[Dec 2007, Volume 4 Quarterly Issue] Pdf File size - The IIPM Think ...

THE
INDIA ECONOMY REVIEW
2007
Volume 4 | Quarterly Issue: 31st December 2007
www.iipmthinktank.com
www.gidf.org
REIMAGINING INDIA:
MORE MARKET,
RETHINK
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DELINEATE
LESS GOVERNMENT
INSIDE THIS ISSUE
Development Agenda
The Visible Hand
Free Exchange
India Re-examined
Progress Within Limits
The Other Path
A New Beginning
A N I I P M T H I N K T A N K
&
G R E A T I N D I A N D R E A M F O U N D A T I O N P R E S E N T A T I O N

THE GREAT INDIAN DREAM
“Let us together dream of a country where poor are
not just merely reduced to statistics but where there are
no poor. Let there be a day when small children are
taken to a poverty museum like science museum where
they shiver at the plight of the way people used to live in
the last millennium. Let this dream take the form of a
revolution and as long as our dreams keep outweighing
our memories, India would remain a young and dynamic
nation on this path to global equality. And for this let the
wait not be for eternity. Let us together achieve this in
the next 25 years.”
Prof. Arindam Chaudhuri
The Great Indian Dream, 2003, Macmillan India,New Delhi
“A Society where man is at the centre of all activities,
a society where exploitation of man by man has been
abolished, where he is cared for as an in a family, where
“to each according to his need’ is practised, a society where
non bureaucratic National Economic Planning is given
due importance for sustainable optimum growth, where
adequate social safety net is a reality and yet market’s
advantages are fully taken care of for creativity and
entrepreneurship, such a society can be truly described as
humane society and the vision as “Humanism”.
Dr. M K Chaudhuri
The Great Indian Dream, 2003, Macmillan India,New Delhi
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CREDITS
Founder
Dr. M. K. Chaudhuri
Editor-in-Chief
Arindam Chaudhuri
Managing Editor
Prasoon.S. Majumdar
Deputy Editor
M.N.V.V.K. Chaitanya
Consulting Editor
Prashanto Banerji
Research Fellows
Pathikrit Payne
Sray Agarwal
Akram Hoque
Tanaya Bose
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PARADIGM PRISM
“There is no knowledge, no light, no
wisdom that you are in possession of, but
what you have received it from some source.”
Who we are?
The IIPM Think Tank, an independent, India-centric research body, is inspired by
Dr. M.K. Chaudhuri’s vision of India as an economic powerhouse in the 21st century; a modern
nation state where poverty becomes history and the underprivileged are not consigned to
the dustbin of amnesia. The national presence (across 7 nodes, New Delhi, Mumbai, Chennai,
Pune, Bangalore, Hyderabad, & Ahmedabad) makes our understanding of the economy superior,
where in many research fellows and scholars, embark on research assignments and network
with global intelligentsia.
What we believe?
The IIPM Think Tank is wholly free of ideology and looks at the Indian developmental paradigms,
purely modelled upon the basis of ‘objective reality’ by opting for prescriptive economics. We
start with real-life problems, lay down solutions and examine them in real-life context (through
G.I.D Foundation) and observe what we learn about people and other variables in the systems
in India as we opine that there is much more to boundary between the humanity and the world
of ideas. We passionately believe in the credo that we constantly seek to follow: rethink, edify
and delineate. This enduring commitment has helped us foster and broaden the parameters of
public policy debate and alternatives. Toward that goal, it strives to achieve greater involvement
of the intelligent, concerned change agents (reform minded politicians, public servants, socially
responsible firms and citizens) in questions of policy and the ideation. Furthermore, we ardently
believe that the managers of tomorrow that are being groomed at IIPM today will play a decisive
role in India’s renewed tryst with destiny.
What we do?
-Brigham Young
As a premier ‘ideas organisation’, The IIPM Think Tank is committed to enhance public
awareness of policy issues in economics and management and to engineer solutions that will
fulfill the Great Indian Dream. By publishing the findings of its research, and through the active
participation of its senior researchers in the media and policy, it aims to bring new knowledge
to the attention of policy makers. Every year, The IIPM Think Tank commissions and publishes
socio-economic three quarterly reviews and an annual review, on a wide range of policy
issues including education, health, poverty, unemployment, agriculture, industry, services, FDI,
external trade, infrastructure and environment. All these outputs meet the highest standards of
scholarship, are accessible to a broad readership, and explore policy alternatives consistent
with the philosophy of ours. The central theme of our issues are devoted to assess where the
critical predicaments are, analysing what needs to be done to annul the element of development
deterrents in the economy and offer concrete proposals on how to accelerate welfare
everywhere towards achieving inclusive development. The India Economy Review is a small
manifestation of that vision. More than 3,000 students (7 nodes of IIPM) have—and continue
to—spent endless hours conducting primary and secondary research on strategic issues that
confront India. This research is then analysed by many scholars across the 7 campuses. Brand
new insights and policy recommendations that are provided by this core team are then crafted,
honed and polished by member Economics Research Group (ERG). This massive effort is
spearheaded and led by the renowned economist and management guru, Prof. Arindam
Chaudhuri. We trust that the untiring efforts of The IIPM Think Tank are a modest, yet
significant contribution to the policy reinvention that is poised to transform India.
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THE FUTURE IS HERE
“The great aim of education is not
knowledge but action.”
-Herbert Spencer
Since its incorporation (1973), IIPM has been an institution with privileged traditions, in the
diversity of its fraternity, its global outlook, its world class research and its commitment to alternative
national economic planning process.
It can be said, without much oversimplification that there are no ‘underdeveloped economies’.
There are only ‘under managed’ countries. Japan 140 years was ago was an underdeveloped
country by every material measurement. But it very quickly produced management of great
competence, indeed of excellence. The policy inference is that ‘management’ is the prime mover
and ‘development’ is the consequence. At IIPM, every one considers that development is a matter
of human energies rather than economic wealth. And the generation and direction of these human
energies is the task of ‘management’. Accordingly, we formed The Great Indian Dream. Unlike
any other dream, this is one dream which each one of us are determined to realise and that too in
our own lifetimes. Each bit of cynicism and condemnation from pessimists makes us evolve even
stronger and determined.
All our endeavours and initiative is towards realisation of this dream, where in we produce
committed ‘bare foot’ managers and entrepreneurs who are needed by nation, on an insistent
basis. As an educational institute, we aim at initializing a three dimensional personality in IIPMites,
viz.
Pursuit of knowledge in economics and management
Commitment to economic, social, political and technological upliftment of masses and
Cultivation of taste for literature, fine arts and etc.
Economists often have limited access to the practical problems facing senior managers, while
senior managers often lack the time and motivation to look beyond their own industry to the
larger issues of the global economy. It has set before it the twin tasks: to reorient education and
research towards the needs of both the private and public sectors and to establish the link between
the National Economic Planning and the development of private enterprises in Indian economy.
IIPM dares to look beyond, and understands that what we teach today, other adopt tomorrow.
IIPM’s service output (education, research and consulting,) is a unique combination of two distinct
disciplines: economics and management. Through this integration, IIPM helps guide business and
policy leaders in shaping the Indian and global economy, bringing together the practical insights
of industry with broader national and global perspectives.
A hall mark of IIPM is that it is armed with the comparative advantage of engaging the
committed, passionate and brightest management post graduates and undergraduates, who
pursued the education at IIPM and subsequently joined it, to realise the dream. IIPM alumni, spread
across the globe, holding crucial decision-making positions in the corporate sector, are bonded by
the one ideology of making a positive difference, turning that ideology into a movement itself.
The India Economy Review is another humble initiative towards the realisation of the same and
more distinctly, engaging the broader publics and pertinent stakeholders.

FROM THE EDITOR’S DESK
planning for competition, not by planning against competition
Dear reader,
After being shackled for nearly five
decades, a sizeable class of ingenious private
entrepreneurs have been fully liberated,
at least in some economic spheres.
They are now exhibiting their true potential
and international competitiveness as
is reflected in the popular media. In this
context, after perusing all those informative,
yet disparate nuggets and given the
fact that India boasts of a deep financial
services sector, long standing and diversified
private participation (relative to
China, Brazil and other emerging economies),
vibrant entrepreneurial class and
Anglo-Saxon legal institutions, it may
seem surprising that India still painfully
needs a much more market-orientation
across all levels. There is still exists a robust
economic reasoning which asserts
that the state should disentangle all obstacles
and disengage the past planning
follies to release the creative, social and
economic energies of the fast growing
‘bottom millions’. Consider this: According
to the Heritage Foundation’s Index of
Economic Freedom (2007), India is only
55.6 percent free. This score makes it the
world’s 104th freest economy!
In this issue of IER, many empirical
research studies profess that, among
other positive outcomes, economic freedom
promotes national growth and poverty
reduction. Furthermore, different
research papers outline the processes and
policy implications of business freedom,
financial freedom and investment freedom
in several areas, which specifically
and importantly includes
basic education,
labour markets
and financial markets.
Unlike most other issues,
IER this time
covers not only business
and economics,
but also deals with
important research
submissions that falls
outside the realm of traditional economics-
such as intellectual property, ecology
and environment, economic history and
politics This issue, we have some original
research and novel analysis about
• Public governance, market, deprivation
and the political system.
• India’s growing ecological footprint
• The international trade in higher education
and implications for India.
Prasoon.S.Majumdar
Managing Editor
M.N.V.V.K.Chaitanya
Deputy Editor
• Why poor parents are choosing ‘More
Market, Less Government’ in education,
and what we should do about it?
• Accountable governance and pro-poor
markets for poverty reduction
• Reforms in the Indian banking sector
and policy reversal
• Economic freedom in India’s product
and labour markets
Above all, after reading all the opinions
featured here in this issue, we at the
IIPM Think Tank are of the firm opinion
that, if we get a state that reflects more of
what this country is actually about, India
can indeed turn the century and its market--
around, in the very near future. The
impressive response in areas that have
been reformed in the recent past must
give policymakers confidence that further
liberalisation will eventually deliver additional
growth dividends and foster the
process of pulling millions of people out
of poverty.
Best,
Prasoon.S.Majumdar
M.N.V.V.K. Chaitanya

SEARCH, SIEVE, SCHEME...
“Research is formalised curiosity. It is poking
and prying with a purpose.”
Zora Neale Hurston
In economics, like in everyday existence, it is
imperative to hear, perceive and consider what
others have to say. Each issue of The IER brings
together a selection of important contributions on a
particular theme, authored by some of the brightest
minds in different areas of Indian economics. The
provocation for publishing these issues arises from
the fact that over the years economic journals have
become copious, exclusive and expensive. Most of
the journals and a good many of the books have gone
beyond the cerebral and financial reach of general
students and other scholars. It is for them that these
issues are primarily being raised and debated here.
Much about India is transparent enough. One does
not require detailed criteria, cunning calibration or
probing analysis to pinpoint India’s problems and
recognise its antecedents. There is in fact much that
is perceptible about India. But not everything about
India is even if simplistic is so simple. The learned
reader would appreciate the fact that India is like an
elephant that looms too large to be grasped within a
distinct structure and paradigm the constituent parts
of which would fail to reveal the entirety. Obviously and
observably, no suggested solution to any protracted
and complex socio-economic problem will satisfy
all sides and stake-holders evenly. Consequently,
there exists an enormous diversity in economic
thinking and perspectives, as is also reflected in the
viewpoints of different expert contributors in this
issue. The intended outcome of this exercise is to
facilitate the invention, improvement, deliberation
and dissemination of innovation in economic thinking
and national economic planning, insisting merely on
well-grounded, open and unbiased debates, without
predetermined outcomes. It is impossible to do justice
to the entire field of Indian economics in a single
issue. The topics selected for this issue are those
which are of critical and immediate importance to
India. Majority of them were freshly and exclusively
written. Encapsulated, it is a constructive attempt
aimed at helping India actualise its promises and
potential. The editors hope that this issue of IER
will proffer the reader a flavour of dynamism and
excitement and persuade her/him to participate
in the journey towards realising ‘The Great Indian
Dream’. At the same time, it illuminates the terrible,
practical problems of India and Bharat.
HAPPY READING...
ACKNOWLEDGEMENTS
The IIPM Think Tank likes to thank all the internal faculty who have been instrumental in coordinating
with many authors all across India and according their unstinted support. The assistance of Prof.
R.Krishnan and Syed Ahmed (IIPM Chennai), Mr. Tareque Laskar (IIPM Bangalore), Mr. Sudipto
Chatterjee (IIPM Ahmedabad), Prof.Jayanta Chakraborti and Ms. Bindiya Naik (IIPM Pune), has been
more valuable than, perhaps, they realise. Ms. Vareen Gadhoke Ray at Planman Media, particularly, did
all that it was possible to do for this issue of IER.

(F)ACT SHEET
INDIA’S FUTURE: Redesigning Development Agenda
Liberalism As The Basis Of Human Rights And Dignity
Christopher LINGLE 12
India’s Future – Knowledge And Learning
Societies Or Mere Markets And State
Lawrence Surendra 16
State And Market Conundrum In The Indian
Context –A Need For Debates
Pradeep Banerjee 24
Larger Market Role, Reduced Government Interventions–
Is It A Misnomer?
Anandajit Goswami 32
THE VISIBLE HAND: Government’s Role
Governance, Market, Deprivation And The Political System
Amal Sanyal 36
The Economics Of Social Unrest – Its Causes And Cure
Nilanjan Banik 42
More Market, Less Government: A Recipe For Disaster For The
Water Sector
Shripad Dharmadikary 46
Inclusive Growth In India: A Case Of Structural And Agrarian
Challenges
D.M. Diwakar 52
Market Economy And The State Of Regional
Disparities In India
Anu Singh 62
Accountable Governance And Pro-poor Markets For Effective
Poverty Reduction
Anindo Banerjee 68
Food Security In India: Issues And Implications
Anajani Sinha 74
FREE EXCHANGE: More Markets
Why Poor Parents Are Choosing ‘More Market, Less Government’
In Education, And What We Should Do About It?
James Tooley 80
International Trade In Higher Education: What Should India Do?
Stephen P. Heyneman 86
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Water Resources In Gujarat And Role Of Water Markets In
Breaking Gridlock In Water Scarcity – A Replicable Policy
Prescription At National Level
Jharna Pathak 94
Commodity Futures: A Catalyst For Agricultural Development
V. Shunmugam & D.G. Prasad 102
Overseas Investment By Indian Firms: Recent Trends
And Patterns
Deepika Wadhwa 108
Indian Banking Reforms And Policy Reversal: A Vicious Cycle
Anurag Sharma 116
Indian Corporate Bond Market: The Road Ahead
Pramod K. Yadav & Ritesh Agarwal 132
QUO VADIS: India Reexamined
Just How Free Are India’s Labour And Product Markets?
Paul Conway, Richard Herd & Sean Dougherty 138
Going For Growth Through Economic Reforms: The Case Of India
Rok Spruk 146
India’s Unique Pattern Of Development: Quo vadis?
Kalpana Kochhar 154
PROGRESS WITHIN LIMITS: Environmental Economics
India’s Growing Ecological Footprint: Exploring Past And
Future Changes
T R Manoharan 164
A NEW BEGINNING: Law And Public Policy
The First Sale Doctrine Before The U.S. Supreme Court:
Intellectual Property Implications For India
Shubha Ghosh 168
SOTTO VOCE: Economic Exposition
Liberty And Prohibition: A Governance Dilemma
Ali Mehdi 172
THE OTHER PATH: Reimagining India
An Alternative Integrated Development Perspective For The
Peripheral Regions: The Case Of Barak Valley In Northeast India
Baharul Islam 174
THE ‘OTHER’ INDIA: Tenancy Reforms
Tenancy Reforms in Orissa: A Critical Perspective
Mrutyunjay Dash 182

CALL FOR PAPERS
IER is a quarterly journal featuring contents of academic and professional interest that are of utility to managers,
policy makers, politicians, consultants, teachers and students in the areas of Economics and Management. It
is a multidisciplinary platform for sharing and disseminating knowledge in the issues of education, health,
poverty, unemployment, agriculture, industry, service, FDI, international trade, infrastructure and environment,
pertaining to Indian economy. We passionately believe in the credo that we constantly seek to follow: rethink,
edify and delineate. This enduring commitment has helped us foster and broaden the parameters of public
policy debate and alternatives. Toward that goal, we strive to achieve greater involvement of the intelligent,
concerned change agents (reform minded politicians, public servants, academicians, socially responsible firms,
civil society organizations and citizens) in questions of policy and the ideation. In order to further augment value
and provision a broad perspective to Indian economic problems, your knowledge and expertise in the above
mentioned fields would be highly valuable to IER. We would like the possibility of receiving a write-up from you,
on a topic of your expertise and interest as per the under-mentioned guidelines.
Guidelines For Contributors
Content: Articles should be in the areas of education, health, poverty, unemployment, agriculture, industry,
service, FDI, international trade, infrastructure and environment, pertaining to Indian economy, which are
of contemporary interest and value to the esteemed and intellectual readers. The journal seeks to present
an eclectic approach supported by empirical research or practical applications as necessary. Contents that
demonstrate clear and bold thinking, fresh and useful ideas and solutions, accessible and jargon-free expression,
and unmistakable authority and proficiency are those most likely to meet our reader’s needs.
Reviewing Process: Each article is reviewed by the Economics Research Group (ERG). If found suitable, the
same may be sent for another round of review before final acceptance. With prior information and consent,
the editors reserve the right to modify and improve the manuscripts to meet IER’s standards of presentation
and style. The editors also have full right to accept or reject an article for publication. Editorial decisions will be
communicated within a period of 2 weeks of the receipt of the submission.
Word Length: Articles should be of 2,500 to 3,000 words including abstract and references.
Headings And Sub-Headings: Headings should be typed in capital and underlined; sub-headings should be
typed in upper and lower case and underlined.
References: References to other publications should follow the Harvard style.
Figures, Charts And Diagrams: Use of figures, charts and diagrams should be kept to the minimum and text
should indicate where the same will appear. All tables, charts, graphs should be typed on separate sheets. They
should be numbered as Table-1, Table 2, etc. The graphs must have the minimum amount of descriptive text and
the axes should be labeled with variable written out in full, along the length of axes.
Abstract And Key Words: An abstract within 100 words and three key words should be submitted.
Author’s Bio-data And Photograph: A brief bio-data with full postal and e-mail addresses and a coloured
photograph should be sent along with the articles.
Copyright: Authors should warrant that their work is not an infringement of any existing copyright and will
indemnify the publisher against any breach of warranty. The articles published in IER will become the legal
copyright of the publisher. The articles appearing in IER are the personal responsibility of the authors themselves
and do not reflect the views of the editor, principal or the Economics Research Group (ERG) or the sponsoring
organization. The author(s) will receive a complementary copy of IER in which their articles are published; they
will also receive ten reprints of their articles for their personal use.
Submission: The submission should be sent to M.N.V.V.K. Chaitanya at m.chaitanya@iipm.edu

Christopher LINGLE,
Professor of Economic at
Universidad Francisco
Marroquin in Guatemala
Liberalism As The Basis Of
Human Rights And Dignity
"Of all the varieties of virtues,
liberalism is the most beloved."
-Aristotle
I
dealism and an abiding concern
for mankind tend to preoccupy
young intellectuals throughout
the world. Ironically, despite the successes
in promoting human development,
Liberalism remains relatively
underappreciated by the youth in
most countries.
This problem is compounded in India
by legal arrangements that make it
impossible to form political organizations
that identify with Liberal ideals.
As it is, modifications to the preamble
of the Constitution made during the
Emergency specify that: “India is a
sovereign, secular, socialist republic.”
At the same time, an amendment
was made to the relevant section in the
Representation of the People Act, 1950
to require all recognized and registered
parties to swear to uphold the
Constitution. The courts have ruled
variously on whether or not the Preamble
is to be deemed a part of the Constitution.
The current view on this is
that since all parties must stand for
Socialism, no party can legally register
to espouse Classical Liberalism as a
political platform. Attempts to challenge
this ban on political speech of
Liberals languish in the court system.
One might consider the level of outrage
that would lead to a rapid hearing
if socialist or communist parties were
banned. And the strongest voice to remove
such limits would almost certainly
be led by Liberals! Another
problem is that opponents of the Liberal
view effectively create a veil of
good intentions to obscure the obvious
flaws and failings of Socialism. Meanwhile,
critiques of Liberalism make the
unfounded assertion that it offers few
answers for solving social problems
within the larger community.
To counter this latter tactic, Liberals
must make clear representations of the
social benefits of Liberalism. One area
that might be fruitful is to articulate
the Liberal basis of the concept of socalled
human rights. It turns out that
Human rights did not formally appear
12 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
in international law until 1948 when
the Universal Declaration of Human
Rights (UDHR) was signed. This document
enshrines principles of equality
and justice, and the sanctity of a person’s
rights regardless of their ethnicity,
religion or gender. The first sentence
of the 1948 Declaration states
that “inherent human dignity” should
be recognized. As such, a balanced application
of human rights principles
would not impose social responsibilities
that come into conflict with
personal rights.
But some attempts to curb assaults
on the dignity of human beings have
contributed to the continuing problems
that offend a collective sense of justice.
Indeed, many of the most vocal supporters
of so-called human rights actually
promote legal concepts that inadvertently
support the sort of misconduct
they wish to see ended. In particular,
demands for human rights in terms of
social or collective rights undermine
the universality intended by the drafters
of the UDHR. For example, government
officials frequently engage in
populist promises that define rights
based on economic or social characteristics.
In modern times, there has been
an emergence of identity politics
whereby leaders of group-based movements
claim they represent the interests
of groups defined by ethnicity,
class, religion, gender, sexual orientation
or other criteria.
A focus on group “rights” divides
communities into distinctive and separate
political classes that are in conflict
with the interests and rights of other
groups. Demands for an assignment of
rights as a matter of law tend to be
based on a perception of some historical
oppression or victimhood. In the
first instance, assignment of particular
rights contradicts a notion of universal
rights wherein all humans possess
equal rights regardless of differences
race or ethnicity. And basing human
rights upon collective concepts of
“fundamental” social rights leads to
zero or negative-sum policy outcomes
with some groups benefiting and others
losing. One common intrusion to
individual liberties relating is the imposition
of limits on the exercise of
private property rights and the freedom
of exchange. In this regard, the
excesses of protectionism and unlawful
expropriation are legendary. There is
an unfortunate tendency for few objections
being raised when the assets of
private corporations are nationalized.
But this indifference overlooks the fact
that acts that diminish economic
freedoms provide the logic and mechanisms
for reducing civic and political
freedoms. Those wishing to support
human rights should consider that
rights and dignity of humans are best
preserved through rigorous support for
individual rights and the Rule of Law.
As it is, proponents of collective or
group rights that ignore the key role of
individuals as bearers of rights guaranteed
to autonomous humans undermine
the Rule of Law.
Indeed, the assertion of group rights
over individual rights provided the basis
for the injustices of apartheid in
South Africa and genocide in other
parts of the world. The assignment of
group rights in the case of apartheid is
a worst-case scenario of abuses arising
from the violation of these generality
conditions. But other extreme acts
arising out of the exclusivity of ethnic
nationalism had destructive consequences
in the Balkans and plague
other parts of the world.
References to social or collective or
group rights mask the fact that assignment
of such rights may involve empowerment
or possessions that require
the action or aid of others. In the process
of activating such group rights, the
rights of other individuals will be violated
by imposing obligation upon
them. Rights that impose obligations
necessarily attenuate the freedom of
choice and action of others. In such an
order, human beings are treated as objects
or servants of the community
Rights that impose obligations necessarily attenuate the
freedom of choice and action of others. In such an order,
human beings are treated as objects or servants of the
community rather than valued as unique individuals
rather than valued as unique individuals.
Whereas the assignment and enforcement
of individual rights encourages
coordination and cooperation,
collectivized rights involve conflict
and require coercion. As it turns out,
many of the countries that suffer most
from communal violence and sectarianism
are those that have imple
mented policies that define rights of
minorities. Clearly, this approach has
not worked.
A collectivistic approach to human
THE INDIA ECONOMY REVIEW
13

REIMAGINING INDIA
rights as group rights also violates the
generality requirement of jurisprudence
associated with Kant’s categorical
imperative. Under a Kantian system,
justice is served when rights are
applied generally without particular,
arbitrary preferences for either individuals
or groups.
What is at stake is the choice of a
system that serves as the means for attaining
and measuring social justice.
On the one hand, private property
rights might be seen as essential for
safeguarding most other civil rights.
On the other hand, these rights might
be the most effective incentive to inspire
individual effort that may lead to
general prosperity of the community.
A focus on “social” or communitarian
rights tends to lead to reliance
upon a politicization of the economic
position (income and wealth) of individuals
in the community. Politicizing
such outcomes in pursuit of a special
sense of social justice is open to exploitation
by special interest groups or
power elites of other groups or specific
individuals within the community.
It also allows envy and politics to brew
up a ghastly stew. Anchoring human
rights to a (more or less inviolable)
concept of private property reduces
the number of politicized decisions affecting
peoples’ lives. This would be
less exploitative and also less arbitrary
and probably more stable since community
actions are justified by mutual
consent and voluntary exchange among
individuals. Despite well-intentioned
attempts to create or promote a broad
sense of community, democracy allows
the interests of special groups to dominate
the interests of the wider community.
Mechanisms that rely upon
For greater harmony in the future, political initiatives
and the relentless expansion of restrictions and bureaucracy
that contribute to dehumanization should be
replaced by individual initiatives
majority rule to determine the distribution
of wealth or goods tends to reinforce
an increased sense of collective
identity as a means to avoid, to deflect
or to harness as well as to direct
the policies.
In the end, politicization arising out
of attempts to enforce collective rights
can be seen as the principal cause of
the powerlessness of individuals. Expansion
in the nature and direction of
state intervention replaces the rights
of the individual, except as a member
of a group.
In the United States of America, increased
political divisiveness has
emerged as more collective action has
been mandated. Despite emphasizing
multi-cultural studies in American
universities, one result has been demands
for a restoration of “separate
but equal” facilities for different
groups. More troubling is what seems
to be a growing intolerance of diversity
due to resentment of members of
groups who are perceived as recipients
of preferential treatment. Members of
groups identified as historical victimizers
begin to imagine that they are
being victimized and captive to an insubstantial
logic of retribution. Certain
members of the Hindu community in
India are making such claims against
the Muslim population.
Defining human rights in collective
or group terms invites an increased
politicization of life outcomes, something
to be avoided given India’s ethic
and religious diversity. Unfortunately,
populist politicians seldom search for
private solutions to solve problems or
conflicting interests in a private manner.
For greater harmony in the future,
political initiatives and the relentless
expansion of restrictions and bureaucracy
that contribute to dehumanization
should be replaced by individual initiatives.
As such, the best way serve
humane ends is to ground the concept
of human rights in a Liberal order
where individual rights are protected
within a Rule of Law.
14 THE IIPM THINK TANK

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Lawrence Surendra,
Planning Commission of India Chair in
Economics, Department of Studies in
Economics and Cooperation,
University of Mysore
India’s Future – Knowledge And Learning
Societies Or Mere Markets And State
"Economics is not a body of concrete
wealth but an engine for
the discovery of concrete truth."
-Alfred Marshall
The Central Statistical Organization
in its estimate released on
May 21, 2007, estimated GDP at
factor cost at 1999 – 2000 prices as
Rs.28,482 billion. India’s GDP at factor
cost increased from US$20 billion in
1950-51 to US$828 billion in 2006-07.
GDP at current market prices was estimated
at US$912 billion in 2006-07. With
increasing integration, share of merchandise
trade (imports + exports) increased
from 12.2 percent of GDP in 1950-51 to
33.6 percent in 2006-07. Inclusion of
services will increase this share further.
As per the World Economic Outlook
(April 2007), India accounted for 6.3
percent of global GDP measured in terms
of Purchasing Power Parity (PPP) and
1.3 percent export of goods and services.
In terms of PPP, India’s GDP in 2006 was
valued at around US$ four trillion, nearly
five times the GDP valued at current
nominal exchange rate.
The figures in terms economic growth
are impressive with the Finance Minister
aiming for a growth rate of above 10 percent
(around 12 percent) next year. Ambitious
but very much in the realm of
possibility, if the Finance Minister plays
his hands well. For those who directly or
indirectly benefit by this growth, especially
the middle and upper middle classes,
this is news to cheer and feel gratified,
in the sense of feeling a sense of pleasure
and comfort. The latter sense of gratification
leads not only to the desire for
greater and greater gratification but also
leads to over-confidence and arrogance;
signs of the latter are plenty and all it requires
is to read the papers in the metros.
This arrogance around a growing economy
also leads to all kinds of fanciful assumptions
about the role of state and
markets and a kind of evangelical zeal
about markets. For those who will benefit
little or nothing by this growth and
for the many who may even become or
already are, victims of the rapid economic
growth, they may still hope that there
would be some protections for them and
that they still remain constitutionally
citizens of India with equal opportunities
16 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
and rights. The fact that the economy
and its growth happens within the framework
of a solemnly constituted nation
bound by constitutional obligations,
could give the poor and disadvantaged
reasons to hope and aspire for an inclusive
growth, something that the Finance
Minister has also recently been referring
to and on more than one occasion. If inclusive
growth is not to become a mantra
but serious policy, then it has important
implications for the future of India as we
know it. The future of India as a nation,
as an idea that has so important a place
in the comity of nations globally, will
critically depend on how economic policy
in our country deals with India’s large
scale mass poverty. That remains and
will remain the Indian economy’s most
central problem; how economic policy
deals with it, will be what makes or breaks
economic growth and political stability;
in the ultimate analysis our ability to
break the poverty trap is what will determine
whether we pull through as a society
or descend gradually into chaos and
anarchy. This reality needs to be stated
upfront before entering into any discussion
about state and markets.
The State And Economists
Faster growth rates in the economy has
led to calls for an entirely market based
economic growth model and to even assume
that, the state is and can no longer
be the primum mobilum of development.
If that is so, then how does one deal with
the question of the state when it comes to
thorny problems such as poverty alleviation,
social exclusion and gross societal
inequalities that are a drag on the overall
development of a nation. Often there is a
scare tactic that is mounted about the
dangers of a dirigistic state and which the
Indian state hardly is, especially after the
reforms of the 1990s and from the VIII
Plan onwards. Once, the distinction between
accepting a role for the state in
development and that of a dirigistic state
is deliberately blurred, it is easier to
equate the two and call all state involvement
as dirigistic and then try to figure
out in the push for market friendly economic
reforms how to reduce the role of
the state. This then becomes a false debate.
More critical than raising false
clashes between state and market in the
new millennium, is whether the state in
developing societies such as India has a
developmental role, if so how does then
one define it and shape it? There is no
point in putting questions arising out of
the 19th century and early 20th century
problems that developed states have gone
through and more so when most states,
including the Indian state in an age of
globalization are bending over backwards
to be market and corporate friendly.
There is nothing in our ‘karma’ that says,
we have to go through the routes other
societies have gone through. Pluralistic
and sensible approaches to economic
policy making and economic reform in
particular requires a profound understanding
that economic policy making
especially in open and still vibrant democracies
as ours, is related to good governance
as a public good and multiplier
of economic efficiency. Good governance
in a society of diverse groups, interests
and pulls and pressures is an art. In a developmental
strategy sense, governance
is central to economic policy. For this the
state has a critical role in the management
of the political economy of the large
economies as ours and with such large
and varied socio-economic problems,
agro-eco systems and federal political
structure. Good governance is an important
and critical public good and for
which the state cannot be seen as an adversary
by the market. Undermining the
state has serious consequences for markets
as well. The State can very well be
undermined from within the State by
market forces. Instead of tired debates
about state versus markets, what we need
is serious debate on better policy and
polity, involving state and markets.
Once, the distinction between accepting a role for the
state in development and that of a dirigistic state is deliberately
blurred, it is easier to equate the two and call all
state involvement as dirigistic
Better policy and polity that works to the
welfare of the nation as a whole than satisfy
the greed of a few be it business
or politicians.
Economics and economic growth is
part of the complexity of social systems
and their inbuilt injustices, contradictions
and handicaps. To think that the
problems of economic growth can be unraveled
without reference to the social
system, would mean that when the social
system starts unraveling itself, it will
sweep in its wake, all traces of economics
development. This is an issue that many
economists have tried to skirt. It may be
fashionable amidst the greed and individualism
in the wake of the benefits
brought to the leisure classes as a result
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17

REIMAGINING INDIA
of globalization, for media gurus to triumphantly
embrace the market as the
panacea for all our ills. But it requires
some humility to recognize that economic
policy making, doing economics and
shaping public policy in the context of
poor and developing societies as ours,
requires also a deep sense of humanity.
A central issue in discussing the role of
the state and economic growth is the issue
about balanced growth, to avoid
growing disparities between states, between
regions and between different sectors
of the population. For example, one
of the major points of criticism by market
friendly economic reformers’ is that
policy and theoretical approaches, based
on ‘balanced growth’, has been the bane
of earlier economic policy making. Sukhamoy
Chakravarty one of our foremost
economists and who engaged in policy
with that deep sense of humanity, in dismissing
the debate about ‘balanced and
unbalanced growth’ as semantic, refers
ence to discussions of trade as a major
engine for growth and like Amartya Sen,
he recognizes “cycles of optimism and
pessimism in trade led growth”. As Sukhamoy
Chakravarty says, “the point I
am driving at is that it was not much due
to the alleged doctrine of ‘market failures’
in the sense indicated by fundamental
theorems of welfare economics that
policy-makers in both developed and developing
countries agreed to a theory of
state-directed industrialization, but from
a growth perspective based on data on
massive agrarian overpopulation in
South and Eastern Europe. Obviously
the extension of this argument to deal
The need to forge the new consensus that Sukhamoy
Chakravorty made a plea for in the 1980s is ironically
even more relevant now in the end of the first decade of
the new millennium
to the problem of surplus labour as a
more serious conceptual and policy issue
to deal with, especially in rural areas.
Economist of the intellectual caliber of
Sukhamoy Chakravarty, in addressing
such critical issues as that of surplus labour
also dealt with the problem of the
state. With regard to debate about the
state he points to the compatibility or
otherwise between the planning principle
and the principle of comparative advantage.
A dichotomy which he says has
been misleadingly drawn. This has refer-
with countries like India was done later,
although it was present in a general way
from the beginning”. So much for the arguments
about socialist inspired penchant
for state involvement in economic
planning and growth. In connection with
the extension of the argument on surplus
labour to underdeveloped areas, he refers
to the UN Expert Group Report of
1951 on 'Measures for the Economic Development
of Underdeveloped Areas.
'Chakravarty says, “this report reflected
the emergence of a ‘development consensus’
which lasted for nearly twenty five
years”. He then refers to the breakdown
of the consensus – “more prominently in
the 1980s, based on criticisms which were
first voiced by a resurgent neo-classicism
on the one hand, and a ‘radical critique’
of the left on the other”. This he says
does not imply a demise of the sub-discipline
of ‘development economics’, but,
“the need to forge a new consensus” (emphasis
added). The need to forge the new
consensus that Sukhamoy Chakravorty
made a plea for in the 1980s is ironically
even more relevant now in the end of the
first decade of the new millennium.
We must consider ourselves very fortunate,
that our nation has been blessed
with a whole number of good, intellectually
honest economists. In the context of
looking at the perspectives of economic
theory and policy, there is much that we
can glean from the insightful writings of
economists like the late Sukhamoy
Chakravarty, (who along with Amartya
Sen) belongs to that unique class of intellectually
honest economists who have not
done their economics only to pander to
the tunes of the times. Economists who
always did their theoretical and practical
policy work, not only standing above
vested interest pulls and pushes but also
with a deep sense of humanity unconcerned
whether that got them applause
from the galleries or not. Sukhamoy
Chakravarty’s contributions in the context
of the discussion on state and markets
are several and relate to the role of
knowledge, the significance of coordination
failure and surplus labour, the need
to go beyond ‘the market failure’ or stages
of growth argument, the impact of
economic organizations from the viewpoint
of “ensuring creativity, growth and
18 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
equity”, the interdependence between
agriculture and industry and the dilemma
between the need for widening the
market and the prevention of the abuse
of monopoly power.
Especially with regard to the abuse of
monopoly power, let us also for example
and for a moment keep in view economists
and others who act like petty salesmen
for the Commerce Ministry concept
of SEZs. These economists, both within
state institutions and belonging to dubious
NGOs, who on the one hand are the
loudest ones to run the State down while
singing the paens of the market, are the
same ones on the other hand who are encouraging
the worst abuses of monopoly
power and the dismantling of the constitutional
state in the name of SEZs. There
can be no greater irony than this. SEZs
are best described as state encouraged
rapacity by market players who cannot
function in a market more even handedly
regulated by the state and by a state
that stands by the Indian Constitution
and its protections for the rights of all
citizens, be they poor peasants or workers.
Those professing an almost evangelistic
deal to have “growth at any cost”
are oblivious to the principle that any
abuse of monopoly power by the state in
the name of the market, is a sure recipe
that can take any nation however great it
may be, including India, down a vortex of
social instability and violence. This is the
reality that is stares before us not only in
the aftermath of Nandigram but in places
like Mangalore, where fraud and deception
is sought to used to divest people
of productive agricultural land and create
social tension and conflict. Finance
Minister Chidambaram’s note of caution
at the recent Indian Economic Forum
that growth cannot be only for the top
ten percent is not only a welcome note of
caution but also an indication that
policy making at the highest level is
recognizing the larger objectives of
economic growth.
Such caution seems absent at the Commerce
Ministry and most statements that
emanate from the Commerce Ministry,
including that of the Commerce Secretary
seems not only totally oblivious to
ground realities but a very unbalanced
approach to economic growth priorities.
While it is a matter of very deep concern
as regards the long term implications for
India of the SEZ route to rapid economic
growth, the fact is that the disastrous
nature of its implementation could actually
bring down the government and the
Congress Party to which belongs Mr.
Kamal Nath the Commerce Minister
whose Ministry seems to be recklessly
spearheading the SEZ concept. Though
all this may not happen before huge economic
and social costs have accrued to
the nation in terms of not only the accentuated
conflicts it is going to engender
but also in terms of the loss of revenues
in terms of the state and loss of income
and livelihood for thousands of people.
In a globalised world where sovereignty
is also at stake, the Commerce Ministry
can try to run rough shod over all other
Ministries including the Finance Ministry.
However, what such deepening fissures
in economic governance shows is
the possibilities that exist for sections of
the market to use one instrumentality of
state, in this case the Commerce Ministry,
to undermine the state as a whole
and thereby society, showing the hollowness
of arguments pitting market versus
the state. In the end the greed and rapacity
of the market can take both state and
market together down.
The challenge for the academic as well
as working economist, for any person
concerned about and engaged with public
policy, is how even in these circumstances
to focus on long term issues for
the country as a whole. In the Indian
context, what seems in my mind and
echoing Sukhamoy Chakravarty, a key
issue that is of great relevance for the immediate
and the long term, is “a proper
formulation of the role of knowledge as
A key issue that is of great relevance for the immediate
and the long term is “a proper formulation of the role of
knowledge as a productive factor” and “institutional arrangements
necessary for transition to a ‘learning society’
a productive factor” and “institutional
arrangements necessary for transition to
a ‘learning society’ ".
Knowledge And The Learning
Society
Chakravarty refers to Simon Kuznets
who was of the conclusion that in the final
analysis, it was the growth of knowledge
which was the most decisive characteristic
of modern economic growth.
Here Kuznets was not referring to technology
alone but as Chakravarty puts it,
“also of basic sciences which are increasingly
having profound impacts on transformations
in the sphere of production
that are leading to changes in the international
economy”. He warns us that a
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19

REIMAGINING INDIA
systematic underinvestment in science “is
likely to be the result if the growth of science
is left to competitive market forces”.
He then refers to the “dilemma of ‘knowledge”,
which he describes as that which,
“pertains to the lack of compatibility between
institutions which lead to the widest
possible diffusion and utilization of
knowledge and those which are particularly
relevant for its creation in the very
first instance”.
If you need active, democratic, broader
socially based, natural resource sustaining
and future oriented policy, you
need to create the intellectual environment
for it. This then means better and
more funding for research, in both the
social sciences and natural sciences, especially
in our universities. It is commendable
that the 11th plan visualizes a
massive investment in a whole new generation
of advanced higher education
institutions but existing universities do
not adequately figure in the plan. The
Finance Minister allocating sums in his
annual budget to Universities is also a
good and welcome sign.
The second theme that I would like to
pick up and highlight from Sukhamoy
Chakravarty’s prodigious output of his
intellectual labour for economics and the
country, is that relating to social learning,
social innovation and questions regarding
when do societies really become
‘learning societies’. To a certain extent,
in my view, it relates to the larger noninstitutional
aspects of knowledge, unlike
above where I partly referred to the
institutional conditions for ‘knowledge’
and ‘learning’. There is also the other
aspect of our ability to learn from other
societies. In referring to the question of
‘learning society’, we are dealing with
broader questions of Human Resources
Development and which are critical and
particularly relevant where we stand today
in our nation’s history. Knowledge in
the perspective of Chakravarty needs to
be seen as a public good. One could say,
that in spite of all the middle class parlour
talk and fashion for criticizing Nehruvian
– Mahalanobis (N-M) strategy,
it did give us a higher initial level of
knowledge to start with. Chakravarty
while objective and critical of the N-M
strategy shows its validity and contribution
also. On the second aspect, that of
knowledge being widely shared, this is
where we as a highly caste-ridden and
hierarchical society, have had our problems
and also by and large inherited so-
There is an extra-ordinarily rich harvest of ideas from
Sukhamoy Chakravarty’s writings and how we can go
beyond the dichotomies of market and state, to address
urgent and needed tasks of creating ‘a learning society’
cially serious failures also.
Other than these broad based requirements
and aspects related to creating a
dynamic learning society, that can be
self-sustaining and sustainable, in an
economic, ecological and social sense,
there are other related aspects. Some of
this is related to problems such as technology,
its adaptation, innovation, use
and dissemination. Chakravarty is of the
view that while TNCs do bring technology,
we have to seriously consider whether
it will in fact “lead to a significant
accretion of technical knowledge appropriate
to Indian conditions”. So the creation
and promotion of the conditions for
a learning society, is not just to import
and imitate but also to adapt and contextualize.
Chakravarty with reference to
technology adaptation says how it is,
“more appropriate to the factor endowments
of developing countries deserve
very close considerations”; then adds a
very important qualifier, “it would be
most inappropriate to leave questions of
adaptation to technologists alone” and
the overall macro-economic framework
must be also made conducive to the process
of adaptation. Finally, his other related
and important point, that “given
the contemporary trends in technology,
it is important to allow for a theory of
‘knowledge’ production and dissemination”.
There is an extra-ordinarily rich
harvest of ideas and practical policy options
from Sukhamoy Chakravarty’s writings
and how we can go beyond the dichotomies
of market and state, to address
urgent and needed tasks of creating ‘a
learning society’. Time and space does
not allow us to go, into further discussion
and elaboration in this area. In sum, one
can only say that we need to see how to
bring ‘knowledge’ and ‘learning’, as two
very critical aspects of not just economic
growth, but for economic, social and cultural
progress in large and complex developing
societies as ours. It would be a
mockery and travesty to reduce such
unique, rich and diverse societies as ours,
to narrow and limited frameworks of
‘state versus market’.
Comparative Development And
Governance
The renowned, ecological and environ-
20 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
mental economist, Herman Daly in his
writings points to the current dilemmas
of economic planning under globalization
wherein comparative advantage has
become absolute advantage, in a situation
of greater integration of economies
and the attempts by powerful countries
to have absolute advantage as regards
trade and investment. Sukhamoy Chakravarty,
with great perspicacity already in
the 1980s pointed to two necessary directions
of theoretical efforts for development
economics in developing countries.
Firstly he had called for “a deeper study
of economic organization from the point
of view of ensuring creativity, growth and
equity” and went on to add that “earlier
discussion of the market versus the Plan
was much too crude”. Secondly and
which is very relevant to our discussion
here, is that “we should possibly reorient
the study of international economics
from its preoccupation with problems of
comparative advantage based on internationally-immobile
primary factors,
towards a study of processes based on
internationalization of capital, changes
in income distribution and the resulting
variations in sectoral productivity levels
which give rise to the emergence of a
process of uneven world economic
growth”. Sukhamoy Chakravarty’s reference
to uneven growth on a world scale
has much relevance even within our
country, in the context of current economic
growth patterns and growth models
dependent and unleashed by globalization,
which in turn are producing very
uneven growth across the country. Thus,
producing income inequalities not only
between groups and individuals but also
between states and regions as a whole
and which has serious implications for
national growth as a whole.
Amartya Sen, similarly has argued (including
in his joint book with Dreze),
“that the success of liberalization and
closer integration with the world economy
may be severely impaired by India’s
backwardness in basic education, elementary
health care, gender inequality
and limitations of land reforms”. He goes
on to say, “While Manmohan Singh (previously
as Finance Minister) did initiate
the correction of governmental over-activity
in some fields, the need to correct
governmental under-activity in other areas
has not really been addressed”. Amartya
Sen’s states that Manmohan Singh,
considered to be the architect of India’s
economic reforms, “stood solidly for
critical scrutiny of the empirical picture,
rather than a large reliance on theory”
and adds that “it would be in the tradition
of his (Manmohan Singh’s) research
to point out that the relevant picture includes
– in the context of the east and
south-east Asian success stories – not
just an orientation towards exports but
also widespread public efforts in basic
education, public health care, female independence,
land reforms, and other
components of social infrastructure”.
Amartya Sen points out that the South-
East Asian and East Asian countries
share conditions “that are particularly
favourable to widespread participation
of the population in economic change.
The relevant features include high rates
of literacy, a fair degree of female empowerment,
and quite radical land reforms”.
He then goes to ask the basic
questions that many market-oriented
economists have not had the courage or
honesty to ask, or have even been deeply
uncomfortable when faced with these
questions. Amartya Sen asks, “Can we
expect in India results similar to those
that the more socially egalitarian countries
have achieved, given that half of the
Indian population (and two-thirds of the
women) are still illiterate, that the female
empowerment is very little achieved in
most parts of India, that credit is very
hard to secure by the rural poor, and that
land reforms remain only partially and
We need to seriously study ‘comparative development’
between us and other economies especially in East and
South East Asia to make the correct conclusions
about the role of state and markets
unevenly executed?”
In the foregoing arguments that I have
put forward buttressed by the views of
eminent economists like Amartya Sen,
the point I am emphasizing is that
progress in economic development and
growth cannot be achieved just by putting
up the state against the market, both have
a role and in many instances have even a
synergetic role to play. I go further and
advocate that we need to seriously study
‘comparative development’ between us
and other economies especially in East
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21

REIMAGINING INDIA
and South-East Asia to make the correct
conclusions about the role of state and
markets and to have the pragmatic approach
to use both. Instead what we have
today is simplistic journalistic comparisons
to other economies and often to
only advance the point that in other cases
cited, they have been more market
friendly than the Indian state has been.
What one witnesses, especially in the
popular press and in TV business programmes,
are almost illiterate comparisons
by journalists to other countries and
societies in East and South-East Asia
without any reference to their history or
a deeper understanding of these societies.
The comparisons are like frozen in
time and are snapshots of the present
without any reference to how they have
come there. Unfortunately academics
also, instead of making up for their lack
of knowledge of Asian societies, in an
incestuous manner quote these journalistic
comparisons when for example there
is opposition to the entry of TNCs to the
retail trade or to the coercive attempts to
deprive people of their land and force
SEZs down the throat of unsuspecting
citizens. In contrast what we seriously
and urgently need is the building of institutional
capacity to study comparative
development between India and other
developing countries especially in the
Asia and Pacific region and focused on
different aspects of economy, society,
social policy and in general the shaping
of public policy. In a sense the old institutional
arrangements that exist in most
of our universities in the form of area
studies and associated centres and departments
may have to be revisited and
both existing capacity strengthened as
well as new capacity created.
An important dimension of generating
knowledge on comparative development
is to link with governance and understanding
governance related issues. Keeping
in line with what has been said earlier
in this paper about the centrality of governance
to ensure growth that can be socially,
culturally and ecologically sustained,
research and studies need to be
done not only comparing India and Asian
countries but also comparisons within
India between regions and states. Keynes
had held that, “the theory of economics
does not furnish a body of settled conclusions
immediately applicable to policy
Unfortunately academics, instead of making up for their
lack of knowledge of Asian societies, in an incestuous
manner quote journalistic simplistic comparisons down the
throat of unsuspecting citizens
and it is a method rather than a doctrine,
an apparatus of the mind, a technique of
thinking”. Comparative development, in
contemporary times, almost two decades
after the emergence of globalization, is “a
technique of thinking’. Keynes was only
echoing Marshall who in his Principle of
Economics had long ago held the view,
“economics is not a body of concrete
wealth but an engine for the discovery of
concrete truth”. Economists and social
scientists in our country have much work
to do to study and learn from other societies
and in order to ensure that economic
progress and development in our country,
means a full human life for all our citizens
not a situation of vulgar wealth mocking
the inhuman conditions of existence that
is the day to day reality for a very large
number of our citizens. Only then India
will be truly and respected for its greatness
and the extraordinary cultural and
philosophical wealth that it possesses.
Otherwise, we will continued to be seen
as a nation of hypocrites (even if no one
for politeness does not say this to our face)
and no amount of nationalistic jingoism
and fanatical cultural nationalism will
change our image or the situation we are
in as a nation. It is therefore time that
middle class intelligentsia, academics and
intellectuals in India came to grips with
this reality than delude themselves with
false images of greatness.
References
• Sukhamoy Chakravarty, ‘Writings on
Development, with an Introduction by
Mihir Rakshit’, Oxford University
Press, Delhi, 1997
• Dreze, Jean and Amartya Sen, ‘India:
Economic Development and Social
Opportunity’, Oxford University Press,
Delhi, 1995
• Dreze, Jean and Amartya Sen (eds),
‘Indian Development: Regional Perspectives’,
Oxford University Press,
Delhi, 1996
• Amartya Sen, ‘Theory and Practice of
Development’, in ‘Indias economic Reforms
and Development-Essays for
Manmohan Singh’, Isher Judge Ahluwalia
and I.M.D.Little (eds), Oxford
University Press, 1998
• Amaresh Bagchi, ‘Role of Planning and
the Planning Commission in the New
Indian Economy: case for a Review’,
Economic and Political Weekly, Bombay,
November 3, 2007.
22 THE IIPM 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 !
Strategicw w
July-September 2007, Volume 1 Issue 3
Innovators
www.iipm.edu
w . i i p m p u b l i c a t i o n s . c o m
Rs.100
Radical knowledge
Re-structuring
INSIDE THIS ISSUE
20 STRATEGIC CHOICES: ANEEL KARNANI
PROFESSOR OF STRATEGY, UNIVERSITY OF MICHIGAN
How Indian firms can make better strategic choices &
execute them to achieve true competitive advantages
32
ILLUSION & REALITY: ANDREW LIKIERMAN
DEAN, LONDON BUSINESS SCHOOL
How the success of an organisation is not reflected by
its sheer size; rather it’s linked to shareholders’ returns
40
PR AND COMMUNICATION SYSTEM: DAVID NORDFORS
SEMIOR RESEARCH SCHOLAR, STANFORD UNIVERSITY
How communicators & journalists are “attention workers”
driving the “innovation communication system”
48
ENTREPRENEURSHIP: ELIZABETH R. THORNTON
PROFESSOR OF ENTREPRENEURSHIP, BABSON COLLEGE
Unveiling the rich
secrets behind those
unanticipated strategic
master-strokes
Explaining the risks and returns behind many
entrepreneurial motives to start their own businesses
56 INDIA’S PATH TO INNOVATION: DR. DAN STEINBOCK
DIRECTOR, ICT RESEARCH INSTITUTE
On how India’s future depends on the private sector
players becoming the highly-active innovation drivers
AN AN IIPM IIPM INTELLIGENCE UNIT UNIT PUBLICATION

Pradeep Banerjee,
Independent Consultant,
Bangalore
State And Market Conundrum In The Indian
Context – A Need For Debates
"Freedom is hammered out on
the anvil of discussion, dissent
and debate."
-Hubert H. Humphrey
A
concern about the economy is
one that has many a participant.
The concern is expressed
in the many debates that refer
to this concern and it does so in a myriad
of ways. It ranges from the animated
to the scholarly, from the simple to the
complex, and from the informed to the
expected. These discussions, then, have
moved out of the confines of the political
class and the academicians. It has
moved in to include members of the
larger civil society. In a manner of
speaking, the debates have become a
part of the discourse of the many participants.
A favoured point in discussions
and debates about the economy is
that about the market. These debates
and discussions are more about the manner
that markets envelope the society,
and also about the manner in which
markets relate to the individual. In some
ways markets have come to be associated
with helping men in their ‘desire of bettering
(their) condition’. 1 That is a probable
reason based on which markets
have almost assumed a proxy for the
economy. Markets, then, are structures
that hold the interest of many. The grip
on the interest accrues from a recognition
that markets and human societies
have moved in tandem over long periods
of time now. It is the ubiquitous presence
of the market that makes it an immediate
point of reference. Markets
existed before economists adopted analytical
tools to work on this ubiquitous
item of every day occurrence. Markets
have been analyzed to understand their
dynamics. Markets have been identified
at a spatial level that on immediate reckoning
looms large as structural constructs.
So there are global markets
where the sheer size is at once baffling.
And then there are country level markets
that operate using methods and
processes to draw lines of conventions
and lines of practice to retain an identity
that is independent of the global
mind sweep. The hierarchy of markets
includes local markets and these local
markets themselves may be larger than
24 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
what can be provided for in a cognitive
mind set of an individual. The calibration
of markets using hierarchy, however,
as the defining attribute, does not quiet
capture all that what make up for markets.
Markets as constructs have evolved
and have changed with time moving
from points at which barter was entered
into to places where the magnitude is at
once large and complex. The pattern of
thinking and arriving at explanations
that have accompanied these transformations
have similarly changed course.
What causes them and why these are
useful to transactions in society, therefore,
remain important issues. And these
have been so for some time now if we
exclude the antiquity from the purview.
Arriving At A Framework Handy
Enough For A Debate
The market is not an island floating in a
sea of societal events. The market is
probably more like an iceberg that has
a ninth of it unseen. These are not institutions
that occur in relative isolation.
Instead these occur when commerce
clearly engages the society as an activity
that a society needs to engage itself
with. Accordingly, and for instance, ‘the
“Spirit” of Capitalism’, in a manner that
Weber approached the issue and elaborated
upon it, probably has a lot to do
with the issue of markets. Weber was of
course concerned with commerce, and
the manner in which this activity
emerged from after being confined to
ethical pits for a long time and particularly
during the Middle Ages and up to
the beginnings of the modern period. As
regards markets, these were accepted as
a part of commerce for these went alongside
commerce. Weber was writing in
the 1890s and he referred to the term
‘economic order’ to which both the individual
and the enterprise had to comply
with. If the modern period is identified
with a pervasiveness of the economic
order and in which compliance comes in
as given, it was not so earlier. ‘The capitalist
spirit’ Weber wrote, ‘has had to
prove itself in a hard struggle against a
world of hostile forces.’ 2 On matters related
to the establishment of commerce,
then, we would need to go an earlier author.
Adam Smith in his The Wealth of
Nations wrote of the manner in which
feudalism underwent erosion. The erosion
had to do with the establishment
and the consequent spread of commerce
and manufacture. The observations of
Smith are relevant in yet another manner.
The spread of commerce and manufacture
brought in certain fundamental
changes in the society. And finally it
brought in the first hints of the involvement
of the ruling elite in this spread.
The Chapter was entitled tellingly “How
the Commerce of Towns Contributed to
the Improvement of the Country”. In it
Smith wrote, ‘commerce and manufactures
gradually introduced order and
good government, and with them, the
liberty and security of individuals.’ 3 The
rationale for the coming in of peace over
that of warfare that were carried on by
manor lords between themselves was
traced to the declining influence of these
manor lords over the sovereign. The surplus
could now be expended on manufactories
that commerce helped deliver
for consumption. And Smith, who was a
votary for individual efforts, once again
emphasized on the ‘desire of bettering
(their) condition’. Smith wrote that, ‘The
natural efforts of every individual to better
his own condition, when suffered to
exert itself with freedom and security, is
so powerful a principle, that it is alone,
and without any assistance, not only capable
of carrying on the society to wealth
and prosperity, but of surmounting a
hundred impertinent obstructions with
which the folly of human laws too often
encumber its operations.’ 4 Smith had his
reservations about commerce and those
who practiced it, and yet he was emphatic
on the impact that commerce and
manufacturing had on society. On the
whole the impact was good. There is a
primacy of economics in his statement
Markets have almost assumed a proxy for the economy.
Markets, then are structures that hold the interest of many.
The grip on the interest accrues from a recognition
that markets and human societies have moved in
tandem over long periods of time now
for he points out that the momentum
generated could surmount the hindrances
to progress. It is of these and similar
hindrances that the referencing by Weber
highlighted.
The intermixing of politics and economics
was clearly seen by others too
and the emerging viewpoint clarified
that the expansion of economics went
along with an expansion of the political
landscape. Of the many who wrote on
this issue, Adam Fergusson (1723-1816),
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25

REIMAGINING INDIA
yet another Scot and identified with the
Scottish Enlightenment, was articulate
on the issue. In his An Essay on the History
of Civil Society (1767), Fergusson
wrote that, ‘It has been found, that, except
in a few singular cases, the commercial
and political arts have advanced
together.’ 5 Fergusson maintained that
the incidence of commerce was quiet
engaged with the ways of nations and
pointed out that, ‘In some nations the
spirit of commerce, intent on securing
its profits, has led the way to political
wisdom’. 6 The point that was being made
by Fergusson was received well and the
text of the Essay on the History of Civil
Society ‘found many enthusiastic readers
in London, where it went through
seven editions in Fergusson’s lifetime.’ 7
It was an endorsement of the general acceptance
of these thoughts and explanations
about the working of the economy.
The schools of German Philosophy
tors who debated on a host of areas that
were at once connected with the enquiries
that Smith and Fergusson were working
on. The transition was clearly visible
and so much so that until the seventeenth
century, the term economy did
not quiet signify much and that university
chairs were set up for studies in ethics
and not that for economics. Smith
himself was appointed as a professor of
moral philosophy in 1752 and published
The Theory of the Moral Sentiments in
1759, years earlier to The Wealth of Nations
which was published in 1776. The
transition was notable enough and
It was reasoned that if the interests of these contending
actors (Commercial class and State) were so intense, the
resultant interactions could well be inimical to either of
them and could therefore be a source of stress in the
society. Hence, came the idea of civil society
would also remain indebted to Fergusson
for the term civil society, a term that
would also be used here in connection
with the market and the State.
The contributions of Smith and Fergusson
were important. They helped
recognize the reasons for commerce and
further enabled recognition of an additional
two domains that were relevant to
matters of manufactories and commerce.
These were those of markets and that of
States. There were many more contribu-
Watson points out that when Smith died
‘after a life of intellectual adventure and
social prudence’, a local newspaper complained
in its obituary (4 August 1790)
that he had ‘converted his chair of moral
philosophy at Glasgow University into
one of trade and finance’.’ 8 And while
earlier in Britain ‘men argued that human
nature rather than the state should
govern economics’, matters changed
course and the role of the state became
clearer so much so that, ‘We should not
forget that state intervention in the
eighteenth century was very important
to economic development and Smith
never disagreed with this.’ 9 The debates
initiated by thinkers such as Smith and
Fergusson, among the many others, had
initiated major long term changes. And
if the stage was set for expansion of commercial
trade and manufactories, their
momentum was quiet clearly induced by
debates that took place during these periods.
Changes during the next period of
the nineteenth century and those thereafter
are testimony to the expansion that
had been achieved by these nations.
The Third Actor – Inclusion Of
The Civil Society As Part Of
The Triad
The growth of these economies brought
into sharp focus a number of developments
that claimed for attention. The
rise of the commercial class with its
members quiet clearly interested in their
private interests and that of the State
could expectedly raise the requirements
of boundaries determining their spheres
of operation. It was reasoned that if the
interests of these contending actors were
so intense, as it appeared to be, the resultant
interactions could well be inimical
to either of them and could therefore
be a source of stress in the society. It is
as an outcome of this concern that the
idea of civil society came to be articulated.
If the term civil society has been
an old one, it is with John Locke (1632-
1704), the Scottish Enlightenment
group, and Georg Hegel (1770-1831) that
the term came to be positioned more
firmly and done so in the contextual format
that includes the State and the market.
Seligman observes that ‘what stood
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MORE MARKETS, LESS GOVERNMENT
at the core of all attempts to articulate
a notion of civil society in that period,
and since, has been the problematic relation
between the private and the public;
the individual and the social; public ethics
and individual interests; and individual
passions, and public concerns.’ 10
The organization of society being an endeavor
of immediate concern, the inclusion
of civil society as a building block is
as relevant and in this context plays a
normative role. Civil society as a normative
ideal emerged, as Seligman points
out to ‘as the result of a crisis in social
order and a breakdown of existing paradigms
of the idea of order.’ 11 The stress
points and crisis refers to that between
the State and individual interests. The
role of civil society has been assessed in
these contexts, and to discharge which
role civil society ‘is most usefully thought
as identifying a set of human capacities,
moral and political.’ 12 This is an effective
expression to hold on to for assessing
the impact of civil society when
functioning as a part of the triad formed
by the State, the market and the
civil society.
Spread Of Markets, Influence
Of States And The Colonial
Period In India
It is a point that is made that the state of
the economy in the earlier part of the
eighteenth century in India was not so
different as compared to that in Britain
and other European countries. It is observed
that the ‘economies of India,
China, and other Asian regions in the
early eighteenth century were not so different
– hardly less sophisticated than in
Europe’ and that ‘the economies of Britain
and Europe accelerated after 1750,
quickly outstripping those of India, China,
Japan and the rest of Asia.’ 13 The
stirrings of the early differences began
at some time during the seventeenth and
the eighteenth centuries. The case study
of India is an illustration of what occurred
as a response to the emergent
State and interactions between the State,
the market and the civil society.
The pre-colonial history of India has
a continuity that is easily segregated
from that of the beginnings of the arrival
of commercial class from Britain
and other European nation states to India
in search of markets. This early history
of travelers, merchants and those of
the East India Company officials are
that of commercial interests in search of
markets. In various ways the State in
Britain and those in other nations too
emerged as supporters that enabled a
deepening of interests. It is, however,
the cessation of the Company rule and
the initiation of the colonial rule by the
State in Britain that the changes came
into much sharper focus. This is expected
inasmuch as the rule by the colonial
State was qualitatively different from
that by commercial interests in the form
of the Company supported though the
Company was by the State. Accordingly,
while the early stages, and that prior to
the proclamation transferring power to
the State of Britain of the territory of
India, offers a fascinating story of the
manner in which the commercial class
established its presence in the country,
it is the firming up of the relationships
under the State that is of relevance here.
The response of the civil society to the
colonial State was at once sharp and often
provocative. Dadabhai Naoroji, the
forefront spokesperson of the economic
drain theory and who estimated the
drain to be to the extent of ‘30,000,000
to 40,000,000 a year’ did not find any
issues with the ‘operations of economic
laws’ as a cause behind this sorry state
of India. Instead, he identified the British
State and its policies that were the
cause. Writing in 1880, Dadabhai pointed
out that, ‘It is not the pitiless operations
of economic laws, but it is the
thoughtless and pitiless action of the
British policy; … in short, it is the pitiless
perversion of economic laws by the
sad bleeding to which India is subjected,
that is destroying India.’ 14 The point
Dadabhai Naoroji, the forefront spokesperson of the economic
drain theory and who estimated the drain to be to
the extent of ‘30,000,000 to 40,000,000 a year’ did not
find any issues with the ‘operations of economic laws’ as a
cause behind this sorry state of India
about the overreach by the State was not
restricted to identifying that it was the
role of the State, and the manner in
which the State denuded the economy
causing, that were the reason for the severe
handicap faced by the populace of
the country over which the State presided.
A further issue was raised, and it
was about the operation and influence
of the colonial State as against that of
the pre-colonial State. Dadabhai pointed
out that under the suzerainty of the
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27

REIMAGINING INDIA
‘native despot the people keep and enjoy
what they produce, though at times they
suffer some violence in the back. Under
the British Indian despot the man is at
peace, there is no violence; his substance
is drained away, unseen, peaceably and
subtly – he starves in peace, and peaceably
perishes in peace, with law and order!”
15 This was a clear recognition of
the differences among the type of States,
and it was a rendition of practices that
each of these States had on the economy.
Dadabhai, a civil society member, was
elaborating on the overreach by the
State and the manner in which its hegemony
overshadowed the development
of indigenous commercial class. The focus
of the drain theory was not on the
underdevelopment of the commercial
class per se. The State and Commercial
interest were locked into a symbiotic relationship
such as to benefit the British
economy. The loss to the peripheral
economy was a consequence. The indigenous
commercial class moved forward
instead on a stunted road.
If the State arose as a means to reduce
the violence among interacting individuals
and groups, the colonial State quiet
well performed on this attribute of Statehood.
Dadabhai clearly recognized this
at the empirical level and wrote about
this while elaborating on the arrival of a
more peaceful time over that which prevailed
earlier. The peaceful time that
the Colonial State brought in augmented
an increase in economic produce in the
form of raw material that the colonizing
economy required as inputs to its produce.
The peripheral economy also provided
the market that the Commercial
interests of the class in that economy
required. The peace that came in was
required for the market and yet there
was no getting away from the fact that
the Colonial State while engaged in doing
so was engendering growth of the
markets for the colonizing State. Dadabhai
wrote that, ‘There is security of life
and property in one sense or way, i.e.,
the people are secure from any violence
from each other or from Native despots.’
And yet this did not secure the economy
from the drain that the colonial State
had established. Accordingly, ‘What is
secure, and well secure, is that England
is perfectly safe and secure …to carry
away from India, and to eat up in India,
The State and Commercial interest were locked into a
symbiotic relationship such as to benefi t the British
economy. The loss to the peripheral economy was a
consequence. The indigenous commercial class moved
forward instead on a stunted road
her property at the present rate of
30,000,000 to 40,000,000 a year.’ 16
So clear were the State and Market
relationship recognized that other members
of the civil society too expressed
their dissension with the practices that
emerged out of this relationship. Writing
in the Indian People on 27 th of February
1903, Sachidanand Sinha, pointed out
that the effective administration practiced
during the governance of Lord
Curzon was more an outcome necessitated
by the requirements of commerce.
‘Trade cannot thrive without efficient
administration’, wrote Sinha and adding
that the ‘latter is not worth attending to
in the absence of profits of the former.’
Consequently, it is ‘always with the assent
and often to the dictates of the
Chambers of Commerce (that) the Government
of India is carried on’. 17
This is not a place for arriving at exhaustive
details of the manner in which
the colonial State worked around to address
the requirements of the markets.
Suffice it note that the thesis of Sate and
market reinforcing each other is quiet
clearly observable during this period
and that the members of the Indian civil
society had been able to identify this
relationship. It was recognition of this
relationship that brought the civil society
to debate about the relationship and
so as to arrive at what was required to
change the coordinates of the relationship.
It was the cohesion of the civil society,
which over the years gathered
members of the commercial class that
prompted the building of alternative
viewpoints of the manner that the economy
should function. The subsequent
participation by political parties as a
joint effort brought in the transition
from the colonial State to a State that
was part of the Indian scenario. This
constitutes the second issue that merits
recognition and it is that of the civil society
playing an important role in influencing
the changeover from the earlier
State mode to that of yet another one.
Post-Colonialism And The
Search For New Paradigms
The triad of State, market and civil society
as it were during the colonial pe-
28 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
riod came in for significant changes after
the colonial period came to their end. In
the Indian instance, their build up were
influenced by the colonial forces. The
market that was more local in the precolonial
period was not quiet so at the
start of the post-colonial period. There
was the availability of a market economy
enabled to a significant degree by a network
of railway connection. The availability
of a market economy is an important
distinction, for it helps to make a
transition from where an economy is to
where it wants to reach in a manner that
is akin to a transformation of the economy.
In the Indian instance, Jha points
out that the country at the start of its
post-colonial journey was, among other
countries, the one that was ‘best placed
to make a transition quickly because it
was the only country with a fully developed
national market economy.’ 18 And
yet at the end of about six decades of
economic management, the changes in
the economy is seemingly short of that
which can be viewed as one of transformation.
The economic transformation
of India, it is contended, ‘has run into
difficulties because it has gone too slow’,
leading to an outcome that Jha refers to
as ‘the paradox of India’s slow transition’.
19 The presence of markets at this
point in time came along with the presence
of the indigenous commercial class
too. As regards the State and the civil
society, the changes recorded by these
two actors require further exploration.
The explanation lies in the specific historical
experiences that the State and
civil society underwent in the country.
The dimensions of the market are
easier to discern; it is not so with that of
the State and the civil society. The involvement
of the civil society in the colonial
period with the colonial State gave
rise to an important development unique
in its own way and quiet different from
that which the European instances
record. In this case, there was a formation
of a ‘we’ that was distinctly different
from the State. It was the norm that nationalist
movements would recruit their
support of interested parties from
among the intending participants in
their cause. The goal was the removal of
the colonial State. Towards this, the participation
that was sought was from an
increasing number of participants and
even from those who were not quiet covered
by the colonial State. The practitioners
of nationalism, in other words,
were making a case of representing the
indigenous populace in all their domains
of practice, be it economic or be it otherwise.
The change from a colonial State
to a nation State was carried out under
the controlling interest of nationalism.
This led to the formation of a State that
was different from the colonial State.
Characterizing this State, Kaviraj points
out that the ‘secret of the immense power
of the nation-states was not the inheritance
from colonialism but from their
nationalist mobilization.’ 20 The range of
activities that the State could now command
over was large and it now had the
advantage of being a representative
State that could speak for all. Note that
this was distinct from the European instances
where attempts were consistently
made to sustain different domains
for the State, the market and the civil
society. The contributions of theorists
who tried to find solutions to the problem
of one of the actors in an overreach
situation over the other the other two,
and covered in the earlier part of this
essay, were directed to this end. In the
evolving model that had emerged in a
post-colonial State, the overreach by the
State was at the cost of the civil society.
An outcome of the influence of the nation State during
the post colonial period, upon most matters that
the nationalists had embedded their positions on in the
colonial period, was that the State took on contingent
responsibilities in a number of activities
An outcome of the influence of the nation
State during the post colonial period
on most matters that the nationalists
had embedded their positions on in
the colonial period was that the State
took on contingent responsibilities in a
number of activities. This meant a
squeezing of the markets that the commercial
classes in the society would have
endorsed targeting for their growth. A
large spread of influence and an inclusive
control over economic activities can
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29

REIMAGINING INDIA
mean a slow down in pushing the economic
agenda. A lesser reliance on market
forces of the type that emerges as
with a market economy and coupled with
an intensifying bureaucratization of
processes can bring in a slow down making
the transition that much more difficult
to execute. Bhagwati points out to
the overhang of the State leading to ‘the
inability to trust the market when scarcities
are acute and the tasks are challenging’.
21 The impact of this overhang on
the market had certain long term effects
for the practices of the State in the economic
sphere. A ‘combination of industrial
licensing and controls at home with
import and exchange controls externally,
effectively cut off rigours of competition
from all sources and made the creation
of a rentier, as against an entrepreneurial,
economy more likely.’ 22 An overhang
of this type has an adverse impact on the
creation of the market and on agents, or
entrepreneurs, who constitute an important
part of the market. The movement
from early post-colonial period and into
latter day envisages the highs and the
lows of the State and its influence on the
economy and the polity. This has not
been a period of the routine; it has instead
been a period that can be characterized
by the term ‘change’.The economy
progressed from early reaching of
high notches as at the end of the early
plans, to a leveling of the growth and
whereby the economy was described as
one that was inflicted by a Hindu rate of
growth. The economy periodically recorded
weaknesses in its ability to deliver
as much as was demanded of it. In
a manner of speaking the overstretched
State which depended on large scale
controls to be able to deliver the promises
that were made now faced road
blocks in its way forward. The liberaliza-
The process of debate is augmentative. The need is to
engage the State by the civil society. Debates are expected
to enhance an understanding of the way that the intricate
relationships between the triad of actors and also to help
determine the way forward from the current relationship
tion of the 1990s and thereafter, accordingly,
focused on dismantling the economic
controls that had been instituted
during the course of the journey after
independence. The growth rates that
have been realized, and the prospects
that have come to be expected, has
prompted a re-look yet again at what
could be the best solution for moving
forward. The market has expectedly become
an arena to be looked into with
more than usual interest.
Debates Are Contributive
We started with the observation that the
debate on the market has progressed
beyond the confines of the few. It now
includes the many instead, and this for
the simple reason that the market concerns
all. Markets, then, turn out to be
constructs that are influenced by the
manner in which economic activities are
handled in society. Markets have that
quality which encourages the many to
arrive at answers about its construct.
This happens because of the relationship
that individuals have with the market.
This is important because it also
brings in the role of democracy and following
the adoption of which there is an
influence by members of society who opt
for a political governance of the type
that is shaped by this political mode of
participation. It is about the influence
that civil society has on the political terrain
and also about the influence that
civil society can have on that terrain.
The influence that matters in the context
that has been drawn out here is that on
the State and Market relationship and it
is here that the influence could be one
of moving forward such that the outcome
is that of consensual gain. The
political influence that leads to the
putting up of a confrontationist barrier
is of negative consequence. It is here
that the process of debate is augmentative.
The need is to engage the State by
the civil society. The debates are expected
to enhance an understanding of the
way that the intricate relationships between
the triad of actors, namely, the
State, the market and the civil society
works and also to help determine the
way forward from the current status of
existing relationship. A preponderant
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MORE MARKETS, LESS GOVERNMENT
reliance on the market can be debilitative
as much as one on the role of the
State to work as the redeemer in view of
its spread and involvement in a majority
of human spheres of activities. A civil
society that is built on representing sectional
interests is yet again a handicap.
The rationale for debates into and about
the interacting relationships is expected
to yield a better perspective about actions
to be taken. In a maturing political
economy, these debates are important
given that ‘these debates form parts of
a collective reflection on the nature of
the conditions which political democracy
requires to take root and flourish.’
23
The market, as it stands, is but a construct.
Taken by itself the market could
be amoral. It is constructed best, and
functions so, when it is mediated by the
State in terms of the coordinates set up
by the civil society. To say so is not to
reduce the entirety of the State, market
and civil society complex as an outcome
of an instrumentalist intervention.
For doing so is not even a good
theoretical exercise, leave alone a matter
of practice.
The State and market conundrum is
an intricate issue and particularly so in
an economy that has had a past of the
type that India has. It is that debates
would address complex body made up
by the State, the market and the civil
society the necessary enabling momentum
to take those steps that would address
needs of the society. That is why
there is a need for debates. And as we
have seen, there have been instances of
such debates influencing the society.
The Indian instance is not exempt
from this.
References
1.
Adam Smith in his ‘An Inquiry into
the Nature and Causes of the Wealth
of Nations’ pointed out that ‘an augmentation
of fortune is the means by
which the greater part of men propose
and wish to better their conditions.’
2.
Weber, Max., ‘The Protestant Ethic
and the “Spirit” of Capitalism and
Other Writings’, Penguin Books, New
York, 2002, p.15.
3.
Hirschman, A., ‘The Passions and the
Interests – Political Arguments for
Capitalism before Its Triumph’, Princeton
University Press, Princeton,
New Jersey, 1997, p.100.
4.
Ibid., p.103
5.
Ibid, p. 120.
6
. Ibid, p. 120.
7.
Watson, P., ‘Ideas – A History from
Fire to Freud’, Widenfield & Nicolson,
London, 2005, p.539.
8.
Ibid., p. 541. Watson herein refers to
the work of Ian Simpson Ross, ‘The
Life of Adam Smith’, Oxford: The Oxford
University Press, 1995.
9.
Ibid., p.541. In this elaboration,
Watson refers to the work of Paul
Langford, ‘A Polite and Commercial
People’, Oxford University Press, Oxford,
1989.
10.
Seligman, A., “Civil Society as Idea
and Ideal”, in Chambers, S and Kymlicka,
W’, (edited)., ‘Alternative Conceptions
of Civil Society’, Princeton
University Press, Princeton, 2002, pp.
13-14.
11.
Ibid., p.14.
12.
Khilnani, S., “The development of
civil society”, in Kaviraj, S and Khilnani,
S, (edited)., ‘Civil Society – History
and Possibilities’, Cambridge
University Press, Foundation Books,
2002, p. 25.
13.
Pomeranz, C., ‘The Great Divergence:
China, Europe and the making of the
Modern World Economy’, Princeton
University Press, Princeton, 2000,
quoted in Watson, P., Ibid.’ p.570.
Also see Frank, Andre Gunder., Review
of ‘The Great Divergence’, Journal
of Asian Studies, at www.rrojasdatabank.org/agfrank/pomeranz.html,
accessed on 19th November 2007.
14.
Naoroji, Dadabhai., ‘Poverty and Un-
British Rule in India’, p.216 and quoted
in Chandra, B, Mukherjee, M,
Mukherjee, A, Panikkar, K. N, and
Mahajan, S., ‘India’s Struggle for Independence
– 1857 – 1947, Penguin
Books, 1991, New Delhi, p.97.
15.
Naoroji, Dadabhai., ‘Speeches’, p.389
and quoted in Chandra, B et al., Op.
cit., p.100.
16.
Naoroji, Dadabhai., ‘Poverty and Un-
British Rule in India’, pp.224-25, Op.
cit., p.99.
17.
Chandra, B et al., Op. cit., p.99.
18.
Jha, Prem Shankar., ‘The Perilous
Road to the Market – The Political
Economy of Reform in Russia, India
and China’, Rupa and Company, New
Delhi, 2002, p. 165.
19
. Ibid., p.165
20.
Kaviraj, S., “In Search of Civil Society”,
in Kaviraj, S and Khilnani, S, (edited).,
Op. cit., p. 314.
21
. Bhagwati, Jagdish., ‘India in Transition
– Freeing the Economy’, Oxford
University Press, New Delhi, 1994,
page. 51.
22
. Ibid., p. 61.
23
.Kaviraj, S., “In Search of Civil
Society”, in Kaviraj, Sudipta and
Khilnani, Sunil, (edited)., Op. cit.,
page. 323.
THE INDIA ECONOMY REVIEW
31

Anandajit Goswami,
Associate Fellow, The Energy
and Resources Institute (TERI),
New Delhi
Larger Market Role, Reduced
Government Interventions – Is It A Misnomer?
"Liberty is the only thing you
cannot have unless you are
willing to give it to others."
-William Allen White
The above title highlights some basic
facets of the reformist changes that
have taken place in India during
the liberalization period. The “India Shining”
campaign marked by stupendous
growth rates of the economy owing to diversified
market led reforms has created a notion
of reimagination of India fraught by
greater role of the market with less government
intervention. But it is absolutely imperative
to look onto other dimensions of
the growth story before such a reimagination
of India is well established. The following
sections of this article would dwell upon
some of those dimensions.
The Growth Story
We all know that the growth of the Indian
economy has not followed the classical
growth pattern as stated by many growth
theorists like Solow where the growth of the
economy starts from agriculture sector followed
by its transmission to the manufacturing
and services sector. In India’s case the
larger part of the growth has been a result
of service led growth. The growth in agriculture
sector started with green revolution
in Indian economy. There after there has
been a leap frogging jump in the growth pattern
towards service sector during the period
from 1990s till now without a subsequent
growth in manufacturing sector. The
manufacturing growth has stagnated at the
same time. According to recent estimates
the share of service sector has increased to
more than 50 percent of the GDP of the Indian
economy whereas the sectoral share for
agriculture in the GDP has dropped down
to 16 percent. 1 Another factor that has contributed
to the growth of Indian economy is
the opening up of the economy through
larger exports and imports. This has been
evident in the double digit (close to 20 percent)
growth rate in the export of principal
commodities from India in the recent years.
The trade policy (2004–2009) 2 of India also
highlights the point of the growth of Indian
economy by meeting export targets. Statistics
show that our current account is in a
deficit due to huge imports, which is balanced
by capital account surplus. This has
been triggered mainly by large amount of
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MORE MARKETS, LESS GOVERNMENT
foreign institutional investments in the Indian
economy. However at the back of all
these shining stories, the cause for worry lies
in another fact. Statistics show that although
Indian GDP has grown at a rate of 7 percent
– 8 percent and is hinting to touch a doubledigit
figure of 10 percent 3 in recent times,
the employment elasticity of the Indian
economy has not grown proportionately
with respect to the growth in GDP. Thus
although income of the country has grown
by one unit it has not increased the employment
potential by one unit. Thus the growth
has created inequality in the Indian economy
which is a serious question at the backdrop
of the service led growth. Studies also
show that the sectoral inequality (Goswami
A, Chakraborty P 2007) across the Indian
economy has also increased during the period
of 1990–2003. So the question is in spite
of market led reforms leading to growth in
the economy why the growth has not been
chanellised to tackle important developmental
factors like growing inequality? The
next section highlights some of the factors
which have contributed to this gloomy side
of the India Shining Story.
The Developmental Side
The startling facts regarding development
come with certain important numbers. Data
shows that in spite of moving in a growth
trajectory India’s ranking in Human Development
Index is 126. 4 This is much lower
than the rank, which many other developing
countries with which India’s growth is being
compared. Development has many dimensions
like poverty, nutrition, fertility rates,
mortality rates, access to safe water and
sanitation. Statistics shows that although
poverty rate (Head Count Ratio) in India is
going down, the malnutrition index is going
up. 5 The moot question is whether it is due
to lack of access to public services and goods
like safe water and sanitation or is it because
of lifestyle changes. The infant mortality
rates are still quite low in certain states like
Orissa in India. The primary school drop
out rates have not decreased to a large extent
in some states and it has failed in some
instances in Rajasthan largely due to institutional
failures. The teacher attendances
in primary schools have not improved in
many rural parts of India. The mid–day
meal programme has failed in some states
like Rajasthan owing to corruption and governance
failures. These governance failures
are reflected in the fact that according to the
recent IFPRI report India stands out at 94
in the Hunger Index and is below African
countries like Burkina Faso, Zimbabwe
whose ranks are 92 and 93 respectively. 6
Some of the neighbouring countries of India
like Srilanka (with a rank 69) are above India
in the Hunger Index. Other than this, the
Transparency International Report quotes
India’s rank in corruption index as 74 7 that
is quite dismal in comparison to many other
growing developing countries like Taiwan.
India has been very poor in implementation
of contract also which is reflected in its position
beyond 150 in the “Implementation of
Contract Index”. 8 This shows that as a country
we have been not been capable of implementing
designed contracts. The next question
is as a country, whether we have the
economic freedom to implement contracts
even in today’s context of booming GDP
growth. As Prof. Amartya Sen brought out
the concept of “Freedom for Development”,
if on those lines one considers India’s development
then the facts are not too striking.
This is because India’s ranking in the “Economic
Freedom Index” stands out at 104 9
which is not an optimistic picture considering
the growth and development of many
other developing countries. Other than this,
a World Bank report also shows that it takes
much more time in opening and closing
business in India in comparison to other
countries of South Asia like Pakistan. This
reduces the ranking of the country in the
economic freedom index. According to a
report 10 India ranked 69 in 2005 amongst
141 countries by the rankings of “Economic
Freedom of the World Report 2007”. This
index gives a relative picture of the countries
in terms of how policies and institutions of
countries stand out in economic freedom.
Economic freedom according to this index
includes indicators like “personal choice,
voluntary exchange, freedom to compete
and security of privately owned property”.
Although India’s position has improved
Statistics show that although GDP has grown at a rate of
7-8% and is hinting to touch a double-digit fi gure of 10%
in recent times, the employment elasticity of the Economy
has not grown proportionately w.r.t. GDP growth
from 89 (in 1990) to 69 (in 2005) in the ranking,
it still leaves scope for lot of improvement.
Domestic institutional structures will
have a critical role to play in such upliftment
of India’s ranking. The reason for highlighting
these facts is that all the above-mentioned
factors play a role towards the development
of the country. A consideration of
these factors is also important while moving
in the service driven growth path of Indian
economy. A large outcome of the index
rankings of India is a result of the governance
failures within the country. As the
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33

REIMAGINING INDIA
country grows it would be more important
to build up institutions within India which
are functional and proactive. The government
has a very critical role to play in building
up action oriented efficient institution
structures and in implementing them. These
institutions have to facilitate the functioning
of the market in an efficient way in certain
segments of the economy to promote the
growth of the Indian economy. This has to
be facilitated by sound governance framework
in Indian economy to address the developmental
dimensions of India along its
growth path. The next section briefly highlights
the governance aspect.
The Governance Aspect
With regard to governance structure the
important issue to ponder about is the role
of the government market driven economy.
In context of India, the role of government
has to be efficient provisioning of public
ment. This needs efficient functioning of
the departments and the bodies associated
with the basic infrastructure services. However
the expenses for such provision of infrastructure
and health care services should
also be met through collection of taxes. The
tax collection policy has to be well targeted
and progressive. This would mean that people
with higher income would pay higher
Market oriented growth is not a solution to the mitigation
of this problem of conflicts. The role of a debating, progressive
society holds the key towards this conflict resolution
and for which government has to take a proactive role
goods, services like safe, wider road networks,
hospital services, water and sanitation
services. In certain cases of such provisioning
public private partnerships could be
tried out in the form of concession, management
contracts. The efficient functioning of
these partnerships would again depend to a
large extent on the nature and extent of implementation
of such contracts, reduction of
corruption in the process of awarding contracts.
Efficient delivery of basic infrastructure
services like safer roads, water and
quality health care could tackle many of the
developmental dimensions of the economy,
which is lying at a dismal state at the mo-
taxes for the provisioning of the infrastructure
services for development. The key towards
the success of this is the implementation
mechanism which has to be monitored
and reviewed from time to time. An accountability
framework has to be brought in
the governance structure for trickling down
of growth of Indian economy towards development.
This trickling down in simpler
terms would mean provision of basic services
like road, health care, water, information
network to the rural areas of India.
Along with that this would also mean provision
of finance to the rural people for generation
of economic activities and income
for them.
The growth of self-help groups and microfinance
with favorable interest rate structure
along with a reduction of intermediaries
and informal lending could be one possible
step in this direction. Larger penetration of
banks, ATMs by allowing large number of
players in banking segment could also be
another step in this direction. However, this
would need the support system of a governance
framework, which would facilitate the
efficient players to operate in the system.
Market led growth thereby doesn’t necessarily
mean a lesser government intervention as
market led growth could often create a larger
need for regulating the costs of growth so
that growth could percolate and transit towards
development of the society. Thus the
importance of the government increases in
that case with a change in its governance
framework and operational structure. If this
doesn’t happen then it could be termed as a
failure of the governance framework, which
could create disparities in the society
through larger conflicts across sections of
the society. The type and extent of these
conflicts would vary from place to place and
from region to region. These could range
from conflicts having their origin in caste
discrimination (like the ones prevalent in
Bihar) to conflicts, hatred originating from
one section of the society, which has been
deprived of the fruits of growth and development
(like the ones in the North-Western
parts of Andhra Pradesh, North-Eastern
states of India). There could be many other
forms, but the two has been cited to bring
out the role of the failure of governance
framework in the development of a country
even with the presence of a market driven
growth. The caste driven conflict (ones in
Bihar) could be because of corruption and
the political system as well as an ineffective
education system. The resource scarcity and
developmental needs driven conflict (ones
in Andhra Pradesh, North-Eastern states of
India) could be because of a lack of governance
framework to enable efficient distribution
of resources between regions across
India. Conflict resolution is an integral part
of development of a country. It arises because
of domestic failures and exists because
of ineffective implementation of stated policies,
contracts. Market oriented growth is
not a solution to the mitigation of this problem
of conflicts. The role of a debating, pro-
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MORE MARKETS, LESS GOVERNMENT
gressive society holds the key towards this
conflict resolution and for which government
has to take a proactive role through an
efficient functioning of the governance
framework. However in this regard one
should mention the role of an important arm
of the governance framework of India viz.
the Administrative Services. It is absolutely
essential in India to create an accountability
system for the civil servants of the country.
Such accountability could be created by efficient
reviewing and monitoring of the performance
of the civil servants. The civil society
has to take a proactive role in
questioning the role of the civil servants of
the country on a regular basis by monitoring
of the performance of the civil servants,
which has to be target oriented. One could
also think of incorporation of efficient managers
in different arms of governance of the
country. The governance framework could
be led by these managers and the research
inputs for further direction for managers
could come from civil society. These are
some of the roads, which have to be traversed
in modification of the existing governance
regime in India to translate the
growth story of India into a larger developmental
story also.
Conclusion
Thus it is clear from the above stated analysis
that if India has to be reimagined it has
to be done in a holistic way. Such a reimagination
would include an efficient functioning
of market along with an effective functioning
of the government through reduction
of corruption and rent seeking activities. It
would also mean an effective governance
framework which would mean government
with a target oriented role towards reduction
of corruption, hunger, death rates, school
drop outs etc. It would also mean a proactive
government, which contributes towards
creation of a well debated progressive society
through a reduction in conflicts across
states of India. Thus given the paradigm of
development in which India is moving, the
time is apt to imagine future India with an
efficient role of market in certain segments
of the economy along with proactive, efficient,
accountable government functioning
to create a trickle down effect of the growth
towards its development.
End Notes
1
www.oecd.org/dataoecd/17/52/39452196.pdf
2
www.foreigntradepolicy.com/main_
policy.htm
3
Emerging Structure of Indian Economy:
Implications of Growing Inter -
Sectoral Imbalances, T. S. Papola
Director, Institute for Studies in Industrial
Development, New Delhi, Presidential
Address, 88 th Conference of The Indian
Economic Association, Andhra
University, Vishakhapatnam, December
27-29, 2005; isidev.nic.in/pdf/presAdd_
IEA05.pdf
4
http://hdr.undp.org/en/statistics/
5
Jha P & Negre M Indian Economy in the
Era of Contemporary Globalisation:
Some Core Elements of the Balance
Sheet, www.macroscan.com/anl/may07/
pdf/Indian_Economy.pdf
6
The Challenge of Hunger 2007 Global
Hunger Index: Facts, determinants, and
trends; Measures being taken to reduce
acute undernourishment and chronic
hunger, Bonn, October 2007, published
by Welt Hunger Hilfe, International Food
Policy Research Institute, Concern
7
www.transparency.org/publications/gcr
8
www.adb.org/Documents/Fact_Sheets/
IND.asp
9
www.heritage.org/research/ features/index/country.cfm?id=India
- 15k -
10
“India ranks 69th in global economies
freedom index”, 4 sep, 2007, Economic
Times. economictimes.indiatimes.com/
articleshow/2337548.cms
References
• The Economic Times. economictimes.
indiatimes.com/articleshow/2337548.cms;
“India ranks 69 th in global economies
freedom index”, 4 Sep, 2007, accessed on
1 st October 2007
• Goswami, A. Chakraborty, P, Inequality
in Indian Economy, Studies in Indian
Economy, Vol. II/ edited by K. R. Gupta;
New Delhi, Atlantic Pub., 2007
• Jha P & Negre M Indian Economy in the
Era of Contemporary Globalisation:
Some Core Elements of the Balance
Sheet , www.macroscan.com/anl/may07/
pdf/Indian_Economy.pdf, accessed on 1 st
Nov 2007
• http://hdr.undp.org/en/statistics/ accessed
on 30th October 2007
• Welt Hunger Hilfe, International Food
Policy Research Institute, Concern , The
Challenge of Hunger 2007 Global Hunger
Index: Facts, determinants, and
trends; Measures being taken to reduce
acute undernourishment and chronic
hunger, Bonn, October 2007,
• www.oecd.org/dataoecd/17/52/39452196.
pdf accessed on 2 nd Nov 2007
• www.foreigntradepolicy.com/main_policy.htm
accessed on 2 nd Nov 2007
• www.transparency.org/publications/gcr
accessed on 2 nd Nov 2007
• www.adb.org/Documents/Fact_Sheets/
IND.asp accessed on 2 nd Nov 2007
• www.heritage.org/research/ features/index/country.cfm?id=India
- 15k – accessed
on 2 nd Nov 2007
THE INDIA ECONOMY REVIEW
35

Amal Sanyal,
Associate Professor,
Lincoln University,
Canterbury, New Zealand
Governance, Market, Deprivation
And The Political System
"The care of human life and
happiness, and not their destruction,
is the first and only
object of good government."
-Thomas Jefferson
A
lot has changed in our economic
institutions in the last
two decades. These changes
have not made much impression on water,
housing, healthcare and power for
low income people, or on poverty. I
strongly believe that these issues are
similarly handled in pre- and post-reform
and that this is a matter of the political
system, which has not changed across the
periods. To these issues it is extraneous
if we have a globally integrated fullfledged
market economy or an importsubstituting
economy run by administered
production and pricing. To address
them properly we need governments to
act pro-actively against deprivation. A
necessary condition is to have governments
formed with competent and
public-minded persons. The present political
system is not capable of producing
such governments. We need a thorough
political reform, not economic, to get
such governments.
I am not competent to discuss the political
system or its reform possibilities.
Given that this issue of the journal focuses
on market reform, I explore if certain
market reforms can play a catalytic
role in reducing deprivation by either
inducing change in the political system
or in spite it. We can get such effects to
a degree by ridding the government of a
variety of governance tasks, i.e. by letting
markets produce these services. My suggestions
do not arise from an economist’s
habit of preaching ‘market’ for the sake
of the economy. Rather, it is a sort of
preaching ‘market’ for the sake of the
political system. I will focus entirely on
market reforms in the provision of governance.
Though I will mainly examine
possible effects on the political system
and deprivation, I will also elaborate on
more general economic effects.
The abstract notion of governance in
practical terms involves production of
services for individuals or communities.
Depending on jurisdiction, central, state
and local governments provide them.
Principles are laid down by the legislature
and production and delivery are
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MORE MARKETS, LESS GOVERNMENT
managed by the executive. At the point
of delivery it is handled by government
offices and workers. Leaving aside defence,
judicial service and policing, we
are left with a bewildering variety of
services that touch our everyday life.
Need for them has appeared gradually
with the evolution of governance and it
was expedient for the government of the
day to start producing them. But taking
stock today, there is no strategic, technical
or logistical reason why they can not
be produced outside the government. On
the other hand there is an important
connection between these services and
the political system. As I reason below
their marketisation can improve our political
system significantly. Further, for
one class of services marketisation can
directly alleviate deprivation, i.e. in spite
of the political system.
We expect three types of gain from
these changes. More important are social
and political. There are of course
economic benefits, though they come
with adverse side effects which need to
be addressed. In the social area, delegation
can produce a significant dent on
corruption. As long as government is the
sole producer and provider, the delivery
person can seek private money for service
or speed. Replacing government by
markets in governance can disable a
large field of rent-seeking. Leaving that
paid to police, bribes the public pays are
to local, state and central government
workers for governance services of this
kind. They can be mostly eliminated by
moving them to the market and keeping
the markets competitive. Improvement
in the political system can come as a direct
result of mitigation of corruption.
Note that service at a government office
can be as easily sped up by bribe as
by show of political power. Those with
right political affiliation easily jump
service queues. Also, politicians reward
people by getting their work done or
sped up in return for vote or allegiance.
This kind of favour is extremely valuable
because certain services are indispensable
for business, property, jobs, pension,
healthcare, litigation, reputation or even
freedom. Government workers who
oblige politicians in this game expect reciprocation.
Generally the return is
through rewards related to their career—promotions,
suitable placements
and protection. This creates a second
round effect on work culture as promotion
gets detached from merit. It reinforces
poor governance and allegiance
to the political system.
Through repeated feedback the nexus
intensifies the corruption of politics. The
nexus itself becomes a stable feature
rather than occasional. Given this stable
relation, politics and political affiliation
have emerged as the surest way of ‘getting
things done’. Politics is now widely
perceived as a tool for benefiting oneself
rather than the community, country or
nation. This image of politics leads to
adverse selection in politics. Relatively
competent people--- sure about their
ability--- tend to stay away to avoid the
stigma. At the same time those who have
the taste and the ability to manipulate,
subvert and criminalise tend to join politics.
Obviously, we do not choose from
among the best of Indians when we vote
in elections. This leads to governments
formed of the less competent and the
corrupt. Reform that snaps the tie between
politics and provision can have
noticeable effect on the nature of our
politics. We can also expect some direct
effects on deprivation in spite of the
apathy of the political system. Services
like forestation, land recovery, bunding,
dredging and de-silting of rivers, arid
area programs etc. have direct impact on
income and quality of life below and
around the poverty line. These services
are under-produced in the present system
and their production can be significantly
increased by marketisation.
On the economic side, we expect improvement
in efficiency. Inefficiency of
the present system shows as poor quality,
Improvement of effi ciency would reduce cost and
generate either taxpayers’ saving or release budgetary
resource for worthwhile projects. These overall gains
will be attended with dislocation for some
failure to deliver in time or to deliver at
all. Cost far exceeds what is technically
required. Part of the resources are
drained through bureaucratic and political
delay, inappropriate technology
and overstaffing. Improvement of efficiency
would reduce cost and generate
either taxpayers’ saving or release budgetary
resource for worthwhile projects.
These overall gains will be attended with
dislocation for some. The most pronounced
short run effect is that the government
has to persuade some employees
to retire. Some retirees would find
employment in new outfits and others’
retirement has to be financed from cost
saving. If we go for this variant of reform,
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37

REIMAGINING INDIA
then the resource saving should be properly
accounted and used strictly for alleviating
adverse side effects.
Model For delegation
For ease of discussion I will arrange governance
services into three groups. First
are the services for individuals that are
provided on demand. As far as the consumer
is concerned, these are like any
other private good that she or he uses
exclusively. Getting a passport, a driving
licence, a variety of registration, certification
and so on are of this category. The
second group consists of services that are
public goods by nature. Once produced
and in place, any one can dip into their
benefit and it is not possible to deny anyone
access. Hence governance involves
producing these services for whoever is
interested and not for any one in particular.
Examples are roads, bridges, street
lighting and road maintenance and so
on. People are quite aware of the usefulness
of these services, but are prone to
understate how much they would be willing
to pay. The reason is so called ‘free
riding’ – why pay if they can’t stop me
from using it? The third group is a special
class of public goods type services
whose benefit most may not be aware of.
Or, even if they are aware, most people
put a low priority on them because the
benefit appears distant and dispersed. I
will call them pro-active governance
services because the public may not generally
press for them as they do for other
public goods like roads or bridges. Some
of these services may be directed at individuals
but most are not directed to anyone
in particular. When serving individuals,
they produce large scale
externality benefits. An example is a program
of immunisation against a contagious
disease. It saves an immunised
person from the disease even as it reduces
the chance of others getting it.
More generally these services are not
directed and are produced for the benefit
of everyone at present and in the future.
Examples are services like foresta-
Services that are public goods by nature are thought to be an
area where markets would fail to produce the right amount at
the right cost even if markets are competitive to the hilt
tion, dredging and cleaning of rivers,
reforestation of hill sides, creating buffers
at arid zones and so on.
The three groups of services lend
themselves to marketisation in different
degrees and are amenable to different
business models. Their impact on corruption
and the political system vary.
Some have more impact on the political
system while others have more
positive and attending adverse side effects
upon the economy.
Individually Demanded Services
Provision of an individually demanded
service can be most easily transferred to
markets. Unlike for public goods, its demand
is easy to recognise. Because demand
arises from the need of an individual
who benefits from it alone, it can
be priced. Also generally these services
are not free under our present system.
They are either sold at a price or a fee is
charged. Therefore they can be sold like
any item of consumption by private sellers.
However, unlike a consumption item,
some services are conditional on not only
the price but also characteristics of the
applicant or buyer. Suppose a registration
service can not be sold to persons
below 18 years. The selling organisation
has to carry out the necessary verification.
In fact part of the price accounts
for the cost of verification of the applicant.
Like clerks in government offices
who currently provide these services,
sellers are to be provided with relevant
rules. These rules should be made public,
displayed prominently at service
shops and should be mandated to be
available on demand.
What are the potential objections to
this possibility? First, will the price remain
reasonable? Yes, if firms are allowed
to enter this business freely, their
competition should keep price close to
the cost of production and provision. In
the present system government offices
producing these services are over-staffed.
It is easy to see that the cost of providing
them would be significantly lower for private
firms. The government often subsidises
the price, which means that part of
the true cost and whole of the cost of inefficiency
of government offices is passed
to the government budget for the tax
payer to bear. Tax payers would be spared
this in the suggested scenario. What if
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MORE MARKETS, LESS GOVERNMENT
the market price turns out to be higher
than what poorer applicants can bear? If
the government means to help, sellers
can be required to sell at lower price to
some applicants and get the difference
reimbursed by the government. Sellers
will be required to verify an applicant’s
claim to the subsidy as per guideline.
What is the incentive of a seller to do the
extra work rather than pass on to the next
applicant? If a seller is not keen to service
these applicants it will simply lose
some business. Poorer buyers will move
to other sellers.
What do we gain by upsetting the
present system? First, as I suggested
above, is to reduce the space for rentseeking.
It not only reduces the burden
of bribes in an ordinary household’s
budget, but cleans the environment of
governance. As rent-seeking abates, the
grip of politics on service provision too
falls to that extent. The effect on political
life can be easily appreciated. Second,
resource spent on providing this
item will come down close to what is necessary
with present technology of provision
and verification. This gain actually
means saving of resources, which should
be earmarked for supporting loss of government
job and hardship. Private firms
are also expected to innovate processes
in order to increase profit margin. This
would bring in improvement in speed
and quality for service users.
Universal Services Or Public
Goods
Services that are public goods by nature
are thought to be an area where markets
would fail to produce the right amount
at the right cost even if markets are competitive
to the hilt. Because people can
not be excluded from such a service once
it is produced, it is difficult to get them
pay the right price -- that is price commensurate
with the benefit. Knowing
that the service is going to be available
any way, no one would be too keen to pay
the deserving price, however much someone
needs it. If such a service were to be
produced by private sellers, they would
find much less than the true demand in
the market. Production will be less than
requirement. Because there is no way of
getting the right price paid, these services
are usually funded from taxes.
However many services that are traditionally
known as public goods have
ceased to be really so. We now have technology
to prevent using many of these
services even when they are available to
others. Toll gates at the ends of a bridge
are now common. We also have toll gates
at the end of newly-built highways. In
many countries gates are operated electronically
to prevent users from skipping
the toll and employees from stealing toll
money. We have the technology to separate
payers and non-payers in much more
complicated situation than the bridge or
the highway example. In London any vehicle
entering the central business district
with many entry and exit points is
automatically billed for entry in working
hours. This is done without obstructing
traffic flow. As soon as we have a lowcost
way to exclude non-payers, the service
becomes like a private good and we
could be better off by delegating them to
market operation. Several state governments
have invited private firms to build
roads and bridges and collect tolls for a
stipulated number of years. A common
uneasiness about marketisation of these
services comes from the belief that tolls
or similar fees are an encroachment on
our private budgets. “Why should we pay
for using roads and bridges at all?”—it is
asked. The fact of the matter is that we
pay and have always paid for similar services
through taxes. Paying a road charge
at the toll gate is definitely fairer than
that because those who do not use a road
do not have to pay.
Much of this is happening in India as I
remarked earlier. The point here is that
this model can be extended over a larger
variety of government services. Maintenance
of public places, government offices
and buildings, railway stations and
property, tourist routes and spots, places
Majority of the services that are traditionally known as
public goods have ceased to be really so. We now have
technology to prevent using many of these services
even when they are available to others
of historical interest and so on can be
brought under this mode of operation.
The basic toll-gate model of business of
course requires adaptation depending on
the service. Several imaginative improvisations
are already in use in various
countries. For example, in some instances
the government may not want to
charge individuals though it is possible.
The government may decide to waive
tolls along the road to a pilgrimage or
not to charge visitors of historical and
educational sites. In this case the government
itself pays the bill to the business
that produces the service. Users do ‘buy’
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39

REIMAGINING INDIA
entry tickets or toll stamps to keep account
of the number of uses. But they buy
it for free, and the bill is paid by the government.
A useful improvement is to allow
a market for these businesses, which
lets an investor sell off, say a toll service,
to a buyer with obligations and rights of
the original contract. This facilitates entry
and exit, allow firms to specialise in
specific services by acquiring similar
business in different places. Can we gain
anything for the political system from
marketisation of these services? Since
these services are not individually demanded,
there is no scope for bribes
from individual buyers and hence no effect
on the political system along the
route discussed earlier. These services
however are a source of significant political
corruption. Public goods are often
gifted to a community before elections.
Secondly when a sanctioned service gets
delayed or stopped on the way it can be
started or re-started only with lobbying.
For urgent service local business or communities
often collectively pay into party
funds as part of lobbying. To stop these
occurrences, of course marketisation
alone is not enough. Whether a project
or a service is taken up will continue to
depend on the political system and hence
on lobbying. But stoppage of work and
allied corruption can be avoided to a
large extent. Economic advantage of
marketisation of these services merits
separate mention. First, to match our
current economic growth investment
needed for infrastructure is beyond the
government’s means. If the government
insists on doing by itself the task will be
either delayed or have to be done by borrowing.
The cost of borrowing is raised
from tax payers while in the suggested
alternative it is substituted by toll paying
users. Toll rates can be reduced as much
as possible through competitive bids
Pro-active services are particularly recommended for
delegation to markets. While their impact on the political
system could be marginal, they could help alleviate
deprivation in spite of the political system
from interested firms. Secondly, it is
easier to assure quality of construction
and subsequent maintenance under the
market system. They are to form part of
the deal with the government who should
enforce them strictly with penalty provisions.
Because of the contractual nature
of the obligation, there is no haziness
about accountability when construction
or maintenance is poor. This contrasts
starkly with government provision, where
it is nearly impossible to fi x responsibility
for failure because of multiple agencies,
hierarchical decisions and change
of governments.
Pro-active Services
These tasks are important and urgent
but government organisations do a poor
job. The primary reason is that assigned
organisations do not have to face customers
because there are no identifiable
customers. Neither they nor the government
or political parties are subject to
any pressure for quantum, quality or
speed. These services are particularly
recommended for delegation to markets.
While their impact on the political
system could be marginal, they could
help alleviate deprivation in spite of the
political system. At present markets for
these services exist only in an odd, theoretical
way. There are no private buyers
willing to pay. The government assumes
a dual personality as both buyer and
producer. It does not help because the
government is only a buying agent, not
a true buyer. It is expected to buy on behalf
of a billion people who do not press
for the services and billions more who
are not even born. There is no economic
or political mechanism to keep the
government interested. The result is too
little production and poor quality.
Whatever little is produced is produced
indifferently. Inefficiency of government
services is compounded here because of
buyer apathy.
Inviting private firms creates a group
seriously interested in them--- as hotly
interested as commercial firms are in
their line of business. Firms specialising
in these services take on the job of demand
creation as part of their business
agenda. They produce media campaigns
to generate public awareness of the urgency
of the services and organise special
interest groups that press on the
political system. Some of these services
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MORE MARKETS, LESS GOVERNMENT
like immunisation, social forestry, reforestation
of hill sides or de-silting of waterways
etc. have a direct impact on the
livelihood and quality of life of the poor.
By generating pressure from the demand
side on the political system, marketisation
can help to produce more of
them and make a difference. We also
gain from the supply side. Since producers
are to make a profit at the end of the
day, every rupee of taxpayer drawn into
the work has to work efficiently. It may
appear puzzling that there should be
any scope for profit in these services. If
the government were to do the job it is
not expected to make a profit out of it.
Taxpayers would then just pay for the
cost. However that cost contains, as experience
tells, not only the technically
required cost but that of inappropriate
technical and political choices, of bureaucratic
delays, of coalition politics
and above all of general inefficiency. For
the same amount of money budgeted for
a project, the suggested system promises
to meet the stipulated quality and
complete it in time with a profit to spare
for the producers. In a sense the profit
is hidden in the present system. It is enjoyed
by bureaucrats and government
workers not in cash but in kind. It takes
the form of the luxury of slack work environment
and unaccountability. It is
this hidden profit that motivates private
firms as much as it motivates some government
workers to prefer jobs in these
areas. The latter take it in kind while
private business would convert it to cash
profit. But the winner would be the public
who would get more services, done in
time at lower cost. To get this going we
need to initiate a market-like environment
by announcing that these services
will be bought on the market. This will
spawn an industry producing these services
that will not only efficiently produce
better quality service but also generate
a demand side awareness to sustain the
industry. United States, North Europe
and Pacific countries like Japan, Australia
and New Zealand have made big
strides in the technology of environment
protection and nurturing in the last decade.
The business model generates ample
incentive for cost-cutting, improvement
of technology and research. A
switch to this model could help us to
make significant difference to the lives
of lower income people and also reduce
resource costs in the long run.

Nilanjan Banik,
Associate Professor, Institute for
Financial Management and
Research (IFMR),Chennai
The Economics Of Social Unrest –
Its Causes And Cure
"Injustice anywhere is a threat
to justice everywhere."
-Martin Luther King Jr.
"Naxalite faction vows to avenge Nandigram
killings"
26 May 2007, Times of India.
Newspaper headlines, such as these,
are not hard to find these days.
The Naxalite movement takes its
name from a peasant uprising which took
place in May 1967 at Naxalbari – a place on
the north-eastern tip of India situated in the
state of West Bengal. Many believe that
these fearsome Naxals are now in Nandigram.
Although to a layman what is happening
in Nandigram carries more political
connotation there are some economics behind
it. The purpose of this article is to examine
the economics of social unrest.
Nandigram is a case in point but the following
arguments in general will have a broader
implication for India as a whole. As is
known, recently the Naxals have also expanded
their area of operations (from their
old pockets in West Bengal, Bihar and Andhra
Pradesh in the 1970s) to new guerilla
zones in other states like Orissa, Maharashtra,
Chhattisgarh, Jharkhand, Madhya
Pradesh and Uttar Pradesh. So what goes
into making a militant? Actually, it is the
socially deprived group of people who takes
arm against the administration. Does the
people are more socially deprived now than
what they were before? We are considering
the period before and after reforms. This
benchmark is because of less militant activities
during the period before reforms.
Although there were few reforms during
early 1980s, the all encompassing process
of reforms started during 1991. We are defining
reforms in terms of globalization and
liberalization. Surprisingly, incidence of
anti-government activities was less during
the period before reforms. Surprising because
then the average Indian in terms of
economic well-being was worse off compared
to what the people are now. For example,
India’s GDP grew at an average rate
of 3.5 percent until mid-1970s; it increased
to 5.5 percent during the 1980s; and further
to around six percent during the 1990s.
During the last three years, Indian economy
has recorded a growth rate of around nine
percent per annum.
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MORE MARKETS, LESS GOVERNMENT
Table 1: Poverty In India
Population below Poverty Line (As per Expert Group Methodology) in India
Sector 1973-74 1977-78 1983 1978-88 1993-94 1999-2000
Population (Millions)
Rural 261.3 264.3 252 231.9 244 193.2
Urban 60 64.6 70.9 75.2 76.3 67
Total 321.3 328.9 322.9 307.1 320.3 260.2
Poverty Ratio (%)
Rural 56.4 53.1 45.7 39.1 37.3 27.1
Urban 49 45.2 40.8 38.2 32.4 23.6
Total 54.9 51.3 44.5 38.9 36 26.1
Source: Rural Development Statistics 2002-03, National Institute of Rural Development
A reflection of this higher growth rate other hand, share of services sector in GDP
also got reflected in terms of higher percapita
income and lower poverty numbers. 1950-51 to 55 percent during 2006-2007.
has increased from 29.80 percent during
Measured in constant US 2005 dollars India’s
per-capita GDP has increased from mained more or less constant at around 27
The share of manufacturing sector has re-
215 during 1975 to 293 during 1988 and further
to 546 during 2005. Like wise, the pov-
Now let us concentrate on the number of
percent during post reforms era.
erty number (measured in terms of head people who are earning their livelihood
count ratio) has fallen from 42 percent during
1987 to the present level of 26.1 percent. cent of the Indian population earns their
from these three sectors. Around, 58.6 per-
Measured by these numbers reforms have livelihood from agricultural and agricultural
related allied activities compared to
increased overall economic well-being.
So where lie the problem? How can we less than 10 percent of the population earning
their livelihood from organized services
explain this anomaly of a rise in social unrest?
The answer to this apparent puzzle lies sector (Table 4). What does it means? In
in examining impact of reforms on income simple words, if the national income is Rs
distribution. Reforms entail unequal payoff 100 then agricultural and allied activities
to economic agents. People with more skill are contributing 18.5 percent of the national
income, that is, Rs 18.5 compared to Rs
stand to gain more compared to people with
less skill sets (read, less productive people). 55 generated by the services sector. Income
And this has resulted in more skewed income
distribution (read, right skewed dentributing
Rs 18.5 to 58.6 people (employed
inequality becomes evident as it is like dissity
function) leading to social unrest. The in agricultural sector) compared to distributing
Rs 55 to less than 10 people (employed
following two boxes will help us to analyze
this scenario better.
in organized service sector) or 23 people
Looking at sectoral GDP share, we find (employed in both organized and unorganized
service sector). What is more worrying
that the share of agriculture has fallen from
56.90 percent during 1950-51 to 18.5 percent
during 2006-2007 (Table 2). On the more as going by the latest data
is that this inequality is going to increase
agricultural
sector is growing at an annual rate of 2.6
percent compared to services growing at
a rate of 11 percent. If the present trend
continues, then share of agriculture in national
income is to become a single digit
number within the next 15 years
– contributing more to inequality in
income distribution.
Table-2 complements Table-1 by throwing
some more additional information. The
share of income generated by the agricultural
sector is more volatile (measured by
the variance of the growth rates) compared
to manufacturing, services and overall GDP.
Uncertainties associated with income have
two specific outcomes: postponement of
investment decision and migration. As is
evident from Table-4 because of fluctuating
agricultural income level of investment
is also least in the agricultural sector. Postponement
of investment decisions have
bearing on future income and reduce future
expected earning from the sector. This is
one way to contribute to the burgeoning
disparity in earnings across sectors. There
is another way and that has to do with migration.
Uncertainty associated with volatile
income leads to migration. As ‘expected’
return in the urban sector (dominated by
the services sector) is higher than ‘actual’
return in the agricultural sector, migration
happens. However, many migrating labors
lack adequate skills for finding
meaningful employment in the services
sector. Consequently, these unemployed
people find add to a higher skewed
income distribution.
Now let us examine why are the workers
in the services sector, especially in the organized
services sector, like, banking, telecommunication,
teaching, medical, legal,
etc., are making so much money relative to
the agriculture workers. For that one has to
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43

REIMAGINING INDIA
Table 2: Reforms And Income Generation
Components 1950-51 1960-61 1970-71 1980-81 1990-91 1995-96 2004-05 2006-07
Agriculture and
allied activities
56.90 46.74 46.07 38.86 31.27 28.24 21.13 18.5
(2.6%)!
Industry 14.28 19.46 20.65 24.50 27.64 28.12 27.15 26.4
(10.4%)
Services 29.80 34.30 33.66 36.64 41.10 43.64 51.72 55
(11%)
Source: Reserve Bank of India (2006) and Central Statistical Organization (2006)
examine the productivity data. The growth
theory literature tells us that more productive
countries tend to prosper more compared
to the less productive ones. If market
is determining the pay-off, same kind of
argument holds true within a country but
across its laborers. So it makes sense to look
at labor productivity data in India. Figure 1
gives a glimpse of sector wise labor productivity
growth in India. Output per worker in
the services sector grew at a rate of seven
percent during 1993-99, compared to only
2.7 percent during the previous decade. The
performance of the labor productivity in the
manufacturing sector was more modest
growing from 3.1 percent to 4.5 percent during
the same period. Agriculture sector was
the lagging sector, with output per worker
rising only to 2.4 percent during 1993-99,
compared to 1.5 percent during the previous
decade. As wages are linked to productivity
it is little surprising to figure out why
people in the services sector making more
money compared to the other sector.
The fact that services is the fastest growing
sector (that is, demand for skilled labors
are always there) and requires only skilled
labors (less in numbers in India); wage rate
in the services sector is much higher than
in the agricultural sector. The average per
day return of agricultural worker varies between
Rs 25 (read Indian Rupees; Rs 39.5
is one US dollar) in States, like, Bihar, Mi-
zoram, Manipur, Arunachal Pradesh, etc.
to an average of around Rs 125 per day in
States, like, Haryana, Punjab, Kerala,
Tamil Nadu, Gujarat, etc. Although spatial
inequalities exist for agricultural sector;
income inequality becomes large considering
inter-sector inequality, i.e. inequality
between services and agricultural sectors.
These days the average salaries for a standard
Business School graduates ranges between
five lacs to seven lacs, per annum.
Quite evidently these are much higher figures
compared to an average agricultural
earning. So what needs to be done? From
the demand side perspective government is
Table 3: Uncertainty In Agricultural Income
spending money on schemes like, minimum
rural employment guarantee
scheme in 200 most
backward districts in India
with the objective of providing
100 days of guaranteed
unskilled wage employment
to each rural
household opting for it. These schemes are
to be spread to other districts as well. However,
such demand management policies
sometime can be self defeating. For instance,
if these people are hired for building
a road and the project never gets completed
then the money allocated for the
purpose will add on to inflation. A better
1971-72 to
1980-81
way to address this problem associated with
income inequality will be to address long
term supply management policies. There
are two major problems. First has to do
with skill formation. Workers can be trained
giving vocational education. The experiences
of some South-East Asian economies
show that one reason these economies fared
well on the distributional aspect of income
1981-82 to
1990-91
1991-92 to
2004-05
GDP
Growth (Mean) 3.16 5.64 5.83
Coff. of Variation 137.75 39.05 31.84
Agriculture and Allied Service
Growth (Mean) 1.83 3.55 2.58
Coff. of Variation 475.21 150.74 188.74
Industry
Growth (Mean) 4.05 7.11 5.81
Coff. of Variation 88.91 28.22 51.85
Services
Growth (Mean) 4.42 6.72 7.78
Coff. of Variation 34.03 17.16 23.04
Source: National Account Statistics
44 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
Figure 1: Sector Wise Factor Productivity
Average Annual Percent Change
7
6
5
4
3
2
1
0
Labor And Total Factor Productivity Growth In India
Output Per Worker
Total Factor Productivity
1960-73 1973-83 1983-93 1993-99 1999-2004
Source: Bosworth, Collins and Virmani (2006)
Table 4: Capital Formation And Employment sion. A better provision
of services
Investment (as a % of 1993-94 1999-2000 2004-2005
total investment)
especially in the
Agricultural and Allied 8.42 8.48 6.63
education sector
will usher in an
Industry 50.09 51.44 54.06
even income distribution.
The sec-
Services 41.19 40.08 39.31
Employment Ratios (as a % of total employment)
ond major problem
Agricultural and Allied 60.39 56.70 58.60
is associated with
Industry 15.83 17.57 18.50
volatile agricultural
Services 23.78 25.73 22.90
income. As we have
Source: Reserve Bank of India (2006) and Central Statistical Organization (2006)
seen volatile agricultural
is because the governments put emphasis
on vocational education. Growth in these
economies is primarily driven by increase
labor force participation. It would make
sense to impart adequate training so that
labors from countryside have necessary
skills to find employment in the services
and manufacturing sectors. Government
expenditure should be directed towards
sectors, like primary education, where social
return is higher than the private return.
For the sector, like higher education and
also vocational education, government can
encourage private participation. Private
participation brings in accountability and
hence efficiency in the way of service provi-
output contributes to rural poverty
affecting the distribution of income. It also
leads to increase migration which in turn is
contributing to inequality. A reason for
volatility in agricultural production is because
of lack of adequate infrastructure.
Because of lack of cold storage facilities,
irrigation system, dams and roads network
connecting to market considerable portion
of agricultural produce depends on weather.
There is a loss of agricultural output either
because of flood or because of drought.
There are not enough man made tanks and
canals which can store water during flood
and supply water during drought.
To reduce this volatility there is a need
to build rural infrastructure. A proper
infrastructural investment in rural sector,
such as irrigation and drainage, storage,
soil conservation, water management systems
and road networks connecting the
rural markets with their urban counterpart,
is necessary to reduce this fluctuation
in agricultural output. Demand management
policies like introduction of crop
insurance, futures trading in agricultural
commodities and greater accessibility to
credit will complement these supply side
measures. None of these exists at this
point of time. It’s a little wonder why the
people in the country side feel deprived
and with further reforms the level of desperation
is growing. Finally, referring
back to our issue about Nandigram what
started the flare in Nandigram was lack of
well defined property rights. Initially, it
was the marginal farmers or share croppers
(working on other’s lands) who were
up in arms against the government. The
land owners were happy with the price
offered by the government for acquiring
their land. However, there exist no property
rights which spell out how the money
is going to get distributed from the land
owners to these share croppers or the
land less laborers. The seed of unrest
could have been solved by addressing
this issue.
End Notes
1 Bosworth, B., Collins, S. and Virmani,
A. (2006), ‘Sources of growth in the Indian
economy’, paper presented to the
Indian Policy Forum, New Delhi, July.
2 Bhanumurthy N. R. and A. Mitra
(2004), ‘Economic growth, poverty, and
inequality in Indian States in the prereform
and reform periods’, Asian Development
Review, Vol. 21, pp. 79-99.
THE INDIA ECONOMY REVIEW
45

Shripad Dharmadikary
Manthan Adhyayan Kendra,
Badwani, Madhya Pradesh
More Market, Less Government
A Recipe For Disaster For The Water Sector
"We never know the worth of
water till the well is dry."
-Thomas Fuller
An article published some time
back argued that in Rajasthan,
petrol was freely available
to anyone who wanted it, while millions
of people faced great difficulty in
obtaining water, even though water is far
more abundant in the state than petrol.
This phenomenon was attributed by the
author to the fact that while the management
of water was entirely controlled by
the government, the supply and management
of petrol was by private players and
operated on market principles. Since
last 16 years, the call to harness the power
of the market (and of private enterprise)
for the better performance of
various sectors of the economy has been
growing stronger. In 1991, the introduction
of the policies of Liberalisation,
Privatisation and Globalisation (LPG)
in the country initiated the process of
the opening up of the financial sector on
one hand, and on the other, the transformation
of sectors hitherto owned and
managed by the government or by other
public agencies into market based operations
and private ownership and
management. While some of the important
sectors where wide-ranging reforms
were introduced included power, telcom
and insurance, the process began later,
and in a fragmented way for other sectors.
The water sector can be put in the
latter category.
Water Markets In India
It is not as if water markets or trade have
not existed in India. In the British times,
several large irrigation schemes were
owned and operated privately, with the
company selling water on a commercial
basis. For example, the Orissa Canal
Scheme, first proposed by Sir Arthur
Cotton in 1858, was started in 1865, with
the East India (Orissa) Irrigation and
Canal Company (EIICC) financing the
project and selling all the water to the
Government, who in turn was to collect
the water charges from farmers, and
pass on the profits to the EIICC after
deducting administrative expenses 1 . In
many parts of the country, for example
46 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
in North Gujarat, thriving groundwater
markets exist, as farmers extract groundwater
using tubewells and sell it primarily
to other farmers for irrigation.
The ‘tanker economy’ is very well established,
with highly developed networks
of tanker owners supplying water
to industries, colonies, commercial establishments
and even households on a
regular or need-based basis. In cities
like Ahemdabad, regular home delivery
of bottled drinking water is a common
feature. Last but not the least, the bottled
water industry has become a thriving
multi-crore rupees business. For all
this, water remains largely in the public
domain. The British experiments with
private irrigation were not very successful
and canal irrigation has been essentially
a public sector endeavour in independent
India. While groundwater is
largely in the private domain, with the
landowners having unrestricted right to
pump out as much water as they want
from their lands – it is largely operated
on an individual and unorganised basis.
Tankers and other supplies to households,
colonies etc. operate more like
informal markets. Even otherwise, these
water markets have formed a small part
of the huge water economy and even a
smaller part of the vast water system.
This is so for a good reason.
Water As A Social Responsibility
Water is a biological necessity for survival.
Water is also the foundation of the
livelihoods of millions of people – agriculture,
fishing, dairying, cattle rearing
being some of the occupations that depend
critically on water. Water is a critical
input into the development process,
apart from the being an essential requirement
for industry and manufacturing.
Thus, water has a vital social significance
apart from its commercial
value. Indeed, water is a basic, fundamental
human right. Due to all this, the
production and provision of water has
long been considered a social and moral
responsibility of the community and the
Government. This is all the more so in
India - since the income and resource
distribution in India is heavily skewed
and iniquitous, and we have large sections
of populations who cannot afford
to bear the cost of even the minimum
necessary supplies of water. This makes
low-priced provision of water services
essential. This is also the reason that
the sector has been heavily subsidised,
and has remained in the public domain
till now.
A New Regime
In the last decade or so, it is being argued
that the water sector must be operated
on market based principles and the
Government must change its role to only
that of a regulator, with the private sector
being allowed into the sector.
Several reasons are being advanced
for this. The many serious problems of
the water sector and its abysmal performance
in delivering services is being attributed
primarily to the inefficiency and
corruption of the government system –
qualities that are believed to be largely
inherent to public sector. The public sector
is also generally considered as deficient
in modern technology, lacking
management skills and badly administered.
Further, the lack of internal resource
generation due to below-cost supply
is leading to deficiency of resources
with the Government to invest in the
needs of the sector.The achievements of
Tankers and other supplies to households, etc. operate
more like informal markets. Even otherwise, these water
markets have formed a small part of the huge water economy
and even a smaller part of the vast water system
the telcom sector, now operating on
market based principles with a large
number of private players is also being
cited as evidence that these polices can
improve access and service levels. Thus,
“More Market, Less Government” is the
mantra being advocated for the water
sector also. As this approach gets translated
into new policies, laws and programs,
some important questions need
to be answered – will this work? What
will be the consequences of such an approach
in the water sector? Is this the
correct policy choice? In some ways, the
cart has already been put before the
horse. While these serious questions
have not been fully debated, far-reaching
transformations in the sector have
already been set in motion.
These transformations can be seen as
an extension of the LPG regime into the
water sector. As with the initial set of
reforms in 1991, the changes in the water
sector are also being driven by the World
Bank and other international financial
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
ank. Water has been among the last of
the sectors to be opened up to the reforms
process; however, we just note this
without going into the reasons for
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47

REIMAGINING INDIA
the same.
The process to aggressively bring LPG
policies into the water sector was initiated
around the mid-1990s with a key
knowledge activity. Around this time,
the World Bank began a comprehensive
and wide-ranging review of India’s water
sector – called the India Water Resources
Management Sector Review.
The Water Sector Review 1998 was a
“sector-wide program undertaken in
partnership between the Government of
India and the World Bank, also with
contributions from the Governments of
U.K., Denmark and the Netherlands.” 2
The purpose was “collectively assessing
and establishing a Reform Agenda and
Action plan for India’s Water Sector.” 3
In 1996, a series of missions visited
India, and then the World Bank team,
with inputs from the Government of India,
and many consultants, finalised five
specialists reports 4 , dealing with
(1) Intersectoral Water Allocation,
Planning and Management
(2) Groundwater Regulation and
Management
(3) Irrigation
(4) Rural Water Supply and Sanitation
(5) Urban Water Supply & Sanitation
A sixth report, synthesising all the
above was also prepared 5 . These were
first published as World Bank reports in
the year 1998.
This Review identified two broad issues
that needed to be addressed –
“Mechanisms ....for integrated treatment
of surface and groundwater... and
for efficiently and equitably allocating
scare water resources between competing
uses...[that is, inter-sector allocations].
Second, reforms to improve service
delivery in the water sub-sectors
(i.e. irrigation, urban water supply, rural
water supply...)”.
For both these broad objectives, the
measures suggested consisted essentially
of transforming the sector to operate
on commercial and market basis, and
the privatisation of various activities.
This agenda is being rolled out through
a number of different measures. The key
One of the far reaching recommendations made by the
World Bank was the introduction of tradable water rights
or water entitlements. The idea is this – that all (or at least
some) people have a defined water entitlement
mechanism to further this approach has
been a series of Water Sector Restructuring
loans given by the World Bank to
a number of states, for example in Madhya
Pradesh, Maharashtra, Rajasthan
etc. 6 The reforms package implemented
through the conditionalities in these
loans is often supported by other loans,
grants and technical assistance from
Asian Development Bank, or agencies
like British Government’s development
assistance agency DFID.
The reforms processes have the following
common elements:
• Unbundling (separation of source,
‘transmission’ and ‘distribution’)
• Independent regulator to set tariffs
and decide other issues
• Steeply increasing tariffs, de-politicisation
of tariffs
• Full cost recovery
• Elimination of subsidies
Cutting off supplies for non-payment
• Dismantling public / community supplies
like public taps, stand posts
• Retrenchment
• Privatisation and PPPs
• Allocation of water to highest value
use through market mechanism
The net result of these policies is the
conversion of the sector into a market.
Not only is the service provision within
a sub-sector (for example irrigation) to
be carried out on a commercial basis, on
market principles, but the inter-sectoral
allocation also is to be done through
market mechanisms. What are the implications?
Let us examine the inter-sectoral
allocation in more detail.
Tradable Water Rights For Inter-
Sectoral Allocation
One of the far reaching recommendations
made by the World Bank in the
Water Sector Review 1998 was the introduction
of tradable water rights or water
entitlements. The idea is this – that all
(or at least some) people have a defined
water entitlement. There is also a
developed market of such entitlements,
in which these can be sold or bartered.
The economic logic is that this trading
will ensure that water is allocated to the
highest value user – thus ensuring
efficiency of use. This is being justified
as an easy way (where political resistance
will be least) of inter-sectoral
allocations.
The Water Sector Resources Stra
tegy of the World Bank, adopted in
2003, states 7 :
“....those requiring additional resources
(such as cities) will be ...able to meet
48 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
their needs by acquiring the rights of
those who are using water for low-value
purposes.
“....there are strong incentives for
those using water for low-value purposes
to voluntarily give up their rights,
making reallocation politically attractive
and practical.”
The Water Sector Review 1998’s Report
on Intersectoral Allocation gives
the example of Chennai. It says 8 :
“As in all parts of the world, the value
of water for irrigated foodcrops is a fraction
of the value for urban and domestic
purposes. Rough calculations suggest
that the value of water in irrigation in
Tamil Nadu is less than Rs. 0.5/cubic
meter. Even if Metrowater could pay several
times this amount, it could obtain
additional water….
“The potential for voluntary inter-sectoral
transfer of water to urban users
from irrigation provide a promising low
cost alternative...”
Thus, the Bank argues that in a water
market, the farmer would find it more
profitable to sell his share of water to the
city (or an industry, or a golf course)
than to grow crops.
One of the first ‘trials’ of this approach
is taking place in Maharashtra. The Maharashtra
Water Resources Regulatory
Authority Act (MWRRA) 2005 came
into force on 8th June 2005. Maharashtra
soon became the first, and so far the
only, state to set up the Water Resources
Regulatory Authority - more or less
on the lines of the regulatory commissions
set up for electricity in various
states - with objectives that include fi x-
ing the rates for use of water for agriculture,
industrial, drinking and other purposes
and several related matters.
Among the functions of the Authority is
the mandate to develop a framework for
trading in water entitlements. The Authority
is to determine the distribution
of entitlements between various users,
and then these entitlements can be
“transferred, bartered, bought or sold
on annual or seasonal basis within a
market system” 9 to be created by the Authority.
The Authority has already begun
the exercise of setting up entitlements in
six irrigation projects in Maharashtra on
a pilot basis, inlcuding tow major projects.
Will such an exercise lead to a rational
and efficient allocation of water?
While the economic argument that water
will be allocated to the highest valueadding
user looks attractive, there are
likely to be serious implications. For example,
if a farmer finds it more profitable
to sell his share of water to industry
or a near by city – and this happens on a
large scale, what are the implications for
food security? What would happen to
associated rural economic activity? For
example, agricultural residues provide
fodder for cattle, but if a farmer does not
cultivate his land, what happens to the
cattle? Another important question is
related to the conversion of livelihood to
cash. The farmer, by cultivating his land,
gets the output in the form of grain,
food, milk and some cash. By selling his
water right, this is likely to be largely
Market driven inter-sector allocation poses more serious
broader concerns. Water is not just an economic commodity
– it is essentially an ecological, natural entity, and
water as an ecological system is vast and complex
converted to cash. This has the danger
of being spent on careless consumptive
expenditure, or worse, on liquor and
other addictions. More cash can also
mean that women will have lesser
control on the household income as cash
is more likely to be controlled by
the men.
Apart from these individual-related
issues, market driven inter-sector allocation
poses even more serious broader
concerns. First of all, water is not just an
economic commodity – it is essentially
an ecological, natural entity, and water
as an ecological system is vast and complex.
Water – and water bodies like rivers,
lakes etc. – have many cultural, social
and religious associations. Thus,
there are many externalities associated
with water, and it is simply not possible
for market mechanisms to address these.
Consider (as is happening in several
places like Chennai) if a farmer wants to
sell his groundwater to the city instead
of farming. But unrestricted withdrawals
by the farmer could affect the wells
of the neighbouring farmers. Or, consider
whether the waters of a river that
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49

REIMAGINING INDIA
has a religious ghat and temple could be
sold for industrial or other purposes? In
fact, this raises another serious issue –
who would be entitled to sell such a
right? For a market to operate there
have to be tradable commodities and
some understanding of ‘ownership’. But
can what is essentially a community resource
– like a river, lake or rainwater
– can such an entity be subjected to a
market regime?
It is because of these very important
externalities and social and human aspects
that water, and in particular the
sectoral allocation of water needs to be
outside the market system. This is the
reason why the priorities for allocation
of water between sectors are prescribed
by policy rather than left to the market.
The Water Policy of the Government of
India, approved in 2002, specifies in its
Clause 5 that
“In the planning and operation of systems,
water allocation priorities should
be broadly as follows:
• Drinking water
• Irrigation
• Hydro-power
• Ecology
• Agro-industries and non-agricultural
industries
• Navigation and other uses.”
Several states too have developed their
own policies which also lay down these
priorities. A market based inter-sectoral
allocation of water is inherently in contradiction
to the allocation based on
criteria of social and environmental
need and equity. This is all the more so
in a country like India where there is
vast inequity in the distribution of income
and where conservation of ecology
is not a luxury but rather a necessity as
it supports the livelihoods of millions.
Last, but not the least, is that by definition,
a market based system allocates
resources to those who have purchasing
power. This not only means that the poor
will be disadvantaged, but that there is
a real danger of concentration of (water)
recourses in the hands of the economically
powerful. There are very few places
where such a market based allocation
of water has been tried out. Chile is one
such country where this system was put
in place in the early 1980s. Indeed, the
World Bank is using Chile as a model to
justify the implementation of this in India.
But the Bank’s own study (which it
seems to have ignored) says 10 :
“According to some reports, the establishment
of tradable water rights in Chile
has encouraged efficient agricultural use
and increased agricultural productivity
per unit of water… Recent reports indicate,
however, that the model encountered
problems as well as successes….
Although benefits have accrued, significant
negative impacts have been felt by
farmers unfamiliar with legal processes
or lacking the money to participate in
markets for water (the poor). Significant
conflicts have also emerged between different
groups of users, and many social
and environmental externalities have yet
to be addressed….”
And 11 :
“The main disadvantage, or risk, of
the new system is monopolisation of water
rights. A couple of power companies
and a single individual have been accused
of accumulating some 70 percent
of all water rights in Chile”
This clearly shows how real the danger
of the monopolisation of the resource
are when it is left to market forces, as
well as the inability of market forces to
handle social, ecological and equity related
externalities.
Intra-Sector Marketisation
The same issues come up in context of
market based operations within a sector
like bringing in private players for service
delivery of irrigation or urban waters, or
transforming these sectors into purely
commercial operations. There is massive
evidence from all over the world that this
has led to very serious impacts on the
economically poor sections of the society.
This is well documented and a subject
in its own right, so we may only mention
a few things here 12 .
The reforms package of full cost recovery,
elimination of subsidies, disconnections
on non-payment (often due to unaffordability),
privatisation and so on may
remove ‘economic ‘distortions’ and lead
to better financial sustainability – the two
major arguments for the justification of
reforms– but this is at the cost of social
responsibility. Where this package has
been implemented, tariffs have often shot
up, and the poor have been disconnected
as they have been unable to pay the high
price for water. For example, in Guinea,
on privatisation of the water supply, water
rates shot up 6-7 times, and more than
10,000 connections, one-third of the total,
were disconnected due to non-payment.
Access of the poor to water has
been the first casualty in many cases of
water sector privatisation and reforms.
Farmers in India are already caught in
a vicious economic pincer grip of rising
prices of inputs and lack of commensurate
prices for their products. Rising water
tariffs in the irrigation sector – a sure
consequence of marketisation - are like-
50 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
ly to skew further the economics of agriculture
that is already leading to large
scale suicides of farmers. Moreover, it is
likely to have a casacading effect on prices
of essentials like foodgrains.
In Indore, an Asian Development
Bank (ADB) loan for Urban Water Supply
has put a condition that all public
standposts must be phased out and the
city Municipal Corporation has taken an
in-principle decision that this should be
done unless the person (who happens to
have a standpost in front of the house)
agrees to pay the bills. The logic is that
public stand posts are a source of leakage
and do not yield revenue. Removing
standposts certainly fits into the process
of making the system more market oriented
– no supply without payment – but
impacts the poor very hard.
Less Market, More Accountable
Government
It is difficult to escape the conclusion
that the marketisation of the system can
only be at the cost of social responsibility.
‘More Market’ in the water sector is
likely to hit hard the most vulnerable sections
of the society, and those living on
the margins are likely to be pushed out
even from there. It is also likely to have a
deleterious impact on livelihoods of
farmers and a cascading effect on millions
of other poor as food prices too
could be affected. Further, the market
cannot handle the many critically important
externalities – social, ecological,
cultural and religious- associated with
water. Commodification and marketisation
of water will also create the dangers
of monopolistic control on this vital resource.
Thus, the advocacy of ‘More
Market’ in the water sector is a sure recipe
for disaster. However, this does in any
way mean, automatically, that business as
usual is fine or that more ‘governmentas-usual’
is the answer. For there is no
denying that the myriad problems of the
water sector – lack of access, inequity,
deteriorating quality, destruction of environment,
displacement due to dams
etc. – are in many ways due to the gross
inefficiency, corruption and mismanagement
by the public agencies handling
water resources. However, water, with its
vital necessity for our very daily survival
as well as its central role in livelihood,
economy, society and culture has to be
under public control. But this public control
has to be really ‘public’ –that is, by
the community at large and not just by
the Government or bureaucratic agencies.
What we need is an accountable,
responsible, transparent and participatory
system of managing water –
Less Markets, More Accountable
Public Systems.
Endnotes
1
D’souza 2006 Page 128-129
2
World Bank 1999a Page ix
3
ibid
4
World Bank 1999b to 1999f
5
World Bank 1999a
6
Since water is primarily a state subject,
the reforms have to take place at the
state level.
7
World Bank 2004
8
World Bank 1999b Page 133-134
9
Maharashtra Water Resources Regulatory
Authority Act (MWRRA)
2005, Clause 11 (i)
10
World Bank 1999c Page 29
11
World Bank 1999d Page 108
l2
For more information, see for example
Water: Private, Limited Issues in Privatisation,
Corporatisation and Commercialisation
of Water Sector in India,
Manthan Adhyayan Kendra 2006,
available at www.manthan-india.org
References
• D’souza Rohan (2006): ‘Drowned and
Dammed – Colonial Capitalism and
flood control in Eastern India’, Oxford
University Press, New Delhi.
• Dwivedi Gaurav, Rehmat and Shripad
Dharmadhikary (2007): ‘Water: Private,
Limited’, Manthan Adhyayan
Kendra, Badwani, Madhya Pradesh.
• World Bank (1999a): ‘Initiating and
Sustaining Water Sector Reforms: A
Synthesis’, World Bank, Washington
D.C. and Allied Publishers Limited,
Mumbai.
• World Bank (1999b): ‘Inter-Sectoral
Water Allocation, Planning and Management’,
World Bank, Washington
D.C. and Allied Publishers Limited,
Mumbai.
• World Bank (1999c): ‘Groundwater
Regulation and Management’, World
Bank, Washington D.C. and Allied
Publishers Limited, Mumbai.
• World Bank (1999d): ‘The Irrigation
Sector’, World Bank, Washington D.
C. and Allied Publishers Limited,
Mumbai.
• World Bank (1999e): ‘Rural Water
Supply and Sanitation’, World Bank,
Washington D.C. and Allied Publishers
Limited, Mumbai.
• World Bank (1999f): ‘Urban Water
Supply and Sanitation’, World Bank,
Washington D.C. and Allied Publishers
Limited, Mumbai.
• World Bank (2004): ‘Water Resources
Sector Strategy’, World Bank, Washington
D.C.
THE INDIA ECONOMY REVIEW
51

D.M.Diwakar,
Professor of Economics
Giri Institute of Development Studies
(GIDS), Lucknow
Inclusive Growth In India: A Case Of
Structural And Agrarian Challenges
"To forget how to dig the
earth and tend the soil is to
forget ourselves."
-Mahatma Gandhi
Measures of economic reforms
in India were expected to
deliver goods and services to
attain higher growth rate of the economy
and provide better employability to accommodate
underemployed, unemployed
and marginalized sections of the
society into mainstream of development.
But realisations over the years have not
been in conformity with the expectations.
There is common agreement
among the experts across the board that
economy has attained higher growth
rates but reforms measures are yet to
prove effective towards distributive justice
with higher growth. Latest Human
Development Report indicates further
sliding down to the rank of 128. Indian
agriculture irrespective of the size of
holdings, which is mainstay for majority
of the masses, has been experiencing
worst forms of crises culminated and
manifested in starvation and tragic suicides
of its producers, who have been
feeding the nation. Besides unregistered
starvation in backward regions in absence
of employment at least at subsistence
level, even diversified and prosperous
agriculture of Punjab, petty cotton
growers of Maharashtra, Andhra and
Karnataka are also not spared from this
trap. Expert Group on agrarian crisis
underlines suicides as a disturbing symptom
of deep-rooted crises that Indian
agriculture has been confronting. Broadly
two dimensions of agrarian crises –
low growth with declining productivity
and high dependence of population on
lower farm income have been the root
causes. Reflecting a little further stagnation,
increasing risk in production and
marketing, collapse of the extension
system, growing institutional vacuum,
and the lack of alternative livelihood
opportunities, etc., are inter alia main
factors behind agrarian crisis (Radhakrishna,
2007).
Challenges of the syndrome of fatigue
at the front of technology, institution,
policy and governance (Narayanamoorthy,
2007; Behera and Mishra, 2007)
have been debated at length. Mounting
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MORE MARKETS, LESS GOVERNMENT
criticisms loaded with adverse results of
reforms undermining human face compelled
planners and policy makers to
incorporate such policies that may appear
addressing the crises and concerns
of marginalisation. Hence the Eleventh
Five Year Plan has been claimed to focus
on faster inclusive growth (GOI, 2006)
to address the issues of exclusions. This
exercise is an attempt to underline challenges
on the way to achieve the targets
of inclusive growth. It is not possible to
do justice with all the factors in one exercise
and therefore, this exercise is intended
to analyse a few important dimensions
of agrarian challenges towards
achieving the objectives of inclusive
growth. This paper is divided in four
parts. Part one examines growth performance
of agricultural economy. Part two
deals with indebtedness and credit markets
and institutions. Part three concentrates
on farmers despair and part four
consolidates discussion and reflects on
possible imperatives and options in
this regard.
1. Decelerating Growth
Share of the agricultural sector declined
from 59.2 percent of Gross Domestic
Product (GDP) in 1950-51 to 27.36 percent
in 1999-2000, This figure has further
fallen to 18.5 percent in 2006-07
(Economic Survey, GOI, 2007:1). Contribution
of agriculture to GDP has been
declining not only because the other sectors
are growing fast but also because of
continued neglect of this sector leading
to decline in rural income. However,
over 56.5 percent of the workforce and
63.9 percent of the rural workforce – 39.8
percent self employed and 24.1 percent
agricultural labour are still directly dependent
on this sector for their livelihood
(National Sample Survey Organisation
(NSSO), 61 st Round, 2006:27).
Out of self-employed workforce majority
of holdings are of marginal and small
farmers. On an average, this sector grew
at the rate of 2.54 percent during 1950-
51 to 2003-04. During pre-Green Revolution
(1950-51 to 1964-65) agriculture
grew by 2.54 percent. Interestingly average
growth rate in post -Green Revolution
period until 1980 was only 2.05 percent,
which was slightly lower than
earlier period. Growth rate of agriculture
in 1980s was the highest at 3.08 percent
and later in last one decade (1993-
94 to 2003-04) this sector suffered
deceleration and grew only by 2.38 percent
(Bhalla, 2005: p.2). During Ninth
and Tenth Five Year Plan, agriculture
grew only by 2 and 1.7 percent respectively
(GOI, 2006:4).
In pre–Green Revolution period
growth rates of all principal crops, in
terms of their area production and yield
were 1.58, 3.15, 1.21 percent, food grains
1.35, 2.82, 1.36 percent and non food
grains 2.44, 3.74, 0.89 percent respectively.
Post-Green Revolution data of
growth rates suggest that area and production
of all principal crops had lower
rate of growth but yield registered higher
rate of growth than that of pre-Green
Revolution period. So far non-food
grains are concerned, growth rates of
area and production witnessed deceleration.
However productivity registered
increasing trend from 0.89 percent to
1.59 percent. In case of food grains area
declined, production registered lower
rate of growth and yield rate increased.
Statisticall, the comparison of 1980s
with 1990s suggests that, in case of all
principal crops, cultivable area increased
in 1990s and production and productivity
parameters registered deceleration.
In the case of food grains, area declined,
production and productivity encountered
lower rate of growth than 1980s.
So far non-food grains are concerned
area, production and productivity indicated
an increasing trend with deceleration,
i.e., lower rate of growth than
1980s. However there was an evidence
of recovery in terms of area and productivity
of food grains, and area production
and productivity in non-food grains
during 2000-01 to 2006-07. As a result,
there was a sign of recovery in area production
and productivity of all principal
crops. However, in terms of the growth
According to NSSO data, over 56.5% of the workforce
and 63.9% of the rural workforce – 39.8% self employed
and 24.1% agricultural labour are still directly dependent
on agriculture sector for their livelihood
rates of production it was still lower than
the growth rates of the production of
1980s (GOI, 2006a).
Expansion of irrigation network, use
of modern technology - HYV seeds,
chemical fertilizer, pesticides combined
- cropping pattern changed remarkably.
Cropping intensity also improved to the
level of 134 percent. But percentage coverage
of food grains did not change significantly
until 1980-81. Coverage of
total cereals hardly changed and remained
at the level of about 75 percent.
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53

REIMAGINING INDIA
During 1990-91 to 2000-01 it remained
around 65 percent. Coverage of oil seeds,
fruits and vegetables almost doubled and
area under HYV increased from 1.2 percent
of GCA to 41.17 percent. Paddy
coverage of HYV has increased from
0.56 percent in 1966-67 to 17.34 percent
in 1998-99, wheat from 0.34 to 12.61 percent,
jowar from 0.12 to 4.89 percent,
bajra from 0.04 to 3.76 and maize 0.13 to
1.89 percent of GCA. Important factors
inter alia for such poor performance was
continued neglect of agriculture towards
structural inequity, prevailing non-development
syndrome in infrastructure,
lack of adequate budgetary allocation of
resources for investment. Agricultural
investment to GDP witnessed declining
trend over the years. During 1985-86 it
was 2.3 percent at 1993-94 prices, which
declined to 1.6 percent in 1989-90 and
continued to decline further to 1.4 percent
in 1999-2000 and 1.3 percent in
2003-04. Even at prices of 1999-2000 the
level of investment in 2003-04 was 1.9
percent and remained stagnated at 1.9
percent only for three consecutive years,
i.e., up to 2005-06 (GOI, 2006-07). This
clearly indicated a decline in investment
in real terms. Realisation at the level of
the Planning Commission of the Government
of India suggests that private
investment cannot be sustained without
sustained public investment. Thus, syndrome
of non-development left this sector
under performed. Much hope is
pinned on Bharat Nirman Yojana to expand
irrigation network. But the provision
made under this scheme in the budget
of current financial year does not
appear consistent with targets. With this
speed the target of covering additional
10 million hectare under irrigation will
take at least 17 years.
Cost of cultivation increased significantly
with the increasing use of modern
technology across the states (Diwakar,
2007). Variation in terms of percentage
rate of change in cost of cultivation since
1991 at least for a few major commodities
suggests that lower range of the cost
of cultivation for paddy increased from
over 73 percent in 97-98 to
117 percent in 2002-03 and
about 173 percent in 2004-
05. Upper range of cost increased
by over 92 percent
in 97-98 to about 149 percent
in 2002-03 and 124 percent
40% of the farmers did not like to continue with agriculture.
About 27% were reluctant to continue in this occpation
precisely because of non-viability. Interstate variations
were even higher than that of all India fi gures
in 2004-05. Lower range of cost of cultivation
of wheat increased by 105 percent
in 1997-98 compared to 1990-91, 132
percent in 2002-03 and 170 percent by
2004-05. Upper range of variation increased
from 85 percent to 106 percent.
Lower range of cost of cultivation for
cotton increased by 149 percent in 97-98
to 184 percent in 2002-03 and upper
range by 235 and 167 percent respectively.
Cost of cultivation for other crops
can similarly worked out to assess the
trend and variation of specific crop
across the states. Difference in cost and
price structure is another dimension for
examination of the viability of the crops.
For example, farm harvest price/cost of
cultivating cotton ratio in 1997-98 in
Haryana, was 0.8633 with respect to
Desi and 0.9656 for American cotton
and in Punjab 0.5515 and 0.6914 respectively.
In Maharashtra price–cost ratio
was 0.9452. Thus, farmers of these states
were not in a position to recover even
cost from the returns. In case of paddy
Andhra Pradesh however, was getting
Rs.445 price per quintal against cost of
cultivation Rs.436.77. Escalating cost of
production with poor returns from agriculture
amidst uncertainty of monsoon,
risk of crop failures, absence
of effective insurance
cover, and almost
non-existence of extension
services pushed farmers
into unprecedented hardships.
Terms of trade remained
against agriculture
even after termination of industrial protection
and devaluation of rupee in 1991
(Bhalla, 2005). Data also suggest that
about 40 percent of the farmers did not
like to continue with agriculture (NSSO,
2005:59 th Round). About 27 percent were
reluctant to continue in this occupation
precisely because of non-viability. Interstate
variations were even higher than
that of all India figures. About 36 percent
of the farmers of Bihar, West Bengal,
34 percent of Orissa, 30 percent of
Haryana and Jharkhand, 29 percent of
Maharashtra, and even 28 percent of the
farmers of Punjab – agriculturally one of
the most developed regions and Kerala,
one of the most developed states in terms
of social development indicators of the
country and Karnataka, and 30 percent
farmers of Haryana did not like agricul-
54 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
ture occupation. Encountering deceleration
resulted into lower farm income
and widening gap between agricultural
and non-agricultural income. Therefore
major challenge is not simply to attain
higher growth target in agriculture,
which has been projected at 4 percent,
but to include agricultural labourers and
marginal and small farmers participating
in the growth process effectively. In
order to make them to participate in the
growth process institutional, infrastructure
and technological constraints need
to be addressed on priority basis. This
sector by and large is dependant on vagaries
of monsoon and unprotected from
the risks of crop failures despite expansion
of significant network of irrigation.
Rising cost of cultivation, embedded
with insufficient infrastructure support
and slowing down of employment and
income, left farmers trapped in the syndrome
of indebtedness and despair. Performance
of agriculture remained dismal
with some minor exceptions, thanks
to the unpredictable monsoon and governmental
indifference towards this sector.
As a result, employment in rural
sector grew at declining rate (Bhalla,
2005). Data from NSS rounds suggest
that there was significant decline in employment
in primary sector for both
males and females (NSSO, 60:506).
Findings are supporting the apprehensions
that National Rural Employment
Guarantee Scheme with this speed cannot
deliver the jobs to rural workforce,
.as implementation reports from different
states is adding frustrations only.
Another disturbing factor is decelerating
real wage rates in agriculture and nonagriculture
(Sharma, 2005). But the
question is whether these were substantial
to offset the decelerating impacts of
primary sector on the income of rural
economy. Decelerating growth rate suggests
that this sector could not generate
sufficient capital and investment even
through private sector. Limited benefits
of expansion of the post -Green Revolution
technology could increase production
and productivity but that also could
not be sustained. Moreover, the gains
could not be transferred significantly to
the rural poor in particular and farm
sector at large in general. Rather due to
lack of effective infrastructure and extension
services, modern technology
added confusions in absence of effective
extension services, increased cost of production,
and created environmental
complications and imbalances added
with greater intensity of exploitation of
poor farmers through usury network of
non-institutional credit market in absence
of effective institutional credit
support.
2. Indebtedness, Credit Markets
And Institutions
Rural indebtedness is an indicative of
deficiency of rural income to carry out
necessary activities for livelihood support.
Decelerating growth in agriculture
and increasing income gap between agriculture
and non-agriculture forced a
great majority of farmers and agricultural
labourers to borrow. Findings of
the Royal Commission (which stated
that 'farmers are born in debt, they live,
die in debt and transfer debt liability to
next generation') still hold good. The
worsening state of farmer's despair is a
matter of serious social concern. In order
to address the deficient need of the
farmers many players – formal as well as
informal - have been operating in the
credit market. NSSO survey report suggests
that about 48.6 percent of the farmers’
households were indebted with an
average outstanding loan amount of
Rs.12,585. Out of indebted farmers
households, 31.3 percent were from the
category of landless and below marginal
farmers, 29.8 percent were from marginal
farmers and 18.8 percent from
small farmers category. Thus, altogether
80 percent of the indebted households
were from the poorest lot in terms of
land in possession. Prevalent rate of indebtedness
of landless labour households
of rural area were 45.3 percent,
About 48.6% of the farmers’ households were indebted
with an average outstanding loan amount of Rs. 12585.
Altogether 80% of the indebted households were from the
poorest lot in terms of land in possession
who owed on an average Rs.6,121. With
the increasing size of land in possession
prevalent rate of indebtedness increased
and so was the amount of loan. Considering
per farmer loan amount by Monthly
Per-capita Expenditure (MPCE), extent
of indebtedness was higher in lower
consumption bracket. With the increase
in monthly per capita expenditure percentage
of indebtedness decreased.
However, amount of loan per farmer remained
positive with the increasing
monthly per capita expenditure. Indebtedness
by social groups suggest that
spread of indebtedness and loan amount
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55

REIMAGINING INDIA
was lowest in STs and second lowest in
SCs. OBCs reported higher spread of
indebtedness and amount of loan than
SCs but lower spread and higher amount
of loan than general category of
social group.
State wise distribution of farmers’ indebtedness
suggests that Andhra
Pradesh registered highest incidence of
debts with 82 percent followed by Tamil
Nadu (74.5 percent), Punjab (65.4 percent),
Kerala (64.4 percent) and Karnataka
(61.6 percent). Uttaranchal reported
lowest percentage of farmers with
loan. In terms of per farmer amount of
loan, Punjab carried the highest burden
of loan amount at Rs.41,576 followed by
Kerala (33,907). Haryana stood at third
with Rs.26,007 followed by Andhra
Pradesh (Rs.23,965), Tamil Nadu
(Rs.23,963), Rajasthan (Rs.18,372),
Karnataka (Rs.18,135) and Maharashrtra
(Rs.16,973). Among social groups of
STs, per farmer loan amount was highest
in Punjab (Rs.1,18,495), followed by
Haryana (Rs.23,555), Tamil Nadu
(Rs.21,023) and Andhra Pradesh
(Rs.12,760). In case of SCs, per farmer
loan amount was highest in Rajasthan
(Rs.16,708) followed by Haryana
(Rs.13,341), Kerala (Rs.13308), Tamil
Nadu 12,786 and Andhra Pradesh
(Rs.12,720). For OBCs per farmer loan
amount was highest in Kerala
(Rs.33,116), followed by Tamil Nadu
(Rs.27,355), Haryana (Rs.26,226),
Andhra Pradesh (Rs.23,697), and Rajasthan
(Rs.22,009). In general category
also per farmer loan amount was highest
in Kerala (Rs.38,013) followed by
Andhra Pradesh (Rs.37,802), Haryana
(Rs.31,548), Gujarat, Karnataka and
Tamil Nadu.
Amount of loan taken was generally
utilized for production and consumption
purposes. Data suggest that 30.6 percent
of loan amount was spent for capital expenditure
in farm business followed by
current capital expenditure (27.8 percent).
Non-farm business consumed 6.7
percent. Thus, altogether 65 percent
loan amount was directly used for production
purposes. Another 15 percent
was spent for social development and
remaining 20 percent was on marriage
and other ceremonial occasions and on
consumption expenditure. Medical
treatment and other expenditure could
eat significant proportion in some of
Near landless and marginal households took 56.7 % and
47.2 % of loan amount respectively from informal usury
networks. State wise variations suggest that non-institutional
share of loan fi nance was higher in many states
the states.
Rural credit market has both formal
and informal players. Formal players are
government, cooperatives, commercial
banks, whereas informal credit market
is run by and large by moneylenders - often
farmer, traders including dealers of
inputs, other professionals, friends and
relatives, and others operate as moneylenders.
NSS data suggest that commercial
banks remained major player in providing
credit to farmers (35.6 percent)
followed by cooperatives (19.6 percent)
and government (2.5 percent). Altogether
57.7 percent of credit taken by farmers
was provided through institutional arrangements.
Remaining 42.3 percent
credit market was controlled by informal
players. These players may be categorized
in one bracket of moneylenders
with a few individual exceptions. It is
evident from data in reference that credit
extended by cooperatives and commercial
banks emerged positively directed
towards increasing size of holdings
whereas credit extended by moneylenders
had inverse direction. Landless
households took 47.3 percent loan from
moneylenders alone. Adding extended
informal usury network it came to 77
percent. Near landless and marginal
households took 56.7 percent and 47.2
percent of loan amount respectively from
informal usury networks. State wise
variations suggest that non-institutional
share of loan finance was higher in many
states. Non-institutional finance controlled
greater credit market to the tune
of 68 percent in Andhra Pradesh followed
by Rajasthan, Assam Bihar and
Punjab. Although Maharashtra provided
83 .8 percent credit through institutional
sources farmers were not free from
distress and suicides. This suggests that
provision of institutional credit is although
important it alone cannot be sufficient
to rescue the farmers from the
syndrome of despair.
Flow of institutional credit amount to
agriculture over the years increased
many folds by cooperatives, commercial
and regional rural banks in terms of
short, medium and long terms loan. But
the question of distributional aspects of
credit remained to be addressed effectively.
Total credit extended by cooperatives
was to the tune of Rs.24.23 crore in
1950-51 to Rs.15,957 crore in 1998-99
56 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
and 33,174 crore by December 2006
(GOI, 2007:171). Credit volume extended
by commercial banks and regional
rural banks were even higher than cooperatives
although initials were the same.
Their initial credit amount was to the
tune of Rs.24.23 crore in 1950-51, which
further got increased to Rs.36,860 crore
in 1998-99 and in December 2006, it
stands at 1, 16, 169 crores. Provisional
estimates, projection and targets indicated
increasing volume of credit. The
share of agriculture in total bank credit
had steadily increased under the impulse
of bank nationalization and reached 18
percent towards the end of
the 1980s. But thereafter,
agriculture suffered severe
neglect of institutional
credit delivery mechanism
in the post reform period.
The achievement has been
almost completely reversed
and the agricultural credit share dipped
to less than 10 percent in the late 90s – a
ratio that had prevailed in the early
1970s. Even the number of farm loan accounts
with scheduled commercial banks
has declined in absolute terms from
27.74 million in March 1992 to 20.84 million
in March 2003 (Shetty, Economic
and Political Weekly, July 17, 2004).
Similarly per hectare credit in rupees to
agriculture in recent years increased
from 1,940 in 1998-99 to 4,578 in 2003-
04, but annual growth rate of per hectare
credit to agriculture, which was 25.5
percent in 1999-00 over previous year,
slipped down to 14.2 percent in the year
2000-01. After witnessing partially recovery
(17.4 percent) in 2001-02, growth
of per hectare credit registered lower
rate ( at 14.1 percent) in 2002-03 (Lok
Sabha.2005). This also partially explains
as to why moneylenders were dominating
the credit market, wherein appropriating
surpluses through exorbitant interest
rates (Bhalla, 2005:6).
3. Farmers In Despair
Vagaries of monsoon added with rising
costs and uncertainty of access to reliable
technology, market and public credit
institutions amidst unprotected risks
with non-profitable agriculture aggravated
the syndrome of frustration among
farmers across the states of India irrespective
of level of development of agriculture.
Initially anticipating
better returns farmers invested
capital mobilising
through public and private
institutions and stayed in
production for couple of
years to make their fortunes.
Richer lots of farmers could stay
for couple of years because of their staying
power and relatively better access to
credit and inputs even if they suffered
losses. Unfortunately many of them specially
farmers from smaller farm size
could not sustain growing burden of
loans from moneylenders, traders, dealers
of inputs for many years. Because of
loss of face before the community consequent
upon mounting burden of debts,
failures of credit, insurance and procurement
delivery mechanisms and agencies,
they were forced to commit suicides.
Various studies and reports have been
conducted on this serious problem. Indira
Gandhi Institute Of Development
Research (IGIDR) has brought a comprehensive
study on suicides of farmers
(Mishra 2006:41) for the government of
Maharashtra. Study found various reasons
for suicides. About 86.5 percent
suicides were because of indebtedness,
73.9 percent for deteriorating economic
status, and 40.5 percent because of crop
failures. Loss of face in community (because
of non-payment of loan, inability
to marry their marriageable sisters and
daughters, etc.), were the other reasons.
About 91 percent of suicides were committed
by males. As per police records,
number of suicides in Maharashtra in
2004 alone was 4147. Study reported that
number of suicides increased from 11866
to 14729 between 1995 to 2004.Study
suggests that suicides in females registered
decline after 1999. Another study
The central issue of farmers’ suicides is the debt trap.
Small and marginal farmers are not eligible for availing
institutional credit and crop insurance. Thus, they land at
the doorsteps of the usurious moneylenders
(Mohanty, 2005) revealed that cash crop
growers, small and marginal farmers of
Amaravati and Yavatmal districts were
trapped in debt anticipating better returns
from cultivation and committed
suicides.
Kisan Sabha estimates that more than
5,000 farmers committed suicide in
Andhra Pradesh since 1998, more than
3000 committed suicide in Maharashtra,
about 1,000 farmers committed suicide
in Punjab from 1998 to the present, and
about 5,000 committed suicide in Karnataka
over the same period. It is estimated
that 488 farmers committed sui-
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57

REIMAGINING INDIA
cide in Wayanad District in Kerala
between 2001 and 2005.” (People’s Democracy,
Vol.30, No. 09, Feb 26, 2006).
Another study (Ridyasagar, and Sunianchandra,
2003) argued that “The central
issue of farmers’ suicides is the debt trap.
Small and marginal farmers, especially
those, who lease in land from others, are
not eligible for availing institutional
credit and crop insurance. Thus, they
land at the doorsteps of the usurious
moneylenders. This debt trap is tightening
because of the drastic shifts in the
cropping pattern that is market driven.”
Seeds, fertilizer and pesticide dealers
are at the centre of a growing controversy
in Andhra Pradesh. They are the
new moneylenders to a peasantry
strapped for credit. “The banks have
given no loans in the past seven years,”
says Malla Reddy, General Secretary of
the Andhra Pradesh Ryuthu Sangham
(APRS). “So many farmers are forced to
depend on sources like these for credit.
The same man advises them on what to
buy and then sets the rates for the purchase.”
With the seed dealers charging
hefty interest rates on their credit sales,
the problem gets more acute. The series
of reports filed by P. Sainath which appeared
in the Hindu and India Together
is indeed an eye opener. The Deccan
Herald dated August 11, 2005 reported
that Movement Against State Repression
(MASR) claims that about 40000
farmers committed suicides in Punjab
alone since 1988 whereas state government
admitted only 2116 cases. Rising
cost of cultivation, lack of market security,
exorbitant rate of interests charged
by moneylenders, dishonouring contracts
etc. were inter alia a few important
reasons. After 1996 loan amounts increased
four times but public institutions’
share was merely 20 percent. Despande
and Prabhu (2005) found that
most of the suicides were driven by debt.
Delivery mechanism of institutional
credit and its defined connivance with
local middle men and functionaries often
hatches conspiracy to confiscate the
land of the poor marginal and small
farmers and forcing them to
commit suicide. Suicide
committed by Manasa Ram
of Maraucha Ishwari Singh
Village (Suratganj Block in
Barabanki district of Uttar
Pradesh) is an example of
Near landless and marginal households took 56.7 % and
47.2 % of loan amount respectively from informal usury
networks. State wise variations suggest that non-institutional
share of loan fi nance was higher in many states
many such cases. However, efforts of social
activists foiled this conspiracy and
the confiscation got cancelled later. Tenant
farmers have seldom access to institutional
credit in absence of ownership
of land as collateral security and therefore
they are forced to be trapped in
usurious exploitative network. They often
sell their crops at pre-decided tied
price to the input dealers or at best at
farm harvest price to petty traders.
Kisan Sabha deliberated upon this serious
crisis and noted: “While every such
death is a tragic individual reality for
grieving families and loved ones, there
are important common features to the
farmers’ suicides. These farmers invested
heavily in inputs – biological inputs,
electricity, machinery, and other components
of fixed and variable costs. These
costs have risen sharply in the period of
liberalisation, and are especially onerous
when the farmer invests in seeds
produced by private companies, particularly
multinational corporations. The
farmers were often the victims of plain
cheating – they were sold spurious seed
and other inputs by unscrupulous traders.
Since 1991, farmers have had to witness
the massive withdrawal of the formal
sector credit from the
countryside, and have had
to borrow from the informal
sector at usurious rates
of interest for their production
and consumption
needs. Finally, when they
reaped a harvest, neo liberalism
and the new trade regime robbed
them of prices that could even cover
their costs, let alone earn them a livelihood.
Where the output itself is destroyed
by pest, disease or natural disaster,
the farmer was un-indemnified by
any system of insurance, and inadequately
compensated, if at all, by the
state. It is the stark reality that, for many
in our society and in such a situation,
suicide appears as the alternative of last
resort” (People’s Democracy, vol.30, no.
09, Feb 26, 2006). Market driven farm
diversification, not necessarily designed
differently but for the interests of corporate
sectors, exploited farm land, thereby
undermining ecological and fertility
balance. Globalisation and new trade
regime has made farmers condition vulnerable
and exposed to uncertainty
58 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
(Vidyasagar and Chandra, 2003, CSD,
NIRD). There is every possibility of
worsening condition of poor farmers
further with the emphasis on investment
through corporate contract farming.
Unless means of production is reoriented
in favour of producers and meaningful
employment and employability of
poor cultivators are ensured through
public sector initiatives for infrastructure
development and input and output
markets are regulated in the interest of
producers it will be difficult to rescue
farmers from the syndrome of distress
and despair leading towards suicides.
4. Policy Imperatives And Options
We have discussed a few dimensions of
agrarian crises rooted in the syndrome
of decelerating growth of agriculture
amidst rising costs and inadequate infrastructure
leading to deficient employment
and income for the livelihood of
rural workers specially small and marginal
cultivators and agricultural labourers.
It emerged from the analysis that
decelerating growth with inadequate infrastructure,
technological support and
institutional arrangements forced majority
of the peasants in the debt trap. Majority
of indebted households were from
the poorest lot in terms of size of land
possession and monthly per capita consumption
expenditure. However, rate of
indebtedness and amount of loan was
directly related with increasing size of
land possession and households with
higher MPCE. Contrary to belief major
amount of loan utilized were for capital
expenditure and current expenditure of
farm and non-farm business instead of
consumption purposes. However, significant
amount of loan was spent on essential
consumption expenditure, marriage
and other ceremonial occasions
also. Expenditure on education and
health was the least. So far sources of
loan were concerned with formal sector
- commercial bank remained the major
player followed by cooperative societies.
Moneylender was yet significantly present
in the rural borrowing market and
other informal sources, i.e., traders,
friends and relatives, professionals and
others were not different than moneylenders
with a few individual exceptions.
Institutional credit remained favourable
for increasing size of land possessions
but mostly in poor states. Banks remained
effective after nationalisation
until 1980s but its performance declined
significantly in late 90s. Per hectare
credit to agriculture was also declined.
Analysis suggests that the geneses of indebtedness
were rooted in continued
neglect of agriculture resulted in decelerated
growth syndrome. Declining investment
and inadequate infrastructure
acted as a drag on institutional and technological
transformation and modernisation
with ecological balance. Poor support
system for technological transfer
and updating, credit, input, insurance
and marketing with dependence on vagaries
of monsoon resulted in crop failures
and lower returns leading to misery,
distress and despair.
In this sort of syndrome, cultivators
were often not in a position to repay the
loan(s). They hardly sustained the loss
The central issue of farmers’ suicides is the debt trap.
Small and marginal farmers are not eligible for availing
institutional credit and crop insurance. Thus, they land at
the doorsteps of the usurious moneylenders
of face before the community and committed
suicides. Thus, most of the unfortunate
suicides were debt driven. Credit
needs have been grown considerably
over the time following commercialisation
and modernization. However, average
household borrowing in rural India
has not been excessive. Inadequacy of
institutional credit delivery network,
poor performance of credit cooperatives,
regional rural banks, and commercial
banks, to meet their farm lending
targets, and high cost of rural banking,
etc., have aggravated further (Radhakrishna,
2007). Consecutive failures
of governance (in terms of effective policies
and their effectual implementation)
were witnessed. Instead of correcting
aforesaid those lapses the economy has
been moving in a different direction in
the interest of the rich and corporate
sectors with a faster pace of reforms. Interestingly
despite symptoms of all the
negative indications against the poor,
contradictory policies for reforms have
been put in place with a lip service to the
poor. Unless poor producers are brought
in the mainstream of production, control
over the means of production and distribution
on sustainable basis this process
of marginalization, distress and despair,
which has emerged out sharply in the era
of reforms and globalisation of markets,
may not be checked. Lowering the rate
of interest on institutional loans and
Right to Work may have positive effects
subject to effective implementation
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59

REIMAGINING INDIA
which is always doubtful. However, Right
to Work on ad hoc basis cannot be continued
for long. Sustainable employment
generation led growth process for poor
producers need to be put in place. This
needs stronger and active role of State,
which has been narrowing down during
reform process. State has compromised
with anti-poor development players. Unskilled
labour force has hardly any space
in the reform led labour market. Meaningful
employment for skilled and unskilled
workforce and initiatives to create
institutions and opportunities to
speed up skill transformation to enter
into the job market is the prime tasks
which market can seldom perform for
poor having no purchasing power. And
civil society cannot rest in peace if the
idle hands do not get employment.
Therefore, pro-poor activism of civil
society and effective mobilisation and
resistance of peasants and social activists
have become an imperative for all
peace loving people to create pressure
upon the state to perform pro-poor role
inorder to achieve growth, with
meaningful employment and actionable
social justice.
Reference
• Behera, B. and Mishra, P., (2007): Acceleration
of Agricultural Growth in
India: Suggestive Policy Framework,
Economic and Political Weekly, vol.
42, No. 42. October 20-26.
•. Bhalla, G.S., (2005): The State of the
Indian Farmers, G. Parthasarathi Memorial
Lecture in 88th Annual Conference
of the Indian Economic Association,
December 28, 2005.
• Despande, R.S., and Prabhu, Nagesh,
(2005): Farmers Distress – Proof beyond
Questions, Economic and Political
Weekly, Vol.40, No. 44 and 45, November
4.
• Diwakar, D.M., (2007): Contours of
Agrarian Crises in India, Uttar
Pradesh-Uttaranchal Economic Association
(UPUEA) Economic Journal,
Annual Conference Number.
• Government of India (2006): Towards
Faster and More Inclusive Growth: An
Approach to the 11th Five Year Plan,
Planning Commission, New Delhi, November
2006.
• Government of India (2006a): Agriculture
at a Glance 2006, Ministry of Agriculture,
New Delhi.
• Government of India (2007): Economic
Survey, Ministry of Finance, New
Delhi.
• Lok Sabha Starred Question No. 611,
dated on 09.05.2005.
• Mishra, Srijit, (2006): Farmers’ Suicide
in Maharashtra, Economic and Political
Weekly,Vol.41,No. 16, April 22-28,
pp. 1538-45,see also, Suicide Mortality
Rates across States of India, in the
same issue p. 1567.
• Mohanty, B.B., (2005): We are Like the
Living Dead: Farmer Suicides in Maharashtra,
Western India, Journal of
Peasant Studies, Vol.32, No.2, April,
pp. 243-276.
• Narayanamoorthy, A., (2007): Deceleration
in Agricultural Growth: Technology
Fatigue or Policy Fatigue? Economic
and Political Weekly, Vol.42,
No.25, June 23.
• National Sample Survey Organisation
(2005): Indebtedness of Farmer Households
in India, NSS Report No. 498,
59 th Round, January-December 2003.
• National Sample Survey Organisation
(NSSO) (2006): Employment and Unemployment
Situation in India, 2004-
05, Report No. 515 -I
• People’s Democracy, Vol.30, No. 09,
February 26 th , 2006.
• Rao, Nageswara, The Hindu, September
11, 2005.
• Radhakrishna, R. (2007): Expert Group
Report on Agrarian Crisis
in India, Government of India,
New Delhi.
• RBI’s Basic Statistical Returns of
Scheduled Commercial Banks in India,
various Issues.
• Sharma, H.R., (2005): Recent Trends
in Wage Earnings of Agricultural Labourers
State Level Analysis for Different
Social Groups, Arth Vijnana,
Vol. XLVII, Nos. 3-4, September-December,
pp. 329-344.
• Shetty, S.L. (2004): Distributional Issues
in Bank Credit, Multi-pronged
Strategy for Correcting Past Neglect,
Economic and Political Weekly, Vol.
Xxxix, no. 29, July 17.
•Sainath,P.,IndiaTogether, accessible at
http://indiatogether.com/agriculture/
suicides.htm; Sainath, P. (2007): Farming-
it ‘s what they do, The Hindu, May
24, 2007, p.11; Suicides are about the
living, not dead, The Hindu, May 21,
2007, p.p.13.; Vidarbha: Packaging an
anniversary, The Hindu, August 31,
2007; it’s official: distress up, suicides
appalling, India Together, 22 November
2006, courtesy The Hindu, p.11;
When farmers die, India Together,
http://www.indiatogether.org/2004/
june/psa-farmdie.htm
• Vidyasagar, R. and Sunianchandra, K.,
(2003): Study on Farmers’ Suicides
in Andhra Pradesh and Karnataka,
CSD, National Institute of Rural
Development.
60 THE IIPM THINK TANK

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O UTREACH • OUTPERFORM • OUTSHINE

Anu Singh,
Professor of Economics, Alliance
Business Academy, Bangalore
Market Economy And The State Of Regional
Disparities In India
"By definition, a government
has no conscience. Sometimes
it has a policy, but
nothing more."
-Albert Camus
Economic and social regional
disparities in India among different
segments of the society
have been the major force behind adopting
planning process in India. With the
establishment of planning commission
in March 1950, India launched the process
of state led ‘growth with social justice’
its prime concern of over all development
of India and of all its states. The
first three decades of planned development
involves massive investments in
backward regions, moreover various
public policies encouraged private investments
in regions which are not very
economically sound. Capital and other
subsidies were seen as the best way of
addressing regional imbalance through
capital formation as well as income and
employment generation. It’s considered
to be the responsibility of the government,
in promoting balanced development
in which all states should get opportunity
to develop evenly through
direct investment in public sector units.
In spite of these commendable efforts
and policy interventions, considerable
level of regional disparities remained at
the end of the Seventies. The accelerated
economic growth since the early
Eighties appears to have aggravated regional
disparities. In 1991 after the balance
of payment crises Indian government
followed the policy regime of
Liberalization, Privatization and Globalization
(LPG), which resulted in a
tremendous increase in GDP and per
capita Income. India today is the fourth
largest economy, in the world in Purchasing
Power Parity (PPP) dollars, after
the US, China and Japan, and has
the third largest GDP in the entire continent
of Asia. It is also the second largest
among emerging nations. India is
also one of the select three markets in
the world which proffers high prospects
for growth and earning potential in
practically all areas of business. The reforms
generated results are quite commendable
at all India level and demonstrated
very great picture of our nation.
But the question is whether these
62 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
achievements like increase in GDP, per
capita income, foreign direct investment
and foreign exchange reserves are sufficient
conditions for the over all development
of the nation and its nationals.
These on-going economic reforms with
stabilization and deregulation policies
as their central pieces seem to have further
widened the regional disparities.
The impact of globalization and privatization
is not uniform across economies
and also across different sections of the
population within an economy. Market
economy is not meant for the equal distribution
of wealth, it is an uneven process
with unequal distribution of benefits
and losses, both across the countries and
within a country across different income
groups: the rich get richer and everyone
else gets poorer, many absolutely and
the rest in relation to the rapidly growing
wealth of the rich. It has distorted
investment priorities, for wealth gets directed
into areas wherein it will earn the
largest profit and not into spaces that
most people really need (accordingly,
public health, education and other basic
social services receive little attention).
II. Analyzing Growth Across
Select Indian States
Economic reforms among other things,
implied that private sector would be the
principal engine of economic growth.
Most of the restrictions on private investment
have been removed. Mounting
debt burden of the government has imposed
a cap on public investment. As a
result, while there was significant increase
in the quantum of private investment,
there was a sharp fall in the public
investment over the last decade. This
has created even more imbalance among
different states throughout India.
For studying the effects of LPG on
regional growth and regional imbalances
among different states we have
taken indicators which have direct
bearing on social and economic development
of the nation or region. The
scope of our analysis in this article is
restricted to a comparative analysis of
the eight major States in respect to few
key parameters which have an intrinsic
bearing on social, human and economic
development. For the purpose of this
article, we have divided these states
into two groups; forward and backward.
Forward states category consists
of Andhra Pradesh, Karnataka Maharashtra,
and Tamil Nadu, the backward
states group comprises of Bihar, Madhya
Pradesh, Orissa, Rajasthan and
Uttar Pradesh. The parameters taken
to analyze the situation are per capita
income, percentage share of poor and
per capita consumption expenditure.
In order to analyze the nature of the
private players or the market mechanism
we have collected cumulative figures of
total cases of foreign direct investments
done in these states. The most important
indicator of the economic development
of a society is the Per-capita Annual Income
(PCI) generated by it. PCI is an
indicator of the level of economic development
and it measures the inequality
in the income distribution among different
regions. Per capita Gross State Domestic
Product (GSDP) as a percentage
of per capita GDP of the country for forward
and backward group of States are
presented in the Table-1. It shows the
growth in per capita incomes of the two
groups of States over the last two and
half decades, especially from 1991. All
the States in the forward group, have
improved their relative position over the
last two and half decades. One important
point is worth mentioning is that the
Per capita incomes of the three states in
the forward group category except Maharashtra
were below the national aver-
Table 1: Per-capita GSDP As A Percentage Of GDP
States 1981-82 1990-91 1999-2000 2005-2006
Forward Group
Andhra Pradesh 87.4 92.5 97.9 101.9
Karnataka 92.8 95.4 105.8 106.1
Maharashtra 143 144.7 147.4 144.2
Tamil Nadu 92.8 100 122.3 116.5
Backward Group
Bihar 58.8 53.5 36.4 30.6
Madhya Pradesh 80.8 78.1 78.2 60.8
Orissa 75 66.9 66.7 NA
Rajasthan 76.6 79.3 85.1 69.5
Uttar Pradesh 75.8 70.6 59.4 51.6
All India 100 100 100 100
Source: http://mospi.nic.in/
THE INDIA ECONOMY REVIEW
63

REIMAGINING INDIA
age in the eighties, but by the year 2005,
all have gone above the national average.
This is basically due to the increasing
share of private investment in these
states and in stark contrast, states in the
backward group experienced relative
deterioration in terms of per capita income
and this specific deterioration was
more marked after the reforms. Table-1
also shows the degree of disparity in per
capita income among these states,
wherein Bihar and Uttar Pradesh have
the greatest degree of disparity, in comparison
to the forward states. The differences
in per capita income between
forward and backward states were minimum
in 1980-81 and maximum in
2005-2006.
Percentage Of Poor
The percentage of poverty is worth to
discuss while analyzing regional disparities
in India. The overall percentage of
poverty has decreased from 51.3 percent
in 1977-78 to 38.9 in 1987-88 and reached
to the level of 36.0% in 1993-94. Now in
2004-05 fewer Indians were living in
poverty than in 1999-2000, with official
data showing poverty declined by 4.3 per
cent during this period. Poverty in India
has declined to 21.8 per cent in 2004-05
from 26.1 per cent in 1999-2000.While
there has been great progress in reducing
poverty, it has been far from even,
and these data masks large regional differences.
Based on NSS data, Orissa was
the poorest state with 39.9 per cent of
people living below poverty line followed
by Jharkhand (34.8 per cent) and Bihar
(32.5 per cent). Poverty levels were low
in Chandigarh (3.8 per cent people living
below poverty line), Jammu and
Kashmir (4.2 per cent) and Punjab
(5.2 percent).
Among the other major states, percentage
of people living below poverty
line was 15 per cent in Assam, 12.5 per
cent in Gujarat, 9.9 per cent in Haryana,
17.4 per cent in Karnataka, 11.4 per cent
in Kerala, 32.4 per cent in Madhya
Pradesh, 17.5 per cent in Rajasthan, 17.8
per cent in Tamil Nadu and 20.6 per cent
in West Bengal. National trends in poverty
reduction have been dominated by
rapid growth in Forward states only
other regions have seen little or no
change. This is clearly presented in Table-2
which is showing the
percentage of poverty share
among different states of
India. The main beneficiaries
of the overall decline in
poverty in the country have
been the fast growing States
in the forward group. In
contrast, the share of the poor in the
States in the backward group has gone
up significantly. As the table indicates,
Table-2 Percentage Share Of Poor
each one of the States in this group has
now increasing share of poor from 1980s
to 2000. These show that economic
growth of forward states is more than
the backward states due to market
mechanism.
Average Monthly Per-capita
Consumption Expenditure
After 15 years of reforms Average
Monthly Per Capita consumption Expenditure
among different states is still
showing wide disparities. For the forward
states, it seems the formula of more
market and less government
is working well, but
for poor states it is working
in opposite direction,
where government gives
incentives to establish industries
in these backward
states, industrialist are
only interested in profit maximization.
All the states in the forward categories
have PCCE more than Rs.1000, whereas
States 1983-84 1987-88 1993-94 1999-2000
Forward Group
Andhra Pradesh 5.1 5.22 4.81 4.57
Karnataka 4.64 5.17 4.88 4.01
Maharashtra 9.01 9.65 9.53 8.76
Tamil Nadu 8.05 7.53 6.31 5.01
Backward Group
Bihar 14.31 13.71 15.4 16.36
Madhya Pradesh 8.61 8.61 9.32 11.47
Orissa 5.62 5.4 5.01 6.5
Rajasthan 3.93 4.65 4.01 3.14
Uttar Pradesh 17.24 17.47 18.87 20.36
All India 100 100 100 100
Source: Planning Commission, Government of India.
64 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
all the states in backward categories are
having PCCE which is less than Rs.1000.
The lowest among them is Bihar with
only Rs.696.27 and highest PCCE is
earned in Uttar Pradesh (Rs.964.02). In
comparison to backward states, the lowest
PCCE stands at Rs.1018.55 and highest
at Rs.1148.27 (Maharashtra).
Total Cases Of Foreign Direct
Investment
FDI influences growth by increasing total
factor productivity and, more generally,
the efficiency of resource use in the
recipient economy. Technology transfers
through FDI generate positive externalities
in the host country. FDI contributes
to export growth, productivity
growth and finance for balance of payments;
it supports increase in national
income. FDI increases employment and
contributes to economic growth. FDI
has increased manifold over the past two
decades. FDI brings private overseas
funds into the country for investments.
Under the new Industrial Policy Resolution
the industrial policy reforms have
substantially reduced the industrial licensing
requirements, removed restrictions
on expansion and facilitated easy
access to foreign technology and foreign
direct investment. Foreign Direct Investment
in India is allowed on automatic
route in almost all sectors. Table-
3 will help us in explaining the much
widening of regional imbalance
throughout India. As it is evident from
the table, the cumulative numbers of
FDI cases are lowest in the state of Bihar(27),
followed by Orissa (91) and
highest in the state of Maharashtra with
3743 and seconded only by Karnataka,
with 2147 cases. That means the total
Table-3 Total Cases Of FDI In Select States Of India
Total Cases of FDI
States Aug 1991-Dec 2004
Forward Group Number Investment in Rs Cr
Andhra Pradesh 1026 11634.44
Karnataka 2147 19096.39
Maharashtra 3743 37107.79
Tamil Nadu 2066 22651.29
Total FG 90489.91
Backward Group
Bihar 27 739.71
Madhya Pradesh 170 9271
Orissa 91 8229.31
Rajasthan 241 2911.21
Uttar Pradesh 536 4836.56
Total BG 25987.79
Source: http://eaindustry.nic.in/handbk0305/chap143.pdf
gap between the highest and the lowest regions of the country. This has enabled
is almost 3716 cases and this depicts the the developed regions to achieve accelerated
economic growth during the
clear case of wide regional inequalities.
Again, the total investment in aforementioned
backward states is only 28.7% of which were unable to attract any signifi-
1990s. Backward regions of the country,
the forward states. Ever since reforms cant private, experienced decelerated
started, a great majority of FDI is directed
only into select states which al-
The issue of regional balance has been
economic growth during this period.
ready had good standard of living. The an integral component of almost every
flow of private investment, both domestic
and foreign, has been extremely bining
and a strategy of State-led industri-
Five Year Plan. The adoption of planased
in favour of the more developed alization, with Plans and policies designed
to facilitate more investments in
the relatively backward areas were intended
to lead to a more balanced
growth in the country. It was expected
that, over time, inter-state disparities
would be minimized. An analysis of
these trends, especially the more recent
trends (after 1991), leads to the inevitable
inference that, regional disparities
still persist and in some indicators it has
widened more especially after reform
THE INDIA ECONOMY REVIEW
65

REIMAGINING INDIA
period. Also, there are others parameters
like number of bank branches
and credit deposit ratio which are showing
the same trend of accentuating
inequality.
Policy Payoffs!
Thus, it is clear from the above discussion
that mere free market forces and
mechanisms will not help in improving
the overall condition of Indian economy.
Government has to work side by side and
even equally with the private sector, in
addition to the policy incentives aimed
at private bodies for attracting the requisite
investments in backward regions.
But as reflected in the data, they did not
work properly because of other reasons
like poor social capital and weak economic
conditions in backward states.
There is, arguably, a greater need for
higher levels of investment in social
services and infrastructure, specifically
in relatively backward states as compared
to the more developed counterparts.
The state governments of the
backward regions tend to be fiscally
weaker and are therefore unable to find
enough resources to meet the huge investment
requirements needed to catch
up. Therefore, if possible government
should concentrate in developing backward
regions and let private bodies concentrate
on forward states and areas. In
addition to this macro policy approach,
there are several other direct and indirect
measures which the state can think
over. It will require Herculean tasks on
the part of the Centre and the leadership
in the concerned regions to ensure that
the gap does not widen further.
In order to reap the maximum benefits
from FDI, there is a need to establish a
transparent, broad and effective enabling
policy environment for investment
and to direct these capital flows into the
areas where it is required most.
References
• http://planningcommission.nic.in/
midterm/english-pdf/chapter-18.
pdf
• http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/81450.pdf
• http://www.iht.com/articles/2007/04/19/news/fdi.php
• http://www.mospi.nic.in/mospi_
nsso_rept_pubn.htm
• http://www.nyu.edu/projects/ollman/docs/china_speech2_content.
php
• http://www.rba.gov.au/PublicationsAndResearch/Conferences/2002/
kishore.pdf
• http://www.rediff.com/money/2007/mar/21poor.htm
Our Weapons of Mass Instruction
66 THE IIPM THINK TANK

THE GREAT INDIAN DREAM
“Many ideas grow better when transplanted into another
mind than in the one where they sprang up.”
-Oliver Wendell Holmes
When Great Indian Dream got released in August 2003, it created
scores of academic debates and ideological dissent among
many leaders. After inquiring into fallacies in national economic
planning, specifically resource mobilisation strategies, it proffers
an alternate plan, reconciling key social developmental imperatives,
economic challenges and political constraints. The futuristic
and unconventional economic wisdom inherent in it has been
gaining a lot of acceptance and appreciation from many thought
leaders in all walks of life. Accrediting their three decade old research
at IIPM, the authors’ talk of potential growth rates over
14%, since then. Their observations were disregarded. But nowadays,
every national and international think-tank, including the PM
talks about a 10%. The Election Commission took a leaf out of
this book and ordered enquiry into the rigging process in West
Bengal. Many politicians were defamed and intelligentsia was
provoked. Veteran lawyer, Ram Jethmalani used it for his campaigns
in opposition to Atal Bihari Vajpayee. As on December
2005, the tax component is almost 55 per cent in petrol and for
diesel, the tax component in the price is almost 34 per cent, in line
with the resource mobilisation strategies of the authors. It is indeed
very assuring to find that in the last two years as it hit book stands,
tolerant of a few minor deviations, the compelling socioecononomic
recommendations mentioned in it remain convincingly
well-founded. The ideology integral to this book has turned
into a movement called ‘GID Foundation’ (GIDF), stirring a social
revolution, as it supports developmental initiatives in more than
2000 villages across 12 states and supporting an estimated 25,
00,000 people residing primarily in the remote/backward areas.
Effectual ideas relating to all social sectors are featured in the
book are being executed to restore pride to the ‘betrayed India’.
Reminds one about Sigmund Freud’s associable observation:
‘Thought is action in rehearsal’.

Anindo Banerjee,
Head, Programme Initiatives, Praxis -
Institute for Participatory Practices,
Patna
Accountable Governance And Pro-poor Markets
For Effective Poverty Reduction
"Adam Smith, the father of modern economics,
is often cited as arguing for the “invisible hand”
and free markets: fi rms, in the pursuit of profi ts,
are led, as if by an invisible hand, to do what is
best for the world. But unlike his followers, Adam
Smith was aware of some of the limitations of
free markets, and research since then has further
clarifi ed why free markets, by themselves, often
do not lead to what is best. As I put it in my
new book, Making Globalization Work, the
reason that the invisible hand often seems invisible
is that it is often not there."
ALTMAN Daniel, Managing Globalization.
In: Q & A with Joseph E. Stiglitz,
Columbia University and The International
Herald Tribune (IHT),
October 11, 2006
In the month of October, when
over twenty five thousand landless
agricultural labourers hailing
from various dalit 1 and tribal communities
of India marched to New Delhi
to press for their land rights and succeeded
in securing a vital policy decision
towards constitution of a highpowered
‘National Land Reforms
Council’ headed by the Prime Minister,
they heralded a historic assertion
against increasing market-led appropriation
of vital resources like land,
water, mines and forests. Given that
the last two decades have witnessed
countless instances of dispossession of
the poor in developing economies
from critical life-support systems,
mostly at the behest of market-forces
actively aided by agencies of the State,
the issues concerning the role and obligations
of market forces and agencies
of the State towards poverty reduction
need to be examined cautiously, with
an eye on the impacts of contemporary
trends and policies on the well-being
of poor communities.
Markets And The Poor
The experiences of several African
governments during the eighties and
the nineties relating to policies aimed
at overcoming acute fiscal imbalances
are a good pointer to the potential impact
of ungoverned market forces on
critical sectors such as agriculture.
Measures administered to this effect
on the advice of international financial
institutions like the World Bank included
withdrawal of the public sector
from sectors like agriculture, de-control
of prices, reduction of farm subsidies
and increased privatization. The
outcomes were equally radical: the
drastic steps immediately affected
over seventy percent of the poor in the
region by drastically suppressing food
production. A recently concluded evaluation
2 of World Bank’s role in African
agriculture attributed the crisis to the
68 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
inability of market forces to step in
and jump-start agricultural growth.
According to Professor Jeffery Sachs
of Columbia University, “The whole
thing was based on the idea that if you
take away the government for the poorest
of the poor, markets will somehow
solve the problems, but markets can’t
step in and won’t step in when people
have nothing. And if you take away
help, you leave them to die.” 3
The example of sub-Saharan Africa
clearly illustrates the criticality of the
role of a pro-poor ‘welfare state’ in
safeguarding the survival needs of the
poorest of the poor, who do not offer
any investment incentives to profitseeking
market forces.
According to the United Nations-
Millennium Development Goals
(MDGs) report of 2007, the share of
the poorest fifth of populations in developing
regions in national consumption
decreased from 4.6 to 3.9 percent
between 1990 and 2004. Widening income
inequality is of particular concern
in Eastern Asia, where the share
of consumption among the poorest
people declined dramatically during
this period. Inequality is the highest in
Latin America, the Caribbean and in
sub-Saharan Africa, where the poorest
fifth of the people account for only
about three percent of national income,
despite increased involvement
of market forces in local economies.
Internationally, 46 countries of the
world have become poorer today than
they were in 1990, according to Human
Development Report 2004.
Nearly 1300 million people live in
absolute poverty, earning less than one
dollar a day, while about 3000 million
people, more than a half of the world’s million people are officially registered
population live on less than two dollars as unemployed, besides an additional
a day. According to the International 700 million underemployed people.
Labour Organization (ILO), over 120 Instances of poverty, which often are
Growing Inequality In The World
Share Of Poorest Quintile In National Consumption,
1990 And 2004 (Percentage)
Latin America & the Caribbean
2.8
2.7
3.4
1990
3.4
2004
Eastern Asia
7.1
4.5
Western Asia
5.9
5.4
South-Eastern Asia
6.2
6.1
CIS
7.9
6.2
Northern Africa
6.2
6.3
Southern Africa
7.2
6.7
Transition Countries Of South-Eastern Europe
8.3
7.8
Developing Regions
4.6
3.9
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
Source: UN MDG Report 2007
THE INDIA ECONOMY REVIEW
69

REIMAGINING INDIA
a complex interplay of social, political
and economic factors, can be addressed
only by interventions that hit
hard at the root causes of inequalities,
rather than by the quirks of unregulated
markets that by design are tailored
to suit the conditions of the rich
and the powerful. Given the enormous
amounts of power, influence and resources
that the latter tend to have at
their disposal, often catalyzed by increasing
overlap of political and business
interests in most modern economies,
the only chance for the poorest
people rests on systems of governance
that can be held to account and at least
be subjected to a floor test of popularity
based on electoral performance of
alternative political ideologies.
The message of the poorest people
is loud and clear: governments must
protect them from the vagaries of market!
Their verdict has been communicated
clearly on many an occasion,
evident in the electoral defeat of the
‘India Shining’ campaign in India. The
resurrection of the ‘Aam Aadmi’ (i.e.
the ‘common man’) as a reference
point of current development policies,
at least rhetorically, has been compelled
by lessons learnt from many of
these recent trends. Yet, the poorest of
the poor in countries like India continue
to face unprecedented challenges
to their existence. The markets are
pushing them hard to extinction, by
encroaching upon some of their commonest
avenues of survival, notably
retail trade, artisan-crafts, common
property resources and most alarmingly,
agriculture.
One needs to delve into the basic
Food grain off-take through the PDS declined from 17
million tonnes per year in the early nineties to 12 million
tonnes per year around the end of the decade, endangering
the food security of millions of the poor
character and orientation of markets
to assess their potential role in poverty
reduction. Markets operate on the
laws of supply and demand, and thereby
play a role in fixation of prices and
wages. Theoretically speaking, the
price of a product or service is directly
proportional to the rarity of its supply,
its quality, the cost of production, and
inversely proportional to the bargaining
power of the buyer and degree of
regulation of unfair practices. For
markets to be favourable entities for
the poor (when participating in markets
as sellers), the latter ought to be
able to vie with competing forces towards
suppressing the cost of production,
acquiring greater market share to
limit the range of suppliers and towards
investing adequately in optimizing
the quality of the product. Such
possibilities are likely to be highly infeasible,
given their limited economic
abilities. Similarly, as buyers of products
or users of services, their bargaining
power is often limited on account
of their limited ability to promise continuity
as buyers or users, limited creditworthiness
and lack of effective
mechanisms to hold sellers/service
providers accountable. Profit-seeking
markets are more likely to serve clients
that can offer greater economic returns
to producers and therefore are
likely to exclude the poor. The only
ways to offset this fundamental likelihood
of exclusion is to either regulate
the markets in order that the poor are
compulsorily served on pro bono terms
as a principle of policy, or to create
alternative providers that by mandate
serve the poor. This necessitates a
role for a pro-poor welfare state
or non-profit organizations in
serving the needs and interests of
the poor.
India was one of the fastest growing
economies in the world during the
nineties. The decade also witnessed an
unprecedented scale of entry of market
forces in various sectors of the
economy. Yet, despite a significant
spurt in macroeconomic growth, the
rate of reduction of rural poverty in
India was halted during the 1990s. Estimates
show that the incidence of poverty,
which between 1972-1973 and
1989-1990 fell from 55.4 percent to
34.3 percent in rural India, never went
below the 1989-90 level in subsequent
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NSSO rounds undertaken up to 1997
(Please refer to the diagram) iv . Though
the rate of decline of rural poverty
picked up again during the subsequent
years (from 1999-2004), the rate of
GDP growth was in fact less during
this phase than during 1993–1999. The
average per-capita expenditure in rural
areas was not even ten percent
higher in 1999-2000 than in 1993-1994,
and rural poverty actually went up in
some of the poorer states, such as Assam
and Orissa. Also, food grain offtake
through the public distribution
system declined from 17 million tonnes
per year in the early nineties to 12 million
tonnes per year around the end of
the decade 5 , endangering the food security
of millions of the poor in the
country at the time when the GDP
growth was unprecedented.
The State vis-à-vis The Poor
The Eleventh Five-Year Plan of India
underscores the challenge of providing
employment to 70 million additional
people by 2011-12. It is also a well-established
fact that the incidence of
It is a well-established fact that the incidence of unemployment
is substantially higher in the ‘below poverty line’
category, and particularly high amongst the Scheduled
Castes (SCs) and Scheduled Tribes(STs)
unemployment is substantially higher
in the ‘Below Poverty Line’ category,
and particularly high amongst the
scheduled castes and tribes therein (as
indicated by successive National Sample
Surveys). A critical question therefore
is: what strategies and preparedness
does the State have to meet this
challenge, which is important to be addressed
to prevent the nation’s slide
into anarchy? Do markets provide a
Trends In The Poverty Ratio (1972 - 1997)
60
55
55.36
Rural
Urban
50
50.6
45
40
35
30
45.67
45.31
40.5
38.81
35.65
34.29
39.23 39.06
36.6
34.3
36.2
33.4
43.47
36.43
33.73
32.76
41.02
36.66
33.5
30.51
37.15
35.78
29.99
25
28.04
Oct 72-Sep 73
Jul 77- Jun 78
Jan 83- Dec 83
Jul 86-Jun 87
Jul 87-Jun 88
Jul 88-Jun 89
Jul 89-Jun 90
Jul 90-Jun 91
Jan 92-Dec 92
Jun 93-Jun 94
Jul 94-Jun 95
Jul 95-Jun 96
Jan 97-Dec 97
Percent Population
(Source: "The Poverty Puzzle" by C.P. Chandrasekhar and Jayati Ghosh, Macroscon, Feb. 22, 2000)
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REIMAGINING INDIA
solution, or do they further endanger
the chances of survival of the poor?
Can democratic governments be allowed
to forego their duties towards a
majority of their trustees who vote
them into power?
Of late, various governments in India
have been offering unprecedented
incentives to the private sector with an
eye on macro-economic growth. For
instance, policies relating to establishment
of Special Economic Zones
(SEZs) include significant supports to
private entrepreneurs in the form of
facilitation of land acquisition, tax rebates
and friendlier administrative
mechanisms, amongst others. However,
many of the provisions jeopardize
the long-term interests of the poor in
many ways and the much-touted objective
of inclusive growth hasn’t come
into effect. For instance, one of the
largest Special Economic Zones in India
proposed to be set up by Reliance
Industries Limited in Maharashtra
across three tehsils of Raigad district
threatens to displace nearly 35,000
farmers based over 25,000 hectares of
agricultural land. The threat to the
livelihoods of the farmers likely to lose
ownership of land are sought to be offset
merely by providing monetary compensation
without any thoughts about
the limited livelihood-choices available
to them, consequent pressure on
limited urban infrastructure, or the
implications for a large number of nonowner
dependents of farmland, e.g.
sharecroppers or wage labourers.
In similar developments across the
country, as many as 396 SEZs have
been accorded formal clearance by the
government (by October 2007), of
which 149 have already been notified.
When households displaced by SEZs
or big projects migrate to cities, their
survival becomes even more arduous,
thanks to modern urban policies that
increasingly shut out spaces from the
reach of the poor. The commonest
Markets, unless regulated with a pro-poor orientation, can
eliminate the poor rather than contributing to poverty
reduction, given the inherent tendencies of supply-side
domination and profi t maximization
coping avenues for the poor, e.g. participation
in retail trade, accessing
state-run basic services, or opting for
low-investment livelihoods (e.g. rag
picking or plying rickshaws) are made
increasingly inaccessible by policies
that allow entry of big business houses
in retail trade, enhance the cost
of basic services by allowing their
privatization, or block public spaces
for the poor.
Another area of concern relates to
increasing privatization of common
property resources in the country,
bearing life-threatening implications
for a large number of poor communities.
The operations of mining companies
in various forest-rich areas of
states like Chhattisgarh and Jharkhand
have destroyed the age-old forestbased
livelihoods of many tribal families.
In Orissa, the state government
has already committed several rivers
and reservoirs for use by industry for
water-intensive activities. In Chhattisgarh
too, industries have been permitted
to draw water from rivers like Kelo
and Sheonath. Kelo, a tributary of Mahanadi
river, happens to be an important
source of livelihood for over sixty
village communities settled alongside
its 98 kilometer long stretch across
Raigarh district of Chhattisgarh,
whose lives have been badly affected
due to severe decline in the stock of
river water. During a People’s Tribunal
held in Kolkata in January 2007, Santwana
Dey – an elderly woman hailing
from a farmer household based in Bejiberia
village of Singur where the
Government of West Bengal acquired
land for handing over to Tata Motors
in lieu of promises of jobs in a car factory
and offers of monetary compensation,
raised a fundamental issue: ‘no
one can dictate what should my family
do for a living; we have a right to pursue
occupations that we are capable of and
cannot be forced to work in a car factory,
which we have no inkling about!’
Santwana’s straightforward assertion
in the Tribunal underscored a legiti-
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mate contention of millions of marginalized
citizens of the country – regarding
their right to work, and
particularly the right to avail of work
of a suitable and gainful nature, in
keeping with the directive of the constitution
of India (Article 41; Directive
Principles of State Policy) calling upon
the State to make effective provisions,
within the limits of its economic capacity
and development, for securing
the right to work. In a country where
the rate of growth of the size of labour
force exceeds the rate of growth of employment,
and where over ninety percent
of the workforce is employed in
the unorganized sector, the challenge
of creating gainful employment opportunities
for a large segment of socially
and economically disadvantaged citizens
remains the greatest trial of relevance
of our welfare state. The performance
of the State with respect to
its duties towards the poorest of the
poor people might have been inadequate
and often inefficient, but it has
undoubtedly been critical. No other
agency has the scale and depth of presence
amongst the poor like agencies of
the State. There are important policies
favouring affirmative action for the
socially marginalized, employment
guarantees, relief from disasters, decentralized
governance, right to information,
provisions against atrocities
and social security benefits for especially-challenged
people and affordable
basic services. However, bureaucracies
managing a State’s performance
have often failed to administer the
pro-poor provisions effectively and
have eluded any kind of accountability
to the people. In many states, they
have also undermined the status and
potential of Panchayati Raj institutions
by assuming sweeping powers over decisions
relating to local development.
Holding functionaries of the State accountable
is the greatest need of the
hour, not reducing the role of
the State.
The Way Forward
For poverty reduction to be effective
and viable in the long run, the State
needs to play a far more efficient and
accountable role than it is today, without
withdrawing itself from the obligation
of poverty reduction. Markets can
be made a supportive channel towards
creation of more development opportunities
for the people, through regulations
that bring about a level playing
field. A two-pronged strategy, where
the State assumes full responsibility
for efficient and accountable delivery
of crucial basic services and entitlements,
and also enables poor communities
to effectively engage with markets
can significantly contribute to the
wellbeing of the poor. Facilitating
meaningful participation of the poor
in contemporary markets would call
for support towards value addition and
sale of economic products of the poor;
storage of goods; establishment of efficient
institutions for managing procurements,
forward movements and
linkages; price control and equitable
incentives, amongst other things. Local
institutions of governance need to
be freed from the control of bureaucracy
and capacitated to play an effective
regulatory role towards safeguarding
the strategic needs of the poor,
based on principles of equity and
social justice.
Markets, unless regulated with a
pro-poor orientation, can eliminate
the poor rather than contributing to
poverty reduction, given the inherent
tendencies of supply-side domination
and profit maximization. The poor
have little say in the functioning of
market forces, but have some stake and
control in the governments they elect.
The only way in which the poor can
safeguard their interests in a market is
by electing pro-poor governments that
eliminate anti-poor market forces and
regulate supplies of essential goods
and services in order that they remain
accessible and affordable to the poor.
Good governance is the right of every
citizen, and ensuring the same through
effective mechanisms of accountability
of government functionaries is the
greatest need of the hour.
End Notes
1
‘Dalit’ literally means ‘oppressed’
and refers to socially marginalized
communities living in India.
2
Evaluation undertaken by The Independent
Evaluation Group of the
World Bank, titled “Assessment
of the Bank’s assistance to agricultural
development in Sub-Saharan
Africa during FY 1991-06”
3
Ref. report titled ‘World Bank Neglects
African Farming, Study Says’,
published in the New York
Times, October 15 2007
4
Ref. ‘The Poverty Puzzle’ by C.P.
Chandrasekhar and Jayati Ghosh,
Macroscan, February 22, 2000
5
Ref. ‘Hunger amidst Plenty’ by Jean
Drèze, India Together, December 3,
2007
THE INDIA ECONOMY REVIEW
73

Anjani Sinha
Managing Director & CEO,
National Spot Exchange Limited,
Mumbai
Food Security In India:
Issues And Implications
"annam na nindyat. tadvratam."
(Do not look down upon anna. That is
the inviolable discipline of life for the one
who knows.)
"annam na paricaksita. tadvratam."
(Do not neglect anna. That is the
inviolable discipline of life for the one
who knows.)
"annam bahu kurvita. tadvratam."
(Multiply anna many-fold. Ensure an
abundance of food all around. That is the
inviolable discipline of life for the one
who knows.)
-The Taittiriyopanisad
1. Concept
Food Security refers to the scenario in
which every citizen of the country has access
to sufficient and affordable good
quality food. The concept has evolved
during the last three decades to include
not only food availability, but also economic
access to food and biological absorption
of food in the body. It is considered
in terms of availability of foods, its
quality, its accessibility and affordability
for general mass. Thus we can say that
there are four pillars of food secu
rity - Availability, Affordability, Accessi
bility and Quality of food in terms of
balanced diet.
2. Objectives And Focus
2.1 India’s food security policy has a
laudable objective to ensure availability
of food grains to common mass at an affordable
price. It has enabled the poor to
have access to food where none existed.
When India got Independence, the then
Prime Minister Late Sri Jawaharlal Nehru
said, “Everything else can wait but
not agriculture.”
2.2 Historically, India’s food security
policy has focused essentially on growth
in agriculture production, fixing minimum
support price for procurement and maintaining
buffer stocks of rice and wheat to
ensure food security.
3. Concerns
3.1 As a matter of fact, concern on
food security has always haunted the
scholars and policy makers right from
Malthusian Theory way back in eighteenth
century. This is mainly because of limited
and declining natural resources and ever
increasing population.
3.2 Recently, Government of India
has taken a policy decision to allocate Rs.
48.82 billion for National Food Security
Mission (NFSM). The primary objective
is to raise the production of rice, wheat
and pulses during the 11 th Five-Year Plan
period (2007-12) and ensure food security
in the country. Assuming requirement of
175 kg cereals and 11 kg of pulses per
capita per annum, India needs 265 million
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Per-capita Per Day Availability Of Foodgrains
In India Since 1971
Period Cereals Pulses Food Grains
1971-1975 393 44 437
1981-1985 417 39 456
1991-1995 445 37 482
2001-2005 414 32 446
Projected Growth Rate And Demand For
Various Food Commodities Towards 2011-12
Food Item
Projected
Growth
Rate (%)
tons of cereals production and 17 million
tons of pulses production by the end of
2050. Achieving this level of production is
not a big task as India currently produces
around 210 million tons of food grains.
But, it needs a serious planning and
effective implementation.
3.3 Adequate per capita availability of
food is a function of food production on
one hand, and growth in population and
purchasing power, on the other. Nature of
food security varies across population categories
and geography. Food production
is the result of interaction of human being’s
crop production technique and management
of the natural resources such as
Demand:
Million
Tonnes
Food grains 2.21 251.7
Milk and milk products 3.18 100.39
Meat 4.65 5.36
Eggs: Billion 4.62 35.77
Fish 4.58 5.91
Oilseeds 2.94 49.2#
Vegetables 2.51 92.93
Fresh Fruits 3.46 29.43
Sugar and gur 1.88 22.49
# Assume 40% dependence on import for edible oil
Source: NACP–ICAR In House Estimates
Note: Projected demand includes export in the same ratio as n the base scenario
2003-04 for foodgrains and in 2004-05 for others.
land, water, weather and climatic
condition. The guiding
principle should be optimal
utilization of scarce
resources. Thus it is important
to know the natural
Resources, understand the
level of technology utilization,
and understand effect
of modern production technology
on the natural resources,
limitation of total
efforts towards production
increase and understanding
of the scope of overall utilization
of scientific knowledge
in our present agriculture.
It is also important
that natural resources
should continue to be available
without deterioration
over a long period of time.
3.4 The natural resources,
which we have, are limited
especially land and
water. Fertility of land is
declining. Soil health has
been declining because of excessive usage
of fertilizer and pesticide. Organic contents
and microenvironment of the soil has
undergone noticeable changes impacting
productivity. There is change in weather
pattern and climatic condition. Frequency
of erratic rain, floods and droughts has
increased considerably.
3.5 Level of technology utilization in
Indian agriculture is highly uneven and
biased to certain pockets of the county.
Green revolution helped India to transform
itself from food deficit to food surplus
country. But unfortunately, green
Revolution has not percolated across all
the states. Application of modern production
techniques is still limited to some
pockets, like the states of Punjab and
Haryana. High variation in production
and productivity in different states is the
result of varying level of technology integration
in our agriculture production.
3.6 The long term sustainability of
agriculture and consistent growth in production
and productivity matching with
population growth is a big question mark.
It has been noticed that in various parts of
Punjab and Haryana, water level has gone
down to such levels that water extraction
has become economically unviable. Nitrogen
contents of water has increased, there
is presence of pesticides residue in drinking
water. Heavy and unscientific method
of fertilizer application has taken a toll on
the soil quality. There is adverse impact on
the local microclimate because of intensive
agriculture and similar crop cycle over
a long period of time. Higher contents of
fertilizer and pesticides in ground water
not only affect productivity, but it also severely
affects the food quality. Situation
Food production is the result of interaction of human being’s
crop production technique and management of the
natural resources. The guiding principle must be
optimal utilization of scarce resources
demands to take corrective as well as preventive
actions to maintain agriculture
growth sustainable in the long run.
3.7 In India average per capita land
holding is less than 0.16 hectare. Average
farm holding with farmers is 1.6 acre. Now
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75

REIMAGINING INDIA
let us take the case of a typical farmer. His
crop production decision is guided by his
immediate needs. The decisions of seeds
selection, fertilizer, pesticides etc are
based on his own feeling or fellow farmers’
advice that may be scientific or unscientific.
Crop cycle is decided not on the basis
of scientific procedure but the personal
requirements of the farmer. Hence, the
concern is how to transform sustenance
agriculture into agri-business.
4. Strategy To Combat
The Concerns
4.1 Though the Government and
different agencies have done commendable
job to transform India from food
starved to food surplus nation, still due
to lack of effective extension services,
the impact in a number of States has
been less than desirable levels. The
States of UP, Bihar and West Bengal
cities, service industry has penetrated in
our day to day life in such a manner, that
we are dependent upon one or the other
service provider for our daily needs. Examples
are newspaper vendor, milk supplier,
etc. without whom the daily routine
does not start in cities. But, in agriculture,
it is not so. A farmer does sowing, irrigation,
pesticide treatment, harvesting and
marketing of produce – all activities himself.
He knows agriculture very well, but
his knowledge is confined to old techniques.
He does not get any professional
training to use modern techniques. In
most cases, he is dependent upon the vendor
only for advisory services also. For
example, he asks the pesticide vendor how
much quantity of pesticide he should use
to treat his farms. There are cases where
only one liter of pesticide is sufficient, if
properly applied, but, the pesticide vendor
sells a 5 liters container advising him to
Crop cycle is decided not on the basis of scientifi c procedure
but the personal requirements of the farmer.
Hence, the concern is how to transform sustenance
agriculture into agri-business
have very fertile land, but productivity is
lower than the national average. Here
lies the potential to be tapped. Major
constraints in these areas are limited use
of modern agriculture production technique
by farmers in absence of effective
extension activities. The productivity of
rice and wheat grown in these areas is
quite low. Hence, by focusing on these
states, we can achieve remarkable success
in ensuring food security.
4.2 Another strategy to ensure food
security is launching of professional commercial
services at village levels to provide
various agri solutions to the farmers. In
apply the same frequently, because the
main interest of the vendor could be to sell
pesticide. If there is a service agency locally
available, which is run by a qualified
agriculture graduate, and he provides an
end to end solution for pesticide treatment
at a fee, the farmer may save money because
of reduction in input cost, yield may
improve because of non application of excessive
pesticide and still the agriculture
graduate can run the service unit in a profitable
manner. We can apply this theory
for all activities associated with agriculture-sowing,
harvesting, processing and
so on. A well qualified professional having
expertise in mangoes can provide excellent
services in mango growing area about
plucking of mangoes scientifically, identifying
such mangoes which are totally matured.
This will give confidence to the
marginal farmer that he himself is the
owner of his land, he himself is in possession
of his land, though he is a marginal
farmer who otherwise cannot buy new machines
and agricultural equipments as it is
not viable for marginal holding, still he can
avail all the modern facilities at his doorstep.
Hence, the second mantra for ensuring
food security in Indian context, considering
the fragmented holding and
marginal farmers, is organizing extensive
application of professional but commercial
services at farm level in the form of either
independent small ventures run by agriculture
graduates or by big corporate
launching such service on a large scale.
4.3 Nature has bestowed us with
enough resources. The Ganges belt is so
fertile that it can feed wheat to the entire
world, if it is utilized properly. Similarly,
soil in other area is most ideal for cotton
production. In order to ensure comprehensive
and sustained growth, what is important
is to have a national level unbiased
scientific crop planning, based on agro
climatic conditions, soil type, soil condition,
method of available irrigation, potential
of irrigation, infrastructure requirement,
existence of infrastructure,
suitability of various crops to be grown in
that area, seed variety selection, fertilizer
dosage determination, application of pesticides
and plant nutrient, crop monitoring,
scientific method of problem identification
and suitable solution, food habits in
the area. India is divided in 15-agro climatic
zones. Each zone has got its own
potential and limitation. Crop production
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planning based on the resources availability
in these zones is required to be done to
use the resources judiciously. Planning
should be based on scientific study coupled
with commercial planning, with farmers’
interest in mind. If his land is suitable
for a specific cash crop, which will give
him better return on investment, he should
be induced to do so, even if it means he has
to buy food grains from the market. Under
this planning, the country as a whole has
to evaluate, which crop we should produce
here and which crop we should import, so
that overall return on agriculture improves.
Similarly, if water is deficient in an
area, farmers should not cultivate sugarcane
there. Instead of thinking in terms
of quintals per hectare, we have to start
thinking in terms of Rupees per hectare.
This will be the real transformation of sustenance
agriculture into agri business.
Hence, the third mantra is national level
integrated crop planning, with focus on
farmers’ return on investment.
4.4 Information is key to success. Authentic
and timely information reduces
uncertainty in business. India is one of the
leading countries in respect of Information
technology. But, if we look at Indian
agriculture or even information relating
to Indian agriculture, we do not find IT
application working anywhere. We know
from USDA data what is happening in US,
but we do not know what is happening in
our own villages. Authentic information
can be generated only if we have robust
information system coupled with robust
connectivity backbone upto village level.
For this purpose, if the entire agricultural
land in the country is mapped on computer
software and latest technology for database
designing and data mining is used,
it will prove to be the most powerful tool
to help agriculture. If the village level representative
is required to feed data on
daily basis regarding sowing, crop pattern,
harvesting on daily basis relating to all
land holding in his area and all such data
travels to a central server, where it is processed
to generate consolidated reports, we
will get the most valuable information
about Indian agriculture on daily basis.
This information will be most useful for
the farmers also, because they will know
in how much area, onion is already sown
and so, whether he should do onion cultivation
or shift to some other crop. Today,
if price of a commodity is higher in a year,
lot of farmers will cultivate the same commodity
next year, which leads to glut; fall
in price and resultant loss. A number of
companies will be interested to buy data,
because their business is connected with
agriculture and hence, the entire venture
can be run in a profitable manner. Looking
at the outstanding success of telecom
revolution in our country, it is not a difficult
target. Hence, the forth important
strategy should be to develop real time
database system to track agriculture after
mapping each and every land holding cultivated
in our country.
4.5 The area under cultivation in our
country is consistently under pressure. Urbanization,
industrialization, housing for
increasing population are taking a toll on
the land under cultivation. But, still India
has a lot of barren and wasteful land, which
is not under cultivation. Such land is wasteful
due to variety of reasons. Somewhere
land is not fit for agriculture because it is
full of stones and hilly layers. Somewhere
it is not cultivable because of poor rainfall
and lack of irrigation facilities. If through
comprehensive planning we can convert at
least a part of such wasteful land into agriculture
land, it will ease the food security
threat. In Rajasthan, agriculture has
progressed very well after creating irrigation
facilities through canalization. In
Kutch area, similar wonders have been
achieved by using Narmada water through
canalization. Similarly, area covered with
stony layers not fit for agriculture can be
developed for poultry. Hence, the next
In Rajasthan, agriculture has progressed very well after
creating irrigation facilities through canalization. In Kutch
area, similar wonders have been achieved by using
Narmada water through canalization
strategy for solving food security problem
should be to convert wasteful land into agriculture
wherever possible.
4.6 If land resources are limited and
population is continuously increasing, fundamentally
there will always be a mismatch
in the long run. The production of food
grains has a degree of inelasticity in the
long run because of long crop period and
seasonality factors. Compared to that, in
the same area production of fruits and vegetables
can be increased manifold by using
better techniques, multi-layer cropping,
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REIMAGINING INDIA
etc. The idea is to increase production of
fruits and vegetables manifold if production
of food grains cannot be increased
significantly. Human food habits also keep
on changing, with change in socio economic
factors. If fruits and vegetables are
commercially within reach of lower middle
class people, it will ease the pressure
on cereals. However, this will also need
good investment in rural infrastructure,
cold chain, transportation and
marketing support.
4.7 In order to ensure food security,
another important strategy should be to
strengthen marketing infrastructure and
make the farming more remunerative. If
production increases, but marketing infrastructure
is not strong to tackle load of
increased production, it will be a big disaster.
In case of absence of strong marketing
infrastructure, increase in production
will lead to glut at arrival centers, which
means unremunerative prices to the farmers
and in such case, increase in production
cannot be sustained. The solution lies
in improving marketing efficiency by reducing
cost of intermediation and bringing
in price transparency. This can be achieved
through developing electronic spot markets
with facilities for deliveries at various
arrival centers and developing a robust
structured market, which can be relied
upon by buyers located anywhere in the
country for sourcing deliveries. The Exchange
will, guarantee payment to the sellers
against deliveries and delivery of quality
certified material to the buyers. Hence,
electronic national level spot exchange is
the next strategy to ensure food security.
4.8 Now, we have Warehousing Development
and Regulation Act in place.
This will certainly promote investment in
rural infrastructure in terms of warehousing,
cold storage, etc. We know that around
Futures market has helped in discovering correct price
levels and improving farmers’ realization. In Uttar Pradesh,
Mentha farmers are now getting Rs.500 per kg; while
earlier they were getting only Rs.300-350 per kg
15% of total production goes as post harvest
losses. Even bringing the storage loss
to 5% will have large effects on our food
security. However, marketability of warehouses
is also crucial, because it is a capital
intensive project and unless people use it,
private investment in rural warehouses will
not be viable in a big way. Marketability of
warehouses means a platform, where warehouse
receipts can be negotiated. If a
farmer or trader knows that by keeping
goods in a designated warehouse, he can
sell his produce on a national level electronic
platform, he will certainly choose to
keep his produce in such designated scientific
rural warehouses. But, for this purpose
national level electronic spot exchange
has to come up, where warehouse
receipts representing quality certified farm
produce can be traded. This will create a
business model for institutional investors
for creating rural infrastructure. In absence
of this, we may find big shopping
malls coming up in cities, but creating
warehouses and cold storage in rural area
may not be achieved, unless we also have
a viable business model enhancing marketability
of warehouses at national level.
Hence, strengthening rural infrastructure
and linking them to modern market is next
strategy to ensure food security.
4.9 Futures market has helped in discovering
correct price levels for various
commodities and hence improving farmers’
realization. In U.P., Mentha farmers
are now getting Rs.500 per kg; while earlier
they were getting only Rs. 300- 350 per
kg. As a result, area under cultivation has
doubled. Production has also increased
from 18000 MT to 32000 MT per annum.
But, futures market will be more helpful
to the farmers, if there is also an electronic
spot market, so that farmers can use
futures market for price discovery and spot
market for price realization. For developing
electronic spot market, the most important
requirement is amendment in
APMC law and recognition of the concept
of E Trading, E Markets or Electronic
Spot Exchanges under the APMC Act.
Presently, the scenario is that sale and purchase
of farm produce outside the principal
yard and sub yard is illegal. A farmer
is not allowed to sell more than head load
to a person not holding APMC license,
otherwise the buyer can be prosecuted.
Futures markets and spot markets will
help ensure food security by making farming
remunerative and improving farmers’
realization thereby strengthening rural
economy. Hence, amendment in APMC
Act, promoting alternative marketing
channels, recognizing E Trading and E
Market as national level platforms, giving
the farmers a choice to sell wherever he
desires, are important steps towards ensuring
food security. In order to ensure
food security, we have to make farming
remunerative and attractive. Developing
alternative channels for marketing of agriculture
produce and giving freedom to
farmers to sell wherever they get the highest
price is key to achieve this goal.
78 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
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James Tooley,
President,
The Education Fund,
Orient Global,Singapore
Why Poor Parents Are Choosing ‘More Market, Less
Government’ In Education And What We Should Do About It?
"Freedom necessarily means
that many things will be done
which we do not like. Our
faith in freedom does not rest
on the foreseeable results in
particular circumstances but
in the belief that it will, on
balance, release more forces
for the good than the bad."
-Friedrich Hayek
I’ve moved to India because something
extraordinary is happening
in education, and I want to be a
part of it. Most excitingly, it concerns
the education of the less well-off in society,
rather than the rich. The accepted
wisdom says that the poor need
governments to provide their education
– in most developing countries,
governments supplemented by hefty
international aid. But government
education for the poor in India isn’t
working well. Visiting a government
school for the poor here is not an edifying
experience. Where there should
be ten teachers, you’ll often only find
two or three present. They won’t all be
teaching either. Children– bright-eyed,
eager young children – will often be
seating on the floor, doing nothing.
Nor will there be sanitation facilities
in many schools. I know one government
school in the slums behind the
Charminar in Hyderabad where the
children have an arrangement to use a
neighbour’s toilet, and avail themselves
of drinking water from him too. In another,
they have to wait until they get
home (which sometimes stops them
coming to school altogether). In a
third, a well-known foundation has
provided computers and a television to
transform teaching. The television is
in the headteacher’s office, still in its
box; the computers are in a locked
room. Reason: the school has no electricity.
This too is commonplace. I’m
not the only one to feel that the poor
deserve much more than what government
education apparently has to offer.
It would all be deeply depressing if it
wasn’t for the fact that the poor, in
huge numbers, are already embracing
an alternative. Private schools are blossoming
in the slums and low-income
areas of urban India, and in rural India
too. These low-cost private schools are
run by entrepreneurs from the communities.
Perhaps a woman has started a
nursery, then been persuaded to extend
it further when parents report
that their children are happy with her.
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MORE MARKETS, LESS GOVERNMENT
Or a husband and wife team starts a
school as a joint business, seeing the
success of other schools in the neighbourhood.
Visit these schools, and
you’ll find the vast majority of teachers
present and teaching, and a vibrant atmosphere
of learning taking place.
And the market for these schools seems
huge: I first discovered for myself these
low cost private schools in poor areas
of the Old City of Hyderabad a few
years back. From the roof of one, I
could see five or six other private
schools, all vying for the same customers.
‘More Market, Less Government’
in education already seemed to be the
impulse of poor parents across India.
How many schools are there? What
proportion of children are they serving?
How good are these low cost private
schools? What is their business
model – and does it have implications
for the way the sector can be enhanced?
These were the questions that leapt out
at me when I first found these schools
for myself. I procured funding from
the John Templeton Foundation to
conduct detailed research – in India,
and also in Nigeria, Ghana, Kenya and
China, for the phenomenon of low cost
private schools turns out to be something
that is widespread across the developing
world. My research teams
explored selected, officially designated
‘poor’ areas, such as slums and shanty
towns in metropolitan cities in these
countries, and poor areas in the rural
hinterlands surrounding these cities.
They researched remote villages in impoverished
North-West China, and
rural communities in south India. The
teams combed these poor areas, going
down every alleyway in the slums, visiting
every settlement in the rural areas,
asking of people on market stalls and
in the streets, to find where the poor
were being educated. They found large
numbers of schools – 918 in the ‘notified’
slums of three zones of Hyderabad,
India, for instance.
What the research teams found
points to an extraordinary grassroots
educational revolution that is taking
place – in India and across the developing
world. In poor urban areas surveyed,
a large majority of school children
were found to be in ‘budget’
private schools. For instance, in the
slums of Hyderabad, India, 65 percent
of schoolchildren were in private unaided
schools. These schools charge
very low fees, affordable to parents on
poverty-line and minimum-wages. In
Hyderabad, mean monthly fees at 4th
grade were Rs.78.17 ($1.74) in unrecognized
and Rs.102.55 ($2.28) in recognized
private schools in the slums –
about 4.2 percent and 5.5 percent
respectively of the monthly wage for a
breadwinner on a typical minimum
wage of about Rs.78/-per day (Government
of India, 2005, assuming 24 working
days per month).
Private schools for the poor are not
just an urban phenomenon either. In
the deprived district of Mahbubnagar,
in Andhra Pradesh, I found around
three-fifths of schools were government,
only a tiny number private aided,
and well over a third were private unaided.
But breaking these figures into
schools in the small towns and rural
areas proper, I could see that small
town Andhra Pradesh is rather similar
to the metropolitan areas: Just as in
urban Hyderabad, the vast majority of
schools – nearly two-thirds – were private
unaided in the small towns of
Mahbubnagar. In the rural areas proper,
however, government schools were
in a majority – around fourth-fifths,
with private unaided schools making
up the remaining fifth. Development
experts who are aware of the existence
of this low cost private sector appear
uniformly to worry about their low
quality: The Oxfam Education Report,
for instance, notes that private schools
for the poor are of ‘inferior quality’,
offering ‘a low-quality service’ that will
In Hyderabad, mean monthly fees at 4th grade were
Rs. 78.17 ($1.74) in unrecognized and Rs.102.55 ($2.28)
in recognized private schools in the slums – about 4.2
percent and 5.5 percent respectively of the monthly wage
for a breadwinner on a typical minimum wage
‘restrict children’s future opportunities.’
(Watkins, 2000, p. 230). Nambissan
(2003) notes that in Calcutta, ‘the
mushrooming of privately managed
unregulated pre-primary and primary
schools… can have only deleterious
consequences for the spread of education
in general and among the poor in
particular’ (p. 52), for the quality of the
private schools is ‘often suspect’ (p. 15,
footnote 25). Significantly, such concerns
about low quality of private provision
must be read in the context of
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81

REIMAGINING INDIA
the reported low standard of government
provision. The Oxfam Education
Report prefaces the remarks quoted
above with the observation that ‘there
is no doubting the appalling standard
of provision in public education systems’
(Watkins, 2000, p. 230). Indeed,
the low quality of government schools
for the poor is one reason given for the
‘mushrooming’ of the private schools:
Venkatanarayana (2004) notes that the
‘failure of public school in terms of
meeting parents’ expectations/aspirations’
has led to a ‘growing demand’ for
private schools in rural Andhra
Pradesh, India (p. 40).
Are the low cost private schools as
bad as the development experts think?
I looked at the issue of quality in detail.
My researchers tested around
24,000 children in the global sample,
taken from stratified random samples
of schools within these poor communities.
Children were tested in key curriculum
subjects, and questionnaires
given to children, their parents, teachers
and school managers, and IQ tests
to children and their teachers, to elicit
data to control for a wide range of
background variables, including peergroup
variables. The results from Delhi
were typical. In mathematics, mean
scores of children in government
schools were 24.5 percent, while those
in private unrecognised schools were
42.1 percent and private recognised
were 43.9 percent. That is, children in
unrecognised private schools achieved
nearly 18 percentage points higher in
Low cost private schools are accountable to the parents –
who can withdraw their children if they’re not satisfi ed; the
entrepreneurs knows this, and knows he or she will feel
the pinch for each parents who doesn’t pay fees, so
makes sure things go well within the school
maths than children in government
schools (a 72 percent advantage!),
while children in recognised private
schools were over 19 percentage points
higher than children in government
schools (a 79 percent advantage). In
English, the performance difference
was much greater (children in unrecognised
schools gaining 35 percentage
points higher, while children in recognised
schools were 41 percentage
points higher). However, these differences
might be expected, given that
government schools are not providing
what parents want, English medium.
(On the other hand, they might not be
expected, given an oft-repeated criticism
that private schools are Englishmedium
in name only, that this is just
another way they pull the wool over ignorant
poor parents’ eyes. What we
found showed that the private schools
were in fact getting their children to a
much higher English standard than
what children might pick up in the environment,
through radio, television
and advertisements, for instance –
which is perhaps what the tests were
measuring for children in government
schools). But in any case, if more private
schools are English medium, this
might lead us to expect that government
schools would be superior in
achievement in Hindi: the opposite was
true. Children in private unrecognised
schools achieved on average 22 percentage
points higher than children in
government schools (an 83 percent advantage).
In recognised private schools,
children scored on average 24 percentage
points higher (an 89 percent advantage.)
Controlling for relevant background
variables, the differences
between government and private
schools were reduced but still hugely
significant: In Hyderabad, for instance,
a child attending a private unrecognised
school would be predicted to
gain 16.1 percentage points higher in
mathematics than the same child attending
a government school. In a private
recognised school, the difference
in scores would be 17.3 percentage
points. In English, the advantages
would be even greater –16.9 percentage
points higher in an unrecognised
school, and 18.9 percentage points in a
recognised school. In Urdu, after controlling
for the background variables,
there turned out to be no statistically
significant difference between government
and either type of private school.
More market, less government in education
– this appears to be how poor
parents see the way forward. And they
are doing it for a good reason – the low
cost private schools are better than the
government alternative. Presumably
they’re better because they’re accountable
to the parents – who can withdraw
their children if they’re not satisfied;
the entrepreneurs knows this, and
knows he or she will feel the pinch for
each parents who doesn’t pay fees, so
keeps a close eye on his teachers and
makes sure things go well within the
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MORE MARKETS, LESS GOVERNMENT
school. Better, however, but perhaps
not good enough. For whatever the advantages
of the low cost private schools
that I’ve outlined above, clearly their
quality could be improved – and noone
acknowledges this more, in my experience,
than the private school entrepreneurs
themselves. They are hungry
for new ideas in curriculum and pedagogy.
They are hungry for investment
in infrastructure and technology. But
this is where something rather exciting
opens up for us. We can see the low
cost private education sector as a new
frontier for investment. The key relevant
finding of my research is that the
vast majority of the private schools in
the poor areas are run as businesses,
not charities, dependent more or less
entirely on fee income and, very importantly,
making a reasonable profit.
In Hyderabad for instance, 91 percent
unrecognized and 82 percent recognized
private schools were entirely dependent
on student fee income, receiving
no outside funding at all. Profit
margins, my research showed, could be
in the region of 20-40 percent of fee
income. Because the private schools
for the poor are run as businesses, this
provides at least three ways forward for
investors to help in improving quality
– each of which is prompted by the observation
that school proprietors are
hungry for improvement and innovation.
Why? Because whatever the critics
of private schools for the poor may
claim, many care about children’s education.
On its own, this might be
enough for some to invest. But, the
power of the market means that it’s
coupled with another major incentive:
proprietors know that they are in an
increasingly competitive market. They
need parents to know that their school
is special, to maintain or increase market
share. If school improvements seem
to have demonstrably better outcomes,
they’ll want them for their schools.
So we can, first, help school proprietors
improve their infrastructure
through providing loans, through existing
or purpose-created non-banking
finance organizations. Typical projects
would include refurbishing or building
new classrooms and buying land. Second,
investors can conduct research
and development to find out what works
to improve desired curriculum and
pedagogical outcomes in low cost education.
Investors can then partner with
local entrepreneurs to ensure that the
improved methods are made available,
suitably packaged, at a price acceptable
to school entrepreneurs.
And this leads to a third exciting
possibility. In 'The Fortune at the Bottom
of the Pyramid', Prof. C.K. Prahalad
challenges the ‘dominant assumption’
that the poor are not bothered
about brand-names: ‘On the contrary’,
his findings suggest, ‘the poor are very
brand-conscious’ (2005, p. 13). In private
education, brand names could be
important to help solve the genuine
information problem that exists – and
this provides a third major opportunity
for investors to enter the education
market. How can poor parents
judge if one private school in their
community is better than another, and
that it is adequately serving the educational
needs of their children? Typically,
my research showed parents using
a variety of informal methods, such
as visiting several schools to see how
committed teachers and the proprietor
appear. Or they talk to friends, comparing
notes about how frequently exercise
books are marked and homework
checked. Importantly, I found
that if parents choose one private
school, but subsequently discover that
another seems better, they have little
In private education, brand names could be important to
help solve the genuine information problem that exists –
and this provides a third major opportunity for investors to
enter the education market
hesitation in moving their child to
where they think they will get a better
education. And school proprietors
know all of this, so make sure teachers
turn up and teach, and invest any surpluses
in school improvement, to ensure
parental satisfaction. So there is
an information problem, but there are
ways around it.
However, in other markets, brand
names provide a safer way of overcoming
parallel information asymmetries.
Buying into trusted brands would be
one way of overcoming the information
problem too, for poor parents wanting
THE INDIA ECONOMY REVIEW
83

REIMAGINING INDIA
the best education for their children.
One possibility would be for investors
to assist expansion-minded proprietors
accessing loan capital. Or it could involve
creating a specialised education
investment fund, to provide equity to
education companies that run chains
of budget private schools. Suitable exit
strategies could be worked out for the
investment fund, perhaps by giving advice
on how to list on local stock markets,
or to get other investors on board.
A further possibility could involve investors
engaging in a joint venture with
local educational entrepreneurs to set
up a chain themselves. Investment in
initial R&D would be required, to create
the standards for a demonstrable
and truly replicable model of private
education for the poor. But here’s the
rub: although it is possible to envisage
creating chains of private schools here
in India as things stand now, the regulatory
environment certainly doesn’t
make life easy for investors and innovators.
The problem is profit. It all
seems to go back to the Unnikrishnan
Supreme Court Judgement of 1993
(Unnikrishnan vs. State of Andhra
Pradesh., 1993, in Padala Rama Reddi
(1993) The Andhra Pradesh Education
Code, Hyderabad, pp. 399-400). The
judgement reads: ‘Education has never
been commerce in this country. Making
it one is opposed to the ethos, tradition
and sensibilities of this nation.’
Moreover, ‘Commercialisation of education
cannot and should not be permitted
… Both in the light of our tradition
and from the standpoint of interest
of general public, commercialisation is
positively harmful, it is opposed to
public policy.’
It’s hard to read these statements
now in the light of the activities of successful
businesses such as NIIT and
Aptech and think that they make much
Although it is possible to envisage creating chains of private
schools here in India as things stand now, the regulatory
environment certainly doesn’t make life easy for investors
and innovators.The problem is profi t
sense. These certainly are commercial
companies, and their business is clearly
education. So they seem to show
that, in point of fact, there is a very fine
Indian ethos and tradition of the ‘business
of education’. Usefully, the Unnikrishnan
judgement was partially
revoked in 2002. In the Supreme Court
on October 31 st 2002 (TMA Pai Foundation
versus State of Karnataka), it
was pointed out that it is ‘no secret that
the examination results at all levels of
unaided private schools, notwithstanding
the stringent regulations of the governmental
authorities, are far superior
to the results of the government-maintained
schools’ (Para 61, p. 40). So
clearly, the judgement said, Unni
Krishnan needs reconsideration if it is
having a dampening effect on private
education entrepreneurs. However,
did this reconsideration mean that Unnikrishnan’s
rejection of profit is also
superseded? It is not clear to me. The
new judgement reads: in ‘setting up a
reasonable fee structure, the element
of profiteering is not as yet accepted in
Indian conditions’ (Para. 53, p. 34).
However, ‘Reasonable surplus to meet
cost of expansion and augmentation of
facilities does not, however amount to
profiteering’ (p. 128). Does this allow
for-profit education? Or not? It seems
that it may still be a grey area – and
grey areas like this can breed corruption
and inefficiency. To make matters
worse, the sentiments behind Unnikrishnan
are there in the regulations
of the examination boards. The CBSE
for instance says that only schools that
are run ‘as a community service and
not as a business’ are able to be affiliated
to the board. And they are there
in many state regulations too, that only
allow schools to be registered if they
are run by non-profit educational societies
or trusts, but not by companies.
All this means that if investors want
to invest in education, it’s not straightforward.
Of course it’s possible. Forprofit
companies can contract with
educational societies and trusts to provide
management and educational inputs.
But these means are cumbersome,
open to regulatory risk, and in
any case obtuse: for the regulations
want to protect us from something that
in other areas of our lives seems whol-
84 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
ly desirable. The profit motive is accepted
as beneficial in most areas of
our lives, in spurring innovation, improving
quality and extending access.
For instance, would anyone deny that
the mobile phone revolution has accomplished
each of these, and that
profit was a key factor underlying each?
The same could be true of the delivery
of education – the profit motive could
spur new methods of learning, which
improve learner outcomes, and help
reach those who currently don’t have
access to quality education. Allowing
the profit motive into education – and
hence allowing masses of investment
into this area – would be wholly beneficial
to education in India. If only India
could break away from this regulatory
morass, then the future could be golden.
If the entrepreneurial spirit that
Indians daily show in the field of education
could be harnessed, rather than
damped down (as it is by current regulations),
then the emerging chains of
private schools, including low cost
schools, funded by investment from
within India and overseas, could have
an extraordinary impact. And this impact
could be felt not only in India but
on the rest of the world too. American
brand names like McDonald’s and
Starbucks are predominant in the current
wave of globalisation. In the next
wave, there could be the educational
equivalents of these chains – offering
standardised delivery of high quality
educational experiences – emanating
from India to take on the rest of the
world. I find that prospect pretty exciting.
Which is why, as I say, I’ve come to
India to see if I can be a part of this
educational revolution.
References
• Nambissan, Geetha, B. (2003) Educational
deprivation and primary school
provision: a study of providers in the
city of Calcutta, IDS Working Paper
187, (Brighton, Institute of Development
Studies).
• Prahalad, C.K. (2005) The Fortune at
the Bottom of the Pyramid, Wharton
School Publishing, Upper Saddle
River, NJ.
• Tooley, James, Dixon, Pauline and
Gomathi, S.V., (2007) Private Schools
and the Millennium Development
Goal of Universal Primary Education:
A census and comparative survey in
Hyderabad, India, Oxford Review of
Education 33(5).
• Tooley, James and Dixon, Pauline,
(2006) ‘De Facto’ Privatisation of
Education and the Poor: Implications
of a Study from sub-Saharan Africa
and India, Compare 36(4), 443-462
• Tooley, James (2006), Backing the
Wrong Horse: How Private Schools
Are Good for the Poor, The Freeman,
May, 8-13.
• Tooley, James (2005) Private schools
for the poor, Education Next: A Journal
of Opinion and Research, Fall,
Vol. 5 (4), 22-32.
• Venkatanarayana, M. (2004) Educational
Deprivation of Children in A.
P: Levels and Trends, Disparities and
Associate Factors, Working Paper
362, Centre for Development Studies
(www.cds.edu), August.
• Watkins, K. (2000), The Oxfam Education
Report. (Oxford, Oxfam in
Great Britain).
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THE INDIA ECONOMY REVIEW
85

Stephen P. Heyneman,
Professor, International Education Policy,
Vanderbilt University, Nashville, Tennessee
International Trade in Higher Education:
What Should India Do?
"Higher education should be left to private enterprise
and for meeting national requirements
whether in the various industries, technical arts,
belles-letters or fi ne arts. The State Universities
should be purely examining bodies, self-supporting
through the fees charged for examinations.
Universities will look after the whole of the fi eld
of education and will prepare and approve
courses of studies in the various departments
of education. No private school should be run
without the previous sanction of the respective
Universities. University charters should be
given liberally to any body of persons of proved
worth and integrity, it being always understood
that the Universities will not cost the State anything
except that it will bear the cost of running
a Central Education Department.The foregoing
scheme does not absolve the State from running
such seminaries as may be required for supplying
State needs."
-Mahatma Gandhi, Harijan,
2 October 1937
At independence, India had
twenty universities; today
there are 348. From a rate of
attendance of less than one percent,
today it is 12 percent. Between 1990
and 2000 the number of students in
higher education grew by 113 percent.
Providers are diverse. Approximately
one third of the students attend nongovernment
institutions and 63 percent
attend institutions financed by state
governments. Of the world’s most famous
scientists and economists, many
received their training in India. Indian
higher education appears healthy. But
according to some estimates India
needs at least 150 new universities. Although
enrollment (12 percent) is
higher than at any time in India’s history,
it is less than any OECD country
and has even fallen behind that of China
(with 16 percent). Less then 2 percent
of the students in India have an
opportunity to attend any of the top
universities sponsored by the national
government. Only $US 406 is spent/
year on the typical university student
in India. This includes expenditures
for electronic libraries, books, research
laboratories, physical infrastructure,
and salaries. The typical student in
China has seven times more resources
at his disposal. The typical student in
Malaysia has 30 times more resources
available, and a student in Canada has
37 times more resources available.
Though overall growth in the last ten
years has been rapid, universities with
advanced research programs grew by
only 51 percent; in the Russian Federation
they grew by 113 percent, in
China by 167 percent and in Malaysia
by 200 percent. Though foreign universities
are higher in cost, 160,000 students
leave India each year seeking
higher education elsewhere. Over
5,000 Indian students arrive annually
to study in the U.S., where the price of
attending universities is higher than
anywhere in the world. They do this
because they cannot find a university
in India comparable in quality.
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Figure I: Ranking Of Asian Universities By Size Of Bandwidth
Rank Multi-Disciplinary Schools Internet Bandwidth per student (kbps) Overall Rank 2000
1 Sun Yat-sen University (Taiwan) 33.53 20
2 Kyungpock National University 27.76 35
3 Chungnam National Unviersity 20.84 50
4 Australian National University 19.58 8
5 Taiwan Normal University 19.02 37
6 Seoul national University 17.14 4
7 Tsing Hua University(Taiwan)* 14.77 18
8 Chonnam National University 14.77 1
9 Tohcku University (Japan) 13.52 34
10 Tianjin University (China) 11.84 2
11 National University of Singapore 11.54 46
12 University of Wollongong 10.81 54
13 University of Adelaide 7.1 5
14 Nagoya University 6.92 45
15 Central University (Taiwan)* 6.88 26
16 Nagoya University 6.58 11
17 Central University (Taiwan)* 6.12 24
18 University of Melbourne 6.06 9
19 Kasetsart University 5.56 63
20 Chao Toung University (Taiwan)* 5.5 28
21 Monash University 5.14 30
22 Chonbuk National University 5 43
23 Taiwan University* 4.1 12
24 Pusan National Unviersity 3.99 39
25 City University of Hong Kong 3.9 27
26 Hckkaido University 3.81 19
27 Southeast University (China) 3.56 60
28 Chung Hsing University (Taiwan)* 3.35 65
29 Keio University* 3.24 22
30 Hanyang University 3.16 38
31 University of Western Australia 2.89 23
32 Sungkyunkwan U niversity 2.83 33
33 Ewha Womans University 2.46 32
34 Macquarie University 2.32 56
35 Ritsumeikan University 2.18 67
36 Waseda University 2.13 29
37 Chinese University of Hong Kong 2.1 6
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REIMAGINING INDIA
Figure I: Ranking Of Asian Universities By Size Of Bandwidth (Contd.)
Rank Multi-Disciplinary Schools Internet bandwidth per student (kbps) Over all Rank 2000
38 University of Hong Kong 2.05 3
39 Korew University 2.04 414
40 Cheng Kung University (Taiwan)* 1.6 16
Although there are many famous Indian
scientists and economists, they
often teach in foreign universities.
They do this because universities in
India cannot offer comparable research
facilities, programs with comparable
innovation, or comparable
levels of remuneration. When one
ranks a nation by the number of citations
to its published scientific literature,
citations from India in 2005
ranked number 21, accounting for only
1.1 percent share of the total. The scarcity
of world class faculty in Indian
Figure II. Asia Week: Multi-Disiplinary Ranking: Top
77 Universities in Asia
Country Number (Percentage) Highes Rank
Korea 13(16.9) 4
Japan 11(14.9) 1
Australia 10(13.0) 8
Taiwan 10(13.0) 12
Thailand 5(6.5) 51
Philippines 4(5.2) 48
New Zealand 4(5.2) 21
Indonesia 4(5.2) 61
Hong Kong 4(5.2) 3
China 4(5.2) 42
Malaysia 3(3.9) 47
India 2(2.6) 40
Bangladesh 1(1.3) 64
Singapore 1(1.3) 5
Sri Lanka 1(1.3) 77
Source: www.asiaweek.com/features/universities2000/school/
multi.overall.html
universities is one explanation for the
fact that of the applications for patents
India accounted for only 0.5 percent.,
and of the ‘capacity to innovate’ in
2005 India ranked 50. No Indian university
appears in the ranking of world
universities; and no university appears
in the top ranked universities in Asia
in terms of what is now considered a
sine qua non of university quality:
bandwidth (Please refer Figure -I). Of
the top ranked 77 universities within
Asia, the highest university in India
only ranked number 40. Only two universities
were even considered (See
Figure-II). It is unfortunate but nevertheless
it is fair to characterize universities
in India as being ‘asleep’, while
universities in other countries quickly
pass by.
In Medieval Europe it is said that
plagues were accompanied by numerous
theories of ‘what went wrong’.
Some attributed impending catastrophe
to insufficient piety. If citizens repent
they said, their futures would
brighten. The problems of Indian higher
education are similarly accompanied
by theories of ‘what went wrong’.
Some theories hold that international
evidence to the contrary is irrelevant
and that there is nothing wrong. Others
suggest that the problems can only
be solved if India does more of what it
has done in the past --- finance higher
education largely from public tax resources,
control prices, limit providers
and forbid foreign competition. And
then there are some theories which
point to the unmitigated success of India’s
entry into telecommunications.
When allowed in, foreign providers
quickly rejuvenated India’s ancient telecommunications
sector thus making
it possible for entrepreneurial spinoffs,
which spurred India into high
economic growth and a decline in poverty.
Why couldn’t international competition
not jump start the Indian
higher education sector as it has other
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Figure III: Pros And Cons For Opening India To International Trade In Education
Cons
Loss of public good character
Only serves individual needs
Rewards universitites independent
of the broad public good
Weakens public funding
Eclipses the public sector by the
private sector quality
Pros
Increased efficiency, quality and choice
Consistent with human rights
Breaks the monopoly of having low quality universities define what whould be learned
Strengthens public funding because it would strengthen public confidence through increased
accountability
Strengthens the public sector due to competition
sectors? There are two paths in Indian
higher education policy: to continue to
protect it or to open it up to international
competition with all of the impending
implications. The answer will
determine India’s future. So what
should India do? One problem is that
the arguments for and against opening
India to higher education trade is generally
made by two divergent groups of
stakeholders. Macro-economists generally
favor international competition;
education policy officials generally do
not. It might be useful to place each of
their arguments on the table and analyze
them one by one (Please do refer
Figures- III and IV).
Higher Education As A Public
Good
Those who oppose international trade
in higher education will argue that
higher education is a public good and
that opening up India to international
providers would threaten the maintenance
of the public interest. Those who
favor international trade will point out
that overtly sectarian or philosophically
dangerous providers can be controlled
through the accreditation process.
Further, they will argue that
competition stimulates efficiency, wider
choice, and higher quality (as it does
in many sectors). In their view these
characteristics are part of public interest.
Is it in the public interest, they
ask, to allow access only to low quality,
inefficient and a narrow choice of professional
programs?
Figure IV: Pros And Cons (Contd.)
Cons
Leads to “Knowledge Capitalism”
Trade Related Aspects of Intellectual
Property Rights (TRIPS) would exclude
low income scholars by maintaining
high prices for curriculum
materials
Since knowledge is public good, reforms
in education finance with decrease
access to public good
Threatens the “Social contract” in
which the present generation finances
future generations
Trade jeopardizes human rights because
it contradicts national commitments
supporting free education
Individual Vs. Social Needs
Those who oppose say that international
trade would serve only the needs
of the individual and that service to the
community, a natural part of higher
education, would be lost if trade barriers
were liberalized. Those who favor
point out that at present human rights
are being abrogated. All individuals
have the right to education they might
say, and if one individual wishes to
study in a field provided by a foreign
university, what right do we have as a
Pros
Leads of the strengthening of non-resourced
subjects through cross-faculty
resource transfer
Adhering to TRIPS would increse access
to high quality products by insuring incomes
from their sale. Hence it would
increase supply, the choice of products,
and lower the real price
Public goods are never free. Reforms in
education finance will increase the income
to public and private producers.
Hence, it will increase the supply and access
to a public good.
Strengthens the social contract by increasing
access, quality and equity
(through cross-subsidization)
Trade would increase human rights by
allowing access to education where it is
currently denied of unavailable
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REIMAGINING INDIA
democracy to limit that access to education?
The same might be true to
textbooks, foreign faculty, internet
facilities and the like. Limitation of
education trade itself is an abrogation
of human rights.
Universities Would Be Rewarded
Independent Of The Public
Good.
Those who oppose would say that universities
should be rewarded for their
research and teaching independent of
their abilities to generate revenue; if
foreign competition were allowed then
Indian universities would have to follow
commercial rather than intellectual
incentives. Those who favor say
that competition is necessary to break
what is now a monopoly. If only low
quality institutions are available, there
is little incentive to imp
rove. Instead of being a threat to intellectual
incentives, foreign comp
etition may be an essential ingredient
to stimulate it.
International Education Trade
Would Weaken The Case For
Public Funding
Those who oppose would point out
that public funding is essential for university
development and if foreign
competition were allowed the case for
more public resources would weaken.
‘Let the private sector provide the facilities’,
the politicians might say, ‘Now
we can allocate resources to problems
other than higher education’. Those
who favor argue the opposite. They say
that foreign competition would
strengthen the case for public funding,
not weaken it. It would strengthen the
Up for consideration should be changes in the entire legal
structure, which would allow the creation of endowments
often from the overseas diaspora (something China has
mastered) and a new tax regime which encourages donations
and gifts to education from both citizens and firms
case because it would increase public
confidence in the higher education
sector because of increased accountability.
Why should the public allocate
additional resources to a sector crippled
by low quality and inefficiency?
Wouldn’t the public be more likely to
allocate resources to a sector in which
it had more confidence? And wouldn’t
open competition help stimulate the
supply response in which they could be
more confident?
Public Wector Quality Would
Be Eclipsed By Private Sector
Quality
If foreign competition were allowed,
what India now thinks of higher quality
would be eclipsed by foreign private
providers. Imagine Oxford in Madras,
or Harvard in Bangalore? For economic
reasons, there is little likelihood that
a high quality provider will open a
multi-faculty university. Most would
open programs highly specific to vocations
such as engineering or business.
However narrow the presence of international
providers would strengthen
the quality of current universities because
of the competition. They would
be more likely to study the syllabi,
student services, faculty productivity
and other indicators of quality if there
is competition than if there is not.
Those who argue for international
trade would say that it is essential for
maintaining the quality of the current
public universities.
International Trade Leads To
‘Knowledge Capitalism’
Critics argue that trade in education
would result in having knowledge pursued
if it results in remuneration and
ignored if it does not. They ask if it is
right for professors to be better rewarded
by virtue of the fact that their
subject is in higher market demand.
They ask what will happen to the pursuit
of truth if it is subject to a price.
Others respond by pointing to the fact
that knowledge can not be immune
from its market value. There is no hiding
the fact that the demand to study
history is less than the demand for
commerce. However, competition need
not lead to a diminishment of history
or other non-revenue producing subject.
The major managerial challenge
in any university is how to cross-subsidize
faculties, or transfer resources
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within the institution to support under
resourced but important subjects.
Without cross-subsidization, a university
cannot successfully compete.
Hence they would argue that international
trade and the success of mastering
the modern art of university administration
is the key ingredient
preventing ‘academic capitalism’.
Trade Related Aspects Of
Intellectual Property Rights
(TRIPS) Excludes Low-Income
scholars from successfully
marketing their own curricula
Critics worry that international trade
in education would lower access to local
curricula; international property
rights agreements would protect the
privileged and freeze-out those who
have not yet broken into the market.
They imagine that there will be an avalanche
of foreign books, guidelines,
and syllabi entering India, making it
difficult for local students to be educated
with local materials. Those who
favor open trade say that adhering to
agreements on intellectual property
would increase access to high quality
pedagogical materials because it would
insure income from their sale. In turn
this would increase the incentive to
write new curricula, and would lead to
greater supply, wider choice, and lower
real prices. In their vision, Indian producers
of curricula would compete successfully,
placing the Indian student
consumer at a distinct advantage over
a circumstance in which there would
be no competition.
Privatization Of Education
Finance Will Decrease Access
To A Public Good
Critics argue that international trade
in education will lead to privatization,
meaning that it will lead to an increase
in the proportion of higher education
finance from sources other than government.
They say that the higher the
privatization the lower the access to a
public good. They say that privatization
helps exclude the poor since they
are the ones who least can afford it.
Those who argue in favor of trade
point out that no public good is ‘free’.
They believe that reforms in education
finance will increase the revenue
for both public and private educational
providers; hence, it will increase
the supply and will increase access to
a public good. Recent international
research on stratification and higher
education suggests that higher education
expansion reduces inequality;
greater privatization is associated
with higher levels of expansion and
higher levels of social equity. The opposite
is also true: control of expansion
is associated with
a monopoly of state financing,
and hence with greater inequality
of access.
Trade Threatens The ‘social
Contract’ Between Generations
If trade leads to greater privatization
(higher portions of the university
budget from sources other than government),
students will have to pay
tuition. To do that they will have to rely
on the generosity of their families,
The problem is that the arguments for and against
opening India to higher education trade are generally made
by two divergent groups of stakeholders. Macro-economists
generally favor international competition;
education policy offi cials generally do not
hence the present generation is expected
to finance the education of future
generations; and the social contract is
broken. Proponents of more open trade
counter with a question and a statement.
The question is: when did it become
true that the present generation
should not sacrifice to help pay for a
future generation? Isn’t that how generations
have been organized since the
beginning? Also, for those who cannot
afford the tuition there would be scholarship
aid. Therefore with tuition there
would be more equity, and more equity
would help to strengthen the social
contract between generations.
Trade Jeopardizes Human
Rights Because It Contradicts
National Commitments For
Free Education
Critics point to the Declaration of Human
Rights and other legal contracts
associated with the United Nations to
suggest that if higher education is not
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REIMAGINING INDIA
free of private cost it constitutes an
abrogation of human rights. Those who
favor open trade point out that the UN
statements on education apply to mandatory
education but not necessarily
all education. But they also say that
trade would increase human rights because
it would allow access to education
when currently denied, unavailable,
or too costly.
Trade Will Lead To Education
Corruption
Trade leads to greater privatization,
and greater privatization leads to a decline
in professionalism. The profit
motive is behind corruption; hence
trade will lead to greater corruption
of education. Proponents of open
trade acknowledge the fact that education
corruption is becoming more
common and is a serious problem.
But they point out that it occurs in
local systems without any education
trade. They also point to recent evidence
suggesting that having international
providers in local education
markets puts a break on corruption.
Students tend to demand an institution
free of corruption and may frequent
international higher education providers
in part because they adhere to
standards of professional conduct in
the foreign nation where they are accredited.
When international providers
of higher education services offer programs
free of corruption local universities
will have to respond with an environment
similarly corruption-free.
Three Universal Ambitions For
Higher Education And A Universal
Dilemma
Today virtually every country has three
ambitions for higher education. First
is the demand for greater access. And
in every country the portion of the age
cohort with access to post secondary
education of some kind is on the
increase.
Second is the ambition to improve
quality. Over the last decade there has
been a revolution in the criteria that
help define quality. Higher education
If foreign competition were allowed, what India now thinks
of higher quality would be eclipsed by foreign private providers.
Imagine Oxford in Madras, or Harvard in Bangalore?
quality now requires electronic modernity
in classrooms, dormitories, libraries,
science laboratories, study halls.
Students are often older, work part
time, and live far away from campus.
High quality syllabi are no longer
based on textbooks but on the most upto-date
information from print and
electronic sources. Students in a modern
university need to have access to
curricular information wherever they
live or travel. Classroom instruction
has changed. Class time is no longer
devoted to providing information for
students; instead it is devoted to the
analysis of information absorbed prior
to class. The internet and other forms
of electronic information have changed
the academic library and enhanced its
quality. There is less need for faculty
or students to visit the physical place.
A high quality academic library used
to be defined by the quantity of its
‘holdings’; now it is defined by the
quantity of its access to information.
The difference is enormous. Every
high quality academic library has
enough money to join exclusive ‘information
networks’ where holdings are
shared with one another, for a fee.
Networks of academic libraries are
trans-national, and cover university
libraries in Europe, Asia and North
America. Access to information
is what separates the excellent libraries
from the mediocre. All acad
emic services, both teaching and
bibliographic, are delivered through
broadband facilities. Universities with
low bandwidth cannot compete in
quality with universities with
large bandwidth. A third common ambition
is to improve equity, that is, to
offer scholarships and fellowships to
the able students from impoverished
families or from disadvantaged regions.
First class universities will have
enough resources to offer about one
third of the students’ scholarships or
fellowships from their own resources.
Taken together, all three ambitions are
expensive and there are few countries
where all three can be financed out of
public resources alone. With the increase
in student numbers and with
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rising expectations for improvements
in quality and in equity, public resources
are insufficient. The scarcity of public
resources is likely to be permanent
and this poses a dilemma: how can
higher education successfully finance
its own objectives, including the
traditional objectives for serving the
public good?
Summary
Many university managers welcome
the freedom to compete and lobby governments
into changing legislation to
make it possible. No rector or university
president who has visited universities
in other countries is unaware of
the responsibilities and privileges of
university managers in less restrictive
environments. Public authorities in India
should not just allow foreign universities
into the country and neglect
to significantly reform the legal environment
in which Indian universities
are asked to operate. That would neither
be fair nor intelligent. Up for consideration
should be changes in the
entire legal structure which would allow
the creation of endowments often
from the overseas Diaspora (something
China has mastered) and a new tax regime
which encourages donations and
gifts to education from both citizens
and firms. Great universities, even
public universities, need not depend on
government financial allocation, but
rather generate their own revenues
though careful management. It is important
to remember that new university
management is the key to success.
Old management styles will likely fail.
There are thirty programs offering
PhD degrees in university management
in the United States of America, with
one (Vanderbilt University) which offers
a doctorate in university advancement
(how to raise money). Shouldn’t
similar programs be available in India?
But in essence India has no choice but
to invite competition into higher education.
No university can be competitive
today unless it has access to its
own resources. The best universities
have to be wise in the re-allocation of
the resources they raise to help preserve
their public good function. To be
sure, institutions will differ in how successful
they are in financing their own
objectives. Some are slow because they
may not recognize that to be of high
quality, all universities have to take
finance and management into their
own hands.
Some could see this ‘privatization’
trend as being reprehensible, and will
want to call for more piety and a return
to traditional sources of finance, i.e.,
from greater allocations of public expenditures
at the expense of other public
priorities. But others see this trend
as no more than a long overdue professionalization
of higher education in
the legitimate pursuit of excellence.
They do not see this as a threat or as
‘copying of the West’, but rather as a
successful model without geographic
origin in which all higher education
systems must participate in order to
address what is now a universal dilemma
of public resource inadequacy and
high public demand for quality.
References
• Agarwal, Pawan 2006 (May). “Higher
Education in India: The Need for
Change,” Working Paper Number
179, ICRIER, New Delhi.
• 2006 (November 11th ) “Higher
Education Policy: Many Contradictions,”
Economic and Political
Weekly. pp. 4645 – 8.
• Heyneman, SP. 1980 “Investment in
Education in India: Unecon
omic?” World Development No. 4 p.
145 – 63
• 1997 “Economics of Education: Disappointments
and Potential,” pp. 25
– 51 in Economics of Human Behaviour
edited by T. Lakshmanasamy
Mumbai: Allied Publishers Ltd.
• 2001 “The Growing International
Market for Education Goods and
Services,” International Journal of
Education Development Vol. 21 No.
4 (July), pp. 345 – 61.
• 2006 “Global Issues in Higher Education”
2006 eJournal USA Washington
D.C.: U.S. Department of
State. http://usinfo.state.gov/journals/journals.htm.
• Heyneman, S.P., Anderson, K. H.
and Nuraliyeva, Nazym. 2008 “The
Cost of Corruption in Higher Education,”
2008 Comparative Education
Review (forthcoming)
• Yossi, Shavit, Arum, Richard and
Gamoran, Adam (eds.) 2007 Stratification
in Higher Education: A
Comparative Study. Stanford, California:
Stanford University Press
• Tilak, Jandhyala B.G. 2005 (December
2 nd .) “Higher Education: A
Public Good or a Commodity for
Trade: Commitment to Higher Education
or Commitment of Higher
Education to Trade?” Barcelona
(Spain): Second Nobel Laureates
Meeting. Global University Network
for Innovation.
THE INDIA ECONOMY REVIEW
93

Jharna Pathak
Assistant Professor,
Gujarat Institute of Development
Research, Ahmedabad
Water Resources In Gujarat And Role Of Water Markets In Breaking Gridlock In
Water Scarcity – A Replicable Policy Prescription At National Level
"Whiskey is for drinkin'; water
is for fi ghtin'."
-Mark Twain
Conferences like Paris Declaration
(1998), Millennium Development
Goals (2000), Vision 21:
Water for People (2003); and water policies
like National Water Policy (1987 and
2002) and Gujarat 2010 emphasises on access
to hygienic conditions, safe water and
sanitation as fundamental rights to be
achieved for all citizens of Gujarat.
As far as availability of water resources
are concerned, Gujarat can be divided into
three dependent hydro-geological units,
namely South, North Gujarat, Saurashtra
and Kachchh. South Gujarat is better
placed in terms of water resource potential
than other three regions. According to the
available statistics, Gujarat state has experienced
rising population on one hand
(from 19 million in 1951 to 60 million in
2001) and the declining water resources on
the other hand. As a result, the state has
experienced a consistent decline in per
capita availability of water, from more than
2000 cubic meters in 1951 to about 1200
cubic meter at present (Government of
Gujarat, 1999). It has been estimated that
the per capita availability will decline to
910 cubic meters in 2010 and to 800 cubic
meters in 2025 (Patel, 1998). The corresponding
figures for India are much higher,
150 cubic meters in 2010 and 1500 cubic
meters in 2025. Let us examine different
components of the total water resource
carefully like groundwater and surface
water resource.
a. Surface Water
As regard to surface water resources, regional
inequalities are high across the regions
(Table-1). The table shows that south
Gujarat has 54 percent of the total surface
water potential and 78 percent of the total
utilisable surface water potential of the
state. These percentages are much lower
in the other regions. This is mainly because
of the high rainfall (upto 2000 mm)
and the large number of perennial rivers
in South Gujarat. Saurashtra and Kachchh
have 71 and 97 rivers respectively, but except
for two major rivers, Bhadar and
Shetrunji, all the rivers are small and more
or less seasonal. In the case of South Gu-
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Table 1: Region-wise Potential And Development Of Surface Water
In Gujarat
Details
South
Gujarat
North
Gujarat
Saurashtra Kachchh Total
the state during 1984, 1991, and 1997 is
evident in figure 1. Figure 1 shows that the
potential has declined from 20 thousand
mcm per year in 1984 to 16 thousand mcm
Regional Details
per year in 1997, implying about 21 percent
No. Of Districts 7 5 6 1 19
decline. Though there has been a small
increase during 1991-97 (11.16 percent increase)
due to the consecutive good sea-
Area sq. kms 47557 38478 64337 45612 195984
% Area Of State (24%) (20%) (33%) (23%) (100%)
sons, the potential is still much less than
No. Of Rivers 11 6 71 97 185
the same in 1984. The same trend is observed
among the districts also; also the
Surface Water Potential
Available Mm3 17510 7940 4550 2430 32430
districts show a decline in the time period
(%) (54%) (25%) (14%) (7%) (100%)
1984-97 (except Amreli, which shows marginal
Utilisable Mm3 13900 2000 1500 400 17800
increase) (Please do refer Figure-2).
(%) (78%) (12%) (8%) (2%) (100%) All except four districts show some increase
Source: NWRD, 1991
in the potential during 1991-97,
jarat, there are 17 rivers and most of them
are perennial. Irrigation increases productivity,
stability and sustainability (Vaidyanathan
(1999); Dhawan (1995). The foremost
issue is the availability of irrigation
potential, its creation and utilization. Ultimate
Irrigation Potential (UIP) corresponds
to the gross area that could theoretically
be irrigated in a year on the basis
of the assumed cropping pattern and the
given probability of rainfall. Pushing the
irrigation potential to the ultimate level
resources in the state. This along with second
committee on Estimation of Groundwater
Resources and Irrigation Potential
in 1991 and the third Committee in 1997
throws light on the changing status of
groundwater in the state.
About 90 percent of the groundwater is
used for irrigation in agriculture. There
are two types of groundwater schemes:
government tubewells and private tubewells.
The total groundwater potential in
thanks to good rainfall (GoG 1999).
Government of Gujarat (1999) in their
study showed the ranges of increase and
decline in groundwater potential across
the different talukas of districts in the
state. They stated that talukas that experienced
the highest declines in groundwater
potential are from North Gujarat
as well as Saurashtra and Kachchh
regions.
Utilisable groundwater resource is equal
to the total groundwater resources
available may be unsustainable in some
cases. Gujarat has utilized its created potential
with almost full utilization (Table-
Table 2: Ultimate Irrigation Potential and
Utilisation (‘000 ha)
minus the provision
for domestic, industrial and
other uses (15 percent of the
2). In as much as most of the available
water resources have been almost fully
exploited, special attention needs to be
paid to management and maximization of
utilization of the available resources.
Details
Utilised Irrigation Potential
Potential created (97-98)
Potential utilised (97-98)
% of potential created to
utilised irrigation potential
Gujarat
6103
3379
3097
55.37
India
139893
92742
82740
66.29
total resources). As seen from
Figure-3, that the total utilisable
groundwater resources
for the state is also declining.
The total utilisable water resources
in fact follow a similar
b. Groundwater Resources
Government of Gujarat has started estimating
groundwater resources systematically
since 1984 when the first technical
group was set up to estimate the resources
% of potential utilised to
potential created
Potential used to Utilised
irrigation potential
Gross irrigated area (98-99)
91.65
50.75
3379
89.19
59.13
73007
trend as that of total water resources.
Government of Gujarat
(1999) shows that 76 percent
of the total talukas in the
state register a decrease in utilisable
as well as the irrigation potential of the Source: Department of Agriculture, Government of Gujarat
groundwater resources
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95

REIMAGINING INDIA
Figure-1: Total Groundwater Reserves
Total Groundwater Reserves (mcm/yr)
21000
16000
11000
6000
1000
-4000
Ahmedabad
Amreli
Banaskantha
Baroda
Bhavnagar
Bharuch
Valsad
Dangs
Districts
Source: Narmada and Water Resource Department, 1984, 1991 and 1997
Gandhinagar
Jamnagar
Junagadh
Kheda
Kutch
1984 1991 1997
Panchmahals
Rajkot
Sabarkantha
Surat
Surendranagar
Mehsana
Gujarat
Figure-2: Bar Graph Showing Absolute Percent Change In Groundwater Reserves In Gujarat
Percentage Change in Groundwater
Reserves (%)
120
100
80
60
40
20
0
-20
-40
-60
Ahmedabad
Amreli
Banaskantha
Baroda
Bhavnagar
Bharuch
Valsad
Districts
Dangs
Gandhinagar
Jamnagar
Junagadh
Kheda
Kutch
Panchmahals
1984-1991 1991-1997 1984-1997
Rajkot
Sabarkantha
Surat
Surendranagar
Mehsana
Gujarat
Source: Narmada and Water Resource Department, 1984, 1991 and 1997
in the period 1984-97. For most of the talukas
the decrease has been 25-50 percent
(Government of Gujarat 1999).
Figure 4 showed data relating to the levels
of development of groundwater in districts
of Gujarat during 1984, 1991 and
1997. The average level of development
shows a jump from 31 percent in 1984 to
76 percent in 1997, implying an increase of
more than 145 percent during the period.
The state as a whole thus falls into “grey”
category which is a serious situation indeed.
This is evident from Map 1.
In short, the long term trends do not indicate
any improvement in the quality
of groundwater in the state. In fact,
they showed negative trends indicating
worsening of the quality of groundwater
96 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
Figure-3: Bar Graph Showing Percentage Change In Utilisable Groundwater Reserves In Gujarat
Percentage Change in total utilisable
groundwater (%)
90
70
50
30
10
-10
-30
-50
Ahmedabad
Amreli
Banaskantha
Baroda
Bhavnagar
Bharuch
Valsad
Dangs
1984-1991
Districts
Gandhinagar
Jamnagar
Junagadh
Kheda
Kutch
Panchmahals
Rajkot
Sabarkantha
Surat
1991-1997 1984-1997
Surendranagar
Mehsana
Gujarat
Source: Narmada and Water Resource Department, 1984, 1991 and 1997
over time.
Government of Gujarat (1999) has projected
the demand and supply of water
resources in the state for 2010 and 2025.
Table 3 is evident of the fact that in the
year 2010 as well as in 2025, South Gujarat
will be the surplus region for water while
North Gujarat, Saurashtra and Kachchh
will be water deficient region. The shortage
is expected to increase in both the regions
from 35 percent in 2010 to 83 percent
in 2025 in the case of North Gujarat. This
growth in demand has not been matched
by an increase in supply. The problem is
compounded by pollution of water, which
has reduced its suitability for various uses.
At the same time, in traditionally water
intensive sectors of the economy such as
agriculture, costs of irrigation have increased
significantly. Under these circumstances,
it is more important than ever
before to use water efficiently. It is also
necessary to anticipate and address intersectoral
conflicts over allocation and use
of water. The standard approach so far has
been to advocate reform of water pricing
across sectors to reflect the scarcity value
of water. This advocacy is based on theoretical
and empirical evidence on the need
and desirability of such reforms including
willing-to-pay studies. Nevertheless, major
users of water (particularly of irrigation
water) have resisted these reforms so far.
Water Markets
In this context, economic theory tells us
that markets increase economic efficiency
by allocating resources to their most valuable
uses. In other words, if certain conditions
are met, markets provide the correct
incentives and lead to efficient resource
use. Therefore, one way to change the incentives
so that water users support the
reallocation of water and to achieving a
more efficient allocation of water is
through water markets. These allow water
users to buy and sell water, thus changing
the whole incentive structure and breaking
the logjam of water pricing reforms – when
water users can gain from reallocation,
they would be willing to sell water or pay a
higher price for new supplies. This paper
explores the role of water markets, particularly
in the context of India’s water supply
and sanitation sector.
Apart from water markets there already
In Gujarat, the per capita availability will decline to 910
cubic meters in 2010 and to 800 cubic meters in 2025.
The corresponding fi gures for India are much higher, 150
cubic meters in 2010 and 1500 cubic meters in 2025
exist numerous non-market mechanisms
for allocating water in most countries.
These usufructuary rights to water have
evolved either explicitly through laws and
regulations or implicitly through conventions.
These water rights are generally
based on one of three systems: first-come,
first-served allocation (also known as
prior appropriation rights), allocation
based on proximity to flows (or riparian
THE INDIA ECONOMY REVIEW
97

Ahmedabad
Amreli
Banaskantha
Baroda
Bhavnagar
Bharuch
Vaksad
Dangs
Gandhinagar
Jamnagar
Junagadh
Kheda
Kutch
Panchmahals
Rajkot
Sabarkantha
Surat
Surendranagar
Mehsana
Gujarat
REIMAGINING INDIA
rights) and public allocation (Sampath
1992, Holden and Thobani 1996, Haddad
2000). Whereas queuing for water is the
basic approach of the prior appropriation
doctrine, the location of one’s land determines
water rights under the riparian doctrine.
Under this approach whoever owns
land along (above) the water has the right
to ownership/reasonable use of the water.
Finally, public allocation involves publicly
administered distribution of water. “Under
this system, public authorities decide
how to allocate water using guidelines or
laws establishing priorities and often specify
the uses to which the water can be put.”
(Holden and Thobani op. cit. p. 2) Most
developing countries follow variants of the
last approach where essentially the rights
are allocated free – though there may be
a charge for water use (typically based on
the amount of irrigated area), the water
rights themselves are obtained without
charge. The track record, however, of administered
systems of water allocation has
not been impressive - across different systems
and states in India, governments,
however experience shortage of funds to
carry out necessary R&R works of the
system. At many places, canals were laid
at uneven level and structures were in bad
shape, which results in frequent breaching
of canals. Consequently, reliability of water
at scheduled time was not taken care
off. Given these problems, Rosegrant and
Binswanger (1994) have suggested that
there may be a better way to achieve efficient
allocation of water by changing incentives
so that users support the efforts
to reallocate water. They argue that if water
markets are established where water is
scarce, then users can buy and sell water
or pay a higher price for new supplies.
While this is well known, the important
point to note here is that none of these
systems fulfil the conditions for well-defined
property rights to water, which in
turn are essential for water markets to exist.
In this context, the question could well
be asked, “Why not use administered efficiency-based
pricing of water as an intermediate
policy between managed quantity
allocation and water markets?” There
are three reasons why water markets could
be preferred to administer efficiency pricing
(i.e., pricing marginal units of water at
their marginal cost). First is the reduction
in information costs – whereas it is theoretically
possible to devise and implement
a system of administered prices which
would lead to efficient allocation of water,
the information requirements are demanding
and may require experimentation
by trial and error. Second and perhaps
more important, if the value of prevailing
usufructuary water rights (formal or informal)
has already been capitalised into
the value of irrigated land, then imposition
of administered pricing is perceived
by right holders as expropriation of those
rights. In effect, this would result in a
capital loss for irrigated farms. This could
explain the strong resistance by these
groups to establishing administered efficiency
prices. Finally, the administrative
solution presumes “far-seeing,incorrupti
Figure-4: Bar And Line Graph Showing In Level Of Groundwater Development
200
150
Level of development (%)
100
50
0
Source: Narmada and Water Resource Department, 1984, 1991 and 1997
Districts
1984 1991 1997
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MORE MARKETS, LESS GOVERNMENT
Map-1: Ground Water Categorisation
Source: NWR and WSD, Government of Gujarat
ble,influence-free” administrative bodies
that are able to design and implement the
‘correct’ prices. In practice, this may often
not be the case: these bodies could be captured
by interest groups or they may be
short-sighted and unable to estimate future
demand, or they may be unable to set
and collect appropriate water charges.
Advocates of administrative approaches,
however, often ignore these problems focusing
at the same time on imperfections
of markets that supposedly reduce the efficacy
of market-based solutions! In effect,
if two second best states are being compared
it may be difficult to order them.
The numerous informal water markets
existing in North Gujarat (tubewell companies)
and South Gujarat (illegal water
lifting from canal) suggest that water users
will buy and sell water even if it is illegal or
discouraged by the government.
Even though water markets are believed
to change incentives for water user and
improve water allocation, there are number
of constraints that may prevent introduction
of water markets. For formal water
markets to work, one key component is for
users to have some type of water right or
use right they can buy or sell. This may
create a serious problem not only because
water rights may be difficult to establish,
but also because public water agencies feel
they will lose a great deal of power if they
allocate water rights to users. If water users
have rights, this means that system operators
have the responsibility to deliver
water to the users more or less when the
users want it. In contrast, if a government
agency holds the water rights, they can dictate
farmers the conditions under which
they will receive water including in some
cases, necessary side payments from farmers.
If water rights are made tradable, this
creates an even greater dilemma for government
agencies. To prevent losing control
over tradable water rights, Comision
Nacional del Agua in Mexico and some of
the water districts of western United States
limit trading among water districts. A water
user must obtain special government
approval to sell water outside the jurisdiction
and any profits from the sale must accrue
to district and not the seller. This, of
course, discourages interdistrict trading,
but reduces the chance that trades will
have third party effect. Such instances of
formal water markets in India are non-existent.
Experience of Mexico, Chile, United
States, France, where water markets
exist in one form or the other, assists in
understanding organisational problems of
water trading through market. First is the
resistance to water trading between or
among district or jurisdiction. Second is
the problem of establishing water rights
and giving the users more control over water.
Other problems which raise the transaction
cost of water trading include legal
challenges by third parties who feel they
In the formal water markets water rights may be very diffi
cult to establish. What's more, public water agencies feel
that they will lose a great deal of power if they allocate
water rights/user rights to users
might be damaged by a transfer, the lack
of sufficient infrastructure to transfer water
among potential buyers, and lack of an
effective means for verifying and enforcing
water rights.
Establishing Water Markets
Before we determine whether there is a
need of reducing transaction cost and
methods to do so, there is a need to understand
the past experience of markets for
allocating water resource. This is done
with the assumption that if a country has
experience with water markets, then it is
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99

REIMAGINING INDIA
Table-3: Details Of Availability And Requirement Of Water Resources In Gujarat
Details
Availability Of
Water (mcm)
Requirement Of
Water (mcm)
Surplus (mcm)
Deficit Of Water Resources
(mcm)
As Per The Year 2010
South Gujarat 24750 14390 10360 -
Saurashtra & Kachchh 9740 13100 - 3360 (34.49)
North Gujarat 10400 17400 - 7000 (67.31)
Total 44890 44890 10360 10360
As Per The Year 2025
South Gujarat 28187 15500 12687 -
Saurashtra & Kachchh 10170 14440 - 4269 (41.97)
North Gujarat 10212 18630 - 8418 (82.43)
Total 48570 48570 12687 12687
Source: NWR and WSD, Government of Gujarat
Note: figures in parentheses indicate the percentage shortage
likely that water will be one of the goods
that can be allocated using market forces.
At least in the case of markets for irrigation
water it appears that both formal and
informal systems of water system are at
work. In India, other than recent intervention
in Maharashtra, there is a dearth of
the experience of the formal market systems.
But numerous countries experience
with water markets are wide ranging, with
most of the formal water markets in North
and South America. For example in several
areas of Chile, the legalisation of water
trading and recording of water use
rights were sufficient to foster an active
formal water markets with relatively low
transaction costs. The combination of effective
water user association and well developed
irrigation infrastructure allowed
these farmers to easily trade water
throughout the system including trades
with the urban section (Hearne 1995).
Garrido (1997) shows the economic gains,
when trading is restricted to an individual
water district. In contrast, if trades are allowed
among communities that are subject
to different supply constraints and drought
conditions, the gains from trade can be
substantial. As per his estimates, inter
community trading results in 50 percent
gain. In their analysis of selected water
markets in Chile, Hearne and Easter
(1997) found trading both within and between
sectors. For permanent transactions,
they felt the importance of well defined
water use rights.
In the case of informal markets in Asia,
Shah (1993) finds that in areas with dependable
groundwater recharge, the selling
of tubewell water has benefited a wide
range of farmers by allowing them to increase
crop production and income.
Groundwater markets play a major role in
boosting agricultural production and returns
to farmers from crop production.
Saleth (1997) estimates that 20 percent of
14 million pump sets are likely to be involved
in water trading. This means that
water markets are providing water for
about 6 million hectares or 15 percent of
the total area irrigated by groundwater. In
Pakistan, 21 percent of the total area irrigated
is from groundwater. Meinzen-Dick
(1997) found that water markets increased
the availability of water and the reliability
of supplies. Study by Pathak (2007) showed
that with greater water supplies and reliability,
yield and returns increased for those
who purchased water particularly for those
who also had access to canal water. However,
the highest yields and income was
still found among farmers who owned
tubewells and had access to canal water.
Even though groundwater markets appear
to be growing rapidly and providing a more
assured source of water to many farmers,
a number of concerns have been raised
about the performance of informal water
markets. Some of the problems are the
following:
• high water demand and declining
groundwater level.
• water rights are not well defined.
• lead to over drafting of aquifers whichcauses
decline in groundwater supplies.
• potential for monopoly pricing and discrimination.
Conclusion
This paper shows that water markets have
100 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
been in operation in many parts of the
world including India. Although informal
water markets have been in existence for
decades, formal markets with clearly assigned,
private and transferable water
rights are of relatively recent origin. In
Chile, Western USA and Australia, where
there are developed formal water markets,
there have been significant gains from water
trading, particularly from trades between
agricultural and urban users as water
gets reallocated to more productive
uses. In many instances, water trading has
alleviated water shortages. International
experience also shows that formal and developed
water markets strengthen the incentives
for conservation and more efficient
use of water. For example, farmers
have responded by switching to water-saving
technologies and high-value, less water
intensive crops. The Indian experience
with water markets has been positive, although
there have been only limited gains
as markets have remained informal, localised
and primitive. Thus, while these markets
have led to some efficiency gains and
have expanded the scope for many resource-poor
farmers to access irrigation,
inter-sectoral water transfers have not
taken place so far. The current challenge
in India is therefore to establish formal
water markets, which will expand the scope
of trading and make inter-sectoral water
transfers possible. Further, since formal
water markets have a legal basis, effective
regulation can be designed to address the
issue of ecological sustainability. These
markets will be of significant relevance to
the urban sector, which has been suffering
from acute shortages of water, but has not
been able to access informal markets. A
formal water market has the potential to
provide low cost solutions to augmentation
of water supply relatively quickly. With respect
to further steps, it is desirable to
make an indepth analysis on various important
questions like
• What are the legitimate users that need
to be protected in water transaction?
• Should third parties have to take into
account the economic losses caused by
not allowing the transfer?
References
• Dhawan, B.D. (1995), “Groundwater
depletion, Land Degradation and Irrigated
Agriculture in India. New Delhi:
Commonwealth Publishers
• Easter, K. William, Ariel Dinar and
Mark W. Rosegrant. 1998. “Water Markets:
Transaction Costs and Institutional
Options,” in K.W. Easter et al. (eds.),
Markets for Water: Potential and
• Performance, Kluwer, Dordrecht, The
Netherlands.
• Shah, Tushaar. 1993. Groundwater Market
and Irrigation Development, Mumbai,
Oxford University Press.
• Hearne R., 1995. The Market Allocation
of Natural Resources: Transaction
of Water Use in Chile. Ph.D Dissertation,
Department of Applied Economics,
University of Minnesota.
• Garrido, (1997). An Economic Analysis
of Water Markets within the Spanish
Agricultural Sector: Can they Provide
Substantial Benefits? In K.W. Easter et
al. (eds.), Markets for Water: Potential
and Performance, Kluwer, Dordrecht,
The Netherlands.
• Government of India. (2002): “National
Water Policy”, Ministry of Water Resources,
New Delhi, India
• Government of India. (1987): “National
Water Policy”, Ministry of Water Resources,
New Delhi, India
• Government of Gujarat. (1999): “White
Paper on Water Policy”, Ministry of
Water Resources, Government of Gujarat,
Gujarat.
• Haddad, Brent M. 2000. Rivers of
Gold: Designing Markets to Allocate
Water in California, Island Press,
Washington, DC.
• Hearne and Easter (1997). The Economic
and Financial Gains from Water
Markets in Chile. In K.W. Easter et al.
(eds.), Markets for Water: Potential and
Performance, Kluwer, Dordrecht, The
Netherlands.
• Holden, Paul and Mateen Thobani.
1996. “Tradable Water Rights: A Property
Rights Approach to Resolving Water
Shortages and Promoting Investment”,
Policy Research Working Paper
-1627, World Bank, Washington, DC.
• Meinzen-Dick (1997) Groundwater
Markets in Pakistan: Institutional Development
and Productivity Impacts. In
K.W. Easter et al. (eds.), Markets for
Water: Potential and Performance, Kluwer,
Dordrecht, The Netherlands.
• Pathak Jharna (2007). Irrigation Management
Transfer: Problems and Policies.
A Ph.D thesis submitted to Gujarat
University.
• Rosegrant, Mark W. and Hans P. Binswanger.
1994. “Markets in Tradable
Water Rights: Potential for Efficiency
Gains in Developing Country Water
Resource Allocation,” World Development,
22(11): 1613-1625.
• Sampath, R.K. 1992. “Issues in Irrigation
Pricing in Developing Countries”,
World Development, 20(7): 967-977.
• Vaidyanathan, A. (1999). Water Resource
Management: Institutions and
Irrigation Development in India. New
Delhi: Oxford University Press.
THE INDIA ECONOMY REVIEW
101

V. Shunmugam D.G. Prasad
Chief Economist
Economist
Multi Commodity Exchange Of India Ltd., Mumbai
Commodity Futures: A Catalyst For
Agricultural Development
“Everything else can wait but
not agriculture.”
-Pandit Jawaharlal Nehru
Historically, India has been considered
an agrarian society;
the fact that the basics of our
culture and lifestyle have been derived
from it stands testimony to our historical
dependence on agriculture. Of late, the
relative share of agriculture during early
1990s declined significantly due to its
sagging growth and leaping progress in
the other sectors. Currently, services
sector had become the largest contributor
to the GDP and the agriculture sector
had become the least contributor
with its share of below 20 percent. The
reality is India cannot afford to neglect
the agriculture sector and back pedal on
reforms related to this sector with about
two thirds of its population still directly
or indirectly dependent on it, especially
with apparent imbalances in the commodities
economy making the policy
choices narrow for the decision makers.
At this point in time the high agricultural
commodities prices combined with
poor supply chain efficiency in the country
affecting all sections of the society
especially with the common man bearing
the brunt of it. Despite the reports
of high commodity prices at the retail
end, farmers today are still complaining
about stagnant prices at the market they
sell. This could lead to the risk of many
shifting their profession, often abandoning
farming activities.
Agrarian Challenges
At the current situation of limited availability
of resources, the country, indeed,
requires a paradigm change from increase
in production to improvement in
the input-use efficiency, to enhance our
competency in the agriculture sector.
Given the current constraints of poor
realization from agriculture and hence
their poor investment in technology and
lack of investment in infrastructure
leading to the operation of a vicious cycle
in the farming sector. This is not to
say that those who command resources
for example the large landholders were
able to overcome the operation of this
vicious cycle with their sheer bargaining
102
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MORE MARKETS, LESS GOVERNMENT
power and reinvestment of profits back
into farming. However, a large chunk of
medium, small, and marginal farmers
are still to come out of the clutches of
the operation of this vicious cycle. Hence
the need of the hour is to provide market
based solutions to these farmers that
could address the problems associated
with inefficient and opaque markets;
poor infrastructure including input supply
systems, low credibility among the
lending institutions, poor infrastructure
especially in terms of transportation,
warehouses, standardization and quality
testing facilities, low value addition and
a rather weak agricultural extension system,
among others. Though there are
production related issues that would
need to be addressed, we believe it could
be effectively tackled by equipping the
farmers through market based empowerment.
Remedies for these challenges
can be approached by classifying them
into two broad categories — marketing
system ills and infrastructure challenges.
As for addressing the infrastructure
challenges, increased private investment
could well be the answer, at least for
overcoming them partially in commercially
profitable areas. However, in the
current marketing system wherein a
large number of middlemen are involved
in the supply chain, prices are largely
determined by traders with immediate
consideration to their profits. This eventually
leads to lesser returns on agriculture
making private investments in agriculture
least remunerative.
The current marketing system in the
country leads to large price spreads suppressing
the prices of commodities actually
offered to the producers while inflating
the prices that the end consumers
are made to pay which often has no relation
to the value addition that the products
had undergone. This could be attributable
to lack of transparency in the
market and an inefficient price discovery
mechanism. Farmers in most of the rural
areas arrive at the market uninformed
of the market situation due to lack of effective/reliable
market information dissemination
systems. Adding to their
woes, farmers more often take sowing
decisions based on the prevailing prices
(unaware of the future price directions),
which would most often prove them
wrong. Thus, remunerative prices for
their produce remain ever elusive to
farmers and remain a major cause of the
current stagnation in agricultural
growth. In other words, the lack of motivational
factor i.e. dwindling returns
to labor and investment is the key reason
for this stagnancy. Increased profits
would be possible only if farmers were
provided fair prices that are reflective of
their supply and demand.
Reforms On Anvil: Move towards
Market Based Mechanism
In a perfect market, price is determined
by the forces of demand and supply (fundamentals).
Frequent changes in the
fundamentals lead to increased price
volatility. In order to make the agriculture
sector more vibrant the Indian Government
allowed national online futures
trading in commodities during 2003.
The objective was to ensure stabilization
of prices of agricultural products and
provide farmers with alternative markets
that could equip them in taking the right
decisions in sowing, harvesting, and selling
of the right crop at the right market
value at the right time. Emergence of
futures trading in this context, following
the Government’s initiative, which serves
the above needs is of great significance
as a remedy to the ills in the existing
marketing system.
The Advent Of Futures Trading
Introduction of national online commodity
derivatives trading would remain
the most significant development in the
history of Indian commodity markets as
the earlier exchanges remained regional
Existence of the three national exchanges had brought in
revolutionary changes in the Indian commodity markets
by bringing in spatial integration and temporal price discovery
for commodities at the national level.
both in terms of their participation and
products. Currently, there are three national
exchanges, and twenty two regional
exchanges that are operating in the
country. Existence of the three national
exchanges had brought in revolutionary
changes in the Indian commodity markets
by bringing in spatial integration
and temporal price discovery for commodities
at the national level.
Undoubtedly, the revival of commodity
futures trading in India has led to a
reduction in daily price volatility of various
commodities in the domestic spot
markets. Table - I provides a comparative
account of price volatility of three
select agri-commodities in the spot markets
before and after the introduction of
futures trading at the Multi Commodity
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103

REIMAGINING INDIA
Table I: Volatility Of Spot Prices
Commodity
Pre MCX futures
(Percentage)
Exchange of India Ltd. (MCX), the
country’s No. 1 commodity derivatives
exchange (in 2007) located in Mumbai.
It was found that there has been a
marked reduction in daily price volatility
in all these three commodities. The
finding corroborates that the resurrection
of futures trading has indeed contributed
to increased stability in agricultural
markets, which in turn has helped
Indian farmers receive a stable income
besides making efficient sell/store decisions.
Availability of future price signals
also reduced the pre and post harvest
differences in prices avoiding the rush of
arrivals immediately post-harvest.
The Drive Behind And The
Benefits Of Futures Markets
Virtually all agricultural commodities
in India have a long supply chain with a
number of middlemen performing the
roles and functions of the brokers, commission
agents, processors, wholesalers,
retailers, etc., and thus making their
marketing costlier that their production
at times. In almost all the cases, the middlemen-levied
charges do not really mirror
the true value of the economic function
they perform in taking a given
commodity from farm gate to the consumer’s
plate. Thus the existing markets
Post MCX futures
(Percentage)
Wheat 4.80 3.49
Tur 1.47 2.4
Urad 2.58 1.8
Source: Delhi Wholesale Market, CMIE, www.cmie.com/database/services
Note: Daily prices were considered.
Post futures period include inception of specific contracts on MCX platform
till June 2006 and corresponding period before inception of futures contracts
was considered for pre-futures.
had a biased marketing
system offering the producer
the lowest while
charging the consumer
the highest. Obviously,
such an undesirable system
cannot continue for
ever and the stakeholders
would look for a way out
— an efficient market
that enables everybody to
participate in a price discovery mechanism
that is fully transparent and yet is
capable of bringing the cost of the value
chain down to the minimum. Here is
where the birth of futures exchanges
proved out to be the panacea for many
of the above ills faced by the physical
markets. These exchanges performed
the function of advance price discovery,
increasing the efficiency of the markets
by helping them streamline prices to reflect
on the commodity fundamentals
rather than reflecting the profit making
initiatives of the private players in the
value chain. That apart, commodity exchanges
also facilitate private participation
in the market related infrastructure
investments. The exchanges’ efforts in
providing effective collateral management,
improved warehousing for
agri-products, widening the network of
quality certification and product standardization
agencies, and providing better
logistics solutions have already
brought in the much needed efficiencies
in the ecosystem.
Commodity Exchanges As Catalysts
Of Agricultural Marketing
Infrastructure Development
MCX took various initiatives to launch
two major infrastructure projects — Na-
tional Spot Exchange Ltd. (NSEL) and
National Bulk Handling Corporation
Ltd. (NBHC). NSEL would provide a
national-level electronic platform for
spot trading in agricultural commodities
by integrating all the physical markets
into a common national market. This
initiative is meant to empower rural India
to usher in the next Green Revolution
by harnessing technology. The effective
co-existence of the spot and
futures markets in the ecosystem will
surely help in coming up with fair price
discovery empowering Indian farmers in
several ways, including leading them to
the use of improved technology, thus,
catalyzing rapid growth in agricultural
production. Services that NBHC – the
delivery arm of MCX extend include
warehousing and bulk handling of agricultural
commodities by managing a
chain of accredited warehouses across
the country, grading and assaying, quality
systems for storage and protection,
offloading and disposal services, demating
of warehouse receipts, etc. In a nutshell,
NBHC’s existence is slowly leading
to awareness in the ecosystem regarding
futures trading, collateral management
systems, warehouse receipt financing,
quality and standards, etc., leading to an
overall improvement in the ecosystem.
Thus, commodity exchanges are the seed
sown to provide a new direction to agricultural
productivity and returns to agriproducts
by improving the marketing
systems of the country with participatory
efforts from all the stakeholders in the
system. Exchanges ensured sustained
and increased returns to agricultural
products through transparent and participatory
price discovery process. Besides,
they also create an environment
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MORE MARKETS, LESS GOVERNMENT
where farmers have a choice — many options
of selling their commodities such
as spot markets and futures markets.
Also, as futures trading is done at the
national level in an electronic format,
integration of banks and institutional
traders on the commodities marketplace
creates several institutional options for
farmers. Thus, with the introduction of
national online commodity exchanges,
the seed for democratic reforms in market
in its process and its infrastructure
has been sown and only time and appropriate
nurturing by supporting policies
can tell us how far these could go.
The Global Impact Of Domestic
Commexes
The establishment of national commodity
exchanges in India is creating a nearperfect
market situation, with a much
wider participation from the market
ecosystem during local and global market
timings. Feeling the necessity for
aligning themselves with the international
markets in globally traded commodities
where there are international
linkages, the domestic commodity exchanges
make use of maximum possible
hours of operation unlike their equity
counterparts in the country by bridging
the time zones of Tokyo and New York
while passing on the price signals to the
European markets. In fact, given the
country’s potential share in global supply
and demand, India has the potential
to become the price-setter in about seventeen
commodities and thus, emerge as
a dominant player in the global markets.
Of late, with the constant strengthening
of the futures market, India has started
emitting price signals to linked global
markets in those commodities having
international linkages. In commodities
such as gold, of which India is the world’s
largest importer and consumer, and
chana, of which the country is the largest
producer/consumer,India, with the
emergence of futures markets, is slowly
gaining the rightful place in the world
markets by setting the prices. The prices
disseminated by Indian exchanges have
become increasingly acceptable to the
business and farmer communities as
they are discovered after assimilating
the information available to
the participants.
The Global Commodity Arena
And MCX’s Role
MCX has made its mark in the global
commodities exchange industry by becoming
the largest silver exchange (in
terms of the number of contracts traded),
the second largest in natural gas,
the third largest bullion exchange after
NYMEX & TOCOM, and also the third
largest exchange in crude oil among the
top 10 commodity derivatives exchanges
in the world in 2007 with only retail, and
corporate participation and without
products other than futures on its platform.
The Exchange believes that as India
becomes a truly global economy, it
would offer greater potential in commodities,
as regulatory and market impediments
that prevent building up of
volumes in the exchanges would get dissolved
and the exchanges would be left
to their own to prove their mettle. The
price correlation in the globally traded
commodities indicates that the prices
discovered in the MCX had more than
90 percent correlation with their international
benchmarks suggesting that the
prices moved in tandem with the international
markets, following a right combination
of domestic and international
Given India's potential share in global supply and demand,
India has the potential to become the price-setter in about
seventeen commodities and thus, emerge as a dominant
player in the global markets
fundamentals. This makes the domestic
online exchanges a cost-effective better
alternative to the domestic participants
particularly for the SME companies,
with enough liquidity as found in the International
benchmark exchanges. However,
the potential in other commodities
and for reaching out to the end-users is
yet to be harnessed, pending various
regulatory reforms.
The Road Ahead
The proposed amendments to the Forward
Contracts Regulation Act is likely
to originate a slew of changes in the
THE INDIA ECONOMY REVIEW
105

REIMAGINING INDIA
commodity derivatives ecosystem. Firstly,
the functional autonomy of the Forward
Markets Commission (FMC) – the
regulator for the commodity markets, as
proposed in the FCRA would make it
more vibrant in the eyes of the market
participants and policy makers and other
regulators such as RBI and SEBI.
This could help facilitate entry of other
participants such as banks and mutual
funds as their regulators namely RBI
and SEBI respectively develop confidence
in the functioning and regulation
of the markets. Further, new products
such as options will offer the stakeholders
(least risk appetite) with one more
instrument for risk management. This
could be more suited to farmers participation
as they are less risk-hungry and
could help them overcome the liquidity
problems that they would otherwise face
in the futures instrument in meeting the
daily MTM margin requirements. The
entry of banks, MFs and foreign institutional
investors (FIIs) would enhance
the liquidity and professionalism in the
markets and thereby bolstering the efficiency
of the Indian commodity markets,
which is essentially needed at a time
when the country’s market is being
opened to traders and investors from
across the borders. Perhaps, with banks
allowed it could even facilitate farmer’s
participation helping them overcome the
present hurdles in their participation.
The permission to launch index-based
instruments following the amendment to
FCRA would open the doors for exchanges
to come out with derivatives
such as index linked futures and options,
sector based derivatives, and weather
derivatives. While rocketing in the current
high-growth trajectory, the domestic
exchanges have also effectively adopted
global best practices from the
The permission to launch index-based instruments would
open the doors for exchanges to come out with derivatives
such as index linked futures and options, sector based
derivatives, and weather derivatives
benchmark exchanges to leap forward
and attain higher levels of efficiency and
trading volumes. In turn, these efficient
marketplaces with right products and
participation are likely to transform the
economy’s competitiveness and help
raise the global competitiveness of Indian
products and services This would
help India to become an efficient global
manufacturing hub and shore up its performance
on the external trade front.
Given all the positive effects of the futures
exchanges to the economy and the
markets, the growth in the commodities
sector has been unsupported unlike its
financial derivatives counterpart.
All in all, one must acknowledge that
given the current trend in globalization
of economies, competitiveness would
remain a major factor affecting the performance
of many of these economies
and may even determine their survival
in a more liberalized trade environment.
As production determines part of the
costs of the product or a service so is
its marketing cost. The more efficiently
commodities are marketed in an
economy could solve a part of the
problem that India is facing in moving
up the ladder in its trading competitiveness.
As goods and services becomes
cheaper due to reduced cost of
marketing it, such as through reduced
wastages through quality production,
standardization and grading, and scientific
storage, paying the intermediary
the right value for the services that
he renders to the marketing of the
commodity. Increased marketing efficiency
coupled with increased production
efficiency is likely to help India remain
competitive. For increased market
efficiency, it is necessary that there are
efficient futures markets that help the
producers and value chain players take
effective production and marketing decisions
to reduce the cost of marketing.
Hence no one can deny that efficient
markets are as much important as like
the efficient industries or the agricultural
production systems that would efficiently
produce primary or the processed
products to help our economy
remain competitive and there is no other
alternative to the commodity derivatives
trading that can bring about necessary
efficiency in the existing
market ecosystem.
106
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AN ARINDAM CHAUDHURI & PLANMAN MEDIA PRESENTATION
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Deepika Wadhwa,
Research Scholar,
Centre for Economic Studies
and Planning, Jawaharlal
Nehru University, New Delhi
Overseas Investment By Indian Firms:
Recent Trends and Patterns
"Today, one of the engines powering the remarkable
growth in India is entrepreneurship. After
being shackled for a number of decades, the
wings of India's large class of talented private
entrepreneurs have been fully freed. After a few
tentative fl utters in the early 1990s, they are
now showing their true worth. Many indigenous
start-ups are becoming global success stories
and Indian business has done unexpectedly
well in the last decade and a half – largely as a
result of more effi cient use of resources, men
and machines."
-Kamal Nath
Minister of Commerce & Industry at
United States-India Business Council
(USIBC) Annual Summit, June 27, 2007
1. Introduction
Last two decades have witnessed liberalisation
and globalisation of many developing
economies across the world.
One of the key outcomes of this process
has been enhanced mobility of capital
across different countries. This has resulted
in a significant increase in the
outward Foreign Direct Investment
(FDI) flows not only from the developed
countries but also from several developing
and transition economies, especially
since the early 1990s. The value of
outward FDI flows from the developing
and transition economies increased
from $ 12 billion in 1990 to $193 billion
in 2006 (which accounted for about 16
percent of the world total outward FDI
flows). Likewise, the value of the outward
FDI stock of developing and transition
economies went up from only $146
billion in 1990 to $881 billion in 2000,
reaching $1.7 trillion in 2006 (14 percent
of the world total outward FDI stock).
In case of India too, the FDI outflows
have assumed significant proportions
(in absolute terms) only since the early
1990s. India’s total outward FDI stock
rose from $124 million in 1990 to (almost)
$13 billion in 2006; still it was
ranked only 16th among the developing
countries in terms of the total outward
FDI stock. Likewise, India’s outward
FDI flows increased from a meagre $6
million in 1990 to $9.7 billion in 2006. 1
India’s ranking in the Outward FDI
Performance Index (of UNCTAD) has
improved over these years, from 82 in
1990 to 56 in 2006. The ‘internationalization’
of Indian firms is also reflected
in the growing number of Indian companies
investing abroad, which has increased
from 187 in the early 1990s to
1700 by the early years of the present
decade. 2
In this backdrop, the present paper
deals with some of the important aspects
of overseas investment by Indian
firms over the last decade. The second
section of the paper presents a brief account
of the changing policy framework
in India with regard to outward FDI.
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MORE MARKETS, LESS GOVERNMENT
The third section discusses the geographical
and sectoral patterns of outward
FDI flows from India. The fourth
section highlights some of the overseas
Mergers & Acquisitions (M&As) made
by Indian firms. The fifth section discusses
their likely motives and the factors
driving overseas investments. The
paper ends with concluding remarks on
some policy implications of the recent
surge in outward FDI from India.
2. The Policy Framework
The policy guidelines for outward FDI
from the country have evolved over the
last few decades. The evolution of India’s
overseas investment policy can be
traced back to 1969, when the guidelines
for overseas direct investment were issued
by the Government of India for the
first time. These guidelines had defined
the extent of participation of Indian
companies in projects abroad. Indian
companies were permitted minority
participation in ‘turnkey projects’ involving
no cash remittances. Subsequently,
these guidelines were revised
in 1978 and 1986, in the pre-reform era.
The main objective of outward investment
policy during this era was to encourage
outward investments by Indian
companies as means of promoting exports
of Indian capital goods, technology
and consultancy services. 3
However, since the onset of economic
reforms in India, overseas investment
policy has undergone a structural
change; with the last five years witnessing
a clear thrust in policy towards promotion
of greater investment opportunities
for Indian firms. The stated
objectives of this structural change in
the overseas investment policy regime
were: to help promote exports from the
country, strengthen its economic linkages
with other countries, provide Indian
firms the access to new markets
and technologies, and increase the global
competitiveness of Indian firms. India’s
overseas investment policy was first
liberalised in 1992, which marked the
introduction of an Automatic Route for
overseas investments and allowed cash
remittances for the first time with restrictions
on the total value of investments.
The total value of overseas investment
by an Indian firm was
restricted to $2 million in a block of
three years, with a cash component of
only $0.5 million. In 1995, the upper
limit for automatic approval was raised
to $4 million; and, the Reserve Bank of
India (RBI) was given the authority for
approval of overseas investment proposals
worth up to $15 million, 4 while overseas
investments worth more than $15
million were still considered and approved
by the Ministry of Finance. The
introduction of Foreign Exchange Management
Act (FEMA), in 2000, brought
in further changes in the policy relating
to investments abroad. The limit for
overseas investment was raised to $50
million annually, without any condition
relating to repatriation of a part of the
declared profits. In March 2002, the upper
limit for automatic approval was
further increased to $100 million annually,
of which 50 percent could be funded
in foreign exchange from any authorized
dealer (i.e. a bank authorized by
RBI to deal in foreign exchange or
foreign securities). 5
Since 2003, however, the policy regime
for overseas investment has been
liberalized significantly. In 2003, Indian
firms were allowed to make overseas
investment (annually) of up to 100 percent
of their net worth under the automatic
approval route. This limit was
enhanced later to 200 percent in 2005
and 300 percent in 2007. 6 In March
2006, RBI also paved the way for proprietary/
unregistered partnership firms
to set up joint ventures or wholly owned
subsidiaries abroad. Recently, the upper
limit for total overseas investment of an
Indian party in all its joint ventures and/
or Wholly Owned Subsidiaries abroad
has been enhanced to, not exceeding
400 percent of its net worth. 7
As regards the implications of these
policy changes in India, Nayyar (2007) 8
observes that the liberalization of the
overseas investment policy regime,
India’s total outward FDI stock rose from $ 124
million in 1990 to (almost) $ 13 billion in 2006.
Still, it was ranked only 16 th among the developing
countries in terms of the total outward FDI stock
along with reforms in the financial sector
particularly those since early 2000s,
have enhanced Indian firms’ access to
capital from both domestic and international
financial markets. For instance,
in April 2003, banks in India were permitted
to provide credit and non-credit
facilities to Indian Joint Ventures or
Wholly Owned Subsidiaries abroad
worth up to 10 percent of their unimpaired
capital funds. This limit was further
raised to 20 percent in November
THE INDIA ECONOMY REVIEW
109

REIMAGINING INDIA
2006. Besides, India has also entered
into Bilateral Investment Promotion
and Protection Agreements (BIPAs)
with a number of countries to promote
and protect foreign investment on a reciprocal
basis. All these policy changes
have resulted in an environment conducive
to a rapid expansion of outward
FDI flows from the country.
3. Overseas Investment: Geographical
And Sectoral Patterns
India’s outward FDI has steadily increased
since 1996, both in terms of
number of approvals and value. Indian
investment abroad has gone up from $
557 million (290 approvals) in the financial
year 1996-97 to $2855 million (1395
approvals) in the financial year 2005-06,
representing an increase of 513 percent
in terms of value of investments and 380
percent in terms of the number of approvals
given. In the financial year
2006-07 (for the period April-October
2006), actual FDI outflows stood at $
3320 million as compared to $ 2109 million
in the corresponding period of
2005-06. 9 Before we move on to a discussion
of geographical and sectoral
patterns of FDI outflows from India, we
must pay attention to some of the limitations
of the statistics on FDI outflows:
these statistics relate only to approvals
rather than actual FDI outflows; the
FDI outflow statistics do not include investment
financed by borrowing in international
financial markets through
special purpose vehicles (SPVs); moreover,
the data on sectoral distribution of
outward FDI are not disaggregated
enough 10 . Nonetheless, even the currently
available statistics on outward
FDI from India provide valuable
insights.
3.1 Geographical Patterns
Until mid-1980s, much of the outward
Indian investment abroad has gone up from $557 million
(290 approvals) in the financial year 1996-97 to $2855
million (1395 approvals) in 2005-06, representing an
increase of 513% in terms of value of investments and
380% in terms of the no. of approvals given
FDI from India was concentrated primarily
in a few developing regions of
Africa (Kenya and Nigeria), Southeast
Asia (Malaysia, Indonesia, and Singapore)
and South Asia (Sri Lanka and
Nepal) 11 . In fact, in the 1980s, India had
emerged as the third largest foreign direct
investor among the developing
countries after Hong Kong and Singapore.
12 The geographical pattern of Indian
outward FDI underwent noticeable
changes since early 1990s, when the
outward FDI flows from India (in some
of the sectors, such as software and
pharmaceuticals) started shifting towards
the developed regions, mainly
North America and European Union.
Over the period from April 1996 to
October 2006, the largest recipient of
India’s FDI was Russia with total Indian
outward FDI of $ 2831 million, which
was followed by USA at $ 2768 million,
Mauritius at $ 2151 million, and UK at
$ 2150 million (see Table 1). More recently,
in 2006-07 (during the period
April-October 2006), the top three destinations
of India’s outward FDI were
UK, Netherlands and Mauritius. In
2006-07, India became the second-biggest
source of outward FDI flows to UK.
While most of the investments in USA
and UK have been in IT services and
pharmaceuticals, those in the Russian
Federation and Sudan have been mainly
in oil exploration. 13 A sizable chunk
of Indian outward FDI has been going
to the tax havens or offshore financial
centres, like Mauritius (10 percent),
British Virgin Islands (4.5 percent), and
Bermuda (3 percent). In fact, it has been
observed that the double taxation avoidance
treaty between India and Mauritius
(and other such tax haven countries)
has encouraged Indian firms to ‘round
trip’ investment through Mauritius (and
other tax haven countries) to take advantage
of the tax benefits enjoyed by
overseas investors. 14 Thus, the geographical
spread of Indian outward FDI
has expanded over the last decade,
with a shift towards the developed
countries.
3.2 Sectoral Patterns
It has been highlighted by several ob-
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MORE MARKETS, LESS GOVERNMENT
servers [see, for instance, Kumar (1995)
& Pradhan (2007) 15 ] that the bulk of
India’s outward FDI during 1970s and
1980s was in the manufacturing sector,
primarily in light engineering, pharmaceuticals,
chemicals and textiles. Along
with the increasing geographical diversification
of outward FDI from the
country, a sectoral diversification (towards
services) also started taking place
in the early 1990s. Although in case of
certain services like, communication
and software, broadcasting and publishing,
engineering and construction, and
hotels and restaurants, outward FDI
from India has been rising; manufacturing
sector still accounts for a major
chunk of total outward FDI from India.
Table-2 presents the sectoral composition
of outward FDI flows from India
during the period from April 1999 to
October 2006. In this period, the largest
amount approved for overseas investment
was in the manufacturing sector
(at $11093 million) followed by non-financial
services sector (including software
development), trading sector and
other activities (see Table-2). Over this
A sizable chunk of Indian outward FDI has been
going to the tax havens or offshore financial
centres like Mauritius (10 percent), British Virgin
Islands (4.5 percent), and Bermuda (3 percent)
period, the share of manufacturing sector
was 53 percent while that of non-financial
services was 33 percent and that
of trading was 5 percent. An almost
similar pattern emerges for the period
Table 1: Geographical Distribution Of Approved Outward FDI Flows From India
(Top 15 Destinations)(Million $ )
Rank Country April 1996 to
March 2002
2002-03 2003-04 2004-05 2005-06 2006-07 * Total Share
(in%)
1 Russia 1748.7 0.2 1.4 1076.2 1.2 3.0 2830.6 12.78
2 USA 1540.8 185.3 207.1 251.4 270.3 313.4 2768.3 12.50
3 Mauritius 618.3 133.4 175.6 149.4 332.7 741.4 2150.7 9.71
4 U.K 410.6 34.5 138.5 71.9 158.3 1335.9 2149.6 9.71
5 Netherlands 157.9 15.9 30.2 30.7 284.6 1005.5 1524.8 6.89
6 Singapore 153.0 46.8 15.9 239.3 200.5 499.5 1154.9 5.22
7 Sudan - 750.0 162.0 51.5 63.0 118.1 1144.7 5.17
8 British Virgin Island 776.5 3.3 4.9 131.4 29.5 39.0 984.7 4.45
9 Cyprus 1.9 - 0.0 1.9 13.4 701.6 718.8 3.25
10 Hong Kong 445.1 14.8 16.2 73.6 88.8 41.5 679.9 3.07
11 Bermuda 232.6 29.0 142.5 221.3 2.6 627.9 2.84
12 UAE 110.2 12.6 32.1 41.9 141.0 205.3 543.0 2.45
13 Australia 7.0 95.0 92.9 158.8 75.3 95.2 524.1 2.37
14 Brazil 13.0 5.2 5.0 17.2 420.1 6.7 467.2 2.11
15 Canada 5.6 2.3 0.7 0.8 3.5 397.8 410.7 1.85
Total Outward Investment
7543.1 1472.1 1450.9 2804.0 2859.1 6003.9 22142.9
All Developed Countries
(Share in%)
All Developing
Countries (Share in%)
2608.8
(35)
4934.2
(65)
396.6
(27)
1075.5
(73)
774.0
(53)
676.9
(47)
799.6
(29)
2004.3
(71)
1015.4
(36)
1843.6
(64)
Source: Compiled from data given in the website of Department of Economic Affairs, Ministry of Finance, Government of India.
Note: * April-October 2006.
4073.9
(68)
1929.8
(32)
9668.4
(44)
12474.4
(56)
THE INDIA ECONOMY REVIEW
111

REIMAGINING INDIA
2006-07 (April-October 2006), with the
largest amount of India’s outward FDI
going to the manufacturing sector at
$2403 million (40 percent)
followed by financial and nonfinancial
services sector (37 percent),
other activities (16 percent) and trading
sector (7 percent), respectively. Although
there has been a decline in the
share of manufacturing sector in India’s
total outward FDI, it still accounts for
While most of the investments from developing
|countries are into other developing countries and in
the service sector, outward FDI from India in the
recent years has been primarily in the developed
countries and in the manufacturing sector
more than half of the outflows of FDI
from the country. In terms of its geographical
and sectoral diversification of
outward FDI, India presents two sharp
contrasts with other developing countries.
While most of the investments
vice sector, outward FDI from India in
the recent years has been primarily in
the developed countries and in the manufacturing
sector. 16
4. Modes Of Outward FDI
From India
In the period preceding 1990s, most of
the outward FDI from India was in the
form of greenfield investments for establishing
new joint ventures or subsidiaries
overseas. Since late 1990s, however,
most of the outward FDI from the
country has been through Mergers and
Acquisitions (M&As) abroad, which was
possibly due to the fact that greater risks
and time could be associated with
greenfield investments abroad. We may
also note here that India’s overseas in-
from developing countries are into other
developing countries and in the servestment
was traditionally led by a small
group of family-owned large business
conglomerates, like Tatas, Birlas,
Thapars etc., which focused mainly on
the neighbouring developing countries.
Since 1990s, there has been an emergence
of a large number of non familyowned
as well as small and medium
sized Indian firms, which have chosen
outward investment as an important
strategy for ‘internationalization’. 17
As mentioned above, the expansion of
outward FDI from India over the last
decade has been led mainly by M&As
abroad. Indian companies have marked
their presence in several industries –
software and IT services, pharmaceuticals,
biotechnology, automotives, hotels
and hospitality, and other consumer
products. Although a significant part of
the Indian outward FDI stock is still in
manufacturing, overseas investment in
software and IT services (for instance,
those by Infosys, TCS and Wipro) has
grown rapidly. Pharmaceuticals companies
such as Dr. Reddy’s and Ranbaxy
Table 2: Sectoral Distribution Of Approved Outward FDI Flows From India (Million $)
Year
Manufacturing
Financial services
Non- financial
services
Trading
Others
Total
OFDI
Value
Share
(in%)
Value
Share
(in%)
Value
Share
(in%)
Value
Share
(in%)
Value
Share
(in%)
1999-00 548.8 31.2 4.3 0.2 1143.5 65.1 58.3 3.3 2.3 0.1 1757.2
2000-01 370.7 26.8 16.6 1.2 876.5 63.4 89.2 6.5 29.1 2.1 1382.1
2001-02 2210.9 73.1 48.6 1.6 565.5 18.7 139.2 4.6 61.3 2.0 3025.5
2002-03 1056.7 71.9 1.8 0.1 280.2 19.1 69.9 4.8 61.7 4.2 1470.3
2003-04 765.6 52.8 35.1 2.4 438.8 30.3 76.9 5.3 134.1 9.2 1450.5
2004-05 2026.4 72.3 9.2 0.3 548.2 19.5 69.1 2.5 151.3 5.4 2804.2
2005-06 1711.1 59.9 167.7 5.9 707.4 24.8 134.3 4.7 134.3 4.7 2854.8
2006-07* 2402.8 39.8 5.8 0.1 2250.0 37.3 390.8 6.5 985.6 16.3 6035.0
Total 11093.1 53.4 289.1 1.4 6810.1 32.8 1027.7 4.9 1559.7 7.5 20779.7
Source: Same as Table 1 above. Note: * April-October 2006.
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Table 3: Cross-Border Mergers And Acquisitions By Indian Firms
Year Purchases Sales
No. of deals Value No. of deals
Value
(Million $)
2000 55 910 111 1219
2001 35 2195 84 1037
2002 35 270 66 1698
2003 57 1362 83 949
2004 64 863 80 1760
2005 91 2649 126 4210
2006 133 4740 163 6716
Source: FDI Database, UNCTAD
have also made sizeable overseas investments.
Large Indian companies in industries
such as steel and chemicals
have also begun to ‘internationalize’ by
acquiring upstream companies, for instance,
in countries like, Australia and
Canada. 18 In the energy sector, India’s
State-owned groups, such as ONGC
Videsh, Indian Oil Corporation and Oil
India, have acquired stakes abroad in
exploration, refining and retailing.
Table 3 presents a snapshot of Indian
firms’ purchases and sales in the form of
cross-border Mergers and Acquisitions.
It shows that the number of Indian companies
investing abroad has been steadily
rising and in some of the years, the
value of outbound deals was more than
the value of in-bound deals.
Presently, systematic information on
cross-border M&As by Indian companies
is not available from any government
agency. Therefore, in this paper,
we rely mainly upon a study on Indian
Acquisitions Abroad by MAPE Advisory
Group 19 and refer to some other
sources as well. According to the said
study, Indian companies acquired 244
foreign companies over the period 1st
January 2000 to 31st March 2006.
Table 4 shows the sectoral distribution
of the 244 acquisitions by Indian
companies covered by the MAPE study.
The software and business process outsourcing
industry saw the largest deal
count, followed by pharmaceuticals and
automotive. In terms of the value of the
acquisitions, however, Manufacturing
sector dominated with more than 40
percent of the acquisitions in industries
such as pharmaceuticals, automotive,
consumer goods, chemicals, fertilizers
and metals; whereas software and business
process outsourcing accounted for
almost 30 percent of the total value of
acquisitions during this period. The
largest number of Indian acquisitions
was in North America and Europe accounting
for (approximately) 34 percent
and 40 percent of the total, respectively.
This reiterates the fact that Indian companies
are investing more in the developed
economies. The MAPE Study
also reports that a certain degree of
concentration can be found among the
Indian firms that made these acquisitions
abroad. Out of the 244 deals, 163
deals involved Indian companies which
have made more than one acquisition
abroad. For instance, ONGC made a
total of 9 acquisitions and Ranbaxy has
made 8. The other main players include
United Phosphorous, Bharat Forge, Dr
Reddy’s, Tatas, HCL Tech, Mahindra &
Mahindra and Nicholas Piramal,
among others.
This outbound M&As activity by Indian
firms has continued to increase.
The year 2007 has already witnessed
two major acquisitions of Tata-Corus
and Hindalco-Novelis. The former acquisition
by Tata Steel was worth over
$12 billion, which has been the largest
acquisition ever by an Indian company;
whereas the latter by Aditya Birla
Group’s Hindalco Industries was worth
$6 billion.
5. Driving Factors And Motives
For Overseas Investment
The recent wave of outward FDI from
India has been boosted by both domestic
and international factors. In some
In some industries such as pharmaceuticals, import substituting
industrialization regime (of the pre-1990s era) had
encouraged local technology and skill development and
also created capacities and abilities in Indian firms which
enabled them to become cost competitive globally
cases, industry specific factors have also
favoured the outward FDI. As regards
the domestic factors, the policy regime
on outward FDI from India has been
liberalized significantly since 2003; a
liberalised investment regime has provided
Indian firms with easy access to
cheap credit from both domestic and
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REIMAGINING INDIA
Table 4: Acquisitions Abroad By Indian Firms
(From January 2000 To March 2006)
Sector Value (Million $) Number Of Deals
Automotives 427.3 24
Chemicals & Fertilizers 655.2 17
Consumer 668.5 10
Pharmaceuticals/ Healthcare 1,604.2 50
Software / BPO 1,115.4 82
Metals & Mining 970.5 11
Oil & Gas 1,587.0 13
Other 1,525.8 37
Total 8,553.8 244
Source: MAPE Advisory Group, 2006
international market; and a booming
stock market too has had a favourable
impact on their capacity to invest. On
the international front, a changing economic
environment has left many small
to medium-sized manufacturing companies
in the developed economies (such
as, USA and Europe) vulnerable for acquisitions,
as their prevailing business
model could no longer be cost
competitive. At the industry level, the
lowering of trade barriers and entry of
multinational firms has increased competition
in the Indian market; which has
compelled many Indian companies to
look overseas for their growth. In this
new competitive environment, the strategy
of ‘internationalization’ has become
vital for many firms. Secondly, as Nagaraj
(2006) argues, in some industries
such as, pharmaceuticals, import substituting
industrialization regime (of the
pre-1990s era) had encouraged local
technology and skill development and
also created capacities and abilities in
Indian firms, which enabled them to become
cost competitive globally. He
In their overseas investments, Indian firms must try to
focus more on resource-seeking activities like exploration
and development of mineral and energy resources. China,
in order to sustain its rapid growth, has invested the most
in exploration of oil fi elds and industrial raw materials
opines that the international competitiveness
of Indian firms in the pharmaceuticals
sector is attributable, to some
extent, to the Patents Act of 1970 that
did not allow ‘product patents’ but allowed
only ‘process patents’ and thus
facilitated the possibilities of ‘reverse
engineering’. Indian firms at present see
an opportunity to produce a large number
of drugs that are going off patent in
the developed countries. Moreover, getting
access to specialised R&D of firms
in developed nations is also one of the
important reasons for Indian firms’ investments
abroad in sectors like
pharmaceuticals. The World Investment
Report 2006 identifies four specific motives,
for which firms look abroad, viz.
market-seeking (i.e. looking for new
customers), efficiency-seeking (i.e. reducing
the costs), resources-seeking (i.e.
accessing key factor inputs), or created/
strategic-asset-seeking (i.e. such as
technology, brands, distribution networks,
R&D facilities and managerial
competences).
As regards the Indian firms, the key
motives for their cross-border M&As
have been gaining market access and
acquiring new technologies and competencies.
For instance, the acquisition of
the Anglo-Dutch company, Corus, by
Tata Steel (for more than $12 billion)
seems driven by this kind of a strategy.
The key motive of Tata Steel could have
been to gain access to European markets;
since Corus, which controls about
50 percent of the UK steel market (in
volume terms), is likely to offer Tata
Steel a direct gateway into the European
markets (where Tata Steel did not
have a presence until now). It would also
provide Tata Steel the access to advanced
technology of Corus. This acquisition
has made Tata Steel the 5th
largest steel producer in the world.
Thus, the main motive of Indian firms
has been getting access to large markets
and acquiring new technologies, and in
several industries, acquisition of firms
in the developed countries seems to offer
the Indian firms not only better technology
but also a sizeable market.
6. Conclusion
Thus, the strategy of ‘internationalization’
being adopted by Indian firms
seems to have been driven by a host of
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factors, such as, a liberalized policy regime
and growing competitive pressures
in the domestic market, among others.
As the Indian firms look out for other
markets and better technologies, the
firms in the developed countries seem
to have offered both in case of several
industries. However, there is a clear
need for precaution in this regard, since
Indian firms borrowing from the global
financial markets for the overseas acquisitions
get exposed to the volatilities of
the global financial markets. In fact,
some of the major acquisitions by Indian
firms in the recent years have been predominantly
financed by debt from the
global financial markets. There is also a
strong need to reorient the motives of
the overseas acquisitions by Indian firms
towards the long-term development of
the country. In their overseas investments,
Indian firms should try to focus
more on resource-seeking activities,
such as exploration and development of
mineral and energy resources (the acquisition
of Sakhalin Oil fields in Russia
by ONGC is an example of this). We
may note here that China, in order to
sustain its rapid growth, has invested
the most in exploration of oil fields and
industrial raw materials. However, it
would be interesting to see how the recent
weakening of Dollar influences
policies governing overseas investment
as well as the capacities of Indian firms
in this regard.
End Notes
1
These results have been computed
from the UNCTAD FDI database accessed
from .
2
UNCTAD (2006) ‘World Investment
Report 2006–FDI from Developing
and Transition Economies: Implications
for Development’.
3
As has been argued by Kumar, Nagesh
(1995) ‘Industrialization, Liberalization
and Two Way Flows of Foreign
Direct Investments: The Case of India’,
Discussion Paper Series, No.
9504, INTECH- The United Nations
University, Netherlands.
4
In 1995, the task of supervision of
overseas investments was transferred
from Ministry of Commerce, Govt.
of India to the Reserve Bank of India
(RBI). This was intended to provide
a single window system for overseas
investment approvals.
5
Gopinath, Shyamala (2007) ‘Overseas
Investments by Indian companies
- Evolution of Policy and Trends,’
Key note address at the International
Conference on Indian cross-border
presence/acquisitions, Mumbai, January
19.
6
As per the Annual Policy Statement
for the Year 2007-08 by Dr. Y. Venugopal
Reddy, Governor, Reserve
Bank of India, May 14, 2007.
7
“RBI further liberalises Forex Rules’,
RBI Press Release, September
2007.
8
Nayyar, Deepak (2007) ‘The Internationalization
of Firms from India:
Investment, Mergers and Acquisitions’
, SLPTMD Working Paper Series,
No. 004, Department of International
Development, University
of Oxford.
9
As has been reported by the Department
of Economic Affairs, Ministry
of Finance, Government of India.
10
These limitations have been pointed
out by several analysts, for instance,
Nayyar (2007).
11
As has been observed by Nagesh Kumar
(1995).
12
Lall, S. (1983) The New Multinationals:
The Spread of Third World Enterprises,
New York: John Wiley
13
As reported by UNCTAD in World
Investment Report 2006.
14
UNCTAD (2004) ‘India’s Outward
FDI: A Giant Awakening?’,
UNCTAD/DITE/IIAB/2004/1,
20th October.
15
Pradhan, J. P. (2007) ‘Growth of Indian
Multinationals in the World
Economy: Implications for Development’,
Working Paper, No. 2007/04,
ISID, New Delhi.
16
Nagaraj, R. (2006) ‘Indian Investments
Abroad: What Explains the
Boom?, Economic and Political
Weekly, Vol. XLI, No. 46, pp.
4716-4718.
17
Pradhan, J. P. (2005) ‘Outward Foreign
Direct Investment from India:
Recent Trends and Patterns’, Working
Paper, No. 153, Gujarat
Institute of Development Research,
Ahmedabad.
18
As reported by UNCTAD in World
Investment Report 2006.
19
MAPE Advisory Group ( 2006)
“India Inc Going Abroad: Indian
Companies’ Foreign Acquisitions’,
background paper for the Seminar
hosted by the IIM Calcutta on
India Inc Going Abroad - Investing
and Managing Internationally,
Bangalore, April 19. There are two
other studies on acquisitions abroad
by Indian firms. First is by FICCI
in 2006 and, the second is by CMIE
in 2007.
THE INDIA ECONOMY REVIEW
115

Anurag Sharma
Research Fellow,
Faculty of Business and Economics,
Monash University, Melbourne
Indian Banking Reforms and Policy
Reversal: A Vicious Cycle
"In sovereignty there are no gradations. There
may be limited royalty, there may be limited
consulship; but there can be no limited government.
There must, in every society, be some
power or other, from which there is no appeal,
which admits no restrictions, which pervades the
whole mass of the community, regulates and
adjusts all subordination, enacts laws or repeals
them, erects or annuls judicatures, extends or
contracts privileges, exempt itself from question
or control, and bounded only by physical
necessity.
By this power, wherever it subsists, all legislation
and jurisdiction is animated and maintained.
From this all legal rights are emanations, which,
whether equitably or not, may be legally recalled.
It is not infallible, for it may do wrong; but it is
irresistible, for it can be resisted only by rebellion,
by an act which makes it questionable, what shall
be thenceforward the supreme power."
-Samuel Johnson
1. Introduction
In the first decade following India’s independence
in 1947, the banking sector
was characterized by low reserve requirements
and no control on interest
rates (Demetriades and Luintel, 1996).
Acting pursuant to its policy of directed
and concessional lending to priority
sectors (agriculture, exports, small
scale industry) the government assumed
control of the financial sector in the
1960’s by nationalizing the major banks.
Liquidity requirements were raised and
interest rates on lending and deposits
controlled and these became a major
source of inefficiencies in the banking
sector, through out the 1970’s and
1980’s. Concessional lending to priority
sectors with weak regulatory and supervision
framework led to a high incidence
of Non Performing Assets (NPA)
in the banking sector. In 1992-93 NPA
amounted to 24 percent of the total assets
of public sector banks. The government
began a gradual process of financial
sector reforms in the mid 1980’s.
Even though the pace of reform increased
following the 1991 financial
crisis, they remain incomplete. Demetriades
and Luintel (1996) examine the
effect of various types of banking controls
on financial deepening in India
and conclude these controls (with the
exception of the lending rate ceiling)
are having a negative impact on financial
deepening and thus adversely affecting
economic growth.
The Indian economy has experienced
more than a decade of economic reform
following the 1991 financial crisis. The
present paper focuses on a critical analysis
of the reforms process with emphasis
on the banking sector, to highlight
those inefficiencies which can contribute
to “policy reversal” by the government.
Policy reversal can be described
as a situation in which government policies
of sound fiscal management or
financial restructuring adversely affect
the banking sector (due to underlying
inefficiencies) so that the government
is forced to revive the banking sector by
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using policies such as recapitalization
of public sector banks, honouring contingent
and reserve of not less than Rs.500000
and b) Satisfy the Reserve Bank of In-
the SBI and its seven independently
capitalized subsidiaries. The govern-
liabilities or explicit bail-out dia (RBI) that its affairs are not ment of India is the major share holder
packages that serve to undermine its
initial efforts and adversely affect the
government exchequer. This paper provides
a brief overview of the evolution
of the banking sector in India. Particular
conducted in a manner detrimental to
the interests of depositors.
Scheduled commercial banks are further
split into Public Sector Banks
(PSB), private sector banks, foreign
in these banks. Prior to 1991, PSBs accounted
for about 90% of all deposits
assets and credit in the economy. Private
sector banks are classified as old
and new private sector banks. There are
emphasis is placed on the possibility
of policy reversal. The outline of the
paper is as follows: Section-1 describes
Concessional lending to priority sectors with weak regulatory
and supervision framework led to a high incidence of
the structure of the banking sector in
India and its main characteristics in the Non Performing Assets (NPA) in the banking sector. In
pre-1991 period. Section-2 outlines the 1992-93 NPA amounted to 24 percent of the total assets
causes and impact of the 1991 financial
of public sector banks
crisis focussing on the changes in exchange
rate regime. Section-3 critically banks and Regional Rural Banks 23 old private sector banks. Eight private
analyses the banking sector reforms after
1991 and summarizes current inefficiencies
in the banking sector emphasizing
high transaction costs and
presence of the contingent liabilities.
Section-4 discusses the relevance of
policy reversals in India and cites some
examples. Section-5 contains the policy
conclusions and other impertaives.
2. Banking Sector In India
Banks in India are classified under the
broad categories of scheduled and nonscheduled.
Scheduled banks consist of
(RRB).
Public sector banks consist of nationalized
banks and State Bank of India
(SBI) group of banks. In 1969 the Indian
government nationalized existing
large private sector banks under its
policy of assisting India’s planned development
strategy by mobilizing financial
resources to strategically important
sectors. Fourteen banks were nationalized
in 1969 and six in 1980. The Punjab
National Bank was merged with the
New Bank of India in 1993 thereby reducing
the total count of national
sector banks opened for business
after 1991 and are classified as new private
sector banks. Currently there are
42 foreign banks in India, although
their share in the holdings of banking
sector assets remains negligible due to
strict regulatory and entry requirements.
RRB’s operate exclusively in
Figure 1: Banking Structure In
India
Reserve Bank of India
Scheduled Commercial bank (SCB) and
banks to nineteen. The
Banks in India
Financial Institutions
scheduled cooperative banks. Non SBI group comprises
Scheduled Banks comprise banks that
are not included in the Second Schedule
of the Banking Regulation Act of
Scheduled Banks
Non-Scheduled Banks
1965 and thus do not satisfy the following
conditions: a)
have paidup
Scheduled Commercial Banks
Scheduled Co-operative Banks
capital Public Sector Banks Private Sector Banks Foreign Banks Regional Rural
Banks
Nationalized Banks
SBI Group
Old Private Sector Banks
New Private Sector Banks
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REIMAGINING INDIA
rural areas to provide credit to small
farmers and entrepreneurs. There are
currently 196 RRB’s accounting for
four percent of the total assets of scheduled
commercial banks. India also has
specialized financial institutions under
the following categories: big industry,
investment and credit guarantee, exim
trade, capital market, agriculture and
housing development. Their geographic
reach is classified as all India, statelevel
and other institutions. All-India
financial institutions include (a) development
banks (i.e., Industrial Development
Bank of India, Industrial Credit
and Investment Corporation of India,
Small Industrial Development Bank,
Industrial Investment Bank of India,
and Industrial Finance Corporation of
India); (b) specialized financial institutions
(such as, Export Import Bank of
India, Technology Development and
Information Company of India); (c) investment
institutions (i.e., Unit Trust of
India (UTI), Life Insurance Corporation
of India, General Insurance Corporation
and subsidiaries); and (d) refinance
institutions (i.e., National Bank
for Agriculture and Rural Development
(NABARD) and National Housing
Bank). The role of these financial institutions
is to promote economic development
in various sectors of the economy.
State level institutions include
state financial corporations and state
industrial development corporations.
Other institutions consist of the Export
Credit and Guarantee Corporation of
India and Deposit Insurance
and Credit Guarantee Corporation.(S
hirai,2002).
2.1 Pre-reform Period
The banking system in India prior to
1991 was highly regulated and inefficient.
The most significant of these distortions
were:
• The existence of high levels of Cash
Reserve Ratio (CRR) and Statuary
Liquidity Ratio (SLR): CRR is a requirement
on banks to hold a certain
amount of deposits in the form of deposits
to RBI. It is calculated as a
percentage of reserve liabilities
which are defined as a difference between
all liabilities exempted from
the SLR requirement and net time
and demand deposits. The CRR rose
from around 15 percent in 1960-70 to
its upper legal limit of 15 percent in
Banking reforms started in the second half of the 1980’s
but was only seriously implemented after the 1991 financial
crisis. The role of foreign and private sector banks
remained negligible due to restricted entry regulations and
strict branch licensing policies
1991. The high value of CRR led to
low profitability for banks and higher
spreads. The RBI uses CRR as a
tool for monetary intervention in the
economy; e.g. the RBI increased
CRR in August 1993 in order to sterilize
capital inflows (Shirai, 2002).
SLR is a liquidity requirement 1 for
banks to hold a certain amount of
deposits in the form of government
and eligible securities. The upper legal
limit of SLR is 40 percent. SLR
increased from 25 percent in 1970 to
38.5 percent in 1991. Hence for some
time periods overall reserve requirements
exceeded 50 percent.
• Prior to 1991, Indian interest rates
were administered by government.
These included lending and deposits
rates including rates on saving deposits.
The administration of rates
was politically motivated and adversely
affected bank balance sheets.
Joshi and Little (1996) report the average
return on assets in the second
half of the 1980’s was just
0.15 percent.
• Directed and Concessional Lending:
The state pursued a policy of allocation
of financial resources to the socalled
“priority sectors”. These included
agriculture, small scale
industries, small business and selfemployed
persons. Thus policy set
quantitative loan targets 2 on banks
and was a major reason behind the
NPA of public sector banks. At the
beginning of 1992-93 NPA amounted
to 24 percent of total credit. 3
• Lack of competition in the banking
sector: The role of foreign and private
sector banks remained negligible
due to restricted entry
regulations and strict branch
licensing policies.
These government policies were the
main cause of deteriorating bank performances
and diminished banks’ incentive
to operate efficiently. There was
lack of a proper regulation and supervision
mechanism, which allowed banks
to take high risks. This situation was
worsened by the presence of implicit
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Table 1: Progress Of Commercial Banking In India
Jun-69 Dec-80 Mar-91 Mar-95 Mar-99
No. of SCB 73.0 154.0 272.0 281.0 297.0
Per capita Deposit (Rs.) 88.0 738.0 2368.0 4242.0 8247.0
Per capita Credit (Rs.) 68.0 457.0 1434.0 2320.0 4705.0
Share of Priority Sector advances
in Total Non-food credit of 15.0 40.3 39.2 35.8 35.9
SCB(%)
Deposits (% of National Income)
15.5 36.0 48.1 46.4 48.7
Total Assets (Rs. Billion) 68.4 710.8 3275.2 5215.4 11516.2
Source: RBI (2003a)
government guarantees i.e. the
existence of contingent liabilities in
the system.
The reform process in the banking
sector started in the second half of the
1980’s but was only seriously implemented
after the 1991 financial crisis.
Table-1 summarizes salient aspects of
the progress of the commercial banking
sector in India. The evolution of the financial
crisis of 1991 and its impact
on the Indian economy is now
briefly outlined 4 .
3. Financial Crisis In India
Prior to 1991 some important financial
characteristics of the Indian economy
can be summarized as follows:
• Restrictive Capital Controls: Direct
Investment was restricted. Capital
inflows mainly consisted of foreign
aid, commercial borrowings and Non
Resident Indian (NRI) deposits. Indian
companies were not allowed to
hold foreign equities. The foreign
portfolio investment was mainly directed
toward a small number of public
sector bond issues.
• High fiscal deficits: Fiscal deficits
were consistently high (combined
gross fiscal deficit of state and central
government rose by 20 and 24
percent respectively in 1990 and
1991) and mainly financed by borrowings
and financial repression
rather than monetization (Jha and
Sharma (2004)). As a result the inflation
rate did not reach extremely high
levels and was at a par with India’s
trading partners.
• Pegged Exchange Rate: The exchange
rate was officially pegged to
a basket of currencies. However the
trade-weighted nominal exchange
rate depreciated steadily relative to
the US$ in the latter half of the
1980’s leading to small frequent devaluations.
The rate of nominal depreciation
was faster than the relative
inflation differential leading to falls
in the real exchange rate.
• Trade: The government strategy was
highly interventionist since independence
and consisted of import
substitution, complex industrial licensing
requirements and public
ownership of heavy industry. In the
second half of the 1980’s, the emphasis
shifted from import substitution
to export-led growth. The government
began a process of gradual liberalization
of trade, investment, and
financial markets. Export growth
was rapid due to real depreciation of
the rupee. However the value of
imports increased at a faster rate
(mainly in the petroleum sector)
because of the easing of
quantitative restrictions.
India’s credit rating was downgraded and outfl ows were
quick. As the forex reserves declined, economy was on
the brink of default by January 1991. One of the major
policy shifts in response to the financial crisis was the
change in exchange rate management
3.1 1991 Financial Crisis
• Due to a widening gap between exports
and imports and downturn of
capital flows the current account
deficit grew steadily and was financed
by external borrowings and
remittances of NRI making the
economy extremely vulnerable to external
shocks. External debt was $69
billion in 1990-91 compared with $35
billion in 1984-85.
• Shocks: The first external shock was
the sharp increase in world oil prices
due to the Gulf War increasing the
value of petroleum imports from $2
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REIMAGINING INDIA
Table 2: Cost Of Banks’ Rescue (Rs.Billion)
in terms of a foreign currency
and commits to
1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 2001-2002
trade in unlimited
Capital Infusion 57.0 52.9 8.5 15.1 27.0 4.0 18.0
amounts at that rate.
Cumulative Infusion 97.0* 149.9 158.4 173.5 200.5 204.5 222.5 Normally the exchange
*: Includes Rs.40 billion injected prior to 1993
rate is allowed to vary
billion to $5.7 billion which was quite
high compared to 5 percent increase
in non-oil imports. Exports were also
adversely affected due to the impact
of the Gulf war on India’s trading
partners. For example, growth of India’s
single largest trading partner,
the US, fell from 3.9 percent in 1989
to -1 percent in 1991. This led to a
sharp deterioration in the trade account.
The Gulf crisis also resulted
in a decline in non resident workers’
remittances to India.
Apart from these external factors,
political uncertainty in India in 1990
and 1991 led to a fall in investor confidence
further widening current account
imbalances and causing a loss in reserves.
India’s credit rating was downgraded
by credit rating agencies leading
to difficulties in commercial bank financing.
The outflows from the economy
were quick and as the forex reserves
declined, the economy was on the brink
of default by January 1991. One of the
major policy shifts in response to the
financial crisis was a change in exchange
rate management. The next section
briefly outlines exchange rate policy
changes from 1970 to the present.
3.2. Exchange Rate Regime
In India
With the collapse of the Bretton Woods
arrangement in 1973 most developed
economies switched from a fixed exchange
rate to a flexible exchange rate
regime. Under a fixed exchange rate
regime the central bank announces the
buying and selling rates of its currency
within a narrow band.
One major drawback of a fixed exchange
rate regime in economies with
perfect capital mobility is that monetary
stabilization policy becomes ineffective
(Obstfeld, 1995). For example if a government
attempts to increase money
supply by open market purchase of domestic
bonds, households will find
themselves holding more money than
they desire. Since interest rate parity
condition holds, household will sell
their excess money holdings to the central
bank for foreign currency at the
fixed exchange rate and invest abroad
to buy the desired amount of bonds.
Such a mechanism will keep interest
rates unchanged and leave the government
with more bonds on the cost of
forex reserves. One option for government
will then be to refuse to buy the
excess money supply and allow the currency
Table 3: Comparison Of Central Government Holdings By Major
Indian Banks After Public Issue
to depreciate.
In spite of its drawbacks a fixed exchange
rate regime is preferred in some
Bank Name Date of Public Issue Government Percentage
holding after public
developing economies especially those
with limited capital mobility. This is
issue (%) as of 2001
due to the following perceptions: a) A
State Bank of India December 1993 66.34
fixed exchange rate regime removes exchange
rate uncertainty thereby retain-
Sate Bank of Bikaner November 1997 75.00
State Bank of Baroda December 1996 66.88
ing investor confidence and macroeconomic
stability; b) The export import
State Bank of Travancore
January 1998 76.00
industry can be protected from huge
Bank of India February 1997 77.00
swings in exchange rates by keeping it
Corporation Bank October 1997 66.33
stable and c) If the currency is pegged
Oriental Bank October 1994 66.48
to a low inflation currency it helps keep
Dena Bank December 1996 71.00
domestic inflation low. For example, a
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Figure 2: Pre- reform Exchange Rate Variability
government running a very high deficit
will be reluctant to adopt an expansionary
monetary policy because of its ineffectiveness
in a fixed rate regime.
Macroeconomic stability is a priority
for any economy and all governments
(irrespective of exchange rate regime)
tend to intervene in the forex markets
in order to influence the exchange rate.
The government can take direct or indirect
measures to counter exchange
rate movements. Direct measures involve
trading in the forex market. The
government uses its foreign exchange
reserves to affect demand and supply in
the forex market. For example, if domestic
currency is depreciating the government
will buy excess money supply
by selling forex reserves to stabilize
supply demand imbalances. The government
can further offset this contractionary
effect in domestic money supply
by a simultaneous and equal purchase
of domestic currency bonds. Such intervention
is called “sterilized intervention”
and is preferred by most governments.
Such direct measures of
intervention are complemented by some
indirect measures like trade and interest
rate restrictions to affect the demand
and supply of foreign currency.
For example, variable interest rates will
affect the capacity of importers. One
example is an interest rate surcharge on
import finance: In order to curb imports
and retain forex reserves, the RBI
increased the interest rate surcharge on
import finance from 15 percent to 25
percent in January 1996.
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in 2004. The general perception is that
if the government reduces SLR the reduced
demand for government bonds
will lead to a rise in interest rates the
government has to pay bond holders.
This may adversely affect the fiscal
deficit. However, banks have continued
to invest around 40 percent of their deposits
in government securities in spite
of the reduction in SLR. This is essentially
because government bonds are
considered to be a risk-free investment
for banks.
Interest rates were deregulated in
1992 leading to complete liberalization
of all term deposit and lending rates,
except for savings deposit rates which
remain controlled. The RBI has also
begun using the bank rate (the rate at
which RBI lends to commercial banks
Table 4: Regulatory Framework Of Indian Banking Sector
Variable 1992-93 2000-01 2001-02 2002-03
Capital to Risk-weighted Assets
Ratio (%)
Domestic banks with international
4 9 9 9
business
Foreign banks 8 9 9 9
Non-performing assets
(period overdue)
Sub-standard assets 4 Q 2 Q 180 days 180
days*
Doubtful Assets
period for which remained substandard
24 M 18 M 18 M 18 M@
Provisioning requirements (%)
Standard Assets - 0.25 0.25 0.25
Sub-standard assets 10 10 10 10
Doubtful Assets (unsecured portion)
100 100 100 100
Loss assets 100 100 100 100
Source: RBI (2003d)
M: Month ; Q: Quarter
by rediscounting bills or eligible paper)
as a reference rate for influencing the
direction of interest rates in the economy
(Bhide et al., 2001). The flexibility
to set lending rates led the banks to use
this measure to offset the cost involved
in concessional lending to priority
sectors. During the reform period the
ceiling of 40 percent on domestic banks
and 33 percent on foreign banks for priority
sector lending remained but banks
were allowed to set the lending rates
and more profitable sectors like the
software industry and venture capital
were included in the definition of priority
sectors. The government relaxed the
norms for entry in the banking sector in
The deregulation of interest rates is also incomplete. Interest
rates on saving deposits and other saving schemes
such as National Savings Certifi cates, public provident
funds etc. remain regulated. Such rigidities reduce the
effectiveness of the transmission of monetary policy
order to increase competitiveness. For
example the ceiling of voting rights of
an individual shareholder was increased
from 1 to 10 percent in 1994. The relaxed
guidelines led to the entry of 8
private sector banks and 26 new foreign
banks in the Indian banking sector.
In response to the Narsimhan Committee
recommendations, the government
gradually started to privatize PSB.
These banks were accumulating large
amounts of NPA due to the pre-reform
regulated regime. They made an aggregate
loss of Rs.35 billion and almost
half of the public sector banks had negative
net worth. Realizing the importance
of recapitalization, the government
spent in the range of 0.02 to 0.7
percent of GDP each year to wipe off
accumulated NPA (Table 2). This
helped the banks clean up their balance
sheets and make public issues of equity.
As Table 3 shows, the central government
still continues to hold a large
share of holdings in major state-owned
banks. 6 Adoption of regulatory and supervision
norms: Strengthening of the
regulatory and supervisory framework
of the banking sector remains a key element
of financial sector reform. The
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125

REIMAGINING INDIA
policy focus is on streamlining banking
operations, upgrading risk management
systems and enhancing the level of bank
compliance with accounting standards
and operationalizing consolidated accounting
practices (RBI, 2003b). However,
progress in this direction has been
gradual. The RBI notes: “Within the
process of convergence with best practices,
finetuning is undertaken keeping
in view the country specific circumstances.”
(RBI, 2003c). For example,
NPA have been defined as loans in
which interest has remained unpaid for
four quarters in 1992-93. This period
was shortened to three quarters in
1993-94 and two quarters in 1994-95.
The central bank now plans to further
shorten the period (in March 2004) to
match the international norm of one
quarter. Thus NPA were underestimated
by Indian accounting standards. The
main reason behind such a policy was
the political lobbying of borrowers. A
summary of some aspects of the regulatory
framework used by the RBI is given
in Table 4.
The financial sector reform process
in India can be described as a graduated
approach in the direction of liberalization.
Figure 5 plots major banking
indicators for the pre-reform and postreform
period. There are still some
weaknesses in the financial sector
which contribute to its inefficiencies.
Though reduced from 40 percent to 25
percent, the SLR has remained at high
levels. Moreover, bank investment in
government bonds and securities is still
around 40 percent of their assets (Bhattacharya
and Patel, 2003). This is because
interest rates paid by the government
are more market based due to the
auction mechanism of its securities such
as Treasury Bills; and also because
banks prefer to invest in government
securities as they are relatively risk free
and more liquid. Banks are reluctant to
take risks in alternative markets because
of stricter prudential norms and
accounting standards. The high investment
in government securities is convenient
for government which is running
high fiscal deficits. However, when
economic growth accelerates, high SLR
can adversely affect the credit formation
role of banks. Banks will be reluctant
to lay off their securities in order
to satisfy increased dem-and for credit.
The CRR also remains higher than its
Table 5: Non Performing Assets 0f Commercial Banking Sector: 1997-2003
Year Public Sector Old Private New Private Foreign Banks
Banks Sector Banks Sector Banks in India
1997 17.80 10.70 2.60 4.30
1998 16.00 10.90 3.50 6.40
1999 15.90 13.10 6.20 7.60
2000 14.00 10.80 4.10 7.00
2001 12.40 11.10 5.10 6.80
2002 11.09 11.01 8.86 5.38
2003 9.36 8.90 7.64 5.22
Definition: Gross NPA/Gross Advances (%)
statuary minimum of three percent.
The deregulation in interest rates is
also incomplete. Interest rates on saving
deposits and other saving schemes
such as National Savings Certificates,
public provident funds etc. remain regulated.
7 Such rigidities reduce the effectiveness
of the transmission of monetary
policy (Sharma, 2004). The
lending rate for advances of over
Rs.200000 was subjected to a ceiling of
16.5 percent in 1987-88. This was eventually
removed in 1994. The Prime
Lending Rate (PLR) was set as a floor
rate and banks are now free to set lending
rates without any upper restriction.
The lending rates though, officially
flexible, are affected by public sector
banks which are the dominant players
in the banking sector. These banks offer
rates below the PLR because of their
advantage in market share and quality
of borrowers. Therefore other banks’
lending rates do not diverge much from
the rates set by PSB thereby making
PLR ineffective. The banks still have to
make some loans based totally on the
political agenda of the government. For
example banks are forced to provide
concessional loans to individuals or
firms belonging to scheduled caste or
scheduled tribes.
4.1 High Transaction Costs
One of the major concerns of the banking
sector is the high transaction costs
involved in the lending operations of
banks. Transaction costs are particularly
high in rural sector areas which
are one of the priority sectors defined
by government. Puhazhendhi (1995)
estimated the transaction costs of lending
to the rural poor in India. He con-
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sidered two major commercial banks,
one regional rural bank and one private
commercial bank from the southern
states of Tamil Nadu and Kerala. The
estimated transaction cost was 3.68 percent
of the loan amount if the loan was
delivered through a direct lending
channel. The literature on micro-credit
(see (Ghatak, 2000) and (de Aghion
and Gollier, 2000)) argues that group
lending to the poor through Non-Governmental
Organization (NGO) and
Self Help Group (SHG) may be an efficient
method of credit delivery system.
In 1991, the RBI initiated the policy of
encouraging direct linkages between
the banks and NGO and SHG due to
the presence of high transaction costs.
Puhazhendhi (1995) estimated the financial
intermediation of NGO and
SHG reduced transaction costs by between
21 and 41 percent relative to the
direct lending channel. In spite of these
efforts transaction costs remain high
even after a decade of reform. The estimated
opportunity cost of existing
high transaction costs in India is
still high. 8
Though heading in the right direction,
prudential norms are yet to reach
global standards. The pace of restructuring
nationalized banks through privatization
is slow. This is mainly because
nationalized banks’ balance
sheets are weak due to accumulated
NPA over the past three decades. The
government needs to clean up balance
sheets by recapitalization and other
measures in order to make these banks
more attractive to investors. Given recent
trends on the magnitude of NPA
(Table 5) the cost of restructuring appears
to be very high, particularly since
it is already running very high deficits.
Such liabilities on the government to
revive the banking sector (contingent
liabilitie000s), are significant in the
case of India. The impact of contingent
liabilities is now examined.
4.2. Contingent Liabilities
The financial sector in transition and
developing economies is characterized
by poor regulatory and enforcement
systems, and inadequate disclosure of
information which may lead to a high
incidence of NPA. When the banking
sector is in stress, out of legal obligation
or political compulsion the central government
has to rescue the banks. Such
public financing by government represents
its contingent liabilities and can
potentially lead to a large increase in
public debt. Because of their uncertain
nature these contingent liabilities are
unbudgeted and, hence, are hidden fiscal
risks. Contingent liabilities are also
important because the government cannot
achieve its long-run objective of a
sound fiscal system without addressing
the problem. Explicit contingent liabilities
are specific obligations which the
government has to settle under a contract
or a law. These include obligations
issued to state governments and public
sector banks, etc. The government can
foresee such guarantees and includes
them in its budget constraint. 9
However, contingent liabilities or implicit
liabilities are uncertain and their
realization is dependent on the probability
of particular events. Sometimes,
these events could be totally exogenous
to government policy, e.g., an earthquake
or any other natural disaster.
Most of the time, these liabilities are a
result of government policy. One interesting
example is a guarantee extended
by government to foreign creditors of
domestic banks. These guarantees may
lead to moral hazard problems in the
banking sector as banks may take high
risks, eventually leading to default on
foreign loanswww, and pressure on the
government to bail them out because of
It is argued that under current ineffi ciencies in the banking
sector, any efforts by government to ensure macroeconomic
stabilization or restructuring will involve an offsetting
effect, adversely affecting the initial policy objectives,
which will transmit mainly through the financial sector
public expectations or political compulsion
(For a detailed model see (Sharma,
2004)). One relevant case study in this
regard is the crisis in the UTI mutual
fund discussed in section 5.
Contingent implicit liabilities are
normally calculated after the event occurs,
as they are dependent on the probability
of the triggering event, the actual
loss and the amount government
pays to bail out the system. (Polackova,
1999) notes the financial systems represent
the most serious contingent implicit
liability. For example the cost of
resolving past banking crises varies
from around 1 percent of GDP (Thailand
1983-87) to around 55 percent of
GDP (Argentina 1980-82) depending
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REIMAGINING INDIA
can subsequently cause what can be
termed a “policy reversal” by government.
Such policy reversals can arise
under several conditions some of which
are:
• Suppose government is running high
deficits and implements a tight monetary
policy by increasing interest
rates. Due to the inflexibility of the
banking sector in passing on interest
higher incidence of NPA in balance
sheets. This may force the government
to revive the banking sector
through measures like recapitalization
which will be a direct burden on
government budget. As discussed
earlier, the cost of reviving banks is
very high in the case of India. The
government indeed began a partial
privatization of banks as part of its
economic reform process initially
providing Rs.40 billion from 1991-92
to 1992-93 to 19 nationalized banks.
Subsequently, the government has
spent around Rs.164.5 billion at a
rate of between 0.02 and 0.7 percent
of GDP each year from 1993-99.
Though there was a decline in NPA
from 17.8 percent in 1997 to 11.4 percent
in 2002 they are still very high.
• A second reason for policy reversal is
the existence of weak regulatory and
supervisory framework in the Indian
Banking sector. The UTI mutual
funds crisis is an example of this (See
Appendix A.1).
The government began a partial privatization of banks,
initially providing Rs.40 billion from 1991-92 to 1992-93
to 19 nationalized banks. Subsequently, ithas spent
around Rs.164.5 billion at a rate of between 0.02 and 0.7
percent of GDP each year from 1993-99
on the state of the financial system.
Standard and Poor’s (Polackova, 1999)
estimate the fiscal cost of a future
banking crisis in India will be around
15 percent of GDP. This is so high because
of the persistent inefficiencies in
the banking system even after a decade
of financial reform (Bhattacharya and
Patel, 2003). Bhattacharya and Patel
(2003) put the estimate of government
guarantees in India as around 12 percent
of GDP. Hence government guarantees
are a crucial part of analysis of
a financial sector especially in developing
economies.
The overview of the reform process
brings up the question of policy reversal
which is covered in the next section.
5. Policy Reversal
Most of the financial reforms in the Indian
economy were guided by “.... objectives
of increasing operational efficacy
of monetary policy....” (RBI, 1997,
page I-9). It is argued that under current
inefficiencies (especially high NPA
and the large share of government ownership)
in the banking sector, any efforts
by government to ensure macroeconomic
stabilization (say reduction
in fiscal deficit) or restructuring will
involve an offsetting effect, adversely
affecting the initial policy objectives,
which will transmit mainly through the
financial sector. This offsetting effect
rates rise this will lead to banking
stress. This inflexibility arises mainly
because of the government’s policy
of directed and concessional lending
to priority sectors. Because of a regulated
interest rate regime, the banks
cannot adjust their deposit rates
much, say in the, area of savings deposits.
Thus stress in the banking
sector will be directly reflected in a
6. Conclusion
The present paper has reviewed the financial
sector reform process in India
focussing on the banking sector. It can
be safely concluded that financial sector
reform in India is incomplete. The
banking sector remains inefficient because
of several factors viz. high reserves
and liquidity requirements, a
poor regulatory and supervisory framework,
the presence of implicit government
guarantees, high transaction costs
etc. These inefficiencies can adversely
affect the long-term policy objectives
of a sound fiscal system and can even
lead to policy reversals.
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APPENDIX
A.1 UTI Crisis
The section is compiled from the www.
rediff.com archives. UTI mutual fund
commenced operation on July 1964. It
was established by the central government
to channel community savings into
productive uses in order to speed up industrial
growth. To quote then Finance
Minister T.T. Krishnamachari “the trust
would be open to any person or institutions
to purchase the units offered by the
trust. However, this institution as we see
it, is intended to cater to the needs of individual
investors, and even among them
as far as possible, to those whose means
are small.” The main objective of the
UTI was to invest retail savings in the
capital market and pass the benefits back
to small investors. UTI had a monopoly
in the funds industry until 1986. Subsequently,
PSBs sponsored funds entered
the market and in 1993 there were 8 mutual
funds. After 1993 private sector mutual
funds were allowed. The funds industry
has grown at a compounded
average rate of 27 percent from an asset
base of Rs.250 million in 1964 to its current
size of Rs.900 billion. The share of
UTI is around Rs.600 billion. UTI invests
about a quarter of this through the
US-64 fund, India’s largest, and accounts
for about 15 percent of the domestic mutual
fund industry’s assets in a year. The
mutual funds (particularly UTI) are very
popular among small investors and became
even more attractive in 1996 when
the mutual fund dividend returned by
equity-oriented schemes was exempted
from tax. In mid 2002, the UTI bank decided
to skip a dividend for its flagship
US-64 scheme for the year 2001-02. This
was because the NAV of the scheme had
eroded sharply and was much lower than
its face value of Rs.10. On 1st August,
2002 the NAV of US-64 was Rs.5.80.
This was the first time the UTI had
skipped paying a dividend for the US-64
scheme, since its inception in 1964. The
UTI Board decided to skip a dividend as
the government had been providing budgetary
support to unit holders, to bridge
the gap between the NAV and repurchase
price of 2001. In the period January-June
2002 the SEBI reported that the UTI had
redemption/repurchase to the tune of
over Rs.63 billion against a mobilization
of just Rs.6.3 billion. All the Minimum
Income Plan (MIP) schemes of the UTI
showed negative reserves on 30 June
2002. According to a report by SEBI, 35
out of 63 schemes (whose unaudited results
were available) had negative reserves.
For the MIP schemes, negative
reserves totalled up to Rs.30 billion.
MIP97(III) had egative reserves of
Rs.2.6 billion and MIP97(IV) had negative
reserves of Rs.2.5 billion. For the
three years between 1999 and 2002, UTI
consistently lost market share in terms of
net assets. On 31 March 1999, UTI had
a 77 percent market share with assets at
Rs.531.45 billion out of total Rs.681.93
billion. These figures dropped dramatically
over the following years and on 30
June 2002 the market share of UTI was
46 percent with assets amounting to
Rs.463.96 billion out of total Rs.1007.03
billion. UTI’s investments make up 11
percent of the value of all stocks traded
on the Bombay Stock Exchange.
The collapse of UTI began in 1999.
The UTI mutual fund scheme was ailing,
the government had issued a Special Securities
Scheme for Rs.33 billion by taking
over a large percentage of public sector
scrips which had a considerably lower
book value. The government continued
to pay interest of 11.2 percent to the trust
until 2002. UTI had not paid any dividend
to the government until then. However,
things did not turn out as planned
and due to harsh market conditions, especially
with the tech meltdown, US- 64
holdings fell by Rs.10 billion during January
to November 2001. The problem
was aggravated because unlike most open
ended schemes US-64 did not declare its
NAV on a daily basis. In 2001-02, the
government provided a cash support of
Rs.3 billion to US-64 following the sudden
freezing of sale and repurchase of
units on 2nd July 2001. In 2002, the central
government doled out Rs.5 billion
and promised another Rs.5 billion for the
US-64 scheme to meet the difference between
its net assets value and the administered
repurchase price. The government
planned to work out a tax concession
package to enthuse investors to remain
with the scheme after May 2003. A committee
was set up to investigate the matter
and make recommendations. The
committee revealed certain weaknesses
in investments made by UTI.
These were:
• Bad investments, including in firms it
had been warned against investing in
by its own internal advisory team. For
example, UTI lost Rs 328 million investing
in an Internet company against
the advice of their own
research department.
• All 19 individual investment decisions
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REIMAGINING INDIA
of the trust were imprudent and turned
out to be in error.
Apart from these investment inconsistencies,
the stock scam in 2001 revealed
the unhealthy nexus among the UTI (and
possibly other mutual funds as well), local
operators and promoters/corporates.
It was believed the UTI mutual fund was
the backbone of purchases in the infotech
sector supported by the infamous operator
Ketan Parikh. The tech meltdown of
2001 resulted in sharp redemption for the
scheme in early 2002. In mid 2002, the
UTI decided to skip a dividend for its
flagship US-64 scheme for the 2001-2002
year. This was because the Net Asset
Value (NAV) of the scheme has eroded
sharply and was much lower than the face
value of Rs.10. On 1st August 2002, the
NAV of US-64 was only Rs.5.80. The
RBI was reported as contemplating a repurchase
arrangement with UTI. This
behavior of the RBI was an attempt to
insulate the guilds market from the UTI
crisis which was already having an impact
on the equity market. Even some commercial
banks such as the Bank of India,
and State Bank of India started extending
loans against UTI’s US-64 scheme
at a steep discount. However, many
other banks adopted a wait and
watch policy.
The Finance inister, Yashwant Sinha
was initially reluctant to provide any sort
of government support to UTI. In a press
conference he was quoted as saying, “We
cannot go on spending government money
for bailouts. A budgetary support is
not a desirable option at the moment.”
However this policy could not be sustained.
A majority of public sector banks
rejected the proposal of buying stocks
held under its flagship US-64 scheme.
However, these banks were willing to extend
clean loans to UTI for a short period,
provided the central government gave
a “comfort letter” ensuring timely payment
of the interest and principal amount.
However, the finance minister was not
keen on providing a “sovereign guarantee”
to public sector banks in lieu of loans
extended to UTI. The chairman of UTI,
Mr. M. Damodaran was quoted as saying
that “There were problems on two fronts
- liquidity and solvency. The liquidity can
be taken care of by the banks line of
credit. But, to address the solvency issue,
the government will have to step in at the
second stage, if the market does not pick
up by that time- That is, the government
will have to bail out UTI.” M. Damodaran
said that, in the wake of a problem
regarding the solvency issue, if the government
was not forthcoming with funding,
UTI would dump its illiquid stocks
in the market.
A report by global consultancy firm
Mckinsey declared that UTI may need
$500 million to stay solvent. Mckinsey
argued that, given the high fiscal deficit,
recapitalization from government funds
would not be easy. Also, funds raised
from the capital market would not be sufficient.
After a series of meetings between
UTI chairman, M. Damodaran and Secretary
of the Department of Economic
Affairs and later with Finance Minister
Y. Sinha, the government decided to provide
cash assistance to UTI of Rs.5 billion.
Officials said the liabilities to the
center would be provided for either in the
budget or the final supplementary demand
for grants and will be in the nature
of a contingent liability on the government.
Financial analysts began suggesting
the government would have to bail
out the country’s largest mutual fund operator
for another year. In the light of a
negative reserve of about Rs.37 billion
and payment obligation for about Rs.9
billion for two of its MIP schemes maturing
2002 UTI had demanded around
Rs.50 billion. The Cabinet Committee
on Economic Affairs chaired by the
Prime minister, Mr. A. B. Vajpayee, approved
a bailout package of over Rs.145
billion for UTI to meet the liabilities on
its flagship US-64 and assured return
schemes. The government also considered
some tax concessions for US-64 unit
holders so as to create a market, reduce
redemption and keep up investment in
the scheme. The Finance Minister also
asserted there would be no budgetary
impact as a result of the package, although
it would add to the fiscal burden
and contribute to public debt. The UTI
case provides an interesting and important
example of policy reversal in the face
of financial crisis.
End Notes
1
“Under section 24 (b) of the Banking
Regulation Act, 1949, every bank is
required to maintain at the close of
business every day, a minimum proportion
of their Net Demand and Time
Liabilities as liquid assets in the form
of cash, gold and un-encumbered approved
securities. The ratio of liquid
assets to demand and time liabilities is
known as Statutory Liquidity Ratio
(SLR). Present SLR is 25 percent. The
RBI is empowered to increase the SLR
up to 40 percent” (RBI Glossary).
2
In 1974, banks were required to direct
33 percent of their net bank credit at
concessional fixed interest rates to priority
sectors. This was raised gradu-
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ally to 40 percent in 1980.
3
NPA have been defined as those loans
for which interest has remained unpaid
for four quarters in 1992-93.
4
For a detailed analysis on financial crisis
see Joshi and Little (1996), Cerra
and Saxena (2002), Kapila and Kapila
(1996) and Rangrajan (1991) among
others.
5
For example (Kohli, 2001) reports the
dates of indirect intervention done by
RBI as October 1995, January and July
1996, November 1997 and January,
June and August 1998.
6
The 1998 committee on banking sector
reforms recommended the minimum
shareholding by the government
or RBI equity in nationalized bank
should be brought down to 33 percent.
7
In fact, few allies in the newly formed
United Progressive Alliance (UPA)
government are demanding a rise in
the interest rates on various provident
fund schemes.
8
To quote RBI Governor Y.V.
Reddy:“The transaction costs are a
drag on the economy and it is time to
put emphasis on their reduction which
can facilitate the growth of GDP by 2
to 3 percent. (November 3, 2003, http://
www.rediff.com/money/2003/nov/
03cred10.htm)
9
Australian and New Zealand governments
currently report such liabilities
in their balance sheets.
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A Further
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Fiscal Deficit. Public Finance Review
32.
• Joshi, V. and I. M. D. Little (1996). India’s
Economic Reforms: 1991-2001.
Oxford: Claredon Press.
• Kapila, R. and U. Kapila (1996). Understanding
India’s Economic Reforms.
New Delhi: Acedamic Foundation.
• Kohli, R. (2001). Aspects of Exchange
Rate Behavior and Management in
India 1993-98. Economic and Political
Weekly January 29.
• Obstfeld, M. (1995). The Mirage of
Fixed Exchange Rates. NBER Working
Paper No. 5191.
• Polackova, H. (1999). Contingent Government
Liabilities: A Hidden Fiscal
Risk. Finance and Development 36.
• Puhazhendhi, V. (1995). Transaction
Costs of Lending to the Rural Poor:
Non-Governmental Organizations
and Self-Help Groups of the Poor as
Intermediaries for Banks in India.
Banking with the Poor (BWTP) network.
• Rangrajan, C. (1991). Recent Monetary
Policy Measures and the Balance
of Payments. Reserve Bank of India
Bulletin July.
• RBI (1990-2003b). Report on Currency
and Finance.
• RBI (1993-2003a). Trend and Progress
in Banking in India.
• RBI (1993-2003c). Reserve Bank of
India Bulletin.
• RBI (1997). Report on Currency and
Finance.
• RBI (2003d). Reserve Bank of India
Annual Report.
• Saez, L. (2001). Banking Reform in
India and China. International Journal
of Finance and Economics 6, 235–44.
• Saggar, M. (1999). Some Issues Relating
to Exchange Rate Policy in India in
the Post Liberalization Period. Ph. D.
Dissertation, Indira Gandhi Institute
of Development Research (IGIDR),
Mumbai, India.
• Sharma, A. (2004) Fiscal Deficits,
Banking Crises And Adjustment Policy
In A Semi-Open Economy Ph. D
Dissertation, Australian National University,
Canberra, Australia
• Shirai, S. (2002). Banking Sector Reforms
in India and China: Does India’s
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Future Reform Agenda. JBIC Discussion
Paper No.2.
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131

REIMAGINING INDIA
Figure 3: Post-reform Exchange Rate Variability
Prior to 1991, the exchange rate regime
in India, was pegged to a currency The plots show the nominal exchange
the currency.
basket. Hence India had a fixed rate rate remained almost stable during the
regime. Figure 1 plots the exchange rate two decades of the 1970’s and 1980’s.
and its annual change, for rupee from The rate of change moved in a band of
1970 to 1990. A positive change +/- 6 percent in the 1970’s except for
indicates depreciation and a negative
change indicates appreciation of percent due to the oil price
1979 when the rupee depreciated by 10
shock.
During the 1991 financial crisis, faced
with very low forex reserves the government
floated the rupee, though the
transition was gradual. Between 1991-
93 there was a dual exchange rate regime
and the rupee was subsequently
floated in early 1993. International experience
has shown exchange rate variability
increases with a change to a
more flexible rate regime. This has not
been the case for India even after a decade
of a floating rate regime as evident
from the Figure 2 which plots the real
effective exchange rate for the rupee
from 1993-2002. This is essentially because
a stable exchange rate remains an
important objective of government exchange
rate policy. Saggar (1999) notes
the RBI’s intervention (measured by
changes in foreign reserves) has in fact
increased in the post 1993 period.
The central bank has used both direct
and indirect methods of market
intervention. 5 The main objective of
government policy is to keep the exchange
rate aligned with the fundamentals
of the economy like inflation. Thus
the exchange rate depreciated by 1.5
percent in September 1997 and the
speed of depreciation was moderated
by intervention sales by the RBI. In the
central banks’ own words “...the conduct
of exchange rate policy was guided
by the need to maintain a delicate balance
between the considerations of external
competitiveness and price stability”
(RBI, 1997, page I-9). This is also
confirmed by analyzing the standard
deviation of the rate of change in exchange
rates, a measure of variability
of the exchange rate. The standard deviation
was 4.7 from 1970-80, 4.6 from
1980-90 and 4.7 from 1993-2003. This
122 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
Figure 4: Trends In Major Macroeconomic Indicators (1970-99)
evidence clearly indicates that although
the rupee has been floated, the government
plays an important role in influencing
demand and supply of forex reserves
and thereby the exchange rate.
4. Post-1991 Banking Reforms
Financial sector reform was launched
in 1991, based on the recommendation
of the Narsimhan Committee (1991)
that was set up by the government. The
1991 financial reforms were based on
five fundamentals: Strengthening prudential
norms and market discipline,
appropriate adoption of international
benchmarks, management of organiza-
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123

REIMAGINING INDIA
Figure 5: Trends In Major Banking Variables (1970-99)
tional change and consolidation, technological
upgrading and human resource
development. Figure-3 compares
major macroeconomic variables in the
pre-reform and post-reform period.
The banking sector reforms specifically
included the following measures:
The RBI reduced the CRR from 15
percent in 1991 to 5.75 percent in November
2001. The cash reserve ratio
was further reduced to 4.5 percent in
May 2004, although it remains higher
than its statuary minimum level of 3
percent. The SLR has been reduced
from 38.5 percent in 1991 to 25 percent
124 THE IIPM THINK TANK

Pramod K.Yadav Ritesh Agarwal
Doctoral Students, Indian Institute of Management (IIM)-Ahmedabad
Indian Corporate Bond Market:
The Road Ahead
"In the age of globalization, where vast amounts
of capital can be moved across the world with
a mere computer keystroke, functioning bond
markets are more important than ever. So is
having a group of infl uential, globally known
bond buyers who can alert the government if its
policies are roiling markets, either by dumping
its debt or speaking out. It's incredibly important
that India's government and central bank continue
to nurture the market's growth. India needs
to take advantage of the favorable economic
climate to strengthen regulation, improve transparency
and bolster liquidity. It also needs to act
faster to increase foreign investors' ability to move
funds here. were put to productive use here.
investor and business confi dence...India is
stepping up efforts to do just that. For all China's
advantages, bonds are one important area where
India is ahead. It means markets here in Mumbai
are likely to have their own Bill Gross before
Shanghai does."
William Pesek Jr.,
International Herald Tribune,(IHT),
October 11, 2004
The Corporate Debt Market in
India is underdeveloped, both in
terms of the market participation
and efficient price discovery; and the
volume of fixed income securities is very
small as compared to equity market.
Most of the big Indian Corporate still
seek bank finance and retained earnings
to fulfill their funding requirements. Primary
corporate debt market is dominated
by non-banking finance companies and
the total corporate debt market is a minuscule
2 percent of the total debt market.
Over the years, Indian firms have
relied more on the equity market, retained
earnings and bank loans to fulfill
the funding requirements. To make the
matter worse, the secondary market in
corporate bonds has also not picked up
as desired. Securities Exchange Board of
India (SEBI) and the stock exchanges did
realize the need of corporate bond and
introduced various regulations to provide
an impetus to the bond market; however
none of the regulations or norm could
yield the desired results. The debt market
in India is broadly classified as government
securities market and corporate
securities market. The Indian debt market
is highly skewed towards government
securities market. Total outstanding debt
of India has increased over the years and
was around 36 percent of the GDP in
2004-way below the mature financial
markets (IMF,2004). The current government
bond segment resulting from
persistently high fiscal deficits and regulatory
requirement in India is about 40
percent of the GDP –at par with the well
functioning financial markets. Nearly 90
percent of the bonds issued in India are
government bonds. The enormous size of
the government bond market is not surprising
considering the persistent high
fiscal deficit and consequentially high
public sector borrowings. Mandatory requirement
on the part of banks to invest
through statutory liquidity reserve
(SLR,currently at 25 percent) compounds
the problem. Perceived risk free nature
132 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
of the government bonds leads banks to
include even greater percentage of government
bonds in their portfolio than the
prescribed SRL of 25 percent. Government
and Reserve Bank of India introduced
many structural changes to improve
transparency in the market
dealings, method of primary auctions, allowing
Primary Dealers, borrowings at
market determined rates, and creating
technology platforms like NDS to recognize
the institutional characteristics of
the market. The same kind of impetus
has been lacking in the Indian corporate
bond markets and as a result of this, major
source of corporate funding is all but
non-existent.
The corporate bond market, in the
sense of raising debt through public issuance
in capital market, is shadowed by
growing equity market and government
bond market and was less than 2 percent
of Indian GDP in 2004 compared to 50
percent in Singapore,68 percent in South
Korea, and 143 percent in USA (IMF,
2004). A well developed corporate bond
market facilitates the firms operating in
the economy to devise their optimum for Indian debt capital markets”,
capital structure and investors to have (Nov,2007), predicts that Indian bond
better spectrum of asset classes to 160
hedge and diversify their fixed income
risks. The share of corporate
140
Government Debt
bonds in the total bond issued has 120
also decreased from 34 percent in
Corporate Debt
100
1999-00 to a 29 percent in 2003-
80
04. The weak status of corporate
bond market was mainly due to 60
dominance of government securities
and structure of the market
itself where government was borrowing
at pre-decided coupon
rates from a group of investors
such as banks. The public sector
Debt As Percentage Of GDP
40
20
undertakings (PSUs) have persistently
overshadowed the private sector bond issuance
over the years. Corporate debt
can be raised either by private placement
or public issue. Private placement is preferred
owing to the regulatory processes,
higher cost associated with public issuance,
and enormous hurdles in public issues
process in the form of various types
of disclosure, registration requisites etc
(NSE, 2005).These reasons have also incentivized
the corporate to raise debt
from abroad because of lesser listing and
disclosure requirements, lower cost, and
better liquidity in secondary market.
Debt raised abroad increased around two
and a half times from 2001 to 2005 equivalent
to 60 percent of corporate issuance
in domestic debt market (NSE, 2005).
The latest report by the Goldman Sachs
titled, “ Bonding the BRICs: Big chance
0
market is going to grow fourfold and
reach to the level of $1.5 trillion by 2016.
It also reports that the corporate bond
market will annually grow by around 28
percent from $100 billion to $575 billion
in 2016.Such a high benchmark (required
growth of 28 percent) when contrasted
with almost non-existent growth rate of
the corporate bond market (historically)
raises a big concern for policy makers and
According to Goldman Sachs, Indian bond market is going
to grow fourfold and reach to the level of $1.5 trillion by
2016. The corporate bond market will annually grow by
around 28 % from $100 billion to $575 billion in 2016
India
China
Korea
Malaysia
Singapore
USA
market participants equally. A robust
policy framework together with a performance
based regulatory approach is
urgently required to push the market to a
higher growth and market friendly frontier.
The booming economy, growing
populations, and rising household income
are exerting huge demand for infrastructure
services. The inability to meet such
a fast growing demand has become more
visible in recent past and evident by congestion
on the roads, airports, ports, frequent
electricity cut etc. There is no way
India can take its infrastructure requirement
for granted if it aims to
traverse the sustainable growth trajectory.
The government officials estimate
the infrastructure requirement
of about $500 billion in next five
years. It is also expected that about 40
percent of the fund will be infused by
the private sector. Considering the
long term irreversible nature of infrastructure
investment and short to
medium term liabilities of banks, long
term financing in the form of debt is
widely accepted as the most appropri-
THE INDIA ECONOMY REVIEW
133

REIMAGINING INDIA
External Commercial Borrowings
Year
ate financing approach. However current
shallow status of Indian bond market
does not seem to be geared to meet the
target capital requirement. The inability
to meet the financing requirement of infrastructure
leads to a lower output and
hence a shortfall in the welfare and GDP
and other various dominos effects.
The demand for corporate debt can be
gauged by the fact that Indian corporate
papers are in huge demand in overseas
market in the form of external commercial
borrowings (ECBs). In 2007 itself,
the net ECB inflow in the country was
about $16 billion and RBI had to tighten
the norms on ECB borrowing in order to
keep inflation and rupee-dollar exchange
rate in check.
ECB Gross
inflow
The experience of US and other developed
countries clearly indicates that the
corporate bond market played an important
role in the development of the economy
as a whole. During the last few years,
DFI’s access to long-term funds has dwindled
and they cannot meet the demand
for term funds of industry and infrastructure
sectors when investment activity is
all set to pick up from the present low
levels. Moreover, as the demand term
debt increases significantly to finance
ECB outflow
(imputed)
Net ECB
inflow
high level of investments, excessive dependence
on banks will hit the creditworthy
borrowers, as they would end up
paying up more than what they would
have to pay if they decide to raise funds
from the market directly.
DEMAND SIDE
The corporate bond market in India is
underdeveloped owing to the limitations/
reluctance of the various market
participants:-
Corporate – The cash credit system of
banks operates in effect like a loan in
perpetuity, many corporates prefer it to
bond financing where the amount has to
be returned on a specific date. Moreover,
they are either riding on the current equity
boom in the economy or relying
more on retained earnings.
Foreign Institutional Investors are
major players in the equities market.
However, there exists a ceiling on their
investment in the debt market (currently
there is a ceiling of $1.5 billion on investment
in corporate debt), they are present
only in a limited way in the bond
market.
Pension Funds And The Insurance
Sector could spurt the market activities
but the absence of pension funds and low
insurance penetration has meant limited
demand for long-term bonds.
Gross inflow
on ECB
2002 2687 4272 -1585
2003 3514 5206 -1692 827
2004 5228 8153 -2925 1714
2005 9084 3890 5194 3856
2006 14547 11824 2723 5463
2007 21291 5207 16084 6744
SOURCE - RBI
Households too are almost completely
absent from the market, due to the lack
of an efficient legal system, and unhappy
experience with debenture trustees.
SUPPLY SIDE
• Public Placement – There are a lot
many regulations related to disclosure
and filing of the norms which adds to
the overall costs of issuing the bonds.
Corporate prefer private placements
owing to less hassles and almost non
existent disclosure norms. Though the
government has limited the private
placement partners to 50 in case of
private placement, corporate has
sought a way out because the partners
can issue the debt issued to them to
new partners.
• Illiquidity – A large part of the market
does not mark-to-market the corporate
bond portfolio. As a result, once any
bond goes into the books, it does not
come out. This takes away liquidity
from the market.
• Trading is concentrated in AAA – rated
bonds, as they are the safest and
most liquid. A large part of the market,
including insurance companies, provident
funds and banks, has restrictions
on private sector paper. Thus the
bonds of public sector units are much
more liquid than private sector
bonds.
Benefits Of Efficient Market For
Market Participants
Corporate
• Availability of long term funds – An
efficient bond market gives the freedom
to issue long term debt. This is
particularly important for India where
there is a large requirement of infra-
134 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
structure financing which involves long
term loans. A well-functioning corporate
bond market allows firms to tailor
their asset and liability profiles and
hence allows them to raise long-term
funds to invest in ventures that have a
long-term payoff.
• Reduced fund costs – The corporate
may borrow directly from the investors
eliminating the intermediaries like
banks which will reduce their overall
cost of funds.
The Financial System
• The net interest margin of Indian banks
has increased from about 225 basis points
to 400 basis points during the last 10 years
leading to a high cost of commercial borrowing.
The high cost of commercial borrowing
has prompted the big corporate
to borrow from overseas markets however
smaller companies are bound to borrow
at high rates from the banks. The
high cost of borrowing is also evident
from low credit-deposit ratio of Indian
banks which is a almost 50 percent to that
Credit-Deposit Ratio Of Indian Banks
140
120
100
80
60
40
20
0
130
114
101
92 90
83 81 80 79
61 61
53
China
UK
Source -RBI & McKinsey
Malaysia
US
Korea
Thailand
Japan
Brazil
Singapore
India
Czech Rep
Turkey
of China. The corporate bond market can rating agencies, a wide range of corporate
exert a competitive pressure on commercial
banks in the matter of lending to priing
sophisticated credit analysis, an op-
debt securities and derivatives demandvate
business and thus help improve the portunity to make private placements,
efficiency of the capital market as a whole. and efficient procedures for corporate.
A well developed corporate bond market
would lead to a reduction in the systemic Investors
risk and probability of crisis. This is because
the presence of such an environ-
is also essential for the investors because
A well developed corporate bond market
ment is associated with greater accounting
transparency, a large community of safe way of investment but also helps
it not only provides them an alternate and
professional financial analysts, respected them diversify their risks.
Leading Rates In India
SOURCE - RBI
Average5 Year
Deposit Rates Average
Lending
Rates
Spread(%)
1997-98 11.75 14.00 2.25
1998-99 11.00 12.50 1.50
1999-00 10.25 12.25 2.00
2000-01 9.75 11.50 1.75
2001-02 8.25 11.50 3.25
2002-03 5.88 11.13 5.25
2003-04 5.38 10.63 5.25
2004-05 6.00 10.50 4.50
2005-06 6.63 10.50 3.88
2006-07 7.25 11.25 4.00
Developing The Corporate Bond
Market
Increasing Market Participation
By Widening The Investor Base
Banks – At present, banks’ loan portfolios
are not treated at par with their investment
portfolio. The investment
portfolio (banks’ investments in corporate
bonds) has to be marked to market
where as the same constraint is not there
in the case of a loan extended to the same
corporate. Hence there is incentive for
the bank to extend loans to the corporate
instead of investing in corporate bonds.
Banks’ investments in corporate bonds
need to be encouraged especially by
THE INDIA ECONOMY REVIEW
135

REIMAGINING INDIA
bringing in changes in the prudential
regulatory mechanism which treats loans
portfolio on par with investment portfolio.
Moreover, Co-operative banks are
permitted to invest only a small part of
their deposits in bonds issued by PSUs
and only scheduled co-operative banks
are allowed to invest in private sector
bonds. Allowing all co-operatives banks
to invest in high quality corporate bonds
would be helpful as cooperative banks
have large deposits.
FIIs – The investment limits of FII in
corporate bonds should be increased
because FIIs are a major investor class
and can bring volumes to the corporate
bond markets. Though the limit was
hiked recently to USD 1.5 billion, still
this is too small for big players taking any
active interest in this market
meaningfully.
Provident Funds And Pension
Funds – These should be allowed to
invest on the basis of rating rather than
in terms of category of issuers. This may
encourage these funds to invest in high
quality corporate bonds. Currently, these
funds are allowed to invest only up to 10
percent of the accruals in a year in private
corporate bonds and 40 percent of the
corpus can be invested in bonds issued by
public sector undertakings. As the Risk
profile of a large number of the PSUs
established by the state governments is
not materially different from that of several
private corporate sector companies.
ECB in India has increased during the last fi ve years.
This is an indication that Indian corporate want to raise
debt... which is not easily available in the market owing to
regulatory issues and high cost of borrowing
Hence, investment that rating quality as
indicated by the recognized rating companies
should become the main criteria
for investment in corporate bonds and
not category of bonds in terms of issuers.
Thus the guidelines issued to PFs and
EPFs need not discriminate between
State Govt. PSUs and private corporate
sector entities. To encourage small investors,
the bond market structure should
emulate the equity market structure and
retail investors should be able to buy and
sell bonds without any restriction on the
minimum market lot. Currently an investor
can buy even one share in the equity
market.
Increasing Market Participation
By Widening The Issuer Base
The Issuer base can be increased primarily
by reviewing the current guidelines
for issuance, disclosure and listing of corporate
bonds. The current regulations
and guidelines should be made less stringent
so that it would become easier for
the companies to issue bonds. On the flip
side, regulations are needed to promote
the volume and liquidity in the primary
market apart from increased issuance.
Currently banks are allowed to issue
bonds of maturities over five years only
for financing infrastructure sector. Since
banks are one of the leading issuers of
bonds, they should be allowed to issue
bonds of maturities over five years subject
to their asset liability matching norms.
The development of an interest rate derivatives
markets is a major prerequisite
to facilitate this.
Banks are one of the major issuers of
bonds to augment their tier-II capital and
these bonds are in turn subscribed to by
other banks (cross holdings). This reduces
the overall volume and liquidity in the
market. Regulatory caps should be fixed
for such cross investments so that other
participants are given an opportunity to
subscribe to these bonds.
Market Makers
Market makers provide exit options to
investors to buy or sell bonds whenever
desired by the investors. The market
making in corporate bonds is necessary
as the market is in a nascent stage and it
would require the psychological comfort
in the beginning. Investment banks that
help corporate to raise money from the
market can possibly be roped in to market
making in the bonds which they have
helped in issuance.
Listing Norms To Be Eased And
Enhancing Liquidity
As mentioned earlier, External Commercial
Borrowing in India has increased
during the last five years which is an indication
that Indian corporate want to
raise debt which is not easily available in
the market owing to regulatory issues
and high cost of borrowing. There is less
issuance of corporate debt in the first
place and secondly disclosure and documentation
norms deter the corporate to
issue debt publicly. Thus, the corporate
debt market is dominated by private
placements. For listed entities, norms
can be made simpler; they should be allowed
an abridged version of disclosure;
whereas unlisted companies issuing
136 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
bonds to institutional investors and
QIBs, rating should form the basis for
placement. However, companies which
are not listed and which are opting for
the private placement mode should be
subjected to stringent disclosure norms.
Privately placed bonds should be mandatorily
listed within seven days from the
date of allotment, as is the case with public
issues. The practice of suspension of
trading/delisting of securities in case of
non compliance with listing norms by an
issuer needs to be replaced by heavy penalties
on the promoters and directors of
the erring company. Debenture trusties
should be made more responsible and
accountable. They also should ensure
that important information such as rating
downgrades should be disseminated
to the investors.
Trade Reporting System
There should be a mechanism to capture
all the information relating to trades in
corporate bonds, disseminate the same
and maintaining a database of trade history.
Regulators should direct the market
participants to report all the transactions
done by them to the trade
reporting system.
Trading, Clearing And Settling
Mechanism
Anonymous screen based order matching
trading systems should be adopted in
order to improve the transparency and
efficiency in the corporate bond transactions.
However, multiple trading platforms
may also impact the liquidity adversely.
Moreover, novation and
multilateral netting should form the
backbone for risk mitigation and enhancement
of liquidity.
Development Of Derivative
Market
Derivative market is essential for hedging
interest rate risk. Though interest
rate swaps and forward rate agreements
exist in India, there is a need for advanced
derivative instruments for better
price discovery and hedging. RBI has
already initiated certain steps and
formed committees to formulate
a framework for some advanced
derivative instruments.
Price Distorting Issues
Stamp duty is a levied by the State
Governments and RBI should reduce the
stamp duty and rationalize it
between different states. Tax Deducted
at Source (TDS) also distorts the pricing
of bonds. TDS on interest income from
corporate bonds is not uniformly
applicable to all the investors. While insurance
companies and mutual funds are
exempt from the provisions of TDS, all
other market players are subject to it in
respect of interest paid on corporate
bonds. An automated computerized
trading system and a meaningful price
discovery process cannot be introduced
because of the differing TDS treatment
for different market player. Therefore it
is desirable to have a uniformTDS rule
for all the market players.
The shut period (for reckoning the registered
owner of the bond for payment of
coupons) is very long and may be brought
on par with that for the government securities,
which is one day. It is also necessary
to standardize the day count conventions.
Currently the day count
conventions in the market differ depending
upon the nature of the
instruments and the nature of
the transaction.
References
• Sharma, V. K. and Sinha, Chandan.
The Corporate Debt Market in India
(2006). Bank for International Settlements,
Paper No. 26
• Stone, M. Corporate Debt Restructuring
in East Asia: Some Lessons from
International Experience (1998). International
Monetary Fund
PPAA/98/13
• Mohan, R. 'Recent Trends in the Indian
Debt Market and Current Initiatives'
(2006)
• Bose, S and Coondoo, D. A Study of the
Indian Corporate Bond Market (2003).
Social Science Research Network.
• Kar , S and Khasnobis, B.G. The Corporate
Debt Market-A Firm-Level
Panel Study for India. Research Paper
No. 2006/50, UNU-WIDER World
Institute for Development Economics
Research
• Reddy, Y.V. 'Issues and challenges in
the development of the debt market in
India' (2003). BIS Paper No.11, Bank
for International Settlements
• 'The Indian Bond Market, Current
Situations and Developments' (2006),
Keio University.
• India’s Capital Market (2007), Deutsche
Bank
• "Bonding the BRICs: A big chance for
India’s Debt Capital Market"(2007),
Goldman Sachs
• IMF Global Financial Stability Report,
September 2007
• IMF Global Financial Stability Report,
April 2007
• NSE Debt RoundUp, October 2007
• "India on fire", The Economist; February
1st 2007
THE INDIA ECONOMY REVIEW
137

Paul Conway Richard Herd
Sean Dougherty
Organisation For Economic Co-operation And Development (OECD), Paris
Just How Free Are India's Labour
And Product Markets?
"Freedom in economic arrangements
is itself a component
of freedom broadly understood,
so economic
freedom is an end in itself ...
Economic freedom is also an
indispensable means toward
the achievement of political
freedom."
-Milton Friedman
1. Since the mid 1980s India has undergone
a profound shift in economic management
as successive reforms have
progressively moved the economy towards
a market-based system. State intervention
and control over economic
activity has been reduced significantly
and the role of private-sector entrepreneurship
increased. Overall, reform has
had a major beneficial impact on the
economy. Annual growth in GDP per
capita has accelerated from just 1¼ per
cent in the three decades after Independence
to 7½ per cent currently, a
rate of growth that will double average
income in a decade. The sustainable
growth rate of the economy is currently
estimated to be 8½ per cent and India
is now the fourth largest economy in the
world when measured using the most
up-to-date purchasing power parities.
Increased economic growth has helped
reduce poverty, which has begun to fall
in absolute terms.
2. In general, areas of the Indian business
sector that have been opened to
private sector involvement have responded
well. In service sectors where
government regulation has either been
eased significantly or was less burdensome
to start with, such as insurance,
asset management and information
technology, output has grown rapidly
with exports of information technology
enabled services being particularly
strong and a key component of India’s
economic transformation. In some of
the former fully government-owned infrastructure
sectors, such as telecommunications
and domestic civil aviation,
opening to the private sector has produced
exemplary results and growth has
been phenomenal. The market shares
of new entrants in both these sectors are
now over 75% while consumer choice
has expanded and prices have fallen.
3. Notwithstanding these and other success
stories, government regulation is
still excessively restrictive and acts as a
barrier to private sector involvement in
a number of areas. In this article we
draw on the OECD’s first Economic
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MORE MARKETS, LESS GOVERNMENT
Survey of India, which was released in
October 2007, to briefly assess two areas
in which regulation could be made
more supportive of competition and private
sector involvement: the business
environment in markets for goods and
services (henceforth referred to as the
product market) and labour markets.
This work is based on field work in
twenty one states that has enabled us to
construct cross-state indicators of regulation
in product and labour markets.
There are other areas where government
interference is also high, such as
the financial and energy sectors, and
areas where large subsidies are paid.
Our views on these areas can be found
in the Survey.
Despite Liberalisation, Product
Market Regulation Could
Still Do More To Support
Competition
Figure 1. Product Market Regulations: An International Comparison
Australia
UK
Iceland
US
Ireland
Denmark
New Zealand
Canada
Sweden
Luxembourg
Japan
Finland
Belgium
Netherlands
Austria
Slovak R.
Germany
Norway
Korea
Portugal
Spain
Switzerland
Grance
Czech R.
Greece
Italy
Brazil
Hungary
Mexico
Chile
Turkey
Poland
INDIA
number of barriers that do limit private
sector involvement and competition in
markets.
PSEs for 14 % of GDP, rising to 22 % of the non-agricultural
business sector and an even higher share of activity
in the formal sector of the economy. Many of the sectors
in which they operate are inherently competitive
OECD
Average
0 1 2 3
The indicator score runs from 0-6 from least to most restrictive of competition
4. Overall, product market regulation in
India restricts completion to a greater
extent than in all OECD countries and
both Brazil and Chile (Figure 1). This
is despite some aspects of India’s regulatory
framework in product markets
being comparable with best practice in
OECD countries. For example, formal
legal barriers to market entry have been
removed in almost all sectors and there
is minimal government interference in
the conduct of private sector firms
through, for example, price controls and
special voting rights (notwithstanding
restrictions on the voting rights of private
shareholders in government-owned
banks). There are, however, still a
The Public Enterprise Sector Is
Large And Distorts Competition
5. A high level of government involvement
in commercial activity is one important
reason why India’s business
environment is less supportive of competition
in comparison to other countries.
Overall, public enterprises account
for 14% of GDP, rising to 22% of
the non-agricultural business sector and
an even higher share of activity in the
formal sector of the economy. Many of
the sectors in which public sector enterprises
(PSEs) operate are inherently
competitive.
6. PSEs have a negative effect on the
business environment for a number of
reasons. First and foremost, because
government plays the dual role of major
market player and policy maker (and
sometimes regulator in infrastructure
sectors), there is often no clear separation
between the ownership function
and other functions that influence market
conditions. For example, PSEs are
often required to fulfil social and public
policy obligations with their governance
adversely affected by political interference
and the use of civil servants as directors.
Moreover, in many states the
strategic commercial choices of PSEs
often have to be cleared by the state assembly.
Finally, the procurement poli-
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REIMAGINING INDIA
Figure 2. Distribution Of Rates Of Return Of Public Sector Enterprises
Rate of Return (%)
50
40
30
20
10
0
-10
-20
-30
-40
PrivateSector Listed Firms
PSEs (Centre)
PSEs (State)
-50
0 10 20 30 40 50 60 70 80 90
Percentile
cies of the central and state governments
often favour PSEs. Because they
dominate some markets, political interference
in the operation of PSEs also
adversely influences overall market conditions.
7. There have been some attempts to
commercialise the activities of central
PSEs through, for example, the Navratna
and Mini-Ratna concepts and
the introduction of higher limits for investments
that do not need to be cleared
by parliament. The proportion of loss
significant variation across states (Table
1). With a large tail of unprofitable
firms, the total losses of loss-making
central and state PSEs amounted to almost
1% of GDP in 2005.
8. There are a number of ways in which
the corporate governance of the PSEs
could be improved to ensure a level
playing field and government neutrality
in its dealings with the private sector
and thereby increase competition. The
centre and state governments need to
transparently unbundle the commercial
The financial health of the state-owned PSEs is, on average,
poor and worse than that of the central enterprises.
The total losses of loss-making central and state PSEs
amounted to almost 1% of GDP in 2005
making central enterprises has been reduced
but, even so, the return earned by
the median PSE was only 3% in 2005
(after subsidies) against 10% in the private
sector (Figure 2). The financial
health of the state-owned PSEs is, on
average, poor and worse than that of the
central enterprises, although there is
and promotional/policy roles of the
PSEs. Moving towards a more centralised
model of PSE management would
be a large step in this direction. Currently,
at the centre, responsibility for
the PSEs rests primarily with the line
ministry while the Department of Public
Enterprises plays a coordinating role
and elaborates the overall
ownership policy. This decentralised
model was predominant
in OECD countries before
the first wave of public
sector reforms during the
1970s. With the shift from
industry-specific policies to
more framework-oriented
and market liberalisation
policies, the main advantage
of this approach of allowing a
more activist industrial policy
has now vanished.
9. A more centralised approach,
where PSEs are put
under the responsibility of an investment
agency, would achieve a clearer
separation between policy and commercial
functions and distance PSEs from
political control. It would also facilitate
a more unified and consistent ownership
policy, simplify the often elaborate
committee structures that currently supervise
and control PSEs, and ensure
equitable treatment of non-state shareholders.
Care would be needed to ensure
that centralising the ownership
function of the PSEs did not entail the
creation of additional layers of control
or bureaucracy within government. Ultimately,
the structure of the public administration
needs to be reorganised to
be more consistent with a modern-day
focus on general framework conditions
instead of the current “command and
control” approach. This will entail a
significant consolidation and reduction
in the number of ministries and departments
in both the central and state
governments.
10. In addition to a more centralised approach,
the way in which any remaining
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MORE MARKETS, LESS GOVERNMENT
Table 1. Performance Of State-Level PSEs
Number
of
PSEs
Proportion
of loss making
PSEs
Losses of
loss making
PSEs
Proportion of capital
in 'non-working'
PSEs
Proportion of
PSEs with negative
net worth
Rate of Return on
Capital
% % SGDP % % medium average
Andhra Pradesh 54 15 -0.06 2.3 14.8 5.6 10.0
Assam 43 77 -3.47 1.6 20.9 -3.3 -16.4
Bihar 54 70 -1.38 13.0 11.1 -2.5 -7.7
Chhattisgarh 11 36 -0.02 0.0 9.1 5.1 4.6
Delhi 11 45 -4.21 0.0 9.1 3.6 -27.8
Goa 16 63 -0.57 0.0 0.0 -0.1 -11.0
Gujarat 51 39 -0.38 50.5 17.6 2.2 -8.9
Haryana 29 59 -0.05 1.4 13.8 5.5 5.0
Himachal
21 62 -0.50 27.8 23.8 3.3 5.7
Pradesh
Jharkhand 6 17 -0.15 0.0 0.0 33.6 43.1
Karnataka 82 41 -0.28 1.5 7.3 3.6 31.2
Kerala 114 61 -0.39 1.1 14.0 1.7 -15.3
Madhya Pradesh 42 33 -0.13 3.8 14.3 1.3 2.2
Maharashtra 82 68 -0.38 3.2 20.7 -0.3 -4.6
Orissa 69 70 -0.28 1.1 21.7 -1.3 -35.0
Punjab 57 44 -0.23 0.3 15.8 -1.2 -12.0
Rajasthan 24 38 -0.06 0.1 20.8 7.4 20.6
Tamil Nadu 68 53 -0.14 0.6 29.4 2.4 -1.6
Uttar Pradesh 94 62 -0.94 51.1 17.0 -1.0 -29.9
Uttaranchal 25 60 -0.32 47.7 12.0 -2.3 -16.4
West Bengal 86 72 -0.50 0.8 44.2 1.4 -45.2
Source: OECD Analysis Of Data From The Comptroller and Auditor General
obligations and responsibilities that
PSEs are required to undertake in terms
of public services should be clearly mandated
by laws or regulations. These obligations
and responsibilities should
also be disclosed to the general public
and the related costs should be covered
by government in a transparent manner.
PSEs should be exposed to competitive
conditions in access to finance. Finally,
preferential procurement policies
should be ended at the state level, following
plans by central government to
do so in 2008.
11. Once these steps have been taken,
the privatisation programme needs to
be revitalised, especially in the competitive
sectors of the economy. To date,
privatisation has been slow and involved
only partial sales which, according to
international evidence, are less effective
in raising productivity and profitability
than full sales to the private sector,
as control stays with the
government. 1 Going forward, mixed
sales that transfer control to the private
sector and combine strategic investors
with public share offerings, have the
potential advantages of developing
strong corporate governance structures
and introducing new management and
technology into the company. For PSEs
operating in network sectors in which
there are monopoly elements, the regulatory
environment needs to be made
consistent with private ownership and
competition with independent regulators
in place as part of the privatisation
process. The worst performing and
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141

REIMAGINING INDIA
Figure 3. Product Market Regulation And Average Labour Productivity
120
Average labour productivity, 1994 -2004
100
80
60
40
20
0
0.5
Goa
Uttaranchal
Delhi
Correlation coefficient= -0.51
t-statistic= -2.56
Haryana
Punjab
Maharashtra
Gujarat
Tamil Nadu
Jharkhand
Kerala
Assam Himachal Pradesh
Madhya Pradesh
Karnataka
Andhra Pradesh
Rajasthan
Chhattisgarh
Uttar Pradesh
Orissa
Bihar
West Bengal
1 1.5 2 2.5 3
Product Market Regulation Indicator Score
1. Reflecting data constraints, labour productivity in Chhattisgarh, Jharkhand & Uttaranchal is measured as the average over 2002-03 period.
Figure 4. An International Comparison Of Employment Protection
Legislation
Australia
United Kingdom
Switzerland
Canada
Brazil
Denmark
Austria
Ireland
New Zealand
Belgium
Italy
Hungary
Finland
Poland
China
Norway
Mexico
Chile
EU 15
Korea
Australia
Greece
Japan
France
Slovak Republic
Turkey
Luxemburg
Netherlands
Germany
Sweden
Spain
India
Czech Republic
Portugal
OECD
average
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0
4.5
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Figure 5. Net Employment Across Different Types Of Workers And Firms
Net Employment (annual % change)
20
15
10
5
0
-5
-10
-15
“non-working” PSEs need to be restructured
to the point where they can be
wound up.
Inefficient Government Procedures,
Particularly In Some Of
The States, Act As A Barrier To
Competition
12. Administrative barriers to entrepreneurship
are also high in India and another
reason why the regulatory environment
is less supportive of
competition than in other countries. In
many state governments, departments
operate in “silos” with minimal information
flows between them. Given a
lack of coordination, administrative
procedures often duplicate the same
function across a number of departments,
leaving firms and citizens in a
complex maze of regulations and administrative
requirements that can be
repetitive, non-transparent, and sometimes
contradictory. This increases
compliance costs, especially for small
firms, and discourages firm expansion,
reducing competition and productivity.
Large Small Overall
All employees Workers Contract Supervisors Others
Overly complex administrative procedures
also increase the discretion of
government staff, thereby facilitating
corruption. In Transparency International’s
Corruption Perceptions Index,
India ranks 70 out of 163 countries in
2006.
13. A number of initiatives for simplifying
red tape have been introduced by
the central and state governments, with
varying degrees of success. For example,
some states have introduced “onestop
shops” for providing information
and, in some cases, applying for licenses
and notifications. In some cases, a
system of “deemed clearance” under
which licenses are issued automatically
if the licensing office does not act by the
end of the statutory response period,
have also been introduced. Some of the
state governments have tried improving
the interface with the private sector by
simplifying and consolidating various
application forms and registers and introducing
self-inspection regimes. Information
and communications technology
(ICT) has also been
successfully integrated into some administrative
procedures.
14. A key element in all efforts to simplify
and improve government bureaucracy
is that administrative processes are
reengineered from the ground up. For
example, one-stop shops need to be implemented
along with other reforms
geared towards cutting red tape. Otherwise
they run the risk of simply adding
another layer of bureaucracy to the
approval process. Alternatively, using
ICT to simply automate existing inefficient
processes or disseminate information
will only produce a limited payoff.
At present, India has no centralised oversight body
charged with reviewing regulatory proposals, using Regulatory
Impact Analysis, to ensure that the costs of administrative
burdens do not outweigh the benefi ts
15. A crucial aspect of reengineering
administrative processes, especially
within some of the state governments,
is improving the coordination of regulatory
functions across government departments.
This is complex and time
consuming and requires a “whole of
government” approach to institutional
change. Indeed, the OECD experience
has been that regulatory reform will often
fail if left entirely to ministries. At
present, India has no centralised oversight
body charged with reviewing regulatory
proposals, using Regulatory Impact
Analysis, to ensure that the costs
of administrative burdens do not outweigh
the benefits. One advantage of
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143

REIMAGINING INDIA
centralised oversight bodies is that they
promote a consistent and systematic
method of reform across the entire administration.
Ideally, its objectives
should be outlined as part of an explicit
regulatory policy which generally
helps countries make greater reform
progress. 2
States That Have Liberalised
More Than Others Are Reaping
The Benefits
16. With state governments having control
over certain aspects of regulatory
policy and responsibility for enforcement,
there are significant differences
in the business environment across
states as shown by our indicators. These
differences have an important bearing
on economic performance. Labour productivity
is higher in states with a regulatory
environment that is more supportive
of competition (Figure 3). There
are a number of reasons for this. First,
virtually all of India’s foreign direct investment
flows to the relatively more
liberal states and domestic investment
also appears to be higher, boosting state
productivity. Second, in states with excessively
restrictive administrative burdens
firms are more likely to remain
informal so as to avoid government administrative
requirements. However,
informal sector firms are usually much
smaller with lower capital intensity and
much less productive than formal sector
enterprises.
A Further Rationalisation And
Reduction Of Restrictions On
Foreign Is Trade Needed
17. As recently as the beginning of this
decade, India’s tariffs were the highest
There is a considerable gap between the standard tariff
rates and the actual revenue raised from tariffs. Such gaps
are indicative of special concessions to certain products or
industries and distort the allocation of resources
in the world and among the most discriminatory.
Significant reforms to liberalise
foreign trade have been undertaking
since then and average tariffs
are scheduled to reach the average
level in ASEAN countries in the near
future. Despite the fears of domestic
producers, the manufacturing sector
has profited from this policy shift and
has been growing as fast as the service
sector since 2003. Manufacturing exports
have also started to grow rapidly,
outpacing most other Asian countries
in the first half of this decade. However,
more could be done to liberalise
foreign trade. Tariffs in ASEAN countries
are still high in relation to those
in developed countries. Moreover,
there is a considerable gap in India between
the standard tariff rates and the
actual revenue raised from tariffs. Such
gaps are indicative of special concessions
granted to favour certain products
or industries and distort the allocation
of resources and lower
productivity. Cross-country evidence
has found that openness to global markets
acts as an important stimulus to
growth and ongoing reductions and rationalisation
of the tariff structure in
India would pay dividends.
Labour Market Regulation Is
Also Excessively Restrictive
18. The dichotomy between formal and
informal businesses is in part caused by
labour market regulation, which is another
key area in which restrictive government
intervention imposes high
economic costs. The strictness of employment
regulation varies across different
segments of the Indian labour
market according to the size of firms
and the type of employment contract.
According to the OECD’s indicators of
employment protection legislation
(EPL), larger firms employing workers
on regular contracts are subject to EPL
that is more restrictive than in all but
two OECD countries. For smaller
firms, the extent of employment protection
is similar to that in the OECD
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MORE MARKETS, LESS GOVERNMENT
area. Very small businesses in the unorganised
sector are subject to few labour
regulations. Across different
types of employment contact, EPL for
temporary or contract employees is just
above the OECD average. Allowing
employees to carry out “non core” work
on temporary agency contracts has
been a main area of recent labour reform.
19. These differences in employment
regulations are mirrored in recent development
in labour markets. While
employment growth has been strong
over recent years, net gains in employment
have been occurring almost exclusively
in the unorganised part of the
economy, which is not subject to restrictive
labour market regulation. In
the organised sector, employment has
actually fallen. The detrimental impact
of excessively restrictive EPL can also
be clearly seen across types of employment
contract; while contract employment
has grown, regular employment
has shrunk (Figure 5). This bias towards
contract employment is only
evident in larger firms, which bear the
brunt of India’s restrictive EPL. Employment
in smaller firms has been increasing
for both contract and regular
workers.
20. It is often argued in India that strict
EPL is not particularly harmful because
firms find ways to circumvent the
legislation. One way of avoiding difficulties
with the labour laws is to stay
small. Indeed, almost 90% of manufacturing
firms employ less than ten people,
a much larger share than in all
OECD countries and China. However,
most of these firms produce far below
minimum efficient scale and are in the
informal sector, the least productive
segment of India’s business sector.
Large firms, faced with high implicit
employment costs, substitute capital
for labour. Thus, restrictive EPL also
effectively negates one of India’s key
comparative advantages of relatively
low-cost labour.
21. Overall, labour market policy in India
is ineffective at protecting employment;
job destruction is lower in areas
of the labour market not subject to the
most restrictive of India’s labour market
regulations. It has also resulted in
a number of unintended consequences
that have been accentuated as product
markets have became more competitive.
With newcomers to the labour
market being pushed into lower-paid
informal employment, economic
growth has not been as inclusive as it
could have been. Our indicators suggest
that some states have introduced a
degree of reform into labour markets.
As yet, these reforms have been at the
margin but, nonetheless, they do appear
to be having some impact on labour
markets. The share of labour income
has stabilised in reforming states
whereas it continues to fall in more restrictive
states. Liberalisation also appears
to be positively related to the
extent of job turnover. Even if there is
currently little evidence of employment
gains in the most liberal states, higher
job turnover improves a person’s chances
of finding a job that matches their
skills. To improve the functioning of
the labour market as the labour force
grows over the next decade comprehensive
labour reform is needed to better
protect all workers, lower the costs of
employment adjustment, and help address
the distortions that have
emerged.
Reforms Need To Be Ongoing If
Government Is To Achieve Its
Growth Target
22. An important key to improving India’s
economic performance further is to
change policies at both the central and
state government level that result in high
levels of government interference in markets
and restrict competition. Relative to
recent history, the government has already
moved significantly in this direction.
However, this article has touched on
areas in which less government intervention
would increase the extent to which
market forces are able to operate and
result in more efficient outcomes. Reform
in these key areas would yield enormous
benefit for the Indian economy.
Indeed, it is difficult to envisage government
achieving its GDP growth target of
10% in 2011 without further reform in
these and other areas outlined in detail
in the recent OECD Economic Survey of
India. The impressive response of the
Indian economy in areas that have been
reformed in the past should give policymakers
confidence that further liberalisation
will deliver additional growth
dividends and foster the process of pulling
millions of people out of poverty.
End Notes
1
OECD (2003b), Privatising stateowned
enterprises: an overview of
policies and practices in OECD countries,
OECD, Paris.
2
OECD (2002), Regulatory policies in
OECD countries: From interventionism
to regulatory governance,
OECD, Paris.
THE INDIA ECONOMY REVIEW
145

Rok SPRUK
International Economist,
Slovenia
Going For Growth Through
Economic Reforms: The Case Of India
"A more innovative economy tends to devote
more resources to investing of all kinds--in new
employees and customers as well as new offi ce
and factory space. And although this may come
about through a shift of resources from the
consumer-goods sector, it also comes through
the recruitment of new participants to the labor
force. Also, the resulting increase of employeeengagement
serves to lower quit rates and,
hence, to make possible a reduction of the
“natural” unemployment rate. Thus, high dynamism
tends to bring a pervasive prosperity to
the economy on top of the productivity advances
and all the self-realization going on. True,
that may not be pronounced every month or
year. Just as the creative artist does not create
all the time, but rather in episodes and breaks,
so the dynamic economy has heightened highfrequency
volatility and may go through wide
swings. Perhaps this volatility is not only normal
but also productive from the point of view of
creativity and, ultimately, achievement."
-Edmund S. Phelps,
Nobel Laureate in Economics, 2006
The purpose of this article is to
highlight some of the increasingly
important issues regarding
India’s economic prospects. In recent
years, the operating capacity of India’s
high-growing economy has been reflected
by a surge in real GDP growth and a slight
downturn in inflation pressures. By the
end of 2007, India’s GDP is estimated to
rise by 8.9 percent and 8.4 percent in 2008
while consumer price index increased by
6.2 percent in 2007 and is expected to decrease
to a mere 4.4 percent rate of overall
price increase. 2 Growth estimates differ
respectively subject to different
methodological evolution of the real GDP
growth measurement. It also depends on
how the engines of growth are estimated,
especially the importance of those factors
in driving growth. There are, in an academic
economic literature, two main economic
paradigms regarding the philosophy,
theory and policy perspective of
economic growth. Keynesian economic
analysis supports the view that the aggregate
demand 3 is a primary source of economic
growth, claiming that an increase
in the government spending per unit of
output, increases investment activity and
drives growth onto a stable trajectory.
Keynesian emulation of the evolution of
economic growth is based on false assertions.
For example, Keynesian interpretation
of economic growth neglects the
impact of aggregate demand on inflation.
As public spending and fiscal outlays increase,
there is a growing probability of
higher inflation. In the short-run, such
policy features boost the economic activity
through an expansionary monetary
incentive, but in the long-run, the negative
impact of government spending surpasses
the short-run effect of government
spending subject to a persistent inflationary
pressures, falling growth rates and
tight grip on capital markets. Notably,
when government spending increases
whereas fiscal expenditure is anchored in
budget deficit, government borrowing reduces
the supply of available monetary
means and thus, increases the interest
rate balance which investors have to bear.
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The answer to the question what impedes
the investment is government spending
and consequently budget deficit, but not
only the budget deficit. Claiming that
‘catch-up’ effects, when a country with
low GDP per capita is catching-up countries
with higher GDP per capita, allow an
expansionary fiscal policy cannot be justified
on empirical grounds and experience
nevertheless. Empirically, high government
spending reduces the operating capacity
of the economic growth due to high
tax burden and expanded public sector
activities. It is crucial for a high-growing
‘catch-up’ economy to reduce government
spending and thus lay a solid foundation
of growth. On the other side, contemporary
growth theory emphasizes the quality
of growth engines such as the quality
of institutions and means of productivity
as determinants of economic growth.
Neoclassical growth theory supports low
government spending, low taxation of
productive behavior, emphasis on price
stability and solid free market institutions,
the enforcement of private property rights
and the rule of law. The latter is essential
to macroeconomic stability. For decades,
economists have questioned the impact of
government spending on economic
growth. The Keynesian controversy began
in 1930s when John Maynard Keynes
wrote a voluminous book on the theory of
employment, interest and money. Keynes
argued that economy’s growth capacity
can be boosted by injecting more purchasing
power into the economy. Keynesians
argued that government could reverse the
economic downturn by borrowing more
money from the private sector to help end
the recession or depression and then return
the money in all sorts of public incentive
programs such as tax rebates. Keynesians
supported high government
spending because they believed that inflation
was resulted from too much economic
growth. The Keynesian economic analysis
and doctrine became a corner-stone
between 1930 and 1970. The overall impact
of Keynesian economics bluntly diminished
when the reality has shown that
there is no long-run trade-off between
inflation and unemployment; an assertion
which was postulated into the famous
Phillips curve. The economies which were
operating under staunch Keynesian economic
policy have faced significant economic
downturns such as multi-year recessions
and even economic depression.
In 1991, Sweden slid into economic recession,
facing high unemployment and rampant
inflation. In Finland, where Keynesian
economic policy dominated the
public policy course from 1945 onwards,
at the beginning of 1990s, economic
growth turned into a decline in GDP,
while inflation and unemployment grew
severely. Numerous other countries faced
the same experience of mistaken Keynesian
economic policy.
One of the fundamental questions
which transition economies, such as India,
face is what the optimal goals of economic
policy are. In addition, what are
important and empirically relevant areas
demanding competitive economic reforms
as a guarantee of sustainable long-term
growth of real GDP and standards of living.
In this article, I entail empirical studies
into economic policy and attempt to
suggest the reform agenda that would
boost India’s competitiveness in terms of
sound market economy with sustainable
economic growth, price stability and freemarket
institutions.
The Empirics Of Growth
Government spending and consumption
is inversely related to the economic
growth. 4 Higher government spending
correlates with higher tax burden while
higher taxes on productive behavior such
as entrepreneurship, saving and investment,
labor supply and innovation impede
growth performance. On the other hand,
the share of government spending positively
relates to the share of public investment
in the GDP. The quality and productivity
of investment highly differs whether
Public investment is directed via political decisions and its
time preference rates of politicians on the electoral basis is
subject to the realization of promises which is oftenly
negatively related to growth prospects
it is conducted in the private sector or on
behalf of public sector. The reason why
resources invested by private investors are
normally more efficient than investment
in the public sector is the fact that risktaking
plays more powerful role in the
private sector. Private investors bear the
information and investment resources efficiently
because of the motives such as
higher productivity perspective and competitive
pressures in the market economy.
The investment conducted by the managers
in public sector is subject to political
pressures while politicians do not pursue
the same goals as private investors. Public
investment is directed via political decisions
and its time preference rates of
politicians on the electoral basis is subject
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REIMAGINING INDIA
Taxes, Corruption And Structural
Defect
Tax system is a powerful weapon in the
hands of economic policymakers. Tax system
is a major source of funding where
political parties and government planners
collect money and slice a fraction of the
GDP for government spending and consumption.
Currently India levies moderate
tax rates on corporate and individual
income. By 2007, top personal and corporate
income tax rates were 33 percent plus
10 percent surcharge. Other taxes includto
the realization of promises which is oftenly
negatively related to growth prospects
and economic performance. Political
preference for expansionary welfare
state demand greater involvement of government
into the economic structure and
thus political pressures reduce the scope
of growth potentials. Every economic
theory agrees that the long-term engine
of growth is capital creation which means
savings and investment. The share of government
in the economy is equally important.
The following picture known as the
Rahn Curve shows the empirical relationship
between economic growth and government
spending.
Output
performance
RAHN CURVE
Goverment apending
as a share of the GDP
Source: Brimelow (1993), Mitchell (2005)
Picture-1: Rahn Curve
An Empirical Perspective On The
Trade-Off Between Government
Size And Economic Growth
Extensive public sector involves several
macroeconomically important costs. Every
single per unit increase in government
size reduces potential unit of output added
to the gross domestic product. The
costs associated with government spending
are huge. First, government spending
requires the collection of funds of spending.
Costly choices mean an inevitable
adverse consequence such as reducing the
size of investment which is an important
component of the GDP. Second, the effi-
ciency of investment is determined by the
efficiency of allocation of resources. In
this respect, expanded public sector hinders
private sector activities subject to the
fact that resources are scarce; the foremost
basic corner-stone of economics.
Third, government spending supports
backward regulation and intervention,
displacing the competitiveness of product
markets and interfering growth performance.
Phillips and Shen (2003) showed
that the overall impact of a 10 percent decrease
of state-owned enterprises in China
boosted the regional growth of GDP
by 1.14 percent. 5 The case of China shows
that costs involved in government spending
include economically undesirable
choices and decisions. In addition, high
level of government intervention through
regulatory agencies protecting existing
monopoly or oligopoly structures stimulates
market distortions by discouraging
productive behavior. The reason why government
spending is wasteful and burdensome
at some point, as demonstrated by
the Rahn Curve, is that additional spending
empowers the size of government and
also because spending outlays boost the
misallocation of resources due to asymmetric
information.
A valuable lesson for Indian policymakers
is to learn the lessons associated with
government spending from other countries
where decades of output growth and
rising productivity returned a comparatively
high GDP per capita and sound
economic performance and also an experience
with economic setbacks and downturns
caused by the mistakes in economic
policy. Bassanini and Scarpetta (2001)
showed that an increase in one percentage
point in tax pressure – two thirds of what
was observed over the past decade in the
OECD sample – could be associated with
a direct reduction of about 0.3 percent in
output per capita. If the investment effect
is taken into account, the overall reduction
would be 0,6-0.7 percent. 6 Tanzi and
Schuknecht (1996) compared the size of
government and growth performance in
selected industrial countries, concluding
that average 5-year growth was higher in
countries with small governments. The
investigation showed that countries with
small governments observed lower actual
unemployment rate, lower rate of shadow
economy and also exhibited more regulatory
efficiency, higher innovation levels
and a well functioning non-distortionary
labor markets. 7 Another argument in favor
of lower government size and spending
as a core economic reform is the wellobserved
fact that the reduction in public
spending as a share of the GDP is positively
related to the growth of total factor
productivity. Decades of mismanaged
economic policy led to an obscure increase
in the size of state-owned enterprises
carrying out some major deficiencies
and the failure in the allocation of
resources which caused a decline in the
overall competitiveness of the economy.
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MORE MARKETS, LESS GOVERNMENT
ed dividend tax, property tax and tax on
insurance contracts. 8 India’s tax system
demands a radical change towards a reduction
in taxation of productive behavior
such as labor supply and investment nevertheless.
The demand and supply of labor
is elastic which supports the thesis
that labor supply is highly sensitive and
responsive to tax rates. 9 Recent highlights
in empirical investigation of the behavior
of labor supply has shown that labor supply
responds dramatically to lower tax
rates on work whereas productivity has
been soaring due to cutting taxes on productive
activity. India’s particular competitive
advantage in terms of tax system
could be innovative; public products such
as internationally competitive territorial
tax system, a model in which Indian provinces
could compete to attract inflows of
direct investment on the international basis.
A strong argument in favor of open
territorial tax competition is that it is rational
to expect lower tax rates on productive
behavior and thus adversely positive
effects on output and productivity growth.
Recent research evidence by Djankov,
Ganser, McLiesh, Ramalho and Schleifer
(2007) has shown consistent and large
adverse effect of corporate taxation on
investment and entrepreneurship. According
to authors’ calculations, a 10 percentage
point increase in the effective
corporate tax rate reduces the investment
to GDP ratio by about 2 percentage
points. 10 Alternatively, India could consider
a possible move in a direction of
abolishing the corporate tax due to its effect
on capital creation and entrepreneurial
activity. Also, India should consider a
fundamental tax refom in a pro-growth
direction. Practically, India may switch its
taxation regime from income tax to consumption-based
tax. In case of cutting-off
income taxes and alternatively adopting
taxes on consumption, higher savings
would dramatically boost the productivity
and living standards. The encouragement
of competitiveness deserves a concrete
treatment of pro-growth tax and economic
policy proposals that could boost output
performance. A significant amount of
empirical evidence suggests that the reduction
in corporate and individual taxation
boosts the operating capacity of the
economy in going for growth as well as
private initiative in fighting India’s structural
weaknesses and human capital creation
which is, by any means, an essential
ingredient of growth in an economy with
astonishing growth potentials. 11
Despite a moderately free fiscal and
public consumption , 12 India’s structural
defects are mostly subject to an inefficient
administrative environment, weak property
rights, government involvement in
the financial sector and widespread perception
of corruption. For instance, India
ranks 72nd out of 188 countries included
in Transparency International’s Corruption
Perception Index. 13 A spiral of structural
deficiencies contributes to the hindering
of India’s growth sustainability and
international macroeconomic and microeconomic
competitiveness. Corruption is
a huge cost reflecting the governance of
institutions enforcing private property
rights, the rule of law and competitive
framework of the economy and individual
interaction. Noteworthy, tax complexity
and high costs of tax compliance contribute
a significant fraction to the legal
and illegal level of corruption. In European
Union, pressures for harmful tax
harmonization 14 aim to expand the scope
Research evidence shows a consistent and large adverse
effect of corporate tax on investment and entrepreneurship.
A 10% point increase in the effective corporate tax
rate reduces the investment to GDP ratio by about 2%
of government bureaucracy in tax collection.
Tax rebates, exemptions, loopholes
and numerous deductions contribute to
the rise of hidden corruption within legal
limits. Fighting against corruption requires
an active approach codified by the
enforcement of competitive law, deregulated
product markets and the elimination
of government involvement in financial
sector and any other sector in the economy.
Of course, in economic theory and
practice there are externalities and market
failures which excuse the role of government
in certain areas. But such approach
would be needed under
cost-benefit analysis, clearly defined competitive
rules and under the absence of
government coercion and political intervention.
Anti-corruption legislation and
THE INDIA ECONOMY REVIEW
149

REIMAGINING INDIA
policy enforcement can significantly reduce
persistence of corruption as a major
structural backlash of an economy in
transition such as India. However, tax
competition, competitive and secure contractual
law, deregulation, private ownership,
strong protection of property rights
and other components of political stability
and economic prosperity are the guiding
swords in fighting against corruption 15
as an obstacle to long-term growth and
stability.
brightest reform concepts and case studies
of the macroeconomic and structural
reforms. I suggest learning from two small
countries, Ireland and Iceland.
Ireland dramatically changed its fiscal
policy over the past 20 years. Once a bastion
of poverty, now became the second
wealthiest economy in the European Union
according to real GDP per capita,
after Luxemburg. Ireland’s reform agenda
included a supply-side package of policy
inputs. For example, top individual income
tax rates was slashed from 65 percent
to 42 percent and the corporate tax
rate was reduced
to 12.5 percent
and was made flat. Low Taxes,
Tax competition
In 1980s, unemployment
was se-
Sound regulation
vere at a doubledigit
rate and government spending
consumed more than 52 percent of total
output. Consequently, growth rates were
rachitic and high tax rates discouraged
the creation of productive behavior. Ireland
quickly became the “sick-man-of-
An increase in one percentage point in tax pressure – two
thirds of what was observed over the past decade in the
OECD sample – could be associated with a direct reduction
of about 0.3 percent in output per capita
Europe”. In early 1990s, Irish policymakers
decided to embrace supply-side
economic policy, deregulate product markets,
cut the size of government and slash
the expenditures. After decades of low
output, overall government spending was
reduced from 52.3 percent in 1986 to 37.7
percent in 1996. Free trade, rigorous tax
cuts and productive education policies
turned the incredible emulation of the
Irish hare into the Celtic Tiger .16 There is
an interesting comparison between Ireland
and Slovenia as a case study between
the supply-side success and Keynesian
failure. Using the data from Penn World
Tables 17 , by the end of 1990, Slovenia and
Ireland had the same real GDP per capita
after inflation, using current prices as
a comparison measure. Throughout the
1990s, Slovenia’s output grew at low rates,
recovering from economic depression in
transition while having high taxes, high
fraction of government ownership and
weak institutions, while Irish economy
International Lessons For India
The growth experience of countries from
around the world offers a useful guideline
in learning from the world’s best and
Picture No.2: Dynamic Engines Of Growth
Sophisticated
Infrastructure
Cost and prices,
Environment of
the firm
Quality of the
Labor Supply
SUSTAINABLE
GROWTH
Human Capital
Source: Forfas, author’s own projections
Business
Performance
Productivity
Performance
Innovation,
Competitiveness,
Entrepreneurship
TARGET
ESSENTIALS
Property Rights,
Rule-of-Law
Free Markets
I
N
P
U
T
S
150 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
grew at robust annual rates, with free
markets, established rule-of-law and protected
private property rights. Using time
difference calculation as a measure, today’s
time gap between Slovenia and Ireland
is approximately 40 years 18 Iceland’s
recovery from decades of interrupted
Keynesian economic policy lasted from
than Icelandic policymakers estimated.
Until late 1980s, Icelandic economy was
marred by government ownership, periods
of high inflation when oil shocks, tight
labor markets and devaluation bias caused
a spiral of inflationary pressures. 19 In
1990, Icelandic policymakers reduced the
corporate tax rate from 50 percent to 33
percent by the mid 1990s. In 2003, the
rate was further slashed to 18 percent.
The effect of supply-side tax reform was
a pure theoretical assertion of the Laffer
curve whereby lower tax rates increased
revenue from taxes as a share of the GDP
respectively. According to Iceland’s Ministry
of Finance, in 1985 when corporate
tax rate was 50 percent, the share of corporate
tax revenue in the GDP was 0.9
percent. In 2003, when the corporate tax
rate was 18 percent, corporate tax revenue
in the share of the GDP jumped to 1.5
percent. 20 Thus, during the period of a
continued reduction of corporate tax rate,
overall revenue from corporate tax increased
by 67 percent. Noteworthy, the
restructuring of Iceland’s economy was
primarily based on privatization of nationalized
enterprises and assets, strong
fiscal management and responsible leadership
on the part of labor unions and
employers. Now, Iceland is one of the
wealthiest countries in the world. In 2006,
according to World Bank, 21 Iceland’s
gross national income per capita was
$50,580 per capita as measured by Atlas
method and $36,560 per capita in terms
of purchasing power parity.
India: High-Growing Tiger Or An
Economic Laggard?
In this article I highlighted the prospects
of the economic reforms in India. After a
detailed study of the data and empirical
work, I concluded the research and put it
in a written and hopefully understandable
form. India is an economy in transition
currently facing high output growth rates
and enviable economic perspective in the
future. Growth is expected to remain
steady over years in the future. However,
substantial change in global environment
demand a significant infusion of economic
reforms to boost the productive behavior,
economic growth while ‘rules-ratherthan-discretion’
monetary policy is
essential to the pursuit of price stability
instead of discretionary price controls and
market regulation that harm competitive
forces in the market. In the international
arena, India is frequently associated with
high-growing East Asian phenomena besides
China. 22 By 2040, China will reach
$123 trillion USD which is equal to three
times of global output by the end of
2000. 23 Growth estimates for India suggest
a relatively lower but steady-state
growth rate mainly because of political
constraints and structural costs such as
widespread perception of corruption, government
intervention and ownership of
enterprises and harmful regulation of the
economy through obscure administrative
code, fiercely uncompetitive investment
environment marred by red-tape, complexity
hostile to foreign direct investors,
trade protectionism and weak enforcement
of private property rights. These
particular politically-installed disadvantages
may hamper India’s long-term economic
performance and impede growth
prospects respectively. Relying on neoclassical
growth theory and strong growth
foundations such as free and deregulated
product markets, liberalized labor market,
the protection of private property,
trade liberalization to the fullest possible
extent, an independent judicial system,
the rule of law and market institutions
would, by experience and empirical
premise, significantly boost India’s economic
potentials and growth perspectives.
Deregulated product and labor markets, protection of
private property, trade liberalization to the fullest possible
extent, an independent judicial system and the rule of law
would signifi cantly boost India’s economic potential
A growing burden of taxes, corruption
and government size and spending would,
contrary to popular assertions, impede
India’s economic performance and its
prospects as a global economic powerhouse
in the 21st century.
End Notes
1
See: Edmund S. Phelps, Dynamic
Capitalism, Opinion Journal, Tuesday,
October 10, 2006
http://www.opinionjournal.com/editorial/feature.html?id=110009068
2
See: World Economic Outlook, International
Monetary Fund, October
2007, Washington D.C.
http://www.imf.org/external/pubs/ft/
weo/2007/02/index.htm
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151

REIMAGINING INDIA
3
Aggregate demand is an investment
driven by government spending
4
Robert Barro: Economic Growth in a
Cross Section of Countries, Quarterly
Journal of Economics, Vol. 106, p.
407-43, May, 1991
http://ideas.repec.org/a/tpr/qjecon/
v106y1991i2p407-43.html
5
Kerk Phillips, Kunrong Shen: What
Effect does the Size of the State-
Owned Sector Have on Regional
Growth in China, Birgham Young
University, Economics Working Papers,
April 2003
http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=395890
6
Andrea Bassanini, Stefano Scarpetta:
The Driving Forces of Economic
Growth: Panel Data Evidence for the
OECD Countries, Organization for
Economic Cooperation and Development,
Economic Studies No.33, February
2001
http://www.oecd.org/dataoecd/26/2/18450995.pdf
7
Vito Tanzi,. Ludger Schuknecht: Reforming
Government in Industrial
Countries, International Monetary
Fund Finance & Development, September
1996
http://www.imf.org/external/pubs/ft/
fandd/1996/09/pdf/tanzi.pdf
8
Index of Economic Freedom 2007 –
India, Heritage Foundation http://
www.heritage.org/research/features/
index/country.cfm?id=India
9
Edward Prescott: The Elasticity of the
Labor Supply and the Consequences
for Tax Policy, Federal Reserve Bank
of Minneapolis, February 2005
http://www.minneapolisfed.org/research/prescott/papers/Labor
Supply.pdf
10
Simoen Djankov, Tim Ganser, Caralee
McLiesh, Rita Ramalho, Andrei
Schleifer: The Effect of Corporate
Taxes on Investment and Entrepreneurship,
Public Economics Program
Meeting 2007, National Bureau of
Economic Research
http://www.nber.org/confer/2007/
pef07/shleifer.pdf
11
Hiroko Oura, Wild or Tamed? India’s
Potential Growth Rate, International
Monetary Fund, Working Paper No.
07/224, September 2007
http://www.imf.org/external/pubs/cat/
longres.cfm?sk=21326.0
12
According to Heritage Foundation’s
annual Index of Economic Freedom
(2007), India is 84,8 percent free in fiscal
terms and 89 percent free in terms
of freedom from government
http://www.heritage.org/research/features/index/countryFiles/pdfs/India.
pdf
13
Transparency International: Corruption
Perception Index, 2007
http://www.transparency.org/policy_
research/surveys_indices/cpi
14
Peter van de Hoek: Tax Harmonization
and Competition in the European
Union, eJournal of Tax Research,
2003
http://www.austlii.edu.au/au/journals/
eJTR/2003/2.html#Heading50
15
A detailed investigation of corruption
and its effect on growth and economic
performance was conducted by:
Paolo Mauro: Corruption and Growth,
The Quarterly Journal of Economics,
vol. 110, Issue 3, p. 681-712, 1995
http://econpapers.repec.org/article/
tprqjecon/v_3A110_3Ay_3A1995_
3Ai_3A3_3Ap_3A681-712.htm
16
Brendan Walsh: The Source of Wealth
in Small States. Small States as Financial
Centers: The Case of Ireland, A
presentation at the conference Small
States as Financial Centers, University
of Iceland, Reykjavik, Friday 14
December, 2007
http://www.skattamal.is/smallstates/
Walsh.SmallStates.14.09.07.ppt
17
Penn World Table
http://pwt.econ.upenn.edu/php_site/
pwt_index.php
18
Author’s own calculations
19
Már Guðmundsson, Palle S. Andersen:
Inflation and disinflation in Iceland,
BIS Working Paper No.52, Bank for
International Settlements, June 1998
http://ideas.repec.org/p/bis/biswps/52.
html
20
Ministry of Finance, Iceland, »Principal
Tax Rates«, July 2006
http://eng.fjarmalaraduneyti.is/media/
Taxes/Principal_tax_rates_2006.pdf.
21
World Bank, GNI per capita 2006, Atlas
method and PPP, World Development
Indicators database, July 1
2006
http://siteresources.worldbank.org/
DATASTATISTICS/Resources/
GNIPC.pdf
22
Srinivasan (2004)
23
Robert W. Fogel: Capitalism and Democracy
in 2040: Forecasts and Speculations,
NBER Working Paper No.
13184, National Bureau of Economic
Research, June 2007; http://www.nber.
org/papers/w13184
References
• Barro, Robert J. (1991), Economic
Growth in a Cross Section of Countries,
Quarterly Journal of Economics,
Vol. 106, p. 407-43
http://ideas.repec.org/a/tpr/qjecon/
152 THE IIPM THINK TANK

MORE MARKETS, LESS GOVERNMENT
v106y1991i2p407-43.html
• Bassanini, Andrea, Scarpetta Stefano
(2001), The Driving Forces of Economic
Growth: Panel Data Evidence
for the OECD Countries, Organization
for Economic Cooperation and
Development, Economic Studies
No.33. http://www.oecd.org/dataoecd/26/2/18450995.pdf
• Bergström, Friderik, Gidehag, Robert
(2004), EU vs. USA, Timbro
http://www.timbro.se/bokhandel/
pdf/9175665646.pdf
• Brimelow, Peter (1993), Why the Deficit
is the Wrong Number, Forbes
• Corruption Perception Index 2007,
Transparency International
http://www.transparency.org/policy_
research/surveys_indices/cpi
• Djankov, Simeon, Ganser, Tim, McLiesh,
Caralee, Ramalho, Rita, Schleifer,
Andrei (2007): The Effect of Corporate
Taxes on Investment and
Entrepreneurship, Public Economics
Program Meeting 2007, National Bureau
of Economic Research
http://www.nber.org/confer/2007/
pef07/shleifer.pdf
• Fogel, Robert W (2007): Capitalism
and Democracy in 2040: Forecasts
and Speculations, NBER Working
Paper No. 13184, National Bureau of
Economic Research
http://www.nber.org/papers/w13184
• Guðmundsson, Már, Andersen, Palle
S. (1998): Inflation and disinflation in
Iceland, BIS Working Paper No.52,
Bank for International Settlements
http://ideas.repec.org/p/bis/biswps/52.
html
• Index of Economic Freedom 2007
http://www.heritage.org/index
• Mauro, Paulo (1995): Corruption and
Growth, The Quarterly Journal of
Economics, vol. 110, Issue 3, p. 681-
712
http://econpapers.repec.org/article/
tprqjecon/v_3A110_3Ay_3A1995_
3Ai_3A3_3Ap_3A681-712.htm
• Ministry of Finance, Iceland, »Principal
Tax Rates«, July 2006
http://eng.fjarmalaraduneyti.is/media/
Taxes/Principal_tax_rates_2006.pdf.
• Mitchell, Daniel J. (2005), The Impact
of Government Spending, Heritage
Backgrounder #1831, Heritage Foundation
http://www.heritage.org/Research/
Budget/bg1831.cfm
• Oura, Hiroko (2007), Wild or Tamed?
India’s Potential Growth Rate, International
Monetary Fund, Working
Paper No. 07/224
http://www.imf.org/external/pubs/cat/
longres.cfm?sk=21326.0
• Penn World Table
http://pwt.econ.upenn.edu/php_site/
pwt_index.php
• Phelps, Edmund S. (2006), Dynamic
Capitalism, Opinion Journal, Tuesday,
October 10, 2006
http://www.opinionjournal.com/editorial/feature.html?id=110009068
• Phillips, Kerk, Shen, Kunrong (2003):
What Effect does the Size of the State-
Owned Sector Have on Regional
Growth in China, Birgham Young
University, Economics Working Papers
http://papers.ssrn.com/sol3/papers.
cfm?abstract_id=395890
• Prescott, Edward (2005): The Elasticity
of the Labor Supply and the Consequences
for Tax Policy, Federal Reserve
Bank of Minneapolis
http://www.minneapolisfed.org/research/prescott/papers/LaborSupply.
pdf
• Srinivasan, T.N. (2004), China and India:
Economic Performance, Competition
and Cooperation. An Update,
WTO Accession, Policy Reform and
Poverty, World Trade Organization
http://www.econ.yale.edu/~srinivas/
C&I%20Economic%20Performance
%20Update.pdf
• Tanzi, Vito, Schuknecht, Ludger
(1996): Reforming Government in Industrial
Countries, International
Monetary Fund Finance & Development
http://www.imf.org/external/pubs/ft/
fandd/1996/09/pdf/tanzi.pdf
• van de Hoek, Peter (2003): Tax Harmonization
and Competition in the
European Union, eJournal of Tax Research
http://www.austlii.edu.au/au/journals/
eJTR/2003/2.html#Heading50
• Walsh, Brendan (2007): The Source of
Wealth in Small States. Small States
as Financial Centers: The Case of Ireland,
A presentation at the conference
Small States as Financial Centers,
University of Iceland, Reykjavik
http://www.skattamal.is/smallstates/
Walsh.SmallStates.14.09.07.ppt
• World Bank, GNI per capita 2006, Atlas
method and PPP, World Development
Indicators database, July 1
2006
http://siteresources.worldbank.org/
DATASTATISTICS/Resources/
GNIPC.pdf
• World Economic Outlook, International
Monetary Fund, October 2007,
Washington D.C.
http://www.imf.org/external/pubs/ft/
weo/2007/02/index.htm
THE INDIA ECONOMY REVIEW
153

Kalpana Kochhar,
Senior Advisor, Asia and
Pacific Department,
International Monetary Fund,
Washington D.C.
India’s Unique Pattern Of
Development: Quo vadis? 1
"If I were asked under what
sky the human mind has
most fully developed some of
its choicest gifts, has most
deeply pondered on the greatest
problems of life, and has
found solutions, I should point
to India."
-Max Muller
Introduction
Much has been written about India’s ongoing
demographic transition and the
dividend from the rise in working age
population that is expected to continue
well into this century. But, of course, this
dividend will only be realized if the 13 million
or so people that will enter the labor
force each year for the next four decades
can be gainfully employed. Has India specialized
in labor intensive as one would
expect in a labor abundant country? And,
if not, how will India be able to foster
growth in labor-intensive manufacturing
going forward so that jobs can be provided
for India’s vast and growing pool of lowskilled
labor?
We start with an examination of how
India’s policies since independence have
influenced its pattern of development.
Then we ask whether the wide-ranging
reforms beginning in the 1980s and accelerating
in the 1990s changed this pattern
of specialization. Finally, we look at the
way India’s states have developed to consider
what the future might look like?
What were the main elements of India’s
development strategy in the first three and
a half decades since Independence? A
simplified view of the main aspects include:
(i) the emphasis on self-sufficiency,
which led to the creation of industries producing
capital goods and extensive trade
restrictions; (ii) the combination of heavy
public sector involvement in production
being reserved only for the public sector
and controlled private sector involvement
to take account of the fact that India was
capital poor. Licenses were required for
investment, capacity expansion, production,
and imports, while foreign exchange,
credit allocation, and even prices were
controlled; (iii) avoidance of undue concentration
of economic power through the
Monopoly and Restrictive Trade Practices
act (MRTP)—which imposed severe
constraints on expansion by large firms
and groups, and the Foreign Exchange
Regulation Act (FERA); (iv) geographically
balanced development with investment
directed towards underdeveloped
areas, even if these areas were not near
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Table 1. Sectoral Shares In Value-Added And Employment
Value Added As Percent Of GDP
Employment In Sector As Percent Of
Total Employment
(1) (2) (3) (4) (5) (6) (7)
Agriculture Manufacturing Industry Services Agriculture Industry Services
1980
India 38.9 16.3 24.5 36.6 68.1 13.9 18.6
Brazil 11.0 33.5 43.8 45.2 29.3 24.7 46.1
China 30.1 40.5 48.5 21.4 68.7 18.2 11.7
Indonesia 24.0 13.0 41.7 34.3 55.9 13.2 30.2
Korea 15.1 28.6 40.5 44.4 34.0 29.0 37.0
Malaysia 22.6 21.6 41.0 36.3 37.2 24.1 38.7
Mexico 9.0 22.3 33.6 57.4 23.5 26.5 49.0
Thailand 23.2 21.5 28.7 48.1 70.8 10.3 18.9
Turkey 26.4 14.3 22.2 51.4 43.0 34.9 22.1
Low income 36.4 14.8 24.4 39.2 74.6 8.7 16.5
Lower middle income 21.5 29.1 41.7 36.8 64.0 18.5 16.4
2000
India 24.6 15.9 26.6 48.8 59.3 18.2 22.4
Brazil 7.3 17.1 28.0 64.7 24.2 19.3 56.5
China 16.4 34.7 50.2 33.4 46.9 23.0 29.9
Indonesia 17.2 24.9 46.1 36.7 45.3 17.3 37.3
Korea 4.3 26.1 36.2 59.5 10.9 28.0 61.0
Malaysia 8.8 32.6 50.7 40.5 18.4 32.2 49.5
Mexico 4.2 20.3 28.0 67.8 17.5 26.9 55.2
Thailand 9.0 33.6 42.0 49.0 48.8 19.0 32.2
Turkey 15.4 15.7 25.3 59.4 34.5 24.5 40.9
Low Income 27.3 14.1 26.6 46.1 64.5 12.3 23.2
Lower Middle Income 12.5 24.2 38.3 49.1 43.2 18.5 38.3
Sources: World Bank, World Development Indicators 2005, except Korea, OECD-Structural Analysis Database, and India, National Accounts Statistics, Indiastat.com.
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,
except India (1983), Brazil (1981 and 1999), and Turkey (1982). Employment shares for the low-income group for 2000 are estimates.
markets or even if scale was inefficiently
small; (v) encouraging labor-intensive
manufacture in the private sector, by giving
significant benefits to small-scale firms
(tax concessions, preferential access to
subsidized credit, preferential treatment
in procurement by the government, and
reserving some goods for exclusive production
by the small-scale sector); (vi)
significant protections for labor, especially
in large firms, through the Industrial
Disputes Act (1947), which in 1982 was
tightened to make it compulsory for firms
with 100 or more workers to seek the permission
of the relevant government to dismiss
workers; (vii) relatively more resources
spent on higher education than on
primary education.
Economic Development
Circa 1980
Next, we examine the legacy of this web
of policies on the pattern of development.
In Table 1, we present the share of output
in the different sectors in India in 1981
and compare it with that in a number of
developing and developed countries. At
a little over 16 percent of GDP, India’s
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Table 2. India In The Cross Section: Share Of Manufacturing And Services, Early 1980s
Share Of Output (1981) Share Of Employment (1983)
Manufacturing Services Industry Services
(1) (2) (3) (4) (5) (6) (7) (8)
Log GDP Per-capita 15.37 21.58 36.27** 27.81 26.76 22.09 66.5** 67.20**
(14.58) (13.75) (17.01) (17.79) (20.8) (20.8) (29.07) (30.07)
Log GDP Per-capita -0.73 -1.09 -1.95* -1.46 -1.17 -0.92 -3.15* -3.19*
(0.88) (0.83) (1.03) (1.08) (1.2) (1.2) (1.71) (1.76)
India Indicator 4.58*** 2.33 -6.50*** -3.55** -0.260 0.560 -7.41** -7.53**
(1.25) (1.76) (1.3) (1.61) (2.52) (2.82) (3.27) (3.63)
Control for country size No Yes No Yes No Yes No Yes
Observations 101 101 122 122 44 44 43 43
Notes: Robust standard errors are reported in parentheses.
***represents significance at 1 percent, **represents significance at 5 percent, *represents significance at 10 percent levels.
Country size is measured by area in square kilometers.
share in manufacturing seems low, especially
when compared with a number of
East Asian countries and China.
But from the work of Kuznets and
Chenery, we know that the manufacturing
share varies with the level of development,
rising and then falling off once a
country approaches a high level of income.
So we examine whether India’s
share of manufacturing is too low after
correcting for its level of income and its
square (to account for non-linearities) 2 .
Correcting only for income, India is a
positive outlier among countries in its
share of value added in manufacturing in
1981 (Table 2). Its share significantly exceeds
the norm by 4.6 percentage points
(see Table 2, column 1). After correcting
for country size, the coefficient on the
India indicator declines to 2.3 percentage
points in 1981 which is not statistically
significant (column 2). When we compare
the shares of industrial sector employment
in total employment across countries,
India is again not an outlier (Table
2, columns 5 and 6) 3 .
What were the characteristics of industry
in 1980? The first industry characteristic
we examine is labor intensity, for
which we use as a proxy the share of wages
in value added for the industry in a
country from the UNIDO database, averaged
across a broad group of developing
countries. For each country, we calculate
Compared with countries at a similar level of development
and size, in 1981 India had approximately the normal
share of output and employment in manufacturing. Output
in services was below the norm, as was employment.
the ratio of value added in industries with
above-median labor-intensity to the value
added in industries with below-median
labor-intensity. If Indian manufacturing
generated relatively more value added in
labor intensive industries in 1981, then in
a cross-country regression of this ratio
against log per capita GDP, its square,
and an indicator for India, the India indicator
should be positive and significant.
However, the coefficient is insignificant
suggesting that India does not have more
value added coming out of labor intensive
industries.
The second characteristic we examined
is skill intensity. We used data from South
Africa contains on 45 sectors and five
primary factors of production—capital
plus four categories of labor: highly
skilled, skilled, unskilled, and informal
sector. We use the share of remuneration
of the highly skilled and skilled categories
of workers in total value as a proxy
for the skill intensity of an industry. 4 If
Indian manufacturing generated relatively
less value added in skill intensive
industries in 1981, then in a cross-country
regression of this ratio against log per
capita GDP, its square, and an indicator
for India, the India indicator should be
negative and significant. What we find is
striking—even by 1981, India specialized
more than the average country in skillintensive
industries.
A third characteristic we examine is
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MORE MARKETS, LESS GOVERNMENT
diversification. Imbs and Wacziarg (2003)
show that in the course of development,
countries first diversify within manufacturing,
producing many things, and then
after a certain level of income, start specializing,
producing fewer things. Technically,
the relationship between the concentration
of value added across
industries (the Gini coefficient or the
Herfindahl index), and income is U-
shaped, with the turning point occurring
at about US$10,000 per capita. Given that
India has more of a presence in skill-intensive
industries, the presumption would
be that it has specialized in more areas
than the typical developing country, and
hence it should exhibit a more diverse
pattern of production. When we examine
the concentration of Indian industry compared
to the average country pattern, we
indeed find that India is significantly
more diversified (less concentrated) in
terms of the distribution of value-added
across industries.
To summarize, compared with countries
at a similar level of development and
size, in 1981 India had approximately the
normal share of output and employment
in manufacturing. Output in services was
below the norm, as was employment in
services. Output and employment were
about average in labor intensive manufacturing
industries and above the norm in
skill intensive industries. And finally, Indian
manufacturing was significantly
more diversified both in terms of output
and employment than countries of comparable
income and size. The paradox of
Indian manufacturing in the early 1980s
is thus that of a labor-rich, capital-poor
economy using too little of the former. 5
The reason, most likely, was policy. The
large investment in tertiary education for
a country of its per capita income resulted
in the plentiful availability of highly
skilled, cheap labor. In addition, labor
laws afforded much less protection to
skilled labor. These factors are likely to
have contributed to India generating
relatively greater value added and employment
in skill-intensive industries as
compared to the typical poor country.
Reforms Of The 1980s And 1990s
The key features of reforms in the
1980s—characterized as “pro business”
in orientation were (i) the liberalization
of capital goods and intermediate input
imports; (ii) the extension of export incentives
through the tax system, and more
liberal access to credit and foreign exchange;
(iii) the significant relaxation of
industrial licensing requirements through
direct “delicensing” of some industries
and through “broad banding”, which permitted
firms in some industries to switch
production between similar product lines;
(iv) the decontrol of administered prices
of key intermediate inputs.
The reforms of the 1990s—characterized
as “pro-market” in orientation—included
(i) the abolition of industrial licensing
and the narrowing of the scope
of public sector monopolies to a much
smaller number of industries; (ii) the liberalization
of inward foreign direct and
portfolio investment; (iii) the sweeping
liberalization of trade which included the
elimination of import licensing and the
progressive reduction of non-tariff barriers;
(iv) financial sector liberalization,
including the removal of controls on capital
issues, freer entry for domestic, and
foreign, private banks and the opening up
Between 1980 and 2002, India’s share of services in
value added exploded from 37 percent to 49 percent. Its
share of manufacturing in value-added remained
broadly unchanged at 16 percent
of the insurance sector; (v) and the liberalization
of investment in important services,
such as telecommunications. Areas
that remained largely untouched by reforms
in the 1990s were the labor market;
small-scale reservations (where there has
been some movement only in the last 4-5
years); privatization both of non-financial
enterprises and of banks; and further agricultural
sector reforms.
Economic Development After
Reforms
How have these twenty years of slow but
steady reforms affected the pattern of
development, if at all? Let us look again
at the variables discussed above—sectoral
shares, factor intensities, and diversification,
between the early 1980s and
early 2000s. The traditional perspective
of Kuznets or Chenery would predict a
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REIMAGINING INDIA
Table 3: India In The Cross Section: Shares Of Mfg. & Services, 2000
Panel A
Share Of Output
Share Of Employment
Manufacturing Services Industry Services
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii)
Log GDP Per-capita 13.18** 15.41** 10.88 8.01 51.79*** 52.4*** 38.99 39.69**
(6.41) (6.38) (10.34) (10.3) (11.28) (11.23) (23.91) (23.83)
Log GDP Per-capita 2 -0.61 -0.72* -0.19 -0.04 -2.67*** -2.71*** -1.49 -1.54
(0.12) (0.38) (0.6) (0.6) (0.62) (0.63) (1.31) (1.3)
India Indicator 2.4** 0.26 -0.05 3.77** 0.56 1.13 -17.22*** -16.57***
(0.73) (1.11) (1.17) (1.46) (1.17) (1.36) (3.03) (3.78)
Control For Size No Yes No Yes No Yes No Yes
Observations 149 149 156 156 76 76 74 74
Panel B
Change In Share Of output (1981-2000)
Change In Share Of Employment
Manufacturing Services Industry Services
(i) (ii) (iii) (iv)
Log Initial GDP Per-Capita -1.19*** 3.96*** -3.37*** 2.91**
(0.66) (0.77) (0.92) (1.39)
Average Annual growth rate 0.7** 0.41 0.47 -0.18
(0.33) (0.53) (0.6) (0.64)
India Indicator -2.56* 9.86*** 1.7 0.94
(1.37) (1.63) (2.05) (3.59)
Observations 93 116 39 38
Notes: Robust standard errors are reported in parentheses
***represents significance at 1%, **represents significance at 5%, *represents significance at 5%, *represents significance at 10%
Country size is measured by area in square killometers.
rapid increase in the share of manufacturing,
a decline in agriculture and an
uncertain or modest effect on services.
However, between 1980 and 2002, India’s
share of services in value added exploded
from 37 percent to 49 percent. Its share
of manufacturing in value added remained
broadly unchanged at 16 percent,
while the decline in agriculture mirrored
the performance of services. 6 The corresponding
numbers for employment were
19 percent to 22 percent and 14 percent
to 18 percent (Table 1).
Is this evolution in sectoral shares unusual
when compared with that of other
countries? In Table 3, columns 1 and 2,
panel A, we see that the coefficient of the
India indicator is still positive but smaller
than in the corresponding specification
for 1981. 7 Furthermore, in the regressions
using the change in the share of
manufacturing value-added to overall
growth (column 1, Panel B), the India indicator
is negative. Thus, the data suggest
a relative slowing in manufacturing
growth.
In contrast, the performance of services
over this period has been unusual.
India’s share in services is a significant 3.8
percent higher than in other countries in
2000 (Table 3, panel A, column 4). This
is broadly confirmed in the change regressions
(panel B), where India records
an increase in the size of the services sector
that is 10 percentage points of GDP
greater than that of the average country.
What happened to labor, skill intensity
and diversification in manufacturing after
the reforms? In Figure 1, we plot the evolution
in the share of output generated in
labor-intensive relative to non labor-intensive
industries for India and a selected
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MORE MARKETS, LESS GOVERNMENT
Figure 1. Value-Added Share of Labor Intensive Industries
Ratio of value added
1
8
6
4
Ratio of value added in above median labor intensive intensive sectors to below median sectors
7.5 8 7.5 9 9.5
CHN IND IDN KOR MYS
Sources: Authors’ calculations; UNIDO 3-digit industrial statistics database (2003).
Notes: The sample for all countries includes observations from 1981 to 1996. The classification of above and below
median labor-intensive sectors is given in Table 3. CHN stands for China, IND for India, IDN for Indonesia, KOR for
Korea, and MYS for Malaysia.
Figure 2. Value-Added Share Of Skill Intensive Industries
Ratio of value added
2.5
2
1.5
1
0.5
Ratio of value added in above median skill intensive sectors to below median sectors
7.5 8 7.5 9 9.5
CHN IND IDN KOR MYS
Sources: Authors’ calculations; UNIDO 3-digit industrial statistics database (2003).
Notes: The sample for all countries includes observations from 1981 to 1996. The classification of above and below
median skill intensive sectors is given in Table 3. CHN stands for China, IND for India, IDN for Indonesia, KOR for
Korea, and MYS for Malaysia.
group of comparator countries. India’s
share is decreasing, when that of many of
the other countries is either increasing, or
decreasing at much higher levels of income.
In Figure 2, we plot the evolution
in the relative share of output generated
in skill-intensive industries for India and
a selected group of comparator countries.
Again, it is striking that India’s share in
skill-intensive manufacturing, which was
already high in 1980 despite its lower
level of per capita income, has been increasing;
it is at levels reached by Malaysia
or Korea at much higher levels of per
capita income. These developments are
not affected by the fact that our data so
far have been limited to the registered
manufacturing sector in India. Indeed,
when we trace the evolution of labor- and
skill-intensive products in the informal
sector, we see the same pattern (Figure
3). Finally, we find that India continues to
be an outlier in 2000 on both measures of
diversification. Indeed, when we compare
the change in diversification between
1980 and 2000, we find that India is again
an outlier, implying that the pace of diversification
in India after 1980 has been
greater than that for the average country
(see Figure 4).
In sum, the evidence suggests that
many of the unique features of India’s
development that were apparent in 1981
have not changed, despite the reforms.
This continuity of trends may be explained
partly by the fact that the reforms
have not been completed. For example,
labor markets remain untouched and
education expenditure is still skewed. But
part of the explanation may well rest with
the fact that in India, the policy distortions
created organizational capabilities
and human capital that led to hysteresis
in growth paths. The growth experience
of the Indian states offers some support
to this view.
Development At The State Level
Are these patterns repeated in India’s
states and are there differences between
the fast growing and the laggard states?
We find that in the fast-growing Indian
states, the share of manufacturing has
remained constant or declined. Where
there has been an increase—in Andhra
Pradesh, Gujarat, and Haryana—it has
occurred in capital- and skill-intensive
industries (In Gujarat, the share of the
textile industry declined a lot, while that
of the petrochemical industry rose substantially;
similarly, in Andhra Pradesh
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REIMAGINING INDIA
Figure 3. Value-Added Shares In Unregistered Manufacturing
3.0
2.5
2.0
1.5
1.0
0.5
Share of High Labor Intensity Industries
Share of High Skill Intensity Industries
0.0
1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000
Source: Authors’ calculations; data on unregistered manufacturing are from the Central Statistical Organization,
Government of India.
Notes: The share of high labor (skill) intensity industries is the ratio of value added in sectors with above-median labor
(skill) intensity to that in sectors with below-median labor (skill) intensity. The relevant sector classification is given in
Table 3.
Figure 4. Diversification In Indian Manufacturing
Herfindahl Index
.12
.1
.08
.06
Herfindahl Index based on value added
7.5 8 7.5 9 9.5
CHN IND IDN KOR MYS
Sources: Authors’ calculations; UNIDO 3-digit industrial statistics database (2003).
Notes: The sample for all countries includes observations from 1981 to 1996. CHN stands for China, IND
for India, IDN for Indonesia, KOR for Korea, and MYS for Malaysia. For each country, the Herfindahl
Index measures concentration in the value added across sectors; the lower the index, the lower the concentration,
or the higher the diversification.
the decline in the share of food, beverages,
tobacco, textiles, and paper related
industries was matched by a significant
increase in the share of basic metals and
alloys). Interestingly, neither the fast nor
the slow growing states increased their
share of value added in labor intensive
industries.
By contrast, nearly all states in India
have seen a uniform shift toward services
but there is a noteworthy difference between
services that are predominantly in
the public sector and those that are in the
private sector. In Figure 5, we find a neg-
ative correlation between the change in
share of services that are performed
mostly by the public sector (such as electricity,
public administration, railways,
and other community services) and the
average annual state growth. In other
words, the share of public sector services
including administration is growing in the
laggard states, while the share of private
sector services is growing in the fast-moving
states.
Armed with all this, let us turn to the
question of where India may be headed?
It would appear that the fast growing peninsular
states are starting to resemble
more developed countries in their specialization,
while the slow growing hinterland
states, with their still rapidly growing,
less well-educated, populations are
falling behind. Visaria and Visaria (2003)
suggest that 60 percent of the expected
620 million addition to the Indian population
between now and 2051 will be in Bihar,
Madhya Pradesh, Rajasthan and Uttar
Pradesh; only 22 percent will be in the
fast growing states of Kerala, Tamil Nadu,
Andhra Pradesh, Karnataka, and Maharashtra.
Such trends could create immense
economic and political strains between
Indian states.
It may well be that the slow growing
states will have to follow a more traditional
path of growth, focusing on laborintensive
manufacturing. But for that
further reform is needed—in particular,
more flexible labor laws and an improvement
of infrastructure, especially vis-à-vis
the states in the hinterland so that these
industries can be internationally costcompetitive—to
revitalize labor-intensive
manufacturing. But the archaic labor laws
have strong organized constituencies, in
particular, labor unions tied to political
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Figure 5. Public Services And States’ Growth
Change in share of Public Services in
NSDP 1980-2000 (%)
20
15
10
Change in share of Public Services in NSDP 1980-2000
JK
BH OR
MP
MN
RJ
HP
pervisory skilled workers are affordable
only if they are used very economically
relative to the use of unskilled labor – if,
for example, firms have scale. 9 Here
again, the fast moving states where the
business and political climate is more
conducive to scale have an advantage. In
5
sum, the fast-growing states could absorb
AS UP
KL GJ MH AP KK TN
the more mobile skilled labor from the
0
PJ
HY
WB slow moving states leading to a further
hollowing out of prospects there. The
-5
DL
obvious solution is not to impede the
1 2 3 4
Average Annual Growth of NSDP per capita 1980-2000 (%)
5 growth of the fast-movers but to enhance
the availability of the resource in scarce
Source: Authors’ calculations; data on unregistered manufacturing are from the Central Statistical Organization, Government
of India.
supply. Although the earlier emphasis on
Notes: The share of high labor (skill) intensity industries is the ratio of value added in sectors with above-median labor
(skill) intensity to that in sectors with below-median labor (skill) intensity. The relevant sector classification is given in funding tertiary education at the expense
Table 3.
of primary education may
Code State Code State Code State
have been an aberration,
AP Andhra Pradesh JK Jammu & Kashmir OR Orissa
India may now have too
little tertiary education of
AS Assam KK Karnataka PJ Punjab
the right kind at this juncture.
There are serious
BH Bihar KL Kerala RJ Rajasthan
DL Delhi MH Maharashtra TN Tamil Nadu
doubts about the quality
GJ Gujarat MN Manipur TP Tripura
of education received by
HP Himachal Pradesh MP Madhya Pradesh UP Uttar Pradesh
the large number of graduates
HY Haryana NG Nagaland WB West Bengal
emerging from uni-
versity every year. The
parties, backing them. Given the way Indian
industry has specialized, the costs of
these laws are not experienced by incumbents,
and the political leadership, or will,
to amend them has not emerged. 8
Even if serious reforms were undertaken
in the laggard states, competition
from the more advanced states will not
make it easy for them to grow. First, laggard
states are typically distant from
ports and airports. Transportation costs
will come down as infrastructure is built
up, but it is unclear whether the improvements
will help them out-compete the
fast-growing peninsular states where
many of the initial large-scale infrastructure
projects are being undertaken, and
where ancillary infrastructure exists.
Second, even labor-intensive unskilled
manufacturing—should it pick up—requires
a skilled supervisory and managerial
force. Despite the large numbers of
graduates emerging from universities in
India, the number of graduates with the
skills to work in industry or the service
sector is relatively limited. With the immense
demand for skilled workers in the
export-oriented services industry, wages
of skilled workers have been going up
very fast. Given the extremely competitive
situation in (typically tradable) labor-intensive
industries, highly paid su-
number of high-quality institutions is
still very small, and thus, India needs to
remove the barriers to starting new institutions,
as well as encourage foreign direct
investment here. In short, from a
policy perspective, the irony is that in
order to promote unskilled labor-intensive
activities in the future, a great deal
of attention may need to be paid in fostering
the supply of skilled labor.
The changes since the early 1980s have
unleashed tremendous economic opportunities,
but also divergence between
states. From uniformly mediocre economic
performance, India has evolved
into a conglomeration of states with per-
TP
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REIMAGINING INDIA
formance more related to the capabilities
of individual states and the opportunities
they create. It is possible that the laggard
states would do what it takes to utilize
their vast pools of underemployed lowcost
labor to attract investment in laborintensive
manufacturing and agri-business.
They would thereby catch up with
the leading states in India. The revival of
manufacturing growth since 2004, albeit
still concentrated in skill-intensive
and capital-intensive industries, offers
hope for this scenario.
End Notes
1
This paper is based upon Kochhar et
al. (2006)
2
Of course, other factors also affect
sectoral shares (see, for example,
Chenery and Taylor (1968)), but our
intent here is primarily to see whether
India is an outlier after controlling for
obvious factors, rather than to do an
exhaustive study of the sectoral composition
of growth per se. Also, we
report results for the largest sample of
countries, though the results are qualitatively
similar, when not specifically
noted, for a smaller cross-section restricted
to non-OECD countries.
3
Comparable cross-country data on
employment shares are not available
separately for the manufacturing sector,
only for industry (manufacturing,
mining, and core infrastructure sectors),
and services. Thus the analysis
of employment shares is conducted for
industry and services .
4
The choice of South Africa was dictated
primarily by data availability.
Our results are robust to alternative
definitions of skill intensity, including
restricting the definition to the highly
skilled category and defining skill intensity
in terms of share of remuneration
in output rather than value added.
We also checked the correlation of our
measures of skill intensity with that
compiled for the U.S. by Rajan and
Wulf (2004). It is 0.66, for the highly
skilled category, and 0.5 when skill
intensity includes highly skilled and
skilled workers.
5
It may well be, of course, that India’s
labor-intensive production was concentrated
in the unregistered sector,
for which we do not have comparable
data from other countries. To the extent
that firms in the unregistered sector
have inefficiently small scale, total
production would still be smaller and
less competitive than it could be without
the spectrum of regulations. Also,
unregistered labor-intensive production
has been falling considerably over
time, suggesting that this explanation
for India’s lack of concentration in labor-intensive
manufacturing is less
applicable today.
6
This development contradicts the
Kuznets-Chenery hypothesis. Kongsamut,
Rebelo, and Xie (2001), however,
argued based on an analysis of
123 countries over the period 1970-89
that the share of services rises with
development more than anticipated by
the Kuznets-Chenery view.
7
However, we find that industry (that
is, manufacturing, mining and core
infrastructure industries) was a significant
negative outlier in 2000, possibly
related to the much worse than
average performance of India’s infrastructure
sector.
8
In other words, most commentators
look to existing firms to see if labor
laws are a problem. But existing firms
have adapted to these laws, as suggested
both by their pattern of specialization
and their scale. The more
pertinent question is whether new
firms are kept from entering because
of the laws. The pattern of specialization
in India suggest they are.
9
Alternatively, the wages on unskilled
labor may fall, but wages in agriculture
may place a floor here.
References
• Chenery, H.B., 1960, Patterns of industrial
growth, American Economic
Review Vol. 57, 415-26, and L.J. Taylor,
1968, Development patterns:
among countries and over time, Review
of Economics and Statistics, Vol.
50, 391-416.
• Imbs, J., and R. Wacziarg, 2003, Stages
of development, The American
Economic Review, March, Vol. 93,
No. 1.
• Kochhar, Kalpana, Utsav Kumar, Raghuram
Rajan, Arvind Subramanian,
Ioannis Tokatlidis, “India’s Pattern of
Development: What Happened, What
Follows?” Journal of Monetary Economics,
Vol 53(5), July 2006
• Kongsamut, P., S. Rebelo, and D. Xie,
2001, Beyond balanced growth, IMF
Working Paper 01/85 (Washington:
International Monetary Fund).
• Visaria, L., and P. Visaria, 2003, Long
term population projections for major
states, 1991-2101, Economic and Political
Weekly, November.
• Rajan, R. and J.Wulf, 2004, Are perks
purely managerial excess? NBER
Working Paper No. 10494 (Cambridge,
Massachusetts : National Bureau of
Economic Research).
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What’s in store
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BUSINESS AND
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T.R.Manoharan,
Senior Coordinator, Forest Programme,
WWF-India,New Delhi
India’s Growing Ecological Footprint: Exploring
Past And Future Changes
"There is enough for everybody’s
need, but not enough
for anybody’s greed."
-Mahatma Gandhi
Introduction
A high economic growth is essential for
India to ensure improved living conditions
of its citizens, which majorly consists of
poor and marginalized sections. The nation
possesses only 2.2 per cent of the land
mass but home to 16 per cent of world
population and 27 percent of world’s poor.
Despite its low per capita income, India is
presently the world’s tenth largest economy
in terms of GDP. The economy is
growing at 7 to 8 per cent per annum since
2003 and is targeted to grow at 9 per cent
or above during 2007-12 (Planning Commission,
2006; World Bank, 2007). To
achieve this target, increased use of bioresources-
both within the country and
elsewhere is inevitable.
Available estimates show that humanity’s
ecological footprint (demand on ecosystems)
has exceeded the bio-capacity of
the planet by late 1980s and the over shoot
is accumulating ever since. It is pointed
out that world is following unsustainable
path of development and the growing ecological
debt is a major factor. Presently,
we are using 30 percent more resources
than the planet can regenerate (In other
words, 1.3 planets). The global footprint
network estimates ecological debt day for
every year to create awareness on how humanity’s
consumption patterns are depleting
the planets bio-resources . In 2007,
the ecological debt day was October 6. By
that day the humanity has consumed total
amount of new resources that the planet
can produce this year. Ecological debt day
marks the day when we begin to live beyond
our ecological means. If we continue
the current path of development, the
ecological debt day will come earlier in
every year. Several options are available
now to minimize the risk of accumulated
ecological debt (WWF, 2006; UNEP,
2007). India, being one of the fastest
growing economies in the world with more
than one billion people, can play a crucial
role to address this global challenge. It is
possible to minimize the ecological footprint
of the nation while continuing higher
economic growth and efforts to attain
high human development.
164 THE IIPM THINK TANK

ENVIRONMENTAL ECONOMICS
Table-1: India’s Economic Growth
Plan
Period
Real Income
Plan
Target
Use Of Natural Resources
India is rich in terms of natural resource
endowments and biodiversity. The nation
is one of the 12 mega biodiversity countries
in the world. More than 45000 flora
and 77000 species of fauna are recorded.
The natural ecosystem include 16 types of
forests 5 types of grass lands, 27,403 wetland
units (both inland and coastal) including
lakes, swamps, tanks and reservoirs,
tidal mudflats, mangroves, estuaries,
lagoons, coral reefs, sand beach (Verma
et. al, 2007). These resources provide a
flow of environmental (ecosystem) services
required for production/economic
development. However, the depletion and
degradation of natural resources pose a
serious threat to the sustained flow of
these ecosystem services. The uncertainty
of quality and quantity of such services
has not been suitably factored into the development
models. Forest is the second
largest land use in India next to agriculture.
The latest assessment of forest survey
of India in 2003 estimated about 67.8 million
hectares of forest cover in the country
Actual
Growth
Sectoral Growth Rate
Agriculture Industry Services
First Plan 1951-56 2.1 3.6 2.9 5.9 3.7
Second Plan 1956-61 4.5 3.9 3.2 6.4 4.6
Third Plan 1961-66 5.6 2.3 -0.5 6.8 5.0
Fourth Plan 1969-74 5.7 3.2 2.6 3.7 4.0
Fifth Plan 1974-79 4.4 4.8 3.4 6.3 5.5
Sixth Plan 1980-85 5.2 5.7 5.5 6.2 5.4
Seventh Plan 1985-90 5.0 6.0 3.4 7.5 7.4
Eighth Plan 1992-97 5.6 6.8 3.9 8.0 7.9
Ninth Plan 1997-02 6.5 5.5 2.1 4.6 8.1
Tenth Plan 2002-07 8.0 7.2* 1.7 8.3 9.0
Eleventh Plan 2007-12 9.0 - 4.1* 10.5* 9.9*
* projected.
Sources: Planning Commission, Govt. of India & http://www.indiastat.com
which is 20.64 percent of the total geographical
area (FSI, 2005). It shows a marginal
increase in the total forest cover, but
the loss of 2.6 million ha of dense forests
when compared to previous assessment in
2001. The nation is targeted to achieve 33
per cent of its area under forest and tree
cover by 2012. The per capita availability
of land in India has declined from 0.91 ha
to 0.33 ha between 1950 and 2001.The per
capita availability of farm land declined
from 0.64 ha to 0.25 ha during the same
period. India occupies 4 per cent of world’s
water resources which are depleting fast.
In 1947, the per capita availability of fresh
water in India was 5150 cu.m but it reduced
to 2200 cu.m in 2000. It is projected
that in 2017, the same will become 1600
cu.m. resulting water stress in many places.
The melting of glaziers in Himalayas and
other climate change related issues can
lead to irreversible changes in ecosystems.
India is said to be particularly vulnerable
due to these effects.
While there is overall decline in India’s
bio-capacity, its use has increased faster
to meet the growing needs of development.
Electricity generation in India has
increased from 6 billion KWH to 556 billion
KWH between 1951 and 2001. The
coal production has increased from 32
million tonnes to 332 million tones between
1951 and 2001. In 2006, the production
was 670 million tones. In order to
meet the growing demand for energy, the
production is targeted to increase to 670
million tones by 2012. In addition to domestic
production, 40-50 million tones of
superior coal is required to be imported
during the 11 th plan period. Crude oil imports
increased from six million tones to
78 million tones between 1961 and 2001
(Table-2).
Ecological Footprint
An ecological footprint measures people’s
demand on nature and compares human
consumption of natural resources with the
Earth’s ecological capacity (bio-capacity)
to regenerate them. A country’s ecological
Available estimates show that humanity’s ecological footprint
has exceeded the bio-capacity of the planet by late
1980s. Presently, we are using 30 percent more
resources than the planet can regenerate
footprint is the total area required to produce
the food and fibre that it consumes,
absorb its waste, and provide space for its
infrastructure. People consume resources
and ecological services all over the world,
so their footprint is the sum of these areas,
wherever they are on the planet. Ecologi-
THE INDIA ECONOMY REVIEW
165

PROGRESS WITHIN LIMITS
Table-2: Changes In Select Indicators Of India’s Bio Capacity And Its Use
Per capita Availability Of:
Year Population
(million)
Land
(ha)
Farm
Land
(ha)
Forest
Area
(ha)
Population
Density
(per
q.km)
Energy
generated
(Billion
KWH)
Crude
Oil
Imports
(Millon
Tonnes)
Imports Of
Petroleum
(Million
tonnes)
Production
Of Coal
(Million
tonnes)
Export (US$
Million)
(including
re-exports)
Import
(US$
Million)
1951 361.1 110 0.91 0.64 0.113 6.6 3.1 32.3 1490 1852
1961 439.2 134 0.75 0.50 0.124 20.1 6 2.5 55.2 1381 2281
1971 548.2 167 0.60 0.41 0.115 61.2 11.7 1.1 76.3 2153 2443
1981 683.3 208 0.48 0.36 0.099 129.2 16.2 7.3 119 8704 15174
1991 846.3 257 0.39 0.30 0.081 289.4 20.7 8.7 225.5 17865 19411
2001 1028.7 313 0.30 0.25 0.074 554.5 78.7 7.0 332.6 43827 51413
Source: Ministry of Environment and Forests,Government of India (Various Reports).
cal footprints enable people to take personal
or collective actions in support of a
world where humanity lives within the
means of one planet (WWF, 2006; Global
footprint network). The available estimates
show that India’s ecological footprint
per person (0.8 global hectares) is
lower than the world average (2.2 global
hectares) but it is much higher than the
nations' biocapacity and this has placed
India in the list of “ecological deficit”
countries. The Living Planet Report -
2006 ranked India as the third largest
footprint country followed by United
States and China. “India’s total ecological
footprint is likely to increase due to the
twin pressures from population and consumption
patterns unless suitable actions
are taken. In 2002, the humanity’s per person
footprint was 2.2 global hectares (gha)
whereas the bio capacity per person was
1.8 gha. India’s footprint was 0.8 gha
which is lower than world average but
lower than the nation’s biocapacity (04
gha). Between 1975 and 2003, India’s foot
print per person has increased faster (16
percent) than that of the world (14 percent)
but much lower than many other economies.
The ecological footprint estimates
indicate that India’s bio-capacity is not
sufficient to meet the needs of the nations'
growing population. In other words, future
development in India is also dependant
on the use of natural resources of
other countries. Globalization makes it
possible to use these resources legally and
openly. The nation has committed to conservation
of natural resources and biodiversity
and implemented several policy
and legal measures. It is also party to
many Multilateral Environmental Agreements
(MEAs) such as Convention on
Biological Diversity (CBD), CITES, Montreal
Table-2: Changes In Select Indicators Of India’s Bio Capacity And Its Use
Protocol. In practice,
Country Ecological
Footprint
(Demand)
Biocapacity
(Supply)
(gha. Per
Ecol. Footprint –
Biocapacity =Ecological
Reserve Or
Footprint
Change Per
Person (%)
Biocapacity
Change Per
Person (%)
these measures have regulated
or prohibited consumptive
use (extraction) of natural resources
in India. However,
(gha. Per Person) Ecological Deficit (-) 1975-2003 1975-2003
Person) 2003 2003 gha. Per Person)2003
this gives economic opportunities
for many biodiversity
India 0.8 0.4 -0.4 16 -23
China 1.6 0.8 -0.9 82 -3
rich countries where such resources
Brazil
South Africa
USA
Indonesia
World
Source: WWF (2006)
2.1
2.3
9.6
1.1
2.2
9.9
2.0
4.7
1.0
1.8
7.8
-0.3
-4.8
-0.1
-0.45
30
-13
38
36
14
-27
-23
-20
-20
-25
are abundant. For
example, felling of timber is
prohibited, wood in log forms
cannot be exported from India
with a view to safeguard
our remaining forests. But,
166 THE IIPM THINK TANK

ENVIRONMENTAL ECONOMICS
we permit imports from all over the world
including those originated from rainforests/
worlds critical eco-regions. There
are several restrictions for land in India for
establishing plantations, but enough land
is offered for Indian companies in many
countries in order to attract investment
and creating employment opportunities in
those countries. The proponents of trade
liberalization may argue that this is the
principle of trade and here the comparative
advantage is the natural resources
(mineral/ timber). Theoretically, there is
no inherent conflict between trade and
environment (Ripetto,1994). They admit
that environmental issues are negative externalities
and the same can be internalized
through appropriate policies such as
“Polluter Pays Principle” (PPP). But, the
environmentalists are concerned about
the depletion of these resources due to
unsustainable extraction. If they are unable
to influence the countries that permit
extraction of such resources, they can request/lobbey
for impose regulation of the
products and services in the leading markets
it reaches/ importing countries. Such
regulations can be in the form of certification,
labeling or other environmental
standards. This in turn can be challenged
by the affected countries as environmental
non-tariff barriers are targeted to distort
their international trade. Therefore, these
measures are applied voluntarily in most
cases. The success of these measures is
dependant on the ability to develop techniques
or approaches for sustainable use
of these resources with the active participation
of all stake holders. Forest Stewardship
Council (FSC) certification is an
example for sustainable and resourceful
usage of timber and other forest products.
Presently, in India, these novel approaches
are yet to gain popularity.
What Options Are Available?
Several options are available to minimize
the ecological footprint and enhance the
bio-capacity. This include appropriate
population policy enabling slowing down
the population growth and providing incentives
for those opting for fewer children.
Promotion of policies and programmes
that can influence changes in
consumption patterns at all levels. It is
recgonised that people living below subsistence
need to increase their consumption
to reach out of poverty, others can
reduce consumption and lavish life style.
The quantity of resources used in the production
of goods and services can be reduced.
This can be achieved through energy
efficiency; minimizing waste;
increasing recycling and reuse, use of fuel
efficient transportation systems; reduction
in transportation of goods and services;
technical innovation; Technologies
need to be promoted to increase productivity.
Biocapacity can be enhanced
through implementation of environmentally
sound land management, effective
use of marginal lands, promotion of agricultural
technologies; protecting soil from
erosion. Several options, including carbon
markets are available for prevention
and mitigation of climate change issues.
Inappropriate use of chemicals can degrade
ecosystems and loss of biodiversity.
To address this, organic farming need to
be promoted. Business and Industry
should adopt environmentally credible
procurement policies to minimize their
footprint. For this, several voluntary certification
schemes, such as forest certification
are available. The approach to the
11 th plan has rightly suggested that environmental
issues cannot be addressed by
slowing economic growth in India. Rather,
high economic growth can provide the
resources to prevent and deal with environmental
issues.
References
• FSI (2005) State of forest report-2003,
Forest survey of India, Dehra Dun
• Haripriya Gundimeda, Sanjeev Sanyal,
Rajiv Sinha and Pavan Sukhdev
(2005) Estimating the value of
agricultural cropland and pastureland
in India, Green Accounting for
Indian States Project-(GIST),
(monograph-)Chennai
• Ripetto, R (1994) Trade and Sustainable
Development, United Nations Environment
Programme, Nairobi
• Planning Commission (2006) Towards
more faster and more inclusive growth-
An approach to the 11 th Five Year Plan,
Planning Commission, Govt. of India
• (1998) Looking Back to Think Ahead-
Green India-2047, Tata Energy Research
Institute, New Delhi.
• UNEP (2007) Global Environment
Outlook-4, Environment and Development,
United Nations Environment
Programme, Nairobi.
• Verma, D D, S Arora and R K Rai
(Eds) (2007); 'Perspectives on biodiversity-
A vision for mega diverse countries',
Ministry of Environment and
Forests (MoEF), Government of India,
New Delhi.
• WWF (2006) Living Planet Report-
2006, WWF-International, Gland
• World Bank (2007) Strengthening Institutions
for Sustainable Growth,
Country environment analysis for India,
The World Bank (India Country
Office), New Delhi.
THE INDIA ECONOMY REVIEW
167

Shubha Ghosh
Professor of Law
SMU Dedman School of Law
Dallas, Texas USA
The First Sale Doctrine Before The U.S. Supreme Court:
Intellectual Property Implications For India
"Bad laws are the worst sort
of tyranny."
-Edmund Burke
The United States Supreme
Court will be hearing oral arguments
in a case called Quanta
Computers v. LG Electronics in
January, 2008. At issue in the case is
the status of the first sale doctrine in
light of recent decisions by the United
States Court of Appeals for the Federal
Circuit, the intermediate appeals court
for the review of claims under patent
law. The Federal Circuit has created a
doctrine called the conditional sale
doctrine which allows patent owners to
impose conditions on the sale of license
of a patented invention which limits the
application of the first sale doctrine.
The following is a summary of an argument
from a brief that I submitted on
behalf of the American Antitrust Institute
that supports Quanta’s position in
the case. Although resolving issues of
U.S. law, the outcome of this case has
important implications for the development
of intellectual property law globally
and in India.
For over a century and a half, the first
sale doctrine (also known as the exhaustion
doctrine) has provided certainty
for users, manufacturers and
other business entities in the distribution
of goods and services protected by
intellectual property law. Patent and
copyright law grants to inventors and
authors limited rights to control the distribution
of the products of their creativity.
However, the first sale doctrine
creates a bright-line rule that ensures
that purchasers of these works can further
transfer these items to third parties
without the interference of the original
intellectual property owners. In this
way, the first sale promotes an active
and vibrant marketplace for works created
through the benefit of patent and
copyright and therefore is integral to
the goals of innovation and competition
that are at the foundation of the system
of intellectual property rights. The
doctrine of conditional sale, as articulated
and applied by the United States
168 THE IIPM THINK TANK

LAW AND PUBLIC POLICY
Court of Appeals for the Federal circuit,
allows patent owners to circumvent
the first sale doctrine and undermine
its beneficial policies, and is inconsistent
with this Court’s precedent.
Given the intangibility and nonrivalrous
characteristic of intellectual property
rights, formal legal titling systems
cannot readily be created to ensure that
such works can be transferred without
being at the sufferance of the original
patent or copyright owner. The first
sale doctrine serves the function of a
formal legal titling system for intellectual
property. Under the first sale doctrine,
a patent or copyright owner exhausts
her distribution right upon the
first sale of the protected work thereby
allowing subsequent purchasers to further
transfer the work. The doctrine
requires that the intellectual property
owner obtain its consideration in the
first sale (or license to sell), before allowing
the distribution of a product
embodying its intellectual property into
the stream of commerce. In this way, it
allows for active and vibrant markets
for works of art, for novels, for movies,
for innovative gadgets containing patented
inventions, and for technology
itself. The doctrine provides the legal
foundation for primary markets, for
secondary markets for rentals of these
types of works, and for credit markets
in which copyright and patents can
serve as security interests. Absent the
first sale doctrine, business people engaged
in the buying and selling of works
that are either directly protected by intellectual
property or contain components
protected by intellectual property
may be required to compensate the
original intellectual property owner
whenever a transfer of interest in the
work occurs. And purchasers of such
works would always take title subject to
the claims of the original intellectual
property owner, perhaps unaware of
such claims. Such actual or potential
interference from the original creator
would only serve to raise transaction
costs and to create impediments to free
and open markets.
Starting with its decision in Mallinckrodt,
Inc. v. Medipart, Inc., 976 F.2d
700 (Fed. Cir. 1992), the Federal Circuit
has misconstrued this Court’s precedent
to permit a patent owner that
“conditions” the sale of a patented invention
to sue subsequent purchasers
who violate the condition for patent infringement.
The Federal Circuit’s justification
for the conditional sale doctrine
rests on a misunderstanding of the
relationship between the transfer of
works protected by intellectual property
rights and conditions attendant in
contracts that accompany such a transfer.
While purporting to rely on contract
principles, the Federal Circuit has
converted restrictions ancillary to the
transfer of a patented invention from
contractual rights, subject to the scrutiny
under relevant contract, antitrust,
and patent law, to intellectual property
rights enforceable through a claim for
patent infringement, with its attendant
panoply of remedies and potential immunity
from antitrust scrutiny. Because
the Federal Circuit’s conditional sale
doctrine allows a patent owner to expand
the reach of its patent grant and
disrupt free and open markets, it should
be reversed.
In the case at bar, respondent’s licensee
has sold an article that “embodies
essential features” of the patented
invention and “has destined the article
to be finished by the purchaser in conformity
to the patent.” Respondent
acquired a large patent portfolio of
technologies used in the manufacture
of computer chips. After a dispute with
Intel, the chip manufacturer, respondent
entered into a complex licensing
agreement with Intel that allowed Intel
to use the technology in the construction
and sale of chips. These chips in
turn were sold to petitioners and incorporated
as components in computer
hardware systems. The LG-Intel license
agreement contained a proviso
that no license was granted to any third
party to combine the chips with non-
Intel products, and that Intel was re-
The first sale doctrine creates a bright-line rule that ensures
that purchasers of the creative works can further
transfer these items to third parties without the interference
of the original intellectual property owners
quired to and did provide notice of this
limitation to petitioners. See LG Electronics,
Inc. v. Bizcom Electronics, Inc.,
453 F.3d 1364, 1368 (Fed. Cir. 2006).
But the license agreement also stipulated
that it would not “limit or alter the
effect of patent exhaustion that otherwise
would apply when” the chips were
sold, the notice received by petitioners
was apparently sent after many of the
sales had already occurred, and the
chips had no other reasonable use. See
THE INDIA ECONOMY REVIEW
169

A NEW BEGINNING
Brief for Petitioners 2, 8-9. Now, respondent
seeks to enforce its patent
rights against the petitioners based on
their alleged violation of “conditions”
placed on the original agreement with
Intel. The first sale doctrine was designed
to prohibit precisely this type of
reach-through by the patent owner to
enforce its patent rights. Under this
Court’s precedents, once the petitioners
purchased products embodying essential
features of the patented invention
in an authorized sale, respondent’s
patent rights were exhausted. If the
conditions placed in the license with
Intel are consistent with contract law,
antitrust law, and the patent misuse
doctrine, then any violations can be enforced
against Intel as contract claims
(or possibly against the petitioners as
third party contract claims), rather than
patent infringement claims with the attendant
remedies of injunctive relief,
treble damages, and attorneys’ fees.
Such a result is consistent with the need
for certainty and competitiveness of not
only this market transaction, but also
the wide ranges of market transactions
that rest on intellectual property. In
eBay Inc. v. Mercexchange, L.L.C., 126
S.Ct. 1837 (2006), a plurality of the
Court was concerned about the development
of an industry “in which firms
use patents not as a basis for producing
and selling goods but, instead, primarily
for obtaining licensing fees”, and the
potentially harmful effects of injunctive
relief “[w]hen the patented invention is
but a small component of the product
the companies seek to produce….” Id.
at 1842 (Kennedy, J., concurring). The
In future cases, Indian High Courts could look to procompetition
decisions in the United States, such as eBay
and perhaps Quanta, to recognize that the need for competition
balances the need for intellectual property rights
first sale doctrine plays a role in preventing
similar market disruption, as
here, when a non-manufacturing patentee
seeks to control the manufacture of
end products in which the patented item
is but a small component.
The United States Supreme Court’s
resolution of the Quanta case has implications
globally. By abrogating the
conditional sale doctrine, the Court will
be affirming the bedrock principle of
the first sale doctrine. More importantly,
it will be recognizing competitive
values in intellectual property law.
Such a result is imperative for countries
like India that are reforming intellectual
property law and institutions. As
the recent dispute brought by Novartis
over the patentability of Gleevak shows,
intellectual property norms are still being
debated locally. The Quanta case
shows that these norms are global. If
the first sale doctrine is affirmed, then
competition becomes an important normative
goal for the design of intellectual
property systems. India will have
a strong position in asserting the values
of competition as a limit on patent and
other intellectual property rights.
More subtly, if the Supreme Court
strikes down the conditional sale doctrine,
the Court will be placing some
limits on the power of the Federal Circuit,
the specialized patent appellate
court in the United States. The Court
will be implicitly saying that despite its
expertise in patent law, the Federal Circuit
cannot alter through the creation
of new rules, like the conditional sale
doctrine, that counter established principles
of competition law and policy,
like the first sale doctrine. In the Novartis
dispute, the High Court of Chennai
deferred to the Indian patent office
and left open the standard for innovation
in the pharmaceutical industry. In
future cases, Indian High Courts could
look to pro-competition decisions in the
United States, such as eBay and perhaps
Quanta, to recognize that the need for
competition balances the need for intellectual
property rights. As discussion
in this essay suggests, intellectual property
rights and competition together are
both important for innovation.
In conclusion, a business dispute over
a patent license is the basis for the dispute
in Quanta. But at stake is a bedrock
principle of law, the first sale doctrine,
and the relationship between
competition norms and intellectual
property law. The Supreme Court’s
decision in the case should be closely
watched for what it implies for international
intellectual property law.
170 THE IIPM THINK TANK

Ali Mehdi,
Research Associate,
Indian Council for Research on International
Economic Relations (ICRIER), New Delhi
Liberty And Prohibition:
A Governance Dilemma
"I don't make jokes. I just
watch the government and
report the facts."
-Will Rogers
The Excise department of the
Delhi government is, self-professedly,
the second largest
revenue earning department of the
state. It generated Rs. 6190 crores as
liquor revenue between 1994-95 and
2004-05, while targeting an all-time
high of Rs.900 crores for 2005-06. The
department’s website boasts that the
success of the government is reflected
in its ever-increasing revenue collection
through liquor sales, which
reached 15.3 crore bottles in 2002-03
from 6.4 crore bottles in 1994-95. Most
of the retail liquor trade in Delhi is
done by four government agencies---
Delhi Tourism and Transportation
Development Corporation (DTTDC),
The Delhi State Civil Supplies Corporation
(DSCSC), Delhi State Industrial
Development Corporation
(DSIDC) and Delhi Consumer Co-operative
Wholesale Store Limited (DC-
CWS) through 309 shops. Private entrepreneurs
hold 95 shops, and two
L-53 licenses for retail sale through
departmental stores for “off-site” consumption
have been granted.
Within the same Delhi government,
there is the Directorate of Prohibition
which vows by Article 47 of the Constitution
and Mahatma gandhi, the Father
of the Nation, claiming that
“drinking in the society has ominous
implications and weakens the entire
social structure by disrupting the institution
of the family and the country
and also distorts the priorities of the
development process.” While the Excise
department is committed to “making
safe liquor available to the consumers,”
the Directorate of Prohibition
tries “to promote healthy living among
the citizens of Delhi by educating them
regarding the ill effects of liquor and
drug abuse and on the damage caused
by the substances of abuse to the society
and to the physical, psychological,
social, economic and occupational life
of an individual.”
Starting as a cell in the Directorate
of Information & Publicity in 1978-79,
172 THE IIPM THINK TANK

SOTTO VOCE
the Directorate of Prohibition has
been organizing fairs/melas, nukkar
nataks, magic programmes, short films,
and propaganda through kiosks,
hoardings, backlit pillars, banners, bus
back panels/queue shelters, computer
animation display systems, seminars
and conferences, personality development
programmes, adventure activities,
youth camps in collaboration with
voluntary organizations. It has a staff
of 21 employees (2005), a budget allocation
of Rs. 1.7 crores for 2006-07,
and has spent almost Rs. 8 crores in 7
years (between 1997-98 and 2004-05).
73.4 percent of the expenditure went as
‘other charges', 10.2 percent into salaries,
6.9 percent into strengthening of
the department, and 9.1 percent in actual
advertisement & publicity. All this
to convey the message, which is mentioned
as the last point in the Do’s &
Don’ts list of the Excise department:
“Consumption of liquor is injurious to
health.” According to a survey conducted
in 2002 by the Evaluation Unit
of Planning department, 92 percent of
those who consumed liquor were aware
of its ill-effects, while 30 percent had
reduced consumption due to Directorate’s
publicity, doctor’s advise, social
compulsion and financial difficulties.
Starting with the name of the Directorate
itself, there is no more “Prohibition”
(as it refers officially to a restriction
or ban on manufacture, import,
export and sale of liquor) in Delhi. Appraisal
of the Annual Plan 2004-05 by
Planning department says that the
functional utility and role of departments/undertakings
like the Directorate
of Prohibition needs to be assessed
in view of “the changed scenario.” At
a time when liquor sector has been liberalized
by the state government,
where is the moral/technical justification
for Directorate of Prohibition?
Alcohol consumption has increased
over the years, but who is reaping the
benefits of it? The government itself,
through its Excise department and infact,
more than the so-called “liquor
mafia.” The government should think
clear and decide what it needs: revenues
or Gandhigiri?
More importantly, by the Directorate’s
own admission, in course of addressing
the reasons for alcohol intake,
the will power of the consumer, love
and affection by people close to him/
her, motivate a consumer to reduce/
give up alcohol consumption (Annual
Report 2001-2002). Is the Directorate
capable of any of these? By all measures,
not in the least. Institutionally,
de-addiction centers would be more
helpful. But the Directorate has none.
If information dissemination is the
aim, civil society does take care of that,
and newspapers do publish newer research
on health issues as well as on
While the Excise department is committed to “making safe
liquor available to the consumers,” the Directorate of Prohibition
tries “to promote healthy living among the citizens
of Delhi by educating the ill effects of liquor!
alcohol consumption (The Times of
India, New Delhi, December 29, 2006).
And they are probably much more effective
owing to their wide reach. If the
government still insists, it could either
remould the Directorate to the status
of a cell within Directorate of Information
& Publicity. This in my opinion,
makes good economic sense. Alternatively,
it can outsource publicity to an
ad vertising agency, as it has undertaken
in the case of ‘India Shining’
campaign. People will vote in its favour.
Widening the debate, and with
far-reaching consequences, let us ask
if the government, especially in a pluralistic
country like India, should be
involved with moral issues of either individual
or social import? Claiming
that alcohol consumption “weakens
the entire social structure” and “distorts
the priorities of the development
process” is too far-fetched to be discussed
seriously. The moral argument
touches upon individual and community
rights, and the freedom that is or
should be available to them. As a
staunch advocate of individual choice,
I am in favour of letting the individuals
decide for themselves, without making
value-judgments or taking subjective
decisions, to the extent that their actions
do not hurt others or the system.
Making drunk driving illegal is fine,
but the invasion of moral spaces in a
secular state like India is extremely
‘disenchanting.’
THE INDIA ECONOMY REVIEW
173

Baharul Islam
Chairman & CEO, South Asia Development
Gateway, & Member, High Power Committee on
International Cooperation,
Government of Mizoram
An Alternative Integrated Development Perspective For The
Peripheral Regions: The Case Of Barak Valley In Northeast India
"Make no little plans; they
have no magic to stir men's
blood...Make big plans, aim
high in hope and work."
-Daniel H. Burnham
Background
It is a legitimate desire for any region like
Barak Valley in Assam (specifically Cachar,
Karimganj & Hailakandi districts) to
mobilize its intellectual resources and
technical expertise including those in the
diasporas, to plan for growth, equity and
economic development. At the dawn of the
third millennium various regions and communities
around the world have weathered
the storm of economic and social crises
that have been the order of the day ever
since the mid seventies. However, due
many reasons, social, political and economic,
Barak Valley region doesn’t have
any such perspective plan. Sons and daughters
of the valley who hold various high
professional positions in India and abroad
often feel a deep urge to work for the development
of the area but in the absence
of any institutional civil society platform,
such desires remain isolated. Looking
ahead into the coming century, it is with
great optimism that some groups of people
from the valley have started to think of
breaking down the developmental processes
into discrete but technically feasible
objectives, the pronouncements-cum-mission
objectives of an integrated socio-economic
development plan for the valley.
The South Asia Development Gateway
early 2007, undertook a mission to incorporate
an Integrated Development Plan
(IDP) for this region. It is to elaborate,
propose and initiate such an exercise within
the civil society and research platforms
such as India Economy Review (IER), I
take this opportunity to put forward some
of the potential plans that we can put together
to develop the region. A sweeping
look at the objectives of various national
plans like Vision 2020 around the world
may give a critical insight into how such
plans are formulated nationally in the strategic
sense: they were measured against
the background of the present situation,
and strategies were designed to attain the
national goals. Despite its constraints,
Barak Valley has a lot more opportunities
than we usually bother to decipher and
indeed, rapid economic growth can only
be achieved if our aspiration gap incites a
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proper management of our technical, financial
and human resources. True, these
resources alone would not suffice, and as
such we have to be very vigilant on those
necessary institutional reforms without
which the transformation of these resources
into socio-economic development
achievements will not be attained.
Development Paradigm
Development is all about people, how they
live their daily lives, how they attain selfrealization
and how they improve on their
living standards. The preliminary work
from which an Integrated Regional Development
Plan emanates is through discussions
at all levels of society, the plan can
therefore validly be said to represent the
aspirations of the local people. This article
covers some of those critical developmental
sectors for Barak Valley that are capable
of showing the most leverage on our
endeavor to improve our position on the
collective income ladder. It is diagnosed
that agriculture, which is presently the
dominant activity in our economy, will
need continuous appraisal of the existing
farming systems and technologies. Effective
research and development within the
framework of local agricultural activities
will enhance productivity and improve on
the quality of farm output. As a corollary
to improvements in farming, a proper marketing
strategy for farm output is needed
to translate these into income. In view of
the subsumed financial resources for this
strategy, it is prescribed that new institutional
arrangements be forged to improve
on financing agribusiness activity through
the establishment of specialized financial
institutions. Although industrial activity
is, as yet, at an early stage of development
in our area, or almost absent in general, it
is common knowledge that this type of
activity has a great leverage on income and
social status in the development process.
Rapid industrialization is perceived to signify
an increase in the population of industrial
units, a quality improvement in output
as well as a geographical expansion of the
market for industrial output.
Looking at the constraints of these specific
objectives, we recommend the adoption
of improved monetary and fiscal
policies that will enhance the mobilization
of savings and facilitate their transfer to
this sector, the targeting of industries
whose technologies are easily assimilated
by the present workforce, the designing of
policies and building of institutions at local
level that will reduce the mortality rate
of the start-ups and spin-offs for all direct
investments and a spatial distribution of
industry in order to curb the rural-urban
drift. Strategies for the main productive
sectors, namely Agriculture and Industry,
have been well articulated with strategies
for the service industries in various states
and regions of the country. Smaller areas,
for instance Guna district in Madhya
Pradesh, have also put in place such perspective
plan but with so much intellectual
and technical expertise belonging to
Barak Valley, no such plan has been
formed till date. The financial sector,
transport sectors as well as the energy and
industry sectors, have been examined in
light of the ultimate objective of such a
plan, namely the transformation of the
Barak Valley into a prosperous region by
the end of the first quarter of the this century.
In an integrated development plan
for the area, the social sectors should be
given the prominence they deserve.
Health, Education and other Social services
form essential pillars of Human Capital
development. Without a coherent and
consistent Human Resource Development
(HRD) strategy, “a decent standard of living
for one and all” as aspired by the people
of the valley today would not be attained.
Finally, perhaps a word of caution
will help dissipate some concerns that people
here and there, may evoke on important
matters not featuring in the document.
The idea of presenting a possible
integrated development plan for Barak
Valley is a specific developmental perspective
and as such constitutional and other
legal matters are best dealt with outside
such a document that proposes to be blue
print for guiding economic and social
policy formulation, implementation and
Resources alone would not suffi ce, and we have to be
vigilant on the necessary institutional reforms, without
which the transformation of these resources into socioeconomic
development achievements will not be attained
monitoring. Implementation strategies do
not also feature in this document but are
already under discussion as to the optimal
strategies and monitoring arrangements.
In order to pilot such an district level integrated
plan, Karimganj district administration
in collaboration with the South
Asia Development Gateway has formed a
District Level Integrated Development
Committee under the Chairmanship of
the local Deputy Commissioner (Collector)
and an expert from the UN Economic
Commission for Asia (Bangkok) will
visit the district in late December, 2007 to
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REIMAGINING INDIA
have a detailed consultation with the stakeholders.
Barak Valley Contexts
An Integrated Development Plan for any
area comprises three inter-related documents,
namely:
(1) A Policy Framework Paper (PFP)
that spells out the strategic thrust, the
strategy content and the budgetary and
institutional framework within which various
projects and programmes will configure,
explicitly linking the region to the
national Vision 2020;
(2) The Operational Framework of the
area Development Strategy which takes
the form of a Medium Term Expenditure
Framework (MTEF). The MTEF is linked
to the Macroeconomic Growth Strategy
through the PFP, the latter reflecting the
objectives of national Vision 2020; and,
(3) The Action Plan for the target area,
which highlights the Implementation Strategy,
the Participatory Plan and the organizational
setting within which strategic
action is implemented, monitored and
evaluated.
The integrated development plan, as opposed
to the state or country level plans, is
intended to be a comprehensive “local development
framework” that links macroeconomic
growth with poverty reduction
strategies. The objective of the plan is to
ensure greater focus on poverty reduction
through generating employment avenues
and renewed emphasis on faster job-sector
growth within the valley outside the traditional
‘government job syndrome’ that ails
the mindset of the potential workforce in
the valley. It is essentially a prerequisite
for sustainable development efforts in the
valley to change that mindset and build an
‘employable workforce’ out of the thousands
of ‘degree-holding but unemployable’
manpower that exist today in the
region.
The integrated development plan is to
serve as the first building block for opera-
The integrated development plan serve as the first building
block for operationalizing an overall development mission
that is locale-specifi c, based on the aspirations of the local
people and don't follow the ‘trickle-down approach
tionalizing an overall development mission
that is locale-specific, based on the aspirations
of the local people and do not necessarily
follow the ‘trickle-down residual
flow approach’ of development. All the
proposed development projects and programmes
financed by government, international
development partners, NGOs,
civil society will be implemented within
this framework of the plan. The rationale
is to move away from the prevailing peacemeal
project approach in the development
process and to give a road-map for the region
that will be a reference point in formulating
programmes/projects to ensure
maximum impact and focus on priorities.
It essentially calls for a more efficient use
of local (in country) and external resources
in support of the ultimate goal of economic
development. The essential feature
of the Barak Valley Integrated Development
Plan is that it is locally owned implying
that it reflects the needs of the people
whose interests are being attended.
An important element of the process is
monitoring and evaluation. This entails
the establishment of benchmarks of performance
indicators by all the sectors in
the implementation of the plan which will
facilitate the measurement of progress towards
the achievement of targets.
Targets And Programme Areas
In line with the international development
goals, a Barak Valley Integrated Development
Plan (BVIDP) will be in tandem with
national and international efforts towards
the achievement of poverty reduction targets,
such as:
• A reduction by one-half of the unemployed
population in the valley.
• Enforced Universal “employable lifeskill”
Education in
• Equality and empowerment of women
by eliminating gender disparities
• Access through the primary health care
system, to reproductive health services
for all people of appropriate ages as
soon as possible
• The implementation of a regional strategy
for sustainable development so as to
ensure that current trends in the loss of
environmental resources are effectively
reversed
• Creation of economic opportunities for
the poor in order to substantially reduce
income and food poverty and the general
feeling of insecurity related to food
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and income poverty; and,
• Development of a full fledged participatory
government based on the consent
of the citizenry and a strong social-audit
system.
The programme areas in the BVIDP
will include macroeconomic growth strategy,
income generating activities, re-distributive
activities, social service delivery,
food security, improving public resource
management, creation of an accounting
framework for poverty reduction interventions,
improving participation in local decision
making, coordination and monitoring
and information, education and
communication.
Integrated Development Plan
Process(es)
Orissa and Madhya Pradesh were among
the few Indian states that reiterated its
commitment to a region-specific Integrated
Development Plan process thus acknowledging
the truism that growth and
pro-poor policies have to focus on the
needs and circumstances of the particular
area. South Asia Development Gateway,
as indicated earlier, initiated the formulation
of such plans in the Northeastern region
starting with Mizoram (state level)
and Karimganj (District level) in Assam.
It was agreed that in view of the multi sectoral
nature of development, a task force
or core committee be formed consisting of
all key decision makers at the highest level
in government sectors and donor representatives.
A technical working group
comprising the concerned departments
was also constituted where necessary. This
group held several consultations and subsequently
United Nations Economic &
Social Commission for Asia and the Pacific
(UNESCAP), Bangkok agreed that
it will assist the pilot programme in the
target levels to develop the Integrated Development
Plans. Accordingly, a senior
UN Regional Advisor will visit the areas.
An expert review of all relevant development
data and surveys will be conducted
first and a draft outline of the plan will be
prepared which will be used as a basis for
starting the process.
Though the Government of Assam was
approached at the very beginning of the
exercise in December 2006, there was no
positive response from the government
departments and even the special requests
from a central minister were found missing
in the secretariat. In the mean time, states
like Mizoram and autonomous regions
like Bodoland shown tremendous interest
in cooperating with international agencies
to develop such plans. The Chief Minister
of Mizoram, himself chairs the High Power
Committee formed for this purpose.
However, in the District of Karimganj, the
Deputy Commissioner and specially the
Additional Deputy Commissioner (Development)
took special interest in formulating
such a plan. In a recently conducted
meeting, Prof.S. P. Parashar, the Director
of IIM, Indore, has agreed to help the district
in formalizing such a development
plan and implement it, after following the
Guna (Madhya Pradesh) model.
Ongoing Activities
Ongoing activities include a review of the
objectives and strategies of the integrated
development programme with a view to
identifying tangible activities for achieving
the said objectives. These objectives have
been identified during the participatory
process. The programme is being designed
to address cross cutting issues such as gender
and environment. In addition, performance
indicators and benchmarks are
being developed for each of the objectives.
Some of the major areas of activities are
outlined below.
Agriculture And Natural
Resources
Agricultural and Natural Resources
(ANR) is the dominant sector in Barak
Valley’s economy, employing the majority
of the total work force. Notwithstanding,
ANR continues to lag behind in productivity
and modernization and is still characterized
by an undiversified primary agricultural
system. It is also conditioned by a
seemingly unbreakable cycle of erratic inadequate
input supplies, inappropriate
technology, low output and productivity
Agricultural and Natural Resources continues to lag behind
in productivity and modernization and is still characterized
by an undiversifi ed primary agricultural system
growth, low incomes and an acute inability
to generate savings for investment.
While some of the constraints are exogenous,
many are occasioned by human deficiencies
and failures. ANR continues to
lack a local policy focus and the political
will necessary to transform the sector.
Progress into next two decades will call for
substantial improvements in the sector’s
output and linkage to the sectors. In particular,
overall productivity will have to
improve significantly.
Improvements in the ANR sector therefore
call for serious examination and setting
of projects that are both realistic and
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REIMAGINING INDIA
attainable in the medium to long term.
These improvements also require an unfailing
commitment and dedication to the
pursuit of the objectives to ensure balanced
growth and an equitable distribution
of incomes. The more important objectives
for the sector are, among others,
to:
1. Increase ANR output of both domestic
and exports produce in order to ensure
food security and generate earnings of
foreign exchange to finance other aspects
of the development process.
2. Create employment and generate income
for the majority of the rural population
who are largely dependent on
ANR.
3. Diversify the ANR base to facilitate the
production of a wider range of food and
export produce in order to reduce the
fluctuations and uncertainties associated
with rural household incomes and
export earnings.
4. Formulate a post-flood recovery plan
when devastating floods coming late in
the year (like in 2007) destroy the crop
in that particular year.
5. Provide effective linkages between ANR
and other sectors of the economy such
that developments in the non-agricultural
sectors, particularly manufacturing
and tourism are founded on a firm
and diversified ANR base capable of
progressively releasing both labour and
financial resources to other sectors of
the economy.
6. Create a sustainable and balanced mix
between rain-fed and irrigated agriculture,
thus ensuring an optimal use of
natural resources of surface and ground
water, animal, aqua-culture and crop
production as well as between chemical
and organic inputs and the use of agricultural
by-products. Improvements in
ANR productivity require a conscious
evaluation of strategies to pursue the
desired objectives. The strategies to be
employed will necessarily have focus on
the constraints and opportunities in the
ANR sector.
Industry And Infrastructure
The long term aspiration of the people of
the Barak Valley is perceived to achieve a
solid infrastructural base for industrial
Effective linkages between ANR and other sectors
ensure that developments in the non-agricultural sectors,
particularly manufacturing and tourism are founded on
a firm and diversifi ed ANR base
development that would permit the
processing of major primary products by
the year 2020. At present, the industrial
sector is very much limited. The following
manufacturing sub-sector will be relied
upon to achieve that objective:
1. Energy
The importance of this sector in the realisation
of the objectives of any Integrated
Development Plan cannot be overemphasised.
The prime objective for this sector
is to overcome the existing bottlenecks and
to ensure a reliable and adequate supply of
energy, both conventional and renewable,
at affordable prices.
2. Manufacturing
Consistent with the objectives of improving
the income status of the people,
the manufacturing sector will undergo
substantial re-orientation aimed at increasing
and diversifying industrial output.
Specifically, this means realizing a net increase
in the number of industrial units,
greater diversification of industry, greater
employment opportunities and capturing
an established and growing export market.
In this regard, priority will be given to a
smoother technology transfer mechanism,
the encouragement of adaptive research in
production and process technologies and
accelerated training and development of
our human resources. By the next decade,
the share of industry should rise through
the provision of institutional support services
and targeted incentives. A manufacturing
base supplying both the domestic
and export markets will be established in
order to reduce the overt dependence on
Agriculture and Trade. Again, on an unfortunate
note, repeated efforts to establish
a specialized rural technology transfer
institute have been impeded by the Govt.
of Assam. Even after ensuring external
funding and a positive response from the
Govt of India, the state government discouraged
and responded negatively to our
proposal. Though the Cachar district administration
identified suitable land for the
institute and the union minister for heavy
industries personally spoke and written to
the Chief Minister of Assam, the concerned
department refused to give ‘no
objection’ to the project on the pretext that
‘there is no financial liability’ upon the
state government! To overcome this felt
undercurrent of apathy towards the development
of Barak Valley, there is a proposal
to establish a national institute of
manufacturing excellence in Barak Valley,
which inturn will help catalyze the growth
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of manufacturing industries in the valley
and train many young people for employment
in this sector.
3. Transport
The railway, airport and road and waterway
network will play a crucial role as providers
of efficient infrastructural services.
The river port in the valley will be upgraded
and rendered more efficient and competitive
in order to cater adequately for
transhipment needs to countries in the
sub-region. With supporting road and rail
links, the transformation of the border
posts with Bangladesh into a regional trade
‘Freeport’ should herald major investment
opportunities in our local businesses. It is
envisaged that such investments will be effected
through joint-ventures with private
sector partners in a bid to involve operators
in the transformation process. Consequently,
there will be created a local international
trade promotion agency which
will offer an unrivalled fiscal and regulatory
regime as well as infrastructural facilities
in order to accelerate the growth of
our industrial development arena. The upgrading
and expansion of the airport is a
major component of the “Barak Valley
Gateway” strategy. The multi-modal transport
initiative subsumed in this initiative
is the valley’s spearhead strategy to play a
crucial role in international trade with
neighbouring countries. In this regard,
facilities at the airport will be upgraded
and modernized, security improved to international
standards to handle an increased
passenger and cargo traffic with
an eye to serving as a transit point for East
Asia. The development of inland road and
water-way transport networks will focus on
improving connections to regional trading
centres, while offering logistic services
(storage and communications) .
Human Resource Development
The developments envisaged under an Integrated
Development Plan can hardly be
realized unless supported by a deliberate
policy of investing in those human capital
resources required to produce, organise,
mobilize and manage the development
processes that will be indispensable in the
21st Century. The Education and Health
sectors therefore have a central place in
the plan. Since independence, Barak valley’s
educational institutional growth have
been default focused on the development
of human resources in the white collar and
peripheral services sector to the detriment
of the advanced and ‘employable’ areas of
Science, Technology, Agriculture and Industry,
particularly the Manufacturing
sector. This focus has created a market
failure, resulting in the creation of a huge
backlog of unemployed human capital, a
dependence on government jobs by the
products of the education systems in the
valley. Unlike some states in south India
like Kerala, we failed to create an export
market for local manpower with the result
that no firm foundation has been laid over
the past decades to provide for sustainable
training and placement of our youths in
the foreign job market. Consequently, in
formulating the Integrated Development
Plan, a proper diagnosis of the available
programmes and skills is needed to redesign
and incorporate new curriculum in
our local institutions that will ensure a capable
human resource base for local and
international market. Objectives for education
include increasing the accessibility
of technical and skill based education to
all the school-age population, a diversification
of institutions to favor vocational and
skilled based training, encouragement of
entrepreneurship skills as a corner-stone
of education and an overall enrichment of
curricula and other extracurricular activities.
Health and Social Welfare
Considering the present inadequacies and
mindful of the constraints faced by the
economy, the provision of adequate, effective
and affordable health care for all is
Notwithstanding the the private sector's role in region’s
future socio-economic development, public sector institutions
have a critical role to play in the delivery of support
infrastructural and social services
one of the long term objective for the
health sector. Intermediate objectives for
the health sector are to provide better infrastructure
for Referral Hospitals and
health facilities. Plans are proposed to establish
a South Asian Research Institute
for Medical Sciences (SARIMS) in Karimganj
– the first medical college for the
border district. Simultaneously, the facility
to produce trained staff for health sector
across East Asia and the establishment
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REIMAGINING INDIA
of efficient procurement arrangements for
the trained staff in health sector should
complete the array of institutional reforms
to ensure effective and efficient health
services. Improvements in ancillary services
will focus on the management of
health data and enhancing research into
paramedical services such as traditional
healing methods.
Housing Amenities
As a consequence of the more recent and
prevailing demographic trends, rapid urbanization
and concentration of the urban
population, the demand for decent housing
is increasingly elusive to satisfy. The
long term objectives of housing sector will
aim at increasing production of decent
housing stock on a more regular basis. A
review of the existing housing schemes like
Indira Awas Yojana (Indira Housing Plan)
is a study in decentralization and institutionalization
of corruption upto the grassroots
level. Contrary to this and to effectively
address the problems posed by
pressing demography and rapid urbanization,
particular attention will be focused
on the need for specialized housing finance
institutions such as housing banks
and housing co-operatives. Improving
housing development capabilities is a prerequisite
for providing a decent standing
of living.
The Way Forward
The foregoing discussion highlights the
potential implications of a proposed Integrated
Development Plan for the Barak
Valley that will be piloted in Karimganj
district. The South Asia Development
Gateway has discussed this plan on various
platforms and consultations to determine
the readiness of the stakeholders
with a view to project a road map leading
to the structure of a development strategy
for the area. The outcome of these consultations
were largely encouraging and
attracted valuable inputs which were as
well enlisted. The approach taken in the
formulation of the strategy is participatory
since all stakeholders will be provided
the opportunity to contribute to the
fundamental design of the strategy based
on the guidelines provided.
On a concluding note, it will not be out
of place to mention that among many
promises of the digital revolution is the
potential to strengthen democracy and
make governments more responsive to
Institutional performance is a critical factor, not only
in the design and implementation of development
programs, but also in the effective realization of any
development policy goals and targets
the needs of the citizens. This Integrated
Development Plan includes the use of
information and communication technologies
to transform the way Government
conducts its business, which includes:
Providing greater access to
government information; Promoting
civic engagement by enabling public to
interact with government officials; Making
government more accountable by
making its operations more transparent
and thus reducing the opportunities for
corruption; Providing development opportunities,
especially benefiting rural
and traditional underserved communi-
ties. Let us now dream to establish “The
Barak Valley Incorporated” as the Integrated
Development Plan aims at a fullfledged
private sector that is responsible
to the development needs of this area and
that can play an active role in the domestic
economy. Government will ensure
that market mechanism function smoothly
within a free market and a stable macro-economic
environment. On the external
front, the maintenance of a steady
exchange rate between the valley and major
foreign trade agencies as well as the
implementation of agreements signed
with international financial institutions
will ensure a more positive insertion of
the economy into the international
scene.
Over the last decade, it has become
clear that an internally consistent set of
economic and financial policies is a necessary
but not sufficient condition for
growth and development. Institution performance
is a critical factor, not only in
the design and implementation to development
programs, but also in the effective
realization of any development policy
goals and targets. Integrated
Development Plan integrates institutional
capacities as a key factor of production
and sets as an objective the correction of
institutional failures in order to accelerate
the implementation of development
programs. Notwithstanding the lead role
of the private sector in region’s future
socio-economic development, public sector
institutions have a critical role to play
in the delivery of support infrastructural
and social services to buttress the development
efforts of the private sector. It is
therefore envisaged that the plan shall
refer to parastatals on one hand and the
bureaucracy on the other hand.
180 THE IIPM THINK TANK

THE OTHER PATH
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manager

Mrutyunjay Dash
Professor of Economics and
Business Environment,
Asian School of Business
Management,Bhubaneswar
Tenancy Reforms in Orissa:
A Critical Perspective
"He who owns the soil, owns
up to the sky."
- Douglas Gerrold
I. Introduction
Orissa is primarily an agrarian economy.
Agriculture is the state’s dominant sector
with a contribution of nearly 28.13 percent
to net state domestic product during 2001-
2002. Agriculture alone provides direct
and indirect employment to around 65
percent of the total workforce of the state
as per 2001 provisional Census. Nearly 87
percent of total population lives in rural
areas. It has remained as an agriculturally
backward state of India with high incidence
of concealed tenancy. Though tenancy
is legally prohibited in the state, it is
observed in large scale across the length
and breadth of Orissa. The Orissa Land
Reforms Committee, 1980, has brought to
the limelight the existence of a vast number
of tenants, mostly unrecorded sharecroppers,
in the rural areas of Orissa. Neither
these tenants have opted for the legal provision
of applying to the revenue officers
for obtaining ryoti right nor the latter, empowered
to initiate action to confer ownership
rights on tenants, have shown any
interest in this regard. Adam Smith (1969)
has rightly remarked that a person, who
has no property rights over land, can have
no other interest except eating as much
and labouring as little as possible, since
the fruit of his hard labour is expropriated
by the proprietor. Psychological feelings of
non-ownership coupled with insecurity
kill their efficiency, enthusiasm and physical
ability. Besides, social distinctions between
landowner and agricultural labourer
deaden the interest and the zeal of the
latter. This is why land reforms in general
and tenurial reforms in particular have to
be assigned the top-most priority in bringing
about the transformation of agricultural
sector so as to make it vibrant, dynamic
and more productive. However, lack
of proper implementation of tenancy reform
measures, prevalence of large scale
concealed tenancy with oral leases, absence
of rent receipts, ignorance of the
legal provisions of tenancy legislations,
built-in legal loopholes and above all, lack
of political will can be attributed for the
results being not so encouraging. In this
paper an attempt has been made to give a
182 THE IIPM THINK TANK

TENANCY REFORMS
brief outline of the extent, types and incidence
of tenancy in the second section. In
the third section reference to important
tenancy legislation is undertaken. Finally,
evaluation of tenancy reforms in Orissa is
made followed by concluding remarks.
II. Extent, Types And
Incidence Of Tenancy
India achieved independence from British
Rule in 1947. Having been created with six
districts: Balasore, Cuttack, Puri, Ganjam,
Koraput and Sambalpur initially, in 1936
Orissa acquired a new geographical shape
after merger of 26 feudatory states on
January 1,1948. In the first stage an attempt
has been made to give a brief account
on the extent of tenancy, types of
Table-1: State-Wise Tenancy Statistics For Rural India,
1981-82 And 1991-92
State
% of Tenant Holdings
to Operational
Holdings
% of Leased-in
Area to Operational
Area
% of Leased-in
Area under
ShareTenancy
1981-82 1991-92 1981-82 1991-92 1991-92
Andhra Pradesh 13.8 14.1 6.2 9.6 20.9
Assam 12.9 10.1 6.4 8.9 27.8
Bihar 19.7 5.6 10.3 3.9 43.5
Gujarat 4.8 3.7 2 3.3 23.7
Haryana 25.9 17.1 18.2 33.7 19.9
Karnataka 10.7 8 6 7.4 28.6
Kerala 6.7 5.2 2.6 2.9 2.1
Madhya Pradesh 8.0 9 3.6 6.3 24.9
Maharashtra 10.6 6.9 5.2 5.5 20.9
Orissa 18.2 16.9 9.9 9.5 50.9
Punjab 21.3 15.9 16.1 18.8 11.3
Rajsthan 7.1 6.5 4.3 5.2 23.4
Tamilnadu 24.7 15.3 10.9 10.9 16.5
Uttar Pradesh 20.5 15.5 10.2 10.5 46.5
West Bengal 23.1 14.4 12.3 10.4 46.5
India 15.2 11 7.2 8.3 34.4
Source: Sarvekshana, Vol,20, No.3, 70th issue, Jan-March, 1997, NSS 48th Round.
tenancy NSS (National Sample Survey).
In India data on extent of tenancy are
available from two sources: National Sample
Survey estimates and Agricultural
Census data, out of which the former is
more reliable being based on independent
household surveys.
However, it will not be out of place
to mention that there is commonality
of opinion on reliability of official data
on incidence of tenancy due to several
reasons. Principally because lease contracts
are mainly oral without any written
record of lease details and tenants’
hesitation to reveal their tenurial identity
in fear of eviction by the landowner.
With this reservation in mind NSS
estimates on incident of tenancy have
been furnished. This is the reason for
which NSS is referred to in this section.
And secondly different tenancy reform
measures undertaken by the Government
of Orissa and their evaluation are
considered also. Orissa belongs to the
category of high Tenancy State in India.
This is supported by NSS findings. As
per NSS data in the year 1981-82 tenants
household constituted 18.2 per cent
of total operational household and it
has been reduced to 16.9 percent (only
by a meagre 1.3 percent), in 1991-92, as
reflected in Table-1. In 1991-92 there
were numerically 6.9 lakh tenant holdings
and leased-in land constituted
4.5 lakh hectares of land. This was 9.5
percent of total operated area and infact
surpasses the All India average of 8.3
percent in the same period. Tenancy in
Orissa is manifested mostly in the form
of sharecropping. Share tenancy is more
pervasive than fixed rent tenancy based
on either fixed produce or fixed money.
Nearly 42.0 percent of leased-in area is
under shared tenancy compared to that
of 13.6 percent and 7.6 percent are on
fixed produce and fixed money respectively
NSS (1971-72) and this figure has
further been increased to 50.9 percent in
1991-92 (Please refer Table-2).
Further, in a labour abundant coupled
with land scarce agrarian economy like
ours, i.e., of Orissa, the tenant is subject
to weak bargaining power and thus
is placed in a disadvantageous position.
The obvious alternative left with, therefore
relates to leasing-in-land irrespective
of the degree of benefits accruing
to the tenants from a certain mode of
lease contract. This is more prominent in
case of marginal and small farmers as is
evident from Table-3. The distribution of
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183

THE 'OTHER' INDIA
Table-2: Changes In Percentage Distribution Of Leased- in Area By
Terms Of Lease
Terms of 1971-72 1981-82 1991-92
Lease (26th) (37th) (48th)
Fixed Money 7.6 5.1 19.7
Fixed Produce 13.6 8.1 4.7
Share of Produce 41.6 42.0 50.9
Others 37.2 44.8 24.7
All Terms 100.0 100.0 100.0
Sources: (a) N.S.S. Report 26th Round (1971-72)
(b) N.S.S. Report 37 th Round (1981-82)
(c) N.S.S. Report 48 th Round (1991-92)
lease-in area according to size classes of
operational holdings shows that in 1991-
92 about 89.76 percent of leased-in area
was in the size classes of less than one
hectare and only 0.47 percent of leasedin
area was in size classes above 4 hectares.
Likewise a significant proportion
of tenant holdings (89.21%) belonged to
the category of marginal farmer. This is
also confirmed from another study that
subsistence tenancy is more widespread
than commercial or capitalist tenancy in
Orissa (Swain; 1999b, 1999c).
III. Tenancy Reforms And Tenancy
Legislation In Orissa
There is no denying the fact that exploitative
land tenant system is one of the
important economic causes leading to
agrarian unrest in land scarce and labour
abundant economies. Various factors
like socio-economic factor, relative
bargaining strength, relative differences
in size class, to mention a few, determine
the degree and extent of exploitation to
which the tenants are subjected. This
is especially because tenants do not
belong to homogeneous groups rather
a lot of heterogeneities witnessed with
regard to their socio-economic status,
size class, etc., are held responsible for
exploitation. As such, differences arise
in their economic resource position and
therefore, in their bargaining strength.
Tenancy reforms include all those measures aiming at
protecting and safeguarding the interest of tenant with
regard to the realization of their due share accruing from
leased-in land and conferring ownership rights
Thus they are all not equally prone to exploitation
by their landlords (Bhardwaj,
1974; Bhardwaj and Das, 1975a; 1975b).
Besides, the extreme concentration of
land ownership (Myrdal, 1982, 1306)
and exploitative production relations,
being established between the landlord
and the tenant during the process of production,
are sufficient enough to make
agricultural growth sluggish (Joshi, 1974,
167;Appu, 1996,40-5). This necessitates
to bring about a thorough and complete
transformation in production relations
between the landlord and tenant on
one hand and in forces of production
on the other. Indian peasant history is
replete with examples which show that
radical tenancy reform legislation, far
from being a liberal gift from the state
is an outcome of a long and protracted
struggle by the tenants. Orissa is not an
exception to this.
As the term suggests tenancy reforms
includes all those measures aiming at
protecting and safeguarding the interest
of tenant with regard to the realization
of their due share or benefits of produce
accruing from leased-in land and conferring
ownership right on land which
they cultivate. In Orissa tenancy contracts
were oral, unrecorded, insecured
and the rent prevailed mostly at around
(on an average basis) 50 percent of the
gross produce in pre-independent era.
Thus to remove the inherent loopholes
in the tenancy system radical tenancy
reform measures were called for after
a long struggle and oppression by the
so-called land owning class. With the
passage of time some legislative measures
undertaken in the years of 1881,
1885, and 1913 to remove the intolerable
suffering of the tenants. For example
in Orissa Tenancy Act, 1913 and
subsequent amendments effected to it
granted some new concessions to the
tenants and raiyats through fixing limitations
on landlords to extract anything
beyond their legitimate dues from the
tenants. Consider this: Section 54 of
Regulation VIII of 1793 declares that
all impositions and exactions (whatever
their designation might be), over and
above the actual rent are illegal. Section
3 of Regulation V of 1812 1 altered
some of the provisions Regulation VIII
of 1793 but attention being given not to
incorporate anything, which sanctions
or legalizes the impositions of arbitrary
184 THE IIPM THINK TANK

TENANCY REFORMS
or indefinite cesses. By the Amendment
Act of 1938, all kinds of illegal cesses as
codified in the original Orissa Tenancy
Act 1913, were deleted so as to make
it more purposive. Further with respect
to recovering from a landlord (by means
of a legal suit), the amount exacted by
the landlord in excess of the rent, the
Amendment Act of 1938 empowered
the Collector of the District or any
Deputy Collector on his behalf to take
action and impose on the landlord such
penalty not exceeding Rs.500/- or simple
imprisonment not exceeding six months.
Thus the amended provision incorporated
certain features for preventing collection
of illegal cesses from tenants. But
for all matters whatsoever, such as illegal
exaction, collections of exorbitant rent, a
ryot was required to move to court of law
and the financial vulnerability and powerful
influence of potential landowning
class taken together could not allow a
majority of poor tenants to realize the
fruits of legislation.
However as a result of the passing of
various Tenancy Acts, i.e. of 1881, 1885,
and in 1913, some well-to-do tenants
could also acquire hereditary rights to
occupancy ryots, and with their legally
protected right, followed the path of their
masters, and found it more profitable to
rent out the land to the under-tenants
and share-croppers who became more
tenants-at-will. They could be evicted
on short notice and virtually enjoyed no
security of tenure. Taking cognizance of
this actuality, immediately after independence,
various tenancy legislation
and subsequent amendments to them
were passed with a view to minimise
the sufferings of the tenants. A brief account
of these legal developments are
given below:
a. The Orissa Tenants’ Protection
Act of 1948
Under the Orissa Tenants Protection
Table-3: Percentage Distribution Of Lessor And Lessee Households
And Leased-in And leased-out Area By Size Class Of Land Ownership
Holdings In Rural Orissa,1991-92
Size Class Of
Ownership
Holdings(ha.)
Percentage Of
Total Lessor
Households
Percentage f
Total Tenant
Households
Percentage f
Total Leased-
In Area
Percentage of
Total Leasedout
Area
Less than1.01 63.96 89.21 89.76 29.40
1.01-2.00 25.96 6.42 5.61 51.18
2.01-4.00 7.01 3.56 4.16 11.51
4.01-10.00 2.38 0.81 0.47 3.53
Above10.00 0.69 0.00 0.00 4.38
All Sizes 100.00 100.00 100.00 100.00
Sources: N.S.S. Report 48 th Round (1991-92)
Act, 1948, it was declared that notwithstanding
anything contained in the
law, contract or usage or any decree of
any court, a person who was cultivating
any land as a tenant on the first day
of September, 1947, should continue
to have the right to cultivate such land
and no landlord was legally entitled
For all matters whatsoever, such as illegal exaction, collections
of exorbitant rent, a ryot was required to move to
court of law and the financial vulnerability and powerful
influence of potential landowning class could not allow a
majority of poor tenants to realize the fruits of legislation
to evict such tenant, O.T.P Act, 1948,
Section 3 (1) (b).
Further as per the Act, tenants enjoying
occupancy rights were not bound
to pay more than one third of the gross
produce as rent to the superior ryot (c)
tenants without security of tenure were
not bound to pay more than two fifths
of the gross produce as rent to the landowners.
However this Act lost its real
purpose of protecting tenants as it allows
landowners (owning 33 acres of land) to
evict his/her tenants from land holding.
b. Orissa Tenants’ Relief Act, 1955
This Act intends to confer security of
tenure, resumption of land for personal
cultivation and regulation of rent so
as to bring relief to the oppressed and
exploited tenants. The Act defined a
tenant a person who under the system
commonly known as Bhag, Sanjha, Kata
or such similar terms under any other
system, law, contract, custom, or usage
cultivated the land of another person on
payment of rent in cash or in kind or
in both or on condition of delivering to
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185

THE 'OTHER' INDIA
that person.
i) a share of the produce of such
land or
ii) the estimated value of a portion of
the crop raised on the land or
iii) a fixed quantity of produce irrespective
of the yield from the land, or
iv) produce or its estimated value partly
in any one of the ways described above
and partly in another, Das (1989).
The law provided that notwithstanding
anything in Law, contract or usage or
in any decree or order of any Court but
subject to the provisions of this Acta)
No tenant with permanent and heritable
rights over holdings in terms of
produce rent was liable to pay more
than 2/3 rd of the rate of rent payable
or to express it in a different way rent
payable was not to exceed 1/6 th of the
produce or value thereof.
b) No landlord was entitled to recover
any cess, rates or other dues payable
or deliverable in relation to the land
by a tenant holding on produce rent.
c) When rent was deliverable in kind it
was to be delivered at the landlords’
granary in the village in which the
land was situated or at such other
granary, within 3 miles of the village,
as may be provided on that behalf by
the landlord.
Further as per the Act, a temporary
tenant was not bound to pay more than
25 percent in kind or cash of the gross
produce of the land. Further it was added
that no tenant having permanent or
hereditary right in land was bound to
pay more than 16 percent of the gross
produce of the land. However to nullify
the very purpose of the Act, the landowners
were obtaining written undertakings
from the tenants to pay 50 percent
of the gross produce after harvest and
that too without any rent receipt.
c. Orissa Land Reforms Act, 1960
The Orissa Land Reforms Act, 1960 and
its subsequent amendments exhibited a
certain degree of qualitative shift from
the earlier tenancy legislation as discussed
above. The basic thrust was given
on land to the tiller. One of the notable
features of O.L.R. Act 1960 relates to
conferment of permanent, heritable and
transferable rights on all raiyats over
their land.
Besides, the agricultural labourers
To nullify the very purpose of the The Orissa Tenants’ Relief
Act, 1955, the landowners were obtaining written undertakings
from the tenants to pay 50 percent of the gross produce
after harvest and that too without any rent receipt
and the village artisans were granted
property rights in respect of their dwelling
houses constructed on the lands of
the superior landlords. Amendment in
O.L.R. Act (Act 17 of 1972) also enabled
the tenants to become ryots in
whole of the land under their occupation
under section 36-A, subject to receipt
of application by the tenant within two
years from October 2 nd , 1973. But the
response from the tenants to claim occupancy
rights was not satisfactory. Hence
under section 36-B the Revenue Officer
was empowered to take appropriate action
where no application was received
from a tenant. Besides, the amount of
rent was retained at 25 percent of the
gross produce of the land or the value
thereof or the value of 25 percent of the
estimated produce of the land.
IV. Evaluation Of Tenancy Reforms
Act In Orissa
After having gone through a brief account
of some of the important tenancy
legislation it would be wise to ascertain
as to what extent these legislation have
yielded results as were supposed to be
during the time of their inception. With
regard to the operation of the Orissa
Tenants’ Protection Act of 1948 it experienced
varied results in different areas
and in most of the cases the tenants did
not claim their dues. For instance Puri
District alone accounted for more than
2/3rd of the cases filed (in the years between
1955-56 and 1956-57) and about
70 percent of the cases filed settled
without any claim on behalf of tenants,
Dash (1989). Moreover, allowing landlord
owning less than 33 acres of land
to evict tenant also questions the very
purpose of the Act. The limit of 33 acres
of land was too high in the land holding
context of Orissa where the majority of
farmers do belong to the categories of
landless labourers or marginal or small
farmer categories (Jena, 1968).
Similarly a Report on the working of
tenancy laws prepared by B. Mishra and
B. Jena (1958) 2 also confirmed that in
three villages of Balasore District, namely
Kalei, Mahadevpur and Balarampur,
out of 105 cultivating families 45 families
reported to have cultivated land on payment
of the share of 50 percent of the
gross produce which strictly violates the
O.T.R. Act, 1955 recommending strongly
a tenant not to pay more than 25 per-
186 THE IIPM THINK TANK

TENANCY REFORMS
cent in kind or cash of the gross produce
of the land. A Report on An Enquiry
into the Working of Orissa Tenants’
Protection Act, 1948, and Orissa Tenants’
Relief Act, 1955 in Five Districts of
Orissa, 1970 by B. Mishra revealed that
payment of rent receipt was not received
by 80 percent of the tenants.
It is interesting to note that even as
the Report states that although the tenants
were fully aware of O.T.R. Act,
1955 only one tenant filed a case and the
case ultimately cost the tenant Rs.130/-
and the decision finally went against
him. Further the Orissa Land Reforms
Committee, 1980, brings to the limelight
the existence of a vast number of tenants
mostly unrecorded sharecroppers
who have neither taken any legal steps
through applying revenue officers to get
ryoti right nor the revenue officers empowered
to initiate actions at their own
level endeavoured to confer ownership
rights on tenants. The tenants also do
not dare to agitate in order to promote
their case because of the fear of retaliation
by the ryoti type of landlords. Thus
various legislation enacted and subsequently
modified from time to time in
the better interest of tenants could not
yield desired result so far. However generalisation
of findings of the Report on
the basis of observation in only three villages
would be improper and it is needless
to say that further detailed empirical
studies need to be undertaken for seeking
definitive and conclusive judgment
on this aspect.
With regard to working of O.L.R.
Act, 1960, also the experiences are not
so encouraging. To substantiate such a
stand in this regard two principal aspects
need to be emphasized. Firstly,
the response from the tenants to claim
occupancy rights, as stressed in O.L.R.
1960, was not satisfactory. Even though
under Section 36-B, the Revenue Officer
was empowered to take appropriate
action in case of any application not
received from tenants the result lagged
far behind expectation. Secondly, as
is evident from O.L.R. Act 1960, the
landlords have been doubly compensated
for their property right over land
once by the Government in the case of
abolition of estates and by fixing Rs 800
per standard acre for tenants to acquire
land vide amendment effected to 1965
Act, for the second time. As the tenants
were subjected to grinding poverty they
failed to acquire the land they cultivated
for want of funds required to pay the
compensation fee. Further, the apparent
inequity evident in the O.L.R. Act 1960,
relates to the payment of heavy premium
to the Government on one hand and receipt
of application from tenants by the
Revenue Officer with respect to getting
proprietary rights within a short period
of 90 days on the other.
Thus heavy compensation fee and premium
coupled with short period of time
to get proprietary rights reveal deliberate
and unjust attempts of legislators to
safeguard the interest of the landowning
class. As a result uptil now oral tenancy,
without any records whatsoever, along
with high rent and insecurity of tenure
do outline the prevailing tenancy system
in Orissa. Such an unfortunate trend has
crept in the agrarian structure of Orissa
not because the tenants lack awareness
of various tenancy legislation but
because the prevailing socio-economic
conditions do not possibly allow exercising
their rights in this regard.
With the provision of resumption of tenanted lands on the
grounds of so-called “personal cultivation” being not defined
clearly by many states, a lot of tenants were subjected
to eviction on a large-scale basis. Many tenants after
conferment of ownership rights either sold or mortgaged it
V. Conclusion
Thus to sum up, different tenancy legislation
and consequent regulations incorporated
in them failed to serve the
very purpose of bringing socio-economic
justice to the poor tenants and thereby
establishing an egalitarian society. With
an exception to few financially better-off
tenants who were in a position to vindicate
their cause, the hardships and sufferings
of tenants in general continued.
Several reasons may be cited in this regard
as to why these tenancy legislation
did not yield desired results.
To mention a few, firstly, there is a
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187

THE 'OTHER' INDIA
wide gulf between policy formulation
and its effective implementation from
the grassroots level. Secondly, universal
application of a single and uniform
standard to the entire State without any
proper understanding of rural agrarian
set-up and prevalence of varied socioeconomic
constraints, might have been
responsible for results being not so
encouraging and last but not the least,
prolonged time taken in the settlement
of legal issues and more often than not,
results going in favor of the land owning
class discouraged tenants to take
recourse to various tenancy legislation.
Thus, the foregoing analysis reveals that
the prevalent inequitable property relationship,
inherent legal loopholes with
an attitude of protection to the so-called
land owning class and unorganized behavior
of tenants have reduced the reforms
package to a near fallacious one.
Despite all legislative measures undertaken
by different State Governments
to take care of the interest of the
actual tiller of the soil from time to time,
a lot remains yet to be achieved in this
regard. With the provision of resumption
of tenanted lands on the grounds
of so-called “personal cultivation” being
not defined clearly by many states, a lot
of tenants were subjected to eviction on
a large-scale basis. Further due to noneconomic
holdings, many tenants after
conferment of ownership rights either
sold or mortgaged it. Protected tenant
also leased out their lands to rich farmers
for want of funds. A large number
of tenants still remain out of the purview
of the law for not being recorded
for one reason or other. Thus, tenancy
reform has not succeeded in achieving
any great impact either in terms of reorienting
the property relationship in
favor of the tenants or elevating their
socio-economic condition.
Additional Notes
1. All sums received by the proprietors
in excess of the amount of rent specified
in the contract would be considered
as extortion and be repaid by
the proprietors with a penalty of 200
percent of the amount exhorted.
Owing to the prevalent inequitable property relationships
and inherent legal loopholes, tenancy reform has not
succeeded in achieving any great impact, either in terms
of reorienting the property relationship in favor of the tenants
or elevating their socio-economic condition
2. A Report on An Enquiry into the
Working of Orissa Tenants’ Protection
Act, 1948, and Orissa Tenants’
Relief Act, 1955 in Five Districts
of Orissa, 1970 by B. Mishra revealed
that payment of rent receipt
was not received by 80 percent of
the tenants.
References
• AICC (All India Congress Committee)
(1949), “Report of the Congress
Agrarian Reforms Committee”, New
Delhi.
• Appu, P.S. (1996). “Land Reforms in
India: A Survey of Policy, Legislation
ad Implementation,” Vikas Publishing
House, New Delhi.
• Bhardwaj, K and P.K. Das (1975a).
Tenurial Conditions and Modes of
Exploitation:”A Study of Some Villages
in Orissa,” EPW Annual Number,
10:221-40, February; and P.K.Das
(1975b). “Tenurial Conditions and
Modes of Exploitation: A Study of
Some Villages in Orissa; Further
Notes,” EPW, Review of Agriculture
10:A49-55, June.
• Dash, Giridhari. (1989). The
Land Systems and Land Reforms
in Orissa,Published by G.
Dash, Cuttack
• Jena, K.C. (1968). Land Revenue
Administration in Orissa During
19 th Century, S. Chand & Co,
New Delhi.
• Joshi, P.C. (1974). Land Reform and
Agrarian Change in India and Pakistan
Since 1947 : I, Journal of Peasant
Studies 1 (2):164-85, January, II.1
(3), April.
• Mitra, A. (1981). Tenancy Reforms
in Orissa, in M. Bose (ed). Land Reforms
in Eastern India, Planning Forum,
Jadavpur University.
• Orissa Tenancy Act, 1913 & Rules
with Notes and Latest Case Laws,
ed. By A. Mohapatra, 1991-92.
• Orissa Govt. (1987). Agricultural Statistics
of Orissa, Directorate of Agriculture
and Food Production.
• Smith,Adam. (1969). The Wealth of
Nations. Pelican Classics, (ed.) Andrew
Skinner, reprint:1974
• Swain,Mamata.(1999b). Agricultural
Share Tenancy and Efficiency: Testing
Alternative Theories with Micro
Evidence from Orissa, IASSI, Quarterly,
Vol.17.No.4. June 1999.
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