations,<br />
built-in legal loopholes and above all, lack<br />
of political will can be attributed for the<br />
results being not so encouraging. In this<br />
paper an attempt has been made to give a<br />
182 THE <strong>IIPM</strong> THINK TANK
TENANCY REFORMS<br />
brief outline of the extent, types and incidence<br />
of tenancy in the second section. In<br />
the third section reference to important<br />
tenancy legislation is undertaken. Finally,<br />
evaluation of tenancy reforms in Orissa is<br />
made followed by concluding remarks.<br />
II. Extent, Types And<br />
Incidence Of Tenancy<br />
India achieved independence from British<br />
Rule in 1947. Having been created with six<br />
districts: Balasore, Cuttack, Puri, Ganjam,<br />
Koraput and Sambalpur initially, in 1936<br />
Orissa acquired a new geographical shape<br />
after merger of 26 feudatory states on<br />
January 1,1948. In the first stage an attempt<br />
has been made to give a brief account<br />
on the extent of tenancy, types of<br />
Table-1: State-Wise Tenancy Statistics For Rural India,<br />
1981-82 And 1991-92<br />
State<br />
% of Tenant Holdings<br />
to Operational<br />
Holdings<br />
% of Leased-in<br />
Area to Operational<br />
Area<br />
% of Leased-in<br />
Area under<br />
ShareTenancy<br />
1981-82 1991-92 1981-82 1991-92 1991-92<br />
Andhra Pradesh 13.8 14.1 6.2 9.6 20.9<br />
Assam 12.9 10.1 6.4 8.9 27.8<br />
Bihar 19.7 5.6 10.3 3.9 43.5<br />
Gujarat 4.8 3.7 2 3.3 23.7<br />
Haryana 25.9 17.1 18.2 33.7 19.9<br />
Karnataka 10.7 8 6 7.4 28.6<br />
Kerala 6.7 5.2 2.6 2.9 2.1<br />
Madhya Pradesh 8.0 9 3.6 6.3 24.9<br />
Maharashtra 10.6 6.9 5.2 5.5 20.9<br />
Orissa 18.2 16.9 9.9 9.5 50.9<br />
Punjab 21.3 15.9 16.1 18.8 11.3<br />
Rajsthan 7.1 6.5 4.3 5.2 23.4<br />
Tamilnadu 24.7 15.3 10.9 10.9 16.5<br />
Uttar Pradesh 20.5 15.5 10.2 10.5 46.5<br />
West Bengal 23.1 14.4 12.3 10.4 46.5<br />
India 15.2 11 7.2 8.3 34.4<br />
Source: Sarvekshana, Vol,20, No.3, 70th issue, Jan-March, 1997, NSS 48th Round.<br />
tenancy NSS (National Sample Survey).<br />
In India data on extent of tenancy are<br />
available from two sources: National Sample<br />
Survey estimates and Agricultural<br />
Census data, out of which the former is<br />
more reliable being based on independent<br />
household surveys.<br />
However, it will not be out of place<br />
to mention that there is commonality<br />
of opinion on reliability of official data<br />
on incidence of tenancy due to several<br />
reasons. Principally because lease contracts<br />
are mainly oral without any written<br />
record of lease details and tenants’<br />
hesitation to reveal their tenurial identity<br />
in fear of eviction by the landowner.<br />
With this reservation in mind NSS<br />
estimates on incident of tenancy have<br />
been furnished. This is the reason for<br />
which NSS is referred to in this section.<br />
And secondly different tenancy reform<br />
measures undertaken by the Government<br />
of Orissa and their evaluation are<br />
considered also. Orissa belongs to the<br />
category of high Tenancy State in India.<br />
This is supported by NSS findings. As<br />
per NSS data in the year 1981-82 tenants<br />
household constituted 18.2 per cent<br />
of total operational household and it<br />
has been reduced to 16.9 percent (only<br />
by a meagre 1.3 percent), in 1991-92, as<br />
reflected in Table-1. In 1991-92 there<br />
were numerically 6.9 lakh tenant holdings<br />
and leased-in land constituted<br />
4.5 lakh hectares of land. This was 9.5<br />
percent of total operated area and infact<br />
surpasses the All India average of 8.3<br />
percent in the same period. Tenancy in<br />
Orissa is manifested mostly in the form<br />
of sharecropping. Share tenancy is more<br />
pervasive than fixed rent tenancy based<br />
on either fixed produce or fixed money.<br />
Nearly 42.0 percent of leased-in area is<br />
under shared tenancy compared to that<br />
of 13.6 percent and 7.6 percent are on<br />
fixed produce and fixed money respectively<br />
NSS (1971-72) and this figure has<br />
further been increased to 50.9 percent in<br />
1991-92 (Please refer Table-2).<br />
Further, in a labour abundant coupled<br />
with land scarce agrarian economy like<br />
ours, i.e., of Orissa, the tenant is subject<br />
to weak bargaining power and thus<br />
is placed in a disadvantageous position.<br />
<strong>The</strong> obvious alternative left with, therefore<br />
relates to leasing-in-land irrespective<br />
of the degree of benefits accruing<br />
to the tenants from a certain mode of<br />
lease contract. This is more prominent in<br />
case of marginal and small farmers as is<br />
evident from Table-3. <strong>The</strong> distribution of<br />
THE INDIA ECONOMY REVIEW<br />
183
THE 'OTHER' INDIA<br />
Table-2: Changes In Percentage Distribution Of Leased- in Area By<br />
Terms Of Lease<br />
Terms of 1971-72 1981-82 1991-92<br />
Lease (26th) (37th) (48th)<br />
Fixed Money 7.6 5.1 19.7<br />
Fixed Produce 13.6 8.1 4.7<br />
Share of Produce 41.6 42.0 50.9<br />
Others 37.2 44.8 24.7<br />
All Terms 100.0 100.0 100.0<br />
Sources: (a) N.S.S. Report 26th Round (1971-72)<br />
(b) N.S.S. Report 37 th Round (1981-82)<br />
(c) N.S.S. Report 48 th Round (1991-92)<br />
lease-in area according to <strong>size</strong> classes of<br />
operational holdings shows that in 1991-<br />
92 about 89.76 percent of leased-in area<br />
was in the <strong>size</strong> classes of less than one<br />
hectare and only 0.47 percent of leasedin<br />
area was in <strong>size</strong> classes above 4 hectares.<br />
Likewise a significant proportion<br />
of tenant holdings (89.21%) belonged to<br />
the category of marginal farmer. This is<br />
also confirmed from another study that<br />
subsistence tenancy is more widespread<br />
than commercial or capitalist tenancy in<br />
Orissa (Swain; 1999b, 1999c).<br />
III. Tenancy Reforms And Tenancy<br />
Legislation In Orissa<br />
<strong>The</strong>re is no denying the fact that exploitative<br />
land tenant system is one of the<br />
important economic causes leading to<br />
agrarian unrest in land scarce and labour<br />
abundant economies. Various factors<br />
like socio-economic factor, relative<br />
bargaining strength, relative differences<br />
in <strong>size</strong> class, to mention a few, determine<br />
the degree and extent of exploitation to<br />
which the tenants are subjected. This<br />
is especially because tenants do not<br />
belong to homogeneous groups rather<br />
a lot of heterogeneities witnessed with<br />
regard to their socio-economic status,<br />
<strong>size</strong> class, etc., are held responsible for<br />
exploitation. As such, differences arise<br />
in their economic resource position and<br />
therefore, in their bargaining strength.<br />
Tenancy reforms include all those measures aiming at<br />
protecting and safeguarding the interest of tenant with<br />
regard to the realization of their due share accruing from<br />
leased-in land and conferring ownership rights<br />
Thus they are all not equally prone to exploitation<br />
by their landlords (Bhardwaj,<br />
1974; Bhardwaj and Das, 1975a; 1975b).<br />
Besides, the extreme concentration of<br />
land ownership (Myrdal, 1982, 1306)<br />
and exploitative production relations,<br />
being established between the landlord<br />
and the tenant during the process of production,<br />
are sufficient enough to make<br />
agricultural growth sluggish (Joshi, 1974,<br />
167;Appu, 1996,40-5). This necessitates<br />
to bring about a thorough and complete<br />
transformation in production relations<br />
between the landlord and tenant on<br />
one hand and in forces of production<br />
on the other. Indian peasant history is<br />
replete with examples which show that<br />
radical tenancy reform legislation, far<br />
from being a liberal gift from the state<br />
is an outcome of a long and protracted<br />
struggle by the tenants. Orissa is not an<br />
exception to this.<br />
As the term suggests tenancy reforms<br />
includes all those measures aiming at<br />
protecting and safeguarding the interest<br />
of tenant with regard to the realization<br />
of their due share or benefits of produce<br />
accruing from leased-in land and conferring<br />
ownership right on land which<br />
they cultivate. In Orissa tenancy contracts<br />
were oral, unrecorded, insecured<br />
and the rent prevailed mostly at around<br />
(on an average basis) 50 percent of the<br />
gross produce in pre-independent era.<br />
Thus to remove the inherent loopholes<br />
in the tenancy system radical tenancy<br />
reform measures were called for after<br />
a long struggle and oppression by the<br />
so-called land owning class. With the<br />
passage of time some legislative measures<br />
undertaken in the years of 1881,<br />
1885, and 1913 to remove the intolerable<br />
suffering of the tenants. For example<br />
in Orissa Tenancy Act, 1913 and<br />
subsequent amendments effected to it<br />
granted some new concessions to the<br />
tenants and raiyats through fixing limitations<br />
on landlords to extract anything<br />
beyond their legitimate dues from the<br />
tenants. Consider this: Section 54 of<br />
Regulation VIII of 1793 declares that<br />
all impositions and exactions (whatever<br />
their designation might be), over and<br />
above the actual rent are illegal. Section<br />
3 of Regulation V of 1812 1 altered<br />
some of the provisions Regulation VIII<br />
of 1793 but attention being given not to<br />
incorporate anything, which sanctions<br />
or legalizes the impositions of arbitrary<br />
184 THE <strong>IIPM</strong> THINK TANK
TENANCY REFORMS<br />
or indefinite cesses. By the Amendment<br />
Act of 1938, all kinds of illegal cesses as<br />
codified in the original Orissa Tenancy<br />
Act 1913, were deleted so as to make<br />
it more purposive. Further with respect<br />
to recovering from a landlord (by means<br />
of a legal suit), the amount exacted by<br />
the landlord in excess of the rent, the<br />
Amendment Act of 1938 empowered<br />
the Collector of the District or any<br />
Deputy Collector on his behalf to take<br />
action and impose on the landlord such<br />
penalty not exceeding Rs.500/- or simple<br />
imprisonment not exceeding six months.<br />
Thus the amended provision incorporated<br />
certain features for preventing collection<br />
of illegal cesses from tenants. But<br />
for all matters whatsoever, such as illegal<br />
exaction, collections of exorbitant rent, a<br />
ryot was required to move to court of law<br />
and the financial vulnerability and powerful<br />
influence of potential landowning<br />
class taken together could not allow a<br />
majority of poor tenants to realize the<br />
fruits of legislation.<br />
However as a result of the passing of<br />
various Tenancy Acts, i.e. of 1881, 1885,<br />
and in 1913, some well-to-do tenants<br />
could also acquire hereditary rights to<br />
occupancy ryots, and with their legally<br />
protected right, followed the path of their<br />
masters, and found it more profitable to<br />
rent out the land to the under-tenants<br />
and share-croppers who became more<br />
tenants-at-will. <strong>The</strong>y could be evicted<br />
on short notice and virtually enjoyed no<br />
security of tenure. Taking cognizance of<br />
this actuality, immediately after independence,<br />
various tenancy legislation<br />
and subsequent amendments to them<br />
were passed with a view to minimise<br />
the sufferings of the tenants. A brief account<br />
of these legal developments are<br />
given below:<br />
a. <strong>The</strong> Orissa Tenants’ Protection<br />
Act of 1948<br />
Under the Orissa Tenants Protection<br />
Table-3: Percentage Distribution Of Lessor And Lessee Households<br />
And Leased-in And leased-out Area By Size Class Of Land Ownership<br />
Holdings In Rural Orissa,1991-92<br />
Size Class Of<br />
Ownership<br />
Holdings(ha.)<br />
Percentage Of<br />
Total Lessor<br />
Households<br />
Percentage f<br />
Total Tenant<br />
Households<br />
Percentage f<br />
Total Leased-<br />
In Area<br />
Percentage of<br />
Total Leasedout<br />
Area<br />
Less than1.01 63.96 89.21 89.76 29.40<br />
1.01-2.00 25.96 6.42 5.61 51.18<br />
2.01-4.00 7.01 3.56 4.16 11.51<br />
4.01-10.00 2.38 0.81 0.47 3.53<br />
Above10.00 0.69 0.00 0.00 4.38<br />
All Sizes 100.00 100.00 100.00 100.00<br />
Sources: N.S.S. Report 48 th Round (1991-92)<br />
Act, 1948, it was declared that notwithstanding<br />
anything contained in the<br />
law, contract or usage or any decree of<br />
any court, a person who was cultivating<br />
any land as a tenant on the first day<br />
of September, 1947, should continue<br />
to have the right to cultivate such land<br />
and no landlord was legally entitled<br />
For all matters whatsoever, such as illegal exaction, collections<br />
of exorbitant rent, a ryot was required to move to<br />
court of law and the financial vulnerability and powerful<br />
influence of potential landowning class could not allow a<br />
majority of poor tenants to realize the fruits of legislation<br />
to evict such tenant, O.T.P Act, 1948,<br />
Section 3 (1) (b).<br />
Further as per the Act, tenants enjoying<br />
occupancy rights were not bound<br />
to pay more than one third of the gross<br />
produce as rent to the superior ryot (c)<br />
tenants without security of tenure were<br />
not bound to pay more than two fifths<br />
of the gross produce as rent to the landowners.<br />
However this Act lost its real<br />
purpose of protecting tenants as it allows<br />
landowners (owning 33 acres of land) to<br />
evict his/her tenants from land holding.<br />
b. Orissa Tenants’ Relief Act, 1955<br />
This Act intends to confer security of<br />
tenure, resumption of land for personal<br />
cultivation and regulation of rent so<br />
as to bring relief to the oppressed and<br />
exploited tenants. <strong>The</strong> Act defined a<br />
tenant a person who under the system<br />
commonly known as Bhag, Sanjha, Kata<br />
or such similar terms under any other<br />
system, law, contract, custom, or usage<br />
cultivated the land of another person on<br />
payment of rent in cash or in kind or<br />
in both or on condition of delivering to<br />
THE INDIA ECONOMY REVIEW<br />
185
THE 'OTHER' INDIA<br />
that person.<br />
i) a share of the produce of such<br />
land or<br />
ii) the estimated value of a portion of<br />
the crop raised on the land or<br />
iii) a fixed quantity of produce irrespective<br />
of the yield from the land, or<br />
iv) produce or its estimated value partly<br />
in any one of the ways described above<br />
and partly in another, Das (1989).<br />
<strong>The</strong> law provided that notwithstanding<br />
anything in Law, contract or usage or<br />
in any decree or order of any Court but<br />
subject to the provisions of this Acta)<br />
No tenant with permanent and heritable<br />
rights over holdings in terms of<br />
produce rent was liable to pay more<br />
than 2/3 rd of the rate of rent payable<br />
or to express it in a different way rent<br />
payable was not to exceed 1/6 th of the<br />
produce or value thereof.<br />
b) No landlord was entitled to recover<br />
any cess, rates or other dues payable<br />
or deliverable in relation to the land<br />
by a tenant holding on produce rent.<br />
c) When rent was deliverable in kind it<br />
was to be delivered at the landlords’<br />
granary in the village in which the<br />
land was situated or at such other<br />
granary, within 3 miles of the village,<br />
as may be provided on that behalf by<br />
the landlord.<br />
Further as per the Act, a temporary<br />
tenant was not bound to pay more than<br />
25 percent in kind or cash of the gross<br />
produce of the land. Further it was added<br />
that no tenant having permanent or<br />
hereditary right in land was bound to<br />
pay more than 16 percent of the gross<br />
produce of the land. However to nullify<br />
the very purpose of the Act, the landowners<br />
were obtaining written undertakings<br />
from the tenants to pay 50 percent<br />
of the gross produce after harvest and<br />
that too without any rent receipt.<br />
c. Orissa Land Reforms Act, 1960<br />
<strong>The</strong> Orissa Land Reforms Act, 1960 and<br />
its subsequent amendments exhibited a<br />
certain degree of qualitative shift from<br />
the earlier tenancy legislation as discussed<br />
above. <strong>The</strong> basic thrust was given<br />
on land to the tiller. One of the notable<br />
features of O.L.R. Act 1960 relates to<br />
conferment of permanent, heritable and<br />
transferable rights on all raiyats over<br />
their land.<br />
Besides, the agricultural labourers<br />
To nullify the very purpose of the <strong>The</strong> Orissa Tenants’ Relief<br />
Act, 1955, the landowners were obtaining written undertakings<br />
from the tenants to pay 50 percent of the gross produce<br />
after harvest and that too without any rent receipt<br />
and the village artisans were granted<br />
property rights in respect of their dwelling<br />
houses constructed on the lands of<br />
the superior landlords. Amendment in<br />
O.L.R. Act (Act 17 of 1972) also enabled<br />
the tenants to become ryots in<br />
whole of the land under their occupation<br />
under section 36-A, subject to receipt<br />
of application by the tenant within two<br />
years from October 2 nd , 1973. But the<br />
response from the tenants to claim occupancy<br />
rights was not satisfactory. Hence<br />
under section 36-B the Revenue Officer<br />
was empowered to take appropriate action<br />
where no application was received<br />
from a tenant. Besides, the amount of<br />
rent was retained at 25 percent of the<br />
gross produce of the land or the value<br />
thereof or the value of 25 percent of the<br />
estimated produce of the land.<br />
IV. Evaluation Of Tenancy Reforms<br />
Act In Orissa<br />
After having gone through a brief account<br />
of some of the important tenancy<br />
legislation it would be wise to ascertain<br />
as to what extent these legislation have<br />
yielded results as were supposed to be<br />
during the time of their inception. With<br />
regard to the operation of the Orissa<br />
Tenants’ Protection Act of 1948 it experienced<br />
varied results in different areas<br />
and in most of the cases the tenants did<br />
not claim their dues. For instance Puri<br />
District alone accounted for more than<br />
2/3rd of the cases filed (in the years between<br />
1955-56 and 1956-57) and about<br />
70 percent of the cases filed settled<br />
without any claim on behalf of tenants,<br />
Dash (1989). Moreover, allowing landlord<br />
owning less than 33 acres of land<br />
to evict tenant also questions the very<br />
purpose of the Act. <strong>The</strong> limit of 33 acres<br />
of land was too high in the land holding<br />
context of Orissa where the majority of<br />
farmers do belong to the categories of<br />
landless labourers or marginal or small<br />
farmer categories (Jena, 1968).<br />
Similarly a Report on the working of<br />
tenancy laws prepared by B. Mishra and<br />
B. Jena (1958) 2 also confirmed that in<br />
three villages of Balasore District, namely<br />
Kalei, Mahadevpur and Balarampur,<br />
out of 105 cultivating families 45 families<br />
reported to have cultivated land on payment<br />
of the share of 50 percent of the<br />
gross produce which strictly violates the<br />
O.T.R. Act, 1955 recommending strongly<br />
a tenant not to pay more than 25 per-<br />
186 THE <strong>IIPM</strong> THINK TANK
TENANCY REFORMS<br />
cent in kind or cash of the gross produce<br />
of the land. A Report on An Enquiry<br />
into the Working of Orissa Tenants’<br />
Protection Act, 1948, and Orissa Tenants’<br />
Relief Act, 1955 in Five Districts of<br />
Orissa, 1970 by B. Mishra revealed that<br />
payment of rent receipt was not received<br />
by 80 percent of the tenants.<br />
It is interesting to note that even as<br />
the Report states that although the tenants<br />
were fully aware of O.T.R. Act,<br />
1955 only one tenant filed a case and the<br />
case ultimately cost the tenant Rs.130/-<br />
and the decision finally went against<br />
him. Further the Orissa Land Reforms<br />
Committee, 1980, brings to the limelight<br />
the existence of a vast number of tenants<br />
mostly unrecorded sharecroppers<br />
who have neither taken any legal steps<br />
through applying revenue officers to get<br />
ryoti right nor the revenue officers empowered<br />
to initiate actions at their own<br />
level endeavoured to confer ownership<br />
rights on tenants. <strong>The</strong> tenants also do<br />
not dare to agitate in order to promote<br />
their case because of the fear of retaliation<br />
by the ryoti type of landlords. Thus<br />
various legislation enacted and subsequently<br />
modified from time to time in<br />
the better interest of tenants could not<br />
yield desired result so far. However generalisation<br />
of findings of the Report on<br />
the basis of observation in only three villages<br />
would be improper and it is needless<br />
to say that further detailed empirical<br />
studies need to be undertaken for seeking<br />
definitive and conclusive judgment<br />
on this aspect.<br />
With regard to working of O.L.R.<br />
Act, 1960, also the experiences are not<br />
so encouraging. To substantiate such a<br />
stand in this regard two principal aspects<br />
need to be empha<strong>size</strong>d. Firstly,<br />
the response from the tenants to claim<br />
occupancy rights, as stressed in O.L.R.<br />
1960, was not satisfactory. Even though<br />
under Section 36-B, the Revenue Officer<br />
was empowered to take appropriate<br />
action in case of any application not<br />
received from tenants the result lagged<br />
far behind expectation. Secondly, as<br />
is evident from O.L.R. Act 1960, the<br />
landlords have been doubly compensated<br />
for their property right over land<br />
once by the Government in the case of<br />
abolition of estates and by fixing Rs 800<br />
per standard acre for tenants to acquire<br />
land vide amendment effected to 1965<br />
Act, for the second time. As the tenants<br />
were subjected to grinding poverty they<br />
failed to acquire the land they cultivated<br />
for want of funds required to pay the<br />
compensation fee. Further, the apparent<br />
inequity evident in the O.L.R. Act 1960,<br />
relates to the payment of heavy premium<br />
to the Government on one hand and receipt<br />
of application from tenants by the<br />
Revenue Officer with respect to getting<br />
proprietary rights within a short period<br />
of 90 days on the other.<br />
Thus heavy compensation fee and premium<br />
coupled with short period of time<br />
to get proprietary rights reveal deliberate<br />
and unjust attempts of legislators to<br />
safeguard the interest of the landowning<br />
class. As a result uptil now oral tenancy,<br />
without any records whatsoever, along<br />
with high rent and insecurity of tenure<br />
do outline the prevailing tenancy system<br />
in Orissa. Such an unfortunate trend has<br />
crept in the agrarian structure of Orissa<br />
not because the tenants lack awareness<br />
of various tenancy legislation but<br />
because the prevailing socio-economic<br />
conditions do not possibly allow exercising<br />
their rights in this regard.<br />
With the provision of resumption of tenanted lands on the<br />
grounds of so-called “personal cultivation” being not defined<br />
clearly by many states, a lot of tenants were subjected<br />
to eviction on a large-scale basis. Many tenants after<br />
conferment of ownership rights either sold or mortgaged it<br />
V. Conclusion<br />
Thus to sum up, different tenancy legislation<br />
and consequent regulations incorporated<br />
in them failed to serve the<br />
very purpose of bringing socio-economic<br />
justice to the poor tenants and thereby<br />
establishing an egalitarian society. With<br />
an exception to few financially better-off<br />
tenants who were in a position to vindicate<br />
their cause, the hardships and sufferings<br />
of tenants in general continued.<br />
Several reasons may be cited in this regard<br />
as to why these tenancy legislation<br />
did not yield desired results.<br />
To mention a few, firstly, there is a<br />
THE INDIA ECONOMY REVIEW<br />
187
THE 'OTHER' INDIA<br />
wide gulf between policy formulation<br />
and its effective implementation from<br />
the grassroots level. Secondly, universal<br />
application of a single and uniform<br />
standard to the entire State without any<br />
proper understanding of rural agrarian<br />
set-up and prevalence of varied socioeconomic<br />
constraints, might have been<br />
responsible for results being not so<br />
encouraging and last but not the least,<br />
prolonged time taken in the settlement<br />
of legal issues and more often than not,<br />
results going in favor of the land owning<br />
class discouraged tenants to take<br />
recourse to various tenancy legislation.<br />
Thus, the foregoing analysis reveals that<br />
the prevalent inequitable property relationship,<br />
inherent legal loopholes with<br />
an attitude of protection to the so-called<br />
land owning class and unorganized behavior<br />
of tenants have reduced the reforms<br />
package to a near fallacious one.<br />
Despite all legislative measures undertaken<br />
by different State Governments<br />
to take care of the interest of the<br />
actual tiller of the soil from time to time,<br />
a lot remains yet to be achieved in this<br />
regard. With the provision of resumption<br />
of tenanted lands on the grounds<br />
of so-called “personal cultivation” being<br />
not defined clearly by many states, a lot<br />
of tenants were subjected to eviction on<br />
a large-scale basis. Further due to noneconomic<br />
holdings, many tenants after<br />
conferment of ownership rights either<br />
sold or mortgaged it. Protected tenant<br />
also leased out their lands to rich farmers<br />
for want of funds. A large number<br />
of tenants still remain out of the purview<br />
of the law for not being recorded<br />
for one reason or other. Thus, tenancy<br />
reform has not succeeded in achieving<br />
any great impact either in terms of reorienting<br />
the property relationship in<br />
favor of the tenants or elevating their<br />
socio-economic condition.<br />
Additional Notes<br />
1. All sums received by the proprietors<br />
in excess of the amount of rent specified<br />
in the contract would be considered<br />
as extortion and be repaid by<br />
the proprietors with a penalty of 200<br />
percent of the amount exhorted.<br />
Owing to the prevalent inequitable property relationships<br />
and inherent legal loopholes, tenancy reform has not<br />
succeeded in achieving any great impact, either in terms<br />
of reorienting the property relationship in favor of the tenants<br />
or elevating their socio-economic condition<br />
2. A Report on An Enquiry into the<br />
Working of Orissa Tenants’ Protection<br />
Act, 1948, and Orissa Tenants’<br />
Relief Act, 1955 in Five Districts<br />
of Orissa, 1970 by B. Mishra revealed<br />
that payment of rent receipt<br />
was not received by 80 percent of<br />
the tenants.<br />
References<br />
• AICC (All India Congress Committee)<br />
(1949), “Report of the Congress<br />
Agrarian Reforms Committee”, New<br />
Delhi.<br />
• Appu, P.S. (1996). “Land Reforms in<br />
India: A Survey of Policy, Legislation<br />
ad Implementation,” Vikas Publishing<br />
House, New Delhi.<br />
• Bhardwaj, K and P.K. Das (1975a).<br />
Tenurial Conditions and Modes of<br />
Exploitation:”A Study of Some Villages<br />
in Orissa,” EPW Annual Number,<br />
10:221-40, February; and P.K.Das<br />
(1975b). “Tenurial Conditions and<br />
Modes of Exploitation: A Study of<br />
Some Villages in Orissa; Further<br />
Notes,” EPW, Review of Agriculture<br />
10:A49-55, June.<br />
• Dash, Giridhari. (1989). <strong>The</strong><br />
Land Systems and Land Reforms<br />
in Orissa,Published by G.<br />
Dash, Cuttack<br />
• Jena, K.C. (1968). Land Revenue<br />
Administration in Orissa During<br />
19 th Century, S. Chand & Co,<br />
New Delhi.<br />
• Joshi, P.C. (1974). Land Reform and<br />
Agrarian Change in India and Pakistan<br />
Since 1947 : I, Journal of Peasant<br />
Studies 1 (2):164-85, January, II.1<br />
(3), April.<br />
• Mitra, A. (1981). Tenancy Reforms<br />
in Orissa, in M. Bose (ed). Land Reforms<br />
in Eastern India, Planning Forum,<br />
Jadavpur University.<br />
• Orissa Tenancy Act, 1913 & Rules<br />
with Notes and Latest Case Laws,<br />
ed. By A. Mohapatra, 1991-92.<br />
• Orissa Govt. (1987). Agricultural Statistics<br />
of Orissa, Directorate of Agriculture<br />
and Food Production.<br />
• Smith,Adam. (1969). <strong>The</strong> Wealth of<br />
Nations. Pelican Classics, (ed.) Andrew<br />
Skinner, reprint:1974<br />
• Swain,Mamata.(1999b). Agricultural<br />
Share Tenancy and Efficiency: Testing<br />
Alternative <strong>The</strong>ories with Micro<br />
Evidence from Orissa, IASSI, <strong>Quarterly</strong>,<br />
Vol.17.No.4. June 1999.<br />
188 THE <strong>IIPM</strong> THINK TANK
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indeed.”<br />
Mr. R. Badrinath, Director, Division of Trade Support Services, International Trade<br />
Centre, Geneva<br />
“…I thoroughly enjoyed going through your recent<br />
IER…it is undoubtedly a mammoth task of pulling together<br />
divergent perspectives on the critical issues of the nation…..”<br />
Dr. Parth J Shah, Centre for Civil Society, New Delhi<br />
“Modern India certainly needs more think tanks like yours... unlike most<br />
academic journals, yours is well-designed, readable and also conveys a sense<br />
of aesthetics and humour through the illustrations... it well reflects the high<br />
standards of the <strong>IIPM</strong>.”<br />
Mr. Brij Khindaria, President, Diplomatic forum for Business, Geneva.