[June 2008, Volume V Quarterly Issue] Pdf File size - The IIPM Think ...

A N I I P M T H I N K T A N K&G R E A T I N D I A N D R E A M F O U N D A T I O N P R E S E N T A T I O N

THE GREAT INDIAN DREAM“A Society where man is at the centre of all activities,a society where exploitation of man by man has beenabolished, where he is cared for as an in a family, where“to each according to his need’ is practised, a society wherenon bureaucratic National Economic Planning is given dueimportance for sustainable optimum growth, where adequatesocial safety net is a reality and yet market’s advantages arefully taken care of for creativity and entrepreneurship, sucha society can be truly described as humane society and thevision as “Humanism”.Dr. M K ChaudhuriThe Great Indian Dream, 2003, MacmillanIndia,New Delhi“Let us together dream of a country where poor are notjust merely reduced to statistics but where there are no poor.Let there be a day when small children are taken to a povertymuseum like science museum where they shiver at the plightof the way people used to live in the last millennium. Let thisdream take the form of a revolution and as long as our dreamskeep outweighing our memories, India would remain a youngand dynamic nation on this path to global equality. And forthis let the wait not be for eternity. Let us together achieve thisin the next 25 years.”Prof. Arindam ChaudhuriThe Great Indian Dream, 2003, MacmillanIndia,New Delhi

IIPM: THE FUTURE IS HERESince its incorporation (1973), IIPM has been an institution with privileged traditions, in the diversity of its fraternity, its global outlook, its worldclass 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. Japan140 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 oneconsiders that development is a matter of human energies rather than economic wealth. And the generation and direction of these human energiesis the task of ‘management’. Accordingly, we formed The Great Indian Dream. Unlike any other dream, this is one dream which each one of usare determined to realise and that too in our own lifetimes. Each bit of cynicism and condemnation from pessimists makes us evolve even strongerand determined.All our endeavours and initiative is towards realisation of this dream, where in we produce committed ‘bare foot’ managers and entrepreneurswho 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 motivationto 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 researchtowards the needs of both the private and public sectors and to establish the link between the National Economic Planning and the developmentof private enterprises in Indian economy. IIPM dares to look beyond, and understands that what we teach today, other adopt tomorrow. IIPM’sservice output (education, research and consulting,) is a unique combination of two distinct disciplines: economics and management. Throughthis integration, IIPM helps guide business and policy leaders in shaping the Indian and global economy, bringing together the practical insights ofindustry 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 postgraduates and undergraduates, who pursued the education at IIPM and subsequently joined it, to realise the dream. IIPM alumni, spread across theglobe, holding crucial decision-making positions in the corporate sector, are bonded by the one ideology of making a positive difference, turningthat 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 publicsand pertinent stakeholders.SEARCH, SIEVE, SCHEME...In economics, like in everyday existence, it is imperative to hear, perceive and consider what others have to say. Each issue of The IER bringstogether 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 isfor 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’sproblems and recognise its antecedents. There is in fact much that is perceptible about India. But not everything about India is even if simplistic isso simple. The learned reader would appreciate the fact that India is like an elephant that looms too large to be grasped within a distinct structureand paradigm the constituent parts of which would fail to reveal the entirety. Obviously and observably, no suggested solution to any protractedand complex socio-economic problem will satisfy all sides and stake-holders evenly. Consequently, there exists an enormous diversity in economicthinking and perspectives, as is also reflected in the viewpoints of different expert contributors in this issue. The intended outcome of this exercise is tofacilitate the invention, improvement, deliberation and dissemination of innovation in economic thinking and national economic planning, insistingmerely on well-grounded, open and unbiased debates, without predetermined outcomes. It is impossible to do justice to the entire field of Indianeconomics in a single issue. The topics selected for this issue are those which are of critical and immediate importance to India. Majority of themwere freshly and exclusively written. Encapsulated, it is a constructive attempt aimed at helping India actualise its promises and potential. The editorshope that this issue of IER will proffer the reader a flavour of dynamism and excitement and persuade her/him to participate in the journey towardsrealising ‘The Great Indian Dream’. At the same time, it illuminates the terrible, practical problems of India and Bharat.ACKNOWLEDGEMENTSThe IIPM Think Tank likes to thank all the internal faculty who have been instrumental in coordinating withmany authors all across India and according their unstinted support. The assistance of Prof. R.Krishnan andAmlan Ray (IIPM Chennai), Prof. Tareque Laskar (IIPM Bangalore), Prof. Sudipto Chatterjee (IIPM Ahmedabad),Prof.Jayanta Chakraborti and Ashish Suri (IIPM Pune) has been more valuable than, perhaps, they realise. Prof.Neeta Tripathi, Head of Department, Languages & International Relations at IIPM New Delhi, particularly, didall that it was possible to do for this issue of IER.

CREDITSFounderDr. M. K. ChaudhuriEditor-in-ChiefArindam ChaudhuriManaging EditorPrasoon.S. MajumdarDeputy EditorM.N.V.V.K. ChaitanyaConsulting EditorPrashanto BanerjiResearch FellowsPathikrit PayneShweta ShuklaSray AgarwalAkram HoqueGroup Design DirectorSatyajit DattaSenior DesignerAmit SharmaDesignerDinesh Chandelkar , Saurabh MishraParvesh Kumar Swami , Sandeep SharmaProduction ManagerGurudas Mallik ThakurProduction SupervisorsDigember Singh ChauhanSoumyajeet GuptaChief Marketing AdvisorAmit SaxenaMarketing & SalesNeha MalhotraPrincipal OfficesSatbari, Chandan Haula, Chattarpur,Bhatimines Road, New Delhi - 110074IIPM Tower, Junction of , 32nd Road & S.V.Road, Bandra (W), Mumbai - 400 050IIPM Tower, 419 100ft. Road, Koramangala,Bangalore - 560 034IIPM Tower, 893/4, Bhandarkar Road,Deccan Gymkhana, Pune - 411 004IIPM Tower, 145, Marshall’s Road,Egmore, Chennai - 600 008IIPM Tower , 19, Inqulab Society, gulbai Tekra,Off C.G. Road, Ahmedabad - 380 015IIPM Tower, 6-3-252/2, Erramanzil, Banjara Hills,Hyderabad - 500 082We are keen to hear from anyone, who would like toshare their experiences concerning Indian economicissues, or would like to know more aboutIIPM Publications. You can e-mail us on m.chaitanya@iipm.edu & shweta.shukla@iipm.eduOr alternatively please call Shweta Shukla at 9811895267Additional Thinkingwww.iipmthinktank.comwww.iipm.eduwww.iipmpublications.comwww.arindamchaudhuri.comwww.thesundayindian.comwww.thedailyindian.comwww.businessandeconomy.orgwww.gidf.orgwww.planmanconsulting.comPrinted by:Rolleract Press Servies, C-163, Ground Floor,Naraina industrial Area, Phase-I, New Delhi - 16Disclaimer :All efforts have been taken to ensure the veracity of the informationcontained in the research, however The IIPM Think Tank expresslydisclaims any and all warranties, express or implied, includingwithout limitation warranties of merchantability and fitness for aparticular purpose, with respect to any service or material. In noevent shall The IIPM Think Tank be liable for any direct, indirect,incidental, punitive, or consequential damages of any kindwhatsoever with respect to the and materials, although the readermay freely use the research and material provided, The IIPM ThinkTank retains all trademark right and copyright on all the textand graphics.The First Words And The Last WordPolicy Perspectives: What Happened, What Follows?Dear Reader,This journal is always at the frontier in reportingresearch in all branches of Indianeconomic science and polity, with the threefoldobjective of proffering an alternative forthe publication of articles by authors of academicstanding or authoritative expertise,furnishing a compact vehicle for publicationPrasoon.S MajumdarManaging EditorM.N.V.V.K.ChaitanyaDeputy Editorof seminal socio-economic investigations and delineating information about the nationaleconomic planning, as practiced in India and other economies. The theme of thepresent issue (‘Policy Perspectives: Ideas, Evidence And Experience’) is particularlyrelevant as the last two decades have thrown up interesting dilemmas, paradoxes andchallenges in terms of India’s pattern of development. This is clearly characterised byan explosive economic growth coupled with simultaneous increases in income inequalityand inadequate reduction of poverty rates across different domains and districts.Our approach has been to try to internalise and capture the cumulative experience aswell as thoughtful policy analysis in a wide spectrum of fields. Sufficient care has beentaken to portray issues from a critical perspective, often at variance with mainstreamresearch ideas and results.The article authored by Rok Spruk wrestles with a central question troubling Indiaand the one written by Jharna Pathak and Caroline Boin focusses upon urban governanceand economics respectively. Also, for the first time under the section ‘MicroMacro’, we managed to include article submissions, whereby civil society organizations/individuals functioning at the micro level could identify with and as well include in theirsubsequent articulation of grass root needs for socio-economic development. Tim Wilsonof Institute of Public Affairs, Australia’s leading free market think tank, analysesthe international debate surrounding the accessibility and barriers of developing countriesaccessing CO 2mitigation technologies. Likewise, this issue draws on many inputsfrom first class practitioners, economists and policy makers who have hands-on pragmaticand practical experience. The lessons learned could benefit policy makers andother stakeholders, who are instrumental in planning priorities, at central, state andlocal levels.Best,Prasoon.S.MajumdarM.N.V.V.K. Chaitanya

CALL FOR PAPERSIER is a quarterly journal featuring contents of academic and professional interest that are of utility to managers, policymakers, politicians, consultants, teachers and students in the areas of Economics and Management. It is a multidisciplinaryplatform 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 passionatelybelieve in the credo that we constantly seek to follow: rethink, edify and delineate. This enduring commitment has helped usfoster and broaden the parameters of public policy debate and alternatives. Toward that goal, we strive to achieve greaterinvolvement of the intelligent, concerned change agents (reform minded politicians, public servants, academicians, sociallyresponsible firms, civil society organizations and citizens) in questions of policy and the ideation. In order to further augmentvalue and provision a broad perspective to Indian economic problems, your knowledge and expertise in the above mentionedfields would be highly valuable to IER. We would like the possibility of receiving a write-up from you, on a topic of your expertiseand interest as per the under-mentioned guidelines.Guidelines For ContributorsContent: 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 andvalue to the esteemed and intellectual readers. The journal seeks to present an eclectic approach supported by empiricalresearch or practical applications as necessary. Contents that demonstrate clear and bold thinking, fresh and useful ideas andsolutions, accessible and jargon-free expression, and unmistakable authority and proficiency are those most likely to meet ourreader’s needs.Reviewing Process: Each article is reviewed by the Economics Research Group (ERG). If found suitable, the same may be sentfor another round of review before final acceptance. With prior information and consent, the editors reserve the right to modifyand improve the manuscripts to meet IER’s standards of presentation and style. The editors also have full right to accept orreject an article for publication. Editorial decisions will be communicated within a period of two weeks of the receipt of thearticle 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 upperand 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 indicatewhere the same will appear. All tables, charts, graphs should be typed on separate sheets. They should be numbered asTable-1, Table 2, etc. The graphs must have the minimum amount of descriptive text and the axes should be labeled withvariable 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 shouldbe sent along with the articles.Copyright: Authors should warrant that their work is not an infringement of any existing copyright and will indemnify thepublisher against any breach of warranty. The articles published in IER will become the legal copyright of the publisher. Thearticles 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 complementarycopy 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

(F)ACT SHEETEngaging Diaspora : TheDevelopmentalMatrixes For IndiaSadananda Sahoo 160Population In India’s Development :Historical Perspective And Future OptionsAlok Ranjan Chaurasia 168Cover Design: Dinesh ChandelkarECONOMICS EXPLAINED: Statism - TheEnemy Of Individual LibertyAna Jud 08POLICY PERSPECTIVES:IDEAS,EVIDENCE AND EXPERIENCESelf Organising System For PrimaryEducationSugata Mitra 12Medical Education: Which Way To Go?Gauri Pada Dutta 18India’s Economic DiplomacyBaladas Ghosal 34Economic Growth, Catch-up EffectsAnd Economic Performance :Macroeconomic Perspective On IndiaRok Spruk 42Time For New Thinking On SlumsCaroline Boin 50Social Implications Of Foreign Capital:Lessons From ChinaChakrapani Ghanta 58Common Service Centers (CSCs) - ABoon For Rural CommunityG.K.Agrawal 64Interpreting Mandal II Judgment:A Fine Balancing Act Or A MissingOpportunityNiranjan Sahoo 72Futurewise: Public-PrivatePartnership(PPP) Model for IndianNanotechnologyVivek Srivastava 80Economic Reforms And CompetitionLaw Implementation In DevelopingEconomiesS. Chakravarthy 88National Competition Policy Is TheNeed Of The HourManas Kumar Chaudhuri 100Sustainable Livelihoods HoldThe Key For NREG SchemeB. Yerram Raju 106Nutritional Deprivation AmongPre- School Children In India: WhereDid We Fail ?Rudra Narayan Mishra 118Widening Trade Deficit, BallooningForex ReservesJayesh Kumar 134Impact Of Rising Food Prices On InflationSurabhi Mittal And Deepti Sethi 138Commodity Derivatives MarketsAnd Our EconomyPrabhakar R. Patil And S.K.Parida 144Commodity Futures Trading: GlitchesAnd GroundsTulsi Lingareddy 152COMMON GOOD: IntellectualProperty And Carbon DioxideMitigation TechnologyTim Wilson 184THE HIDDEN SIDE OF EVERYTHING:Irrationality Unbounded – More Risk,More IncentivesChiragra Chakrabarty, Ankan MondalAnd Jhuma Banerjee 194BAD FAITH: IMF-Incompetence ByDesign Or Default ?M.R. Venkatesh 200CULTIVATING DISCONTENT: AgrarianDistress And Farmers’ Suicide InIndia: Focus On MaharashtraSangeeta Shroff 204THIS INDIA, THAT INDIA: EquitableAnd Inclusive Growth-TowardsA National AgendaPrakash Louis 210INDIA BETWEEN WORLDS: Pitch Report-Inclusive Growth ImperativesKumkum Dasgupta 218MICRO MACRO: Towards More Pro-PoorLocal Government In Urban AreasJharna Pathak 224BEST AND BRIGHTEST: Education,Entrepreneurship and Immigration:America’s New Immigrant EntrepreneursVivek Wadhwa, Ben Rissing, AnnaLeeSaxenian And Gary Gereffi 244COMMENTARY: Ob‘SEZ’sion- SEZScenario in IndiaAkshay Dhume 272

T HE MACHINERY OF FREEDOM“But when a long train of abuses and usurpationspursues invariably the same object evinces adesign to reduce them under absolute despotism,it is their right, it is their duty to throw off suchgovernment and to provide new guards for theirfuture security.”Thomas Jefferson,Declaration of Independence, 1776Ana JudPolitical Scientist, Ljubljana, SloveniaIn his book Britain’s Economic Renaissance, AlanWalters, the economic adviser of Margaret Thatcherwrote how Mrs. Thatcher fought the status quo of hightaxes, nationalized industries and the regulation of theeconomy. One of the most credible commitments of Mrs.Thatcher’s reform agenda was the deregulation of the labormarket and the reduction of the monopoly power of tradeunions. As a particular concern over individual liberty, themonopoly of trade unions and other interest groups is theprimary source of coercion that puts collectivism ahead ofindividual sovereignty and personal liberty. The Britishexperience shows that slashing-out the collective coercion ishaving fruitful long-term benefits in defence of the individualliberty. As a developing market democracy, India’s long-rangeeconomic forecast shows that India will emerge as one of themost powerful and influential players in the internationaleconomic and political affairs. The purpose of this article is tohighlight particular issues that present a threat to the existenceof individual liberty and also to show that without8 THE IIPM THINK TANK

E CONOMICS EXPLAINEDStatism – The Enemyof Individual Libertyeconomic freedom, there is no individual freedom and, hence,no political freedom.Liberty, Democracy And Interest GroupsAs a political system, democracy is often associated witheconomic, individual and political liberty. The myth of thedemocracy is an influential tool in defending falsified arguments.In theory, democracy should offer an alternative toharmful policies that impair individual and economic liberty,but in practice, democracy gives harmful interventionisteconomic and social policies a safe shelter. Bryan Caplan, theprofessor of economics at George Mason University, wrote amasterful book entitled The Myth of the Rational Voter, wherehe explained why democracy is a system that heavily underminesthe individual liberty.From the aspect of politicaltheory, democracy is an idealthat is being sold to developingcountries and is consideredas the foremost ideal.However, a closer look atthe democracy reveals itsharmful nature. In a market society, there are two mechanismsof voting. The economic mechanism of voting is themarket place where consumers vote after prices give themsufficient information in the function of the allocation ofresources. The political mechanism of voting is the electionwhere voters put their preferences in ballot boxes. In freemarketsociety, there is no such thing as coercion. Coercionitself always emerges from the political oppression andcollectivistic institutional system that hampers the individualliberties, responsibilities and economic liberties. When thepreference over particular interest groups is codified into theconstitution, the real threat of coercion is not the questioningof the existence of particular interest groups but their abilityFrom the aspect of politicaltheory, democracy is an idealthat is being sold to developingcountries as the foremost oneto use public means to achieve private wants. Wherever theprivilege of the few begins, the individual liberty is erodedheavily. Long-term consequences of the lack of liberty ininstitutional set and non-coercion in the institutional systemare correlated with economic development as well. Theinability of societies to develop low-cost and efficientinstitutions is certainly the most fundamental reason forhistorical stagnation.Institutions, Property Rights And The Rule Of LawStatist politico-economic system supposes that it is legitimatefor central government authority to direct the decisions of theindividuals. Historically, the role of institutions is a powerfulweapon in setting the course of the future. Institutions aredivided into formal andinformal institutions. Formalinstitutions are the institutionsthat are defined by constitutionand the law while informalinstitutions are the institutionsthat exist but are not codifiedwithin the legal system such asculture, ethics and habits. Institutions always emerge from theview that an individual has on the world. Over time, the viewon the world emulates into the framework of formal andinformal institutions. John Locke, the British philosopheronce wrote a brilliant sentence: people have rights. Theinstitutions that protect private property and guarantee theright to life, liberty and the pursuit of happiness are notmeans of oppression but an evolutionary order withoutcommands. The most obvious reason for the lack of privateproperty rights is the coercive power that interest groups exercise.The rule of interest groups is the rule of the few. Theviolation of law, and thus the violation of private property isnot a sudden phenomena but a result of the lack of commit-THE INDIA ECONOMY REVIEW9

T HE MACHINERY OF FREEDOMment to rule-based legal and political framework and also aresult of a deliberate action of the interest groups and theirlegal ability to break the law and abuse the rule of law to gainthe privilege that was granted by command. Without propertyrights, there is no rule of law and hence, no protection ofhuman life. It is absurd to have an institute of the ombudsmanwhich is the coercion by the varying degree and the mostobvious obstacle to the order without deliberate commands.For example, ombudsmen have never opposed price controlsbecause if prices are controlled, the access to the informationis automatically denied. In a free society, where free ideas arethe mechanism of market exchange, coercive institutions suchas the ombudsman break thelaw by giving a privilege toparticular individuals orgroups that send a signalover the lack of the credibilityof institutions and therule of law. The failure ofeffective institutions is not aconsequence of market failures but a result of the failure todevelop institutions with low transaction costs followed by thedisrespect for private property which is an end of the rule oflaw and spontaneous order itself.According to Hume, it is wrong tothink that people are governed byinterest but in the end, people aregoverned entirely by opinionMedia Freedom Versus Media OppressionThe collapse of the central-planning politico-economic systemopened a path for former communist countries on the road tofree-market economy. The majority of post-communistcountries have adopted free-market reforms that acceleratedeconomic growth and greater economic freedom. Estonia, theBaltic free-market beacon, is among economically andpolitically the freest countries in Europe. An important aspectof the transition to market economy is the role of media inpost-communist societies. Media is nothing else than a mirrorof society’s ideas and itsinformal institutions. DavidHume, Scottish philosopherand economist, once wrote thatit is wrong to think that peopleare governed by interest but inthe end, people are governedentirely by opinion. A valuablelesson that India, as an emerging market democracy canlearn, is the lesson that political and corporate control of themedia is the first towards the monopolization and control ofthe opinion. In the long run, ifopinion is controlled and manipulatedby government interventionand political elites, the individualfreedom looses its greatest spiritof the right to information.Europe Versus USAThe historical emulation ofindividual liberty from thetradition of classical liberalism hasnever found its place in theEuropean continent. The FrenchRevolution of the 18 th century wascertainly not an attributablemilestone of putting individualliberty ahead of collectivism.Europe itself was created byhistorical, while the U.S. wascreated by philosophy. The U.S.constitution is, after the Declara-10 THE IIPM THINK TANK

E CONOMICS EXPLAINEDtion of Independence, the longest living document of classicalliberalism. For nearly 135 years, the United States had noincome tax which reflected the respect for individual libertygrounded in the philosophical writings of John Locke, JamesMadison and Thomas Jefferson. In Europe, there is a longlivingtradition of government intervention and welfare state.The proponents of Europe’s failed social model claim thathigh taxes, regulation and welfare state are giving Europe asense of diversity. Europe’s philosophy of failure is simply theresult of the disrespect for individual and economic libertythat European cradle-to-grave welfare states have pushed upfor centuries. It is not a surprise that the best and brightest inEurope are fleeing the continent heading for a better life insearch of the pursuit of happiness. America’s greateststrength is the relative ability to live under lessened coercion,giving individuals the ability to reach the entrepreneurialdreams beyond their imagination; entrepreneurial dreamsthat Europe has never witnessed. The creative powers of afree civilization and the individual liberty together with thefreedom of economic arrangements not only form the basisfor the evolution of informal institutions that emerge overtime but also the ground from which the creativity enabled bythe individual freedom reaches the stage on which voluntaryexchange and the creation of ideas propel the greatest dreamthat human mind is looking to achieve.India, Be Aware Of StatismA society that puts equality ahead of individual liberty willalways end up with neither, but a society that puts the spirit ofindividual liberty ahead of equality will end up with greaterliberty. By itself, egalitarianism is the greatest exploitation ofthe freedom of human mind as well as the exploitation ofprivate property rights ever witnessed in human history. Thereal sense of support for individual liberty is not to put libertyahead of responsibility or vice versa. But the truest admirationof individual liberty is that creativity leads to experiencethat statist politico-economic system of majority coercion andthe government of interest groups as the privilege of the fewis a system that is certainly a short-sighted menu that offers nofree lunch but instead, it offers the lunch at the oppressivecompromise which is something that everyone agrees with butnobody believes in.THE INDIA ECONOMY REVIEW11

Reliving TheGreatIndianDreamSelf OrganisingSystems ForPrimary EducationSugata MitraSchool of Education, Communication and Language Sciences,Newcastle University,United Kingdom12 THE IIPM THINK TANK

P OLICY PERSPECTIVESSchools, Education, Or The Lack ThereofA world with Universal Primary Education (UPE) would beone where every child is educated. In order for that to happenit is assumed that every child would go to school. The currenttarget year for this to happen, according to the UN is 2015.Because “school” is equal to “education”. While this may beundoubtedly true, many may invert this equation to - “noschool” is equal to “no education”. I think we have a problemwith this second equation. Education does not happen onlythrough schools. Learning certainly does not. This article isabout the problems of schools for UPE and about somealternative learning scenarios.Let’s look at schools first. There are over 6,00,000 schools inIndia. While this is a large number, the population of India(currently 1.2 billion) is large enough to overcome it. There arean estimated 122 million children in India who do not go toschool. In order to have the right number of schools for allchildren in India to go toschool, we would need to triplethe number of schools and thenumber of available teachers.There is not enough money todo this, nor enough time, ormanagement capability orinstitutions. The problem isjust too large to solve with traditional, linear methods of scalingup. 122 million children growing up without an education spellstrouble in the 21 st century.Let us, for a moment, assume that we could, somehow, buildthe necessary number of schools and train the necessarynumber of teachers, in time. We would suppose that all theschools we have built have a uniform level of quality, performanceand efficiency and then, I am afraid, run into a quality ofeducation problem. And that one is even harder to solve thanthe numbers problem. Here is how the argument goes.Schools in remote areas do not have good enough:1. Teachers: because good teachers tend to migrate to urbanschools for better salaries and standards of living.2. Retention of teachers: The occasional good teacher stays fora while before moving to urban schools.3. Infrastructure: Local infrastructure in remote or rural areasare constrained by the size and economics of the marketavailable to them. There is not as much competition andvariety as would be in an urban area.122 million children growingup without an education spellstrouble. We would need to triplethe number of schools4. Maintenance of infrastructure: It is expensive to maintaininfrastructure in remote areas because such maintenancewould usually come from the nearest urban area. This alsoresults in a higher Mean-Time-To-Repair (MTTR).In other words, the farther a school is from an urban area,the worse off it is. The quality of education from a remoteschool will usually be less than that from its urban cousin. Thisis a human problem, not an economic one. After all, cities werebuilt for comfort, safety, convenience and so on. So, peoplewant to live in cities. Surely there are exceptions, but mostpeople anywhere in the world tend to congregate towards citiesand their suburbs. In the developing world, where rural andremote infrastructure is weak or non-existent, the problem isall the more acute.Remoteness does not only have to be of the geographicalkind. There are areas within cities that are socially remote,economically remote, and religiously remote. There is alsoethnic and many more versionsof remoteness. In every suchremote area, there is aproblem with the quality ofeducation.There will always be placeson this planet where, forwhatever reason, good schoolswill not exist and good teachers will not go. Looks like UPE iscaught in a bizarre stalemate. Not all the money in the worldwill correct the problem of lower quality education in remoteschools. Schools with absent teachers, no teachers, wickedteachers, sick teachers are abundant throughout Africa, India,South America and other large parts of the world. The moremoney we spend on teacher development, the more they moveto the cities. Without good teachers and administrators, theschools crumble and break. Children remain in schools, only onofficial records.A recent survey in India (Annual Status of Education Reportfor Rural India 2005) shows that 51.9% of children aged 7-14cannot read Grade-2 texts and about 65.5% of these childrencannot perform simple arithmetic operations. The developedworld is somewhat better off because their remote areas oftenhave infrastructural facilities comparable to their cities. Butonly to a limited extent can that attract good (quality) teachers.A school in New Jersey will always have a wider choice ofteachers, equipment and infrastructure than a school in Alaska,THE INDIA ECONOMY REVIEW13

Reliving TheGreatIndianDreamor even Newfoundland. The problem of quality will remain.And There Is, Yet Another, Serious Problem51.9% of children (aged 7-14)can't read Grade-2 texts, 65.5%of these children can't performsimple arithmetic operationsIt is generally understood that low skilled jobs are migrating tolow wage economies as a result of advances in information andcommunication technology. While this is happening in India,such growth will be limited to a workforce that is trained incities, and therefore, relatively small in numbers. Such jobs arelocated in affluent suburbs of large cities, where the standard ofliving, the cost of living and wages are already beginning toreach, and sometimes exceed, those in the developed economies.As a result, industries are moving to smaller towns andwill, eventually reach the rural communities. This is where 70%(700 million in the case of India) of the population live.However, the standards of education in such remote areas arenot suitable for the low skilledjob market. Unless thisproblem is immediatelyaddressed, outsourcing of lowskilled jobs to India will reachits limits.It is also assumed that highskilled jobs will remain in thedeveloped economies and high skilled workers will migrate tosuch economies. In the Indian IT sector, this has traditionallybeen so. However, in recent times, there is an increasingtendency for high skilled workers to return, or indeed, notleave to start with. This is the result of higher wages and theresultant standards of living within the Indian IT industry. As aresult, the research and development laboratories of some ofthe largest technology companies in the world have moved toIndia. As economic growth drives standards of living higher,there will be a major slowing down of the migration of highskilled people from urban India.If India is to continue exporting high skilled people to thedeveloped economies, such workers will have to be producedfrom the non-urban and less affluent areas of the country. Thequality of education in such areas is, once again, entirelyinadequate for the production of such workers. Indeed, thedemand for low and high skilled workers within the Indiandomestic industry is also facing a shortage. In order to addressthe issue of education in remote (non-urban) locations, it isnecessary to first understand the effects of remoteness on thequality of education. It is then necessary to examine alternativesto traditional educational practice. Teacher migration is aroot cause for the poor quality of education in remote areas.Teacher training to improve the quality of teachers, thetraditional “solution” on which enormous resources are used,only aggravates the problem. Trained teachers find it eveneasier to migrate to cities.In the next five years, if growth is to be maintained, the focuswill have to shift away from administrative “solutions”, such asteacher training, to the fundamentals of educational theory,technology and a search for alternative educational systems.Self organising systems, synchronous distance education, teacherindependent learning and remote presence technologies willform the basis of such alternatives.It is in this context that we need to look for alternativemethods for primary education that are relatively independentof teachers and infrastructure.Educational technology (ET)has traditionally been pilotedand introduced first in goodschools in urban areas. Sincethese areas have good teachers,the performance ofstudents is, in any case, good.Hence, not much improvement is noticed in learning, and therole of ET has often been questioned. Many teachers considerthe use of technology in education as an over-hyped andunder-performing idea. There are serious shortcomings in thedevelopment, testing and eventual deployment of educationaltechnology. Most of the technology used in schools and othereducational institutions is borrowed from other applicationareas. For example, Microsoft Power Point is one of the mostcommonly used applications in educational institutions.However, it was not designed for the use of educators andlearners – it was designed for business communications. Thepersonal computer itself is designed for climate controlled andelectrically stable environments such as found in most officesand businesses. They are not designed for use in rugged oroutdoor environments and also not designed for use bychildren. Projectors, screens, “smart” boards, video conferencingetc. are all technologies that have been designed andinvented for use by businesses.In view of this, I think that the most advanced educationaltechnology should go first to the most disadvantaged learners.Any advantage to such a learner would be a benefit. For14 THE IIPM THINK TANK

P OLICY PERSPECTIVESexample, a learner in an urban school with good teachers mayscore 80% in some test of performance. A learner in a remoteschool with poor resources may score 30% (failed) in the sametest. If the introduction of educational technology the urbanlearner increases the score to 90%, it may be considered tooexpensive for the value it provides. On the other hand, if thesame technology were to increase the scores for the disadvantagedlearner to 40% (passed), it may be considered vital andvery good value for money. A little improvement, at the“bottom of the pyramid” affects larger numbers, permanently.For technology to be introduced first in rural and remote areas,it must be designed such that it is easy to transport and requireslittle maintenance.The “Hole In The Wall” ExperimentsGroups of children can learn to use computers on their own,irrespective of who or where they are. Groups of children, givenaccess to shared, publicly accessible computers in playgroundsand other public areas, will teach themselves to use thetechnology on their own.We found this through a set of experiments conducted from1999 onwards and often referred to as the “Hole-in-the-wall”experiments.We found that children given unsupervised access to computersin public or play areas would become:1. Computer literate – in their own way, with their own vocabulary,but highly effective nevertheless.2. Better at math and English – I don’t know why, maybebecause they learn to analyse and solve problems in groups.3. More social and cooperative – because they learn that knowledge,unlike material objects, grows with sharing.4. More interested in school – if the computer is near or in theschool premises.5. Less likely to drop out of school – because they want theircomputer.6. Less interested in petty crime – mostly because all their freetime is spent at the computer7. Generate local goodwill – parents like the idea that the childis learning something and not creating trouble at home.It took us five years of rigorous measurements across theIndian subcontinent to verify these results amongst 40,000 ofthe world’s poorest children. Almost half of them are girls. Thedata based outcomes showed:• Acquisition of functional computer literacy• Improvement in academic performance• Increase in confidence and self-esteem• Increased collaborative behaviourApart from data-based findings, there is consistent anecdotalevidence of large-scale impact on school enrollment, retention,concentration, attention span and problem-solving ability. Tokeep computers working in, mostly, outdoor environments, wehad to design several pieces of hardware and software. In fiveyears of time, a design emerged that is reliable and low onmaintenance. The design is resistant to vandalism and undesirableadult access. Interestingly, both vandalism and adultaccess is automatically low in public places where children arepresent. We were also able to design computer software toremotely monitor all activity at these “playground” computers.We found much more effective use of the computers alreadyowned by schools—200 children can become computer literateusing one playground computer—making it an effective andaffordable method. Without adult intervention or supervision,40,000 village children experimented with computers andsoftware to acquire an enduring understanding of the informationage.How It Works?Computers are made available to children in shared, publicspaces, free of charge and no structure is imposed on when,how or what they learn. Shared outdoor public computers,preferably connected to the Internet, incorporating self-protectivehardware and software are combined with voluntary groupTHE INDIA ECONOMY REVIEW15

P OLICY PERSPECTIVESarithmetic more than boys.Self Organizing PedagogyMinimally Invasive Education (or MIE, as we call it) wasdeveloped by observing and analysing natural collaborativelearning of computer skills among Indian children in 12ethnically and linguistically different states, from Ladakh toTamil Nadu (3000 Kilometres apart, north to south), and fromRajasthan to West Bengal (also 3000 Kilometres apart, west toeast). Having isolated the common cross-cultural factors inlearning, the researchers then focused on enhancing them inways that were “minimally invasive”, or largely invisible to thechildren, such as testing and selecting the most effectivecontent, allowing some children to observe a technicianperforming a task so that they would later teach the others, andoccasionally by developing animated tutorial software in whicha cartoon character coaches children through a particularlydifficult task, such as signing up for an e-mail account.Throughout, all instruction by adults and older youngsters wasrigorously avoided, to prevent the children becoming dependenton scarce and expensiveresources. Participatingteachers were encouraged toassign tasks to be performed atthe computers, and to leadclass discussions aboutcomputer learning, but wereasked to avoid direct instruction.As a result, “child teachers” emerged at each of theexperimental sites—typically, talented 6-8 year old boys andgirls who took on the “teacher” role and taught three or four“generations” of children to use the computers. In effect, everylearner was a teacher and vice-versa.Highly interconnected systems, such as the Internet, orbiological structures such as us, show self-organisation. Thisfield of study, called Complex Systems is mostly studied byphysicists and is relatively new and unexplored. It seems tocontain the answers to how life, cognition and consciousnesswork. Self organizing systems show what is called “emergentbehaviour”, that is, behaviour that was not programmed orexpected from it. Small changes in the inputs to such systemscan cause disproportionately large changes in its output. Itseems to me that these are properties that could be extremelydesirable for mass education. Could there be a pedagogy basedSelf organizing systems show“emergent behaviour”, thatis, behaviour that was notprogrammed or expected from iton self organization?The “hole in the wall” experiments seem to suggest analternative, inexpensive and reliable method for bringingcomputer literacy and primary education to those areas whereconventional schools are not functional. Such facilities are notmeant to replace schools and teachers, they are meant tosupplement, complement and stand-by for those areas of theearth where good schools and good teachers are, for whateverreason, absent.References:1. Children and the Internet: Experiments with minimallyinvasive education in India, Sugata Mitra and Vivek Rana,The British Journal of Educational Technology, 32,2,pp221-232 (2001)2. Minimally Invasive Education: A progress report on the“Hole-in-the-wall” experiments, S. Mitra, The BritishJournal of Educational Technology,34, 3, pp367-371 (2003)3. Minimally Invasive Education, pedagogy for development ina connected world, S. Mitra, Invited talk at the Internationalconference on Science andMathematics Education,Bibliotheca Alexandrina,Alexandria, Egypt (2003)4. Improving English pronunciation– an automatedinstructional approach, S.Mitra, J. Tooley, P. Inamdarand P. Dixon, Information Technology and InternationalDevelopment, 1(1) pp741-83, MIT Press (2003)5. The Hole In The Wall, Sugata Mitra, Dataquest, September23 (2004), http://www.dqindia.com/contentindustrymarket/2004/104092301.asp#interact6. Self organizing systems for mass computer literacy:Findings from the “hole in the wall” experiments, SugataMitra, Int. J. Development Issues, Australia, Vol. 4 (1),71-81 (2005)7. Acquisition of Computer Literacy on Shared Public Computers:Children and the “Hole in the wall”, Sugata Mitra,Ritu Dangwal, Shiffon Chatterjee, Swati Jha, Ravinder S.Bisht and Preeti Kapur, Australasian Journal of EducationalTechnology, 407-426 (2005)(The views expressed in the write-up are personal)THE INDIA ECONOMY REVIEW17

Reliving TheGreatIndianDreamMedical Education:

P OLICY PERSPECTIVESWhich Way To Go ?Gouri Pada DuttaChairman, Subject Committe (Health), StatePlanning Board, West BengalPreamblePotential application of educational science in medicine wassystematically and seriously explored since the latter half oftwentieth century. Although such educational courses forhealth manpower production have increasingly appeared inmany parts of the world, even today its utility, purpose andfunctions are debated and criticised in many parts of theworld. A consensus of opinion among academicians, policymakers and planners of health care in this context is the feltneed of the hour.International ScenarioShift in interest from hitherto pursued non-selective accumulationof knowledge and examination-oriented medicaleducation to socially relevant, need-based and integratedhealth care-oriented medical education is just an idea. But thedilemma between prioritisation for universal and essentialhealth care and over-emphasis on techno-centric medicare stillexists, although in different degrees around the world.Eventually, curative bias and hospital treatment had predominatedin most of the developing countries, where healthmanpower production was an immediate and urgent need.Paradoxically, resources and expertise are very limited in thesecountries. All these have retarded the growth of communitybasedhealth care orientation of medical education. The fruitof this paradigm shift is still an unfulfilled hope and re-orientationof medical education is very sluggish, scratchy or evennon-existent. Medical education is not fulfilling its objectiveand commitment to the people. This is applicable for bothdeveloped and developing countries; of course their prioritiesand perspectives are different. The developing countries aresuffering because of their limited resources that too inequitablygrasped by hospital-oriented medicare introduced by thecolonial rulers, coupled with lack of understanding aboutTHE INDIA ECONOMY REVIEW19

Reliving TheGreatIndianDreamnational needs and priorities of health care.Interestingly, most of the literature on medical educationwas directed towards identifying what was wrong. It is anexample of over-diagnosis and under-treatment by itself, anexample of masterly inactivity and watchful expectancy also.Various factors, narrow outlook private interests have overpoweredthe application of public health orientation inmedical education. But still the need for change in medicaleducation is well felt in the concerned corners. Some steps arebeing taken both in our country and abroad. There is need tochronicle the efforts made in different countries for necessarychanges in the curriculum, the methodologyon medical education andevaluate critically their success andfailures. In course of such exercise,indications on the steps necessary in ourcountry will also be highlighted.Before we proceed further, it is betterto ask oneself to internalise the statementof Miller: "If you don't know where you are going, you mayend up somewhere else and not even know it." This indicatedthe need of determining the mission, vision, goal or purpose ofmedical education asobjectively as possible andalso rationally as feltnecessary. Its aspirationsshould be clearly spelt out;what do we need, 'a primarycare physician', a medicalscientist who is devoted toserve his country havingadequate training ofadvanced knowledge andtechnology but capable ofusing appropriate technologysuitable for his country(if the situation so arises) ora physician who wants to go abroad? The apprehension ofdeteriorating quality of medical education due to such a trendhave undermined its importance, underrated its significanceand neglected any such effort, due to few obvious and perceptiblereasons. The changing priority of content of medicaleducation, from ever-increasing emphasis on diagnosis ofunforeseen, complicated, rare or even ill-defined clinicalMedical graduates werelargely absorbed inprivate market in Indiaand abroad for thosewho could afford to payailments using wide array of technologies, to communitydiagnosis and care and orientation of public health, oftentalked about, but enough dent could not be made. Reportedly,the clinical skill of medical graduates is also fast deteriorating.So long the medical graduates were largely absorbed in privatemarket in India and abroad for those who could afford to pay.Public utilisation was less and the benefit kept far from vastmajority of people. Both commitment of stakeholders andexpectations of people from them were extremely at low ebb.The people were left at the mercy of magic cure by indigenousmeasures, which was the only choice left for them. Thereafter,widespread development of publichealth system could neither attract thedoctors, or the clients, due to severalperceptible reasons. Lately, ineffectivemedical education has been singled outas the main reason for such failure.Now, overcoming the dichotomybetween specialist skill for privatemarket and leadership of a health team for rural primaryhealth care is the decisive factor to formulate the nature ofmedical education. Obviously, doctors will like to cure thepatients, facilitate forinvestigation and management,rather than giving lipservices for safe water, useof latrine, hygiene, vectorbreading etc. etc. a long listof messages to preventoccurrence, recurrence orpersistence of the hugedisease burden thatprevails. Interestingly,proactive gesture forintegrated health care ismore aspirational ratherthan operational. Suffice itto say that it is more to preach less to practise.WHO and UNICEF organized World Conference onMedical Education at Edinburgh in 1988. The conferencecame out with a Charter known as Edinburgh Declaration.General Medical Council (GMC) of Great Britain made acomprehensive review of medical education in England in1991. WHO and other national and international medical20 THE IIPM THINK TANK

P OLICY PERSPECTIVESjournals, regarding the problems ofmedical education in different countries,published a number of books andundertook articles and various innovativeprograms. World Medical Association(WMA) organised a WorldConference on Medical Education inCalifornia in 1989. We can have aglimpse of the changes felt necessaryand efforts undertaken in differentcountries through a short review ofthese materials.Global ReviewUndergraduate medical education inJapan is governed by two basic rules. Itassures freedom of conducting researchand education, and immunity from anyreligious and political interference.Among the medical schools, privatesector institutions exist in large numbers.The faculty is granted autonomy inuniversity administration. They are,therefore, responsible for maintenanceof educational standard. The Council ofUniversity Establishment has set upguidelines of minimum requirementsfor medical schools. The course consistsof two years pre-medical study, followedby four years professional medical curriculum. The pre-medicalcourse deals with liberal arts, social science, naturalscience, foreign language, and medical sciences. The studentsare admitted by merit tests, which are composed of bothwritten examination and interview or aptitude tests. The resultof entrance examination is considered as the denominator inreview of progress of students also.The four-year course deals with basic medical science,clinical medicine, socio-medical and other related subjects.The requirement of material facilities are also specified andlooked into. Cadaver Donation Act was passed to facilitate it.The Association of Dean and Directors of Medical Schoolsconducts review every two year. Accordingly, efforts are madefor improvement also.The post-graduate medical education in Japan is composedInterestingly, theproactive gesture forintegrated health care ismore aspirational ratherthan operationalof three phases, initial clinical trainingin university hospital and other teachinghospitals for two years to developskills of primary care, judgement ofreferral, terminal care, legal responsibilities,spirit of teamwork etc. This isfollowed by training in differentspecialities conducted by national levelboard of specialists and finally fouryears course of Doctor of MedicalEducation for medical teachers andresearchers. The medical associationand Japanese Association of MedicalSciences play pivotal role in this wholespecific process.The non-selective and traditionalmedical education, lack of creativethinking, paucity of problem-basedlearning content etc was quite evidentin the retrospective evaluation ofmedical education in Great Britain.There was steady decline of admissionsin undergraduate education. The hoursof work, change of public attitudetowards this profession, reduction ofrelative earning compared to otherprofessions etc were considered asresponsible for this downtrend. TheGeneral Medical Council of Great Britainthus recommended reduction of factual information,introduction of problem-based learning, early introduction ofclinical teaching etc.Besides knowledge, skill and attitude as basic requirementsfor admission to the course, merit was also considered bydiverse criteria in different schools, e.g. personality, motivationetc or according to excellence beyond academic standard,community services, social activities etc along with minimumrecommended scholastic achievements. In MC MasterUniversity, performance in small territorial groups is consideredthe key factor for admission. As merit test for certifyingevaluation, GMC recommended introduction of factual recall,MCQs, progress test, test of clinical skill etc.For quality assurance of teaching, teaching commitment,audit of teaching ability, financial award for excellence ofTHE INDIA ECONOMY REVIEW21

Reliving TheGreatIndianDreamteaching etc were recommended. For assessing teachingquality, GMC recommended several criteria like performancein lecture classes, objectivity of teaching, field work, managerialcapacity, innovative approaches and invitations receivedfor guest lecture or speaker. Research was considered asprime need for reward or promotion.While re-structuring the medical curriculum in UK, theGMC laid emphasis on understanding on scientific basis ofmedicine, health promotion and disease prevention, understandingof human relationship, organisation of healthservices, social and legal responsibilities of doctors, withnecessity of introducing problem-based learning.In USA, the medical educators are trying to teach basicmedical science at all levels of medical education. This hasensured integrated teaching/learning on relevant healthproblems, which both students and teachers often encounter.Emphasis is given on related social issues, economics of healthcare, medical ethics etc. The curriculum consists of eightsemesters, out of which biomedical science is taught in sevensemesters. The need of an additional semester is beingexplored to take care of the shortcoming. Since first year,anatomy is taught in the context of clinical cases. Thereafter,the curriculum includes more sophisticated patient care,treatment modalities in detail, its cost and way and means inthe context of the patient's socio-economic constraints.The under-graduate medical education in European regionis the responsibility of ministry of education. The budgetaryallocation for final year comes from ministry of health. Thecourse duration varies from five to seven years in differentcountries. But only two years training is necessary for licenceto practise in countries like Portugal,Germany and France etc. Privatepractitioners or community physiciansconduct this training in public hospitalsor health centres. After this training,the students choose to become eithergeneral practitioners or specialiststhrough nation-wide merit test. InIsrael, out of four medical schools, traditional medicaleducation still continues in two schools. Contact with patientsstart in fourth year only. In Tel-Aviv, behavioural sciences likepsychology, sociology and anthropology are taught in the firsttwo years. The bedside clinical teaching and laboratory workare also offered in a number of affiliated hospitals. TheCurative bias, hospitalorientation andmisunderstanding aboutcommunity health aresome of the problemsmedical school of Beer Sheva focuses on primary health careand practice of community medicine. The patient contactstarts since first year itself. With clear-cut objectives toprepare family physicians, the services of clinical training areutilised from regional rural physicians.Overall shortage, uneven rural urban distribution, unwillingnessto serve in rural areas, curative bias and hospitalorientation, lack of understanding about the prevailingcommunity health problems and its socio-economic determinantsetc are the constant and salient features of healthscenario in most of the countries of South East Asia. Themedical education is being discredited, because it does nottake into account countries' health needs in deciding thecurriculum. Lately, attempts are being made for necessarymodifications of medical education system in its totalperspective. In 1954, leaders of medicaleducation in South East Asia regionrecognised "the urgent necessity forreadjustment of medical education to theactual need of the region; (and) that thereare important trends in medicaleducation for re-orientation of the basicmedical education methods, includingthe shift in emphasis to the preventive and community approach".(WHO Resolution No. SEA/RC.7/R 9 1954)Despite this, medical education in the region developedlargely along traditional line. The programme was disciplineoriented,teacher-centred and conducted mainly in the tertiarycare hospitals.22 THE IIPM THINK TANK

P OLICY PERSPECTIVESThe regional committee (WHO) in 1976 noted that"Notwithstanding the attainment of high standard of medicaleducation, a large majority of doctors are not trained andequipped to meet the needs of the community…that the trainingcontinues to be hospital-based, thus making the trainee doctorsdependent on sophisticated aids and diagnostic services andgiving them very little exposure to ruralconditions…" It emphasised thatdoctors produced by medical institutionsshould be as close to the communityand be trained to be able to work inreal life situations obtaining in ruralcommunities. (Res. No.SEA/RC 29; R91976). After a series of meetings in1979, 1983 and 1987, they finalised the goal for re-orientationof medical education in the SEA region: "The goal forre-orientation of medical education in the South East Asia is thatby the year 2000 all medical schools in the region will beproducing, according to the needs and resources of the country,graduate or specialist doctors who are responsive to the socialand societal needs and who possess the appropriate ethical,Doctors must be closeto the community andtrained to be able towork in real and rurallife situationssocial, technical, scientific and management abilities so as toenable them to work effectively in the comprehensive healthsystem based on primary health care". In Thailand, the studentsare selected from rural provinces, evaluated after exposingthem to rural life situations at the provincial/district hospitalsand health centres. The faculty of university evaluates theiraptitude, academic achievement andcommunication skills. After selection,the students are recruited in ruralhealth facility. An agreement to serveafter graduation is made before theiradmission to the course. Curriculum iscommunity-oriented, rural exposure is aroutine practice since the beginningpriority is given on major health problems. The evaluation ofgraduates of this project (medical education for students inrural area project) reveals satisfactory results.The university, named Chulalongkorn University of Thailand,has initiated another innovative project called targetedproblem-based programme. It ensures development ofproblem-solving, critical thinking and self-learning abilitiesDiagram: Types Of Medical Care At Each Level Of Each TrackP.M.G.I.Level OneLevel Two1 st yr 2 nd yr 3 rd yr 4 th yrConventional TrackBasicClinical1 st -2 nd years 3 rd -4 th yearsMedical Attention To Patients WithRare Disorders At The SubspecialtyMedical Attention To Ambulatory Cases AtThe Speciality LevelPrimary Health Care And Healthy Population At RiskTHE INDIA ECONOMY REVIEW23

Reliving TheGreatIndianDreamamong medical graduates.Nepal has cited a unique example of success of promotingrural physicians by offering medical course to mid-level healthworkers like health assistants, lab technicians, nurses etc afterthree years of rural service by them. The course has laidemphasis on problem-based and learner-oriented training withadequate community exposure.In an attempt to revise the course curriculum in Myanmar,measures taken included formulation of instructional manualon common diseases, emphasis on behavioural and politicalsciences, multi-disciplinary integration, early communityexposure and patient contact, through posting at pre-blocklevel township hospital. The students are eligible to appear infinal examination only after successful completion of thesespecific postings.For a long time, the major emphasis of many programmes,concerned with the education and training of health personnelhas been on increase in quantity. Although this drive forquantity has been successful, and in some cases even impressive,leading to overproduction of certain categories of healthpersonnel, the relevance of the trained personnel to the healthneeds and demands of the population has often been far fromsatisfactory. In 1974, the School of Medicine of the UniversidadNacional Autonoma de Mexico (UNAM) funded a newprogramme: the Programa de Medicina General Integral(PMGI). PMGI is an experimental education track, which isgradually getting acceptance by thestudents and recipients as well. The newcurriculum was to develop professionalsnot only with sound scientific andtechnical knowledge but also with adeep and realistic appreciation ofMexico's social, economic and healthsector problems.In 1985 another important educational innovation wasinitiated. A new integrated medical school curriculumreplaced the traditional subject-oriented track. The newcurriculum was an outgrowth of the success of PMGI. Theinnovative teaching model was to meet the following goals. Inthe beginning, students were recruited on their choice fromthe first-year classes by the School of Medicine. From the verybeginning, the evaluation of students in PMGI was to be morediverse than traditional method and better suited to the broadobjectives of the programme.The curative orientedhealth establishmentsof western models werenot relevant for the realneeds of our countryLevel One (Years One And Two)During Level One, the students study six modules coveringhuman growth and development. This is co-ordinated within-service training at the affiliated health centre. There,students learn the rudiments of early diagnosis and prevention,through contact with health centre clinic patients andby home visiting and surveys with the population at large.The basis of the second-year curriculum is the interrelationshipbetween the body systems, the whole organism, andthe environment. It is covered with 12 modules and again isintegrated with the Health Centres, and also with Programsof Elementary School Health and Community Research.The types of medical school on each level of each track ispresented in the diagram. Similar experimentations arebeing done in four universities of USA (Michigan StateUniversity, University of New Mexico, Rush Medical Schooland Harvard Medical School), one in Mexico (NationalAutonomous University of Mexico), one in Philippines(University of the Philippines), one in Thailand (ChulalaongkornUniversity), and one in China (Shanghai SecondMedical University).Indian PerspectiveDuring 1986, the statement of Dr. David Morley in his bookentitled "My Name is Today" reiterated the very nature ofmismatch between medical education and health servicesthat prevailed in most of the developingcountries, including India. Itstates: "The university trains doctorstowards international standards. TheMinistry of Health needs doctors toservice rural health programme. Theirexpectations for doctors are not thesame. "Better or worse, after all werealise the responsibility we have as university teachers; wehave done so little to prepare doctors appropriately for thecountry in which they serve. Today, it is needless to ask,"Which way to go?" Contrary to the circumstances, thebetrayal of the so-called social reformers vitiated theenvironment of educational institution within a short time.Long back in 1833, the committee appointed by GovernorGeneral of British India Lord William Bentinck recommendedthat principles and practice of medical education inIndia should be in strict accordance with the model accepted24 THE IIPM THINK TANK

P OLICY PERSPECTIVESin Europe. It took almost 150 years to realise. The nationalhealth policy documents in 1982, bluntly accepted that almostwholesale adoption of health manpower development policyand curative oriented health establishments of western modelswere not relevant for the real needs and economic conditionsof our country. During this period, a large number of committeeshad attempted to re-orient medical education and healthcare system. In spite of these recommendations reiterated inalmost all health policy documents in independent India, therehad been continuous growth of medical colleges and medicalmanpower, doctors in particular. The issues and concerns ofpublic health have been continuously ignored. Medicaleducation in India has not changed its directions judiciously.Obviously, improvement is not perceived till date. If theBritish rule had ensured the establishment of transplantededucation in British and European model, we have onlyprovided lip service to the need of community orientation andpreventive, promotive and environmental health. Keeping inview the national needs, priorities and goals, it is essential toupgrade the skills of health manpower through appropriatechanges in course curriculum of medical and health institutionsat all levels. Since the decentralisation process is empoweredby the 73 rd and 74 th amendments of the Constitution, thelong uncherished dream of need-based health services nowmerit more serious attention.Medical education in India must be re-structured totranslate the aspirations of our countrymeninto reality. The paradigm shift ofnational family welfare programme tothe Reproductive and Child Health programme,has already initiated theprocess of demand-driven, bottom-upapproach for work plan of rural healthcare institutions. Its spirit is to beimbued deeper. This mindset, orientation and skill are to beinculcated in medical education and training programmes byall possible means.Evolution Of Indian Medical EducationIndia has traversed a long pathway of diverse strategies andpolicies concerning health care and medical education since itspolitical independence. The Sokhey Committee (1937) andBhore Committee (1946) identified lack of communityorientation in medical education in India. The need of ruralWe have only providedlip service to theneed of communityorientation andpreventive healthinternship training of MBBS doctors as well as development ofrural infrastructure for integrated and comprehensive ruralhealth cares were emphasised. Thereafter, during the successivefive-year plan periods, a huge network of health infrastructurehas developed across the country. But until recently,the matching modification of curriculum of medical educationand training programmes of health workers have remained insilence of negligence.The Srivastava Committee identified the major challengesagainst the community-oriented medical education in thesetting of peripheral health care institutions in 1974. Stronginclination of medical educators towards traditional teachingsettings and methods predominantly forspecialised care in tertiary level institutionswere identified as the majorbarrier. The health needs of thecommunity were ignored by and large.An increasing trend of specialisation,acquisition of post-graduate degree andbrain drain was the obvious eventualitiesof health manpower development in India. The loss ofprecious health manpower of our country remained unabated.But the so-called benefit of better learning opportunity ofhigher education in developed countries was found as counterproductive.The manpower quality was necessary for operatingthe prospective health machinery that our country was strivingto develop. Instead of the meagrely paid jobs in own butunknown God-forsaken rural land, the cash benefit of confinementabroad was an attractive proposition in most cases ofbrain drain. Instead, the recipient countries welcomed thisTHE INDIA ECONOMY REVIEW25

Reliving TheGreatIndianDreamunearned gain of obtaining readymade health manpower freeof cost.The process of evolution and development of medicaleducation and health care started even before independenceby Sokhey Committee (1937) and Bhore Committee (1946).The problems of medical education and the need of communityorientation were emphasised time and again. The renewedinterest for restructuring the system of medical educationwas emphatically recommended by Srivastava Committeethree decades later. While highlighting the problems andbarriers of change, the committee identified inclination ofmedical educators towards traditionalteaching methods, exclusive orientationfor teaching to facilitate the tertiary carefunctions only. The neglect of trainingfor capacity building to manage themajor health burden, acquisition ofpost-graduate degree to attract theglobal export market etc were recognisedas the major impediments against changing the valuesystem of medical education and its process.Since then, a commendable progress was made in analysingthe health situation and medical education. Judicious changeof medical education was quite evident. These endeavourswere documented in reports like:1. Re-orientation of Medical Education (ROME) scheme,1975;2. ICMR/CSSR report on "Health for All by 2000 AD -- AnAlternative Strategy" (1981);3. National Health Policy (1982);4. Recommendations on Under-Graduate Medical Educationby MCI (1982);5. National Medical Education Policy (1986);6. The Development of Health University Concept;7. Teachers' Training;8. MCI curriculum on Under-Graduate MedicalEducation (1993);9. CMAI-AHAI Medical Education Report;10.Report of Committee of Calcutta University toexamine the Under-Graduate Medical Education;and lastly11.Report of Subject Committee on Health andFamily Welfare, West Bengal LegislativeAssembly.The benefit of betterlearning opportunityof higher education indeveloped world wascounter-productiveSince then, efforts to re-orient the medical education andrestructuring the rural health in primary health care modelwere nurtured quite enthusiastically during last few decades.Pioneering efforts in this direction known as Re-Orientationof Medical Education (ROME) scheme (1975) was an utterfailure. Rural health scheme (1977), ICMR/ICSSR studygroup report on "Health For All by 2000 AD -- An AlternativeStrategy" (1981) recommended for translating the aspirationand commitment of Srivastava Committee, endorsed theglobal strategy of Health For All by 2000 AD and Alma AtaDeclaration on Primary Health Care as policy and approach ofhealth care delivery. All these effortswere consolidated towards futuredirections in National Policy (1982) andthe revised regulations and recommendationsof Under-Graduate MedicalEducation by MCI (1982). The wholeconcept of revamping the medicaleducation has been routed through theNational Medical Education Policy (1986). Development ofHealth University concept, teachers' training programme byseveral institutions, formulation of curriculum for Under-Graduate Medical Education by MCI (1993), CMAI-AHAIMedical Education project report, 1993 etc exemplify few ofsuch advocacies. However, efforts of few centres to evolvecommunity-oriented courses according to MCI guidelineshave failed due mainly to inadequate response of facultiestowards the changing system, changing value system ofmedical entrants and also change of social ethos.A study of pace setter colleges and alternate working centreshad few interesting findings. The Medical Education progress26 THE IIPM THINK TANK

P OLICY PERSPECTIVESreport (March 1993 document) critically revealed that there-orientation of medical education according to its socialrelevance was a fringe activity, not a core one. The initiativeof Christian Medical College was the only exception, whereCommunity Health and Development was directional foroverall socio-economic development in several rural blocks ofVellore, which were attached to the medical college. Corollaryto that, the medical entrants were also exposed to a logicallybuilt-in educational programme in a phased manner. The firstphase called Community Orientation Phase (COP) introducedcommunity problems, behavioural sciences, environmentaldeterminants, traditional health problems,functioning of various healthservice system bio-statistics etc. Thestudents live in the villages and presentcase studies. Guest speakers expose thestudents to agriculture, rural economy,banking, animal husbandry etc. Technicalskills are gradually developed duringsecond phase by exposing them to epidemiological fieldexercises like morbidity, mortality survey, national healthproblems and programmes. Thereafter, the students developtechnical and managerial skills by organising health anddevelopment programmes, develop community partnership,and evaluate progress, achievements and shortfalls. At theend of course, students submit reports regarding all theactivities carried out, case studies, lab procedures, operationsperformed etc. Thus the main features of CHAD educationalprogramme focuses on inter-disciplinary approaches toidentify problems and seek solutions and thus developingrelevant practical skills and attitude. So, the health manpowerpossesses relevant and appropriate epidemiological, clinical,behavioural and management skills.Even with all these experiments and efforts, need-basedre-orientation of medical education could not be achieved.One may become apprehensive about the recent trend ofcommercialisation of medical education through privateenterprises. This is being promoted by international agenciesin the name of globalisation. They consider health as purchasablecommodity. Health care and medical education provide apotential market of profit.Need-Based Medical EducationWay back in 1950s, the WHO in a resolution emphasised "theunder-privileged countries will do well to focus their health effortson the rural and urban poor…they must make use of healthworkers and involve the community, instead of just waiting foruniversity-qualified doctors to settle in the villages". Sinceindependence, our health care system has traversed a longpathway of diverse strategies and policies. But problem-solvingaptitude to limit this mismatch has not been perceptible.As a result, despite continuous attempts made to provideorganised health services produce health manpower andutilise them, effective health services accessible and acceptableto vast unattended rural poor and under-privileged sections ofcommunity is still left undone.It is important not to loose sight ofthe fact that the health personnel arefundamentally the instruments ofproviding health care. So, training ofhealth personnel is one of the toolsavailable for expanding and improvinghealth care coverage. The objective ofmedical education is primarily to support health developmentof a nation. Therefore, it should be community-oriented andrelevant to its actual health needs. But, unfortunately, thepillars of medical education were hospital-based, specialisation-orientedand dependant on sophisticated investigativeprocedures. The curriculum is overcrowded with factualinformation and examination-oriented. It does not promotecompetence of problem solving skills and creative and criticalthinking to identify problems or seek solutions. The EdinburghDeclaration says: "the aim of medical education is toproduce doctors who will promote the health of all people." Itfurther states that scientific research continues to bring richreward, but people need more than just "science alone and it isthe health needs of human race as a whole and of the wholeperson that medical education must affirm." The declarationalso emphasised to enlarge the educational settings beyondthe four walls of the hospital, ensure the content of education,which reflects national health priorities and resources availableto afford the nation. It is realistic assumption that dearthof health resources should be compensated by supplementaryresources from the community itself. The declaration alsoemphasises the shifting of teaching/learning activities frommere passive to active learning. It is unfortunate that medicaleducation policy did not follow the spirit of EdinburghDeclaration. The ultimate purpose of medical education is toIt is unfortunate thatmedical educationpolicy did not followthe spirit of EdinburghDeclarationTHE INDIA ECONOMY REVIEW27

Reliving TheGreatIndianDreamfacilitate development of intellectual and practical skill, whichwill be predictably contributory for maintaining and improvinghealth of the people besides crisis management in healthcontingencies. So, the relevance of medical education to thereal health needs and demands should be ensured adequately.Unless the purpose is clearly defined, no educational systemwill be effective. The competence of health personnel will alsonot satisfy the health needs.Medical Education: Opportunities And ThreatsThe medical educationists, around the globe, had theiranswers from sociological background. The medical educationin the medical colleges often has a hidden curriculum.The students wish to follow life style of their teachers, have alarge car and earn generous sums fromprivate practice. The hidden prestigecost of attachment in big hospital toachieve a large private practice is alsocherished. The students find interest inunusual referred cases, not managingthe easy common conditions. Thestudents are often taught about theinvestigative technologies to rely upon diagnosis, which theymay not find in their working institutions. The doctors aretrained in such a way that they may not be happy either in therural areas or in the cities, nor if they migrate to industrialisedcountries. Expectations are created in such a way for materialgoods, which without private practice earnings, they cannotachieve. The cities are already over-crowded with doctorsuncomfortable at its market fluctuation and ill prepared to doa useful job at this real work place.Most formidable challengesare resistance from teachers to widen the setting of teachingfrom the disease palaces to the natural milieu of the ailingcommunity to emphasise the disease causation, recurrences,and persistence to learn from iceberg phenomenon of diseaseand seek solutions. The dilemma of medical colleges, itsfaculty, culture and consumerism, its excellence in terms ofhigh technology and specialisation, are also contrary to thecommunity orientation in medical education.Teachers express their concern about deterioration ofstandard of medical education if community orientation getspriority. The students also feel reluctant. They are nevertaught about social commitment of the profession in theirpre-medical or general education. A degree, training, aIt is unfortunate thatmedical educationpolicy did not followthe spirit of EdinburghDeclarationcommercial market value and career development are obviouslythe only aspirations of the students. The better scope toserve the health of the people is never internalised as implicitin the ethics of medical education.There are also social, political and financial powers to resistsuch reform. Understanding of the government authoritiesand the attitude of the prevailing political systems are alsoreluctant, if not resistant to such changes. Unless the governmentand the political system agree to this innovation, theresources also will not be available to implement such changes.Evidently, the political goal of ruling echelons have beenserved through their patronising and control of the medicaleducation system currently being followed in our country. Anyattempt to reform the same may threaten their interest andmay confront obstructions. Thecontemporary public health disciplineis also paying very little attention tocomprehensive public health measures;the approaches of priority public healthmeasures are often misdirected. Theso-called specialisation in public healthhas also given indulgence in mechanicalhealth management only. There are conceptual lacunae ofhealth care in general, and its failure to understand the politicsbehind the present form of health care practices, in particular.28 THE IIPM THINK TANK

P OLICY PERSPECTIVESDilemma Between Medical Care And Health CareThe multi-faceted problems of health care are also ill understood;its importance is under-rated and need of solutionshave been undermined. Any simplistic assumption to characteriseit, as merely the result of mismatched demand andsupply is absolutely wrong and efforts taken on that basis willbe in vain. Instead, an overview of the milestones of itsdevelopment will explain the underlying factors and will helprational decision and actual solutions.The crisis of health care for the people exists both indeveloped and developing countries, but its nature andmagnitudes are obviously different. There has been phenomenaldevelopment of medical science. The knowledge abouthuman anatomy, physiology and pathology has also beenconsiderably advanced. Newer diagnostictechnology and therapeutic measureshave been invented; many potent andhighly effective drugs have been discovered.But still, human sufferings fromdisease burden could not be optimallyrelieved. Health care remains as apurchasable commodity. Only 15-20%of people of poor communities has access to health care.Newer ailments, iatrogenic diseases in particular, are appearingin greater frequency than before. The triple burden ofdiseases composed of age-old infections; non-communicable,degenerative, lifestyle-related diseases along with emergenceand re-emergence of newer infections are quite puzzling. Itappears that the cause of this situation is not limited to thediseases and their medical care alone. The reasons of thisdeep-rooted malady are remaining uncovered. The internationalcommunity is thus compelled to recognise the problemof health care as a global issue. As a result, the League ofNations established its role in 1918 AD. The WHO was bornin 1949. The health has been redefined in its perspective ofsocial and economic productivity. Thus, the slogans of "Healthfor All by 2000 AD" and Primary Health Care approach ofAlma Ata Declaration came into being. So long, attainment ofgood health was considered as an individual responsibility.But, the recent declarations have rightly pointed out itsinseparable social factor. The pro-activists of health careknew that health is the final manifestation of life. Even then,the health care was purposefully synonymous as medicare andwas dealt in isolation. Introspection had made it transparentand protects the interest of the ruling section of the society.It is well felt that medicare is a component of total healthcare which encompasses other frontiers of life for comprehensiveappreciation of preventive and promotive interventionsalso. But, the health care delivery was deliberately limited tothe crisis management or curative services to the sufferinghumanity. In reality, the proper health care is possible only ifsocial justice is universalised and every section of the peopleenjoys benefits. This means a radical social and educationalchange, which the ruling section cannot afford to endure.The study of history of medicine made it evident that healthcare delivery was only way of domination by stronger sectionof the society to the others. Their ever-increasing control overthe health care institutions, training and education of medicaland para-medical personnel and alsoproduction and use of diagnostic andtherapeutic appliances perpetuatedthis domination. The process was longcontinuous and sustained since theformation of society. This nexus of theruler, the priests and the scientists iswell evident in the history of mankindand all along while developing the social structure also. Therole of scientists and physicians were also interesting. Theyhad to subserve the ruling coterie for their existence and othermaterial benefits. But, time and again their commitment tothe people forced them to fight and stand against the ominousmotives and the politics of ruling class also. This continuousprocess of dominance has lately acquired new dimensions andsignificance due to commercialisation of health care. Subsequently,increased awareness and consciousness of commonpeople has increased and the authorities are forced to admitthat the age-old practice of medical care is not at all healthcare and does not subserve its purpose. Although there areall-out efforts to detail and divert the realisation of the politicsof health care by different methods of wrong indoctrination,the shift of interest from basic cause of ill health to theimmediate attention for relief of felt-need of the sick hasgradually emerged.A Network of community-oriented Educational Institutionfor Health Sciences was founded in Jamaica in 1979. Thisorganisation sponsored the Albuquerque Conference, whichwas supported by WHO and hosted by the University of NewMexico School of Medicine in 1986. Representatives of eightOnly 15-20% of poorcommunities has accessto health care andit still remains as apurchasable commodityTHE INDIA ECONOMY REVIEW29

Reliving TheGreatIndianDreaminnovative health science institutions attended it from China,Mexico, Philippines, Thailand and the United States. Each ofthese institutions has addressed the problems of medicaleducation in one specific way by establishing an innovativecircular track. It is a curriculum distinct from, but runningparallel with, the existing curriculum. Although each group ofinnovators faced different problems and obstacles, eachneeded change within its established traditional institutions byusing the same strategy. Albuquerque Conference presentedseven important reasons for successful implementation ofinnovative track for medical education:1. It immunises threat i.e., a small group of committed facultymembers and students can implement the programmewithout initially forcing the rest of the faculty to change.2. It bypasses departmental control.3. It provides a protected environment.4. It allows extensive student involvement in the community.5. It offers alternative approach of learning.6. It provides an ethical approach to educational innovation.7. It permits experimental comparison.An innovative/alternative under-graduate medical educationin India was finally evolved after a lot of debate and discussion,which is presented to provide an opportunity to introduce aneed-based community-oriented medical education in ourcountry. This is a maiden attempt. Many more modificationsmay be necessary to optimise the project. It is also envisagedthat this form of training of the doctorswill help the people's health movementto achieve its goal.The Proposal Of InnovativeMedical EducationThe proposal of instituting innovativemedical education has also undergonemodifications. Initially, it was proposed as follows-One medical college (preferably Burdwan Medical College,as envisaged by the State Planning Board Core Committee)may be selected for this model. The specific approach wouldbe one of integrated, problem-solving and community-orientedmedical education.New ApproachTo ensure a people-oriented, need-based medical education, itProper healthcare ispossible only if socialjustice is universalisedand every section of thepeople enjoys benefitshas been proposed that the medical students will be selectedon the basis of their merit and intention to serve the community.The entire proposal will be communicated to them prior toand when they will undertake this medical education.A group of socially committed teachers will be recruited andtrained at each stage. They will be provided with modules ofteaching along with the methodology of imparting it. Themethods of involving the community will be outlined.The Studentship Will Begin From The Primary(Rural) Hospitals /CHCsThe teachers and students will be residential in the peripheralcentres. The learning will all along be problem-based andintegrated. The students in course of their learning will beacquainted with the community to assess their need anddevelop dexterity for appropriate technology. The studentsguided by their teachers/preceptors will interact with Panchayatsystem, mass organisations and be acquainted with infrastructuralfacilities provided by the Government as well asother sectors.First Phase:Initially, for the eighteen months, students will be taught in anintegrated manner in Block- level hospital, Rural Hospital /Community Health Centre (CHC). This will be hands-ontraining. All the students will study the prevalence of thediseases, morbidity profile of the locality and the response ofindividual and the community to meettheir felt need.Second Phase:After this period, they will be taughtand trained system-wise (modular) inregional hospitals (District / largeSub-Divisional Hospital) for 18 months.This system-wise teaching will beintegrated, problem-based and also community-oriented. Inthis period, they will learn in a participatory manner to solvethe problems of complicated secondary care and tertiaryhealth care with the help of their specialist teachers.Third Phase:In the last 18 months, traditional teachers will teach thestudents in the newly conceived medical college. This will besubject-wise teaching, problem-based, student-oriented andintegrated with learning in participatory form. At this stage,30 THE IIPM THINK TANK

P OLICY PERSPECTIVESthe students have become competent enough to deal with theproblems of health care delivery and the modality of treatmentfor secondary and tertiary disease. In this period, they will alsolearn the advanced technologies and will be in a position tofind out their scope and limitation. Thus, they will acquire theacumen of rational use of the technologies.At every stage, there will be continuous evaluation as well assummative evaluation of their knowledge, skill, attitude andcommitment to the science and community.Externship trainingstarting from collegehospital to regional and thento peripheral hospitals(CHCs) will follow this.Through this process oflearning, they will attainconfidence and self-respect,because they will be able tosolve problems with ingenuityusing available resources.In this approach, theteaching is taken outside thefour walls of college and hospital to the community itself, fromonly diseased persons to the healthy people. He will developbetter understanding of the socio-economic and culturalsituation where he is supposed to work.The academic faculty is constituted with core and non-coreteachers. The doctors, who are actuallyserving the community, are taken in asnon-core teachers. They will alsocontribute to the health movementwhen they will understand that they areplaying a vital role in planning andimplementing an optimum health caredelivery for the people.As both the teachers and students are learning appropriatetechnology from direct exposure to the community itself, theywill be proud to feel themselves as part of the total endeavour.These doctors will imbibe the spirit of service and dedication,who will be an asset to the peoples' health movement optimisingpeoples health care.It is encouraging to note that Medical Council of India(MCI) has accepted this proposal. Government of India is alsoexpected to accept it. Introduction of this innovative medicalThe approach wouldbe one of integrated,problem-solving andcommunity-orientedmedical educationeducation will definitely produce better doctors, capable ofserving the people and leading a people-oriented healthmovement.Orientation Of TeachersTo quote Gilbert, "Teaching is nothing but an interactionbetween teachers and students under teachers' responsibility inorder to bring about desirable changes in the students' behaviour."The purpose of teaching is acknowledged as to help thestudents acquire knowledge,retain and use it, to understand,analyse, synthesise andevaluate, achieve skills,establish habits developattitude. To accomplish this,the steps of teaching approachesas identified by Abrahamsonare---• Talk to students• Talk with students• Let them talk together• Show students how• Supervise them• Provide them opportunity to practiseThe teachers should learn the method of teaching so thatthey can utilise the technology of education for impartingknowledge and skill of medical sciencesappropriate for health needs of ourcountry. Eventually, they will also becapable of appropriate e methods ofteaching/learning processes andcontinue to enrich it with their everincreasingexperience.Similar understanding of teachingshould also be applicable to teachers of medical sciences. Thisis simply because medical education is a skill-oriented andcompetence based practical science. In medical education,learners are equipped with sufficient intellectual skill, expertisein communication and practical skill simultaneously.Medical teaching was originated as apprenticeship training,wherein the students used to learn through close association ofteachers, assisting them and taking care of patients, preparingdrugs and appliances under his guidance and supervision.THE INDIA ECONOMY REVIEW31

Reliving TheGreatIndianDreamThus, the lifestyle of teachers, their understanding of thesubjects, skills, professional manners and competence aretraditionally the role model to the pupils. The dedication ofthe teachers, his ability, art of communication and socialcommitment is essentially the attraction to the studentcommunities. On the other hand, the students are on thereceivers' end. This quality of the students in the process oflearning should be totally dependent on quidance of the quideshould be cultivated. So, while selecting the students byassessing their aptitude and merit, the role of general education,background socio-economic, cultural environmentshould also be understood by the teachers.India is the foremost ancient country, which has institutionalisedmedicine by elevating it from embryonic magico-religiousform. These indigenous institutions, mostly by personalendeavour, could not thrive because of the conservativeattitude of the principal promoter andtheir followers. The absence of royalpatronage eventually led to its stagnationand subsequent decay or perversions.Meanwhile, the industrialrevolution in the western world openedup a broad horizon of scientific developmentof various fields. The understandingof human biology and pathology, discovery of causativeagents in quick succession, invention of specific therapy anddiagnostic technology have unmasked many mysteries of illhealth and lessened many miseries of human life. Consequently,medical education also became complicated, elaboratedand speciality oriented sophistication. Tele-commercialinterest has provided more financial aids to the medicalThe doctors, who areactually serving thecommunity, are taken inas part of the non-coreteaching communityscientists for their sophisticated discoveries. These furtherencouraged discovery of newer diagnostic and therapeuticappliances, innovations and precisions in medical practice.This development has influenced the doctor-client relationship;the psychological and emotional interaction has graduallywaned. The thrust of rapid commercialisation andconsumerism has affected both medical service and medicaleducation also. In this situation, the developing countries, theancient country like India in particular, are in a crossroad.Both indigenous, traditional and western system of careco-exists in our country. The traditional mode of medicaleducation still exist. The impact of western medicine andimposition of modern gadget assisted medical education.Mimicking the western system has put India in difficultsituation. The commercial interest promotes financial assistancefor sophisticated discoveries by medical scientists. Theseencouraged discovery of new drugs, diagnostic and therapeuticappliances, for precision in medical service. This approachhas made the interventions narrowed down to personal care,with resultant stakeholder client relationship of single understanding.Any breach of expected return, quite possibly, maylead to dissatisfaction, mistrust and disharmony. Thus, theresultant relationship became cash-based; its psychologicaland emotional bondage/links had eventually waned near tonon-existence. Medical education is no exception.Quite obviously, the thrust of consumerism and commercialisationhas readily formulaised the medical educationsystem to nurture and develop priority of health care in thecommercial market. The large institute of industrialisedcountries, where there is relatively lessneed of improved quality of teaching/learning material because there is nostaff shortage as well as most requirementscan be met from their ownresources, still drawing enough technologicalresources for preparation ofteaching materials, especially audiovisualaids of rewarding quality which are still recognised asmost glamorous and potentially useful educational aid. But,the situation is quite different in most of the developingcountries where more health manpower production is animmediate and urgent need. Paradoxically, resources as well asexpertise in preparation and correct use of audio-visual aidsare very limited in these countries (WHO, 1974).32 THE IIPM THINK TANK

P OLICY PERSPECTIVESSelection of StudentsBlock/Rural HospitalDist./Sub Div. HospitalMedical College6 Months1 Year3 YearsPracticeServicePost-GraduationRotationalInternshipThis scheme was subsequently modified by MCI--Selection of StudentsModule Based TeachingIn Block & RHRegional HospitalsDist./Sub-Div.Medical CollegeSubject-wise training1 1/2 YearsSystem-basedTraining1 1/2 Year byCore-Group TeachersIdentification& Training ofTeachersNon-Core groupNon-Core-GroupHowever, it is quite evident that teaching/learning materialcan not be considered in isolation, it is a part of whole educationalprocess. So, its utility has to be judged in the context ofits content, level of learners and experiences and feeling ofteachers. Looking towards the limitation of lack of resources,non-availability and high cost of supervision, quality teaching/learning materials, measuring its effectiveness by appraisal,validation and evaluation process is of paramount importance.However, among wide varieties of teaching methods nowmade available to us, including an ever-increasing array ofseemingly useless gadgets, both visual and audio-visual,lecture discussions are still the most dominant mode ofinstruction. Evidences suggest that lecture is likely to remainas one of the principal methods of instruction in school ofmedical sciences. Nonetheless, the use of lecture is stillcriticised and defended. Most vital criticism against lecture isthat the learners are passive participants. It does not placestudents in active situation of learning; it is less likely to beeffective. While confidently establishing the utility of lecturemethod, Bughman (1978) emphasised the importance ofthoughtful preparation and easy flow of communication toOne preceptor& three aidesinvolve the students' activity in the process.Active learning, so achieved, resolves the mainfocus of criticism against lecture method ofteaching. More importantly, it is the personal involvementand attitude of teachers, which is more decisive factor to makea lecture effective and increase audiences' response. Finally,active learning in field practice area leads to sustained opportunityto practise the performance objectives as similar aspossible to the job situation.ConclusionToday the social dynamics, economic order, the dimensions ofhealth risks and the value judgement all demand for newdefinition of quality of education in health sciences. The twinneeds of accelerating human resources in public health andtargeting their education for achieving the community healthgoals prompt us for social consciousness as the commondenominator for measuring the responsiveness of education inhealth sciences. Health oriented general education, coupledwith community centred, problem solving, multi-dimensionalprofessional education are emerging as most appropriateresponse to cope up with these changes.(The author lives in Kolkotta and can be contacted at hise-mail address: gouripada_dutta@rediffmail.com)THE INDIA ECONOMY REVIEW33

Reliving TheGreatIndianDreamThe historic Silk Route betweenIndia and China will be openedshortly to link Sikkim and Tibetambitious agenda to forge bilateral, regional and multilateraltrade pacts with a host of countries and trading blocs as a newpillar of its economic diplomacy and globalisation drive. TheUruguay Round took eight years to settle. The Doha Roundhas already taken four. When the WTO process reaches itsculmination, perhaps in the next 15 years or so, regional tradepacts will be redundant. Butthat is a long way off. In themeantime, many countries inthe world have been formingregional trade and economicalliances and signing FreeTrade Agreement (FTA) and Preferential Trade Agreement(PTA) with other countries and trade groups, for market accessand greater economic clout. India has also started pursuing asimilar strategy. “Countries, developed and developing, look toregional economic integration as a means of strengtheningtheir international competitiveness and as an engine of economicgrowth in recent years," Manmohan Singh said in alecture in November 2005. "The new-found interest in regionalarrangements is based not just on trade promotion but onexploiting the potential of efficiency-seeking restructuring ofindustry on a pan-regional basis," he added. 4 ManmohanSingh’s emphasis is based on concrete evidence - as has beenrevealed by the statisticscompiled by India’s commerceministry from sources such asthe World Bank and theUnited Nations Conferenceon Trade and Development(Unctad). India has already signed a FTA with Sri Lanka,which has become a successful trendsetter. Now we are movingto the next stage to sign a comprehensive Economic CooperationAgreement. PTA with Afghanistan has already beensigned. It has started negotiations for FTA with Bangladesh. ASouth Asian Free Trade Area (SAFTA) was signed in 2004.36 THE IIPM THINK TANK

P OLICYPERSPECTIVESThere are over 200 operationalregional trade agreements--- morethan the number of economiesIndia is on the way of conducting trade and reaching economicagreements with China. It had already signed economiccooperation with the Gulf Cooperation Council, and a tradeagreement with Iran. Framework agreements had been signedwith the South African Customs Union and with the Andeancommunity in South America, and these should lead to freetrade agreements.As part of our “Look East”policy, we have concludednegotiations for FTA withThailand, a ComprehensiveEconomic CooperationAgreement (CECA) withSingapore. FTA negotiations are on with ASEAN, even thoughit is taking longer time than was envisaged. From countries inthe Far East to those in Latin America and the EuropeanUnion, India wants to enlarge its trade and economic engagementlike never before with Prime Minister Manmohan Singhsetting the agenda for such trade pacts. Prime Minister ManmohanSingh's proposal for the long-term creation of an "AsianEconomic Community", with Greater East Asia as also India asthe nucleus, has been received well in ASEAN circles. And theplanned ASEAN-India FTA is being seen in South-East Asia asa test of New Delhi's political will to attain this objective. Ourinfluence in South and South East Asia will grow only if weshow a measure of self-confidence and integrate our markets tothese countries for trade and investment. We could dealbilaterally with individual ASEAN members and with ASEANitself to achieve these objectives. Economic Cooperationbetween Bangladesh, India, Myanmar, Sri Lanka and Thailand(BIMST-EC) is progressing. India became a policy dialoguepartner of OECD way back in 1996 and in the following yearbecame a leading member of Indian Ocean Rim-Associationfor Regional Cooperation (IOR-ARC) launched in Mauritius.All these would lead to sharp reduction in tariffs for both sides.India realises that free trade pacts are a sine qua non for thecountry’s economic progress and the process has been given anew thrust by the Trade and Economic Relations Committee(TERC) with the prime minister as its chairman. India hasformed a strategic trilateral group IBSA (India, Brazil andSouth Africa) with the two emerging powers of Africa andLatin America to promote economic, commercial and politicalcooperation and to advance our common interests globally. Tofacilitate and complement the trade flows, India is now focusingon integration of rail and road linkages in our extendedneighborhood. India-Myanmar – Thailand trilateral highwayand Delhi – Hanoi railway are projects which will bringlong-term economic benefits. It has started building a transportcorridor through Iran to Afghanistan in a bid to overcome thepolitical barrier that Pakistan has been to regional economicintegration. Iran will also become the gateway to Russia andEurope through the North-South Corridor that is beingdeveloped. The historic SilkRoute between India andChina will be opened shortlyto link Sikkim and Tibet. SriLanka has been interested in building a land bridge to Indiathat can move people and goods. At the same time, transportlinks with Nepal and Bangladesh are in an awful shape anddemand immediate political attention. Energy security considerationshave moved India from being a mere buyer of petro-THE INDIA ECONOMY REVIEW37

P OLICYPERSPECTIVESeconomic division, which is today a de facto "department"composed of four divisions, and the installation of effectiveembassy networks) and on process (the integration of economicsinto bilateral diplomacy).In the era of economic reform, economic diplomacy has asignificant contributory role that deserves to be developed to itsfullest potential. 6 There is, therefore, an urgent need forrefining our economic diplomacy so that it can perform betterand be more effective. Economic diplomacy has been a keycomponent of India's foreign policy. Apart from long establishedDivisions in the Ministry to deal with economic issues, anInvestment Publicity Unit (IPU) was specifically set up in 1990with a view to disseminating economic information andcoordinating the economic and commercial activities of IndianMissions abroad in the light ofthe recent economic reformsunderway in the country. Oneaspect of economic diplomacyhas been the promotion ofSouth-South Cooperation.The Indian Economic and Technical Cooperation (IETC)Program was established in 1964. Today it extends to 110countries in Asia, East Europe, Africa and Latin America andfacilitates the training of as many as 1000 foreign candidates inIndian institutions each year. The 1990s did, however, see a seaThe strategic value of economicdiplomacy is yet to spread acrossand filter down to operational levelchange in our diplomatic priorities and in the functioning ofour missions abroad. New dimensions were, however, added tothe economic priorities of Indian diplomatic missions in thepost-liberalisation era. Embassies and consulates also becameactively involved in investment promotion work as India soughtto develop an investment friendly approach to the world. Boththe then Prime Minister P.V. Narasimha Rao and FinanceMinister Manmohan Singh deserve major credit for themanner and speed with which they brought about this seachange in the functioning of Indian missions abroad. SouthBlock is now well conditioned to play a key role in promotingour economic interests in a globalized world economic order.One of the MEA’s long-standing problems has been its turfbattle with the economic ministries. The MEA has traditionallyresisted the entry of non-IndianForeign Service personnel,fearing that this would lead todemands for postings abroadby personnel inducted fromother ministries. Yet the MEAneeds access to talent from wider sources, especially in theeconomic arena. A simple way to square the circle would be to"pre-select" officials who are to go abroad against the handfulof non-IFS posts in missions; these officials would serve in theMEA for two or three years, working in the economic divisionor in territorial divisions that handlesubstantive amounts of economic work.A qualified official at the rank of asenior joint secretary might serve as an"economic adviser". Such in-placementsoffer multiple advantages,integrating the MEA into the networkof ministries, giving access to neededmanpower, and giving non-MEApersonnel abroad better connectionswith their IFS colleagues. One of theobjectives of HR development shouldbe career-planning for officials, toprovide the MEA with a wide range ofin-house expertise at varying levels ofseniority. India's outreach, advocacyand target-pursuit methods for foreigndirect investment harvesting abroadstill largely depends on the initiativesTHE INDIA ECONOMY REVIEW39

Reliving TheGreatIndianDreamof individuals, and need to be institutionalised. The attentiondevoted to economic diplomacy by Indian missions on theground varies, and this is especially true of FDI mobilisation.Both territorial divisions and the economic division needmanpower to monitor the work performed and assist missionsin this area. One simple device would be to entrust to apexbusiness bodies the work of support and mobilisation fordesignated missions, and carry out targeted marketing throughsuch joint actions. 7Even now, the MEA does not have a research institution ofits own. Economic diplomacy in the field needs to be supportedwith research tailored to empirical studies, and focus onpractical ways in which Indian economic diplomacy can beimproved. This calls for a small research institute that could beperhaps linked with the training arm, the Foreign Serviceinstitute. The latest proposal for equipping our Foreign Serviceprobationers to deal with the challenges of economic diplomacyhas come from the Foreign Minister, Pranab Mukherjee,who has suggested sending the probationers to London Schoolof Economics (LSE) and the Massachusetts Institute ofTechnology (MIT) for advanced training on economic issues.While the exposure of the probationers to such prestigiousinstitutions will surely equip them with training and expertise ineconomic diplomacy, it has also some dangers of losing them tomultinational companies due to a huge gap in the salary andother benefits between the government and the private sector,an apprehension expressed by foreign secretary Shiv ShankarMenon, according reports. Decentralisation of power from theCentre to the states is a new feature in our federal structure,reflecting in actions of states such as Andhra Pradesh inexternal borrowings, and in Kerala in the carving out of adistinct tourism destination identity. Other large countriesshow us the way in using the latent power of provincial entitiesin their actions to mobilise FDI, and push exports. The Chineseand several others depute personnel from the foreign ministryto the provinces. This latter idea is doing the rounds in NewDelhi and deserves action. The Ministry of External Affairs andthe Indian Embassies are working in partnership with the otherorgans of the Government and the private sector business ofIndia in advancing our common interests abroad. As a sign ofthis partnership MEA has started the practice of includingbusiness delegations during outgoing and incoming VVIPand Ministerial visits.The objectives of the new Economic Diplomacy call for achange in the mindset of our diplomats who were trained inthe traditional diplomacy. The MEA has therefore startedorienting and retraining our diplomats by directing ourAmbassadors to be proactive in economic and commercialwork and to provide information and assistance to ourexporters. Ambassadors and Commercial Officers arebrought from different regions for face-to-face interactionwith our exporters and export bodies in India from time totime. The MEA is focussing on capacity building for ourdiplomats to equip them to respond to the sophisticatedinternational market place, putting in place arrangements tostrengthen and accelerate information flows between ourmissions abroad, and the government and business andindustry back home. 8 Our Missions have started publishingbusiness guides and market studies and providing businessinformation through their websites. India has set up businessCentres in some of the missions, for use of visiting Indianexporters and delegations. The Indian exporters, business andindustry are invited to avail themselves of the services of ourmissions abroad. MEA has been providing technical assistanceand aid to other developing countries. MEA gives training toabout 3,000 candidates from developing countries every year infields ranging from IT to poultry management. Many of thesetrainees have become brand Ambassadors for India with theirknowledge and admiration of India. Many have becomesuccessful and. As part of India’s economic diplomacy, India isengaging Indians abroad (NRIs) who have become prosperous40 THE IIPM THINK TANK

P OLICYPERSPECTIVESas entrepreneurs and professionals to harness their talents,capital and technology expertise for the development of India.At the same time, India is also seeking opportunities for Indianmanpower in other countries and protecting their interests,where necessary.The Indian Missions are playing a proactive role in openingnew markets and increasing our exports. MEA and the missionsare working with the Commerce Ministry and exportbodies in the Focus – Latin America, Focus-Africa and Focus-CIS programmes for export promotion. The Government isencouraging Indian companies to invest and form joint venturesabroad to take advantage of the opportunities in othercountries. The Indian investment abroad has been increasing.Indian companies have invested in developed markets, such asthe USA, Europe and Australia as well as developing countries,such as China, Brazil, ASEAN and Africa. India has formedJoint Commissions and Joint Business Councils with a numberof countries for promotion of business and economic cooperation.As many as 65 embassies and high commissions and all ofour consulates have commercial wings dedicated to promotingthe country’s economic interests through the promotion ofexports, investments, and technology exchanges.In the backdrop of growing inter-dependence amongstnations, the success of a strategy for faster growth and prosperityof a nation will be determined by new forms of economicdiplomacy that are pressed into service. Sections of the Indianestablishment have begun to see the strategic value of economicdiplomacy but it is yet to spread across and filter down to theoperational level. Much needs to be done to knit togethervarious strands into coordinated diplomacy to project India as arising power.Endnotes1Raymond Saner and Lichia Yiu, International EconomicDiplomacy: Mutations in Post Modern Times, DiscussionPaper on Diplomacy, Netherlands Institute of InternationalRelations. 20012“Globalization is not a phenomenon. It is not just somepassing trend. It is an overarching international systemshaping domestic politics and foreign relations to virtuallyevery country, and we need to understand it as such.” See,Thomas Friedman, The Lexus and the Olive Tree: UnderstandingGlobalization, Harper Collins, 2000 P.73Quoted in The Hindu, 25 September 20024Quoted in B.K.Zutshi, Training Needs for Commercial andEconomic Diplomacy: An Indian case Study, report preparedby CUTS International Jaipur for the Ministry ofCommerce and Industries, Government of India, 20085See “Trade pacts - new pillars in India’s economic diplomacy,”Malayalam Manorama, 6 December 20056Sanjay Baru, Strategic Consequences of India's EconomicPerformance ' Academic Foundation, New Delhi. 2006. ForBaru, diplomacy and foreign policy without economic inputshave no meaning.7See Zutshi, op cit8See Ministry of External Affairs, Government of India,Annual ReportsAdditional Thinking• Raymond Saner and Lichia Yiu, International EconomicDiplomacy: Mutations in Post Modern Times, DiscussionPaper on Diplomacy, Netherlands Institute of InternationalRelations. The Hague, 2001• Thomas Friedman, The Lexus and the Olive Tree: UnderstandingGlobalization, Harper Collins, 2000• Rik Coolsaet, The transformation of Diplomacy at theThreshold of the New Millennium, University of Ghent,Belgium, 1998• G.R.Berridge and Alan James, A Dictionary of Diplomacy,Palgrave, Hampshire, U.K. 2001• Edward Finn, “International Relational Relations in aChanging World: New Diplomacy,” Perceptions, July-August2000, pp. 144-45• C. Raja Mohan, “India’s Economic Diplomacy,” The Hindu,14 August 2003• Suvrokamal Dutta, “Economic Diplomacy: India’s PertinentNeed,” merinews, 5 October 2007• B.K.Zutshi, Training Needs for Commercial and EconomicDiplomacy: An Indian case Study, report prepared by CUTSInternational ,Jaipur, for the Ministry of Commerce andIndustries, Government of India, 2008• Rafiq Dossani and Srnidhi Vijaykumar, “Indian Federalismand the Conduct of Foreign Policy in Border States StateParticipation and Central Accommodation since 1990,”Stanford Journal of International Relations, Winter 2006.(The views expressed in the write-up are personal and does notreflect the official policy or position of organisation. He can bereached at baladas_1@yahoo.co.in).THE INDIA ECONOMY REVIEW41

Reliving TheGreatIndianDreamEconomic Growth,Catch-up Effects AndEconomic Performance :Macroeconomic Perspective On IndiaThe question of why particular nations increase theamount of wealth over time more than other nationshave always been an essential interest of the economists.In 1776, Adam Smith, the father of modern economics,wrote The Wealth of Nations where he, by intuition andmasterful analytical and philosophical insight, set he principlesand framework within which the economic science fuels knowledgecreation. Historically, the theory of economic growth hasbeen a fundamental core of the macroeconomic theory in theanalysis and perspectives of issues of key macroeconomicdisciplines such as output, prices, trade and employment. Overtime, economics has swam away from trivial issues thatpresuppose the static and dynamic analysis as the centerpieceof macroeconomic theory but macroeconomics itself hasremained a scientific coursenot only because it is a notableattempt to explain the issuesthat have been curious to theindividuals for centuries butalso because macroeconomicschools of thought offerdifferent perspectives on theinterrelation between output, prices, trade and employment.The historical evolution of economics has repeatedly produceda body of systemic knowledge that has captured the combinationof normative and positive views on economic issues thatbridge the scientific explanation with experiment and knowledgeablebasis of economic analysis with subjective and empiricallychallenging arguments over a variety of macroeconomicissues. The importance of economic growth is often neglectedJean Baptiste Say had discoveredwhat is referred to as Say's law,according to which supply is thesignal that creates the demandand disinterested among citizens and even professionals thatclaim themselves to be renowned economic analysts. Thepurpose of this article is to entail the essence of modern theoryof economic growth. Also, this article attempts to capture theempirical investigation of India's economic growth prospectsby estimating the catch-up period of real convergence as wellas the importance of economic growth and in the long run.Diversity Of Macroeconomic Schools Of ThoughtThe birth of economics coexisted with the emergence of ideasof how spontaneous forces of supply and demand respond toincentives resulted in constant changes of prices and quantitiesin the classical equilibrium model. The emergence of aclassical school of economics has had a wider impact thateconomic historians assume.A brilliant classical Frencheconomist, Jean Baptiste Sayhad discovered what isreferred to as Say's law,according to which supply isthe signal that creates thedemand. By an orthodoxtheory, demand curve is sloped negatively as there is a negativefunctional relationship between quantity and price. Accordingto Say's law, real wages and prices are determined by flexiblecompetitive markets. In the long run, aggregate demand has nopermanent effect on economic growth. On the other hand,aggregate supply is the key determinant of output growth in thelong run. Classical macroeconomic theory assumed thatmonetary and fiscal policy, the driving forces of aggregate42 THE IIPM THINK TANK

P OLICY PERSPECTIVESRok SprukLibertarian and Macro Economist, SloveniaHoovernomics, have produced a bulwarkof damage to the U.S economy. Forexample, Herbert Hoover signed thefamous Smooth-Hawley act which increasedthe level of protectionism andimposed several hampering trade barriers.In 1933, the stock market had been hit byan ordinary and transitory self-regulatingfinancial shock. The policy response was adeflating decrease of money supply thatresulted in the loss of stability of thebanking sector. The chain reaction continuedin the behavior of stock market andthen the black Tuesday and the GreatDepression began. Thus, it would be afull-fledged mistaken to believe or claimthat the Great Depression was produced bythe instability of the private sector. In fact,the precise analysis and historical economicstudies have shown that the GreatDepression was produced by government'smismanaged and misguided economic policyof government intervention. In 1930s,Keynesian economics became the milestonein the development of macroeconomicthought. John Maynard Keynes claimedthat government can stabilize the businesscycle by countercyclical economic policythrough monetary expansion and fiscalpolicy. Keynes postulated governmentaldemand do not affect output growth simultaneously. The management of the economy in the so-called model of aggregatedemand and aggregate supply according to which outputclassical macroeconomic theory had been used for a longperiod of time. For more than one hundred years, the United can be increased by the expansion of money supply and fiscalStates had no institute of income taxation and government expenditure. Keynesian economists have also argued thatintervention in the economy had been reduced to the minimum.In 1913, President Woodrow Wilson signed an act that economy balanced. Totalitarian economic policies such asrecessions can be avoided and cyclical performance of theimposed federal income tax. Alongside, Federal Reserve Bank Hitler's national-socialist economic agenda, Mussolini'sand Internal Revenue Service had been established. The corporate model of the state and Roosevelt's New Deal weregolden age and the spread of the »bull market« resulted in the based on Keynesian macroeconomic ideas. The Great Depressionwas, of course, stopped by the World War II and also byrelentless growth of prosperity. Aftermath, the U.S. wentthrough a major tax reform known as Harding-Mellon tax cuts. the natural resilience. The beginning of the World War IIOne of the most mistakenly understood periods in economic brought the longest expansion of government spending andhistory is certainly the Great Depression which started in 1933. regulatory control as well as the relentless increase of governmentindebtedness in the share of the GDP. After the President Herbert Hoover and his economic policy known asWorldTHE INDIA ECONOMY REVIEW43

Reliving TheGreatIndianDreamWar II, Keynesian economics governed the economic policy invirtually all Western countries. European countries slidedtowards a full-fledged socialism. Aside from Germany, France,Britain and other European countries introduced hardcoregovernment planning and the nationalization of industries.The economic development had shown the myopic analyticaland empirical nature of Keynesian economics. France faced agrowing public debt, rachitic growth rates and a spiral of agrowing inflation fuled by aggregate demand shocks. In GreatBritain, the economic performance went through miserableoutput growth. Before Margaret Thatcher undertook progrowtheconomic and tax policies, Britain’s top tax rate onpersonal income was 98 percent. The only real savior ofBritain's economy were Margaret Thatcher's pro-growtheconomic reforms that included the financial stability, deregulationof the economy, the privatization of state-ownedindustries and the assurance of effective competition inproduct markets that was distorted by an enormous power oftrade unions. In sooner than a decade, Britain experienced aneconomic revival fueled by market-oriented economic reforms.In a debate with Keynesian economists, Thatcher brought upHayek's The Constitution of Liberty and said: »This is what webelieve. Keynesian economics was defeated in 1970s whenstagflation showed that there is no long-run trade-off betweeninflation and unemployment. Milton Friedman showed that inthe long run, inflation is a monetary phenomenon, driven bythe growth rate of money supply so the only way of a complexmonetary stabilization is the so-called golden rule of monetarypolicy which states that the growth rate of money supply isdetermined in advance. Also, new classical macroeconomistssuch as Thomas Sargent, Robert Lucas and Robert Barroshowed that Keynesian economic policy models are unable tocapture a degree of reliability in macroeconomic policy-making.New classical macroeconomics emphasized rational expectationsand the role of information. The authors have explainedand shown empirically that the so-called Phillips curve whichpostulates the long-run trade-off between inflation andunemployment is seriously questionable because it automaticallyassumes the reliability of economic policy. Contrary toKeynesian beliefs, new classical macroeconomics definedcounter-cyclical economic policy as a source of misperceptions,inefficiencies and as a signal of that distorts rational behavioraldecisions of the agents, competitive and flexible markets drivenby information and formed by rational and adaptive expectations.New classical macroeconomists also showed thateconomic policy should be driven by rules, not by discretionthat fuels distortionary inefficiencies. In the beginning of1980s, supply-side economics entered the market for macroeconomicideas. The guiding principle of supply-side economicswas the proposition that high tax rates on labor supplyand productive behavior in general discourage capital formationsuch as savings and investment and that lower marginal taxrates would not result in the loss of tax revenue partly becauselower tax rates reduce tax evasion and also because an expandedtax base would have a double positive effect: (1) it wouldincrease tax revenue and (2) it would also create a stimulus foreconomic growth. Ronald Reagan and Margaret Thatcherpioneered the supply-side economics. After Warren Hardingand John F. Kennedy, Ronald Reagan imposed the largest taxcuts in the American history. Personal income tax rates werereduced to 16 percent and 28 percent. The centerpiece ofsupply-side economics is the Laffer curve which measures therelationship between tax rates and tax revenue. Empiricalevidence has shown that lower tax rates and reduced governmentspending repeatedly resulted in higher economic growthrates and, as a result of an expanded tax base, higher taxrevenue as well. The opponents of supply-side economics claimthat lower tax rates frequently do not result in higher taxrevenue. In the absence of reduction in government spending,lower tax rates may infuse fiscal deficits that repeatedlyproduce crowding-out effects which under particular realistic44 THE IIPM THINK TANK

P OLICY PERSPECTIVESassumptions result in higher interest rates and lower investmentparticipation. The true supply-side effect has been seenin Iceland where economic policymakers reduced corporatetax rates from 50 percent in 1985 to 18 percent in 2002. Theeffect of the reduction in government spending was a dramaticrise in tax revenue which increased from 0.9 percent of theGDP in 1985 to 1.5 percent of the GDP in 2002. After 1991,supply-side economics has become the milestone of economicpolicy in transition countries. In early 1990s, Mart Laar,former Estonian prime minister and free-market reformleader, introduced pro-growth economic and tax reforms suchas the introduction of flat-rated income tax, the elimination ofbarriers to international trade, the rule of law and the deregulationof product markets.Following the introduction ofreforms, Estonian economyexperienced robust outputgrowth rates. A relativecomparison of Estonia andother transition countriesconfirms Estonia’s acceleratedconvergence of purchasing power parity and output percapita. In 1991, Slovenia emerged as the wealthiest formercommunist country. Measuring the development gap betweenSlovenia and Estonia, Slovenia had a relative advantage of35-40 years ahead of Estonia. Throughout the transition,Slovenia’s economic policy pursued gradualistic approach andconsequently low output growth, high inflation rate and theNew classical macroeconomicsshowed that economic policymust be driven by rules, not bydiscretion that fuels inefficienciesregulation of economy reduced growth expectations. On theother hand, Estonia’s economic policy pursued shock therapythat at first resulted in dramatic output decline but later outputgrew dramatically on a stable and sustainable trajectory. Thus,in 2007, the development gap between Slovenia and Estoniahad been reduced on the level of 12-13 years. Today, the courseof macroeconomic policy in the world is reflected in the light offinancial turmoil and housing market crisis that began in theU.S. Recent policy approach by the Federal Reserve where thelatter is committed to interest rate cuts shows that Keynesianeconomics is still an influential policy measure. Looking to thefuture, periodic interest rate cuts based on monetary expansionenabled by international reserves of the U.S dollars, areincreasing a probability ofdeflation trap such as theJapanese economy experiencedin 1990s. Also, fightingthe recession by the models ofaggregate expenditure andIS-LM model is questionableand it entails several empiricaldrawbacks. Reducing the interest rate in the period of outputdecline has serious negative effects on output growth in thefuture. In the short run, the reduction in the interest rateconducted by the central bank may infuse the increase ininvestment but on the other hand increased demand forliquidity leads to higher interest rate and, further, to lowerinvestment activity in the future. The counterweight ofThe Effect Of Money Supply and OutputiLM-1LM-2i MS-1 MS-2PASi-1i-1P-2i-2i-2P-1AD-2ISLAD-1Y-1Y-2Lower interest rate increases the amount ofmoney supply in the economyYM-1M-2The expansion of money supplyincreases liquidity demandMY-1Y-2Increased aggregate demand resultin higher price level and rachitic orzero output growth rateYTHE INDIA ECONOMY REVIEW45

Reliving TheGreatIndianDreamexpansionary monetary policy is shown in Picture No.1. Whenthe central bank artificially reduces the interest rate, theamount of money supply is increased. Also, an expandedmoney supply boosts the demand for liquidity. The final effecton output is a zero-sum game. Given the potential output, asudden increase in aggregate demand does not yield anincrease in output. In thegraph showing the expansionaryeffects of monetary policyin the IS-LM model, Y is theoutput, i is the interest rateand M is the money supply.The next section of thearticle makes an insight intothe theory of economic growth in the light of open marketsregarding the importance of credible non-discretionaryeconomic policy from globalization’s perspective.Theoretical Aspects Of Economic GrowthAs an emerging market economy, India has been experiencingrobust continued output growth rates. The future growthestimates by International Monetary Fund foresee a continuedexpansion of India’s economy above the threshold of sixpercent which gives India a solid basis for real convergence thatThe essence of institutions isoften not captured. Douglass C.North explained the essentiality ofinstitutions for first time in 1993correlates with the growth of output. Besides China, Russiaand Brazil, India’s economy is estimated to become of themajor world economic players in the future considering theshare of India’s economy in world GDP. The most intuitive andchallenging question in the theory of economic growth is howto ensure a solid basis through which India’s economy couldattain sustainable annual output growth rates. The historicalexperience has shown that the old approach where governmentdirects economic development has been abandoned by anoverleaping majority of credible economic policies in theworld. When Bretton-Wood system of fixed exchange rates wasended and after the European economic integration reachedthe criteria that enabled the establishment of a monetaryunion, economic policies around the world decided to stopmanaging the exchange rate and switch towards a free-floatingexchange rate regime. Exchange rate policy is often a vulnerablesource of discretionary policy manipulation. Of course,each variant of exchange rate regime has its own advantagesand disadvantages. Fixed exchange rate eliminates particularsources of macroeconomic risk as currency pegging of countryA is fixed relative to the currency of country B. In the long run,free-floating exchange rate regime is the only viable option thatgives a solid foundation of economic growth by letting thecurrency to fluctuate freely in the world currency market.Regarding the importance of economic growth it is essentialfor a credible and non-discretionary economic policy tounderstand the dynamics ofeconomic growth frommacroeconomic perspective.In the long run, productivityis the only engine of thegrowth of the standard ofliving. Aside from productivitymeasures, technology, capitalcreation such as savings, investment and human capitalcreation, know-how and market-oriented institutions areamong the essential engines of growth in the long run. Theessence of institutions is often not captured. Douglass C.North, the Nobel-winning economist in 1993, explained theessentiality of institutions by comparing the historical economicdevelopment of the Western world and third-world countries.A particular learnable lesson that India’s economic policymakerscan learn and absorb into the decisional course of economicpolicy is that the inability of developing effective institutions46 THE IIPM THINK TANK

P OLICY PERSPECTIVESwith low transaction costs is the primary reason for historicaleconomic stagnation of third-world countries.The essential question of the challenge of macroeconomicpolicy is how to respond to macroeconomic shocks through themeans of economic policy. The taxonomy of macroeconomicshocks divides the shocks into three types with a clear guidelinefor macroeconomic policy in terms of policy responses toparticular macroeconomic shocks.Demand-Side ShocksUsing the AD-AS model of general equilibrium, when fiscalpolicymakers increase government spending, the sequentialeffect is a robust output expansion at the cost of higherinflation that undermines rational decision-making of householdsand companies, causing a disallocating effect. From anempirical perspective, the instability of prices is the mostobvious damage caused by the lack of credibility in macroeconomicpolicy. The macroeconomic policy response to aggregatedemand shocks is the neutralization of the shock byraising the interest rate so that the persistence of the shockdoes not cause additional pressures on the rate of inflation.The real danger that endangers the macroeconomic stabilityand the complexity of the stabilization policy is a Keynesiantrap in which periodic increases of aggregate demand resultedin a higher prolonged inflation rate that disables the credibilityof macroeconomic policy as well as it impairs the macroeconomicstabilization of anopen-market economy.Cost-Push ShocksWhen a sudden cost-pushshock occurs, such as anexogenous shock in the worldmarket that affects theeconomy, macroeconomic policy frequently attempts tocompensate the shock damage either by monetary expansionand exchange rate depreciation or even by increasing theaggregate demand. However, any kind of policy response toexogenous shock is roughly inefficient since exogenous shocksare transitory and not permanent. Neither exchange ratedepreciation nor monetary expansion in terms of suddeninterest rate cuts that could boost the anticipated investmentare far away from being efficient, so the approach of non-intervention,restrictive fiscal policy, pro-growth policy inputs andEmpirically, instability of pricesis the most obvious damagecaused by the lack of credibility inmacroeconomic policyself-resilience is certainly the most credible macroeconomicpolicy response that does not distort growth prospects in thelong run.Productivity ShocksProductivity shocks expand the potential output and have asignificantly positive effect on prices and welfare. In microeconomicterms, productivity shock such as an increased productivityemerging from technological management of the companyresults in the process of the economies of scale whereaverage and marginal cost of production decline over time,creating an increased quantity of supply and bringing-up lowerprice per unit of product. In this case, macroeconomic policyshould not aim to increase aggregate demand but to stimulatethe growth of potential output by a credible and non-discretionaryrule-based monetary and fiscal policy. It is oftenmisunderstood when particular experts claim that productivityshocks deserve an anticipatory policy response through theIS-LM model. Any kind of such measures does certainly notstimulate potential output but causes disallocating andinefficient effects in partial equilibrium models in the decisionsof companies and households. In the long run, the outcome ofinterventionist macroeconomic policy regarding productivityshocks is a zero-sum game resulted in the loss of macroeconomicstability and policy credibility.India’s Long-RunGrowth: An EmpiricalPerspectiveOne of the most importantand certainly challengingquestions in macroeconomictheory and policy is how longmay it take for particularcountry to catch-up with the most developed countries in termsof per capita purchasing power parity. For example, an intuitivequestion is how long it will take for India to close the developmentgap and catch-up period relative to developed Westernnations. To tackle this question, I set the empirical model ofthe catch-up effects that shows estimated output growth ratesconsidering the length of the period of catch-up effects.Equation (1) shows the empirical relationship between time,economic growth and income per capita. T is the time in whichIndia will attain the income per capita level of developedTHE INDIA ECONOMY REVIEW47

Reliving TheGreatIndianDreamChart 1 : India's Estimated Output Growth Rates Considering Catch-Up Time PeriodsCountryGDP p.c(PPP)inUSDGrowthRate(%)OUTPUTCOEFFI-CIENTCatch-up Time Period(Years) Estimated Annual OutputGrowth Rate (%)50 60 70 50 60 70Luxembourg 59560 2.900 1.02900 0.087223 0.077296 0.07026 8.722 7.730 7.026United States 44260 2.767 1.02767 0.077296 0.070592 0.064353 7.939 7.059 6.435Norway 43820 2.433 1.02433 0.07939 0.066935 0.060742 7.567 6.694 6.074Switzerland 40930 1.670 1.01670 0.066198 0.057784 0.051815 6.620 5.778 5.182Iceland 37580 2.500 1.02500 0.073068 0.064903 0.059109 7.307 6.490 5.911Denmark 36460 2.067 1.02067 0.067889 0.05987 0.054179 6.789 5.987 5.418Ireland 35900 2.850 1.02850 0.075748 0.067725 0.062031 7.575 6.773 6.203United Kingdom 35180 2.200 1.02200 0.068516 0.060619 0.055014 6.852 6.062 5.501Finland 35150 2.330 1.02330 0.069857 0.061953 0.056343 6.986 6.195 5.634Austria 35130 2.330 1.02333 0.069876 0.061974 0.056365 6.988 6.197 5.637Belgium 35090 2.833 1.01833 0.064625 0.056765 0.051187 6.462 5.677 5.119Sweden 35070 2.433 1.02433 0.070885 0.062982 0.057372 7.089 6.298 5.737Canada 34610 2.567 1.02567 0.072003 0.064138 0.058555 7.200 6.414 5.856Australia 34060 2.933 1.02933 0.075484 0.06765 0.06209 7.548 6.765 6.209France 33740 2.000 1.02000 0.065534 0.057806 0.052321 6.553 5.781 5.232Japan 33150 1.467 1.01467 0.059592 0.05197 0.046558 5.959 5.197 4.656Germany 31830 2.200 1.02200 0.06638 0.058852 0.053507 6.638 5.885 5.351Italy 30550 1.667 1.01667 0.059948 0.052609 0.047398 5.995 5.261 4.740Spain 28030 2.467 1.02467 0.066451 0.059371 0.054343 6.645 5.937 5.434Greece 24560 2.467 1.02467 0.063636 0.05704 0.052354 6.364 5.704 5.235Slovenia 23970 3.000 1.03000 0.068649 0.062108 0.05746 6.865 6.211 5.746India 3800 7.467 1.07467* Source: Author's Own CalculationWestern nations. Y is the income per capita and ΔY is thegrowth of output.ΔY India= ((Y x/Y India) (1/t) )(1+ΔY x)-1 (1)Chart No.1 shows the results from (1). Purchasing power paritydata have been obtained from the World Bank and outputgrowth rates have been obtained from Economist IntelligenceUnit and then recalculated on the average basis. Using themodel as a practical tool for macroeconomic policy perspective,the model enables to see how growth rate change overtime when the catch-up period is also changed. The modelapplied to the perspective of economic growth in India,includes three time periods within which India may attain theprocess of real convergence relative to developed Westernnations: 50 years, 60 years and 70 years. An additional challengeis to build the model of catch-up growth perspective inreduced time period, for example, how fast should India’seconomy grow to come on par with Western economies in 35years for instance. Required output growth rate is an endogenousvariable while other parameters are exogenous variablesas they enter into the model to derive a particular result.ConclusionAs an emerging market economy, India’s long run economicgrowth rate depends on the growth of productivity as theforerunning engine of growth in the evolutionary process ofeconomic growth. If India’s economic growth rate is increased48 THE IIPM THINK TANK

P OLICY PERSPECTIVESfrom 6.2 percent to 7.5 percent, then India would catch-upIreland’s level of income per capita in 50 years instead of 70years. Minimal differences in output growth rates may result indecades of economic stagnation. The course an goals set by theeconomic policy is essential to the performance of the Indianeconomy in the long run. Economic history has repeatedlygiven valuable lessons, showing that government interventionand protectionism are not an answer to the vicious circle ofeconomic stagnation. On the other hand, openness to globalization,free trade, open markets, macroeconomic stabilizationand pro-growth economic policy lead to greater prosperity andhigher standard of living. Using monetary and fiscal policy as asource of discretion such as famous counter-cyclical economicpolicy is a zero-sum game. Nevertheless, the essential questionis not how to increase aggregate demand but how to stimulatethe growth of potential output through growth-oriented andmarket-friendly economic policy. Certainly, higher economicgrowth rate requires macroeconomic stabilization. Whengovernment spending is increased, the effect needs to beneutralized by an increase in the rate of interest to avoidinflationary pressures. Also, the quality of macroeconomic andmicroeconomic environment is an important measure of thecredibility of economic policy. Thus, the aim of economicpolicy should not be how to pursue government ownership ofenterprises but how to create macroeconomic and microeconomicenvironment that is friendly to productive behavior suchas labor supply, savings, investment and entrepreneurship.Only first-class business and legal environment, pro-growtheconomic and tax policy and commitment to credibility inmacroeconomic policy can result in the continued sustainablerate of output growth that would cut the development gapbetween India and developed Western economies.References And Additional Thinking• Acemoglu, D. (2007), Political Economy of Institutions andDevelopment, Lecture Notes, Department of Economics,Massachusettes Institute of Technology• Alesina A. (2003), The Size of Countries: Does It Matter?,Journal of the European Economic Association, SchumpeterLecture, June 2003, 301-16.• Ahuja, H.L. (2000), Macroeconomics: Theory and Policy,S. Chand & Company, New Delhi• Barro, R.J. (1997), Macroeconomics, Fifth Edition, MITPress, Cambridge Massachusettes• Barro, R.J. (1994), Democracy and Growth, NBER WorkingPaper No. 4909• Barro, R.J. and V. Grilli (1994), European Macroeconomics,Macmillan, London• Bassanini, A. in S. Scarpetta (2001), The Driving Forces ofEconomic Growth: Panel Data Evidence for the OECDCountries, OECD Economic Studies No. 33• Coase, R. (1960), The Problem of the Social Cost, Journalof Law and Economics• Djankov S., R. La Porta, F. Lopez de Silanes, and A.Shleifer (2000): The Regulation of Entry, DiscussionPaper No. 1904, Harvard Institute of Economic Research• Friedman, M. and Jacobson-Schwartz A. (1971), MonetaryHistory of the United States, 1860-1960, PrincetonUniversity Press• Glaeser, E.L., R. La Porta, F. Lopez de Silanes and A.Schleifer (2004), Do Institutions Cause Growth, NBERWorking Paper No. W10568• Hayek, F.A. (1937), Economics and Knowledge, Economica• Hill K., Hoffman D. and Hoffman M.K. (2005), Lessonsfrom the Irish Miracle, W.P. Carey School of Business• Kaufmann, D. and A. Kraay (2002), Growth withoutGovernance, WB Policy Research Working Paper No.2928, World Bank• Krugman P. (1980), Scale Economies, Product Differentiationand the Pattern of Trade, American Economic Review70(5), pp. 950-959• Kuznets, S. (1971), Economic Growth of Nations, BelknapPress, Harvard University• Mankiw G. and Reis R. (2006), What Measure of InflationShould the Central Bank Target, Vol. 1, No. 5, pp. 1058-1086• North, D. (1990), Institutional, Institutional Performanceand Economic Change, Cambridge University Press• Tullock, G. (2005), Bureaucracy, The Selected Works ofGordon Tullock, Liberty Fund Inc• Tanzi, V. (1997), Corruption, Governmental Activities andPolicy Instruments: A Brief Review of the Main Issues,mimeo• Samuelson P. and W. Nordhaus (1998), Economics,Sixteenth Edition, McGraw-Hill• Smith, A. (1776), The Wealth of Nations, Adam SmithInstitute, mimeoTHE INDIA ECONOMY REVIEW49

Time For NewThinking On SlumsCaroline BoinDirector, Environment Programme, International Policy Network, London50 THE IIPM THINK TANK

P OLICY PERSPECTIVESIndia’s slum population has doubled to 61.8 million in 20years. Globally, the United Nations forecasts that morethan half the world’s population will live in cities by nextyear. UN-HABITAT, the UN agency for housing the poor, hasrecently called for more plans to “stabilise the unplanned andchaotic aspects of urban growth.” In the same spirit, India’sMinister for Housing and Urban Poverty Alleviation, KumariSelja recently estimated that it would cost four trillion rupees(£49 billion) to build the estimated 24 million units needed torehouse India's slum-dwellers. 4 She called upon the governmentto address the problem seriously, unveiling several plansaimed at ameliorating slum conditions. But grandiose publicbuilding schemes simply ignore the underlying causes andproblems of “slum sprawl” — and will probably make themworse. The root cause of slums in India and around the world isgovernment mismanagement – in particular the failure torecognise property rights.UN-HABITAT says that the five principal characteristics of aslum are “lack of durable housing, insufficient living area, lackof access to clean water, inadequate sanitation and insecuretenure.” 5 Recent estimates put the world population of slumsclose to one billion and growing. India – with other notableexamples such as Nigeria, Kenya and Brazil – has gainedattention from the international community with an estimated52,000 urban slums, accommodating about eight millionhouseholds (14 per cent of total Indian urban households). 6 Theissue has especially gained prominence amongst poverty-reductioncampaigners and agencies over the past decade, who aredeeply concerned about the squalid and unhealthy livingconditions endured by slum-dwellers.Although many people move to slums in cities as a way ofescaping rural poverty, it seems that things might not be so goodwhen they arrive. The UN-HABITAT State of the World’s CitiesReport 2006-7 concludes that there are “remarkable similaritiesbetween slums and rural areas in health, education, employmentand mortality” (UN-HABITAT 2006). As the report putsit, “Slum dwellers in developing countries are as badly off if notworse off than their rural relatives.”There are however crucial differences between life for therural poor and life for the urban poor. Causes of mortality anddiseases are different between the two areas: malnourishment,for example, affects rural areas slightly more than urban slumareas. 7 It is true that poverty is one of the defining characteristicsof mega-cities or slums. More and more people who moveto urban areas are now affected by contaminated water, absentor poor sanitation and the spread of diseases, notably AIDS.However, this approach overlooks an important factor. It failsto recognise and understand the motivation of those whomigrate to urban areas. In India’s - and most of the world’s -slums, most residents come from rural areas in search of workand material prosperity. They seek to escape a life of povertyand drudgery in subsistence agriculture – and the recentdecrease in the growth of India’s agriculture sector and its sharein total GDP will only accelerate the current trend of urbanisation.8 Despite equally-low living-standards in poor rural areasTHE INDIA ECONOMY REVIEW51

Reliving TheGreatIndianDreamand slums, slums offer immediate opportunities for families tolift themselves out of poverty. Most new employment opportunitiesare created in cities, especially in developing countries asthese move away from an economy based on agriculture to oneIt is estimated that DDA hasover 50,000 acres of primemetropolitan land at its disposalbased on industry (and later services). Furthermore, over thelong term, such economic opportunities will add up to betterliving conditions and improved health.Rapid urbanisation may worsen conditions for arrivingindividuals and the slum communities at first. However, SimonKuznets – American economist and Nobel Prize winner –showed how workers migrating from rural to urban areas canbenefit from great economic and social opportunities. Ifurbanisation and industrialisation cause social inequalities todeepen in the short-run, these eventually decrease over time,leaving all sections of society better off.Kibera- Dharavi – One Bad Solution Solves All?Two of the world’s largest slums -- Dharavi in Mumbai andKibera in Nairobi – shed some light on how governments havefailed to both stop the creation ofslums and prevent their growth. Bothslums are estimated to have anywherebetween 5,00,000 and 1.2 millioninhabitants.Kibera was once a forest, Dharavi aswamp. The former was originallyformed by “Nubian soldiers of thedemobilised arms of British EastAfrica” post-WWII 9 , while Dharavigrew from a fishing village. Over time– and for contrasting reasons - bothareas grew to represent an opportunityfor those in search of jobs and a betterlife, and once-temporary sheltersbecame permanent residences. Today,both slums are on the doorstep ofcities booming with economic growthand employment opportunities.Neither the Kenyan nor Indian governments did anythingpositive to address the steady enlargement of these slum townsin fact, their interventions have tended to exacerbate theproblem. The growth of Kibera can largely be traced back togovernment expropriation of land for the benefit of the rulingelite. Former President Daniel Arap Moi and his circle annexedlarge parcels of land in Nairobi for themselves, forcing the largenumbers of displaced residents to squat in what is today knownas Kibera. 10 Indian authorities repeated a pattern, in which theyignored, tried to displace or remove the slum dwellers, and thenbribe them with certain “privileges” such as the vote – only torepeat the cycle. 11 The experiences of Kibera’s and Dharavi’sslum dwellers with government authorities have been one offear, corruption or neglect. It isn’t hard to understand, then,why the inhabitants of both slums are distrustful of recentlyproposed regeneration and rehousing plans.Kenyan President Kibaki plans to rehouse Kibera’s residentsin 14 gigantic apartment blocks and 770 housing units. WhileKibaki proposes to do this with $12 billion of aid money,Dharavi will soon be overhauled by a private developer in themulti-billion dollar (Rs. 9,250 crore) Dharavi RedevelopmentProject (DRP). Slum dweller associations fear that a largeamount of land will be up for sale – making the current slumland unaffordable to its residents. And though the governmentpromises that the plan will see 57,000 families rehoused – the52 THE IIPM THINK TANK

P OLICY PERSPECTIVESNational Slum Dwellers Federation arguesthat “the figure of 57,000 houses is way offthe mark”. 12 A widely quoted survey conductedin the early 1990s by the NSDF listedaround 85,000 residential properties inDharavi, discounting separate and homebasedbusiness and industry units – while agovernment survey of the same time counted55,000. 13 Understandably, Dharavi’s residentshave taken issue with the governmentplan to set up luxury apartments and utilitiesthat they will never be able to use - “hospitals,schools, gardens, jogging tracks andeven a golf-driving range”. 14When designed and driven by politiciansand bureaucrats, housing projects of this sortfrequently prove counterproductive orarbitrary, even in wealthy countries withabundant government budgets. Politiciansand bureaucrats have their own grandiosevisions of what an urban space should looklike, and these visions are frequently divorcedfrom the needs of the people who willhave to live there. Forcibly relocating peoplebreaks up existing social networks andcreates disharmony. Zoning laws in theUnited States, for example, have preventedcommunities from changing with the timesand from growing in a harmonious way.Often, housing will be far from new employmentopportunities, shops and social hubs.Industrial zones may be placed in areaswhich businesses will not find convenient touse, leading to urban decay. Land that could otherwise havebeen preserved as parks or nature reserves has to be developedinto residential areas. 15 Road traffic can worsen as people areforced to commute between zones. The result: social disharmonyand an unhappy city.Worse, in countries where the rich have more rights than thepoor and where corruption is entrenched, there is no guaranteethat under-privileged families will be rehoused by the redevelopmentschemes. When land was seized by the government inthe 1980s, 400 flats were built in Kibera – but none went to theslum’s inhabitants. 16 Similarly, India’s slum dweller associationsand civil rights groups have denounced numerous redevelopmentprojects – including the DRP – as the result of corruptdeals between politicians and business developers. 17The Real Causes Of SlumsSuch grand schemes will not solve the problem of slums.Rather, they fit in a long line of misguided policies that havefailed to understand the real causes of slums – and are just likelyto exacerbate the problem.The growth of Indian slums is often rather crudely explainedby the country’s total population growth, as well as the degreeTHE INDIA ECONOMY REVIEW53

Reliving TheGreatIndianDreamof rural to urban migration over the past forty years. India’stotal population has more than doubled over this time, from487,324,000 in 1965 to 1,094,583,000 in 2005. 18 This has beenaccompanied by urbanisation; the urban share of the populationhas increased from 19 per cent in 1965 to 29 per cent in2005. Despite a steady decrease in urban population growthsince the early 1980s, as well as an apparent decrease in totalpopulation growth over recent years, policymakers at all levelsof government continue to fret about population growth and itsattendant effects.Slums and the associated hunger and disease, are actually theresult of poor governance. Bad policies - in particular a lack ofPeruvian economist Hernando deSoto estimates that there is nearly$10 trillion in 'dead capital'clearly defined and tradable property rights - have left peopleunable to rise out of poverty. Property rights are created inorder to resolve competing claims over resources. In order toincentivise people to use resources in the most efficient mannerpossible, they must be well defined, enforceable in an independentcourt of law and transferable. In this way, property rightsare capital; they give people incentives to invest in their landand they give people an asset against which they can borrow,helping them become entrepreneurs. When people own theirland and shelter, they have incentives to improve them becausethey know they will be able to benefit from any such improvements.They are also able to obtain mortgages and credit loans,providing sufficient capital for all sorts of ventures – be it, abusiness opportunity or investing in their family’s education andwellbeing.However, poor countries generally lack well-defined, readilyenforceable property rights. People in poor countries areoppressed by tenure rules which make it difficult for them torent, buy or sell property formally. They have no access tocapital, no opportunities to realise their ideas and ambitions –and therefore no escape route from poverty. Land transactionstypically involve paying large bribes to local officials, who have avested interest in maintaining the status quo. Simply rehousingslum-dwellers in government-owned dwellings – as is beingproposed in both Dharavi and Kibera - would not address thisfundamental point.As Peruvian economist Hernando de Soto has documented,the poor typically do not have secure title to their land: eitherthere is no clear system for titling, or there are all manner ofbureaucratic restrictions on transferring title. 19 As a result, heestimates that there is approximately $10 trillion in “deadcapital” — capital that cannot be realised either by sale or assecurity against loans. Much of the world’s dead capital is inslums that are not formally recognised by city councils, whereresidents do not receive municipal services and cannot formallyown their property.There is no shortage of land in India to justify the creationand condition of slums– rather, uncertainty about the ownershipof transfer of property has created an artificial shortage ofliving space. Meanwhile, restrictions on the free transfer ofproperty in most rural areas inhibit investment and wealthcreation and perpetuate the very lowest levels of subsistencefarming, thereby encouraging urban flight.To add to this problem, planning policies in the cities discour-54 THE IIPM THINK TANK

P OLICY PERSPECTIVESover urban land, which not only limitsland availability but often penalises thepoor. The Delhi Development Authority,for example, controls land use inmuch of the city and has destroyedhomes in numerous districts on thegrounds that they did not comply withits planning rules — essentially forcingpeople to live in slums. And eventhough it is estimated that the DDA has“over 50,000 acres of prime metropolitanland at its disposal,” the authorityperversely blames Delhi’s 2.7 millionslum-inhabitants on unexpectedpopulation growth. 23age building homes for these migrants and encourage thespread of many slums. Government interference in real estatemarkets creates an imbalance between supply and demandforces. Public ownership of land, rent controls, ‘green belts’,restrictions on the sale and transfer of land and restrictionsupon building height reduce the quantity of available accommodation,pushing prices upwards. Governmental interference hasalso meant that private companies are reticent to develop land,or to supply water and electricity facilities. The possibility ofland reappropriation, sectoral nationalisations, price controlsand regulatory uncertainty creates risk, which discourages manyinvestors.Policies such as the Indian Urban Land (Ceiling and Regulation)Act of 1976, the application of stamp duties rangingbetween 8 and 14.5 per cent, rent control and property tax haveall contributed to the artificial shortage – and consequent highcost – of land and housing in various Indian states. 20 In Mumbaifor example, the 1947 Rent Control Act and its successor, theMaharashtra Rent Control Act froze rents 60 years ago,effectively creating “a city of sitting tenants, who cannot affordto move, adding to the slum problem and limiting the supply ofrented homes… (pushing) up the cost of rentable flats.” 21 Thisand other policies explain why Mumbai is the seventh mostexpensive city in the world in terms of accommodation costs. 22Just as damaging is the control and ownership the state hasMumbai is the seventh mostexpensive city in the world in termsof accommodation costsSolutions From The Bottom-UpA better solution for Dharavi, Kibera orany slum is to allow their residents toformalise their ownership rights. Simply removing currentgovernment restrictions on land tenure would be a step in theright direction. The presumption that the poorest will not payfor housing is patronising. People invest money and effortbuilding homes for themselves and their families – and this istrue all over the world, in poor and rich countries alike. In 1980,the British government granted five million council housetenants the right to buy their home, with a discount of 33 – 66per cent on the market value. 24 This policy gave people independence,freedom, and with that came responsibility andopportunity. Power was transferred from politicians to people.The policy was extremely popular, with 2.1 million propertiestransferred away from the public sector to new property ownersbetween 1970 and 1995. 25When an economy is over-regulated and over-taxed, andthere is a weak rule of law, extra-legal and informal economiesflourish. Often, people have claimed that poverty acts as abarrier to development, that slums are too poor to act likeproperly-functioning communities. However, many slumdwellers are using their ingenuity to provide themselves andTHE INDIA ECONOMY REVIEW55

Reliving TheGreatIndianDreamtheir neighbours with ‘public’ services. Kibera is an illegalsettlement that does not benefit from government services, suchas water, sanitation, electricity, healthcare or education. Andyet, there are many reports of privately run latrines, clean waterfor sale and even private schools, all run by Kibera’s residentsfor Kibera’s residents. Even before entering into contract withthe Nairobi Water Company, Maji Bora Kibera (Clean WaterKibera), a grouping of around 500 water vendors, sold water toaround 500,000 inhabitants. 26 Perhaps even more extraordinarily,76 private schools have more than 12,000 students, the greatmajority of them slum children. 27 Fees are around 200 Kenyanshillings, around ten per cent of the average wage; but it is aprice that parents who are dissatisfied with the quality of freepublic education are willing to pay. Subsequent research byProf. James Tooley – an expert on education in developingcountries – showed that children in private schools for the pooraround the world consistently scored higher on subjects likeEnglish and maths than children in government schools. Thosewho criticise such initiatives on the grounds that such servicesshould be freely provided by the government should realisethat, without these entrepreneurs, 5,00,000 inhabitants wouldbe without safe drinking water, and 12,000 children withouteducational opportunities. Private entrepreneurs are notimpeding governments from providing services – rather, theystepped in exactly because governments failed to care for theseresidents.In Dharavi, the average income is only $10, but the slum’seconomy is valued at $650 million, namely thanks to therecycling business. 28 Here too, independent vendors sell waterto slum-dwellers, providing people when taps run dry as wellas those without tap access. Such innovation is found rightacross India. In the slums of Hyderabad, James Tooley foundthat 65% of schoolchildren were in private unaided schools. 29In Delhi, it is estimated that the black market share of totalcash – a reflection of the informal economy - is between 40and 60 percent. 30 The worst way to “deal” with the slums wouldbe to shut down these competitive and innovative entrepreneurs.Instead of engaging in population control or urbanplanning, governments must create an enabling environmentof stable market institutions, allowing all to benefit from theirhard work, to make their own decisions and to prosper. Forthis, it is crucial to formalise the property rights of slum-dwellers– clearly-defined property rights that can be sold, used toobtain mortgages and defended in court. Such a process willnot be easy and will certainly be subject to many contradictoryclaims, but it is the only sustainable way to address the issue ofslums.The growth of illegal settlements around the world has provedthat the poor are not helpless. They are willing to invest time,money and effort in their well-being, be it for education, wateror housing. All they need is for governments to stop interferingand to grant them the fundamental human rights offreedom and self-determination.End Notes4Page, J. (2007)5BBC (2006a)6Mahanti, T.K. (2004)7UN-HABITAT (2007)8World Bank (2007)9Ndeti, Y. (2003)10Vasagar, J. (2004)11The Hindu (2000)12Menon, M. (2007)13Mumbai 15th May Morning session (2003)14O’Connor, A. (2007)15Liebmann, G.W. (1996)16The Economist (2007)17Badam, R.T. (2007)18World Bank (2007)19de Soto, H. (2000)20Indian Ground, accessed December 200721Orange, R. (2007)22“While places in the main city area can range from anywherebetween 15,000 ($335) to 40,000 rupees per square foot,those in the suburbs can start around 5,000 rupees and goup to 25,000. So scarce and expensive is housing that even asmall 8x10 foot hut in Dharavi is priced between 1,50,000 to3,00,000 rupees.” Quote from BBC (2006b). Also seeTimes of India (2007)23Times of India (2003)24BBC (1979)25politics.co.uk, accessed December 200726Birongo, J.M. and Le, N.Q. (2004/2005)27Tooley, J. (2005)28Kostigen, T. (2007)29Tooley, J. (2007)30Chikermane, G. (2007)56 THE IIPM THINK TANK

P OLICY PERSPECTIVESBibliography• Badam, R.T. (2007), “Massive Indian slum to be redeveloped”,ABC News, May 30, 2007, http://abcnews.go.com/International/wireStory?id=3229152• BBC News website (1979) “Council tenants will have ‘right tobuy’”, December 20, 1979, http://news.bbc.co.uk/onthisday/hi/dates/stories/december/20/newsid_4017000/4017019.stm• BBC News website (2006a), “Report reveals global slumcrisis”, June 16, 2006, http://news.bbc.co.uk/1/hi/in_depth/5078654.stm• BBC News website (2006b), “Mumbai houses priced out ofmarket”, November 11, 2006, http://news.bbc.co.uk/1/hi/world/south_asia/6132846.stm• Birongo, J.M. and Le, N.Q. (2004/2005), “An analysis ofwater governance in Kibera, Kenya”, Roskilde University,http://rudar.ruc.dk/bitstream/1800/863/1/Project%20Report%20-%20Group%202249.pdf• Chikermane, G. (2007) “What state govts can learn from deSoto and a market fundamentalist”, October 29, 2007, http://www.indianexpress.com/story/233430.html• de Soto, Hernando. (2000), The Mystery of Capital: WhyCapitalism Triumphs in the West and Fails Everywhere Else,London: Bantam Press / Random House• Eberstadt, N. (2007), Too many people, London: InternationalPolicy Press, http://www.sdnetwork.net/files/pdf/Too%20Many%20People_%20web.pdf• Indian Ground, “Legal Help”, http://www.indianground.com/legal.aspx• Kostigen, T. (2007), “Recycling profits”, Market Watch,November 26, 2007, http://www.marketwatch.com/news/story/thomas-kostigens-ethics-monitor-indias/story.aspx?guid=%7B50B32B2B-68DC-455B-B12E-750485-D44B84%7D&dist=hplatest• Liebmann, G.W. (1996), “Modernization of zoning: A meansto reform”, Regulation 19(2), http://www.cato.org/pubs/regulation/reg19n2f.html• Mahanti, T.K. (2004), “Higher GDP growth bypasses slumdwellers”, The Economic Times, March 29, 2004• Menon, M. (2007), “Will Dharavi lose its soul?”, The Hindu,November 25, 2007. http://www.hindu.com/mag/2007/11/25/stories/2007112550190500.htm• Mumbai 15th May Morning session (2003), “ExploringAmartya Sen’s Development Framework and theIndian Alliance”, May 13-16 2003. http://www.removingunfreedoms.org/documents/mumbai/Mumbai_6.pdf• Ndeti, Y. (2003), “Slums have a history too: A brief history ofKibera”, One World website, October 25, 2003, http://uk.oneworld.net/article/view/71289/1/• O’Connor, A. (2007), “Shantytown tells Bombay to preparefor a bloodbath”, The Times, June 2, 2007, http://business.timesonline.co.uk/tol/business/markets/india/article1873073.ece• Orange, R. (2007), “Bombay slums make way for socialhousing”, The Times, September 14, 2007, http://business.timesonline.co.uk/tol/business/specials/global_india/article2379372.ece• Page, J. (2007), “Indian slum population doubles in twodecades”, The Times, May 18, 2007. http://www.timesonline.co.uk/tol/news/world/asia/article1805596.ece• politics.co.uk, “Issue Briefs: Right to Buy” http://www.politics.co.uk/issue-briefs/domestic-policy/housing-and-planning/right-buy/right-buy-$366612.htm• The Economist, (2007), “The strange allure of the slums”,May 5, 2007• The Hindu (2000), “Rediscovering Dharavi” September 17,2000, http://www.hinduonnet.com/2000/09/17/stories/13170632.htm• Times of India (2003), “Break up DDA, say experts”, April 6,2003, http://timesofindia.indiatimes.com/articleshow/42605229.cms• Times of India (2007), “Mumbai in top 10 most expensivecities”, May 22, 2007, http://timesofindia.indiatimes.com/Cities/Mumbai/Mumbai_in_top_10_most_expensive_cities/articleshow/2067351.cms• Tooley, J. (2005), “Giving Africa a private schooling”, TheTimes, June 26, 2005, http://www.timesonline.co.uk/tol/news/article537377.ece• Tooley, J. (2007), “Why poor parents are choosing ‘Moremarkets, Less Government’ in education, and what weshould do about it?”, The India Economy Review 2007,Volume 4, Quarterly Issue: 31st December 2007• UN-HABITAT (2007), “State of the World’s Cities 2006/7”,UN-HABITAT Feature/Backgrounder• Vasagar, J. (2004), “Bulldozers go in to clear Kenya’s slumcity”, The Guardian, April 20 2004• World Bank (2007), “World Development Indicators Online”(The views expressed in this article are those of the author and donot necessary represent those of Organisation).THE INDIA ECONOMY REVIEW57

Reliving TheGreatIndianDreamSocial Implications Of ForeignCapital: Lessons From China“Whether a cat is black or white makes no difference.As long as it catches mice, it is a good cat.”This was the Deng Xiaoping’s reply to the critics who questions abouteconomic reforms in Communist China. Ascending to power in 1978,Deng ridiculed the Cultural Revolution slogan that held it was “betterto be poor under socialism than rich under capitalism” is working asmantra in modern China. We need not bother from where the moneycomes as long as it helps the country prosper is the stern belief of Dengwho brought in major reforms in the country. His dreams came true astoday China is among the leading and prosperous nation in the world.China’s speed of attracting Foreign Direct Investments (FDIs) hasattracted world attentions in recent years.Chakrapani GhantaFellow, India China Institute, New School, New YorkIntroductionAccording to World Investment Reportissued by the United Nations Conferenceon Trade and Development (UNCTAD)in September 2004 China is the Number 1destination for foreign investments in2003. China is continuing this successstory and is still the most attractiveeconomic destination for foreign capitalin the world. Foreign Direct Investment(FDI) into China (in 2006) topped 63billion U.S. dollars; it was higher than fiveper cent over the previous year 1 accordingto the official sources. The exact contractualvalue of foreign funds was notavailable at press time. CommerceMinister Bo Xilai said China would makeeffective use of foreign funds and makethe service sector a key area to attractforeign investment. According to thereports, although China has been thelargest recipient of foreign investmentamong all developing nations for 15 years,there is much to be done to improve bothof its quality and quantity.The International Monetary Fund(IMF) latest survey report released inOctober 2007 (Please do refer Chart 1and 2) certifies the Chinese ‘un-reliable’data by saying “China is now the singlemost important contributor to worldgrowth, in terms of both market andpurchasing-power-parity (PPP) exchangerates.” The report further predicts thatChina’s economy continues to grow atbreakneck speed, turning it into a drivingforce in the global economy. China’s58 THE IIPM THINK TANK

P OLICY PERSPECTIVESeconomy gained further momentum in 2007, growing at 11½per cent, and is expected to grow by 10 per cent in 2008. Otheremerging markets are also growing strongly 2 . Deng’s slogan ‘toget rich is glorious’ is working in China. Work, Save and livewith dignity through prosperity is the ideology on whichmodern day China is deriving its strength from. But theChinese economists are perplexed looking at the magnitude ofincreasing FDI, reserves and high rate of savings. How toregulate wealth, how to narrow inequalities and direct/place thecountry's socialist path are some of the issues bothering theChinese leadership and economists.The Road MapFDI is the singular factor that has put China on the economicupswing. China has been the world largest FDI recipientamong developing countries since early 1990s. In recent years,FDI to China accounts for 1/4 to 1/3 of total FDI inflow todeveloping countries. Foreign investment has become animportant source for China.s investment in fixed assets. Itsshare in total annual investment in fixed assets grew from 3.8%in 1981 to its peak level of 12%in 1996. After the Asianfinancial crisis in 1997, FDIinflows fell and its contributionto fixed assets investment hasalso decreased to about 9% and7% in 1998 and 1999, respectively.According to the figures released by the government,there was an average 10 per cent growth rate in the economyduring the past four years with the FDI touching 720 billiondollars. In 2006 alone, China received 69.5 billion dollar FDIand in ten months of 2007 it was 67.8 billion dollars. Thesupporters of China open door policy always believe thatforeign capital in China has played a largely positive role in itseconomic development. They see more benefits out of the FDIsapart from solving the capital shortage problem. The countrywill have better access to existing, local technologies, indirectproductivity gains through spillovers, world class labor trainingand management strategies. Of course they proved right. Thesuccess story of China's high rise economy has started way backin 70s. Since late 1970s, China has gradually and in a phasedmanner opened its economy for foreign businesses and hasattracted large amount of FDI. At each phase the Governmentcarefully evaluated its policy and based on the experiences itWork, save and live with dignitythrough prosperity is the ideologyon which modern day China isderiving its strength fromhas incorporated changes on their policy priorities. In the firststage during late 1970s and early 1980s, government policiesare characterized by setting new regulations to permit jointventures using foreign capital and setting up Special EconomicZones (SEZs) and Open Cities 3 .Open cities obviously opened their doors to FDIs by takingadvantage of reforms. The State Council also awarded rights ofautonomy in foreign trade to Guangdong and Fujian Provincesand, in 1980, set up four Special Economic Zones (SEZs) inShenzhen, Zhuhai, Shantou, and Xiamen. Later on in December1982, the decision to open up China to the world economywas formally included in the 1982 state constitution adopted bythe Sixth National People’s Congress. Late in 1983, Regulationsfor the Implementation of the Law of the People'sRepublic of China on Joint Ventures using Chinese andForeign Investment was formulated in 1983 to further liberalizethe domestic market and to clarify the business environmentfor foreign joint ventures. Since 1984, China has also moved tofurther open up the country to FDI. In 1984, the concept ofSEZs was extended to another fourteen coastal cities andHainan Island. Twelve of thefourteen cities were designatedTechnology Promotion Zonesin 1985 to expedite the transferof technology. In 1985, developmenttriangles- the YangtzeRiver delta, the Pearl Riverdelta in Guangdong, and the Min Nan region in Fujian,Liaodong and Shandong Peninsulas, and the Bohai Sea CoastalRegion- were also opened to foreign investors. Later in 1990,the Pudong District of Shanghai was designated as a newdevelopment zone to lead development along Yangtze River.Article-22 4 for the Encouragement of Foreign Investmentadapted (1986) more favorable regulations and provisions arehelped in attracting FDI inflow, especially export-oriented jointventures and joint ventures using advanced technologies. Thisamendment allowed wholly foreign-owned enterprises andprovided foreign joint ventures with preferential tax treatment,the freedom to import inputs such as materials and equipment,the right to retain and swap foreign exchange with each other,and simpler licensing procedures. Additional tax benefits wereoffered to export-oriented joint ventures and those employingadvanced technology. The government also attempted toguarantee further the autonomy of joint ventures from externalTHE INDIA ECONOMY REVIEW59

Reliving TheGreatIndianDreambureaucratic interference, to eliminate many ‘unfair’ localcosts, and to provide alternative ways for joint ventures tobalance foreign exchange. Privileged access was provided tosupplies of water, electricity and transportation on par withother State owned companies and further facilitated to provideinterest-free RMB loans. To strengthen the Article -22 anotherregulation known as Article-3 5which explicitly linked (Article3) the establishment of whollyforeign-owned enterprises tothe development of China’snational economy, and requiredsuch enterprises either to beexported-oriented or to use advanced technology andequipment. The amendment of 1979 Joint Venture Law(1990) further relaxed the rules by allowing non-Chinese to actas Chairman of the Board of Directors, extensions to the termsof operation of joint ventures, and removed the upper limit tothe proportion of the registered capital contributed by theforeign partner, which resulted in increasing inflow of foreigncapital in the late 1980s and, in particular, early 1990s. Frommid 1990s, while maintaining favorable environment forforeign businesses, government policies began to focus moreon linking FDI promotion to domestic industrial objectives.Generally speaking, China's policies toward FDI haveexperienced roughly three stages: gradual andlimited opening, active promoting throughpreferential treatment, and promoting FDI inaccordance with domestic industrial objectives.These changes in policy priorities inevitably affectedthe pattern of FDI inflow in China. Between 1978 and1982 about 920 companies invested just 1.8 billiondollars while the investment went up billion bybillion and in the next decade and has attractedabout 48,764 companies by 1982. Yet the FDIdid not cross 4.5 billion mark. Stepping up theeconomic reforms China started Special EconomicZones (SEZs), Autonomous business zones alongthe coastal region. This resulted in a ten-foldgrowth of FDI in just ten years. Hong Kong,Macau besides Taiwan, Japan, America and Europeannations are today investing millions of dollars in the countryand the average income increased from $200 in the year 1979 to$1269 in 2004.As Deng Xiaoping said longback, now every Chinese citizenfirmly believes “Poverty is notsocialism. To be rich is glorious"‘The Glory Of Prosperity’Before making the China worlds destiny of prosperity Dengdestroyed several ‘old’ practices and reformed the China fromgrassroots. He reversed the Mao’s slogans and trained Chinesehow to live with money. One of Deng’s first reforms was toabolish Mao’s rural agricultural communes and allow peasantsto cultivate family plots. Grainharvests quickly increased, andother reforms followed. Citydwellers were allowed to startsmall-scale businesses, ordinaryChinese were allowed to buyconsumer goods, and Dengactively courted international investors. As he said long backnow an average Chinese city dweller firmly believes “Poverty isnot socialism. To be rich is glorious”. The flood of FDIs andother investments have completely changed the social andeconomic structure of China. This has changed the life style ofpeople living in cities and those migrating to cities. Seventy percent of the people living in Chinese cities have an annualincome between $2,000 and $8,000 while in Indian cities peopleearn not more than $2,000. While people in the annual incomegroup of more than $7,500 are about 6 per cent, in India it isjust 1.2 per cent. More than six lakh foreign companies areoperating in China and employment was created to over 15crore people. China has attracted more FDI than any othercountry, including US, in the world. The country achieved 1560 THE IIPM THINK TANK

P OLICY PERSPECTIVESChart 1: New Driving ForceThe major emerging markets have become the main engines of world growth. For the first time,China and India are making the largest country-level contributions to global growth.(based on PPP weights, per cent of world growth)35302520151050China India US Euro Area Russia Japan BrazilSource: IMF staff calculations.Contributions To Real GDP Growth 20062007Chart 2: Pulling Its WeightChina is also making the largest contribution to world growth at market prices.(based on market GDP weights, per cent of world growth)252015105Contributions To Real GDP Growth200620070Source: IMF staff calculations.US Euro Area China Japan India UK Russiaper cent industrial growth since 1980 and diverted the profits todevelop infrastructure. It has built 30,000 km express highwaywhile India could not build one-tenth of that stretch. Chineseinvestment in these projects is very nominal. The 1.3 billionstrong country has turned its manpower into a major factor inthe development process. People above 16 years form onebillion and 76 per cent of the populace take part in developmentprocess. At least 60 per cent of the population haveprimary or secondary education and have some technicalknowledge and the education system trains them in somevocational course. This is how China’s workforce form 78 to 80crore which is working to its advantage. There are no legalhurdles for those who want to invest in China, which providesworkforce. There is no ‘serious’ implementation of minimumwage rule. Earnings vary from the nature of work, place of workand the industry one works. This method is always beneficial tothe company and workers hardly have any bargaining powerand there is no chance of any trade union activity or workersorganizing themselves. This is a major attraction for companiesto set up shop in China and is the reason for the swelling FDI.Shadow Of InequalitiesBecause of the reforms taken up by Deng and the constructionof vast SEZs, the coastal areas became industrial villages andproduction factories. Thus, compared with villagers’ income,their income increased from 500 to 1000 times. During theReforms time, the facility of free medicine for rural people inChina was abolished and insurance methods were introduced.With this, medicine became an unbearable burden for the ruralpoor. On the other hand, the divide increased as not all couldpossibly access new jobs and ways of income earning that werecoming into reach. Migrating from one place to anotherwithout permission from the government is banned in China.Even to migrate to urban areas, they require government’sTHE INDIA ECONOMY REVIEW61

Reliving TheGreatIndianDreampermission. Government will not permit any one without astable employment appointment letter. Those who are becomingimprisoned forcibly to land (agriculture) are being subjectedto intense grief because of this. On the other hand, thenumber of people who are migrating discretely, workingillegally and settling down is in millions. Such people who aremortgaged for very low wages cannot access any governmentfacilities, cannot escape rigorous punishment, if they caught.Growth of investments and decrease of liberty is going tobecome another major problem for China. As a result ofLiberalisation, the state completely changed many laws whichwere favorable to workers. Many public limited companieswere closed on the pretext of losses. Private and public-privatepartnership companies are growing in number. According to astudy by Li Cheng Shui, chief of the State Statistics Bureau(SSB) in 1981-84 (that was made public on October 12, 2006),the public sector employed only 32% of China’s industrial andservice workers, and accounted for 37% of the country’s GDP.This represents a remarkable change from just what it was adecade ago. In 1995 the public sector accounted for 78% ofGDP. Li presented his findings in a report first completed inMay 2006 6 . With its new found wealth, China has embarkedupon a massive urbanization plan and infrastructure developmentplan is percolating to rural areas as well. Beijing is tryingto reduce the dependency of its populace upon agriculturalsector. Swelling of investments is creating heartburn among thepeople. There are warnings that the socialist philosophy of thecountry would be harmed unless the growth in wealth, facilitiesand assets in cities are not regularized in an appropriatefashion. Increase of income has changed the life style in cities.The neo-rich class in the industrialized areas is a cause ofconcern. Boom in real estate sector has led to luxury cars andjazzy life style. Real estate prices are going up at 15 to 20 percent annually since 2000. Shanghai, Beijing and ten other citieshave become out of bounds for middle class population,according to a popular survey. Statistics reveal a 25 per centhike in real estate investment from 2005 to 2006 and in the lastsix months construction activity was taken up in about 1.41billion square feet.ConclusionNo doubt capital will create economic growth but for thecountries like India and China development is more important,and the development should be inclusive and equitable in termsof social, geographical aspects.FDI has created a flutter in the Communist country, for sureand the development was achieved by swimming against thestream. China has now achieved fourth place in world in GDP,third in international trade, second in FDI and is first in exportsand imports. But within the country there is social divide anddissent is growing. This is going to be a hindrance to thecountry. Bearing this in mind, China has taken up remote areadevelopment besides focusing on rural areas. It has started theexercise of narrowing regional inequalities and has plans to banFDI in some core areas/sectors. The country which preached'development through FDI' is now trying to wriggle out of theweb created by FDI. The way China is now reciting thesocialist mantra vouches that FDI has created further complicationsin the social structure ofthe country.End Notes And References:1http://www.chinadaily.com.cn/bizchina/2007-01/15/content_783851.htm2By Tim Callen, IMF Research Department, EmergingMarkets Main Engine of Growth, IMF Survey Magazine3For this extent the second session of the FifthNational People’s Congress held in July 1979 was adaptedthe Law on Joint-Ventures using Chinese and ForeignInvestment.4On October 11, 1986, the State Council promulgated theProvisions of the State Council of the People’s Republic ofChina for the Encouragement of Foreign Investment5The Law of the People’s Republic of China on EnterprisesOperated Exclusively with Foreign Capital adoption onApril 12, 1986, at the fourth Session of the Sixth NationalPeople’s Congress6The report was uploaded to the www.hbgongren.comwebsite in October 2007. Li based his study on the officialSSB figures. He also drew data from a report released inMarch 2006 by the All China Federation of Industry andCommerce (ACFIC) that surveyed the state of China’sminying (“people’s-run”) enterprises during the 10thfive-year plan (2001-05).(The views expressed in the write-up are personal and does notreflect the official policy or position of organisation. He can bereached at chakrapanighanta@gmail.com).62 THE IIPM THINK TANK

Reliving TheGreatIndianDreamCommon ServiceCenters (CSCs)-A Boon For Rural CommunityG K AgrawalEx-Executive Director, NABARD, Rural andMicro-Finance Consultant, Mumbai1. Introduction1.1 In the context of globalization, World getting flattened,knowledge becoming a major tool of power, Information andCommunication Technology (ICT) is proving to be a boon inbringing economic prosperity and social empowerment. India isemerging as a leading power in ICT, which constitute majorcomponent of the Service Sector. However, the rural andsemi-urban areas in India where more than 70% of the populationresides are yet not benefited by IT boom to an significantextent. The need of the hour is to bring this segment within thedoor step reach of e-services and e-education.1.2 Advances in Information and Communication Technologieshave made it possible today to provide a whole range ofhigh-quality and cost-effective services relating to video, voiceand data content through a single communication channelusing appropriate terminal equipment. This opens up a wholerealm of possibilities for provision of e-government, entertainment,education, telemedicine, e-commerce, info-services, etc.ubiquitously. Government of India is committed to leveragingthese advances in Information and Communication Technolo-64 THE IIPM THINK TANK

P OLICYPERSPECTIVESgies (ICT) for the benefit of the citizens, especially those inrural and remote areas.2. Frame Work2.1 The Framework brought out, in October 2006, by theDepartment of Information Technology (DIT), Government ofIndia and circulated to State Governments outlines the policyframework, strategy and contours of financial support ofGovernment for rapid proliferation of Common ServiceCenters (CSCs) across the country. It is intended that thisFramework would create an enabling environment for establishmentof 1,00,000 Common Service Centers in the ruralareas and 10,000 Centers in urban areas to give a boost todevelopment by helping to bridge the digital divide substantiallyextend the reach of digital services and economic opportunitiesinto the rural and remote areas of the country andprovide all possible government and private and other servicesat the door step of ultimate users.2.2 The CSC is a strategic cornerstone of the Nationale-Governance Plan, approved earlier by the Government inMay 2006, as part of its commitment in the National CommonMinimum Programme to introduce e-governance on a massivescale. It is aimed at making all government services accessibleto the common man in his locality. CSC is one of the threeinfrastructure pillars of e-governance which the government iscommitted to building, to ensure “anytime anywhere” webenabled delivery of governmentservices. The other two pillars arethe State Wide Area NetworkConnectivity, which has alreadybeen approved by the governmentat a total cost of Rs.3,334 croresand State Data Centres.2.3 The one lakh centers will cater to six lakh villages i.e., atleast one CSC in a cluster of six villages at a total estimatedcost of Rs. 5,742 crore. Of this, the Government of India’soutlay would be Rs. 856 crore, and the State Governments’share Rs.793 crore. The balance amount of Rs.4,093 crore isexpected to come from the private sector.2.4 The CSCs would provide high quality and cost-effectivevideo, voice and data content and services, in the areas ofe-governance, education, health, telemedicine, entertainmentas well as other private services. A highlight of the CSCs is thatit will offer web-enabled e-governance services in rural areas,Government is committed toleveraging these advances inICT for the benefit of the citizens,especially in rural areasincluding application forms, certificates, and utility paymentssuch as electricity, telephone and water bills . Other significantpublic and private services that can be accessed through thesecenters would be remote consulting for healthcare, e-enabledvocational training, market and supply chain linkages, ruralBPO, agricultural price and weather information etc. The CSCsare thus envisaged to act as change agents in acceleratingintegration of the rural masses into the economic mainstreamof the country.2.5 While the project is a Central Scheme aimed at coveringthe whole nation, its implementation is decentralized enablingentrepreneurship to flourish locally. The Scheme creates aconducive environment for the private sector and NGOs toplay an active role in implementation of the CSC Scheme,thereby becoming a partner of the government in the developmentof rural India . The CSCs are expected to create one lakhdirect jobs and two-three lakh additional indirect jobs. Thescheme, when fully operational, will help people enjoy higherdisposable income achieved by reducing time and costs inobtaining the government and private services, and throughenhanced employment opportunities available digitally.2.6 The Scheme envisions CSCs as the front-end deliverypoints for Government, private and social sector services torural citizens of India , in an integrated manner. The objectiveis to develop a platform that can enable Government, privateand social sector organizations to align their social and commercialgoals for the benefit of therural population in the remotestcorners of the country through acombination of IT-based as well asnon-IT-based services. The projectis expected to substantially extendthe reach of digital services andeconomic opportunities into the rural and remote areas.2.7 The CSCs are envisaged to work on Public Private Partnership(PPP) to provide world class IT infrastructure with lastmile connectivity, focusing on Rural entrepreneur and bebroadband Internet enabled and would offer a basket ofGovernment- to-Citizen (G2C market mechanism with no capitalsubsidy but with assured revenue by Central/state govts. TheCSCs will) and Business- to-Customer (B2C) services.2.8 The Hon'ble Union Finance Minister in his Budget Speechon 28 February 2005 had also announced the GOI’s decisionto allocate a sum of Rs.100 crore to be made available to theTHE INDIA ECONOMY REVIEW65

Reliving TheGreatIndianDreamthen Mission 2007’s knowledge centers (KCs) throughNABARD under the Rural Infrastructure DevelopmentFund (RIDF) Scheme. Considering the similarity betweenthe services proposed to be provided by the KCs and theCSCs, the above policy Framework on CSCs also providethat the State Governments may decide to avail the loan facilityto be provided by NABARD under RIDF for establishingsuch Centers.3. Role Of Various Intermediary AgenciesThe Scheme envisages to roll out all the one lakh CSCsacross the country, by March 2008, with an equitable geographicalspread to the extent feasible, through a three-tierstructure for the States. At the first (CSC) level would be thelocal Village Level Entrepreneur (VLE – loosely analogous toa franchisee). At the second/middle level would be an entitytermed the Service Centre Agency (SCA – loosely analogous toa franchiser). At the third level would be the agency designatedby the State to facilitate implementation of the scheme withinthe State. This entrepreneurialmodel will help in socio-economicdevelopment of rural India byproviding job opportunities,awareness, knowledge empowermentand cost savings for thecitizens as well as the stategovernments. These three tiers would function in accordancewith this Framework and the further Guidelines issued fromtime to time by the Department of Information Technology,Government of India, either directly or through the designatedThe Common Service Centresare expected to create onelakh direct jobs and two-threelakhs additional indirect jobsNational Level Service Agency which would be responsible forthe overall planning and management of the project at thenational and state level in close co-ordination with the DIT andthe State Governments. The CSC Scheme’s focus will be onPublic Service Delivery & Outcomes through Process Re-engineering& Change Management3.1 National Level Service Agency (NLSA)3.1.1 The NLSA, to be appointed by the DIT, GOI is expectedto carry out effective project management and ensurespeedy implementation through SCAs leading to a roll-out of1,00,000 CSCs by the projected time frame.3.1.2 The NLSA would act as a catalyst to coalesce focusedpartnerships for content, services, technology, training, software,etc. that would form the backbone of the implementationprocess. It would also harness national level resources byeffectively integrating State/Central infrastructure, knowledge,administrative expertise and manpower into project planningand implementation.3.1.3 The NLSA would provideeconomies of scale throughcentralized mobilization ofresources, particularly financialand underwriting the same,standardization of design, contentand processes into an easilyreplicable collaborative framework for all the stakeholders. TheNLSA would also create appropriate type standardization inthe design of CSCs by providing suitable branding/logo.3.1.4 The NLSA would also incorporate and integrate bestpractices across a variety of activities and stakeholders. Moreimportantly, the NLSA would adopt a market-driven approachto achieve rapid socio-economic change, consistent with theStates’ development goals and objectives.3.1.5 The Infrastructure Leasing & Financial Services Ltd.,(IL&FS) has since been appointed as the National LevelService Agency (NLSA)- Programme Management Agency bythe DIT, GOI to initiate various project level activities as perthe provisions of the above Framework and the SCAs are to beappointed by the NLSA/ State level designated agency toidentify the VLEs, arrange for their training, orientation andoperationalizing the CSCs.3.2 Service Centre Agency (SCA)3.2.1 The SCAs would be identified through an appropriate66 THE IIPM THINK TANK

P OLICYPERSPECTIVESopen, competitive selection process to be managed by theNational Level Service Agency in consultation with theState-designated agency. A State level committee that wouldinclude representatives of the State Government and Governmentof India would oversee this process. The SCAs would inturn select the VLEs for operating the CSCs in accordance withthe Framework and the guidelines.3.2.2 The SCA would be responsible for working with theNLSA and/ or the State- designated agency towards identifyingthe required applications and services, harnessing the network,identifying and training the VLE, establishing the CSC (eitherdirectly or through the VLE), supplying, aggregating andupdating the content (this would include entering into appropriatecommercial agreements with local third party content/service providers) and also addressing various requirements ofthe CSCs from time to time.3.2.3 The SCA, partnering with NLSA, is further required toconduct a detailed benchmark survey for the specific State /area to assess demand and viability, identify content, createappropriate service package, evaluate the suitability of alocation for establishing a CSC, etc.3.3 Village Level Entrepreneur (VLE)A VLE should have all the qualities necessary to sub-serve thebasic objectives of the CSC. The quality of service at the CSCswould be as effective as the qualityof persons running them. Selectionand proper training of the VLEtherefore would play a vital role inmaking the CSC a success. Giventhe rural environment in thecountry, the VLE is also requiredto be an effective ‘change agent’ i.e., to change the mindset ofthe rural citizen.3.4 State Government And Designated Agency3.4.1 State Governments intending to participate in theScheme would designate an Agency, which would work withDIT and/ or the identified NLSA to facilitate implementationof the Scheme. For this purpose the State-designated agencywould be responsible for providing all assistance in implementationof this Scheme through its field formations and/or thedistrict administration in the entire State. The State-designatedagency would also co-ordinate with other State GovernmentThe Village Level Entrepreneuris required to be an effective'change agent', to change themindset of the rural citizensdepartments and agencies to help bring in a basket of ofe-governance applications and services as relevant in therespective State and ensure that the CSCs perform the role offront-end delivery points for administration and welfaregovernance.3.4.2 The issue of economic sustainability has been the primeconcern for the CSCs. While the primary responsibility forensuring sustainability of a CSC rests with the NLSA/SCA/VLE, the State government would, in consultation with theDIT, indicate a roll-out plan for the various e-governanceapplications.3.4.3 States would help the SCAs and/ or the NLSA to identifysuitable sites for the CSCs. Stateswould also consider providinggrant assistance to those SCAs /VLEs in the form of land by theStates to be combined withprovision of grant support fromGOI for construction of permanentstructure for such CSCs.3.5 NGOs/VOsNGOs/VOs can play a decisive and visibly effective role ingrounding the whole programme, provided a supportive andconducive atmosphere is available and adequate promotionaland capacity building support and initial funding of operationaldeficits are provided to them.4. Typical CSC InfrastructureTwo PCs, two printers (Inkjet+ DOT Matrix), digital/webcamera, broadband connectivity, gen. set / inverter, mobileTHE INDIA ECONOMY REVIEW67

Reliving TheGreatIndianDreamphone, furniture and fixtures, OS and other software, otherservices related Capex cost, etc.5. Functions And Activities Of CSCs5.1 The CSCs will provide a wide range of govt. and privatee-services, based on local community needs and requirements -different segment wise- and classifying them as free and feebased services through convergence of modern and traditionaldissemination techniques, so as to provide knowledge basedlivelihoods and income generation opportunities for poor/disadvantaged rural people.5.2 An illustrative list of various services for providing informationby CSCs is given below:• Genetic i.e. relating to genetically modified farm products)• Legal (i.e. IPR and Farmers’ and Breeders’ Rights),• Quality (i.e. sanitary and phytosanitary measures and codexalimentarius standards) Trade (i.e. prices in home andexternal markets)• Local agro-ecological and socio-cultural conditions of eachvillage/unit• Various farming methods and techniques• Access to healthcareVarious Stakeholders In CSCDITNational levelService Agency (IL&FS)Source: IL&FS WebsiteService CenterAgency(Franchise)Village LevelEntrepreneur/CSCG2C ServicesStateGovernmentB2C ServicesRural HouseholdsPrivateSector(Service Provider)• Health status of livestock and poultry• On-farm and off farm livelihoods• Market-led entrepreneurship opportunities for the poor andthe marginalized• Promoting functional literacy among the adult illiterate• Making learning joyful for the young through interactivepedagogic methodologies.• Computer Aided Learning facility through 3D multimediasoftware• Free and Fee based Computer Training in local and Englishlanguage• Training programs on various computer languages, softwareprograms, conduct of examination and certification andliaising with software companies for employment of trainedpersonnel• Dissemination of information on Rights to Information Actand other civil rights and obligations.• Making available brochures and online information onvarious government development and bank financialschemes and checklist thereof and making available applicationforms for various purposes.• Distant education to villagers about new upcoming developmentsthrough State elite and online studio programs• Periodic awareness, exhibition of documentaries on general/sector specific developments.• Association with PRIs- Training on effectiverole and functions of elected members, orientationto the elected members on the use ofcomputers and its importance for Panchayats,computerization of the gamut of activities ofPanchayats.• Provide “Spoken English” and computertraining to job seeking youth• Conduct Job fairs and Career Counseling forVillage youth• Maintenance of Software Library• Empowerment of women and girls in therural area• Dissemination of information on benefits ofExistingDistributionChannelIT education5.3 The indicative list of broad heads of Serviceactivities is given below• Agriculture• Agricultural tools68 THE IIPM THINK TANK

P OLICYPERSPECTIVES• Animal husbandry• Fisheries• Citizen services• Right to Information• Health• Education• Women empowerment• Eco-development• Banks and Financial Institutions• Land/property• Employment• Social welfare• Utility services• Business Procedures• Panchayat matters• Tourism and transport• Consumer welfare• e-governance5.4 The services can be Information Services in Counseling,Certification, Authentication, Education, Marketing, OnlineApplications and Payments and can be extended to GovernmentOrders, Panchayat Plans, Election Information, GramSabha Decisions, Knowledge management, News & Events andVillage Statistics.5.5 The typical content for rural households in each of theAccess Centers would enable the users to build wealth by:• Reducing farming costs• Increasing crop yield• Computer awareness• Enabling effective post harvest management• Higher education possibilities• Job and career opportunities• Reducing risks• Financial assistance opportunities• Providing expertise in animal husbandry, watershed management,wasteland development, agro and social forestry• Enabling better credit options and facilities• To live a healthier life by having access to:❊ Health & sanitation❊ Medical assistance❊ Medical insurance❊ Medical diagnostics plans❊ Disease prevention communication• To help plan the future through:❊ Curriculum based education❊ Career guidance❊ Adult education❊ Learning English6. CSCs And Panchayati Raj Institutions6.1 The Panchayati Raj Institutions are the Pillars of theIndian democracy to empower local populace. Article 40 of theConstitution enshrines one of the Directive Principles of StatePolicy which lays down that the State shall take steps toorganize village Panchayats and endow them with such powersand authority as may be necessary to enable them to function asunits of self-government.6.2 73 rd Amendment to the Constitution is a revolutionary steptowards decentralization of powers, grassroots governance,demand driven development, bottom up and participativeplanning for economic development and social justice throughthe Panchayati Raj comprising Gram Sabha, Panchayats, andState governments. To enhance the capacity of local bodyleaders, the panchayats are placed in an effective position tocreate a knowledge society at the grassroots level. The ChennaiConsultation held on 9 th June 2005 also adopted ChennaiPlatform for Action for involving the PRIs in implementingTHE INDIA ECONOMY REVIEW69

Reliving TheGreatIndianDreamMission 2007 on setting up Knowledge Centers in villages in astructured manner.6.3 A number of States have taken steps to invest money andresources for IT implementation in governance and citizenservices. Achievements have already been made in the policy,infrastructure, application development, data-warehousingareas and endeavors are on to achieve more in the areas ofindustry, networking, content creation and informationmanagement. ICT is being considered as the emblem of‘Change through Knowledge Revolution’.6.4 ICT can be harnessed through CSCs for better delivery ofCitizen Services in the villages through computerization of thevarious functions as well as functional computer literacy of theGram Panchayat members, such as:6.4.1 Training on effective role and functions of electedmembers:To provide computer awareness tothe PRI members for harnessingof Communication Technology inevery day life, CSCs can be used asResource Centers. There shouldbe a convivial atmosphere of learningand acceptance in Panchayat Members, to welcome the newtechnology that is going to help, manage and assist their lives inmore than just one way.6.4.2 Orientation to the Elected Members on the use ofComputers and its importance for Panchayats:Orientation to the Elected Members on the use of Computersand its importance for Panchayat bodies (for self-development).6.4.3 Computerization of the entire gamut of activities of allPanchayat bodies:The second phase of computer training program, after awarenessof computers, could be to use effectively use the computerizeddata in policy planning, implementation, and monitoringat local level.7. Present Status7.1 The Cabinet approval for the CSC scheme was received inSeptember 2006 and the Guidelines issued to State Govts. Bythe DIT, GOI in October 2006. The latest May 08 end status(as per DIT, GOI) is given in the enclosed Pyramid. It may beseen there from that 61,491 CSCs are reported to have sincebeen rolled out in eleven states viz., Jharkhand, West Bengal,All over India, panchayat bodiesare placed in an effectiveposition to create a knowledgesociety at the grassroots levelHaryana, Bihar, Tripura, and Gujarat. Madhya Pradesh,Assam, Uttar Pradesh, Sikkim and Uttrakhand.Letters of Intent are since issued in three states viz., TamilNadu, Manipur and Orissa, SCA since selected in four statesviz., Andhra Pradesh, Maharashtra, Himachal Pradesh andJammu and Kashmir, Bid evaluation underway in Meghalaya,RFP since issued in two states viz., Mizoram and Rajasthan. Inother eleven States and UTs viz., Chhattisgarh, ArunachalPradesh, Nagaland, Punjab, Kerala, Andaman, Lakshadweep,Daman & Diu, Dadra & Nagar, Karnataka and Pondicherry,there would not appear to be any significant progress. Delhi,Chandigarh and Goa are reportedly not inclined to join thescheme as of now.7.2 A number of Corporates, Banks/FIs, other agencies bothin private, government and social sectors have shown keeninterest to participate in thescheme. However, considering thetarget of 1,00,000 CSCs to be setup within a given time frame of 18months, i.e., by March 2008 or so,(which is since over), the progresswould appear to be some whattardy. It may take time before the CSCs are fully operationaland the necessary steps are needed by the concerned agenciesto speed up all aspects of the processes.8. Emerging Issues8.1 During the course of implementation and the feed backavailable, a no. of issues have cropped up, which are reportedlyMay 08CSC RolloutLOI IssuedSCA SelectedBid Evaluation under wayCSC Status at a Glance (May 01, 2008)Jharkhand,WB, Haryana,Bihar, TripuraGujarat, MP, Assam,UP, Sikkim,UttarakhandTamil Nadu , Manipur,OrissaAndhra Pradesh, Maharashtra,Himachal Pradesh, J&KMeghalaya,CSC6149116447399Cumulative CSC6149114397 7588892335RFP Issued Mizoram, Rajasthan 6662 99396Chhattisgarh, Arunachal Pradesh,Nagaland, Punjab, Kerala, Andaman, Lakshadweep,Daman&Diu, Dadra&Nagar, Karnataka, Pondicherry92734113,000+Note : Delhi, Chandigarh, Goa as of now are not inclined to implement the CSC scheme of Government of IndiaSource: DIT, GoI70 THE IIPM THINK TANK

P OLICYPERSPECTIVEScoming in the way of speedy implementation of the project andneed to be addressed on priority. These are as under:8.1.1 Tendering StipulationsBecause of the stringent conditions for tendering such as,minimum no. of years to be in business, large no. of centers tobe covered in each operational zone, high value of net ownedfunds for corporates and turnover requirements for NGOs,high earnest money requirements for tenders, bank performanceguarantee stipulations, (which may be otherwise necessaryfor award of contract to the financially capable and professionallyequipped agencies for successful execution of the project),contracts in most of the States are reported to have beenawarded to big software companies but having no grass rootlinkages and experience and the middle level agencies, NGOshaving grass root feel, touch and linkages are not able to bidfor the tenders and participate in the PPP in any real way.8.1.2 InfrastructureFinding suitable premises, non-availability of power and lastmile connectivity are the other problem areas to be tackled onan urgent basis.8.1.3 TrainingA massive Training and orientation programme for as large as100000 VLEs (100000x1), and staff of other intermediaries isneeded to cope with the operationalization of the CSCs.8.1.4 Compatibility Of SoftwareAvailability and compatibility of SWAN and soft ware of otherservice providers and updating of websites of various agencies.There is an urgent need for Convergence between variousprogrammes and models.8.1.5 Financially Sustainable ModelThere is an increasing felt need for evolving a financiallysustainable model for general adoption with changes as perlocal needs and potential. As there is no capital subsidy and thegovt. funding support will be for free govt. e services, there is aproblem of funding infrastructure cost and meeting theoperational deficits, promotional and capacity building supportduring the gestation period.8.1.6 RIDFState Govts. are reportedly reluctant to borrow from NAB-ARD under Rural Infrastructure Development Fund(RIDF) to support setting up of CSCs. The state govts. shouldformulate projects for setting up of CSCs by borrowing loansunder RIDF from NABARD.8.1.7 NABARDNABARD, as the Apex Development Bank forAgriculture and Rural Development, should consider tode-link its exclusive support from RIDF and come forwardin a major way to formulate the well designed and aninclusive policy for supporting setting up CSCs with theassistance and active involvement of NSLA, SCAs, ICT serviceproviders, grass root NGOs/VOs and other agencies throughpreparation of model projects, training, capacity buildingsupport to NGOs and other agencies, VLEs participating inthe programme and refinance support to banks financingsetting up of CSCs.8.1.8 Priority Sector LendingFinancing of CSCs by banks may be specifically included byRBI as an approved purpose for Priority Sector Lending.8.1.9 Budgetary SupportAdequate budgetary support at least in the initial years isneeded to fund the infrastructure cost in tribal and backwardareas, operational deficits, training and capacity buildingSupport ,etc.8.1.10 Glocalisation Of Local KnowledgeGLocalisation is a process of globalizing local knowledge. WithCSCs envisoned as emerging empowering and enabling ICTtool, the people of India have an opportunity to leverage theirlocal knowledge, assets, wisdom, products and services for theirown benefit, and for a global presence. These require to besuitably incorporated in the concept and software of CSCs soas to take advantage there of.8.1.11 User FriendlySince most of the rural population is still illiterate, the biggestchallenge is to make CSCs services and information in locallanguage and user friendly.8.1.12 Monitoring And Co-ordination8.1.12.1 Effective system for close monitoring and findingexpeditious solutions to the grass root issues and problemshas to be placed in motion on priority, at the state, district andtaluka levels. Departments and unified command and redressalsystem for issues/ complaints /pending applications withgovt. departments, banks etc. have to be evolved on priorty.8.1.12.2 There is an urgent need to study and understand thechallenges and opportunities for setting up the CSCs on asustainable basis, and integrating the commercial and socialgoals of various stakeholders.(The views expressed are personal. He can be reached atgka2004@yahoo.com).THE INDIA ECONOMY REVIEW71

Reliving TheGreatIndianDreamInterpreting Mandal IIJudgment: A FineBalancing Act Or A MissedOpportunity?Niranjan SahooFellow, Observer Research Foundation, New Delhi72 THE IIPM THINK TANK

P OLICY PERSPECTIVESThe much awaited Mandal II judgment (AshokKumar Thakur V. the Union of India) on extendingreservation for Other Backward Classes (OBCs)has come on an expected line. The judgment madea fine balancing act by providing each a piecefrom the quota cake. While the five-member Benchupheld the validity of Central Higher EducationalAct, 2006, it unequivocally restored the creamylayer clause. However, the judgment has come asa dampener for many of the social scientists andequity advocates as it has done little to expand thesocial justice debate. Why is it difficult to break theOBC quota impasse? Why is OBC reservation a farmore controversial issue than the similar provisionsfor Schedule Castes (SCs) and Scheduled Tribes(STs)? What are the possible implications of thiskey judgment?Politics Of OBC QuotaIt is not easy to interpret Mandal II judgment. Such a statementstems from the complex nature of the Mandal II issue. In fact,the reservation for OBC is a far more complex public policyissue than the case of SCs and STs. Therefore, any interpretationof Mandal II judgment must precede by a fair glance at itsbackground, historical context, political economy and issuesinvolved so as to do adequate justice to this complex theme.The reservation system as an affirmative policy to tackledeeply entrenched social inequality/exclusion did not evolve uniformlyfor all social groups viz; scheduledcastes, scheduled tribes and theother backward classes. They tookseparate routes. While the policy ofreservation for the SCs evolvedthrough a series of mobilization by Ambedkar and others, thecase of the OBCs involved a completely different dynamic.Although the Constituent Assembly made passing reference tobackward classes and some members demanded similarprovisions as SC/STs, the new constitution did not incorporateany special measures similar to the SC/ST 1 . It merely mentionedbackward classes under Article 340 committing to set up aIn the absence of Centre’sleadership role, stateswent ahead with their ownschemes for OBCscommission to look into their problems. The issue of reservationfor the OBCs acquired an all-India status only in the post-Independencephase (Galanter, 1978).In the post-Independence phase, the first concrete initiativewas taken in the form of personal letters to Nehru and MaulanaAzad in March 1948 "requesting that some amount should be setapart for the award of scholarships to the Other BackwardClasses (OBCs) as also done for the SC/STs. Apart from theCentral scholarships, provisions for OBCs roughly followed aregional pattern." In South India and in Bombay, provisions forOBCs flourished. In Northern India, there were mostly a scatterof educational concessions and many states did not have any listsat all (other than compiled for the post-matric scholarship).Courts, Commissions And Dilemma Of OBC QuotaIn the post-independent period, the first genuine effort toaddress the demand for reservation by OBCs began in the year1953 when the Parliament appointed a Backward ClassesCommission under the Chairmanship of Kaka Kalelkar todetermine the criteria to be adopted considering whether anysections of people…(in addition to the SC/STs) should betreated as socially and educationally backward classes; and inaccordance with such criteria to prepare a list of such classes.After two years of work, the Commission presented a list of2,399 backward groups and recommended various measures fortheir economic, education, social, cultural and political advancement.The Commission estimated that these groups comprised atotal of more than 116 million members (about 32%). Asgeneral criteria of backwardness, the Commission listed tradeand occupation, security of employment, educational attainments,representation in governmentservice and, most emphatically,position in social hierarchy. 2 Interms of its recommendations, theCommission earmarked reservationsfor the Backward Classes ingovernment service of at least 25%in Class I, 33.5% in Class II, 40% in Class IV. The Commissiondesired a 70% reservation for Backward Classes students inmedical, scientific and technical colleges (Backward ClassesCommission, 1955).The Commission’s report was tabled by the both houses of theParliament in 1956 accompanied by strong critique from theMinistry of Home Affairs, expressing disappointments with itsTHE INDIA ECONOMY REVIEW73

Reliving TheGreatIndianDreamcriteria and its conclusions. The matter was however referred tostates to prepare adhoc list and Parliament did not take up theissue until 1965 despite occasional agitations by backwardclasses organizations.In the absence of Centre’s leadership role to resolve thedemands of the OBCs, the state governments went ahead withtheir schemes and methods to address the concerns of theOBCs. State after state set up their commissions and expertpanels to set criteria and recommend measures for the OBCsand some of them (Andhra Pradesh and Mysore) seem to havefollowed Centre’s line of endorsement of economic criteria inthe place of caste and many of them had to include income,literacy and other criteria largely to avoid judicial scrutiny.However, by and large all other states gave greater emphasis on‘caste’ criteria.The Mandal CommissionThe issue of OBC demand for reservation and the dilemmas ofchoosing correct criteria to measure “backwardness” thoughremained on the backburner for quite sometime at the centrallevel, some concrete efforts to find a way out emerged in thewake of the Janata Governmentcoming to power in 1977. 3 Inpursuance of their electoral promise,the Janata Government in 1979 setup a Commission under the leadershipof B.P. Mandal to look into theissues of Backward Classes andsuggest measures to address their concerns. One of the majorthrusts of the new commission was to determine the criteria fordefining the socially and educationally backward classes. It wasexpected from the Commission to come out with more acceptablecriteria than what its predecessors in Kalelkar Commissionhad offered (Prakash, 2003).How did the Mandal Commission settle the issue of determiningbackwardness and in what measure was it different fromKalelkar Commission? Due to paucity of time and lack ofrequisite resources (including research and academic inputs),the Kalelkar Commission had relied heavily on country widetour to collect on-the-spot evidence to identify castes, classesand tribes as backward, whereas the Mandal made an effort toimprove this gap by formulating a set of objective criteria toidentify backward classes. The Commission took special care totap a number of independent sources for the collection ofThe commission called for27% reservation for theOBCs in public services andseveral public institutionsprimary data. Some of the important measures taken in thisconnection were: seminar of sociologists on social backwardness,issue of three set of questionnaires to state governments,central government and the public, extensive touring of thecountry by the commission, undertaking countrywide socioeducationalsurvey, preparation of reports on some importantissues by specialized agencies like Tata Institute of SocialSciences and analysis of census data. By adopting this multipleapproach the Commission was able to cast its net far and wide(Yadav, 2002).To generate number of indicators for criteria to determinebackwardness, the commission initiated a countrywide socioeducationalsurvey, covering 405 out of 407 districts (two villagesand one urban block in each district), with the help of theBureau of Economics and Statistics of various states. The datagathered from the survey were computerized and 31 primarytables were generated from this data in respect of each state andunion territory. Indicators for Backwardness were decided firstby selecting a dozen of well known castes known for theireducational and social backwardness from each state. Thesecastes were treated as “Control” to test the indicators and derivevarious cut off points for a particularstate. Then, on the basis of analyzingseveral variables including caste asan independent variable, 11 indicatorsor criteria for social and educationalbackwardness were derivedunder three heads; social, educationaland economic.Separate weightage was given to indicators of each group. Aweightage of three points each was given to all the socialindicators. The commission applied 11 indicators against variouscastes and communities that it enlisted through its socio-educationalsurvey, state lists, public evidence and the personalknowledge gained through extensive touring and personalinterviews. By using these criteria for both Hindus and non-Hindus, the Commission identified 3,743 caste groups as OBCscomprising 52 percent of total population contrary to 32percent as estimated by the Kalelkar Commission. The 52%figure was arrived at by subtracting from 100 the populationpercentages for the SCs, STs and non-Hindus (22.56 and 16.16respectively) as per the 1971 Census, and the percentage for“forward Hindus” (17.58) as extrapolated from the incomplete1931 Census, and adding to this derived sum (43.7) about half of74 THE IIPM THINK TANK

P OLICY PERSPECTIVESthe population percentage for non-Hindus (8.4). So far as therecommendations were concerned, among others, the commissioncalled for 27% reservation for the OBCs in public servicesand scientific, technical and professional institutions run by theCentral and State governments. 4The Mandal Report faced stormy protest and opposition bothfrom the opponents and its architects. 5 Besides, politically itreceived cold response as by the time the Commission submittedits report (December 31, 1980), the Janata Government hadcollapsed and the Congress Party had assumed power at theCentre. The Congress Government under Indira Gandhi’sleadership initiated very little to implement the recommendationsmade by the commission. After a series of protests anddemands by Lok Dal led by Charan Singh, the CongressGovernment conceded to put the Report before the Lok SabhaJanata Dal, the distant heir of the Janata Party came to power.Although the decision to implement the Mandal Report wastaken in a hurry by V.P. Singh to unsettle the formidable politicalchallenge posed by Devi Lal and the group, the issue hadprominently figured in National Front’s election manifesto andV.P. Singh government’s First Inaugural Address to the Parliament.It said loudly that “the recommendations of the MandalCommission will be implemented expediously”. This suddenannouncement of new quota of 27 per cent brought a violentnation wide agitations, public outcry ultimately leading to thefall of V.P. Singh government in 1990.The implementation of the recommendations of the MandalReport was challenged and opposed not only by angry studentsbelonging to the upper caste Hindus, but also by the SupremeCourt Bar Association. A writ petition was filed in the name ofIndra Sawhney, one of the practicing advocates of the SupremeCourt. A nine members Bench of Supreme Court in IndraSawhney v. Union of India (Mandal-I) judgment made farreaching announcements defining nature and relevance ofOBC quota. The Bench rejected the quota proposal for “economicallybackward” as suggested by the Government and wenton to uphold 27 per cent reservation for the OBCs subject to theexclusion of socially advanced persons/sections (creamy layer)from amongst the OBCs and directed the government to evolvecriteria for identification of this creamy layer. 7 Importantly, theBench sought the Government to revisit the OBC lists and findout more appropriate mechanisms than only the ‘caste’ toascertain backwardness. In short, for the first time, the HighestCourt recognized the legitimacy of OBC reservation in clearterms by clearing all ongoing doubts and controversies.on 30 April 1982 and it was done when there was barely aquorum in the House, a clear indication of ruling party’spriority. While the OBC leaders like Chandrajit Yadav of LokDal demanded for speedy implementation of Mandal Report,senior Congress representative in the House objected to suchaffirmative measures for the OBCs. 6 The Report was notimplemented by the Congress and rather the Party went on toannounce a new 20-point program which emphasized healthcare, welfare programmes for women and greater provision ofeducation (Jaffrelot 2003).The OBC reservation came to limelight in 1989, when theMandal IIThe Supreme Court’s judgment in Indra Sawhney case althoughcleared the persisting doubts over the legality of reservation forOBCs, it left number of areas of potential conflicts particularlythe extension of reservation to other domains particularly thelucrative higher education. Owing to the constant politicallobbying by OBC groups and UPA’s own calculation of regainingbackward classes constituencies, in 2005 the issue of extendingreservation in higher education institutions was taken up by theLok Sabha in the form of 93 rd (Constitution) Amendmentextending 27% of seats in elite educational institutions such asIndian Institute of Technologies and Indian Institute of Managementfor OBCs. This was followed by an Act of Parliament inTHE INDIA ECONOMY REVIEW75

Reliving TheGreatIndianDream2007 which confined itself to quotas for OBCs in centraleducational institutions.However, this move was opposed by number of legal luminariesand open groups like Youth for Equality by means ofagitations and filing petitions before the Highest Court. Thequota for OBCs was opposed on several grounds. One is thatsuch quotas violate the right to equality enshrined in theConstitution and hence undermine the basic structure of theConstitution. This roughly translates into the most commonargument against quotas, namely, that ‘merit’ or marks obtainedalone should be the basis for admission to educational institutions.The other being that the quotas cannot be caste-based: wecannot equate “backward classes” with “backward castes”. Thisagain is an argument often heard in popular discourse. Thosewho oppose quotas for Socially and Educationally, BackwardClasses (SEBCs) say they are all for affirmative action in favourof the economically weak. But they are opposed to caste-basedquotas because well-off groups or individuals — the ‘creamylayer’— tend to walk away with the benefits.In responding to these arguments, the Supreme Court’sfive-member Bench in Ashok Kumar Thakur Vs. Union of Indiaand Others (Mandal II case) the Bench said that there is theright to equality, however, the basic structure of the Constitutionis violated only when any right is abrogated, not when thatright is amended or altered. In short, the Bench unanimouslyagreed that it is legitimate to place some limitation on the rightto equality in order to pursue a larger social purpose. In supportingthis view, the Court supported caste as legitimatecriterion for determining backwardness, although not the solecriterion. The Court said as long as caste is used along withother criteria for determining backwardness, it cannot be said tobe violative of the Constitution. As for the ‘creamy layer’, theBench unanimously rejected its exclusion from the mainprovision of reservation. The judgment said that creamy layerstands excluded the moment it is accepted that, along with caste,poverty has to be a criterion for determining backwardness. Inthe words of the Chief Justice, extending the benefits of quotasto those who have already attained economic well-being oreducational advancement would be “unreasonable, discriminatoryor arbitrary, resulting in reverse discrimination.”Interpreting The Mandal IIAs expected, the Mandal II judgment has generated a mixedreactions both from its supporters and the opponents byproviding a pie to everyone to salvage their reputation. Whilethe Human Resource Development minister Arjun Singh, themost ardent champion of OBC cause was quick to call theverdict “historic”, the anti-reservationists could take some leafout of the Supreme Court’s unanimous rejection of creamy layerexclusion from the quota law. However, there are number ofacademics and analysts who responded saying that the judgmentas “cautious and conservative” as it missed another opportunityto settle the quota controversy. To them, the judgment in AshokKumar Thakur Vs. Union of India case nearly confirms to theMandal I (Indra Sawhney vs. Union of India). Not only has thejudgment once again reiterated the importance of ‘caste’ indetermining backwardness that it had uttered in Mandal-Ijudgment, it has sought to re-emphasize once again on the exitroute for forward communities among backward classes.On a more stricter note, the Mandal II judgment by givinggreen signal to OBC reservation with its overwhelming emphasison ‘caste criterion’ has killed the possibility of havinginstitutional brilliance and innovation in affirmative action.From now onward, it will be uniform 27% quota implementedmechanically as one sees in the case of SC/STs. A known scholaron affirmative action has put it aptly saying "this round of quotadebate reaffirmed our inability to come out of the spell of easysolutions. The debate, the arguments in the Court and the rulingitself seem to have let slip the opportunity to shift the paradigmof social justice debate. The supporters were blinkered in theirsteadfast efforts to perpetuate quotas as instruments of socialjustice; the opponents showed a matching lack of concern forsocial justice as a policy concern; the Court chose to restrain76 THE IIPM THINK TANK

P OLICY PERSPECTIVESitself and allow the political class to miss the opportunity."(Palshikar, 2008).Possible ImplicationsWhat are the possible implications of a supposedly conservativejudgment? The implications of the Mandal II judgment could befar reaching. The most immediate impact will be felt by thecentral higher educational institutions. Elite higher educationalinstitutions particularly the IITs, IIMs and Central Universitieswill be under heavy pressure to rapidly enhance their facultystrength and infrastructure in order to accommodate additional27% students. Given the near collapsing academic and researchfacilities that these institutions have, it would be seen how theyrespond to this huge additional burden while not compromisingtheir once enviable quality and academic reputation.The judgment, however, has several long term implicationswith far reaching costs for the country. First and the foremostimpact will felt on the issue of creamy layer. Although the Benchwas unanimous in its stand on theinclusion of creamy layer in order toimply that the policy of compensatorydiscrimination was not based oncaste alone but on other factors suchas social and economic advancementas well, except for some personaljottings by individual judges, the Bench has once again failed toclear the deck in terms of determining creamy layer criteria. Ithas still left a number of grey areas on which there will bepotential areas of claims and counter-claims by its supportersand the opponents. Already several political parties can be seenpitching their voice in favour of dropping out creamy layer andare exploring means to move a review petition before the Court.The political parties and OBC groups supporting creamy layerexclusion are exploring other options to tinker the creamy layercriteria to allow well off sections among OBCs being included tobenefit from higher education quota. One of the suggestionsdoing rounds is the enhancement of income criteria to Rs. 6lakh than the current Rs. 2.5 lakh. In short, the judgment isbound to keep the creamy layer debate on boil. Second andrelated to the creamy layer controversy is the issue of sub-categorizationof the backward classes. With the growing demandfrom other social groups to get an entry into OBC lists and theensuing battle over removing creamy layer clause, there areenough indications for sub-categorizing the OBCs in theThe most importantimplication of the judgmentwill be on unaided privatelyrun educational institutionsmanner that Tamil Nadu, Karnataka and Bihar have undertaken.There are suggestions that since the inclusion of creamylayer will lead seats remaining vacant for OBCs, the appropriatestep can be to sub-categorize OBCs (extremely backward, mostbackward and backwards, etc) and earmark a percentage asproportionate to their share of the population. In other words,the Supreme Court’s unequivocal stand on creamy layerinclusion leaves little options for quota warriors but to explorebest possible bargain and sub-categorization looks to be mostattractive alternative.Final and the most important implication of the judgment willbe on unaided privately run educational institutions. Althoughthe judgment did not take the legality of reservation in unaidedprivate educational institutions and some of the judges haveexpressed in negatives to support such a move, the Bench hasnot settled the legality of extending reservation to unaidedprivate education institutions. With a rapid expansion of privatehigher educational institutions since the last decade and thegrowing call from various sections tomake these institutions inclusive,there is going to be another round ofquota battle in the court and on thestreets. Such a possibility looks quiteimminent with the current governmentweighing options to draft a Billon this in the next session of the parliament.Endnotes1In the Assembly, there was considerable confusion about whois a backward class person and reservation for other backwardclasses. The delegates from the north expressedpuzzlement at the provisions for “Backward Classes” (in whatcame to be Article 16[4]). It struck them as vague and somethought it was meant merely as a synonym for the ScheduledCastes, while others were concerned that it might mean more.While the representatives from Madras, Mysore and Bombayassured their colleagues that Backward Classes was a distinctterm with a technical meaning. Examples were given ofMysore where Backward Classes included all but Brahmins,of Madras where it referred to a stratum of non-untouchableHindu castes and to Bombay where it included not onlyScheduled Castes and Tribes but others who are economically,educationally, and socially backward. K.M. Munshi, a leadingmember of Assembly assured the delegates that “the termTHE INDIA ECONOMY REVIEW77

Reliving TheGreatIndianDreamsignifies people – touchable or untouchable, belonging to thiscommunity or that – who are so backward that special protectionis required in the services.” When the same was referredto Ambedkar, he replied that the backward community is leftfor the local government to decide. All these clearly indicatethat the matter was not clearly settled and to which T.T.Krishnamachari predicted to a “lawyers paradise” in time tocome (See : CAD, Vol-IX).2While indicating its desire to end perpetuation of the evils ofcaste and its eagerness to avoid caste, the Commission “foundit difficult to avoid caste in the present prevailing conditions”.The Commission felt it was “not only correct but inevitable” tointerpret its terms of reference “as mainly relating to socialhierarchy based on caste” (See Galanter, 1978).3The OBCs bandwagon was led by Ram Manohar Lohia, thetallest socialist leader who publicly demanded 60% of civilservices reserved for the backward classes. The Socialists couldnot however, promote their ideas at the Centre as long as theCongress remained in office. They finally could reach thatposition through Janata Party victory in 1977.4As per the earlier verdict of the Supreme Court in Balaji Case(1963), the maximum quota can stretch up to 50 percent. Sincethe SC/ST reservation was 22.5 percent, the maximum that theMandal Commission could recommend was 27 percent.5Social anthropologist Roy Burman who was the Chairman ofthe Research Planning Team and a member of the TechnicalSub committee of the Mandal Commission and who dissociatedhimself from the commission’s findings, argues that thecriteria adopted were faulty, and suggests what should havebeen done by the Commission. This was also opposed anddenounced by other members of Technical Committee likeYogendra Singh and M.N. Srinivasan. The only dalit memberof the Commission, L.R. Naik too protested against theReport of the Commission by not signing its recommendations.See B.K. Roy Burman, “Formula for Identification ofOBC,” Vacham, Bhopal, 3(1) January 1992, pp 23-25. Seealso Andre Beteille, “Is Job Reservation a Good Policy,”Seminar, No. 375, November 1990, pp 41-42.6R. Venkataraman, who was the then Defence Minister wenton to claim that the Mandal Commission Report which hadidentified 3,743 castes, contradicted the findings of the KelkarCommission. According to him, neither could it be reconciledwith the lists established by the states. He went to demandsuch affirmative policies for economically backward people aswell. (See Lok Sabha Secretariat, Lok Sabha Debates, NewDelhi, Vol.31, 1982).7The government appointed a committee to address the issue.As per the recommendations, the rule of exclusion applies tochildren of persons holding different constitutional positions,class-I officers and defence officers who hold the rank ofcolonel or above. The children of persons with annual incomegreater than Rs.1 lakh were also to be excluded. The limit waslater revised to Rs. 2.5 lakh in 2004.References:1. Das, Bhagwan (2000): “Moments in a History of Reservations”,Economic and Political Weekly, October 28.2. Galanter, Marc (1984). Law and Society in Modern India.New Delhi: Oxford University Press.3. Galanter, Marc (1984). Competing Equalities: Law andthe Backward Classes in India, Berkely: University ofCalifornia Press.4. Jaffrelot, C (2003). India’s Silent Revolution: the Rise ofthe Lower Castes in North India. Delhi: Permanent Black.5. Palshikar, Suhas (2008), The Quota of Missed Opportunities,Indian Express, April 12.6. Shiva Rao, B. (1968): The Framing of India’s Constitution:Volume III, New Delhi: Indian Institute of Public Administration.Reports• Backward Classes Commission Report (Kaka Kalelkar),Government of India, 1953.• Report of the Backward Classes Commission, 7 volumes,New Delhi, 1990.• National Commission for Scheduled Castes and ScheduledTribes (Fifth report, 1998-99)• Mandal Commission Report, 1980, Government of India.• Constituent Assembly Debates, Volumes 5, 6, and 7.Judgments:• Indra Sawhney and Others vs. Union of India(1993), AIR477 (SC).• Ashok Kumar Thakur vs. Union of India and Others (2006),A.I.R. SC at 265(The views expressed in this article are those of the author anddo not necessary represent those of ORF. Readers may contactthe author at niranjansahoo@orfonline.org).78 THE IIPM THINK TANK

THE HUMAN FACTORM A K E W E A L T H W H I L E O T H E R S T H I N K O F I TNEED THE DOUGH?January-March 2008 Volume 3 Issue I www.iipmthinktank.comRs. 100PRIVATE EQUITYSPECIALPITFALLS INVALUATION OFPRIVATE EQUITYINVESTMENTSAN IIPM THINK TANK PUBLICATIONAn IIPM Intelligence Unit Publication | 286August-October 2005

Reliving TheGreatIndianDreamFUTUREWISE:Public-PrivatePartnership(PPP)Model for IndianNanotechnology80 THE IIPM THINK TANK

P OLICY PERSPECTIVESVivek Srivastava,Consultant, Nano-IT Associates,MumbaiNanotechnology is the new buzzword in the techcommunity and likely to become a household namein the near future. A very general definition of thetechnology is “the science and technology of small things,typically a few nanometers in length scale”. A nanometer isone billionth of a meter. Introductions to the topic typically tryto make the nanometer more tangible by comparing it to thewidth of a human hair. However a 1:1,00,000 relationship(which happens to be the ratio of one nanometer to width of ahuman hair) still remains quite intangible to conceive for mostof us. To get a real perspective on the numbers, consider anatom of hydrogen, the smallest atom known. If ten hydrogenatoms were placed next to each other the total length of theline thus generated would be ONE nanometer. A humanblood cell is about a thousand nanometers. The excitementabout nanotechnology is sometimes due to the possibility ofminiaturization. A television commercial in recent times by abig multinational company reinforces that impression bytalking about cell phones of the size of a fingernail. Though,nanotechnology does allow for miniaturization, to think ofnanotechnology as a miniaturization technology is to miss thepoint completely. Nanotechnology, or the technology of smallthings, offers possibilities much beyond miniaturization. Forthe scientifically oriented, the technology has numerousfundamental differences to the various technologies developedto date:• The science behind the technology moves from Newtonianlaws of motion to Einsteins’ laws of relativity and quantumphysics. The usual forces of gravity, inertia, dynamics andelectrostatics on the macro (typically acting over a fewmicrons) no longer govern the design. Hiesenberg’s uncertaintyprinciple, laws of relativity and atomic interaction forcesform the basic design rules in this regime.• The technology is not material dependent; rather it aims tolead to new materials with novel properties. Amazingly, fornano-crystalline materials, the proportions of atomssituated at boundaries goes up to 40-50% and nominallysame material exhibits rather unusual properties likesuperplasticity, exceptional strength, resistance to wear andtear, lower band gaps etc. Looking a step further, it will bepossible to manufacture new materials atom by atom withdesigner properties. The concept remains the same as thatof composite materials; with the difference that now we candesign properties beyond just mechanical properties likestrength and stiffness.• The technology attempts to replicate nature. All fabricationtechniques employed to date use a top-down approach,i.e. attempt to build a system by assembling togethercomponents. The components themselves are made byremoving away material by machining or etching. However,researchers in nanotechnology are focused on developingtechnologies that use self-assembly concepts or a bottom-upapproach. This approach is characterized by attempts tobuild components by putting together materials (or atomsand molecules) using the memory of these components.This is the fabrication technique that is used by nature e.g.formation of sugar cubes from a solution or the naturalgrowing process of living beings. A step closer to nature is astep closer to being GOD or creator.Nanotechnology, or the technologyof small things, offers possibilitiesmuch beyond miniaturization• The technology is intrinsically scalable at various levels andtherefore economies of scale can be employed.Current State Of The Indian NanotechnologyIndian economy has been growing consistently at 8-9% overthe last five years and has led to a spate of new products in themarket place. Indian and global corporate are rushing to graba share of this expanding and potentially huge market, and areinvesting in technology to improve their products. LeadingIndian companies like Reliance, Tata Group, Mahindra &Mahindra, and Intel India are making investments in nanotechnologyboth for improving products their existing businessesand new businesses for the next generation. According tosome rough estimates these companies have pumped in closeto $250 million in R&D. For example, Tata Chemicals islooking at entering the biotech business using nano-science asa base and focusing on high value fertilizers at its R&D lab inTHE INDIA ECONOMY REVIEW81

Reliving TheGreatIndianDreamHyderabad, while Reliance has set up a nanotechnologycentre to concentrate its R&D efforts in the area. Nanotechnologyis making inroads in the automobile accessoriessegment and Indian automobile OEM, Mahindra & Mahindra,are investing in technologies like wiper free windscreenand nano-ceramic window films.A handful of start-up companies have emerged in the last4-5 years. Out of about a dozen start ups founded since 2002,50% of them are providing consultancy, market research andtraining, while product development efforts are directedtowards chip design and development, nanomanipulation,nanomedicine, and nanomaterials (e.g. carbon nanotubes,silica and alumina). Almost all these start-ups are at productState has spent approximately $50million over the past five years topromote R&D in Nanotechnologydevelopment stage with limited commercial success. Lack ofseed capital is hampering these product development efforts.Indian venture capital firms, especially after the IT bust at theturn of the century, are risk averse and are reluctant toprovide seed funding to unproven businesses.Government Spending On Nanotechnology On TheRise To Promote Infrastructure DevelopmentThe government has been at the forefront of promotingnanotechnology industry in India through its three majorfunding agencies, namely Department of Science and Technology(DST), Department of Scientific and IndustrialResearch (DSIR), and Department of Biotechnology (DBT).DST launched the NanoScience and Technology Initiative(NSTI) in 2001 under the leadership of Prof. C. N. R. Rao. Itsaim was to make India a major player in this sector, andprovided a total of $15 million for nanotechnology over fiveyears. The NSTI funded about 100 research projects, andprovided funding for setting up ten core groups in nano-science,six centers of nanotechnology, and one of computationalmaterials science at different institutions across India. DSTremains by far the largest funding agency. Governmentspending in nanotechnology through all its funding agenciesamounted to less than $20 million (in 2003-04) out of totalR&D expenditure of about $3.03 billion (0.8% of GNP ofIndia). According to government figures, the government hasspent approximately $50 million over the past five years topromote R&D in the area of nanotechnology.Under the leadership of the outgoing president, Dr. A.P.J.Abdul Kalam, public spending on R&D in nanotechnology isrising in India. The government recently passed a proposal toinvest Rs.1,000 Crore (US $230 million) under a five yearNanoScience and Technology Mission (NSTM). This isfollow-on programme to NSTI launched in 2001. For thenewly launched NSTM, there is no 'mission document' yetavailable to give an idea of what the mission objectives wouldbe and what the deliverables would be. However some detailsof how the money is likely to be invested can be obtained fromthe press releases and ministerial speeches. The mission envisagescreation of national facilities at five different placesspecializing in complementary areas, including one or morenano-fab facilities, with an investment of about Rs.100 Croresin each of them over the next five years, ten mini centersacross the country (which may or may not be co-located withthe national facility). The mission also proposes the creationof a synchrotron facility with an investment of about Rs.250Crores in addition to the one already being established underthe Department of Atomic Energy.R&D activity in India is concentrated at the top-20 premierinstitutions like Indian Institute of Science, various IndianInstitute of Technology, and universities like Anna University,University of Delhi. Defense organizations like DefenseResearch and Development Organization (DRDO) are alsoactive contributors to R&D output from the country. Theseorganizations will be profiled in greater detail in thesecolumns. These institutes focus on basic research and includefollowing research areas: synthesis of nanomaterials andnanocomposites, thin films processing and characterization,nano-sensors, nano-biotechnology, and superconductivity,micro- and nano-fabrication.However, India’s nanoscience and technology funding andpolicies are in their infancy. The fact that the latest R&Dstatistics released by DST make no exclusive reference to thissector makes it clear that it has not emerged as a major areaof research in India, despite the emphasis placed on the industryby the President of India himself. One of the majorbarriers to growth of nanotechnology industry in India is lackof capital and nanotechnology infrastructure. The govern-82 THE IIPM THINK TANK

P OLICY PERSPECTIVESment has set up special funds to develop facilities and infrastructureto conduct nanotechnology research in variousinstitutions. Indian Institute of Sciences (IISc), Bangalore hasset up a joint research initiative involving 40 faculty acrossvarious department to provide shared access to world classinfrastructure. Indian Institute of Technology (IIT)-Bombay isdrawing up plans to set up a nano-fabrication facility that isaccessible to all researchers in the country.Latest R&D statistics released byGovernment make no exclusivemention of Nanotechnology sectorPotential To Become A Major R&D Hub AndService ProviderIn an effort to exploit the advantages offered by India, largemultinational companies like General Electric, GeneralMotors and IBM have set up captive R&D bases in India.Smaller companies too, like Nano-tex have plans to set up aR&D centre in the region to carry out research on nanoparticlesfor fabrics and textiles. It has an existing tie-up with anIndian textile and garment manufacturer, Madura Garments.The company’s management explains that the motivation forthis step was to exploit technological skills available in thecountry and to forge closer ties with Indian customers.Some other companies like Monad Nanotech have taken upagencies to market nanomaterials in the country, to exploitthe market potential and skilled sales staff. Yash Nanotechhas tied up with Cientifica, a leading information and consultancycompany to offer market research, consultancy, andtraining services to Indian businesses venturing in this space.Hilaal Alam, CEO of Qtech Nanosystem, elaborates on thistrend: “India has got (the) potential to become a serviceprovider for (global) nanotechnology industry; but not apipeline for new products. Majority of investment in India uptill now has gone in services sector and into building a testingand characterization infrastructure.” He laments the lack ofcoordinated efforts in building product development capabilities.Incidentally, Qtech Nanosystems which started operationsin Bangalore, India, has shifted its corporate activities toSingapore and utilizes their base in India for manufacturingand QA. An analysis of the geographical location of thenanotechnology companies reveals that Mumbai and Bangaloreare emerging as favored destinations by the industry.These two locations offer differing advantages. Mumbai ispreferred for its concentration of Indian industries andcorporate houses. The IT and biotechnology hub of thecountry, Bangalore, offers access to superior technical talent.It is also the seat of IISc, the leading centre for nanotechnologyresearch in the country. Convergence of IT, biotechnology,semiconductors, and nanotechnology industries inBangalore is likely to throw up some of the most fascinatingdevelopment in the coming years. Such confluence of mostadvanced technologies, coupled with the “entrepreneurialfrenzy” gripping the region is most likely to propel BangaloreTHE INDIA ECONOMY REVIEW83

Reliving TheGreatIndianDreamas a leading centre of nanotechnology research in the world.Technical Skills Available Aplenty, Capital AndManagers At A PremiumIndia offers a large and growing market for nanotechnologyenabled products, fuelling investment in a diverse range oftechnologies for product development and improvement. Thisis coupled with availability of low cost, young technical talentin the country and experienced scientists returning from west.This had led to establishment of competent research groups atvarious research institutes working on futuristic products andtechnologies. Growing awareness and emphasize on intellectualproperty related issues has resulted in growing number ofpatent applications and simplified the technology transfermechanism. Nanotechnology R&D in premier Indian researchinstitutes is blossoming thanks to international andlocal collaborations between industry and academicians.Optimists believe that this would lead to an explosion of newand innovative products and technology in near to mediumterm. Some of the key barriers – capital, managerial andcultural, are identified and discussed below.India is many ways a land of contrasts: the country boasts ofhaving four of the ten richest individuals in the world and atthe same time its farmers are forced to commit suicide due topoverty. A country is the midst of rising feminism and alsoreporting rising rate of female foeticide. It is also a countrywith over-supply of funds, coupled with lack of funds for newentrepreneurs. Venture capitalism is essentially taking abackseat and is relegated to oblivion by private funding to topnotch companies and mid-cap companies with proven trackrecord. ASSOCHAM forecasts that private equity funding inIndia is expected to be $48 billion by 2010. Similarly, microfinancealso got much impetus with conventional banksforaying into the field. Reports state that by 2010, amount ofmicrofinance in India would be about $3 billion. But theproblem of availability of seed capital for a conventionalstart-up still remains. As a rule of thumb, if it takes one dollarto do research, it takes additional ten dollars to do developmentand a further 100 dollars to do product marketing andsales. Cambridge Commonweath Trust may well provide8,00,000 pounds to IIT-Bombay for academic research, whereis the rest of 100 million pounds for a nanotech start up goingto come from? As discussed earlier, Indian VC community isvery small and stays far away from anything involving technologythat is non-IT. Without a local VC leading the investment,oversees investors would rather relocate the company to theirpreferred geography. For this to happen, either the company/technology should either be a particularly promising one, orelse the promoters should be willing to move base on theirown accord. This adds extra complication like disruptedpersonal lives, integration into a new business environmentetc. More commonly we see technologies developed in Indianuniversities transferred to foreign companies and the productsshipped back into Indian market. This is the preferred and84 THE IIPM THINK TANK

P OLICY PERSPECTIVEStraditional route to (globally) commercialize innovativeIndian R&D. Experiments involving university spin-offs,start-ups, technology transfer to local businesses have remainlimited to local markets primarily due to limited funds tolaunch products globally and to some extent with the size ofthe dream of Indian entrepreneurs. Having said that, one alsoneeds to note that Indians are increasingly dreaming big andrisk taking appetite is increasing greatly. The moot point is “Isthe change fast enough to yield the desired results in fivesevenyears or not”.As R&D activities rise in the country, shortage of experiencedtechno-commercial managers is increasingly being feltiterating the whole process. This is quite frustrating for mostIndian psyche. The journey from a concept and a product ininvolves more brawn than brains and not very palatable toIndian culture. To supplement my argument, consider thisfact. India has produced some of the world’s best physicists,chemists and mathematicians (Sir Raman, Aryabhatt, Chandrasekhar,C. N. R. Rao to name a few prominent names).World renowned engineers from India though remain in shortsupply. At the risk of being severely criticized, I venture to saythat India is not best suited for engineering and manufacturingkind of industries and its strength lies in providing servicesand knowledge.across industries. This is especially true for an interdisciplinaryfield like nanotechnology, and lack of competent productand program management, marketing, sales, and distributionASSOCHAM forecasts that privateskills may turn out to be major weakness for the Indianequity funding in India is expectedindustries. Nanotechnology start ups looking to hire thesetalents face stiff competition from cash rich industries, which to be $48 billion by 2010themselves are experiencing major shortages of experiencedprofessionals with business skills. Nanotechnology start upsare further disadvantaged when compared to similar companiesfrom other sectors like IT or services due to high risk thatis inherent to unproven technologies and long gestationperiod during product development and commercialization.Finally, I come to the most controversial of my argumentsconstraining the nanotechnology industry in particular andmanufacturing sector in general. Historically, Indians hasdisplayed a higher affinity towards science as compared toengineering. The Indian culture strongly promotes abstractthinking, philosophical discussions, and conceptualization.Nobel Laureate Dr. Amartya Sen discusses this aspect ofOvercoming The BarriersDespite all the hype surrounding nanotechnology, it stillremains a nascent technology. So far, there hasn’t been asingle major success story in this technology. To sustain theinterest in nanotechnology, unless the results start to show,would be a major challenge in the short to medium term.In order to emerge as a major player in nanotechnology, Indiahas to frame policies and establish an eco-system that overcomesthese debilitating disadvantages. While some of theissues are generic in nature; access to long term capital andfacilities is a matter of survival for a budding, technologyIndian culture in greatdetail in his book, “the Table 1: Comparative Assessment Of Various Product Development Modelargumentative Indian”.The next step, takingProduct DevelopmentModelsInhouse R&D StartupAcquistionTechnologyAcquisitionCollaborativeNPDLscience to the world of Technology Fuzzy Frontend Fuzzy Established Emergingengineering, though, is notone of the greatest Indian Intellectual Property OwnedFrontendOwned Owned Sharedstrength. Engineering Cost High High High Moderateinvolves filling in the Experience & Expertise High High Low LowRequireddetails, going through theRisknumbers, conductingHigh High Low Lowrepetitive experiments,Risk Diversification None None Low Hightesting, validating and Source : Nano-IT AssociatesTHE INDIA ECONOMY REVIEW85

Reliving TheGreatIndianDreamintensive nanotechnology industry.• Access to high quality, cheap, readilyavailable infrastructure and lab facilities• Availability of governmental support interms of grants and loans• Easier entry to global marketplace andaccess to capital• Stronger IPR protectionFollowing three models have been successfulemployed elsewhere in the world to helpstart-up companies and potentially can beemployed to support emerging Indiannanotechnology companies.i) Public-Private Partnership (PPP):PPP between the public and private sectors todeliver infrastructure services for the industry.University led and government fundedincubation centres form the backbone of suchinitiatives. These incubation centres form the hub for technologylicensing, joint R&D, and hand holding to facilitatefledging business opportunities in nanotechnology. MinisterIndian culture strongly promotesabstract thinking, philosophicaldiscussions, and conceptualizationof state for finance P. K. Bansal admitted that the governmentis not in a position to make large investment in nanotechnology,and PPP model is required to tap the potential of thesegment. In April, 2006, first such project having state-of–the-art institutes and world class facilities was announced forsetting up a “nano-city” in the state of Haryana for a totalinvestment of US $2 billion.ii) Collaboration With LSI/MMC:This model enables speedy scale up of a commercially feasibletechnology. The start up can use a high quality infrastructureand good management practices, right in the initial stage,along with a readymade market. This model is gainingincreased acceptance from the industry with a number ofMNCs having their own venture funds to support theseemerging/nascent technologies.iii) Segment Approach:The difference between the earlier and this approach is thatthe partnering companies do not have an exclusivity clause inthe agreement. This allows the start-up to work with only onelarge company in one particular segment. After establishing afoothold in that particular industry segment, the start-upexpands by developing applications and products for othersegments.Collaborative Approach Shares Risks And CostsFor New Product DevelopmentSeveral existing businesses are evaluating nanotechnology as aroute to create growth opportunities. A number of R&Dprograms are underway at various organizations aimed atdeveloping new products using nanotechnology. However,due to the IPR related issues most of these efforts are beingcarried out in isolation. The matrix (Table 1) presents acomparative evaluation of traditional technology and productdevelopment models viz. inhouse R&D, startup acquisitionand technology transfer along three dimensions: Technologyand IP issues, cost and expertise required and risk factors. It86 THE IIPM THINK TANK

P OLICY PERSPECTIVESFigure 1: Collaborative NPDL Model-- Expertise Of All ThePartners Are Leveraged In Mutually Beneficial WayBasicResearchUniversitiesSource : Nano-IT AssociatesAppliedResearchNano-tech CompanyTechnical expertsNano InfrastructureProduct Development expertCustomer 1Domain knowledgeMarket knowledgeDistribution NetworkCustomer 2Domain knowledgeMarket knowledgeDistribution NetworkProductDevelopmentTeam1can be seen that the traditional models only offer advantagesin terms of ownership of IP, while have major disadvantageswhen viewed along other dimensions. One important factorCollaborative NPDL model worksin a manner that is very similar tothe classical outsourcing modelDevelopmentProductDevelopmentTeam2(that is not obvious from the matrix) is the technical expertiserequirement. For successful technical development in nanotechnology,there is a need to have interdisciplinary expertise.This can be achieved only by having large teams with expertsin fields like science, engineering, product development anddomain experts. Assembling such a diverse team can be adelimiting factor and sometimes even not possible due tolimited number of scientific and domain experts available.Keeping these factors in mind, a new business model based on“Collaborative New Product Development and Launch(collaborative NPDL)” is proposed. This model takes aholistic view of the various issues and with a specific focus onthe basic nature of nanotechnology. By compromising onownership of IP, it offers a whole lot of other benefits thatmore than offset sharing the IP. Moreover, thepresent IP regime is far from perfect and hasnumerous loopholes that can be exploited andis a very poor mechanism in terms of achievinga sustainable competitive advantage.Exploiting Diverse Competencies ToGenerate ValueThe above arguments demonstrate that both:nanotechnolgy start-ups and establishedbusinesses stand to gain by collaborating moreclosely with each other and leveraging theirmutual competencies to ensure better executionand smoother launch of new products andtechnologies into the marketplace. In today’s“synconomy”, there is growing recognitionthat businesses are becoming increasinglyinterdependent and need to operate innetwork of value generating agents. CollaborativeNew Product Development and Launchmodel explicitly incorporates these dynamics and adopts themto the nuances of the nanotechnology industry.Collaborative NPDL model works in a manner that is verysimilar to the classical outsourcing model (refer Figure 1).The technical development part of the business is outsourcedto a company that has nanotech as its core strength. Thisstart-up company should have a team of nano-scientists,engineers from all traditional branches and experts in productdevelopment. The outsourcing corporate partner/customerwould provide domain experts to help build a complete team.This team works closely on product development tapping intothe combined pool of human, technical, infrastructural andfinancial resources such that the costs and risks are sharedbetween all parties. On completion of the developmentwork, the patents can be licensed out for exclusive use ofthe partner.References And Additional Thinkinghttp://www.nanotech-now.com/columns/http://www.nanotech-now.com/columns/?column=10http://www.nsti.orghttp://nanomission.gov.in/(Views are personal and please send your feedback atsrivastava.v@gmail.com).THE INDIA ECONOMY REVIEW87

Reliving TheGreatIndianDreamEconomicReforms AndCompetitionLawImplementationIn DevelopingEconomiesS.ChakravarthyCivil Servant; Consultant to World Bank,Asian Development Bank; Formerly, Member,Monopolies and Restrictive Trade PracticesCommission, India; Presently, Consultant onCompetition Policy and LawIntroductionThe world economy has been experiencing a progressiveinternational economic integration for the last half a century.There has been a marked acceleration in this process ofglobalisation and also liberalisation during the last threedecades. This paper, sequentially, addresses the broad contoursof liberalisation and economic reforms, consumer andpublic interest, executive policies like trade policy, State88 THE IIPM THINK TANK

P OLICY PERSPECTIVESmonopolies policy, labour policy, WTO compatible policies,objectives and focus of competition policies and specificallydeals with implementation problems.Liberalisation And Economic ReformsThe economic factors, which have been instrumental in thisprocess of globalisation, are the dismantling of barriers tointernational economic transactions, the development ofenabling technologies and emerging forms of industrialorganisations. Recent years have seen widespread regulatoryreforms and the privatisation of many State-owned enterprises.These reforms have been undertaken as a result of an increasedawareness and evidence of regulatory failure. There isa perception, in the developed countries and market economies,and also in the developing and under developed economiesthat not only do markets fail to function but regulation isTHE INDIA ECONOMY REVIEW89

Reliving TheGreatIndianDreamoften seen not achieving its objective of correcting marketfailures (OECD, 1992).The formulations of an intellectual rationale for globalisationsuggest that it is a means to ensure not only efficiency andequity but also growth and development in the nationaleconomies in particularand the world economyin general. There is theneo-liberal model,which suggests certainanalytical foundationsfor the intellectualrationale. It argues thatGovernment’s intervention in the economic process can lead toserious inefficiencies. It further argues that a competitivemarket is the preferred alternative as it is seen to generallyperform better. The model proceeds on the assumption thatrelative market prices conforming in ratio to internationalprices (as far as possible) should govern policies on resourceallocation and resource utilisation and further proceeds tosuggest that national boundaries, national ideologies anddomestic economic concerns should not act as constraints.Regulatory regimes were enforced in many countries in the60’s and 70’s. India, in particular had a kind of a strongregulatory regime till 1991, when certain measures and policieswere ushered in as a part of the liberalisation and globalisationprocess and economic reforms. The regulation regime utilisedmany devices, ranging from price control to control of the“commanding heights” in the economy by State-ownedenterprises, allocation of public procurement, control offoreign direct investment, regulation of entry and exit includingthose of sick units, public subsidies, etc. Governments alsoused various means to monitor the shaping of industry structuresand to protect their national firms from the rigours ofdomestic and international competition. With economicderegulation, countries have taken to measures designed toeliminate public monopolies and to open competition instrategic sectors such as telecommunications, electricitygeneration and distribution, airlines, railway transportationetc. There has been an increasing trend towards introductionof competition in the economic activities of many countries- developed, developing and least developed. However,competition cannot be legislated for.What is needed is a range of Government policies to enablethe economy to conform to basic market principles. Tradepolicy, industrial policy, privatisation, de-regulation, regionalpolicy and labour and social policy all need to be conducted ina manner compatible with the market mechanism for aneconomy to function as efficiently as possible. These policiesneed to be conducted ina complementarymanner and it isimportant that amechanism exists forincorporating the“competition dimension”within Governmentdecisions on such policies. Experience suggests that, inthe process of transition to a less regulated and more openeconomy, the existence and application of competition policycan usefully support other policy initiatives (APEC, 1999).Competition cannot be legislated for.What is needed is a range ofgovernmental policies to enable theeconomy to conform to market principles90 THE IIPM THINK TANK

P OLICY PERSPECTIVESIn most developing countries, if Industry is to competeeffectively on a global basis, it is only fair that it should begoverned by laws and regulations which are globally competitive.It is therefore important that a specific study should bemade of existing laws and regulations extant in a country, fromthe perspective of competition principles before positing acompetition regime. Since competition policy depends verylargely on free and open entry, it follows as a corollary thatimpediments to free and easy exit are not allowed to behandicaps to it.Consumer Interest And Public InterestAt this stage, a brief discussion on the difference betweenconsumer interest and public interest may be necessary to helpappreciate the rest of the paper.Often, consumer interest and public interest are consideredsynonymous. But they are not and need to be distinguished. Inthe name of public interest, many Governmental policies areformulated which are either anti-competitive in nature orwhich manifest themselves in anti-competitive behaviour. Ifthe consumer is at the fulcrum, consumer interest and consumerwelfare should have primacy in all policy formulations.Consumer is a member of a broad class of people whopurchase, use, maintain and dispose of products and services.Consumers are affected by pricing policies, financing practices,quality of goods and services and various trade practices. Theyare clearly distinguishable frommanufacturers, who produce goodsand wholesalers or retailers, who sellgoods. Public interest, on the otherhand, is something in which society asa whole has some interest, not fullycaptured, by a competitive market. Itis an externality. However, there is ajustifiable apprehension that in thename of “public interest”, Governmentalpolicies may be fashioned andintroduced which may not be in theultimate interest of the consumers.The asymmetry arises from the factthat all producers are consumers butmost are producers as well. What isdesirable for them in one capacity maybe inimical in the other capacity. Asimple example will make the point clear. A farmer wants theprice of goods he consumes to be as cheap as possible butwants the highest price for his produce. A Government wishingto encourage agriculture for self-sufficiency in food as anational security measure faces the conflict: should it supporthigh prices to encourage production or low prices to protectthe consumer? This is a characteristic public interest-consumerinterest conflict. In general, it can be stated that buyers wantcompetition and sellers monopoly. The economists’ answer isthat there are in a society too many such divergent interestsand therefore the resolution is best left to markets withoutGovernment intervention. They are all too conscious of thepossibility of abuse of the expression “public interest” by vestedinterests.Privatisation And Regulatory ReformsRecent years have seen widespread regulatory reforms and theprivatisation of many State-owned enterprises in many countries.These reforms have been undertaken as a result of anincreased awareness and evidence of regulatory failure. Theincrease in reliance on market mechanisms to promoteeconomic progress is exemplified by the trend towards privatisation,de-regulation, adoption and enforcement of CompetitionLaw, reduction in the scope of industrial policy etc (Jenny,1997). India is now on the anvil of formulating and implementingthe second generation economic reforms (the first genera-THE INDIA ECONOMY REVIEW91

Reliving TheGreatIndianDreamtion reforms have been under implementation for some timenow, particularly after 1991). But still, even now, there areprice controls and dual pricing in India leading to distortions inthe market. For instance, restrictions on sugarcane prices andprocurement, production capacities, dual pricing of sugar (levyand non-levy), restraint of exports and imports and many otherlike restrictions have enabled the inefficient producers of sugarto continue and prevent the rise of a competitive industry(Rao, 1998).There is therefore an imperative need to further the economicreforms of liberalisation, de-regulation and privatisationso as to enable the consumers to reap the benefits of competitionin the market. Nonetheless, a caveat needs to be addedthat while competition principles need to govern and inform allGovernmental policies including further economic reforms,there should be some flexibility in the competition policy toprovide for the needs, aspirations and goals of the country. Italso needs to be said that economic reforms including liberalisation,de-regulation and privatisation should be so designedthat they strengthen the competition policy and vice-versa.These two paradigms should be complemental to each other.Trade PolicyTrade liberalisation and competition policy are complementaryto each other and neither can fully achieve its objectswithout the other. Given this premise, anappropriate approach would be to adoptcompetition policy simultaneously withtrade liberalisation and other economicreforms such as privatisation and deregulation.In this way, competition policywould act as a catalyst for economicreforms and development based onmarket-oriented principles.While an open trade policy will besupportive of competition policy objectives,it is not always that the former willbe a guarantor of competition in allcircumstances. Governmental policies,particularly those that give rise torestraints and distortions in tradepractices and the market, may be a threatto the attainment of competition objectives.All trade policies may therefore berequired to fall within the framework of competition principles.The framework needs to be based on two parameters,one, whether a restriction affects all competitors or just foreigncompetitors and the other, whether the restriction falls withinthe category of measures that have been traditionally subject tocompetition law disciplines. Trade policies laid down by theGovernment include measures relating to industrial policies,domestic regulations, licensing requirements, discriminatorystandard-setting practices, State monopolies and State tradingenterprises, all of which may be restricting competitiondomestically and impeding market access to foreigners. In theinterest of the consumers and free and fair trade, it is necessaryto have an effective Competition Policy to ensure that tradepolicies fall within the contours of competition principles.Trade policy includes tariffs, quotas, subsidies, anti-dumpingactions, domestic content regulations and export restraints.Trade policies of this kind and of a similar nature need toconform to competition principles and where they do not, needto be required to be refashioned, so that they do. To make thecompetition policy effective it should be ensured that thereshould be no physical or fiscal barriers to domestic trade fromone end of the country to another. It would mean fiscalmeasures like uniform sales tax, abolition of octroi, eliminationof such other State level entry or exit taxes and elimination ofphysical control of goods movement throughout the country.92 THE IIPM THINK TANK

P OLICY PERSPECTIVESState Monopolies PolicyState monopolies are not only a reality but are regarded bymany countries as inevitable instruments of public growth andpublic interest. While ideology may have playedsome role in spurring the growth of State monopolies,much of this increase can be attributed to thepragmatic response to the prevailing milieu, whichis frequently an outcome of the historical past indifferent countries. A view shared by many is thatState monopolies and public enterprises in manydeveloping countries have played a vital role in itsdeveloping process, have engineered growth in critical coreareas and have performed social obligations. Nonetheless,there is also a recognition, consequent on the adverse financialresults and the resultant pumping of budgetary oxygen fromthe Government treasury to those enterprises, that there is notonly scope for their reformation but also for structural andoperational improvements. This recognition has led to thetrend towards privatising some of them. This is also a part ofthe general process of liberalisation and deregulation. Privatisationinvolves not only divestiture and sale of Governmentassets but also a gradual decline in the interventionist roleplayed by them. State monopolies may lead to certain harmfuleffects, anti-thetical to the scheme of a modern competitionpolicy. They are:A. The dominant power enjoyed by State monopolies may beabused because of Government patronage and support.B. Because of the said patronage, State monopolies may adoptpolicies which tantamount to restrictive trade practices. Forexample, preference to public sector units in tenders andbids, insistence on using public sector services for reimbursementfrom Government (travelling allowance forGovernment officials).C. State monopolies suffer from the schemes of administeredprices, contrary to the spirit of competition policy.It is well accepted that competition is a key to improving theperformance of State monopolies and public enterprises. Theoft-noted inefficiency of state firms stems from their isolationfrom effective competition (Aharoni, Yair, 1986). In theinterest of the consumers, State monopolies and publicenterprises need to be competitive in the production andservice delivery. While Government should reserve the right togrant statutory monopoly status to select public enterprises inthe broad national interest, it is desirable for the Governmentto always keep in mind that de-regulation of statutory monopoliesand privatisation are likely to engender competition thatwould be healthy for the market and consumers.Privatisation also involves a gradualdecline in the interventionist role. Statemonopolies lead to effects, anti-thetical tothe modern competition policyEfficiency is related more to the degree of competitionrather than to ownership (Jones, et al, 1990). The Governmentalpolicy in this regard should be to divest its shares andassets from State monopolies and public enterprises and toprivatise them in a phased manner in all sectors other thancore areas and in areas related to the security of the countryand to the sovereign functions of the State. In other words,the Governmental policy should be to exit from businesseswhere it has no reason to be in. Where it is not Government’sbusiness to be in business, it should exit by divestiture andprivatisation.THE INDIA ECONOMY REVIEW93

Reliving TheGreatIndianDreamLabour PolicyMost developing countries have legislations relating to theinterest of the labour and offering its protection. A scan of thelabour statutes of such countries shows that the balance isgenerally in furtherance and in protection of the interest andwelfare of the labour. While this may appear to be a step in theright direction, one aspect cannot be overlooked, namely, thatfirms desiring to exit may not be able to do so easily because ofcertain provisions in the existing labour legislation. Firms,which cannot logically survive in a competitive market, shouldbe capable of closing down. More often than not, they arerendered unviable because labour cost is becoming a fixed costgiven the labour regulatory framework and also is becominghighly inflationary due to the effects of automatic neutralisationof inflation through schemes of dearness allowance widelyprevalent in the industrial sector and the concept of periodiclong term settlementsleading to substantialupward revision inremuneration andbenefits for the unionisedworkforce periodically,say, every twothreeyears. If unviableunits continue to operate in the market, it can only be at aheavy price for the society. In a competition driven market,non-viable, ill-managed and inefficient firms must be allowedto exit freely, subject to their conforming to the rules andregulations governing their liabilities. Contestable markets arebased on the theory of free entry and free exit. If competitionis an engine of growth and consumer welfare, it is necessaryand even inevitable that the laws of the country encourage theviable, well-managed and efficient units and allow the nonviable,ill-managed and inefficient to fall by the way side.WTO Compatible PoliciesWhen framing a competition policy and a correspondingcompetition law, it is necessary to keep in view the impact oncompetition of a broad range of trade policy instruments andWTO provisions. Being signatories to the WTO Agreements,most developing countries need to fashion their competitionpolicy without trenching any of the WTO Agreements orprinciples. It is axiomatic that the domestic competition lawshould not discriminate between domestic companies andforeign companies. However, competition policy / law needs tohave necessary provisions and teeth to examine and adjudicateupon anti-competition practices that may accompany or followdevelopments arising out of the implementation of WTOagreements. These are broadly discussed below.Foreign InvestmentConsequent on liberalisation and globalisation, there is anincrease in the flow of foreign investment to the developingcountries; three broad factors determine where and to whatextent foreign investments are made:• The policies of host countries• The pro-active measures, countries adopt to promote andfacilitate investments• The characteristics of their economiesThe relative importance of different location-specificforeign investmentdeterminants dependsupon the motive andtype of investment, theindustry in question andthe size and the strategyof the investor. Domesticpolicies relating toforeign investments are generally underpinned by the country’spolitical philosophy, ethos, goals and objectives. The ExpertGroup (1999) on the Interaction between Trade and CompetitionPolicy appointed by the Ministry of Commerce hassuggested in its report, that “there should be enough flexibilityin the foreign investment policy of a country to reckon not onlythe competition policy but also its development dimensions,national priority and its special and differential needs” (para7.4.1 of the report). In other words, the competition policy tobe framed needs to specify exemptions and exceptions inapplying it to the investment policy. In the interests of fair andfree trade and in the context of the desire to achieve a marketdriven environment, it is suggested that a short negative list benotified by the Government by way of exceptions and exemptionsfrom competition policy. In other words, only investmentsin the sectors notified in the negative list will requirepre-entry approval of the Government. Investments in all othersectors will be free from any competition control. The negativelist may include sectors covered by the sovereign functions ofthe State like defence, atomic energy, currency etc and suchBeing signatories to the WTOagreements, developing countries needto fashion their competition policy withouttrenching any of the WTO principles94 THE IIPM THINK TANK

P OLICY PERSPECTIVESsectors considered core and critical in National interest. Thecompetition law should be able to deal with enterprise behaviourby prohibiting restrictive business practices which dilute,distort or prevent competition. Such practices would include,inter-alia, competition restricting horizontal agreements andacquisitions, abuses of dominant position and competitionrestricting vertical distribution agreements. Foreign investmentswhich take the route of horizontal or vertical mergers,amalgamations, acquisitions and take-overs may have to beunder the surveillanceof Competition Policy/Law to ensure that suchinvestments do notresult in some kind ofmere ownership ormanagement take-overand constitute abuse ofdominance. The objective behind the foreign investmentshould inhere a development dimension which can be manifestedin better productivity, better quality, economies of scaleand increased choice for the consumer.Objectives Of Competition Policy And LawMany leading competition experts like Shyam Khemani believein the premise that, in the presence of competition, the marketwill achieve the objective of maximising welfare (World Bank,1999). Competition policy includes all Governmental measuresthat have the objective of creating and sustaining theappropriate market environment. The purpose of any competitionlaw is to provide teeth to competition policy, where this isnecessary. Generally a great deal of discretion is likely to existin the administrationand implementation ofthe policy and the law,in the name of publicinterest. Thus thedanger, as with anyGovernment intervention,is that this maylead to too much intervention and over-regulation. Therefore,in designing and administering the law, great care needs to betaken that the scope for necessary intervention and over-regulationis minimised, as this would defeat the fundamentalobjective of consumer interest, for which the policy and the laware being created. The “public interest” dimension, which hasbeen discussed supra, may haveprimacy over the consumer interestdimension in exceptional circumstancesbut such exceptions shouldbe few and far between and shouldnot be allowed to dilute competition.Any such exceptions should belaid on the floor of the Parliamentor public forum, with full justificationfor the same. Care should betaken not to allow “public interest”to be abused to circumvent competition.Many competition experts like ShyamKhemani believe that, in the presence ofcompetition, the market will achieve theobjective of maximising welfareMeeting Present Day NeedsThus, it is obvious that there can beno law for all times and all situations.In designing the law,developing countries would do wellto draw lessons from and utilise theexperience of others and also keepTHE INDIA ECONOMY REVIEW95

Reliving TheGreatIndianDreamin mind their own unique requirements. Firms in such countriesneed to survive and be able to compete, not throughprotection but through efficiency and growth. Any law that isnot sensitive to these needs could easily become counter-productiveand act as a barrier to increasing efficiency and welfare.Focus Of Competition LawsThere are three areas of enforcement that provide the focusfor most Competition Laws today:• Agreements among enterprises• Abuse of Dominance• Mergers or, more generally, Combinations among firmsAlthough there are differences in emphasis and interpretationacross countries, and over time within countries, thepurview of the laws in most countries is generally limited tothese three areas. These three areas are not mutuallyexclusive and there is considerable overlap between them. Anumber of actions that constitute abuse of dominance couldinfringe the law regarding agreements among enterprises. Theactions are similarthough the causesmight be different. Inthe one case, it is thejoint action of one ormore undertakings thatis in question, whereasin the other, it isthe action of one dominant undertaking that is the drivingforce. The concern with mergers is ultimately a concern withmarket power and the possible abuse of that market powerby the merged entity. In spite of this, most laws deal withthis separately. One reason for this is that it might be difficultto deal with the situation after the fact. In spite of the inevitableduplication that follows from this classification, it providesa useful taxonomy for organising the thinking about competitionlaw.Implementation BluesIt may not be a daunting task for many developing countries toformulate legislation on competition law to subserve their competitionpolicies. But to legislate is not the end of the road.Indeed, driving on the laid down road is the crucial part of theexercise of fostering competition in the market and curbinganti-competitive practices. It is in the implementation of thecompetition law that lies the road to success. Many developingcountries have found their waterloo in the implementation oftheir competition laws (CUTS, 2003). The following would,perhaps, constitute some of the major problems faced indeveloping countries in so far as designing and implementationof competition law are concerned.Designing Competition Law“There is no one size fits all competition law”, says FredericJenny (CUTS, 2003), a competition expert and Judge inFrance. Different countries are in different stages ofdevelopment with disparate cultures and administrativesystems. An universal competition statute is not apracticality nor is it desirable. Every country should have theflexibility to order its own competition regime to suit its genius,goals and aspirations. Given these premises, designing ofcompetition law needs to be an effort in proper assessment ofthe country’s systems, strengths, weaknesses, goals andobjectives and constraints of finance and trained personnel toman the CompetitionAuthority. The extent ofpolitical and economicdevelopment of acountry is also germaneto designing its competitionlaw.It is imperative towalk first and walk well before running.A country embarking on a competition law for the first timeneed not clothe its competition law with all the features,which a developed country may have. Even if the law is sodrafted that it encompasses most, if not all features of thelaws of developed countries with rich experience incompetition matters, it is desirable that the law is so calibratedthat different features are enforced gradually over a periodof time, instead of ALL AT ONCE. As stressed above, thelaw should inhere the genius of the country. Over ambitiousapproach may result in the law not being applied effectivelyor efficiently. It is apposite to remember that no law is betterthan a poorly administered law. It is in the design of thelaw that every country should address their best brains.Brains include lawyers, judges, economists, accountants,functionaries of the Government, consumer organisations, professionalinstitutes, chambers of industry and commerce etc.Unless the consumers have the awarenessof the benefits of a competition drivenmarket, it is not much that competitionlaw can do or the authorities can achieve96 THE IIPM THINK TANK

P OLICY PERSPECTIVESWide consultations should precede drafting of the law. Evenafter the draft is ready, it should be placed before the so-calledBRAINS and their feed back and suggestions secured beforegetting the legislation through the Parliament. A country’sethos should inform its competition regime. While lessons maybe gleaned from the experience of different countries indesigning and implementing competition laws, competition lawat the national level should be looked at in the context of localeconomic, legal, sociological and political considerations.Competition Culture And AwarenessFor the success of competition law enforcement in developingcountries, one important pre-requisite is the development ofcompetition culture in Government, Business and the GeneralPublic. The level of awareness of the potential benefit of thecompetition instrument is generally inadequate in mostdeveloping countries. In its study report covering sevencountries in Asia and Africa, CUTS (2003) came out with acategorical conclusion that “On an average, the 7-Up countrieshave a poor competition culture”. Poor not only in the letter oflaw as in its implementation. Implementation of the law variedfrom country to country depending upon the economicsituation. On awareness, the study found that it was quite insignificantand whatever of it existed was mostly found amongbusinesses and bureaucrats. The media, academia and civilsociety were reported to be not cognisant of competitionmatters. Competition culture is an essential pre-requisite forderiving the benefits of competition and its contribution to thefurtherance of economic development.Behaviour Rather Than StructureImplementation of Competition Law needs to focus onbehaviour of enterprises rather than their structure. Obviously,the Competition Authority would find it easier toanalyse the structure of enterprises, as the effort involvesanalyses of available andsecurable data and information.While structural analysescould lead to some conclusionson the size and composition ofenterprises and further lead toconclusions on the issues ofeconomic power, dominanceetc. (mostly arithmetical inmethodology), what is ofgreater relevance is thebehaviour of enterprisesleading to prejudice to competitionand prejudice to consumerinterest. Study and analysisof behaviour do not lendthemselves to any arithmeticalformula and consequently aremore difficult. Competitionlaw also needs to be designedto focus on conduct andbehaviour rather than structure.This is not to say thatstructure analysis is not important but to say that conduct andbehaviour are critical to competition analysis. Analysingconduct and behaviour by the Competition Authority is a bigchallenge in all developing countries, as it is more complexthan structure. It may be added here that analysis of conductand behaviour demands more resource requirements thananalysis of structure.THE INDIA ECONOMY REVIEW97

Reliving TheGreatIndianDreamBudgetary ConstraintsCompetition law enforcement is hardly a priority item ingovernance in most developing countries. This could be due tothe poor competition culture prevalent therein. Consequently,the budgetary allocation for the activity of competition enforcementis poor, if not dismal. Of the seven countries covered bythe study of CUTS (2003), the best funded competition regime isthat of South Africa. But even in that country, the budgetaryallocation for the Competition Authority was just 0.033 % of itsannual Government budget in the year 2000. Interestingly, 49 %of the budget of the South African Competition Commissionwas obtained from filing fees paid by enterprises seekingmergers! The derivative conclusion is that competition cultureneeds to be inculcated, particularly in the Government with theconcomitant increase in the budgetary allocation for theCompetition Authority. In other words, competition cultureand budgetary allocation go hand in hand.Personnel ConstraintsIn most developing countries, competent and qualified staff areneither available and even, if available, are difficult to retain.For competitionanalysis, a multi-disciplinaryapproach isimportant. Economists,accountants, lawyers andexperts in analysis haveto constitute a team foranalyzing the market,the level of competition, extent of dominance etc. In mergercases, the resultant dominance and the potential harm toconsumers need a multi-disciplinary analysis. Cartels are alwaysdifficult to proceed against, as there will be little documentaryevidence to prosecute. Breaking a cartel would need carefullyplanned strategies and intelligent investigations. Likewise,predatory pricing has always been a challenge for investigators,as the mens rea of the offending parties is not easy to establish. Inmany developing countries, there is a shortage of lawyers. Evenif there is no shortage, their skills may not be of the requiredstandard. Furthermore, the process of recruitments in suchcountries is neither systematic nor taken seriously, by theAuthority concerned. Training facilities are also lacking in suchcountries. An added problem is that the pay scales and remunerationoffered for the personnel of the Competition Authorityare generally those of the Government, thus not attractiveenough for talented people to offer their services. Lack ofbudgetary support and lack of attractive remuneration are twokey reasons, why top quality economists and lawyers do not feelattracted to seek employment in the office of the CompetitionAuthority. Even if they seek employment, the CompetitionAuthority may not be able to retain them in the wake of betterremuneration offered by the private sector.Composition Of Competition AuthorityIn the institutional design, the Competition Law should beso drafted that the Competition Authority is manned by personshaving expertise and knowledge in competition and competitionrelated matters, experience in adjudication and unassailableintegrity. This is a tall order for many developing countries. TheCompetition Authority needs to be constituted with judicialmembers, economists and accountants etc in order to have amulti-disciplinary approach in adjudication in competition cases.Furthermore, the Competition Authority should have a levelof independence for it to be considered a credible and impartialenforcer of competition law. There should be also a clearunderstanding of therelationship of theCompetition Authoritywith the executivebranch of the Governmentand the businesscommunity. In addition,its relationship with thecourts and with the sectoral regulators needs to be posited in thelaw and its regulations. The quality of adjudication and enforcementand the budgetary allocation to ensure it need to be fullyappreciated by the Government and the Parliament. In manydeveloping countries, the Governmental control over theCompetition Authority is manifest in terms of its power toappoint and remove the Members of the Competition Authorityand in some cases, to supersede the Authority itself. Independenceof the Authority is seriously undermined by Governmentalcontrol, threats of supersession and inadequate budgetarysupport.Interestingly, 49 % of the budget of theSouth African Competition Commissionwas obtained from filing fees paid byenterprises seeking mergers!Consumer Movement And EducationMost developing countries do not have strong consumerorganisations and NGOs to conduct research and to bring98 THE IIPM THINK TANK

P OLICY PERSPECTIVESforward complaints before the Competition Authority. Forinstance, Tanzania does not have even a single consumerorganisation. Consumer movement is generally weak in thedeveloping countries. This is an offshoot of weak consumereducation and lack of competition culture. Unless the public andthe consumers have the awareness of the benefits of a competitiondriven market, it is not much that competition law can do orthe Competition Authorities can achieve.Competition AdvocacyThe Competition Authority needs to perform an importantfunction in addition to curbing, if not eliminating anti-competitivepractices in the market. The function is competitionadvocacy. Competition advocacy creates a culture of competition.There are many possible valuable roles for competitionadvocacy, depending on a country’s legal and economiccircumstances. An OECD Report noted as follows:“In virtually every member country where significant reformefforts have been undertaken, the competition agencies havebeen active participants in the reform process. This ‘advocacy’… can include persuasion offered behind the scenes, as well aspublicity outside of formal proceedings. Some competitionagencies have the power, at least in theory, to bring formalchallenges against anti-competitive actions by other agencies orofficial or quasi-official bodies. More indirect, but still visible, isformal participation in another agency’s public hearings anddeliberations. What is appropriate depends on the particularinstitutional setting” (OECD, 1997).In terms of advocacy, the Competition Authority should beenabled by appropriate provisions in the law, to participate inthe formulation of the country’s economic policies and toparticipate in the reviewing of laws related to competition. TheAuthority will therefore be assuming the role of competitionadvocate, acting pro-actively to bring about Governmentpolicies that lower barriers to entry, that promote deregulationand trade liberalisation and that promote competition in themarket place. The law should seek to bring about a directrelationship between competition advocacy and enforcement ofcompetition law. One of the main objectives of competitionadvocacy is to foster conditions that lead to a more competitivemarket structure and business behaviour without the directpenalty loaded intervention of the Competition Authority. Atfirst glance, the advocacy role of the Competition Authoritymight seem somewhat of a luxury, especially for developingcountries, which face numerous competing priorities in implementingcompetition disciplines. However it cannot be gainsaidthat competition policy advocacy has the potential for asignificant impact upon general economic development. Thereis no doubt that competition advocacy involves certain expendituresto the Competition Authority but this investment is boundto bear fruit in the long term by reducing the challenges tocompetition like in the case of a market foreclosure by adominant entity. Competition advocacy and building capacityon competition in the developing countries would be the firststep towards protecting and serving consumer interest.References• Aharoni, Yair, 1986: “The Evolution and Management ofState Owned Enterprises” – Cambridge, Ma, 1986.• APEC, 1999: “Competition Law for Developing Economies”- Asia-Pacific Economic Cooperation Trade andInvestment Committee, Singapore, 1999.• CUTS, 2003: “Pulling up our Socks” – CUTS, Jaipur, India,2003• Expert Group, 1999 : “Report of the Expert Group onInteraction between Trade and Competition Policy” - Ministryof Commerce, Government of India, New Delhi,January, 1999.• Jenny, 1997: “The Interface between Competition Policy andTrade, Investment and Economic Development” - Paperpresented at the Conference on “Competition Policy in aGlobal Economy”-New Delhi, 17-19 March 1997.• Jones, et al, 1990: “Selling Public Enterprises - A Cost-BenefitMethodology” - The MIT Press, Cambridge, Ma, 1990.• OECD, 1992: “Regulatory Reforms, Privatisation andCompetition Policy” - Paris, 1992• OECD, 1997: 2 OECD Report on Regulatory Reform 265,1997• Rao, 1998: Towards a National Competition Policy forIndia” - Economic and Political weekly, Sameeksha TrustPublication, Vol. XXXIII, No.9, Mumbai, 28 February - 6March, 1998• World Bank, 1999: “A Framework for the Design andImplementation of Competition Law and Policy” – WorldBank, Washington DC, 1999.(The views expressed in the write-up are personal. The author canbe reached at chakravarthy38@hotmail.com).THE INDIA ECONOMY REVIEW99

Reliving TheGreatIndianDreamManas Kumar ChaudhuriHead- Competition Law Practice,J.Sagar Associates , New Delhi100 THE IIPM THINK TANK

P OLICY PERSPECTIVESNational CompetitionPolicy Is The Need Of The HourWhy Is It Needed?Sovereign functions alone qualify for exemption from judicialscrutiny, and not the welfare activities or economic adventuresundertaken by the Government. Government departmentsdischarging sovereign functions, if there are units within suchdepartments which are industries and they are substantiallyseverable, then they can be – such in-house units – consideredto be an industry. Supreme Court of India decided this inBangalore Water Supply & Sewerage Board v. A. Rajappa case 1 .Once this test of severability is able to be successfully appliedin a given economic analysis, the unit that comes within theambit of “industry” should necessarily not get any specialfinancial privilege and/or protection from the State in amarket-driven economy. In the post-1991 liberalized economicscenario, Indian industry has been strongly urging for levelplayingfields between government-aided commercial bodiesand private enterprises with aview to ensuring enhancement ofcompetitiveness of Indianindustry – initially in domesticoperations and subsequently inthe global markets. Any functionof the State if can also be undertakenby any agency other thanthe State, such function cannot be regarded as a “sovereign”function of the State. That being the undisputed position, it istime that we looked into some international views on theissues of “State Aid”.“Governments of all levels (whether local, regional, state,national or supranational) may give financial assistance to firmsin various ways. This financial assistance can have the effect ofdistorting competition in the markets in which the firms compete.This distortion of competition can be either the primary intendedeffect or a secondary or unintended effect of the pursuit of otherSovereign functions alonequalify for exemption fromjudicial scrutiny and not thewelfare or economic activitiesobjectives. In industries with imperfect competition, eachjurisdiction may have an incentive to support its own firms inorder to capture a larger share of the oligopoly rents to be earnedin the industry. In the absence of rules constraining subsidies, thiscan lead to an inefficiently high level of subsidies 2 ”.The financial aid and assistance can be doled out to Staterununits/enterprises in many ways. It can be directly given toenterprises by way of State Grant-in-Aid. Or, can also beextended by way of low-interest loans. Some of the otherknown methods of State Aid are the following:a) the sale of raw materials at below market prices;b) the purchase of finished products and/or provisions ofservices at above the market price;c) Writing off losses of State-run enterprisesd) Government as guarantor for the enterprises’ credite) Reduction of taxes including tax deferments or tax holidaysIll-effects of State Aid togovernment-run enterprises aresevere and can erode the economybeyond imagination of anyordinary prudent man. A recentexample of the same is highlightedbelow:Reliance Industries Limited(RIL) has closed all its 1,432 petrol pumps in the country.There have been virtually no sales from the pumps as buyerspreferred the outlets of PSU petrol pumps (IOC, BPCL andHPCL etc.) where fuel prices were lower by as much as Rs.8-10 per litre. RIL owned less than three per cent of the 36,936petrol dispensing pumps in the country. Of the total retailoutlets, state run petrol marketing companies – the PSUs –own 34,304 pumps. The market share of three percent may beprima facie insignificant for any competition assessment, butthe very process of opening up an important segment ofTHE INDIA ECONOMY REVIEW101

Reliving TheGreatIndianDreamindustry to competition gets palpably nipped in the bud. RILhas informed that sales at their retail outlets were negligibledue to price differential between private and PSU outlets,leading to the closure of all their 1,432 pumps in the countrywith effect from March 15, 2008. Shri Murli Deora, PetroleumMinister had informed the Rajya Sabha recently. Shri Deoracontinued that IOC, BPCL and HPCL planned to set up 1,830more petrol pumps in the country during the 2008-09 fiscal.Meaning thereby that the closure of 1,432 units by the RIL isgoing to affect the demand-supply ratio and but for the samebeing augmented by newer units the market would continue toremain distorted. Competition Act, 2002 of India defines“predatory price 3 ”. It says that the sale of goods or provision ofservices, at a price which is below the cost, as may be determinedby regulations, of production of the goods or provision of services,with a view to reduce competition or eliminate the competitors.Closure of 1,432 petrol pumps by RIL on grounds of pricedifferential that prevailed between PSUs and RIL and subsequentannouncement by the Union Minister to set up additionalpetrol pumps to the tune of 1,830 clearly indicates thatthe policy of providing “State Aid” to PSUs tantamount to“predation” and such an anti-competitive practice by dominantenterprises (PSUs) has driven out competitor (RIL) fromthe relevant market and it would recoup the loss by opening upnew petrol pumps.The PSU petrol pumps too sell petrol at a loss but make upthe same by the government through oil bonds and a subsidyshare from upstream firms such as ONGC and GAIL (India)Limited. RIL, including other private entities, was not entitledto the subsidy and priced fuel from their pumps at muchhigher rates, leading to a fall in market share 4 . The pricefixation of petrol by PSUs in consultation with the governmentis generating complacency in PSUs leading to their failing toattain domestic competitiveness, much less global competitiveness.“Price fixation” between enterprises engaged in identicalor similar trade of goods is generally regarded a “cartel” butwhen the same is resorted to with the consultation of governmentit is popularly termed as “sovereign cartel” a la Organizationof the Petroleum Exporting Countries (OPEC). Any aidgranted by a State or through State resources in any formwhatsoever which distorts competition by favouring certainundertakings or the procurement of certain goods is harmfulfor the economy of any nation State. In terms of ruling of theApex Court, highlighted in the foregoing, the activitiesundertaken by the State-run petroleum marketing PSUscannot be regarded as “sovereign” functions. The test ofseverability, as indicated by the Apex Court, if applied, woulddistinguish the functioning of the Ministry of Petroleum quathe PSUs. The MRTP Act, 1969 is the current competitionlegislation which would soon be repealed and replaced by theCompetition Act, 2002. The former law protects the PSUs 5 ,but the ambit and scope of the latter law 6 are wider and wouldnot protect anti-competitive practice and conduct of the PSUsif such practice causes or likely to cause appreciable adverseeffect on competition or abuse its dominant position to thedetriment of competitors or consumers in a relevant market.Armed with statutory provisions and decisions of the ApexCourt prima facie, there may not be any reason for the latterregulator 7 not to inquire/investigate any alleged anti-competitivepractice of PSUs which may breach the law. Complacencyof the PSUs would be at stake and the inefficient amongstthem are forewarned because inefficiency may not be protectedunder the age-old maxim of “public interest” any longer.Private enterprises may have reasons to cheer up with thisdevelopment.Way AheadIndia should strive to develop a National Competition Policy.The aim of the competition law is to ensure free and faircompetition in the market with end objective of ensuringconsumer benefit. Indian competition law provides this102 THE IIPM THINK TANK

P OLICY PERSPECTIVESphilosophy in the preamble of the Competition Act. Severaldeveloped and transition economies have adopted suchpolicies and many more jurisdictions are about to adopt thesame soon. There were about twenty odd competition authoritiesacross the globe in the early nineties and now the figurestands at 106. People’s Republic of China is the latest in the listas it too has enacted Competition Law in August 2007 and hasannounced to make its Commission fully functional from 1 stAugust 2008. Competition Policy generally aims at reviewingand revising existing economic policies of a nation state so asto make it compliant with the principles of competition law.The policy and law supplement each other with an ultimateobjective of developing an overall competition culture forhuman welfare.The Indian National Competition Policy should take withinits fold thorough revision of existing industrial policy, tradepolicy, labour policy, state-aid policy, privatization policy andreviewing most of the State and Union laws which hithertoguided Indian economy. The positive signals are visible insome sectors. One of such initiatives is discussed in thefollowing paragraph.The Ministry of Civil Aviation has made a plea to theFinance Ministers of several States to reduce the sales tax onAviation Turbine Fuel (ATF) to 12.5 per cent. Currently,States levy a sales tax ranging between 20% and 30% on jetfuel. This matter was taken up by the senior functionaries ofthe Ministry and the CMD of Air India with the EmpoweredCommittee of State FinanceMinisters on 5th May 2008 at ameeting held at Kerala. If the partiesto the meeting reach aconsensus, airlines companies,both government and private,would be expected to saveapproximately five per cent oftheir total operating costs and consequently the passengerswould be benefited in the long run.Conversely, it has been noticed that some of the governmentpolicies as of now are detrimental to economic growth therebyresulting in consumer harm. Reliance India Limited (RIL) andEssar Oil export diesel from their refineries. Last year thecombined export of these two companies of diesel rose to34%. The PSU marketing oil companies, on the other hand,import diesel. During April – February 2007 – 08 the totalA dynamic Industrial Policycommensurate with globalbest practices of marketeconomy is urgently requiredimport of diesel by IOC, BPCL and HPCL rose to 165%compared with the same period last year. India’s refiningcapacity of diesel is 149 mt per annum and is about 27% higherthan the domestic consumption i.e., 117 mt per annum. With asurplus of 27%, the domestic need of diesel could not befulfilled due to export of 43.5 mt per annum of diesel by RILand Essar Oil. RIL and Essar Oilcould not compete with PSUs onprice in the domestic marketthereby were compelled to exportso as to avoid the discomfort ofexiting the market pre-maturely.State Aid acted as an “entrybarrier” in this arrangement.Resultantly, the end consumer could not get a competitiveprice. A dynamic Industrial Policy commensurate withinternational best practices of market economy in such ascenario would have salvaged the situation.There is yet another kind of Government control of puretrading activities of commodities which arises out of Statutes.Tea Act, 1953 is one such statute. The Preamble of this Actcategorically stipulates the factors of emphatic governmentcontrol of business activities of “tea” which, in my view, is notTHE INDIA ECONOMY REVIEW103

Reliving TheGreatIndianDreamneeded any further but may perhaps need minimal buteffective regulation. Tea production and marketing areeconomic activities of private enterprises and all such enterprisesmust have carried out due legal diligence while commencingtheir respective business activities of trading in tea.Therefore, the need to impose an additional statutory controlover their bonafide legal and commercial activities is burdensomeand requires a comprehensive review of entire conceptin the light of post-1991 scenario. There were perhaps historicalreasons for such control during the British-India period.With the advent of independencein 1947 the historic legacy ofexporting tea under fixed “quota”system having been scrappedgradually the residual controlshould also have been graduallyphased out leaving the industry togain domestic competitivenessamongst them and gradually attain international competitiveness.Tea production and marketing being controlled effectivelyby private enterprises all along, Government had nofinancial stake or implication in this industry as such; exceptperhaps the issues relating to welfare of the workforce in theIn-house Competition LawCompliance Programme isgaining momentum in thewake of severe finestea plantations, the control, much less statutory control,appears superfluous. The labour welfare could have beentaken care of without the Tea Act 8 also. While going throughthe official website of the Tea Board India some interestinginformation has been found under the sub-heading “IndianTea Industry”. It says, “While India is facing competition fromSri Lanka and Indonesia with regard to export of orthodox teasand from China with regard to green tea export, it is facingcompetition from Kenya and from other African countries inexporting CTC teas.” The admission of this fact in the officialwebsite confirms the foregoingobservations. The official websitedoes also give informationrelating to statutory and nonstatutoryguidelines to the teaindustry besides loads of informationto public about the product.These guidelines may form thebasis of a regulatory mechanism, if structured suitably, and theconcept of the Board may well get revamped by a regulatoryauthority to oversee the compliance of the already existingguidelines. Penalties can be imposed for non-compliance ofguidelines. The composition of Tea Board is a well-representedbody of the industry-experts and it can act as a policyadviser to the proposed regulatory authority. India producesthe best of teas in the world and in abiding by the basicprinciples of economics – that is – “a producer produces for theconsumer to consume” the producers and consumers of Indiantea must be linked directly in a competitive market scenariorather than through intermediaries. It is, therefore, reiteratedthat India needs a comprehensive National Competition Policyon an urgent basis.Private Enterprises To Be ResponsibleIn-house Competition Law Compliance Programme is gainingmomentum in the wake of severe pecuniary penalties beingimposed more frequently by competition authorities across theglobe. Private business enterprises whenever discuss businesswith competitors; three broad areas of sensitivity are indicated:a red list involving those contacts most likely to be unlawfuland best avoided ab initio. An amber list, which has thepotential to cross the boundary into invalidity or illegality,needs very careful consideration as to whether or not toproceed further and if decided to forge ahead caveats may be104 THE IIPM THINK TANK

P OLICY PERSPECTIVEScreated for unforeseen future complications which may arisebefore any competition authorities. A green list may not besensitive and can be discussed freely. The red list constitutesdiscussions relating to price-fixing, terms and conditions ofprice-fixing, market sharing, collective boycott, collectivepredatory pricing, bid-rigging and collusive bidding andexchange of sensitive commercial information. Red Listpractice reminds us of the maxim propounded by Adam Smithin his magnum opus , "The Wealth of Nations” (1776) where hesaid “People of the same trade seldom meet together, even formerriment and diversion, but the conversation ends in aconspiracy against the public, or in some contrivance to raiseprices”. The amber list notes such discussions which arealready in public domain. But the discussion that takes place ofsuch matters generally provides for benchmarking exercises inwhich anonymity is ensured. Exchange of information in suchcases is also made through secure modes. In cases of doubts,parties seek advice from their respective legal counsels. Greenlist matters mostly relate to technical and scientific issues,innovations, social factors, registered intellectual propertyrights and human resources matters.The competition compliance programme is one of mostsuccessful tools that large enterprises have developed andfine-tuned with practical experiences which have at momentsof serious discomfort before competition agencies helpedthem getting softer orders and leniencies by authorities. Itsmain thrust is aimed at creating awareness amongst companyemployees who have external contacts. The employees shouldgenerally not act purely on commercial instinct but, keeping inview competition law concerns, they should either adapt thecommercial strategy accordingly, or frequently seek advicefrom legal counsels in-house or otherwise. Several modulesare available depending on the nature of the business activitiesthat give a vivid picture of various compliance mechanismsbeing adopted by enterprises. Lecture on general law and/orcompetition law is not what would be required, since most ofthe employees may not be specialists in Law. Instead, the ideais for employees to know, when working day-to-day on themain business of the company, the situations which are “high”risk activities. Besides, a minimal legal understanding isprobably needed to realize what kind of activities are prohibitedand would invite “immediate” action from competitionauthorities. Competition laws in spite of being national law ofsovereign countries have cross-border sweep as such somebasic information relating to overseas competition laws wouldalso be important especially those jurisdiction where thecompanies generally have business activities.Final ViewIndian industry is pitted against global competition from largebusiness houses in post-1991 economic liberalization era.Global mergers and acquisitions are order of the day and Indiais no exception. Indian enterprises too venture out to consolidatebusiness activities in the overseas jurisdictions. Some ofthem face severe challenges in such jurisdictions from competitionauthorities and till disposal of matters by competitionauthorities they get stuck and incur huge financial losses bothon account of delays and expenses incurred in obtaining legaland other professional services in such jurisdictions. Afunctional Competition Authority in India would give Indianenterprises to enjoy a level-playing field. It would, in addition,create awareness amongst all stakeholders about the overallbenefits of implementing a strong competition regime.Domestic competitiveness of Indian industry is the need of thehour. It can come only with the help and support of a comprehensiveand transparent governmental policy. Once implementedin letter and spirit, Indian industry, and more soIndian economy, would achieve international competitiveness.The intents and purposes of freedom of trade and commerceas enshrined under the Indian Constitution would appear toget realized in true sense of the terms.End Notes1(1978) 2 SCC 2132OECD Document No. DAFFE/CLP(2001)243Explanation (b) below section 4(2) of the Competition Act,20024Extracts from Infraline Newsletter 7 May 20085Section 3 of the MRTP Act, 19696Section 2(h), (l), (m)(u), (w) and (x) of the CompetitionAct, 2002 (as amended in 2007)7Competition Commission of India8Plantation Labour Act, 1951 is a comprehensive legislationin this behalf(The views expressed in the write-up are personal and does notreflect the official policy or position of organisation.The authorcan be contacted at manas@jsalaw.com).THE INDIA ECONOMY REVIEW105

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P OLICY PERSPECTIVESSUSTAINABLELIVELIHOODSHOLD THEKEY FOR NREGSCHEMENational Rural Employment Guarantee Scheme(NREGS), one of the most important social policyinitiatives in independent India, launched by thePrime Minister in Anantapur District of Andhra Pradesh inMarch 2006 would appear to have consigned to history theState’s notoriety in the implementation of the Food for Workprogramme in the past. This article aims at giving the readers ahistorical perspective of this important initiative of the UPAGovernment and addresses some of the concerns in implementation.Part I deals with the Constitutional obligations and thehistorical perspective of employment guarantee schemes. PartII deals with the NREG Act and the manual of instructions forimplementation. Part III deals with the assessment anddesirable emphasis of the Scheme.B. YERRAM RAJUDirector (Projects & Research), Development& Research Services (P) Ltd., HyderabadPart IThe United Nations Hot Springs Conference, as far back as1943, proclaimed “The first cause of hunger and malnutritionis poverty; and the first cause of poverty is lack of work.”Mahatma Gandhi, father of the Nation who believed insimplicity and not rhetoric reinforced it: “To the poor andhungry, God is bread and appears in the promise of work.”The Constitution of India, through the various clauses ofFundamental Rights and Directive Principles of the StatePolicy, has provided for ‘Social Security’ both directly andthrough implied provisions. Article 41(in Part IV DirectivePrinciples) already provides that the State shall, within theTHE INDIA ECONOMY REVIEW107

Reliving TheGreatIndianDreamNUTRITIONALDEPRIVATIONAMONGPRE-SCHOOLCHILDREN ININDIA: WHEREDID WE FAIL?Rudra Narayan MishraFaculty Associate, GujaratInstitute of DevelopmentResearch, Ahmedabad118 THE IIPM THINK TANK

P OLICY PERSPECTIVERecent march of Indian economy has createdunprecedented enthusiasms not only among theIndians from different walk-of-life but also all overthe world. The current century is said to be of two Asiangiants, India and it’s neighbour China. However in thebackdrop of the success storries of Indian IT sectors, IndianMNCs, surging NRI population and flood of FIIs, thereremain some basic issues of deprivation unresolved affectingmillions of fellow citizens.Human deprivation in India has several dimensions.Nutritional deprivation is one of them. Nutritional deprivationis an outcome of several other deprivations; deprivationin terms of food, lack of basic health care, poor hygiene andother host of factors. One of the categories of sufferers ofnutritional deprivation are India’s future citizens; thechildren. Vast majority of Indian children across the statessuffer from various degrees of undernutrition. Despite thepioneering schemes like ‘Integrated Child DevelopmentServices (ICDS), the bane of undernutrition still hangs likeDamocleus’s sword for many toddlers in India.Now let us explore the roots of this gloomy scenario wherethe state failed to ensure an ‘undernutrition-free world’ forit’s children, despite the huge expenditure it incurred onprogrammes like ICDS. Being one of the few countries inthe world with rich human resources, India has failed to saveit’s future generation from clutches of undernutrition. Whatmakes us fail? Is that failure has any implication for ourdream of being a developed nation by 2020? Could we reachmillennium goals of reducing prevalenceof undernutrition to the level outlined byUNICEF by year 2020? These are theteething concerns confronted by theresearchers of child nutrition scenario inIndia. The current article is a humbleattempt to understand the scenario ofchild nutritional deprivation in a betterway. This may perhaps lead to change instrategies, that we have pursued so far inintervention programmes like ICDS.This paper has four sections. In thefirst section we will examine the magnitudeof nutritional deprivation amongstthe children below three years as medicatedby different clinical and anthropometricindicators. In section-2, the focus will be on role ofimmediate causes of undernutrition and it’s implication forIndian children. In the section-3, focus will shift to interventionstrategy that India pursues to ameliorate child undernutrition.Section-4, is on the possible will be on possiblealternatives within and outside the framework of ICDS,while keeping in view the resource constraints in budgetaryallocation to ICDS programme. The study will be limited to20 major states whose population is above 20 million. Allthese states taken together represent more than 90 percentof Indian population. The statistics are taken from differentNFHS rounds and other relevant sources mentioned below.1. Magnitude Of The ProblemAccording to the most recent global report on the status ofchildren, India is one of the few exceptions where economicprosperity and persistent deprivation of children, in terms ofpoor nutrition, coexists. India has higher rate of undernutritionamong children below five years of age (48 percent ofchildren have stunting and 43 percent of them have underweight)than whole of Sub-Saharan Africa (38 percent and28 percent stunting and underweight respectively) despitehaving higher per-capita income as well as Gross DomesticProduct than any individual country of that region[UNICEF; 2008, pp. 118-128]. Nearly 2.1 million childrendie of malnutrition every year in this country. Results of therecently conducted ‘National Family Health Survey’(NFHS-3) also endrosed that situation of undernutritionamong Indian children has been detoriatedin several indicators since the earlierround i.e NFHS-2. In other wordsbetween 2005-06 and 1998-99 (correspondingyears for which NFHS-3 andNFHS-2 data are collected), the situationhas been worsened in case of manyof the states or marginally improved insome of them as pointed out in Table-2.In the same period the Sensex crossesfrom 6,000 plus figures to 14,000 plus.[http://www.bseindia.com/]. No doubtthe matter of success in the stock marketis a reason to be celebrated by thecitizens of this country. India is increasinglybeing recognised as economic andTHE INDIA ECONOMY REVIEW119

Reliving TheGreatIndianDreampolitical powerhouse of the world. At the same time thecorresponding figures for poor health of our children shouldmake all of us ashamed.Undernutrition Among Indian Children ThroughPrisms Of Different Outcome IndicatorsAnaemiaGraph-1: ‘Food-Health-Care’ Frame WorkOUTCOMESIMMEDIATECAUSESUNDERLYINGCAUSES ATHOUSEHOLD/FAMILY LEVELBASICCAUSES INSOCIETYIndequatedietary intakeInsufficent accessto FOODChild undernutrition,death, and disabilityInadequateMaternal and childCARING practicesInadequate and/or inappropriate knowledge and discriminatoryattitudes limit household access to actual resourcesQuanitity and qualtiy of actual resources –human, economic, and organizational – andway they are controlledPolitical, cultural , religious, economic, and social systems, includingstatus of women, limit the use of potential resourcesPotential resources : environment,technology, peoplehttp://www.unsystem.org/scn/archives/rwns04/index.htmSource: UNICEF (1998) From The State Of The World’s Children 1998. Oxford: OxfordUniversity PressIt reflects the deficiency of iron in the children. The implicationof anaemia for children are reflected in impairedcognitive performance, poor behavioural and motor development,poor coordination, slow development in communicatingability especially ability to speak, affects educationand scholastic development in future and also causes highermorbidity through various infectious diseases [Shesadri;1997]. Major factors that contribute toanaemia among children are, inadequatefood intake and repeatedepisodes of ailments like diarrhoeaand various infections [Gillespie andJohnson; 1998]. According to NFHS-3In all major states considered in thestudy except Tamilnadu, the prevalenceof anaemia among children ofage 6-35 months is higher than 50Disease percent of total children of that agegroup [Table-1; row 1]. In between tworounds of NFHS-2 and NFHS-3 forwhich the information on childanaemia is available, shows thePoor Water/sanitationand inadequate problem of child anaemia has increasedin states such as AndhraHEALTH ServicesPradesh, Assam, Bihar, Gujarat,Karnataka, Kerala, Madhya Pradesh,Orissa, Uttar Pradesh as well as for allIndia. In some of them like Assam,Karnataka, Madhya Pradesh andUttar Pradesh, the prevalence hasincreased by more than ten percentagepoint. Surprisingly, Kerala which iswell-known for the achievements inhuman development registered amassive increase in child anaemia ofmagnitude of more than ten percentagepoint, at par with some of thestates mentioned above. In almost allthe states the urban-rural gap inprevalence of child anaemia can benoticed. But in states like AndhraPradesh, Bihar, Gujarat, HimachalPradesh, Jharkhand, Maharashtra, Orissa, Tamil Nadu andWest Bengal, the gap is near 10-percentage point to 15120 THE IIPM THINK TANK

P OLICY PERSPECTIVEpercentage points. This signals the need of urgent attentionfor rural children in these states. [Table-2; column 2 and 3].StuntingThis indicator measures child’s physical growth failure interms of height-for-age. Children who have less than twostandard deviation from recommended height for their givenage (as suggested in International Population Growth Chart)are regarded as stunted children [WHO; 1995]. Majorcorrelates of stunting are again poor dietary intake andchildhood ailments like diarrhoea, fever and cough alongwith host of other intermediary factors like poor hygiene atthe household, poor education status of women and foodinadequacy at the household level. Basic correlates ofstunting are poverty at societal level, poor governance andlack of adequate human resources in areas like health careand education, poor infrastructure in rural areas etc. Theimplication of stunting for children is reflected in their poorphysical stature, which, in future affect his/her labourproductivity and his earning capacity. Poor stature is alsorelated with cardiac diseases and higher morbidity in laterstage of life [WHO; 1995]. Coming to the issue of stuntingamong Indian children the story is little better than childanaemia. At all India level the prevalence of child stuntinghas comedown by seven percentage point, i.e. 45.5 percent in1998-99 to 38.5 in 2005-06. In all most all the major statesincluded in our analysis shows phenomenal reduction inchild stunting except the state of Gujarat where the reductionis only 0.5 percentage point for the same period.Needless to say Gujarat is one of the highly industrialisedand urbanised state in Indiaand also one of the fastesteconomically growing statewhere SDP is growing withdouble digit figure for pastseveral years [Krishna; 2004,pp. 18]. Urban-rural gap isvery wide in prevalence ofchild stunting for all states except Gujarat, Kerala andTamilnadu, where the gap is below two-percentage point.Here, it should be remembered that Kerala and Tamilnaduboth have very low prevalence of stunting among all thestates included in our analysis for both the rounds (below 25percent). For states like Bihar, Chattishgarh, Haryana,Unopposed, the social pressureexerted by the middle class gavea push to the forces demandingprivatisation of the health sectorJharkhand, Karnataka, Rajasthan, Uttarakhand and WestBengal, the urban-rural gap in prevalence of stunting amongpre-school children is more than ten percentage points. Theimplication of the huge urban-rural gap in prevalence ofchild stunting reinforcesimilar findings on status ofchild anaemia, makes itnecessary to devise specialstrategies for pre-schoolchildren in rural India,especially those belong tonorthern part of the country[Table-2; column 4 and 5].UnderweightThis particular anthropometric indicator, which measureboth short-term and long-term nutritional status of children,in terms of poor weight-for-age, is a widely used indicator toTHE INDIA ECONOMY REVIEW121

Reliving TheGreatIndianDreammeasure the nutritional status of children. If the child fails toachieve recommended weight for his/her given age as suggestin International Population Growth Chart, it will certainlyimplicate that child is lacking adequate nutrient. [WHO;1995]. Child mortality rate is higher among underweightchildren. Overall the prevalence of underweight has comedownmarginally for Indian children. The analysis shows thatOrissa is the only state where the prevalence of underweighthas come down by more than ten percentage point betweenthe two-reference period followed by Maharastra (9.9percentage point) and Chattishgarh (8.7 percentage point).In states such as Assam, Bihar, Gujarat, Haryana,Jharkhand, Kerala and Madhya Pradesh the situation hasworsened and for Andhra Pradesh and Punjab the improvementis only marginal (1.2 and 1.7 percentage point respectively).In all other states the improvement is around fivepercentage point. The urban-rural gap in prevalence ofunderweight is very wide for states like Jharkhand (near 20percentage point), followed by Chattishgarh (15.7 percentagepoint). In states such as Andhra Pradesh, Jammu andKashmir, Karnataka, Uttar Pradesh, Uttaranchal and WestBengal, the gap is well above ten-percentage point. Forremaining states the urban-rural gap varies between five toten percentage points, except for Himachal Pradesh wherethe figure stands at 2.5-percentage point. In Haryana, theprevalence of underweight is marginally higher for urbanchildren by 0.3 percentage point [Table 2; column 6 and 7].WaistingThis particular outcome indicator reflects the weight-forheightfor children. It generally refers to severe form ofundernutrition among children. Like weight-for-age, thisparticular indicator is also based on the weight of thechildren. So the causes of waisting and consequences aresimilar for both the indicators, except in case of waisitng theintensity of energy deficiency will be higher [WHO; 1995] Somost of the interventions for reducing waisting is centred onfood supplementation programmes. Unfortunately recentfindings from NFHS-3 show that prevalence of waisitng hasbeen increased for all the states except Assam and Karnataka(both of them registered marginal decline). Theincrease is highest for Madhya Pradesh followed by Haryana(13.1 and 11.4 percentage respectively). Coming to Urbanruralgap in waisting among different states, Orissa andTable 1: Prevalence Of Different Form Child Undernutrition Across Major States Of India In 2005-06< than 10 percent 10-20 percent 20-30 percent 30-40 percentChild Anameia - Tamil Nadu - -Child Stunting - - Himachal Pradesh,Jharkhand, Jammuand Kashmir, Kerala,Punjab, Tamil NaduUnderweight amongchildrenJammu and Kasmir,Kerala, Punjab,Andhra Pradesh,Haryana,Karnataka, Maharshtra,Madhya Pradesh,Orissa, Rajasthan, Uttaranchal,West Bengal,Andhra Pradesh, HimachalPradesh, Maharashtra, TamilNaduWaisting Punjab Andhra Pradesh, Assam, Chattishgarh,Gujarat, Haryana,Himachal Pradesh, Jammuand Kashmir, Karanataka ,Kerala, Maharastra, Orissa,Rajasthan, Uttar Pradesh, Uttar,Uttaranchal, All IndiaBihar, Tamil Nadu,Jharkhand, Madhya PradeshNote: The data is taken from NFHS-3 fact sheets for 20 states which has population of 20 million or more. The children of age 0-35 months are only considered122 THE IIPM THINK TANK

P OLICY PERSPECTIVEUttarakhand have registered highest urban-rural gap (by 6.8percentage points). This is a bad news because this form ofundernourishment reflects acute energy deficiency forchildren [Table-2; column 8 and 9].2. Role Of Immediate Causes On Outcome OfUndernutritionAs mentioned earlier, there are multiple causes for undernutrition.To understand theThe framework is known as 'foodhealth-care'and is widely usedto understand the role of specificcorrelated in nutritional outcomerole of each cause to theoutcome of undernutrition,one has to arrange them totheir proximity to theoutcome. One frameworkadvanced by UNICEF/WHO/ACC-SCN arrangescauses of undernutrition on the basis of their proximity tothe outcome [see Graph-1]. The framework is known as‘food-health-care’ framework and is widely used to understandthe role of specific correlates in nutritional outcome.The advantage of this framework is that it can be applied toany outcome of undernutrition (clinical as well as anthropometric)for any age and sex groups, from children to adults.This framework divides the causes of undernutrition in threebroad categories; namely immediate causes, intermediatecauses and basic causes. Immediate causes of any form ofundernutrition are dietary intake and ailments or morbidity.Whereas household food insecurity, maternal education andavailability of basic household amenities are recognised asintermediary causes. These intermediary causes determinethe outcome of immediatecauses mentioned above.Intermediate causes are alsoknown as Household LevelCorrelates because they areobserved at household level.Intermediate causes in turnare determined by basiccauses, which are governed by the society, economy, andpolitical system in which the household is located. So theoverall level of poverty, deprivation, lack of basic infrastructureand human resources, political stability etc. are thebasic causes and they determine the household level causes.So any intervention strategy to reduce undernutrition has to40-50 percent 50-60 percent 60-70 percent 70-80 percent 80-90 percent 90 percent plus- Himachal Pradesh,-KeralaBihar, Chattishgarh,Gujarat, Jharkhand,Uttar Pradesh, AllIndiaJammu and Kashmir,Uttaranchal,West BengalAndhra Pradesh,Assam, Jharkhand,Maharshtra, Orissa,Rajasthan , All IndiaBihar, Chattishgarh,Gujarat, Haryana,Karnataka, MadhyaPradesh, Punjab,Uttar Pradesh- - - - -Assam, Haryana,Karnataka, Orissa,Rajasthan, UttarPradesh, West Bengal,All IndiaBihar, Chhattishgarh,Gujarat,Jharkhand, MadhyaPradesh- - - -- - - - - -THE INDIA ECONOMY REVIEW123

Reliving TheGreatIndianDreamfor marginalised communities and sections of population,which will help them to come out of undernutrition trap. Butall these process involving increasing income, removingsocial discrimination and building skill for the vast majorityof deprived population is time consuming as well as requiremassive financial support. In a developing country like India,where many sectors needs urgent attention, mobilisingunlimited resources for any given goal is unrealistic (irrespectiveof their importance).There comes the importance of choosing interventionstrategies, which are less costly but give quick results.take into account at what level of causes the intervention hasto be made. If the intervention strategy focuses on immediatecauses, the change in outcome will take place in shortesttime period but sustaining this deprivation at lower level orcomplete removal will require for improvement in thehousehold’s income, food availability, improvement in childcare practices and improving mother’s knowledge aboutchild health by educating her. All these improvements athousehold level needs massive investment because thehousehold has to be provided with meaningful employmentso that it will generate enough assets and income which willhelp the household to escape hunger and undernutrition. Atthe same time, the householders needs to be educated sothat they can liberate from low-skilled and low-paid job cycleand earn higher income by joining skilled labour market.The increased level of education will ensure better demandfor health and other basic services, which will reduce themorbidity risk for the household and enable the household tobenefit from the specific welfare schemes. Removal ofgender inequality and discrimination based of birth willensure better access to the services and income opportunityThe Strategic Importance Of Immediate FactorsIn Indian ContextThe role of immediate correlates of undernutrition amongpre-school children needs to be focused for under-mentionedreasons.1. Poverty in India is widespread. It has it’s roots in complexsocial and economic structure of the country. Poverty isone of the prime reasons of deprivation for many Indians.Rigid social hierarchy in terms of caste makes the scenariomore complex. Any intervention to reduce poverty musttake into account the role of non-economic factors likecaste, religion and gender relation into account in Indiancontext. Since these social stratification is deeply related tothe cultural and religious life of people, any interventionto change in these structural characteristics are timeconsuming process.2. Adding to poverty and social stratification, issue of spatialconcentration is also one of the crucial aspects of anydeprivation in India. People in rural areas, backwardregions and those living in forests share unequal burden ofany given deprivation than their counter parts in urbanareas. Children are no exception. There are many causesof regional backwardness in this huge country. One ofthem is geography or the location where people lives. Lackof basic infrastructure like roads, dams, electricity,communication and irrigation channels created pockets ofbackwardness across the length and breadth of the country.Even the highly economically developed states likeGujarat, Maharastra, Punjab, Haryana and Tamil Naduhave theses backward pockets. States like Bihar, Rajasthan,Jharkhand, Chattisgarh, Uttar Pradesh and Madhyapradesh have vast population living in backward regions124 THE IIPM THINK TANK

P OLICY PERSPECTIVEGraph-2 : Gap In ICDS Coverage For Children Under Six In India Across Major States10080AndhraPradeshAssamBiharChattishgarhGujaratHimachalPradeshPercentageHaryanaJharkhandJammu andKashmirKarnatakaKeralaMaharashtraMadhya PradeshOrissaPunjabRajasthanTamil NaduUttar PradeshUttaranchalWest BengalAll India6040200Percentage of children under age six living in enumeration are covered by an AWCPercentage of children under age six who got any service from ICDS[India development report; 2004]. In these regions processof economic development, employment generation, socialdevelopment, creation of basic infrastructures, availabilityof skilled human resource, availability of health care andimplementation of poverty alleviation programmes growsat very low space. So the pace of poverty eradication is alsolow. In these areas the incidence of child undernutritionlike any other deprivation is very high. So to improve thenutritional status of children, intervention in immediatecorrelates is necessary.3. In India it is found thatincidence of child undernutritionis unusually higheven among economicallyand socially developedclasses. For example, theprevalence of childundernutrition amongforward castes (in NFHS round they are dubbed asothers), is around 40 percent in terms of stunting and 41percent in terms of underweight in 1998-99 [NFHS-2]. In2005-06 the figure for young children of same socialgroups stands at around 40 percent for stunting and 33.7for underweight [NFHS-3] So the incidence of stuntinghas not comedown much for children for this group, whereIt is found that incidence of childundernutrition is unusually higheven among economically andsocially developed classesas for underweight it is somewhat improved. Similarly forhighest wealth quartile, the incidence of stunting is aroundtwenty-five percent and incidence of underweight is neartwenty percent. Similarly, the spatial advantage for youngchildren from urban areas is also low, as over thirtypercent of them suffers from either of the two forms ofundernutrition, stunting or underweight. Needless to saythe pre-school children from well to do sections of thesociety and urban background have higher incidence levelof undernutrition than children of the some of the poorcountries like Srilanka,Bhutan and Peru (as indicatedin State of World’sChildren in 2008, pp.118-121). One would safelyinfer that, food is not aproblem for the children ofsocially and economicallywell-to-do class. Then it is not food alone, but some othernon-food factors which affect the child’s nutritionaloutcome in these socially and economically well-to-doclasses. Most likely these factors are related to the incidenceof morbidity for these children. So instead of food, itis the childhood ailments which need to be focused toimprove nutritional status of these children.THE INDIA ECONOMY REVIEW125

Reliving TheGreatIndianDreamGiven these arguments lets focus on the findings on someof the immediate correlates of child undernutrition fromNFHS-3 (2005-06) and compare it with the correspondingfigure of NFHS-2 (1998-99).a) Dietary IntakeDiet of children for young children changes according to therage. However, during initial six months, the children isrecommended exclusive breastfeeding, as mother’s milk isconsidered nutritionally adequate for the children. Apartfrom it, mother’s milk is free from any contamination whichmay cause diarrhoea to the child. So it is considered as safefor the children and government encourages exclusivebreastfeeding through Breastfeeding Network of India(BFNI). It is recommended that within one hour of birth, thechild should have breastfeeding. But, only 23 percent ofchildren in India receive breastfeeding within one hour oftheir birth. Even in case of Kerala, which is regarded asbenchmark for other Indian states as far as maternal andchild health care practices are concerned, has only 55percent of children who had breastfeeding within one hourof their birth. Despite the increase in percentage of childrenTable-2 Improvement/Decline In Prevalence Of Different Forms Of Undernutrition Over NFHS-2 AndNFHS-3 Rounds And Urban-Rural Gap Observed In NFHS-3 Among Children Of 0-35 Age Across MajorIndian States In IndiaStatesImp./Dec.fromNFHS-2(2)Anaemia Stunting Underweight waistingU-R gapinNFHS-3(3)Imp./Dec.fromNFHS-2(4)U-R gapinNFHS-3(5)Imp./Dec.fromNFHS-2(6)U-R gapinNFHS-3(7)Imp./Dec.fromNFHS-2(8)U-R gapinNFHS-3(9)Andhra Pradesh -6.7 -10.7 4.7 -9.9 1.2 -11.3 -3.6 0.5Assam -13.5 -7 15.4 -6.6 -4.4 -7 0.2 3.6Bihar -6.5 -13.2 12.6 -11.8 -4.1 -7.8 -2.8 1.1Chattishgarh 6.7 -6.5 12.5 -15.1 8.7 -15.7 -2.8 -0.2Gujarat -5.6 -9.8 0.5 -8.9 -2.3 -7.3 -0.8 -2Himachal Pradesh 11.1 -10.7 14.7 -1.7 7.4 -2.5 -1.9 -0.3Haryana 1.4 -3.5 14.1 -12 -7.3 0.3 -11.4 1.7Jharkhand 4.7 -14.6 8 -16.1 -4.9 -19.8 -5.7 -1Jammu and Kashmir 3 4.7 11.2 -3.1 5.1 -11 -3.6 -3.9Karnataka -12.1 -4.9 -1.4 -14.9 2.8 -11.3 2.1 -3.3Kerala -11.8 -6.6 0.8 0.2 -1.9 -9.4 -5 -9Maharastra 4.1 -11.1 2 -5.5 9.9 -8.7 6.6 -2.2Madhya Pradesh -11.3 -9.7 9.1 -7 -6.8 -9.8 -13.1 1.4Orissa -1.9 -12.6 5.7 -12.2 10.4 -12.4 5.8 -6.8Punjab -0.2 0.5 12 -2.2 1.7 -8.4 -1.9 -2.8Rajasthan 2.7 -2.6 18.3 -13.5 6.6 -9.6 -8 -0.7Tamil Nadu 5.5 -13.8 4.3 1.5 3.5 -3.5 -1.6 -1.5Uttar Pradesh -11.3 -3.2 9.7 -7.5 4.5 -11.1 0Uttarakhand 15.9 -1.8 14.7 -17.9 3.8 -11.4 -2.3 -0.7West Bengal 8.9 -13.7 8.5 -12.7 5.2 -16.7 -5.4 -6All India -5 -8.5 7 -9.6 1.1 -12.6 -3.6 -2.9Note: Difference between two rounds i.e. NFHS-2 and NFHS-3 and urban-rural gap (U-R gap) are calculated from data provided in NFHS-3 fact sheets. Data is based on undernutritionof various forms, reported for children of age 0-35 months.Negative figures refer to decline observed in NFHS-3 (from NFHS-2 round) in column no. 2, 4, 6 and 8.Similarly figures for column no. 3, 5, 7 and 9 refer to urban-rural gap (for NFHS-3 only). Negative figures in these columns refer to rural disadvantage of young children againsturban children.126 THE IIPM THINK TANK

P OLICY PERSPECTIVEwho had breastfeeding within one hour of their birth overthe three NFHS rounds, the figure is well below the satisfactorylevel [Table-3; column 2 and 3]. In case of rural areas,the percentage is still lower and in states like Bihar andUttar Pradesh, the percentage is well below ten percentagepoint. These two states have higher number of populationthan any other states and also the highest share of youngchildren. Similarly, national average for exclusive breastfeedingfor children below six months is less than 50 percent.Only in states like AndhraPradesh and Assam, littlemore than 60 percent ofchildren of age 0-5 monthsare exclusively breastfed. Inthis case also urban-rural gapis very high but this gap is infavour of rural children. Inurban areas, the higher purchasing power of the householdand easy availability of alternative baby food, includingmilk, results in low percentage of children exclusivelybreastfed. In rural areas, lack of purchasing power andnon-availability of milk-substitutes results in higher numberof children exclusively breastfed. Exposure of children toother sources of diet, instead of mother’s milk, also exposesthem to water born pathogens. If the preparations of alternativediets are not hygienic and the bottles used for feedingchildren if not cleaned properly, then the children havehigher risk to ailments like diarrhoea which might affect thenutritional status if such episodes occurred very frequentlyAs reported in NFHS-3, amongnon-breastfed children only 11.9%have prescribed four or more foodgroups and fed four or more times[Brown et al; 1989].Mushy food supplementation is recommended to thechild from six months onwards along with breastfeeding.But NFHS-3 shows only in southern states, the mushy orsemi-solid food supplementation is satisfactory. InKerala, 93 percent of children between 6-9 months getsome kind of semi-liquid food. This is followed byTamilnadu (77 percent approximately), Karnataka (72percent approaximately) and Andhra Pradesh (near 63percent). Among the northern states, only Jharkhandreports over 60 percent of children between 6-9 monthshave additional food supplementation along withbreastfeeding [Table-3; column 5 and 6]. Under the ageof three, only one third of breastfeeding children haveaccess to vegetables and fruits; While for non breastfeedingchildren, the figure is nearly 50 percent. It indicatesif the child is breastfed, then she is less likely to have additionalsource of energy. Similarly, in case of children who arenot breastfed, lack of breast milk deprives her of many richnutrients. So the both the situations are not desirable.However, the children who are not breastfed and also notconsuming vegetables and fruits are more likely to experiencedifferent form of undernutrition (due to energy deficiencyas well as lack of micronutrients like Vitamin-A, ironand iodine). As reported inNFHS-3, among nonbreastfed children only 11.9percent have prescribed fouror more food groups and fedfour or more times. Thismeans, remaining 88percent children are vulnerableto one or the other form of undernutrition because oflack of balanced diet, which can meet their requirement ofall the nutrients. For individual states this figures are likelyto vary but for poorest and backward states one can imaginethe severity of the problem. Thus the feeding practices ofchildren in India have many gaps and can be termed asinadequate for majority of them [NFHS-3, pp. 282-287].b) Childhood Ailments:Childhood ailments are very crucial factors resultingundernourishment among children. These ailments affectchild’s health in two different ways. First, they affect theTHE INDIA ECONOMY REVIEW127

Reliving TheGreatIndianDreamTable 3: Important Indicators For Feeding And Health Care Practices For Children Of Age 0-3 MonthsStatesBreastfeeding startedwith in one hour of birthImp. /Dec.fromNFHS-2(2)U-R gap inNFHS-3(3)Exclusive breastfeedingfor 0-5monthsReported inNFHS-3(4)Supplementary feeding givenbetween 6-9 monthsImp. /Dec.from NFHS-2(5)U-R gap inNFHS-3(6)Immunisation coverageImp. /Dec. fromNFHS-2(7)U-R gap inNFHS-3Andhra Pradesh 12.1 -5.2 62.7 63.7 -5.2 -12.7 8.3Assam 5.9 0.4 63.1 9.6 57.1 14.6 -2.6Bihar -1.4 2.2 27.9 57.3 -4.1 21.2 14.5Chattishgarh 10.6 4 82 54.5 - 26.9 31.6Gujarat 17 5 47.8 57.1 20.6 -7.8 14.6Himachal Pradesh 22.7 -5.4 27.1 66 - -9.2 6.4Haryana 10.6 3.9 16.9 44.8 -2.8 2.6 21.9Jharkhand 1.9 7.4 57.8 65.3 - - 21.2Jammu & Kashmir 11.1 -13.9 42.3 56.9 - 10 9.1Karnataka 17.1 2 58 72.5 16 -5 7.4Kerala 12.5 -1.9 56.2 93.6 - -4.7 4.5Maharastra 29 -2.5 53 47.8 17.2 9.1 20.8Madhya Pradesh 6 7 21.6 51.9 11.6 13.1 23.8Orissa 29.4 -0.2 50.2 67.5 9.7 8.1 1.1Punjab 4.2 8.4 36 50 - -12 6.3Rajasthan 8.5 9.7 33.2 38.7 26.7 9.2 22.2Tamil Nadu 5 6.5 33.3 77.9 11.3 -8 -5.8Uttar Pradesh 1.5 1.6 51.3 45.5 5 2.7 12.1Uttaranchal 10.8 -5.1 31.2 51.6 - 19.1 9.8West Bengal -1.3 -3.7 58.6 55.9 2.7 20.5 7.5All India 7.4 7.8 46.3 55.8 8.3 1.5 9.7(8)Note: Difference between two rounds i.e. NFHS-2 and NFHS-3 and urban-rural gap for NFHS-3 (U-R gap) are calculated from data provided in NFHS-3 fact sheets.The information on childhood diseases and care sought for them is available only for 15 days preceding the survey. Here childcare refers to taking child in case of a diarrhoealepisode or fever, to a nearest health facility for check-up.Negative figures refer to decline in NFHS-3 (from NFHS-2 round) in column no. 2, 5, 7 and 9. Similarly figures for column 3, 6, 8, 10 and 12 refer to urban-rural gap (for NFHS-3only). Negative figures in these columns refer to rural disadvantage of young children against urban children.In remaining columns the figures refers to findings from NFHS-3 round only.Immunisation refers to complete vaccination provided to children for all six diseases within one year of birth. So the cases included here only refers to the children between 12-23months.child’s diet intake through reduced absorption capacityduring illness and also the general dislike of children to havefood when she is not well. At the same time, when ill childrequires more nutrients to maintain her ‘physical activitylevel’ for functioning of vital organs and to strengthening her‘immune system’ to recover from the illness. So her energyrequirement is more during illness, while in reality herreduced food intake makes her incapable to meet this extraenergy requirement [WHO; 1995]. Childhood diseases canbe broadly divided in to two categories, immunable andnon-immunable. The distinction is entirely based on theavailable clinical intervention strategy to protect the childrenfrom the diseases. While various types of viruses mainlycause the immunable diseases, the non-immunable diseasesare basically caused by water born pathogens and bacteria.For Indian children immunisation is available for polio,diphtheria, measles, tuberculosis (BCG), whooping coughand tetanus (DPT). Since most of these diseases are fatal in128 THE IIPM THINK TANK

P OLICY PERSPECTIVEIn Major Indian States 2005-06Percentage of children takento health centre for a diarrhoealepisode in last 15 daysImp. /Dec. fromNFHS-2(9)Percentage of children taken tohealth centre for a diarrhoealepisode in last 15 daysU-R gap inNFHS-3U-R gap inNFHS-3As reportedin(10)NFHS-3(11)(12)5.2 -7.6 66.6 1.913.5 -17.6 35.4 18.3- -10.2 54.6 6.6- 6 69.5 16.21 -3.3 72 19.619.5 -24.3 80.3 -25.5 -9.9 88.1 -- -1 46.3 34.9- -12.1 77.6 10.52.5 -3.1 78.9 -1.910.7 -14.7 81.4 5.916 0.6 83.5 1.9- 0 68.7 9.90.19 11.71 63.4 7.95.2 -13.9 86.8 -9.98.2 -1.6 68.9 15.210.9 -7.2 80.5 22.4- -7.4 63.6 25.2- 0.8 71.6 10.5-29.2 -1.5 48 17.93.4 -7.3 64.2 18.2nature, the immunisation or vaccination is necessary for children.The immunisation starts at six weeks after birth andwith in 12 months child should receive the prescribed dosesof vaccination for all the six diseases mentioned above. FromMFHS-2 and NFHS-3 it isfound that the immunisationcoverage is below 100percent for all the states,except Kerala (93 percent ofchildren above 12 monthshave given recommendeddoses for all the six diseases)and Tamil Nadu (where coverage is near 80 percent). Insome states like Gujarat, Himachal Pradesh, Punjab andThe working group constituted byPlanning Commission points thatonly 30 percent children haveaccess to ICDS, at all India levelKarnataka, the immunisation coverage reported in 2005-06is below that of 1998-99 level. Even for well-performingstates, as far as child immunisation coverage is concerned,Kerala and Tamilnadu registered five and eight percentagepoint decline respectively. This is a serious issue and it hasdisastrous implication for child’s health. In some states likeUttar Pradesh and Rajasthan, the coverage is well below 25percent. The huge urban-rural group indicates the vaulnerbityto the six fatal diseases listed above, are higher for ruralchildren. Immunisation mechanism in rural areas of all thestates needs urgent attention [Table-3; column 7 and 8].Coming to the non-immunable diseases (these diseasesare called non-immunable because there are no vaccinesavailable for them till now, nonetheless the term non-immunabledoes not refer to non-curable), diarrhoea is the mostcommon/fatal childhood ailments. There exists a linearrelationship between incidence of diarrhoea and underfive-mortality rate among children [WHO; 1995]. Still,diarrhoeal diseases cause 17 percent of all child deathsunder age five [UNICEF 2008, pp. 8-9]. Diarrhoea is mainlycaused by unsafe drinking water and poor hygiene. This is abacteria born disease and transmitted through food anddrinking water. When children are not fed in properlysanitised bowels or bottles, they are more susceptible todiarrhoea and other gastronomical diseases. Results fromNFHS-3 (2005-06) suggests the percentage of children whoare taken for to any health facility for diarrhoeal treatmenthas comedown for most of the states from NFHS-2 (1998-99)round. Even the practice of administering ORS to childrenin case of diarrhoea (which is a simple prescribed method) tooffset the fatal loss of water and nutrients (especially electrolytes)to some extent, has not taken off successfully. Only26.2 percentage of children who suffered diarrhoea beforetwo weeks of the survey are found to be administered withORS in NFHS-3 against 26.9percent in NFHS-2 at allIndia level. The urban-ruralgap stands out to be eightpercentage points (32.7percent for urban areasagainst 24.0 percent in ruralareas). The urban-ruraldifference shows wide gap in seeking health care in case ofdiarrhoeal treatment for children below three years of age.THE INDIA ECONOMY REVIEW129

Reliving TheGreatIndianDreamThe picture is not different for the treatment of ‘AcuteRespiratory Infection’ (ARI) for the young children [Fordetails see Table-3 column 9-12].3. Current Intervention StrategyOnly strategy adopted to fight child undernutrition amongpre-school children in India, is ICDS or ‘Integrated ChildDevelopment Service’. Started in 1975, it targets children ofage 0-6 years and pregnant and lactating mothers. It includessupplement feeding for children, immunisation of thechildren, health check-ups and referrals for children as wellas pregnant and lactating mothers, pre-school learning for3-6 years children, micronutrient supplementation forchildren and pregnant women, health and nutrition educationto adult women. This programme is administered in‘Anganwadis’ with help of‘Anganwadi workers orAWWs’. There are populationnorms of minimum 1000for an ‘Anganwadi’ to openunder ICDS with one AWWworker. But if the populationis 2000 or more, then twoAWW workers are assigned. This norm is under revisionbecause of Supreme court order in 2001 (which directs thegovernment to cover all children under age six in ICDS) tocover 150 population size hamlets. The objective is to reachchildren of those small communities who lives in far flungareas, especially in forests and inaccessible regions. Till nowgovernment is spending Rs. 1 for children under the scheme.While central government provides half of the requiredmonetary assistance the states provide remaining amount.ICDS, though the largest intervention scheme for pre-schoolchildren in any where in the World, it has several deficiencies.As pointed out by the ‘Working group on childrenunder six’ constituted by planning commission of India[EPW; 2007]. One of the major deficiencies is ‘undercoverage’. (that it still does not cover the total number ofchildren in age 0-6 years). According to the group only 30percent children at all India level have access to ICDS. Therecent finding from NFHS-3 reinforces this observation [SeeGraph-2]. Given the under coverage one can conclude themaximum number of children in 0-3 years are left out of theprogramme because they can not come on their own to theThe answer to undernutritionproblem does not lie only in foodsupplementation but in better fooddiversification for children‘Anganwadi’ centres. At the same time on an average one‘Anganwadiworkers’ (AWW) covers 39 children of age 0-6years, which makes it difficult for her to keep record of eachand every child under her jurisdiction. Apart from preparingfood for children in ‘Anganwadi centre’, she has to take careof other responsibilities as well, like immunisation ofchildren, creating awareness on nutritional issues and betterchild care practices and imparting education to the childrenabove three years of age. Quite often, she is also the mediumthrough which other schemes related to maternal and childhealth are executed. At paltry monthly reimbursement of1,000 rupees, expecting total commitment from her to theimplementation of the programme is unrealistic.To rectify the shortcomings in current strategy of implementationof ICDS, planning commission constituted aworking group in 2007. Theworking group has madeseveral recommendations toimprove coverage andefficiency of ICDS scheme.Prominent among them areproviding one more AWWsto each Anganwadi centresand increasing per-child expenditure from current Rs.1 toRs. 3 to provide better quality food to them. It also recommendedthat an ‘Anganwadi ‘ should operate for minimum300 days a year. It also suggest to improve the quality of the‘Take home rations or THR’ for those young children whocan not come to centre and pregnant mothers. The groupalso recommends doubling the ration amount for childrenwho suffers from severe form of undernutrition along withnecessary medical attention. Greater focus on Children frommarginalized communities and increasing the scope ofcommunity participation in ICDS are also stressed in thereport [EPW; 2007].There is no doubt that the recommendations will bringsignificant change in operation and outcome of ICDSscheme and benefit the young children in India, majority ofwhom are forced to suffer from the consequences of undernutrition,right from mother’s womb.But making ICDS universal with quality needs huge publicexpenditure. To ensure universal ICDS with better quality assuggested by the ‘Working Group on ICDS’, (constituted byplanning commission) and the recommendation of National130 THE IIPM THINK TANK

P OLICY PERSPECTIVEAdvisory Council (NAC), Rs. 9,600 crores are needed forimplementing the ICDS by 2007-08, a whooping Rs. 8,000crores more when compared to the amount spent in 2004-05.But in reality the amount spent on ICDS is only Rs. 5,293crores in the year 2007-08, approximately 55-percent of theamount recommended by NAC in that year. For comingfinancial year i.e. 2008-09, the budget proposes only Rs.6,300 crores i.e. 65-percent of what NAC had suggested forspending on ICDS by 2007-08 (i.e. Rs. 9,000 crores). Theseshows that despite the committed efforts by government andvarious supporting agencies, the competing expenditureheads will not allow to increase the ICDS anywhere near tothe Rs. 9,600 crores in coming years. [http://indiabudget.nic.in/ub2004-05/eb/sbe59.pdf, http://indiabudget.nic.in/ub2007-08/eb/sbe59.pdf]4. Where To Go From Here?As the discussion above reveals the gap in suggested expenditurefor ICDS and the current expenditure is not going to bebridged in the near future. On the other hand, time isrunning out for crores of undernourished infants and youngchildren. Then what could be the possible way out? Thispaper argues in the light of findings from NFHS-3 and it’sprevious rounds, that we need to focus on the dietary intakeof children and curtailing the morbidity risk for them.Despite the all out effort the ‘ICDS’ is reaching only 30percent of eligible children. At the same time, vast majorityof children from well to do classes and social groups alsoexperience different forms of undernutrition. The urgentneed is to guide these households to ensure a better nutritionalenvironment for their children with diversifying foodsources available in the home. As NFHS-3 shows that only30 percent of children below age three are fed with vitaminrich vegetables and fruits and only ten percent among themhave access to animal proteins in terms of meat, egg and fishetc. Cheese and yogurt are consumed by even less than tenpercent of children. Even for richest quartile household, thestandard ‘Infant and Young Feeding Practices or IYFP’ arefar from satisfactory because only 22.8 percent children fromthis group are given more than three categories of food itemsand fed at least four or more times.Taking the social background of the households in toconsideration, the IYFP practice is found satisfactory foronly 29.1 percent of children. [NFHS-3, pp. 282-287] Nowchildren from the richest wealth quartile clearly do not needsupplementation feeding from ICDS. At the same timewealthiest groups have near 25 percent of stunting, 16percent of underweight, 12 percent of waisting and 56percent among young children. So the answer to undernutritionproblem does not lie only in food supplementation, butin better food diversification for these children.It is also about decreasing morbidity risk for the childrenby improving immunisation coverage. The wealthiest groupshave only 70 percent of complete vaccination for childrenbelow 12-23 months of age, which normally one would expectto be total. In case of these households mothers have to bemade more sensitised towards betterhealth care practices. As expected thepoorest class has the lowest immunisationcoverage, standing at 24 percentonly. For children of scheduled caste,scheduled tribe and other backwardcaste the coverage is below 40 percent.So ICDS and other programmes, whichaim to improve nutritional status ofchildren, must focus more and moreupon children from these specificbackward classes, in order that theyundergoing complete immunisation.As discussed earlier, incidence ofdiarrhoea has to be checked for betternutritional outcome of children. AsTHE INDIA ECONOMY REVIEW131

Reliving TheGreatIndianDreamreported incidence of diarrhoea is higher among children of6-11 months age groups (25.11percent in NFHS-2 and 18.1percent in NFHS-3), followed by 12-23 months age groups(21.3 percent in NFHS-2 and 13.8 percent in NFHS-3). Thelogic is simple. In the age groups of 6-23 months the child isintroduced to complementary feeding, semi-solid and solidfood. If the preparation of these foods is not hygienic thenthe child will be exposed to water born pathogens that causesdiarrhoea. At all India level it is found that the incidencelevel of diarrhoea is more or lese homogenous acrossdifferent social groups and wealth quartiles. That reflects thelack of knowledge about child care practices can leadchildren from non-poor and rich households to a undernutritiontrap, where availability of adequate food intake is not anissue. This further strengthens our argument that, betterhealth care practices can reduce the existing level of undernutritionto a great extent. Since the NFHS collects informationon diarrhoeal episode in two weeks preceding thesurvey and the incidence of diarrhoea is higher in summerseason (major sources of drinking water for majority ofIndian households are rivers,open wells and ponds etc. inabsence of public water supply,which are dried in summerheat or have very less water)and in rainy seasons (when allthe water sources except that ofwater treatment plants arecontaminated due to flood andrainwater), the reportedincidence level may be safelyassumed to be underestimated.As shown in NFHS-3 in manyof the states like Uttar Pradesh,Assam, Rajasthan, andJharkhand administering ORSto ‘children with diarrhoea’ranges between 13-17 percent,while in other states exceptHimachal Pradesh, the administrationof ORS remains below40 percent. This also confirmsto the fact discussed above thatlack of knowledge about properchildcare practices aggravate the problem of undernutritionin India. Similar is the story in case of seeking health carefrom a institutional provider incase of diarrhoea and fever[For details see Table-3].Given these arguments the current budget (any nutritionalintervention for children) should find out ways to increaseawareness about the recommended ‘IYCF feeding norms’with food items available in the household for children belowthree years of age, spend more on immunisation drive andcreate awareness about better child care practices likeminimising the risk of diarrhoea through hygienic preparationof food for young children, spreading knowledge aboutuse of ORS and other recommended liquids to minimise theimpact of dehydration and loss of electrolytes, and ensuringhealth check ups at recommended health care centres in caseof child suffering from ‘Acute Respiratory Infection’ and‘fever’. While making sincere effort to spread ICDS to allpopulation settlements, irrespective of their populationsizes, as directed by the honourable Supreme court of India,through various budgetary means (one of them is levyingadditional cess as recommendedby ‘Working group ondevelopment of children for theeleventh five year plan-2007-12’, on some widely usedconsumer items and servicesproposed by the as done in caseof ‘Sarva Siksha Abhiyana’,(which aims at universaleducation up to primary levelfor all the children in thecountry) and encouragingpublic-private partnershipthrough adoption of ‘Anganwadicentres’ by privatecorporate sector and industrialhouses. The need of the hour isvery specific. Reduce the riskof undernourishment where itcan be done easily withoutmuch effort.As suggested by the ‘workinggroup on children under agesix’ and ‘Working group on132 THE IIPM THINK TANK

P OLICY PERSPECTIVEDevelopment of Children for the Eleventh Five Year Plan(2007-12)’, synergy between ICDS and other welfare schemeshas to be developed and exploited to it’s potential. This is awelcome move. The service of ‘National Rural EmploymentGuarantee Scheme’ (NREGS) can be used to build ‘Anganwadicentres and it’s other infrastructures. Manpower andinfrastructure at the disposal of ‘Total Sanitation Campaignor TSC’ could be used for building awareness on hygienicpractices in the household and building toilets in the poorhouseholds who otherwise cannot afford it. Similarly,services of ‘Accredited Social Health Worker or ASHA’, whois entrusted with door-to-door supervision of women andchildren in the neighbourhood will be used to spreadawareness about recommended child feeding practices,advise the mothers regarding the symptoms of variouschildhood ailments and ensure that the sick children arereceiving care in locally available medical facility. Theservices of ‘Rajiv Gandhi National Drinking Water Missionor RGNDWM’ and ‘Swajalladhara Schemes’ could be usedfor providing safe drinking water to the villages, which willreduce the exposure to water born diseases for the youngchildren. ‘Pradhan Mantri Grama Sadak Yojna’ could beused to connect remote villages to nearest Taluka levelhealth centres for better accessibility of primary health care,which will benefit the children. It will also help easy movementof food other items of ICDS programme to the designated‘Anganwadi centres’. Similarly, the rural electrificationprogrammes could help ICDS centre to store perishable fooditems and vaccines in advance. Lack of proper refrigerationis one of important causes of failure of ICDS scheme toensure vaccination for the beneficiaries, be it children orwomen, because most of the vaccines need to be preserved incertain degree of low temperatures. Thus, the money fromother budgetary sources can be channelised for achieving thegoal of better nutritional status of children.The problem of child undernutrition in India cannot be heldhostage to lack of funds any longer. Given the financialconstraint, we must pick up the intervention strategies thatare easy to be targeted and implementation can bring quickresults. Improving the dietary practices and awareness aboutbetter health care practices can pull out millions of childrenfrom the clutches of undernutrition in India. At the sametime, future budgetary exercise must ensure the complementaritiesamong various welfare schemes to undo the consequenceof financial scarcity for implementation ‘Universallyand qualitatively superior’ ICDS programme.References• Brown K.H, Black R.E., de Romana GL, de KanashiroHC (1989), ‘Infant feeding practices and their relationshipwith diarrhoeal and other diseases in Huascar (Lima),Peru, Pediatrics, vol. 83, pp. 31-40http://www.bseindia.com/• Gillespie S, Johnson JL (1998), ‘Expert consultation onAnemia Determinants and Interventions’, Ottawa,Micronutrient Initiativehttp://indiabudget.nic.in/ub2004-05/eb/sbe59.pdfhttp://indiabudget.nic.in/ub2007-08/eb/sbe59.pdf• IIPS and ORC Macro (2000), ‘National Family HealthSurvey (NFHS-2)’, 1998-99;India, Mumbai IIPS.• IIPS and ORC Macro (2006) ‘National Family HealthSurvey (NFHS-3)’, 2005-06;India, Mumbai IIPS.• IIPS and ORC Macro (2006), ‘National Family HealthSurvey State Fact sheets’, (NFHS-3), 2005-06, India,Mumbai IIPS.• Kirit S. Parikh and R.Radhakrishna (2004), ‘India developmentreport’, Oxford University Press, India.• Shesadri Subhadra (1997), ‘Nutritional Anemia in SouthAsia’, in Malnutrtion in South Asia: A regional profile,edited by Stuart Gillespie, UNICEF, Kathmandu.• UNICEF (2008), ‘The State of The World’s Children2008-Child Survival’, UNICEF, Newyork, pp. 118-121.• Working Group on Children Under Six, (2007), ‘Strategiesfor children Under six’, Economic and Political Weekly,Vol.42, No. 52, pp. 87-101.• Working Group on Development of children for theeleventh five year plan (2007-12)-A Report, (2008), ‘ICDSand Nutrition in the Eleventh Five Year Plan (2007-12)’,Ministry of Women and Child Development, Governmentof India, Shastri Bhawan, New Delhi• World Health Organisation (1995), ‘Physical status: TheUse and Interpretation of Anthropometry’, WHO TechnicalReport series 854, Geneva(Author is grateful to Mr. Amrit for going through the draftversion of the article. The views expressed in the write-up arepersonal and does not reflect the official policy or position oforganisation. He can be reached at rudraam@gmail.com).THE INDIA ECONOMY REVIEW133

Reliving TheGreatIndianDreamWIDENING TRADEDEFICIT, BALLOONINGFOREX RESERVESJayesh KumarAssociate Vice President, Industry Research Group, Kotak Mahindra Bank Limited, Mumbai134 THE IIPM THINK TANK

P OLICY PERSPECTIVESIndia's Balance Of Payments ScenarioAccording to the Directorate General of Commercial Intelligenceand Statistics release on India’s exports, imports and trade balance,India’s trade deficit stood at whopping $72.5 billion duringApril-February 2008 as against to $49 billion during the sameperiod previous year. Imports grew by 30.2 per cent while exportgrew only by 22.9 per cent during the same period. Preliminarydata on India’s Balance of Payments (BoP) for the third quarter(Q3) i.e., October-December 2007 of the financial year 2007-08,reveals a current account deficit (CAD) of $5.4 billion, bringingApril-December 2007 CAD to $16 billion ($14 billion in last yearfor the same period). With increasing global crude prices (currentlytrading in range of $110-$114/barrel), which is the main componentof India’s import basket, CAD is all set to further increase over thecourse of year.On surface, this doesn’t look like good news, so much so undercurrent macro economic scenario of significantly high inflation levels,high interest rate, slowing pace of economic growth. Howeverlooking at the sources of change in the current account providesinteresting reflections. Merchandise exports recorded a growth of34.9 per cent in Q3 of 2007-08 as compared with 20.9 per cent inQuarter-3 of the previous year. Net invisibles continue to do well,growing from $12.8 billion in Quarter-3 last year to $20 billionthis year. What really changed to cause a larger trade deficit was asharp rise in imports.Exports were at $41.7 billion during the quarter compared to$30.9 billion in the Q3 of the previous year. A decent, though notstellar performance, imports blasted off to $67 billion during thequarter against $47.5 billion in Q3 of 2006-07. The annual contributionby way of remittances by the non-resident Indians (NRIs) isabout three per cent of GDP in addition to export of services, especiallysoftware that is of the same order. With a sharp surge in importsbut not in exports, the trade deficit widened to $25.4 billion,as against $16.5 billion during the corresponding period of 2006.Given the net invisibles earnings the current account recorded adeficit a deficit of $5.4 billion.A rise in imports is worrisome when caused by external shockssuch as a rise in higher oil prices. However, import figures showthat during Quarter-3, what really changed were non-oil imports,capital goods import rose sharply by 53 per cent. Oil imports, asper the DGCI&S data, increased by 21.7 per cent in April-December2007 (39.4 per cent in April-December 2006). According to theMinistry of Petroleum and Natural Gas, the volume of oil importsincreased by eleven per cent in April-December 2007. The commodity-wiseexport indicated that growth in exports of petroleumproducts (35.4 per cent), engineering goods (22.4 per cent) andgems and jewellery (25.5 per cent) remained as the major drivers ofIndian export growth.Non-oil imports such as capital goods are leading indicators forgrowth in industry. They increase when domestic and/or exportdemand is strong. The sharp rise in non-oil imports over Quarter-3,hence, augurs well for India. We should be lamenting, if there wasa slump in non-oil imports growth!Under some circumstances, CAD can signal economic problemsthat call for changes in economic policies. However, it at best providemixed and ambiguous evidence about appropriate economicpolicy changes because the current account agglomerates a largearray of underlying economic factors. Sometimes it results fromnew investment opportunities created by technological innovation,coercing economies to engage in net borrowing on world marketsto finance those investments. At other times, it results from reductionsin net national savings rates, due to changes in consumerconfidence that lead to changes in consumer expenditures, or dueto changes in tax rates that affect after-tax savings rates, or due tochanges in government fiscal positions that affect national savings.India’s CAD today reflects three main factors: (1) increase in investmentopportunities; (2) low rates of saving; and (3) economicdisruptions in other economies.o e Current accounts involve intertemporal trade, CAD means thatthe Indian trades claims on itsfuture production for currentgoods and services. Economistsoften suggest that a CADthreatens future economic omicproblems if current spendingfalls on consumption ratherthan investment. That is notthe case in the India today,where CAD has financedan investment boom. As amatter of pure accounting,we can divide factors affectingCAD into thoseaffecting investment andthose reflecting national nalconsumption. The majorfactor responsible forTHE INDIA IA ECONOMY REVIEW135

Reliving TheGreatIndianDreamthe deficit is the high rate of investment in India. A secondary factoris the low savings rate. Evidence over many countries and timeperiods shows that growth rates of exports and imports are procyclical,rising and falling with the growth rate of real GDP. However,exports typically vary less than imports; consequently, the tradedeficit is distinctly procyclical. While Indian CAD results partlyfrom Indian conditions and policies, they also reflect conditionsand policies in other countries. Credit crisis in western economiesand,more recently, slowing US economy, may have contributed tothe Indian current account deficit. These factors have also contributedto appreciation of the rupee on foreign exchange markets.Looking at India’s current balance of payments scenario, onecould very well argue that once the capital flow reverts as it happenedin case of East-Asian tigers a decade back. India could verywell be back in 1990s time in terms of foreign currency. However,we should not look at the CAD in isolations. India has also beena net recipient of substantial capital inflows on account of debtand foreign direct and portfolio investment, leading to a huge accumulationof foreign exchangereserves. The question arisingof the situation is which policymeasures are required to tacklethe very situation of rising currentaccount deficit, with capitalaccount surplus. The capital accountsurplus in India is strictlydifferent from those of China or Russia. Capital inflows in Indiaare mainly in the form of the foreign institutional investor’s inflow(FII) rather than in form of foreign direct inflow (FDI), which isthe case of China.Ballooning Forex ReservesReserves held by monetary authorities worldwide stood at $4.9trillion in 2006, equivalent to 11% of world GDP. This makesmonetary authorities, as a group, are the most important players inforeign financial markets. Indeed, changes in reserve managementpolicies have become a subject of great interest to market participantsfor their possible impact on demand for certain assets andtherefore their prices.India's foreign exchange reserves, the third-largest holdings inAsia, rose to a record $312.37 billion on April 11, 2008 up by $2.6billion in just three weeks. The level of foreign exchange reserveshad steadily increased from US$ 5.8 billion (March 1991) to US$199.2 billion by March 2007.The level of foreign exchangereserves had steadily increasedfrom US$ 5.8 billion in 1991 toUS$ 199.2 billion in 2007The obvious question arising out of the situation is that do wereally need to hold such a large amount of foreign exchange reserves.Adequacy of reserves measured by traditional trade-basedindicator defined as import cover of reserves, which was at a lowof 3 weeks of imports in December 1990, has been substantiallyrising reaching to 11.5 months of imports in 2002 increased furtherto 14.2 months of imports or about five years of debt servicing in2003. The import cover for reserves was 14 months as at end September2007. The ratio of short-term debt to the foreign exchangereserves declined from 146.5 per cent in 1991 to 12.4 per cent atend September 2007. The ratio of volatile capital flows (defined toinclude cumulative portfolio inflows and short-term debt) to thereserves declined from 146.6 per cent in 1991 to 42.7 per cent as atend September 2007.Such ballooning reserves call for appropriate policy measures tobetter utilize the resources to generate higher returns. In India, theuse of India’s forex reserves for setting up a sovereign wealth fund(SWF) has been the subject of much debate of late. With Indianeconomy having both currentaccount deficit and fiscal deficit,it makes case for setting up anSFW to generate higher return,which is not possible withoutan SWF given the limitationsplaced on the central bank byits mandate. India has a negativeInternational Investment Position (IIP) with liabilities farexceeding assets. And to augment further investment requirementto sustain economic expansion at the rate of eight-nine per cent wemust utilize the reserves to generate higher returns or use it for thefunding of infrastructure (also referred by economists as backboneof the economy) betterment.Existence of SWF goes back to 1950s, the interest in their magnitudeand workings have gained interest only recently. The firstSWF was the Kuwait Investment Board, a commodity SWF createdin 1953 from oil revenues. SWF is a special purpose vehicleof the government, funded by foreign currency assets, mandatedwith high return expectations. Unlike official reserves, which areusually held in short duration treasury bonds serving short termcurrency stabilization and liquidity management, the SWF portfoliohas a product mix of different fixed income, equity, commodityand realty instruments. The management of assets under SWF isseparate from the management of the official reserves. Since theinvestments are in foreign markets, there would be no inflationary136 THE IIPM THINK TANK

P OLICY PERSPECTIVESSovereign Wealth Funds buy intoprivate equity firms thereby givingthem an indirect presence in thecountries where these firms investpressures due to sterilization (which would be the case with use ofthe reserves for infrastructure funding). SWF is mainly the nationalforeign asset funds often termed as stabilization fund, petroleumfund, investment authority, pension fund and likes.The SWF club has over thirty members and dozens others haveshown interest, including India. Media reports that in a move tobetter utilize its $300 billion offoreign exchange reserves, thegovernment of India is consideringa SWF with an initial corpusof $5 billion. SWF expected toreach $15 trillion by 2015 fromits current level of $2-3 trillion,are larger than all the world’shedge funds combined. Abu Dhabi Investment Authority with $875billion of assets is one of the super funds, all of which have assetsover $100 billion. These funds are The Government Pension Fundof Norway ($380 billion); Government of Singapore InvestmentCorporation ($330 billion); Kuwait InvestmentAuthority ($250 billion); China Investment Corporation ($200billion); Singapore's Temasek Holdings ($160 billion); and theStabilization Fund of the Russian Federation ($155 billion). As aproportion of GDP the five largest funds are ADIA, Brunei ($30billion), Kuwait, the Qatar Investment Authority QIA ($60 billion)and Singapore's GIC.The debate about the risks and opportunities of sovereign wealthfunds is similar to that of hedge funds. Concerns are that theiroperations are opaque and not regulated by any single authority.Most of SWF are non-transparent and do not report their holdingsor strategies to the public (except few like Singapore and Norway).However, the question is whether any authority other than a multilateralorganization can meaningfully regulate a sovereign whoowns the funds. Some believe they are passive investments, whileothers fear they are a matter of national security. These are causesfor concern for many people, investors, and governments; and mayfuel the fires of financial protectionism. There are reports aboutGermany drawing up plans to stop strategic assets falling into thehands of “giant locust funds” controlled by Russia, China and WestAsian governments. This turnaround is surprising as, till recently,the developed world were the advocates of globalization with capitalfreedom and foreign investment as its centerpiece. Sympatheticto emerging economies were cautioning about ‘excessive’ build-upof reserves and investing them in low-yielding US Treasuries.The current observed trend is that these SWFs buy into privateequity firms thereby giving them an indirect presence in the countrieswhere these PE firms invest. China Investment Corporation(CIC), China’s SWF, with an initial corpus of $200 billion (almost87 per cent of India’s total forex reserves) made an indirect forayinto India through its substantial $3 billion stake in US-basedprivate equity group Blackstone. Among the top three privateequity funds active in India,Blackstone already has stakes ineven defense supplier MTARTechnologies and was in therace for the troubled publicsector financial titan IndustrialFinance Corporation of India(IFCI). Singapore government’sTemasek has been the largest investor in Bharti Infratel.While, the argument continues that the Indian governmentshould float such a fund or not, there are various sovereign wealthfunds that have already forayed into the country!References and Additional Thinking1. Economic Advisory Council to The Prime Minister (2008), Reviewof the Economy 2007/082. RBI (2008), India's Balance of Payments Developments duringthe Third Quarter of 2007-083. RBI (2008), Macroeconomic and Monetary Developments:Third Quarter Review 2007-084. Stockman, Alan C. (2000), "Learning the Right Lessons fromthe Current Account Deficit and Dollar Appreciation", ShadowOpen Market Committee Meeting(Views expressed are personal. The author can be contacted at jay.kum@gmail.com).THE INDIA ECONOMY REVIEW137

Reliving TheGreatIndianDreamIMPACT OF RISINGFOOD PRICES ONINFLATIONSurabhi Mittal and Deepti SethiIndian Council for Research on International Economic Relations (ICRIER), New Delhi138 THE IIPM THINK TANK

P OLICY PERSPECTIVESAccording to World Bank, 33economies around the worldwould face social unrest becauseof rise in food and energy pricesInflation rate in India has almost doubled during thefirst five months of 2008 and has reached the past threeyears highest of 7.82 per cent for the week ended May10. It was 6.7% in 2007 and 4.1% in 2005-06. Such asudden hike in the prices has exposed the households,especially poor to the more vulnerable situation and hasresulted in the pressure on Reserve Bank to take steps tocurb inflation.But rise in inflation is a global phenomena at the moment.The developing and developed nations both are seeing aspurt in inflation and some of the developing economies likePakistan, Bangladesh andSrilanka are registering avery high inflation rate(Figure 1). Universal risingtrend in inflation is seenboth in the absolute and percent terms for most of theeconomies. It is generallyexpected that higher GDP is likely to be followed by higherinflation rates. But there is no particular trend observed interms of growth in GDP and inflation. For most of theeconomies GDP and inflation are not correlated. As seen inFigure 2, the trend in GDP growth and inflation in India donot follow a pattern. The rising fuel prices and food shortagesare supposed to be the main reason for the growinginflation. The World Bank has estimated that 33 countriesaround the world would face social unrest because of thisrise in food and energy prices. But it is also seen that this isnot only food but increasing prices of cement, steel andmetals have also helped nudge up inflation.Inflation Trends In IndiaThe all India Whole Sale Price Index numbers for weekended May 10 in 2008 has risen to 229 from 212.4 last year.The increase in the index, which tracks prices of all wholesalecommodities as ameasure of inflation, is onaccount of rising almost allfood items such as, rice,wheat, pulses, cereals,edible oil, fruits and vegetables.Annual inflation inWholesale Price Index shotup to 7.41 per cent in the first week of April, highest in thelast three years. It eased to 7.14 per cent in the week endingon April 5, and kept on increasing, registering the level 7.82percent in weekend on May 10 th . But for this escalatinginflation, food category is not the only category responsible.Infact, every category comprising of Whole Sale Price IndexFigure 1: Inflation Trends In Developed and Developing Nations160AUSTRALIABANGLADESHCHINAINDIAKOREAMALAYSIA150PAKISTANTHAILANDUNITED STATESAVERAGE ANNUAL CP1401301201101002000 20012002 2003 2004 2005 2006 2007 2008Note: The trend is represented by Average Annual Consumer Price Index (CPI) at year 2000=100Source: International Monetary Fund, World Economic Outlook Database, April 2008THE INDIA ECONOMY REVIEW139

Reliving TheGreatIndianDreamFigure 2: India- GDP And Inflation Trends(%)1614121086420199019911992199319941995INDIA GDP, CONSTANT PRICESINDIA GDP, ACP199619971998199920002001Source: International Monetary Fund, World Economic Outlook Database, April 2008is accountable for the same such as non-food articles,manufactured goods and power, fuel and light. It is quiteevident from Figure 3 that percentage increase in inflationhas been more in food articles, but non-food articles havehighest annual inflation among all categories. Still theinflation is effecting the common person the most becauseof steep rise in food prices.Food ScenarioFor the food prices in particular, Prices are likely to rise ifthe supply is not able to meet the demand. In India, the rateat which the consumerpreferences are changing ismuch less than the rate ofslow down in production ofcereals, along with diversificationof land towards highvalue agriculture. This effectis likely to create pressure onsupply, but in the present time, the rising fuel prices haveprimarily led to the spurt in food prices. The hike in pricescan also be attributed to the escalating rise in the worldfood demand and the diversified tastes and preferences.Due to rapid economic growth and hence the increase inthe purchasing power of the consumers in developingeconomies there is a dietary shift inthe demand away from the staple foodtowards high value food, such as meat,fruits and vegetable and milk. Inflationaryexpectations on food haveforced export bans in various countriesand this is further creating a rippleeffect upon the world food scenario. InIndia this step is taken because of thegrim demand supply situation thatIndia might have to face in future(Table 1). In the table, a negative gapindicates that the demand of thecommodity is more than its supply andthis implies a deficit of the foodcommodity in future. The gap betweensupply and demand is narrowing downover the years for all the food items.The supply-demand gap for totalcereals is expected to be 21.19 mt in 2011 whereas it isprojected at -16.96 mt in 2026 (Mittal, 2008).Since last two decades, Indian agriculture output isconstrained by low yields, falling water table, poor infrastructure,lack of irrigation, no technological breakthrough.Grain output has been stagnant and agriculture had beengrowing at a low rate of 2-2.5 per cent. Need for investmentin agriculture has been repeatedly highlighted. On the otherside, increase in demand of cereals from the livestock sectorfor feed, the use of cereals for bio-fuel has further diversifiedthe use of grains. Thus in the present time, high fuelcosts, increasing demand forfeed, use of cereals forbio-fuel along with unattendedsupply constraintshave created pressure onsupply. Still the majorconcern is that of risingglobal temperature whichwould further impact the yields and this trend of risingprices may not be a short-lived phenomena.Other reason for fuelling up prices in the world market isshrinking in the supply of foodgrains accompanied bydiversion of farm output to the manufacture of crude oilsubstituting biofuels. With crude oil prices at US$131 a2002200320042005200620072008In 2007, the food price index (ascalculated by FAO) has increasedby 40 percent as compared tonine percent in previous year140 THE IIPM THINK TANK

P OLICY PERSPECTIVESbarrel (as on May 27, 2008) and increased subsidization ofenergy crops in US, there has been a continual and immenseshift towards the cultivation of bio-fuels crops,especially maize at the cost of wheat cultivation. It has beenestimated, that around 30 per cent of US maize productionwill be used in 2008 for ethanol rather than feeding theworld. Moreover, drought inAustralia (the largestproducer of wheat) is alsoresponsible for price increase.In 2007, the foodprice index calculated byFood and AgricultureOrganization (FAO) hasincreased by 40 per cent as compared to nine percent inprevious year. Moreover, very recently, global food marketreport of FAO has said that growing number of cerealconsumers are in US rather than in India and China.According to that report, cereal consumption in India isprojected to have grown by 2.17 per cent and that of Chinaby 1.8 per cent in 2007-08. In the same period, US hasFigure 3: Annual Inflation In Wholesale Price IndexAbhijit Sen Panel is of the viewthat continuation of the ban willnot work efficiently in commoditieslike rice or wheatregistered 11.81 per cent projected growth rate in cerealconsumption. Major reason for this is huge demand forbio-fuels in US.Often, the role of commodity markets in inflation is alsoquestioned. On this front, it has been said that the recentprohibition on futures trading in four agricultural commoditiesnamely, potatoes, gram(chana), refined Soya-oiland rubber, is against theinterests of the farmers. Itwas prohibited in order tocurb the ballooning inflation,but there is not muchevidence which support thehypothesis that commodity markets contribute to inflation.The draft recommendations of the Abhijit Sen Panel oncommodity markets (which as well did not found any linkbetween future and spot prices), is of the view that continuationof the ban and futures trade will not work efficiently incommodities such as rice or wheat where the government isinto the business of procuring food stocks to provisionPRIMARY ARTICLESFOOD ARTICLESALL COMMODITIES1513NON-FOOD ARTICLESFUEL, POWER LIGHT AND LUBRICANTSMANUFACTURED PRODUCTS11INFLATION (%)975311 DEC, 078 DEC, 0715 DEC, 0722 DEC, 0729 DEC, 075 JAN, 0812 JAN, 0819 JAN, 0826 JAN, 082 FEB, 089 FEB, 0816 FEB, 0823 FEB, 081 MAR, 088 MAR, 0815 MAR, 0822 MAR, 0829 MAR, 085 APR, 0812 APR, 0819 APR, 0826 APR, 083 MAY, 0810 MAY, 08Source: Office of the Economic Adviser, Ministry of Commerce & IndustryTHE INDIA ECONOMY REVIEW141

Reliving TheGreatIndianDreamTable 1: Supply-Demand Gap For Selected Food ItemsFood ItemsGap (Supply-Demand)2011 2021 2026Rice 1.26 8.98 9.13Wheat 21.21 27.33 32.04Total Cereals 21.19 -2.94 -16.97Pulses -8.05 -24.92 -39.31Edible oil -6.66 -17.68 -26.99Sugar -4.31 -39.67 -74.13Note: 10.2% is conversion factor of sugarcane to sugar and 33.9% is the average conversionfactor of edible oilseed to edible oil. Demand scenario of GDP growth at 9% isconsidered heresubsidized grains to the poor.(Unit: Million Metric Tonnes)Inflated Food PricesThe estimated food production in India is not falling shortas was anticipated few months back. According to theMinistry of Agriculture, currently the crop size of wheat hasset a new record of 76.8 mt. Not only India, but Bangladesh,Thailand, and Cambodia, are also expected to end theseason with record outputs of wheat. According to FAO,India is expected to be one of the countries in Asia that willregister the highest gain in output, in absolute terms. Thesituation of wheat and rice in terms of production is infactis much better than other countries in the world. Theforecast for 2007-08 for India predicts an output of 227.32million tonnes of foodgrains, more than 10 million tonnesover the previous yearBut the problem arises from the government price andprocurement policy. In 2007-08, as per FCI’s estimates,government has procured over 11 million tonnes of wheatand 17 million tonnes of rice as against total wheat outputof 74.8 million tones and rice output of 93 millions tones.Wheat procurement accounts for around 15 per cent of thetotal wheat output and that of rice registered 19 per cent ofits output (Table 2). It is expected that government willprocure around 17 to 18 million tonnes mark of wheat thisyear, accounting for 20 per cent of total output. It is almostup by nine million tonnes from the same period last year.This gives clear signal to the world market that India maynot be a buyer of wheat – not until six months from now.The figures 4 and 5 clearly portrays that India’s productionin wheat and rice had been as per expected but low procurementby the government is responsible for drawing down ofstocks and increasing dependence on imports at steep pricesin the past. The reason for low procurement is the government’sprocurement price policy. The government announcesthe minimum support price (MSP) for some major cropsbased on the recommendations of the Commission on Costand Pricing (CACP). MSP is done for the objective ofprocurement of the basic agricultural food and non-foodproducts for the public distribution scheme (PDS). Thisprice acts as an insurance to farmers against any sharp fallin the farm prices and the procured quantity is furtherdistributed at a subsidized priced to the targeted poorpopulation. Usually farmers face lower MSP in the time of abumper harvest and are given marginally better price intimes of shortage. With the changing time, and amendmentof the APMC private procurement agencies are offeringfarmers the prices, which are higher than the MSP fixed bygovernment. Although government is procuring the shortfallof the wheat through imports at the price of Rs. 1,600per quintal where as MSP for farmers are Rs. 1,000 perquintal. Thus the farmers are objecting to this situationwhere imports are undertaken at the higher prices than theprices paid to Indian farmers. This has lead to a situation,which looks like food crisis, but infact it is low procurementnot low production. In a way, there is an artificial shortagein the economy. What is required is to take some steps tosolve this dilemma, in the interest of the farmers andvulnerable poor population of our economy. Government’sTable 2: Percent Of Government Procurement FromTotal ProductionYear Wheat Rice1997-98 14.02 18.891998-99 17.74 14.641999-00 18.52 20.332000-01 23.46 25.042001-02 28.35 23.712002-03 28.97 22.862003-04 21.90 23.492004-05 24.48 28.872005-06 21.34 29.092006-07 12.28 28.352007-08 14.84 18.49142 THE IIPM THINK TANK

P OLICY PERSPECTIVESFigure 4: Production And Procurement Of Wheat In India inflationary expectation, RBI has increased CRRby 0.25 percentage points to 8.25 per cent withWHEATeffect from May 24, 2008 while assuring the74.802007-0811.10continuation of growth rate at 8 -8.5 per cent.74.892006-07 9.2069.35RBI is in the process of lowering inflation to 5.52005-0614.8068.642004-05per cent from the current level of 7.82 per cent.16.802003-0415.8072.16 This increase in inflation would help in moderatinginflation to some extent. Steps that India has65.762002-0319.0572.772001-0220.6369.68recently taken to minimize inflation, such as2000-0116.3576.371999-00curbing non-basmati exports, extending ban on14.141998-9912.6571.29pulses, and liberalizing imports of edible oils and1997-98 9.3066.35maize to some extent will have harmful effects onWHEAT PROCUREMENT BY GOVERNMENT TOTAL WHEAT PRODUCTIONtrading partners dependent on imports and giveSource: Agriculture Statistics at Glance, 2007 and Economic Survey, 2007-08incorrect incentives to farmers by reducing theirpotential market size.step to curtail inflation is openly focused on reducing foodprices for consumers. This microscopic vision of governmentwould only lead to the make farmers the sufferers, asthey do not get the right price for their produce. Evidenceshows that international wheat prices have more thandoubled in last one and half year but the price at whichgovernment procures wheat from farmers has increased byonly ten per cent .References• Agricultural Statistics at a Glance, 2007. Directorate ofEconomics and Statistics, Ministry of Agriculture,Government of India, New Delhi.• Braun, Joachim Von (2008). Rising Food Prices, WhatShould be Done? IFPRI Policy Brief. April.• Economic Survey 2007-08, Government of India. http://indiabudget.nic.in/es2007-08/esmain.htmConclusionIn India, the rising food prices has raised the seriousconcern about the food security of poor people. Governmenthas very significant role to play in bringing stabilityand helping poor people cope with higher food prices and in• Mittal, Surabhi (2008). Demand-Supply Trends andProjections of Food in India. ICRIER Working PaperNo. 209, New Delhi.(The views expressed are those of the authors and do not reflectthe official policy or position of ICRIER).this regard, lot of fiscal measures have beentaken up by the government like abandoningFigure 5: Production And Procurement Of Rice In Indiaimport duty on crude edible oils andRICEbanning export of non-basmati rice, wheat93.002007-0817.20and pulses as a check against inflation. But,92.762006-0726.23these measures can make international91.792005-0626.7083.13markets smaller and more unstable. As 2004-0524.0088.53price controls will reduce the remunerative 2003-0420.8071.822002-0316.42prices that farmers get for their output and93.342001-0222.13hence the incentive to produce more.84.982000-0121.2889.68Export restrictions and import liberalizationmeasures have very destructive 1998-9912.601999-0018.2386.0882.531997-9815.59impacts on trading partners and would onlydistort the potential market size of farmers.Concerning this inflationary pressure andRICE PROCUREMENT BY GOVERNMENTTOTAL RICE PRODUCTIONNote: 10.2% is conversion factor of sugarcane to sugar and 33.9% is the average conversion factor of edibleoilseed to edible oil. Demand scenario of GDP growth at 9% is considered hereTHE INDIA ECONOMY REVIEW143

Reliving TheGreatIndianDreamCOMMODITY DERIVATIVESMARKETS AND OUR ECONOMYPrabhakar R. Patil and S.K. ParidaForward Markets Commission, MumbaiAn OverviewThe importance and the usefulness of the commodity derivativesmarkets (CDM) have been recognized the world over. Thenecessity for CDM was felt because of an acute need to managethe price risk and the concomitant huge losses faced by theproducers and other stakeholders in different parts of theworld. Beginning from the late seventeenth century when ricefutures started in an organized form under the auspices of theDojima Rice exchange, Osaka, Japan till today, price riskmanagement (also called hedging) has become the paramountobjective of CDM. This apart, other rationale for the existenceof the CDM are price discovery, operational advantages,market efficiency, price stabilization, integrated price structurethroughout the country, balance in supply and demand positionthroughout the year and competition. Further, commodityderivatives trading – mainly trading of derivative instrumentslike futures contracts, option contracts and swaps – has beenimmensely helpful to the governments in effectively dealingwith the problems of undesirable price movements stemmingfrom ‘information asymmetry’.144 THE IIPM THINK TANK

P OLICY PERSPECTIVESOrigin, History And DevelopmentsThe origin “futures” contracts is generally traced to the Yodoyarice market in Osaka, Japan around 1650. These were evidentlystandardized contracts, which made them much like today’sfutures, although there is no evidence that the contracts weremarked to market daily and/or had credit guarantees. In themid 1800s, famed New York financier Russell Sage begancreating synthetic loans using the principle of put-call parity.Sage would buy the stock and a put from his customer and sellthe customer a call. By fixing the put, call, and strike prices,Sage was creating a synthetic loan with an interest rate significantlyhigher than usury laws allowed.Subsequently, in a related development, grain traders ofChicago felt the need for price risk management. Due to theseasonality of production of grain, Chicago’s storage facilitieswere unable to accommodate the enormous increase in supplythat occurred following the harvest. Similarly, its facilities wereunderutilized in the spring. During this period, Chicago spotprices rose and fell drastically.A group of grain traderscreated the “to-arrive”contract, which permittedfarmers to lock in the priceand deliver the grain later.This allowed the farmer tostore the grain either on thefarm or at a storage facility nearby and deliver it to Chicagomonths later. These to-arrive contracts proved useful as adevice for hedging and speculating on price changes. Farmersand traders soon realized that the sale and delivery of the grainitself was not nearly as important as the ability to transfer theprice risk associated with the grain. The grain could always besold and delivered anywhere else at any time. Followingestablishment of the Chicago Board of Trade in 1848, on LakeMichigan, Chicago developed as a major center for the storage,sale, and distribution of Midwestern grain. In 1874, theChicago Mercantile Exchange’s predecessor, the ChicagoProduce Exchange, was formed. It became the modern dayMerc in 1919.In the wake of a disastrous harvest in 1891 at Reichstag andRussia, grain consumers in the German Reich suffered anincrease in both the level and volatility of prices. Publicagitation against speculative ventures on the Bourses was metwith open arms, given the dominance of Agrarian interests inAs on today, there are 22Commodity Exchanges, out ofwhich three are permitted to tradein all the permitted commoditiesthe Reichstag. From January 1, 1897, the Produce Exchangewas forced to incorporate representatives of agricultural andwilling interests into its executive committees, the publicationof futures and spot prices was prohibited, and dealing in grainfutures was banned outright (Flux, 1900). The consequencewas disastrous and failed to accomplish most touted benefit, thestabilization of commodity prices. With a changing politicalcomposition of the Reichstag and growing hostility to Agrarianinterests, the Exchange Act was rescinded early in 1900. Theempirical data showed spot prices were much more volatileduring the intermediate period with its lack of functioningWheat futures market in Berlin. David Jacks (2005) carried outcross section price data of Liverpool and New York city whichsuggests that the prohibition of futures markets in Berlin raisedthe volatility of Wheat price when the volatility of wheat pricewas declining in world markets and rehabilitation of futuresmarkets in Berlin lowered the volatility of wheat prices whenthe volatility of wheat prices was increasing in world markets.All the while, options, futuresand various derivativescontinued to be banned fromtime to time in severalcountries. Interestingly,derivatives trading (futuresand options) was bannednumerous times in Europeand Japan and even in the U.S in the state of Illinois in 1867,though the law was quickly repealed subsequently.In 1922, the USA federal government made its first effort toregulate the futures market with the Grain Futures Act. USGrain Futures Act of 1922 sought to impose governmentstandards on the grading, discounting and contracting offutures in grain markets. Soon after, the Act was challengedand affidavits were filed by twenty two nationally knowneconomists, each of whom declared his belief that, withinfrequent and minor exceptions, futures trading had a markedtendency to stabilize prices. The most prominent among themwere John Bates Clark, Irving Fisher, Wesley Clark Mitchell,Abbot Payton Usher and Allyn Young. During 1936, optionson futures were banned in the United States. Bakken (1960)counts at least 330 bills introduced in US Congress during 1884to 1953 for prohibiting futures trading in agricultural commodities.Among them, Hatch Bill in 1892 aim to impose a ten percent flat rate tax on all futures transactions in grains and cotton,THE INDIA ECONOMY REVIEW145

Reliving TheGreatIndianDreameffectively destroying the margin for speculators. In 1972, theChicago Mercantile Exchange, responding to the now-freelyfloating international currencies, created the InternationalMonetary Market, which allowed trading in currency futures.These were the first futures contracts that were not on physicalcommodities. In 1975, the Chicago Board of Trade created thefirst interest rate futures contract, one based on Ginnie Mae(GNMA) mortgages. While the contract met with initialsuccess, it eventually died. The CBOT resuscitated it severaltimes, changing its structure,but it never became viable. In1975, the Merc respondedwith the Treasury bill futurescontract. This contract was thefirst successful pure interestrate futures.The year 1973 marked thecreation of both the Chicago Board Options Exchange and thepublication of perhaps the most famous formula in finance, theoption pricing model of Fischer Black and Myron Scholes(1972).Evolution Of Futures Trading In IndiaPrice risk in the agricultural sector is much higher than in mostother industries. This is mainly because of the fact that Indianagriculture is subject to the gamble of monsoon, holdingcapacity of our farmers is limited and lack of adequate storagefacilities available in the country. Historically, prices of agriculturalcommodities have fluctuated more widely than prices ofnon-agricultural commodities. For example, prices received byfarmers changed almost ten per cent per year since 1920, morethan double the average yearly fluctuation in wholesaleindustrial prices. In addition, prices paid by farmers and pricesreceived by farmers have on occasion moved in oppositedirections. On a yearly basis this has occurred more than tentimes since 1920.One source of price fluctuations in agriculture is the natureof the supply of farm products. The quantity of food demandedby the people at large is generally price inelastic; i.e the amountthat people consume is relatively unresponsive to changes inprices. Thus, small changes in the supply of farm products,resulting from adverse weather conditions for example, canlead to considerable price movement. In addition, shiftsdemand stemming from general business fluctuations orThe year 1973 marked thecreation of both Chicago BoardOptions Exchange and publicationof 'Option Pricing Model'changing export demands can have substantial effects on price.Traditionally, producers have borne most of the risk resultingfrom price fluctuations. India has a very long tradition of morethan 125 years in futures trading. Futures’ trading in cotton,oilseeds and wheat was being organized under the auspices ofThe Bombay Cotton Trade Association Ltd. (1875), GujaratVyapari Mandal (1900) and the Chamber of Commerce, Hapur(1913) respectively. Further, futures trading in raw jute wasbeing organized under the auspices of the Calcutta HessianExchange Ltd. (1919) and theEast India Jute AssociationLtd. (1927). These twoassociations dealing in rawjute and jute goods amalgamatedin 1945 to form thepresent East India Jute &Hessian Exchange Ltd.,Kolkata. As on today, there are 22 Commodity Exchanges, outof which three exchanges are permitted to trade in all thepermitted commodities and rest of the Exchanges havepermission to trade only selected commodities. There are over100 commodities permitted for trading at Commodity Exchanges.The three nation wide multi commodity exchanges – MultiCommodity Exchange of India Ltd., Mumbai; NationalCommodity & Derivatives Exchange Ltd., Mumbai, and theNational Multi Commodity Exchange of India Ltd., Ahmedabad- are demutualised exchanges and have on-line real timetrading platform spread across the country. The 19 Exchangesthat have permission to trade in limited number of commodities,trade in open out-cry trading platform.Characteristics Of Futures TradingA “Futures Contract” is a highly standardized contract withcertain distinct features. Some of the important features are asunder:(a) Future trading is conducted through an Exchange inaccordance with the procedure laid down in its Rules andBye - laws.(b) It is entered into for a standard variety known as the “basisvariety” with provision for delivery of other identifiedvarieties known as “tenderable varieties”.(c) The unit of price quotation and the unit of trading are fixedin these contracts.(d) The delivery period is specified.146 THE IIPM THINK TANK

P OLICY PERSPECTIVES(e) The seller in a futures market normally has the choice todecide whether to deliver goods against outstanding salecontracts. In case he decides to deliver goods he can do sothrough a number of pre-specified delivery centers. There isa gradual move towards compulsory delivery where all theoutstanding position on the maturity of the contract has to becompulsorily delivered. Intention matching delivery logic– delivery of goods if both parties agree - has also beenintroduced in some contracts.(f) Futures trading may not necessarily result in delivery.However, the “threat of delivery” should always exist in themarket to ensure that thefutures prices are not out ofalignment with the physicalmarket. Therefore, in afutures market, most of thetransactions are squared upbefore the due date of thecontract and contracts aresettled by payment of money differences. The outstandingtrades are settled at the end of settlement period by way ofeither physical delivery or cash depending upon the terms ofthe contract.(g) Other features of such contracts include performanceguaranteed by the exchange, daily clearing, and imposition ofmargins to avoid default.Regulatory EnvironmentThe outbreak of World War II led to greater Governmentintervention and adoption ofstringent regulatory measures. TheGovernment of Bombay issued anordinance in September, 1939,prohibiting options business whichwas later replaced by the BombayOptions in Cotton Prohibition Act,1939. Owing to shortages andescalating prices during thisperiod, the Defence of India Actwas utilized in 1943 for banningforwards in certain commoditiesand regulating trading in others.Oilseeds, food grains, spices,sugar, vegetable oils and cloth'Threat of delivery' must alwaysexist to ensure that the futuresprices are not out of alignmentwith the physical marketcame under the list of banned items. After the lapse of theDefence of India Act, these orders remained in force under theEssential Supplies Temporary Powers Act, 1946.The Forward Contracts (Regulations) Act (FCRA), 1952paved the way for regulating commodity derivatives market andthe Forward Markets Commission (FMC) was established in1953 under the provisions of the aforesaid Act for regulatingthe CDM. The basic objective of the Act is to regulate futurestrading in approved commodities at the recognized commodityexchanges and to prohibit options trading. The FCRA envisagesa three tier regulatory system – the recognized commodityexchanges, the ForwardMarkets Commission, and thecentral Government.Futures trading is alsocapable of being misused byunscrupulous speculators. Inorder to safeguard againstuncontrolled speculation thefollowing regulatory measures are imposed by the Commissionfrom time to time.(a) Limit on open position of an individual operator to preventover trading;(b) Limit on price fluctuation (daily/weekly) to prevent abruptupswing or downswing in prices;(c) Special margin deposits to be collected on outstandingpurchases or sales to curb excessive speculative activitythrough financial restraints;(d) Minimum/maximum prices to be prescribed to preventfuture prices from falling below the certain levels that are notremunerative and from rising above certain the levels notwarranted by genuine supply and demand factors.Benefits Of Futures TradingFutures contracts perform two important functions of pricediscovery and price risk management with reference to a givencommodity. It is useful to all segments of economy. It is usefulto producer because he can get an idea of the price likely toprevail at a future point in time and therefore can decidebetween various competing commodities. It enables theconsumer to get an idea of the price at which the commoditywould be available at a future point in time. He can do propercosting and also cover his purchases by making forwardcontracts. Futures trading is very useful to the exporters as itTHE INDIA ECONOMY REVIEW147

Reliving TheGreatIndianDreamprovides an advance indication of the price likely to prevail andthereby help the exporter in quoting a realistic price andthereby secure export contract in a competitive market. Havingentered into an export contract, it enables him to hedge his riskby operating in futures market. The mechanism of hedgingbegins with the hypothesis that the spot and the futures pricesmove in tandem. Consider a merchant who is holding aninventory. Should the spot price fall, he will suffer a loss, andshould it rise he will profit. By selling futures contracts equal inquantity to his inventory, he can eliminate price risk. Byassumption, the futures price falls by the same amount. Hencethe loss on the inventory exactly equals the gain on the futurescommitments so that the merchant breaks even. If the spotprice rises, the gain on the inventory holdings is exactly offsetby the loss on the merchant’s futures position. Hence, in thiscase as well the merchant breaks even. Exactly parallel movementof the spot and futures price is not necessary for thevalidity of this argument. As long as the movement is approximatelyparallel the merchant can reduce the price risk of hisinventory holdings so that the hedge gives him insuranceagainst losses from adverse price changes.Benefit To Farmers And Other StakeholdersFarmers can also benefit from derivatives trading. During theperiod between the initialexpenditure and the marketingof the product, changingprice relationships betweenfarm products and farm inputsresult in considerable risk tothe farm operator. Sinceproduction plans are made onthe basis of price relationships during the planning stages,changes in such relationships can result in either ‘windfall gains’or ‘substantial losses.’ Farmers can reduce such risks by (a)using price signals for taking pre-sowing and post harvestdecisions, and (b) taking short position in the futures markets,and by buying put option contracts ( options on goods arebanned presently) on the Exchange platform. Similarly,processors, exporters, importers, stockiest can hedge theirposition in the spot market by taking suitable positions in thederivatives markets.Other Benefits Of Futures TradingThe total value of trade has grownto Rs. 40.66 lakh crore in 2007-08 from a meager figure of Rs.1.29 lakh crore in 2003-04(i) Price stabilization-in times of violent price fluctuations - thismechanism dampens the peaks and lifts up the valleys i.e.the amplititude of price variation is reduced.(ii) Leads to integrated price structure throughout the country.(iii) Facilitates lengthy and complex, production and manufacturing activities.(iv) Helps balance in supply and demand position throughoutthe year.(v) Encourages competition and acts as a price barometer tofarmers and other market participants.Growth Of Futures Trading In IndiaThe Commodity Futures Market in India has witnessedunprecedented growth in the last four years. The total value oftrade of the Commodity Futures Market has grown to Rs. 40.66lakh crore in 2007-08 from a meager figure of Rs. 1.29 lakhcrore in 2003-04, registering a growth of 3052% in a span offour years. The commodities being traded on the 22 exchangesinclude Bullion (Gold and silver), Energy products (Crude oiland Natural Gas), Base Metals (Copper, Zinc, etc.), Agri.-Commodities (Pulses, oil complex, Guargum, Potato andSpices etc.). Trading volumes in absolute value terms andpercentage of total for disaggregated form are presented in thefollowing tables: From the Table 1, bullion volumes have grownfrom Rs. 1,79,052 crore in theyear 2004-05 to Rs14,90,458.71 crore in the year2007-08, a whopping jump of732 per cent; Metals otherthan Bullion had grown fromRs. 618.22 crore in 2004-05 toRs. 8,32,398.28 crore in2007-08, an exponential growth of 1,34,544 per cent; EnergyTable 1: Trading Volumes (In Rs. Crore)Commodity 2004-05 2005-06 2006-07 2007-08Bullion 179052.84 760674.86 1723348.29 1725952.45Metals other 618.22 18723.49 405636.89 897714.34than BullionEnergy 1900.14 181882.64 230711.92 500942.14Plastic 0.00 1614.16 104.36 19.48Agricultural 390188.36 1192226.87 1317125.21 941361.07Total 571759.56 2155122.02 3676926.67 4065989.47Source: Forward Markets Commission148 THE IIPM THINK TANK

P OLICY PERSPECTIVESTable 2: Share Of Each Segment (In %Age)Commodity 2004-05 2005-06 2006-07 2007-08Bullion 31.32 35.30 46.87 42.45Metals other than 0.11 0.87 11.03 22.08BullionEnergy 0.33 8.44 6.27 12.32Plastic 0.00 0.07 0.00 0.00Agricultural 68.24 55.32 35.82 23.15Total 100 100 100 100Source: Forward Markets Commissionvolumes moved from Rs.1,900.14 crore in 2004-05 to Rs.4,46,828.86 crore in 2007-08, an explosive growth of 23,416 percent; Plastic volumes declined from Rs. 1,614.16 crore in2005-06 to Rs. 19.48 crore in 2007-08, a decline of 99 per cent;and most important Agricultural commodities have registered amarginal increase in trading volumes from Rs. 3,90,188.36 crorein 2004-05 to Rs. 8,26,143.56 crore in 2007-08, a growth of 112percent. From the table 2, bullion share in total volumes havegrown from 31.32 per cent to in the year 2004-05 to 41.45 percent in the year 2007-08, a steep increase of 10 points; Metalsother than Bullion share in the total volume had grown from amere 11 basis points in 2004-05 to 23.15 per cent in 2007-08, anexponential increase of 23 points; Energy share in total volumesmoved up from 33 basis points in 2004-05 to 12.43 percentagein 2007-08, an explosive increase of 12 points; Plastic share intotal volumes almost insignificant from the beginning of theperiod: Agricultural commodities share in the total volumesdeclined from 68.24 per cent in 2004-05 to 22.97 per cent in2007-08, a steep fall in the share of 45 points.The table 3 reflects the growth of each segment during the lastfour years. Bullion had shown a growth of 324.83% during2005-06 followed by 126.56% in 2006-07 and only 0.15% in2007-08. Similarly, metals other than bullion showed a growthof 2,928.61% in 2006-06, and the same figure declined to121.31% in 2007-08. In case of the other two groups of commoditiesviz. energy and plastic, the growth rate was negativefor the year 2007-08 than what it was during the previous twofinancial years. As regards agricultural commodities, the growthrate declined to 10.58 % in 2007-08 than what it was during theprevious two financial years as shown above.Recent DevelopmentsA number of initiatives have been taken by the Governmentand the FMC recently for the development and modernizationof the CDM. Notable among them are as follows. On 31stJanuary, 2008, an Ordinance was promulgated to amend theFC(R) Act, 1952 so as to give financial and administrativeautonomy to the FMC and to allow, among other things,introduction of options on goods. Unfortunately, the Ordinancelapsed on 7 th April, 2008 as the FC(R) Amendment Billcould not be passed by the Parliament within the stipulatedtime. The Bill is yet to be passed by the Parliament.In order to facilitate the participation of farmers in thefutures markets, the exchanges and the FMC are working onvarious models of aggregation. The aggregators will be supposedto provide an interface between the small farmers andthe exchanges. In order to be able to benefit from the CDM, itis necessary that the stakeholders are aware of these markets,their functions and how to benefit from the same. The FMC haslaunched a countrywide awareness campaign in collaborationwith commodity exchanges. Special attention is being paid tothe farmers, so that benefits of these markets may reach them.Other organizations associated with this campaign includeState Governments, Agricultural Universities, AcademicInstitutions, NGOs, and Banks. In addition, the FMC hasundertaken a project for dissemination of the prices discoveredon the nationwide multi commodity exchanges throughout thecountry by placing Ticker Boards at important Mandis and postoffices.ConclusionThe usefulness of the CDM can hardly be over emphasized.For the success of these markets certain basic conditions suchas well developed and well organized spot markets and awarenessamong the stakeholders are required to be met. It isTable 3: Percentage Change Over CorrespondingPrevious YearCommodity 2005-06 2006-07 2007-08Bullion 324.83 126.56 0.15Metals Other Than Bullion 2928.61 2066.46 121.31Energy 9472.07 26.85 117.13Plastic NA -93.53 -81.33Agricultural 205.55 10.48 -28.53Total 276.93 70.61 10.58Source: Forward Markets CommissionTHE INDIA ECONOMY REVIEW149

Reliving TheGreatIndianDreamindeed disappointing that awareness about these markets isvery low among the stakeholders and the people at large evenafter fifty-five years of the enactment of the FC(R) Act, 1952.We are still debating on the usefulness of these markets somuch so that futures trading has been identified, correctly orincorrectly, as one of the reasons for high inflation beingwitnessed today in the country. As a matter of fact, studiesconducted in the developed countries show that futures tradinghas led to stabilization of prices rather than causing pricevolatility. To substantiate this theory in the Indian context, itmay be pointed out that in spite of introduction of sugar futuresin our country for more than four years, prices of sugar havebeen remarkably stabilized owing to adequate supply of sugar.Therefore, the key to price stabilization is effective managementof supply and demand factors by responding to theadvance indication about price trendsemanating from the CDM. In view ofthis scenario, it is important for thecritics of futures trading to understandas to why there is no inflationaryrise in the prices of sugar in spiteof introduction of sugar futures inour country.The usefulness of the CDM in oureconomy will be fully appreciated ifthe benefits of these markets reachall sections of our society. In fact,regulation and promotion of thesemarkets are in complete, if thebenefits do not reach the mostdeserving and the neediest section ofour society – the farmers, amongothers. To ensure that benefits of theCDM reach all sections of our society, these markets need to beregulated effectively for which the FC(R) Amendment Billneeds to be passed by the Parliament at the earliest. In addition,the following measures are required to be taken. Amassive awareness campaign involving both the print andelectronic media, NGOs, college teachers and students,people’s representatives, state governments and local selfgovernments need to be launched throughout the countrywithin a specific time period of , say, five years. In addition, theprice dissemination project started by the FMC in Gujaratneeds to be extended to all other states of the country, particularlywhere people need hedging facility. Options on commoditiesalso need to be introduced at the earliest. Jurisdiction ofthe FMC should be extended to the spot markets as well so thatif necessary, the FMC can investigate a specific case of squeezeand cornering. It may be mentioned that the CommodityFutures Trading Commission (CFTC), the U.S. counterpart ofthe FMC, has jurisdiction over the spot commodity marketsthere. Government may also consider subsidizing the premiumand margins to be paid by the farmers for hedging their positionin the spot markets through the futures and options contracts.Besides, CDM should be introduced as a part of the curriculumof economics, commerce and management studies both at theundergraduate and post graduate levels of our colleges anduniversities. While FMC and the exchanges are taking steps forcreating awareness about the CDM, a lot more remains to bedone on a war footing basis. To achieve the objectives ofcreating awareness about these markets and ensuring that thebenefits of these markets reach all sections of our society withinthe specific time period of five years, office of the FMC andother related offices of the Government need to functiontwenty four hours - in three shifts of eight hours each. If theabove measures are taken, beneficial impact of the CDM onour economy as a whole can be easily discernible.References1. Baer, J.B. and O.G. Sason, Commodity Exchanges andFutures Trading, New York, Harper Brothers, 19492. Bakken, H.W. “Historical Evaluation, Theory and LegalStatus of Futures Trading in American Agricultural Commodities,”In H.W. Bakken et al (Eds) Futures TradingSeminar: History and Development, Madison, 19603. Boyle, J.E., Speculation and the Chicago Board of Trade,New York, MacMillan, 19214. Flux, A.W., “The Berlin Produce Exchange,” EconomicJournal, Volume no. 10, 19005. Jacks, D.S., “Populists Versus Theorists: Futures Marketsand the Volatility of Prices,” Conference on AgriculturalDevelopment in Economic History, Canadian Network inEconomic History, April 20056. Black, Fischer and Myron Scholes. "The Pricing of Optionsand Corporate Liabilities." The Journal of Political Economy,Vol 81,1972 .(The views expressed are that of the authors only and not that ofthe FMC. Feedback may be sent to prp.fmc@nic.in).150 THE IIPM THINK TANK

Reliving TheGreatIndianDreamCommodity FuturesTrading: GlitchesAnd GroundsTULSI LINGAREDDYDeputy Manager, Clearing Corporation of India Limited (CCIL), Mumbai152 THE IIPM THINK TANK

P OLICY PERSPECTIVESTrading in commodity futures has come under intensescrutiny and debate following the delisting of futurestrading in four food grains (wheat, rice, tur and urad)in January and February of 2007. Ever since, there are argumentsand counter arguments on whether to ban or not to banfutures trading particularly in essential commodities. Since, thereason for the ban was indicated as the suspicion for contributingto rise in inflation, most of the subsequent debate has beenfocused on studying the inflationary impact of futures trading.However, the studies could not find clear empirical (economic)evidence towards the rise in prices except for urad and wheat.Moreover, the trading volumes in other two commodities werenot consistent and significant.At this juncture, it is important to note that it is possible thatfutures trading may drive prices up under deficit supply situation,as noted in the Khusro Committee Report “when everyoneis expecting a price rise, both trend wise and seasonally, it maybe thought that there are no dissenting opinions. All opinionswould seem to converge over a price rise. The futures prices willthen stand above the spot prices and would be rising over time”(GoI, 1980). In the case of urad, apart from the tight demandsupplyconditions, futures trade was conducted exclusively inimported variety from Myanmar (Black Matpe) except for a fewmonths before the ban. Nevertheless, based on the evidencefound in a few cases, one cannot generalize the impacts forfutures trading as a whole but take measures case by case. Themarket structure and characteristics of each commodity isdifferent from others and hence the results found in one casemay not be applicable to the rest of the commodities.But, following the delisting in 2007, the futures tradinghas primarily been validated with their contribution to rise orfall in inflation (spot prices) and generalized the results to thefutures trading altogether. While there were evidences ofincrease in volatilities in certain commodities and they werefound to be unidirectional too, reasons led to the observedtrends were of specific functional irregularities associated withinformation asymmetry, contract specifications, inherentcommodity characters etc., rather than the existence of futurestrading per se.Ideally, trading in commodity futures per se, contributesneither for a rise nor for a fall in prices as they do not increaseor reduce the demand and/or supply of the underlying commodities.Understandably, they merely help in arriving at thefuture prices at a present day based on the information availableon demand and supply of the commodity. Futures (derivatives)trading is an ideal instrument for hedging and minimization ofprice risk. Nevertheless, like any other instrument, if not usedjudiciously it may have adverse impact on the underlyingphysical markets. A number of anomalies witnessed in the pastfour years of commodity futures trading were evidence towardsthe fact that functional inefficiencies and inadequacies can leadto serious implications but not the futures trading per se. In thiscontext, it is necessary to look into the nature of functionalirregularities experienced in the past four years and factorsresponsible for such irregularities. However, in order to keepthe focus on the ongoing debate the study is primarily confinedto agricultural commodities.Recent Trends In Commodity Futures TradingBefore looking into the details of anomalies witnessed in futuresmarkets, a brief overview of recent trends may provide the stateof commodity futures markets. The overall growth in futurestrading volumes has decelerated to 22 per cent 2007-08 againstthe 55 per cent in 2006-07 and a three digit growth recorded inthe years before (Table 1). The distinct deceleration within thethree years of their full-fledged initiation evidently suggests theinadequacies in the functioning of futures markets.Commodity futures trade in the recent months indicatedthat the share of agricultural commodities has understandablyreduced significantly below 20 per cent, following thedelisting and apprehensions of further interventions by thegovernment against its prominent presence with morethan 50 per cent in 2004-05 (Appendix I). As a result, theshare of precious metals reached about 50 per cent of totalvolumes all the commodities traded on the futures exchanges.On the other hand, the share of metals has been in therange of about 15 per cent in the last two months of2007-08 while it was nearly 20 per cent at the beginning ofthe year. Energy products, primarily dominated by thecrude, have remained more or less remained stable at aroundten per cent.Glitches And GroundsThe irregularities witnessed in the Indian futures marketsduring the past four years were the result of functional inadequaciesand inefficiencies at various levels of regulatorysystem. The cases of irregularities can be grouped based on thefactors responsible them.THE INDIA ECONOMY REVIEW153

Reliving TheGreatIndianDreamInadequate Flow Of InformationA critical factor responsible for the efficient functioning offutures markets and price discovery is the free flow informationon the actual and various factors influencing the demand andsupply of the commodity. The prices, thus arrived are consideredas the benchmark prices and provide direction for futuremovement of the physicalFurther, the FMC has been taking efforts to disseminate thefutures prices across the country but no such efforts could befind towards the improvement of information on arriving atprices. As a result, distribution of the basic and vital informationfor arriving at the prices is skewed towards a few sections of thestakeholders in the market. The prices discovered under suchcircumstances may not beprices. Towards this, precise,reflective of the actualThe share of precious metalstimely and accurate flow ofsituation as all the marketinformation is a pre-requisite.reached about 50% of totalparticipants may not take theThus, the futures prices are volumes of all the commodities informed decisions and lead toprimarily dependent on the traded in futures exchanges anomalies.extent and accuracy ofinformation flows in to themarket and available to all the market participants.But, unlike the case of the US and other developed countries,the availability of information and demand and supply ofIn addition, inadequate flowof information and misinterpretationof policies and events may also lead to functionalirregularities in the futures markets. There were instances offlow of adverse information leading to absurd trends in trading.commodities in India, particularly on agricultural commoditiesis very minimal and even staggered. In case of agriculturalcommodities, the ministry of agriculture releases four advancedestimates but at distant intervals and there is a significantrevision from one estimate to the other and by the time the finalestimates are released (in Dec of following year), again with asubstantial revision, it is six months after the marketing seasonstarts.On the other hand, there are no official or authenticatedestimates available on the demand side of agricultural commoditiesin India. The NSSO estimates consumption levels butwith a lag of two to three years that too on per capita consumptionand not aggregate. Not every market participant may becapable of deriving the aggregate demand for the present andforecast the future demand based on the per capita consumptionfigures distributed across rural and urban categories.Hence, there is need for free flow information in public domainon the demand and supply of agricultural commodities indomestic as well as international markets.Case Of Misinterpretation Of PolicyWhen there was a ban in the export of pulses during 2006,futures trading in guar seed (a legume crop product) wasadversely affected and the prices started falling rather steeply.The government’s notification on June 28, 2006 prohibitingexport of guar seed along with pulses, though its not a pulse butbelongs to bean family (Leguminaceae), had apparently driventhe guar futures steeply down, beyond the daily price fluctuationlimit of four per cent on June 29, 2006. But the losses werehighly unwarranted, as there were hardly any exports of guarseed. Guar is mostly exported in the form of guar gum and itsexports were not actually banned. More importantly, the exportban of guar seeds seems to be brought considering it as one ofthe pulses/ beans (cluster bean of pulses family) though it is nota pulse. However, the market became normal once the real factssurfaced. In an another instance, news on the presence ofinferior quality of stocks at the exchange warehouse triggered asteep fall in chilli prices while the spot prices continued to riseduring the lean season (Lingareddy, 2007).Table 1: Trends In Volume Trade On Futures Exchanges Thus, proper interpretation of the facts and policies is2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 also important for the efficient futures trading as itTurnover 66,530 129363 571759 2134471 3327633 4065989largely relies on information flows in to the market. For(Rs. Crore)Growth(per cent)92.8 94.4 342.0 273.3 55.9 22.2efficient and accurate price discovery, an authenticatedinformation network with accurate and precise informationnot only on the demand-supply situation but variousother factors influencing the prices is a pre-requisite.Source: Annual Reports, Ministry of Food and Consumer Affairs, Delhi, Forward MarketsCommission154 THE IIPM THINK TANK

P OLICY PERSPECTIVESTable 2: Trends In Futures Trade VolumesNon-agriculture Rs. Crore Share(%)Commodity CharacteristicsFeb 2008 March 08Rs. CroreShare(%)Gold 146246 33.6 141857 30.2Silver 72921 16.8 92168 19.6Copper 43123 9.9 33871 7.2Zinc 17076 3.9 16731 3.6Nickel 4805 1.1 4713 1Lead 8612 2 6616 1.4Crude 44680 10.3 52754 11.2Agricultural ProductsPepper 5453 1.3 4808 1Jeera 4026 0.9 2050 0.4Soy oil 26040 6 34644 7.4Gaurseed 7985 1.8 13951 3Chana 14311 3.3 14070 3R/M seed 8194 1.9 12472 2.7Soybean 7664 1.8 8091 1.7Turmeric 5036 1.2 3029 0.6Source: Forward Markets Commission (FMC), www.fmc.gov.inAlthough all the commodities are allowed for futures tradingwith the complete lifting of ban, all the commodities may not besuitable for trading in futures markets. Characteristics ofcommodities such as market size, availability of large number ofvarieties, feasibility for grading and standardization etc., have astrong influence on futures trading. As indicated in the GuruCommittee’s report, (GoI,2001) the following charactersto be important for a commodityto trade in futures“All the commodities arenot suited for futures trading.For a commodity to besuitable for futures trading itmust possess the following characteristicsi. The commodity should have a suitable demand and supplyconditions i.e. volume and marketable surplus should belarge.ii. Prices should be volatile to necessitate hedging throughfutures trading in this case persons with a spot marketThere are no official orauthenticated estimatesavailable on the demand sideof agricultural commoditiescommitment face a price risk. As a result there would be ademand for hedging facilities.iii. The commodity should be free from substantial control fromGovt. regulations (or other bodies) imposing restrictions onsupply, distribution and prices of the commodity.iv.The commodity should be homogenous or, alternately it mustbe possible to specify a standard grade and to measuredeviations from that grade. This condition is necessary for thefutures exchange to deal in standardized contracts.v. The commodity should be storable. In the absence of thiscondition arbitrage would not be possible and there would beno relationship between spot and futures markets.”However, looking at the contracts exclusively for importedvarieties of pulses whose market size is very small (about 2-5lakh tonnes) and in wheat and rice where there is a substantialgovernment control, it appears that the exchanges have apparentlynot taken into account of these specifications whiledeveloping futures contract. In case of pulses, no prior or evenpost information is available in the public domain in terms ofimport arrivals, prices, demand and supply situation in thesource country (Myanmar). Even the feasibility report did notcontain detailed information indicating the trends in demandand supply of the imported pulses except for imports for a yearor two. As a result, imported pulses particularly, urad (importedinitially and desi variety for short period before ban witnessedextreme volatilities and anomalies in its futures while thewheat futures turned unpredictable following the governmentinterventions. The cases are presented belowCase of urad: The spot as well as January futures contractprices have gone up rather steeply by about 12.5 per cent,during the last few tradingdays of January contract. But,the spot prices have comedownmore sharply, registeringa thirteen per cent fallwithin four trading days(21 st –25 th January) immediatelyafter expiry of theJanuary 06 contract as revealed by Chart-1.A similar pattern of sudden spiralling of prices could be seentowards the expiry of February contract as well from 11 thFebruary 2006 onwards. These trends, particularly in spotmarket, are beyond the logic of any normal trading practices,especially prior to the expiry of contracts and when there is noTHE INDIA ECONOMY REVIEW155

Reliving TheGreatIndianDreamChart 1: Volatility In Burmese Urad PricesPrices Rs/Q3200300012.50%13%2800260024002200200002-01-200609-01-200616-01-200623-01-200630-01-200606-02-200613-02-2006Source: Websites of NCDEX and MCXSpot Feb-06 Jan-06significant increase in demand and no proportionate rise in dallprices. This has led to more uncertainties in the markets ratherthan bringing stability. Futures markets, aimed at price discoveryand price risk minimization processes, had actually sentwrong signals to spot markets and turned them more volatile.Under such a volatile situation, small traders or millers whowork for normal profit margins may not be able to sustain andmay be driven out of the system.Hence, it is important to research thoroughly whether thecharacteristics of the commodity fit for introduction of futurescontracts or not. The feasibility studies conducted by theexchanges primarily covered only to the extent of volatility, ifthere is volatility then it was decided that the futures contractsneed to be introduced.Government InterventionOn the other hand, Government intervention causes unpredictablechanges in demand-supply situation thereby rendering theprior expectations based on which the positions taken in futurescontracts void. Under such a situation the futures marketsbecome unpredictable and unviable leading to losses for all themarket participants.Case of wheat: A classic example of the government interventionleading to uncertainties in futures rendering themunviable is wheat. Wheat pricesstarted moving up in futures rathersteeply during first of January 2006,following the fall in stocks below thebuffer stock norms. The rise infutures continued until the openmarket sale of wheat by the ministryon January 25, 2006, thereafter thefutures as well as spot prices havedeclined equally steep (ten per cent infour trading days). Further, the rise infutures prices was much higher thanthat of spot even for the near-month(January) contract. While theFebruary futures prices remained athigher level, the January futuresprices were settled after losing fourper cent in the last four days of trade.Corresponding to this, widefluctuations were also witnessedin spot prices as presented in Appendix II. Thus, futurestrading in commodities, where substantial governmentcontrols exist, may lead to uncertainties rather than minimizingprice risk.Contract SpecificationsSubstantial research efforts are required for developingcontract specifications that would suit to the existing commoditiesparticularly considering the less developed physical marketsin terms of uniform quality, varieties, etc. However, the existingcontracts, in many cases, were inadequate in addressing theseproblems and not seem to be reflective of real situation.Absence of substantial trade volumes in traditionally tradedcommodities such as cotton is a clear indication of inadequateefforts in developing futures contracts. Varietal specification infutures contracts of agricultural commodities led to narrowingthe market size further, particularly in case of pulses.Position Limits: On the other hand, position limits were notfixed proportionate to the deliverable market supplies insteadof some fixed number across all the contracts. Because thedeliverable stocks in the lean season are significantly less thanthe total supplies and hence the market becomes narrowmaking it susceptible for purposive influences.156 THE IIPM THINK TANK

P OLICY PERSPECTIVESQuality Specifications: must accommodate majority of thecommon grades & varieties so that the arbitrage betweenfutures as well as spot markets can be facilitated.Regulatory ReasonsCommodity derivatives markets in India are regulated by athree-tier system containing the exchanges, the FMC & theUnion government. However, the major decisions on regulationSettlement Price: currently, every exchange is deriving itsown settlement price claiming that they have a unique methodto do it. As a result, there is no unique price and methodprevailing for final settlement of futures contract. This createsmore confusion on the part of the trader. There were instanceson a single from the same centre there was a difference of Rs.100 between the prices arrived by the two national commodityexchanges. In order to avoid this, there should be at least acommon process, if not the price, to derive the settlement price.A government or an independent neutral agency acceptable forall the exchanges may be given the responsibility to bring aboutuniform spot prices for settlingof futures trading such as the listing and delisting of commoditieshave so far been taken by the Union government alone. TheKabra Committee report as well as the World Bank’s study hasstrongly suggested that futures trade in pulses, wheat, rice andsugar do not satisfy the minimum suitability criteria. Despitethis, the government has permitted futures trading in pulses,wheat, rice and sugar along with 100 other commodities in 2002.However, there was no significant gain in futures volumes ofrice, wheat and sugar due to regular government intervention.In case of pulses, volumes have exploded but with highvolatilities driven by excessive speculation and even manipulationtaking the advantage ofcontracts at all the exchanges.their small market sizeThe current setbacks in theNumber Of Contracts:(Lingareddy, 2006).At present, contracts aredevelopment of futures marketsExchanges, despite beingavailable for almost all months in India are primarily the results the ground level regulators,but they can be limited and of functional inadequacies have been taking measureslean season contracts can berestricted.Wider Coverage: futures contract must include as manynumbers of varieties as possible so that the maximum amount ofsupply becomes fit for delivery.only in the form of ensuringposition limits with membersand action against them when violated. But, there seems to beno self disciplinary action while introducing contracts and otherfunctional problems leading to anomalies in price discovery.Over the past four years, the FMC has taken a few regulatorymeasures such as directing theChart 2: Wheat Futures Under Government Interventionexchanges to alter margins, limit950300000open positions and to bring compulsorydelivery option in some930commodities. Nevertheless, these910250000890measures could not bring any200000870significant changes in the functioningof futures markets. In order to850150000830provide some new features and810100000790enhance powers of the FMC, the50000770Department of food and consumer7500affairs has proposed amendment ofthe Forward Contracts (Regulation)Act, 1952 and the Forward ContractsJan-06 Feb-06 Volume Open Interest(Regulation) AmendmentBill, 2006 has been introduced in theSource: NCDEXLok Sabha on March 21, 2006.Prices/Q10-09-0524-09-0508-10-0522-10-0505-11-0519-11-0503-12-0517-12-0531-12-0514-01-0628-01-0611-02-06volume\OITHE INDIA ECONOMY REVIEW157

Reliving TheGreatIndianDreamNevertheless, non-approval of the bill may restrain the FMCfrom the additional powers to introduce options trading etc, butnot from playing a constructive role. It is surprising to seepanicky statements instead of clarifications and assurance fromthe regulator, FMC when the Commodity Transaction Tax(CTT) was introduced in the budget 2008-09. A statementindicating a possible shift in futures trade to illegal futuresmarkets, further acknowledges the inabilities of the regulatorysystem. While the Bill is awaited amendment, the governmenthas once again intervened and de-listed urad, tur, wheat andrice from the futures trading in 2007.Further, four more commodities (chana,rubber, potato and soy oil) were suspendedfrom futures trade for a few months withthe immediate effect from May 8, 2008.Thus, the major regulatory decisionsparticularly on the listing and delisting ofcommodities for futures trade has beentaken by the Union government and moreoften these decisions appeared to berandom and irrational without supported by any strong and logicalexplanation. In order to bring efficiency in futures marketsand build confidence among the market participants, theregulatory system at the bottom level, that’s the exchanges andFMC, need to be foolproof with stringent disciplinary actionsand orderly functioning system in place.ConclusionThus, the setbacks in the development of futures markets inIndia are primarily the results of functional inadequacies ratherthan the existence of futures trading per se. The inadequaciesand loopholes associated with actions and inactions at variousThree-tier Regulatory System In IndiaMinistry of Food And Consumer AffairsTier IIIForward Markets CommissionTier IIExchangesTier IMarket Participants (Members And Clients)regulatory levels of the system that has given a way for exploitationby some sections of the market participants and led toanomalies in the market. Such inadequacies have been croppedup due to the casual and inadequate efforts from the lower levelof the regulatory system, exchanges and the regulator, inaddition to the random decisions taken by the top level of theregulatory system (the Union Ministry). Hence, for the futuresmarkets to grow in the right direction towards serving theireconomic objectives of price discovery and risk minimization,efficient functional as well as stringent and vigilant regulatorysystems should be in place. Towards this, theexchanges need to take a greater responsibilitywhile introducing futures contractsinstead of rushing to introduce as manycontracts as possible only for gainingvolumes, because an incomprehensiveapproach may dilute the efforts to meet theultimate objectives of the futures marketsand deteriorate confidence of the marketparticipants thereby leading to damage ofthe markets in the long run.References• FMC (2007) Market Review, Forward Markets Commission,www.fmc.gov.in• GoI, Ministry of Civil Supplies (1980): Report of the Committeeon Forward Markets, (Chairman: A M Khusro), Delhi• GoI (2001) Report of The Expert Committee on Strengtheningand Developing Agricultural Marketing (Chairman:Guru), Delhi.• Lingareddy Thulasamma (2007) Futures Trading, AlternativeEconomic Survey, India, 2006–07, Daanish Books, Delhi• MCX (2007) Market data, Multi Commodity Exchange ofIndia Limited, www.mcxindia.com• NCDEX (2007) Market data, National Commodities andDerivatives Exchange India Limited, www.ncdex.com• World Bank (1996) India Managing Price Risks in India'sLiberalized Agriculture: Can Futures Markets Help?" ReportNo. 15453-IN, Agriculture and Water Operations DivisionCountry Department II, South Asia Region, World Bank andCommodity Division, United Nations Conference on Tradeand Development.(Views expressed are personal. The author can be contacted atthulasi.lr@gmail.com)158 THE IIPM THINK TANK

P OLICY PERSPECTIVESAPPENDIX I: Commodity-wise Trends In Volume Traded (Rs. Crore)2005 share 2006 share 2007 shareJan-Dec % Jan-Dec % Jan-Mar %Precious metals 4,87,333 32.1 16,81,220 49.7 3,86,523 42.7Gold 2,06,398 13.6 10,45,573 30.9 2,04,261 22.6Silver 2,80,935 18.5 6,35,647 18.8 1,82,263 20.1Base Metals 3,916 0.3 2,33,449 6.9 1,73,353 19.1Aluminum 31 5,072 0.2 3,966 0.4Copper 3,544 0.2 1,76,941 5.2 99,909 11.0Lead 337 1,110 0.1Nickel 230 946 11,996 1.3Tin 111 193 335 0.0Zinc 49,960 1.5 56,037 6.2Ferrous 5,099 0.3 7,947 0.2 1,043 0.1Energy 1,44,888 9.5 1,72,362 5.1 98,978 10.9Crude Oil 1,44,288 9.5 1,37,372 4.1 87,181 9.6Natural Gas 32,625 1.0 11,793 1.3Polymers 489 1,229 -Agri 8,79,149 57.8 12,85,372 38.0 2,45,426 27.1Cereal 10,664 0.7 34,543 1.0 2,749 0.3Fiber 9,327 0.6 7,602 0.2 2,401 0.3Oil complex 1,04,548 6.9 1,28,854 3.8 46,971 5.2Pulses 3,00,699 19.8 5,16,137 15.3 45,713 5.0Plantations 4,828 0.3 6,944 0.2 4,005 0.4Spices 27,606 1.8 1,46,482 4.3 82,972 9.2Others 4,21,477 27.7 4,44,808 13.2 60,615 6.7Grand Total 15,20,385 100 33,80,350 100 9,05,323 100Source: Forward Markets Commission, NCDEX and MCX, MumbaiAPPENDIX II: Chart Spot Prices At Delhi12001150110010509509008508007507001\2\20061/20/20062/9/20062/28/20063/18/20064/6/20064/25/20065/13/20066/1/20066/20/20067/8/20067/27/20068/16/20069/4/20069/22/200610/12/200610/31/200611/18/200612/7/200612/2/2006Rs\QTHE INDIA ECONOMY REVIEW159

Reliving TheGreatIndianDreamEngaging Diaspora:The Developmental Matrices For IndiaSadananda SahooInstitute of Applied Manpower Research(IAMR), New DelhiThe Indian economy in recent years has emerged as oneof the fastest growing economies of the world. Quitecontrast to this India’s human development index (acomposite measure of life expectancy, adult literacy andstandard of living) has slipped to 128 among 177 countries in2007. The Eleventh Plan Approach Paper “Towards Faster andMore Inclusive Growth” emphasizes reducing such disparitiesacross regions and communities by ensuring access to basicphysical infrastructure as well as health and education servicesto all (Para 1.41). The Plan strategy clearly stated (Para 1.4.3):“A key element of the strategy for inclusive growth must be anall out effort to provide the mass of our people the access tobasic facilities such as health, education, clean drinking wateretc that they need. In the short run these essential publicservices impact directly on welfare. In the longer run theydetermine economic opportunities for the future... better levelsof health and education are in fact the pre-conditions forsustained long-term growth.”Towards “faster and more inclusive growth” is a huge taskand requires enormous energy, resources, ideas and vision. In aglobalizing world, India is simultaneously facing challenges aswell as opportunities at local and global levels. In this contextIndian diaspora assumes enormous significance if it is mobilizedin a proper way towards development.Planning has a historical significance in the diaspora formationsince the colonial time. The recruitment of labour duringcolonial times to the present emigration is interplay of bothglobal and national policies.This paper tries to critically examine the following in thecontext of present 11 th Plan Approach Paper:(1) Towards a faster and inclusive growth in the context ofemerging knowledge economy vis a vis Indian diaspora.(2) Diaspora as a stakeholder in the development process.(3) Critically examining the existing policies pursued by theIndian Government towards diaspora.I. Knowledge Economy Towards A Faster GrowthToday, knowledge has become the most important capital, andtherefore, the success of any society depends on harnessingwhat is called “knowledge capital”. The knowledge-basedeconomy placed great importance on the diffusion and use ofinformation and knowledge as well as it creation. Most of thedeveloped countries are more and more turnings towardsknowledge-based economy resulting in spending more onR&D. There is also demand for high skilled workers.160 THE IIPM THINK TANK

P OLICY PERSPECTIVESThe U.S. Bureau of Labor Statistics projects a shortfall often million workers in the U.S by 2010 (Manpower: 2007: 2).This global pull for skilled and knowledge worker hasadverse impact on developing countries. Most developingcountries are victims of unequal knowledge distribution astheir brightest and most talented migrate to the developedcountries and contribute to the growth of their countries ofdomicile. This talent loss is a huge cost for the developingcountries. Countries like India have been spending a hugeamount of resources to train doctors, engineers andtechnicians who were then emigrating to other countries.However, this apprehension has been changing in recent|years as Indians abroad started contributing directly orindirectly to India through remittances and other form ofdevelopmental activities.Should we bother about braindrain when the flow of brainis moving in all directions intoday’s global economy?Creating Brain ChainEmigration is an inevitable process of globalization of talentpool and not bad always. Somescholars view that “migrationof world-class academics orscientists from India is not aloss as it has led to greatercontribution to the global poolof knowledge from which Indiahas also benefited, along withother countries. For example, the work by Amartya Sen orJagdish Bhagwati on Indian economy conducted abroad hasadvanced the understanding of Indian economy more thanmuch of the work done by Indian economists in India. Then,should we bother about brain drain when the flow of brain ismoving in all directions in today’s global economy?” (AlokRay: 2006). In fact, it is inevitable now to think of accessingknowledge resources globally than restricting people. With theavailable technology the labour and skills are being used fromany parts of world undermining the geographical location. TheBusiness Process Outsourcing (BPO) sector is a brightexample. Increasingly, many countries have come to regardtheir diaspora as a resource for nation building. In today’senvironment, information and communication technology,and virtual networks can be easily tapped. These networks can,for instance, link Indian professionals overseas with theircounterparts back home. China, Thailand, Australia andseveral African countries have already set up diaspora knowledgenetworks (DKN) to harness this creative energy. Grassrootsinitiatives in South Africa and Latin America now linktheir researchers to their respective diasporas. Ghanaians inthe diaspora created a Ghana Association of Distance Learningand Computer Literacy with the support of their government.Over last one decade, there has been a great deal ofinterest and excitement on the part of Indian government anddevelopment agencies about the potential role of “Diaspora”in the development. Though quite a few NGOs and industrieshave started their collaboration with the diaspora counterpartsin the early 1980s and 90s 1 , the official response to engagediaspora came little later. It is perhaps visible only since lastone decade i.e after the constitution of High Level Committee(HLC) on Indian Diaspora and subsequently opening up anew Ministry of Overseas Indian Affairs (MOIA). In theemerging knowledge based society, the importance of diasporaunderscore further.The competitiveness of India in the development of buildinga knowledge based economyoften depends upon the accessto the global stock of knowledge.Knowledge diaspora canopen that channel to India.The above table is just a tip oficeberg and many more arethere to yet be documented.These are professionals who have associations and institutionsin the area of their specialization that directly establisheslinks with the institutions in their country of origin. Many ofthese also collaborate with the institutions in India. Jean-Baptiste Meyer and Mercy Brown (1999), socio-economistsbased in France and Cape Town respectively, identified somenetworks of Indian diaspora professionals mentioned below:a) Silicon Valley Indian Professionals Association (SIPA)b) Worldwide Indian Networkc) The International Association of Scientists and Engineersand Technologists of Bharatiya Origind) Interface for Non Resident Indian Scientists and TechnologistsProgramme (INRIST)These professional networks have immense potential thatcan be harnessed for growth. As knowledge-based economiesthrive, the collaboration with and support from these knowledgegroups are very important for developing educationaland research institutes within India.THE INDIA ECONOMY REVIEW161

Reliving TheGreatIndianDreamSome Successful Initiatives Through Diaspora Participation In Building Knowledge Based InstitutionsSl.No. Selected Key Players- Individuals/ Organizations Establishment/Impact In India1 Rajat Gupta, former managing director ofIndian School of Business (ISB), Hyderabad.McKinsey & Company played a crucial role inestablising the institution, which is suppose to beone of three best institutes in the world today.2 Alumni of IITs in Sillicon Valley etc. Bangalore’s software boom, contributing towards globalcompetitiveness of IIT through infrastructure developmentand centers of excellence.3 Medical Professional Organizations such asAmerican Association of Physician of IndianOrigin (AAPI)Specialized services in Healthcare such as Eye care in L.V.Prasad Eye Institute, Philanthropic Services in Healthcare.AAPI has been engaged in several states in India topromote healthcare.4 Sam Pitroda, Telecom Telecom Sector5 Amartya Sen etc. in Social Sector Inclusive development6 NEA-IndoUS (Venture capital firm formed entrepreneursfrom both Syllicon Valley and India.Vinod Dham, who is widely acknowledged asthe Father of the Pentium" microprocessor is itsExecutive Managing DirectorNEA-IndoUS a leading venture capital firm which providesearly and mid-stage funding to new or growing businesses inIndia.Diaspora For Inclusive GrowthThe challenge of social inclusion is the greatest challenge of ourtimes. Certain groups are being marginalized from the fruits ofgrowth and development because of their gender, race, ethnicity,age and social status, as well as their access to marketopportunities. Diaspora unlike other external developmentagents can act better as a player in the inclusive process due toits socially and culturally closeness with the civil society.Diasporas are as Werbner (2002) observed ‘embodiments ofcultural, political, and philanthropic sentimental performances…theyexist through material flows of goods and money,through gestures of ‘giving’ or public service. Often these threedimensions of materiality- culture, politics, and philanthropyareintertwined. Members of the diaspora mobilize politically todefend against injustices and human rights abuses suffered byco-diasporics elsewhere’. Diaspora has an advantage to play aconstructive role in healthcare, education and rural developmentto bring inclusive growth.Inclusive HealthcareProviding affordable healthcare is an urgent issue for a countrywhere majority of people still live in poverty. Many poorundergo debt trap due to lack of capacity to pay for theirhealthcare. Healthcare is a major area where India looksforward to, for diaspora participation. The current state ofIndia’s achievement in providing healthcare is not encouraging.The lack of skilled manpower, inadequate funding and oftenobselete technology are some of the important areas of concern.Government has already made institutional arrangement withone of the large organization of Indian doctors abroad. Thesigning of a Memorandum of Understanding (MOU) betweenthe Ministry of Overseas Indian Affairs (MOIA) and theAmerican Association of Physicians of Indian Origin (AAPI) isjust two year old and the visible result is not yet known.Model ExamplesL.V. Prasad Eye Institute (LVPEI) is a classic example ofdiaspora’s participation in developing a world-class institutionin healthcare that is reaching to the people below poverty line(BPL). LVPEI was set up as a not-for-profit trust, in October1986 by a NRI, Dr. Gullapalli N. Rao, then an opthalmologist inRochester, New York.“The institute is a true reflection of an NRI commitment, thespirit of American excellence transplanted into the Indianhealthcare system. This was made possible by NRI participationin diverse ways, including planning and development, collaborativesupport in teaching and research and significant monetaryhelp to create world-class infrastructure,” says Rao. “This162 THE IIPM THINK TANK

P OLICY PERSPECTIVEScontribution was pivotal to the rapid evolution of the institute toa leadership position among the eye centres of the world in lessthan a decade.” LVPEI focuses on providing services to themost vulnerable that include people in the BPL (Below PovertyLine) category in rural areas, and slum dwellers in urban areas.Besides, preference is also given to women and children.LVPEI gets major support from several diaspora philanthropists,besides other nationals and corporate bodies. LVPEIinvites faculty, senior consultants and experts internationallyand share their knowledge and expertise through consultancy,seminars and conferences. Several of them hold influentialpositions abroad.Rural DevelopmentThere are few cases in whichNRI in Punjab, Tamil Nadu,Gujarat, Andhra Pradeshadopting their native village forall-round development 2 . SomeNRIs who have had their originin villages have also establishedhealthcare and education institutions. This however is notwidespread due to the lack of mobilizing agency at the ruralareas.There is regional disparity/ bias due to the NRIs emotionallink to his/her native place. Most of these cases happening in thestates where there were maximum first generation diaspora,who still have strong bond with their relatives at native place. Arough estimation from news and study shows that Punjab hasmaximum number of NRI participation in the rural developmentproject.Maximum number of professionals who migrated abroad arefrom urban areas. Migration of professionals from rural areas isvery less. Mostly first generation diaspora love to do charitiesthrough their known people and in familiar places. Ruraldevelopment projects through diaspora can be multiplied by theactive role of the civil society.EducationWe have already witnessed donation to IITs 3 by Alumni Associationof various IITs is very encouraging. The funds generatedby IITs are mainly spent for 1. Student Scholarships (Attract thebest students to IIT). 3. Visiting Faculty Program (Attract thetop-tier faculty from around the world to visit, teach andIndia receives the largestamount of remittances in theworld, with a whopping $27billion in 2007 aloneconduct research at IIT). 4. Quality of Student Life Program(Improve the quality of student life at IIT) 5. Endowment Fund(The principal from the Endowment Fund is preserved, andonly the interest from this fund will be spent on the variousprograms). There are also donations given by Alumni toUniversities. But the poor masses need more support in termsof providing quality education in rural and tribal areas.In a major boost to enhancing world-class research facilitiesat the Indian Institute of Technology (IIT), two of its alumnihave given a whopping USD six million donation to their almamater as a "give back" during its golden jubilee celebrations.General partner at Kleiner Perkins Caufield & Byers andco-founder of Sun Microsystems, Mr. Vinod Khosla andAdvisory Director of GoldmanSachs, Mr. Avi Nash announceddonations of USD fivemillion and one millionrespectively for their almamater IIT Delhi and IITMumbai. The "gift" by Khosla isthe largest by a single individualin the history of IIT Delhi, and will help maintain and enhancethe excellence of the school. Still there is a need for greaterparticipation in building the higher education to the globalstandard. But the real challenges are in providing access toeducation to the masses. More participation of social backwardsections in getting education is the challenge since independence.Diaspora’s participation in basic education is still notencouraging. Diaspora can make a huge difference in this areaby playing an active role.Diaspora As A StakeholderWhy diaspora should play as stakeholder?In an era of accelerated globalization, the relationship betweendiaspora and the economic and social development of manycountries is increasingly relevant. The world economic andpolitical order has been changed since colonial period more sowith the advancement of recent communication revolution thatgenerated large movements of people in almost every region.The global movements of people and spread of electronicmedia are distinctive features of the current historical moment.The unprecedented scale and scope of this global movementand spread has had profound consequences for the cognitiveand social arena. This scenario brings enormous opportunity asTHE INDIA ECONOMY REVIEW163

Reliving TheGreatIndianDreamwell as challenges for development planning or public policy.Many countries now opened their special departments andministries to engage their diasporas in development projects asa stake holders. Diaspora engages with their land of origin in adiverse ways depending upon the context. Indian diaspora is anentrepreneurial and professional success in the USA and someparts of Europe. The achievements of Indians in Silicon Valley,their listing in fortune magazines and presence in public spaceof the countries of adoption have brought them to the limelight.Indians doctors constitute a very significant numbers in healthcareof USA and Europe. There has been a growing number ofIndian scientists in Developed countries. Thanks to the IITs,IIM-A and other premier institutes that produced such internationalstandard students.In recent years the there has been more interaction betweenIndia and Indian Diaspora. Thanks to the ICT and easytransportation facilities. Therehas been growing cases of NRIsserving as visiting scholars,creating virtual networks andshaping the direction ofscholarly environment andcapacity building in various fields of science, technology,cultural exchange, business, etc. The diaspora network iscreating a familial chain across the globe, which can be sociallyand economically enriching for host countries, diaspora(themselves) and the country of origin. Some of the recenttrends are:1. The Indian export business related to the ethnic productssuch as food, clothes and cultural products (movies, scripturesand items used in rituals such as books, idols etc.) hasthe tremendous demand among the Indian Diasporacommunity all over the world.According to governmentalsources, the Indian Diasporanumbers over 25 million2. More remittances. India receives the largest amount ofremittances in the world, with a whopping $27 billion in 2007alone (World Bank: 2008).Diaspora InvestmentCurrently, India gets about $4 billion of foreign investment ofwhich the contribution of overseas Indians varies between 9 and15 per cent. This is often rated as "very modest" compared towhat the overseas Chinese community invests in China. Theoverseas Chinese, by comparison, are responsible for about 50per cent of some $48 billion overseas investment China attracts.The other half of $48 billion mainly comes from the US, theEuropean Union and Japan. The Resurgent India Bonds (RIB)floated in 1998 and the India Millennium Deposits (IMD)floated in 2000 resulted in the mobilisation of about US $ 4.2billion and US $ 5.51 billion respectively, as mentioned byReport of HLC on Indian Diaspora (2001: xxxi). Investmentscenario is encouraging but there have been large scale internaldisparities, which needs to be addressed.Growing RemittancesIndia receives the largest amount of remittances in the world,with a whopping $27 billion in 2007 alone (World Bank: 2008).Remittances can be seen as a form of private financial aid,which not only flows straight into the pockets of both low-incomeand well to do households in both rural and urbanlocations (something that normal aid receipts fail to do). With astrategic plan, remittance flowswill help in poverty reductionand bring inclusive growth.Remittances alone are unlikelyto lift people out of poverty:rather it is their interplay withother economic, social and cultural factors which determine thescale and type of impact remittances can have on povertyreduction. Thus, the focus should be on what remittances canadd to the process of moving people out of poverty or reducingtheir vulnerability to poverty.Remittances continue to be the largest source of externalfinance to the developing world, exceeding foreign investmentand foreign aid every year. And its potential impact on povertyalleviation and development is clearly important. In India, mostof the remittances comes from the Gulf migrants who hail fromlower middle and poor families.164 THE IIPM THINK TANK

P OLICY PERSPECTIVESUnderutilized Cultural MarketIndian diaspora is a huge market consisting of 25 million peoplehaving better purchasing power than that of their Indiancounterparts. Indian diaspora has an estimated combinedincome of $160 billion in 2004 and it is growing faster. TheIndian diaspora is rated as affluent and this is evident in thelifestyle of the Indian communities in parts of the EuropeanUnion, North America and Africa.The High Level Committee on Indian Diaspora (2001) notedthat the Diaspora's presence in their countries of settlement hascatalysed demand for Indian goods and services, ranging fromfood to fashion to the Indian entertainment industry. Thedemand for bollywood movie, yoga, ayurveda, spiritual booksand spiritual gurus are in growing demand among Indiandiaspora. Growing number of Indian T.V. channels are nowfound in all across the globe. There is a huge potential forIndian products. Sadly, the Indian consumers today buy Indianritual items produced by Chinese industry. Many items such asidols of God and Goddesses and other ritual items are alreadymanufactured in large quantity in China.Critical Appraisal Of The PoliciesThe Government of India was lukewarm to the issues ofoverseas Indians until she realised the potential of the NewDiaspora, or NRIs who immigrated after independence to thedeveloped world. They came from the middle class elite familiesare a highly skilled groups of professionals, scientists, doctorsand Engineers.Only in the last decade, NRIs were encouraged to invest inIndia through certain attractive schemes such as Resurgent IndiaBond (RIB) and they were welcomed to launch industrialenterprises along with transfer of technology. There is hardlyany evidence of reaching the majority of the People of IndianOrigin, the Old Diaspora, till the announcement of the newscheme of PIO Card was announce during the early 1999.High Level Committee On Indian DiasporaA High Level Committee on Indian Diaspora was appointed bythe Ministry of External Affairs in September 2000, with theapproval of the Prime Minister to recommend a broad andflexible policy framework after reviewing the status, needs androle of People of Indian Origin (PIOs) and Non-ResidentIndians (NRIs). HLC recommended for i) PIO Card ii)observation of Pravasi Bharatiya Divas on January 9 th (the dayMahatma Gandhi returned to India from South Africa) of everyyear, in India and abroad, to recognise and appreciate the roleof Indian Diaspora in the promotion of India’s interest, and iii)the institution of Pravasi Bharatiya Samman Awards foreminent PIOs and NRIs. This initiatives are now undertakeneffectively and helps further bonding with the diaspora. TheReport (MEA 2001) also suggests that the Government of Indiaand also the state governments should try to remove all theobstacles for promoting philanthropic and voluntary or welfareactivities of NGOs that the members of Indian Diaspora wish topursue in India.Policies Under UPA GovernmentUnder the UPA government several initiatives were taken up toengage Indian diaspora further. The creation of a new Ministryof Overseas Indian Affairs (MOIA) itself is a serious effort. TheMinistry has taken up a range of activities such as diasporaservices, financial services, overseas employment services andsocial services that encourages the diaspora’s involvement in awide array of activities within India. The mission of the MOIA isto drive policy and build partnership with the diaspora through1) offering flexible solutions to overseas Indian communities. 2)Lending a strategic dimension to India’s engagement with theDiaspora. 3) Tapping the investible diasporic community interns of knowledge and resources; and 4) Anchoring all diasporicinitiatives in the states.State governments like Kerala have undertaken several measuresto engage its diaspora.. Unlike many other states, Keralahas become virtually integrated with the world economy as itseconomy is influenced by the remittances. Kerala is the firststate in India to establish a special department for the KeralaDiaspora i.e. Non Resident Keralites' Affairs (NORKA) 4 inDecember 1996. However, Kerala’s experience over the lastseveral decades vividly demonstrates that there is a need formuch more planning at various institutional levels to leveragethe diaspora resources. Many other states have wakened up torealize the economic potential of networking with their diaspora.Gujarat, Punjab, Andhra Pradesh etc. are some of the statesworking on creating policies to attract more diaspora engagementin development projects. The Pravasi Bhatatiya Divas(PBD) creates a platform to promote interaction amongmultiple stakeholders i.e Central and State governments, NRIinvestors, NGOs, Industries, Academician, Entrepreneurs,second and third generation diaspora youths, etc.THE INDIA ECONOMY REVIEW165

Reliving TheGreatIndianDreamConclusion And SuggestionsGlobal movement of people is inevitable today. If not suficientlyplanned the developing countries like India will be thelosers. However, the emerging technology brings certainopportunities which can be tapped especially by creating ahuman chain. Indian Diaspora which includes both non-residentIndian (NRI) and People of Indian Origin (PIO) is not auniform community. It is the most diverse than all otherdiasporas in the world. It is as complex as India itself representingvarious ethnic, linguistic, religious, regional and castegroups. In terms of sheer number, it is the third largestdiaspora in the world, only next to British and Chinese.According to the Governmentof India estimates the IndianDiaspora numbers over 25million (Ministry of OverseasIndian Affairs).Policy Challenges1. Transnational policies have to comply with the interest ofmultiple stakeholders that include individual and nationalinterest.2. Now it is quite evident that the Indian diaspora is diverse interms of its resource and there is need for specific policiesto engage the diverse group unique way in the developmentalprojects as a stakeholder. Diaspora is a vastreservoir of human capital (knowledge as embodied inhuman beings) and social capital that is yet to be profitablyharnessed.3. Agent mobilisation is one of the most important means toharness the social, intellectual, cultural capital from thediaspora and subsequently engage the same in the developmentprocess as stakeholders. Mobilizing agency: religiousgroups who have mobilized it more successfully thandevelopment agents. However, in recent years the growthand investment scenario is changing and diaspora can bemobilized with the help of civil society organizations suchas NGOs in course of their development activities.4. There is a need for consistency of policies to engagediaspora. The history of politics in India is known for thiskind of inconsistency. Where there is a change of politicalparty they change the policy. This gives wrong signal tothe investors.5. Bureaucratic delay and corruption does not encourage anyProf. Amartya Sen attributes thesuccess of Indian IT sector to itsinteractive opennessinvestment. Indian political system also needs topromote transparency and accountability to gain trustamong investors.6. The policies on Indian diaspora must take into diversity ofboth India and Indian Diaspora that includes theirsocio-cultural, economic and educational status. Thediversity in cultural, religious, linguistic and caste in Indiais a major challenge not only to the outside investors butalso for NRIs.7. Institutions and governments needs to create enablingenvironment for Diaspora’s participation in a wide areas ofdevelopment activities such as education, health, trade andcommerce, science andtechnology etc. Governanceshould support and facilitate inthe areas where the stakeholdersalready working rather thancreating rules and regulation inanticipation of possibleprojects. There are some models already working well i.eL.V. Prasad Eye Institutes, Indian School of Business (ISB)and etc.8. Research, documentation, monitoring and evaluation ofthe ongoing diaspora activities within India. Successfulventures should be brought to limelight and encouraged.9. To harness the human capital in many scientific areas thereis a need for up-gradation of R&D facilities in all highereducation system. The types of laboratory equipments,library services etc., available to scientists abroad cannot becompared with the meagre facilities in India. Addressingthe Pravasis in 2003, Prof. Amartya Sen emphasized‘Indian success is ascribed to its interactive quality that ledto the development of science and mathematics in thecountry’. Citing the example of the tremendous successachieved in the information technology sector by India, Sensaid it was indicative of the interactive openness (FICCI:2003).10.Public-Private-Partnership in mobilizing, monitoring andevaluating diaspora collaboration. Research and findingsshould be made out and advertised for better recognition.11.Inclusive heath and education through philanthropy andinvestment should be encouraged.12.Diaspora Philanthropy as a vital complementary developmentalforce should be encouraged in all areas to promote166 THE IIPM THINK TANK

P OLICY PERSPECTIVESmore inclusive growth.13.With regards to remittances, a policy environment thatsupports a more inclusive financial system is important.An important means to increase the benefits of remittanceis through reducing its costs. There is still a large scopefor further reduction in costs. This needs co-operationfrom both by financial and non-financial institutions toprovide more financial access – including efficient moneytransfers, housing finance, insurance, etc. - to the underserved.Reduced transaction cost and use of remittancesfor greater development impact. The case of Kerala isnot encouraging. This needs an immediate policyattention.14. Encourage the institutional autonomy to network withdiaspora professionals, promoting diaspora internship inall professional areas and social services.EndNotes1In 1980s and 90s some organizations in healthcare andsoftware started collaborating with their diaspora counterpartsfor example Apollo Hospitals, LV. Prasas Eye Institutes,Software firms in Bangalore etc.2NRI to adopt school in native village, The Hindu, Tuesday,Aug 23, 2005. http://www.hindu.com/2005/08/23/stories/2005082311690400.htm*Illinois physician devotes herself to tribal children, HindustanTimes, Tuesday, February 26, 2008*NRIs help in development projects, 29 Dec 2004, Times ofIndia, Prathima Nandakumar & Prashant Rupera.*NRI turns crusader, adopts 100 Delhi widows' children,Indian Express, September 25, 1999, http://www.indianexpress.com/res/web/pIe/ie/daily/19990925/ige25006.html3IIT Foundation website at http://www.iitfoundation.org/donate/categories.phpIIT gets $6 mn from its alumni, Dharam Shourie (Press Trustof India) http://www.expressindia.com/fullstory.php?newsid=18492, Sunday, January 19, 20034Non Resident Keralites' Affairs (NORKA) was a platformthat promotes socio-economic and cultural relations withKerala Diaspora. Some of its activities include introduction ofID Cards for NRKs, Welfare Funds for NRKs, Global YouthFestival for NRKs (to promote linkages with the second andthird generation Kerala Diaspora) etc.http://www.norkaroots.netReferences And Additional Thinking• Battelle (Business & Innovation Organisation). 2008. GlobalR&D Report 2008 (The Business and Innovation), Battelle,Columbus, Ohio, page- 4. www.rdmag.com/pdf/RD79GlobalReport.pdf• High Level Committee on Indian Diaspora. 2001. TheReport of the High Level Committee on Indian Diaspora,Indian Council of World Affairs, New Delhi.• Manpower. 2007. “Confronting the Talent Crunch: 2007” (AManpower White paper), Milwaukee, WI, USA. www.manpower.com• Organisation for Economic Co-Operation and Development(OECD). 1996. “The Knowledge-Based Economy”, OCDE/GD(96)102, OECD, Paris.• Planning Commission. 2007. “Towards Faster and MoreInclusive Growth” (An approach to the Eleventh Five YearPlan 2007-2012), Planning Commission, New Delhi. http://www.planningcommission.nic.in/• Ray, Alok. 2006. “Brain drain: oxymoron in a global workforce”,The Hindu, January 4.• Sahoo, Sadananda. 2007. “Harnessing Human Capital”,Pravasi Bharatiya, Vol.1, Iss.1, 16-23 pp.• Sen, Amartya. 2003. “Special Address at Pravasi BharatiyaDivas”, January 9, FICCI, New Delhi, http://www.ficci.com/media-room/speeches-presentations/2003/Jan/pbd-amartya.htm• Werbner, Pnina. 2002. The Place Which is Diaspora:Citizenship, Religion and Gender in the Making ofChaordic Transnationalism. Journal of Ethnic and MigrationStudies, Taylor & Francis Ltd. January, Vol.28, i1.• World Bank. 2008. Migration and Remittances Fact book,World Bank, Washington, DC USA, www.worldbank.org/prospects/migrationandremittancesWebsites:World Business Council for Sustainable Developmenthttp://www.inclusivebusiness.org/2007/12/sending-money-h.htmlRemittance Forumhttp://www.ifad.org/events/remittances/maps/index.htm(The views expressed in the write-up are personal and does notreflect the official policy or position of organisation. The authorcan be contacted at sahoocsid@yahoo.com).THE INDIA ECONOMY REVIEW167

Reliving TheGreatIndianDreamPopulation In India’s Development:Historical Perspective And Future OptionsAlok Ranjan ChaurasiaInstitute of Economic Growth, New DelhiBackgroundIndia is the largest democracy and second most populouscountry in the world. The huge population of the country hasbeen a matter of concern to development policy makers anddevelopment planners right since Independence.The generalthinking at the time of Independence was that the massivepopulation of the country and its unchecked growth wasdetrimental to accelerated social and economic progress of thecountry and therefore efforts should be made to curtailpopulation growth. This line of argument was instrumental inadopting an official population policy and launching a nationalprogramme of birth limitation through the promotion offamily planning techniques in 1952. Since then populationcontrol or population stabilisation has always been an integralcomponent of the social and economic development agenda ofthe country. The government highlights the success of thisapproach while the critiques point out to many of its failingsand numerous missed opportunities. In this paper, we attemptto analyse India’s population stock - levels, patterns and changesin the size, structure, distribution of the population - in thecontext of social and economic development during the 60years since Independence. The paper also attempts to presentsalient features of government policies and programmes tomodify the population stock in the country.Population Growth And DistributionAt the time of Independence, India was home to an estimated345 million people. This number almost tripled to 1,029million at the 2001 population census. It is estimated that, by 1July 2007, India’s population would have swelled to 1,134168 THE IIPM THINK TANK

P OLICY PERSPECTIVESPopulation growth accounted for more than 56% of the increase inenergy consumption and 36% of the increase in CO 2emissionsmillion - an increase of approximately 789 million over aperiod of 60 years since Independence. By all accounts, thegrowth in Indian population since Independence has beenrapid. Such a population growth is termed as the rapid populationgrowth. It has important implications for social andMadhya Pradesh (including Chhattisgarh) is the only Statewhere the average annual population growth rate decreasedduring the decade 1991-2001. In Bihar (including Jharkhand),it increased, whereas in Rajasthan and Uttar Pradesh (includingUttarakhand), it remained unchanged.economic development and quality of life of the people.A population growth at a rate of two percent per yeardoubles itself in a period of about 35 years. This has happenedin India as the population more than doubled from 361 millionin 1951 to 763 million in 1986. During the decade 1951-61,around 78 million people were added to the population of thecountry. This number increased to almost 183 million duringthe decade 1991-2001 despite a marginal slow down in populationgrowth rate. It is projected that India’s population willincrease to somewhere between 325 million to 485 million inthe first quarter of the present century depending upon theintensity of population stabilisation efforts and speed offertility decline. Clearly, a substantial growth in the populationof the country in the near future is almost inevitable. As theresult, India would become the most populous country of theworld somewhere during 2035-40, surpassing the population ofChina which is currently the most populous country of theworld. Most of the concerns about population growth in Indiasince Independence have been confined to four States - Bihar(including Jharkhand), Madhya Pradesh (including Chhattisgarh),Rajasthan and Uttar Pradesh (including Uttarakhand).These states accounted for more than 41 percent of country’spopulation at the 2001 population census. Among these States,Development Context Of PopulationImplications of the massive increase in population during thelast 60 years to sustainable development and improvements inthe quality of life may be termed as serious to both social andeconomic development and to environmental sustainability.Between 1950-51 and 2005-06, the Gross National Product ofthe country increased by almost 12 times at fixed (1990-2000)prices from around Rs 2,179 billion in 1950-51 to almost Rs25,807 billion in 2005-06. By contrast, the Gross NationalProduct per capita increased by only about 3.57 times from Rs5,799 per person per year during 1950-51 to Rs 20,734 perperson per year during 2005-06. Clearly, a very substantialproportion of the increase in the Gross National Product wasspent in meeting the basic needs of the increasing populationand contributed little in improving the quality of life.The impact of population growth on environmental sustainabilityare also revealing. Between 1990 and 2002, total energyuse in India increased from 366 million tonnes to 538 milliontonnes of oil equivalent while the carbon dioxide emissionsincreased from 680 million tonnes to 1,118 million tonnesbetween 1990 and 2000 as the result of both increase in percapita consumption of energy and increase in population. Infact, the growth in population accounted forTable 1: Population Growth: 1947-2001more than 56 percent of this increase in energyconsumption and 36 percent of the increase inYear PopulationIncreaseAverageAbsolute (Million)(%)ProportionAnnual Growthcarbon dioxide emissions putting considerable(Million)Rate (%) pressure on the environment. Population growthduring the 60 years since Independence appears1951 361.088to have seriously constrained the availability of1961 439.235 78.147 21.64 1.976resources necessary for social and economic1971 548.160 108.925 24.80 2.197progress and improvements in the quality of life.1981 682.329 134.169 24.48 2.223Similarly, increase in population, in combination1991 846.421 164.092 24.05 2.140with the increase in per capita consumption and2001 1028.737 182.316 21.54 1.951energy use, has put serious pressure on theSource: Registrar General and Census Commissioner, Indiasustainability of the environment.. It is obviousTHE INDIA ECONOMY REVIEW169

Reliving TheGreatIndianDreamTable 2: Population Size And Population Growth In India And States, 1951- 2001Country/StatePopulation(Million)1951 2001 Absolute(Million)Population Growth1951-2001PercentAverageAnnualIncrease(Percent)India 361.09 1028.74 667.65 184.90 2.094Uttar Pradesh 63.22 174.69 111.47 176.34 2.033Bihar 38.79 109.94 71.16 183.46 2.084Maharashtra 32.00 96.88 64.88 202.72 2.215Madhya Pradesh 26.07 81.18 55.11 211.38 2.272West Bengal 26.30 80.18 53.88 204.85 2.229Andhra Pradesh 31.12 76.21 45.10 144.93 1.792Tamil Nadu 30.12 62.41 32.29 107.20 1.457Rajasthan 15.97 56.51 40.54 253.82 2.527Karnataka 19.40 52.85 33.45 172.40 2.004Gujarat 16.26 50.67 34.41 211.58 2.273Orissa 14.65 36.81 22.16 151.30 1.843Kerala 13.55 31.84 18.29 135.01 1.709Assam 8.24 26.66 18.42 223.50 2.348Punjab 9.16 24.36 15.20 165.90 1.956Haryana 5.67 21.15 15.47 272.66 2.631Small States andUnion Territories10.57 46.42 35.85 339.06 2.959Remarks: Population of Bihar includes population of Jharkhand. Population of Madhya Pradesh includes population of Chhattisgarh. Population of Uttar Pradesh includespopulation of Uttarakhand.Source: Registrar General of India and Census Commissioner.that for sustainable development, a balance has to be arrivedbetween the size and growth of the population and the levelsand patterns of per capita consumption or use of resources.Population PolicyEfforts to control the rapid growth of population have primarilybeen guided by the population policies formulated by thegovernment of India. Evolution of these policies has howeverfollowed an ad-hoc approach with little institutionalisation.Right since 1952, population polic in India has focussed onreducing the natural growth of the population by bringingdown levels of fertility and mortality through the promotion offamily planning. As a result, both fertility and mortality aredeclining all over the country. The decline in fertility andmortality has led to the transition in the age structure resultingan increased concentration of the population in the workingages. This increase in the concentration of the population inthe working ages is estimated to have contributed to onlyabout eight percent of the growth rate of the Gross DomesticProduct per capita between 1991 and 2001. The demographicbonus in India has not been substantial because fertility levelsare still well above the replacement level and the pace offertility decline has remained slow. As the result, the shift inthe age structure of the population has at best been marginal.170 THE IIPM THINK TANK

P OLICY PERSPECTIVESTable 3: Levels And Trends In Selected Indicators Of The Age Structure Of The Population: 1951-2001Indicator 1951 1961 1971 1981 1991 2001Population0-14 years (percent) 38.42 41.04 42.03 39.57 37.46 35.4415-29 years (percent) 25.78 25.02 23.97 25.90 26.71 26.6530-59 years (percent) 30.30 28.30 28.03 28.04 29.03 30.4460 years and above 5.50 5.63 5.97 6.49 6.80 7.47(percent)Dependency RatioYoung (per 1000) 685 770 808 734 672 621Old (per 1000) 98 106 115 120 122 131Combined (per 1000) 783 875 923 854 794 752Aging Index (percent) 14.31 13.72 14.20 16.41 18.15 21.07Table 4: Projected Population Growth: 2001-2026 (The Registrar General Of India)YearPopulation(Million)Increase(Million)GrowthRate (percent)2001 1028.6102006 1112.186 83.576 1.5622011 1192.506 80.32 1.3952016 1268.961 76.455 1.2432021 1339.471 70.51 1.0822026 1399.838 60.367 0.882Period CBR TFR CDR IMR E 0Male E 0Female2001-05 23.2 2.9 7.5 61.3 63.8 66.12006-10 21.3 2.6 7.3 54.3 65.8 68.12011-15 19.6 2.3 7.2 49.2 67.3 69.62016-20 18.0 2.2 7.1 44.0 68.8 71.12021-26 16.0 2.0 7.2 40.2 69.8 72.3Source: National Population Commission (2006)Table 5: Goal Effectiveness Of Family Planning (Targets And Achievements In Terms Of Birth Rate)Year Birth Rate Target (0/00) Actual Birth Rate (0/00) Goal Effectiveness (Percent)1972 25.00 36.60 68.311978-79 23.00 33.20 69.281979-81 w25.00 33.40 74.851982-83 30.00 33.70 89.021983-84 25.00 33.80 73.961984 25.00 33.90 73.751985 25.00 32.90 75.992000 21.00 25.80 81.402002 23.50 25.00 94.00THE INDIA ECONOMY REVIEW171

Reliving TheGreatIndianDreamTable 6: Impact Of The Official Family Planning Programme1,000 population was set to be realisedYear Births Averted(Million)Eligible Couples(Thousand)Births Averted Per1000 Eligible Coupleby the year 1972. This birth rate targetcould be realised only after a gap of 30years. Similarly, the National Population1974-75 3.0299 103089 29Policy 2000 has set the target of1975-76 3.1294 105239 30replacement fertility to be achieved by1976-77 3.7228 107389 35the year 2010. There is, however, little1977-78 5.0500 109589 46possibility of realising this target before1978-79 4.9281 111689 44the year 2021. Among different States1979-80 4.9087 113839 43of the country, Uttar Pradesh (including1980-81 4.9328 116033 43Uttarakhand) is expected to1981-82 5.1059 118705 43achieve the replacement fertility only1982-83 5.4709 121377 45after 2025.1983-84 6.2101 124049 50Family Planning1984-85 7.2686 126721 57The official family planning programmehas been the mainstay of1985-86 8.1203 129432 631986-87 9.0008 132572 68population stabilisation efforts since1987-88 9.9555 135710 73Independence. The delivery of family1988-89 10.8716 138850 78planning services has however been1989-90 11.6740 141990 82tagged with the delivery of public1990-91 12.3047 145140 85health services right from the beginning.1991-92 12.6938 148430 86As the result, family planning in1992-93 12.7542 151720 84India has evolved as a techno-medical1993-94 13.1560 155020 85interventions rather than a social,1994-95 14.0488 158310 89cultural and behavioural imperative.1995-96 14.5948 161593 90Even today, it is largely a bureaucratic1996-97 14.8152 164749 90activity funded almost entirely by the1997-98 14.7633 165869 89government of India. It has failed tobecome a people’s programme as1998-99 15.0703 168558 89oft-repeated in almost all policy1999-00 15.3359 171198 90statements right since Independence.2000-01 15.6404 173835 90Even today, family planning in India2001-02 15.7867 176697 89has very limited constituency amongst2002-03 16.2577 179544 91the masses. This is so when it is well2003-04 16.9810 182371 93known that family planning can2004-05 17.2667 185177 93become more effective in reducingSource: Government of India (2007)fertility as well as infant and childmortality when integrated with broaderMore than 35 percent of the population in India is still below15 years of age. The impact of the population policy in Indiacan be explored in terms of the realisation of the birth ratetargets set at different points in time. In the First Five yearDevelopment Plan, a birth rate target of 25 live births persocial and economic development programmes and activities.The development orientation of population stabilisationefforts in India is still missing to a large extent.Performance of family planning programme in reducingfertility levels and curbing population growth depends upon172 THE IIPM THINK TANK

P OLICY PERSPECTIVESThe institutional mechanisms required for the effective implementationof the community needs assessment approach largely remain elusivehealth needs of the people of the country, theprogramme requires a comprehensive reinvigoration.Because of the bureaucratic orientation, theprogramme, until recently, had followed anumerical targets based, top down approach,which had little room for taking into considerationsthe local factors of reproductive behaviour.Preoccupation with achieving the targets in termsof new acceptors of different family planningmethods in the implementation of the programmeresulted in overlooking the social,psychological, cultural and family factors ofreproductive behaviour including the use offamily planning methods. As a result, familyplanning had only a limited impact on thereproductive behaviour of the people.Since 1996, the community needs assessmentapproach has been introduced under the programme.the realised efficiency of the programme. The realised efficiencydepends upon the goal effectiveness which in turn isinfluenced by the need effectiveness and capacity efficiency.The available evidence suggests that the need effectiveness offamily planning appears to have increased in most of the statesof the country. However, little is currently known about thecapacity efficiency of these efforts. There is a pressing need ofassessing the capacity of the official family planning programmein the context of the felt reproductive and child healthneeds of the people.In order to ensure that official family planning efforts areable to meet the family planning and reproductive and childHowever, the institutional mechanisms required forthe effective implementation of the community needs assessmentapproach largely remain elusive. Moreover, the proportionof couples effectively protected through the official familyplanning programme appears to have stagnated since 1995-96.This specific aspect confirms insufficient administrativecapacity and organisational efficiency of the official familyplanning programme to implement the community needsassessment approach.Successful implementation of the community needs assessmentapproach requires considerable capacity building at thelocal level, especially in terms of planning for family planningservice delivery and communityTable 7: Estimates Of Child Mortality: 1970-2003 (Per 1000 Live Births)based monitoring andevaluation population controlPeriod Early Neonatal Neonatal Infant Mortality Under-Fiveactivities. This is a majorMortality Rate Mortality Rate Rate Mortality Ratechallenge as decentralisation1970-72 50 72 132 223of the service delivery system1980-82 39 69 110 175and local level planning for1990-92 36 51 80 119service delivery involving the2001-03 26 39 63 84people and their representativesDecrease 24 33 69 139are contrary to funda-Source: Sample Registration Systemmental ethos of the publicTHE INDIA ECONOMY REVIEW173

Reliving TheGreatIndianDreamTable 8: Estimates Of Avoidable Childhood Deaths: 2000deaths in India in the year 2001 and nearly93 percent of these deaths occurred in theDisease Or ConditionUnder-Five OfDeathsEstimated Proportion Avoidable Under-Five rural areas compared to just around sevenpercent in the urban areas. It is alsoDeaths Under-Five Number Proportion(000) Deathsestimated that nearly 70 percent of the(000) (Percent)(Percent)maternal deaths are concentrated in theDiarrhoea 557 23.19 506 37.15 EAG states of the country, namely BiharPneumonia 544 22.65 360 26.43 (including Jharkhand), Uttar PradeshMeasles 14 0.58 1 0.07 (including Uttarakhand), Madhya PradeshMalaria 3 0.12 0 0.00 (including Chhattisgarh), Rajasthan andHIV/AIDS 20 0.83 1 0.07Orissa. Nearly 50 percent of the maternaldeaths in India are because of just twoNeonatal Deaths 863 35.93 470 34.51causes - haemorrhage and sepsis. Reductionin fertility and an efficient yet effectiveBirth Asphyxia 250 10.41 97 7.12Prematurity 207 8.62 119 8.74reproductive health care delivery systemInfections 216 8.99 205 15.05are necessary for preventing majority ofTetanus 60 2.50 49 3.60the maternal deaths in the country. TheOthers 130 5.41 0 0.00 current approach of the government toOthers 388 16.15 0 0.00 prevent maternal deaths is to promoteTotal 2,402 100.00 1,362 100.00 institutional deliveries. This approach maySource: Jones, Schultink, Babille (2006).not be effective for two counts. First, mostof the deliveries in India occur in out of theadministration system in India. Fortunately, the 73 rd and 74 thamendments in the Constitution provide a framework forbuilding local capacity for planning, implementation and monitoringand evaluation of family planning services in particularand population stabilisation services in general.hospital settings, especially in the rural areas. Second, hugeinvestments in infrastructure, and human resources will berequired to ensure availability of institutional delivery facilitiesto all.Like the maternal mortality, the under-five mortality is alsodecreasing in the country and in all of its constituent states andReproductive And Child HealthOne of the persistent contributing factors towards persistenthigh fertility in many parts of the country is the unacceptablyhigh levels of infant, child and maternal mortality. Although,levels of maternal, infant and child mortality are declining inthe country and in all the states, yet the decline remains slowerthan expected and the goals set in under the Reproductive andUnion Territories. However, most of the decrease in the underfivemortality is confined to life beyond the first year. Moreover,despite reduction, rural-urban and regional differentials inthe under-five mortality continue to persist. It has beenestimated that nearly 60 percent of the under-five deaths in thecountry can be prevented through universal coverage of basicpublic health and nutrition interventions.Child Health Programme as well as the Millennium DevelopmentGoals remain elusive. Even today, around 300 mothersdie because of the complications of pregnancy and delivery forevery hundred thousand live births every year and one in everyhundred women face the risk of a maternal death every year. Itis estimated that there were more than 92 thousand maternalPopulation And Development IntegrationAlthough population issues have always been considered to beintegral to the development discourse in India, yet populationrelated variables have never been endogenised in the mainmacro-economic development planning model. Rather,There were more than 92 thousand maternal deaths in the year 2001and nearly 93 percent of these deaths occurred in the rural areas174 THE IIPM THINK TANK

P OLICY PERSPECTIVESTable 9: Levels And Trends In The Coverage Of Reproductive And Child Health Services: 1992-2005IndicatorReproductive HealthNFHS I1992-93NFHS II1998-99NFHS III2005-061 Women (20-24) married by age 18 (Percent) 54.2 50.0 44.52 Total fertility rate (Births per woman) 3.4 2.9 2.73 Women (15-19) pregnant or mother at survey (Percent) 16.04 Median age at first birth for women (25-49) (Years) 19.4 19.3 19.85 Mothers with 3 ANC in the last birth43.9 44.2 50.7(Percent)6 Mothers consuming IFA tbs for 90 days in the22.3last pregnancy (Percent)7 Births attended by professionally trained33.0 42.4 48.3persons8 Institutional deliveries (Percent) 26.1 33.6 40.79 Mother receiving PNC from professionally36.4trained person (Percent)10 Current use of any family planning method40.7 48.2 56.3(Percent)11 Current use of any modern family planning36.5 42.8 48.5method (Percent)12 Total unmet need (Percent) 19.5 15.8 13.213 Unmet need for spacing (Percent) 11.0 8.3 6.314 Unmet need for limiting (Percent) 8.5 7.5 6.8Child Health1 Children (12-23) fully immunized (Percent) 35.5 42.0 43.52 Children (12-35) received Vitamin A (Percent) 21.03 Children with diarrhoea received ORS (Per17.8 26.9 26.2cent)4 Children (

Reliving TheGreatIndianDreamTable 10: Coverage Of Reproductive And Child Health Services In Best Five And Worst Five States: 2005-06IndicatorReproductive HealthBestFiveStatesWorst FiveStates1 Women (20-24) married by age 18 (Percent) 24..42 56.92 32.502 Total fertility rate (Births per woman) 2.15 3.49 1.343 Women (15-19) pregnant or mother at survey (Percent) 9.54 19.28 9.744 Median age at first birth for women (25-49) (Years) 21.76 19.20 2.565 Mothers with 3 ANC in the last birth (Percent) 76.82 32.14 44.686 Mothers consuming IFA tbs for 90 days in the last pregnancy (Percent) 49.14 11.52 37.627 Births attended by professionally trained persons 73.22 33.82 39.408 Institutional deliveries (Percent) 69.40 25.02 44.389 Mother receiving PNC from professionally trained person (Percent) 62.70 20.66 42.0410 Current use of any family planning method (Percent) 57.30 43.30 14.0011 Current use of any modern family planning method (Percent) 51.44 37.28 14.1612 Total unmet need (Percent) 12.42 19.04 6.6213 Unmet need for spacing (Percent) 6.32 8.88 2.5614 Unmet need for limiting (Percent) 6.12 10.18 4.06Child Health1 Children (12-23) fully immunized (Percent) 68.68 31.40 37.282 Children (12-35) received Vitamin A (Percent) 32.98 17.86 15.123 Children with diarrhoea received ORS (Percent) 37.10 19.32 17.784 Children (

P OLICY PERSPECTIVESTable 11: Progress Towards Population Policy Goals In Terms Of Impact IndicatorsIndia/StatesTotal FertilityRateInfant MortalityRateIndex Of Progress InMaternalMortality RatioProportion OfFemales MarriedAfter 18 Years Of AgeIndia 0.23 0.29 0.31 0.11Jammu & Kashmir 0.54 0.57 0.63 0.37Himachal Pradesh 1.00 0.00 0.18 0.00Punjab 1.00 0.56 0.55 0.00Uttarakhand 0.00 0.00 0.00 0.13Haryana 0.24 0.56 0.55 0.04Delhi 0.90 0.41 0.32 0.00Rajasthan 0.34 0.30 0.34 0.16Uttar Pradesh 0.12 0.27 0.31 0.18Bihar 0.00 0.33 0.34 0.16Sikkim 1.00 0.71 0.66 0.00Arunachal Pradesh 0.00 0.06 0.07 0.00Nagaland 0.02 0.33 0.05 0.08Manipur 0.22 1.00 0.65 0.00Mizoram 0.04 0.43 0.34 0.00Tripura 0.00 0.00 0.00 0.00Meghalaya 0.31 0.75 0.69 0.04Assam 0.00 0.10 0.20 0.07West Bengal 0.11 0.05 0.06 0.00Jharkhand 0.00 0.00 0.00 0.05Orissa 0.25 0.31 0.40 0.03Chhattisgarh 0.25 0.20 0.31 0.15Madhya Pradesh 0.23 0.31 0.35 0.18Gujarat 0.48 0.39 0.47 0.18Maharashtra 0.98 0.50 0.56 0.19Andhra Pradesh 1.00 0.36 0.45 0.15Karnataka 1.00 0.41 0.51 0.11Goa 1.00 1.00 1.00 0.00Kerala 1.00 1.00 1.00 0.09Tamil Nadu 1.00 0.94 1.00 0.14-the interface with the community. Population and developmentintegration at the local level has the added advantage ofcapturing the local context of population and the local contextof social and economic development. The 73 rd and 74 thamendments in the Constitution have provided the legal andconstitutional basis for population and development integrationat the grass roots level. A lens and mirror mechanism isrequired to be evolved and institutionalised for successful andsustained population and development integration. Alldevelopment efforts and activities must also be viewedTHE INDIA ECONOMY REVIEW177

Reliving TheGreatIndianDreamTable 12: Progress Of The States Towards Population Policy Goals (Programme Indicators)India/StatesMet Demand ForContraceptionImmunisation OfChildrenIndex Of Progress InSafe DeliveriesRegistration OfBirthsIndia 0.24 0.03 0.10 0.05Jammu & Kashmir 0.24 0.23 0.31 0.00Himachal Pradesh 0.18 0.00 0.17 1.00Punjab 0.00 0.00 0.16 1.00Uttarakhand 0.52 0.32 0.11 0.32Haryana 0.00 0.07 0.21 0.28Delhi 0.35 0.00 0.00 0.00Rajasthan 0.20 0.11 0.12 0.34Uttar Pradesh 0.31 0.03 0.09 0.03Bihar 0.23 0.24 0.08 0.07Sikkim 0.23 0.42 0.32 1.00Arunachal Pradesh 0.28 0.10 0.02 0.78Nagaland 0.06 0.08 0.00 1.00Manipur 0.45 0.08 0.17 0.51Mizoram 0.00 0.00 0.06 0.00Tripura 0.42 0.15 0.05 1.00Meghalaya 0.08 0.22 0.14 0.07Assam 0.43 0.18 0.12 0.03West Bengal 0.27 0.36 0.03 1.00Jharkhand 0.07 0.28 0.14 0.12Orissa 0.08 0.14 0.20 0.11Chhattisgarh 0.30 0.34 0.18 0.00Madhya Pradesh 0.39 0.23 0.12 0.18Gujarat 0.38 0.00 0.24 0.62Maharashtra 0.28 0.00 0.28 0.39Andhra Pradesh 0.36 0.00 0.26 0.39Karnataka 0.13 0.00 0.30 0.00Goa 0.19 0.00 0.38 1.00Kerala 0.25 0.00 0.95 1.00Tamil Nadu 0.35 0.00 0.58 0.85through a population lense in terms of the impact of developmentactivities on the population stock. In other words, apopulation impact assessment exercise must be associatedwith every development activity or programme. Similarly, allpopulation stabilisation efforts must have their reflections inthe development mirror in terms of improvements in thequality of life of the people. The challenge is to define thepopulation lens and to characterise the development mirror.Because of the wide social and economic diversity that is sopervasive in India, it is obvious that the definition of thepopulation lens and characterisation of the developmentmirror varies from place to place.178 THE IIPM THINK TANK

P OLICY PERSPECTIVESTable 13: Clustering Of States In Terms Of Progress Towards Population Policy Goals (Impact Indicators)Cluster States Average Index Of ProgressIIIIIIIVVArunachal PradeshAssamJharkhandTripuraUttarakhandWest BengalBiharChhattisgarhMadhya PradeshMizoramNagalandOrissaRajasthanUttar PradeshGujaratHaryanaJammu & KashmirManipurMeghalayaAndhra PradeshDelhiHimachal PradeshKarnatakaMaharashtraPunjabSikkimKeralaTamil NaduGoaTFR IMR MMR MAR0.02 0.04 0.06 0.040.16 0.31 0.3 0.120.36 0.65 0.6 0.120.98 0.42 0.46 0.061 0.98 1 0.08National Population PolicyThe National Population Policy was announced in 2000. Theultimate goal of the Policy is to achieve the goal of stablepopulation by the year 2045. In order to achieve this goal, thepolicy envisages achieving replacement fertility (total fertilityrate of 2.1 live births per woman) by the year 2010 and theimmediate goal of addressing the unmet need of the people interms of contraception, health care infrastructure and healthpersonnel. An attempt has been made to measures theprogress of states towards National Population Policy goals byestimating the index of progress in terms of eight indicators,four of which are impact indicators and four are programmeindicators. The impact indicators used are total fertility rate,infant mortality rate, maternal mortality ratio, and proportionof females married before 18 years of age whereas the programmeindicators are met demand of contraception, proportionof children fully immunised, proportion of safe deliveries,and completeness of birth registration. For the country as awhole, the index of progress was 23 percent in case of totalfertility rate, 29 percent in case of infant mortality rate, 31percent in case of maternal mortality rate and 11 percent incase of the proportion of females married before 18 years ofNational Population Policy calls for convergence in the implementationof population and health interventions with the social sectorTHE INDIA ECONOMY REVIEW179

Reliving TheGreatIndianDreamTable 14: Clustering Of States – Progress Towards Population Policy Goals (Programme Indicators)Cluster States Average Index Of ProgressMDC IMM SDE REGIIIIIIIVVHaryanaJharkhandKarnatakaMeghalayaMizoramOrissaRajasthanAssamBiharChhattisgarhDelhiJammu & KashmirMadhya PradeshUttarakhandUttar PradeshAndhra PradeshGujaratManipurMaharashtraArunachal PradeshHimachal PradeshNagalandPunjabTripuraSikkimGoa,Tamil NaduKerala0.08 0.12 0.16 0.130.35 0.2 0.13 0.080.37 0.02 0.24 0.480.21 0.16 0.11 0.970.26 0 0.64 0.95age around the year 2005. Since the year 2005 was the middleyear of the period 2000-2010, the index of progress in terms ofany indicator should have been around 50 percent. Clearly,progress of the country and its constituent states towards theNational Population Policy goals is far from satisfactory. It isalso clear that, with the existing efforts, there is little probabilityof achieving population stabilisation in the country by theyear 2045. Among different states of the country, progresstowards population stabilisation goals has varied widely. Forthe sake of comparison, the states can be grouped in fivecategories. There is virtually no progress in six states - ArunachalPradesh, Assam, Jharkhand, Tripura, Uttarakhand,West Bengal. In these states, there is little hope of achievingpopulation policy goals by the year 2010. In eight other states -Bihar, Chhattisgarh, Madhya Pradesh, Mizoram, Nagaland,Orissa, Rajasthan and Uttar Pradesh - the progress is precarious.These states also have a remote probability of achievingpopulation policy goals by the year 2010. In Gujarat, Haryana,Jammu and Kashmir, Manipur and Meghalaya, on the otherhand, there is a probability that with additional efforts,National Population Policy goals can be achieved. Finally,there are seven states - Andhra Pradesh, Delhi, HimachalPradesh, Karnataka, Maharashtra, Punjab and Sikkim - whichare on way to the realisation of the National Population Policygoals whereas in Kerala, Tamil Nadu and Goa, the NationalPopulation Policy goals have already been achieved in three ofthe four indicators. A similar scenario emerges when theprogress towards population policy goals is measured in termsof programme indicators. In fifteen states of the country, theprogress in terms of programme indicators is poor to very poor180 THE IIPM THINK TANK

P OLICY PERSPECTIVESOwing to social and economic diversity, definition of population lensand characterisation of development mirror varies from place to placeand almost satisfactory in only three states - Goa, Tamil Naduand Kerala - although there has been a marginal decrease inthe proportion of fully immunised children in these states.Moreover, the progress is not uniform in all the eight impactand programme indicators. The progress is very poor in termsof the proportion of females married before 18 years of ageand in terms of the proportion of fully immunised children inall states of the country. It appears that the health and familywelfare services delivery system is still not oriented towardsachieving the population policy goals. The National PopulationPolicy calls for the convergence in the implementation ofpopulation and health interventions with the social sectorprogrammes and activities. There is however little progress inthis direction. Tuning the health and family welfare servicesdelivery system towards the goals of the National PopulationPolicy remains a major challenge.Strategic OptionsGiven the wide diversity in population and health transition aswell as in the levels of social and economic development andsocial and cultural milieu, strategic options for populationstabilisation in India vary from state to state. There is nouniversal prescription.One approach of exploring strategic options for populationstabilisation in India can be explored in terms of current levelsof fertility across the states and Union Territories in excess tothe replacement fertility (total fertility rate of 2.1 live birthsper woman). Fertility in excess to replacement fertility can bebroken down into wanted fertility in excess to replacementfertility and unwanted fertility. The constituent states andUnion Territories of India can be divided into three categorieson the basis of the levels of wanted and unwanted fertility. Thefirst category of states comprises of those states where replacementfertility has already beenachieved. These states areTable 15: Future Population Growth In The Three Category Of States, 2001-26Particulars 2001 2006 2011 2016 2021 2026Population (000)India 10,28,610 11,12,186 11,92,506 12,68,961 13,39,741 13,99,828Category I states 2,55,634 2,69,952 2,83,011 2,94,639 3,04,426 3,12,021Category II states 3,68,849 3,97,889 4,25,922 4,52,897 4,78,286 5,01,078Category III states 4,01,461 4,41,011 4,79,505 5,16,592 5,51,157 5,80,281Rest 2,666 3,334 4,068 4,833 5,872 6,448Net Addition To The Population (000)India 83,576 80,320 76,455 70,780 60,087Category I states 14,318 13,059 11,628 9,787 7,595Category II states 29,040 28,033 26,975 25,389 22,792Category III states 39,550 38,494 37,087 34,565 29,124Rest 668 734 765 1,039 576Relative Contribution (Percent)India 100 100.00 100.00 100.00 100Category I states 17.13 16.26 15.21 13.83 12.64Category II states 34.75 34.90 35.28 35.87 37.39Category III states 47.32 47.93 48.51 48.83 48.47Rest 0.8 0.91 1.00 1.47 0.96Source: Estimated from Government of India (2006)THE INDIA ECONOMY REVIEW181

Reliving TheGreatIndianDreamTable 16: Fertility In Excess To Replacement Fertility In India And States, 2005-06Country/StateCurrent FertilityFertility In Excess ToReplacementFertilityWanted Fertility In ExcessTo ReplacementFertilityUnwantedFertilityTFR ETFR EWTFR EUWTFRIndia 2.68 0.58 0.00 0.58Category I StatesAndhra Pradesh 1.79 0.00 0.00 0.00Goa 1.79 0.00 0.00 0.00Himachal Pradesh 1.94 0.00 0.00 0.00Karnataka 2.08 0.00 0.00 0.00Kerala 1.93 0.00 0.00 0.00Punjab 1.99 0.00 0.00 0.00Sikkim 2.02 0.00 0.00 0.00Tamil Nadu 1.80 0.00 0.00 0.00Category II StatesAssam 2.42 0.32 0.00 0.32Chhattisgarh 2.62 0.52 0.00 0.52Delhi 2.13 0.03 0.00 0.03Gujarat 2.42 0.32 0.00 0.32Haryana 2.69 0.59 0.00 0.59Jammu & Kashmir 2.38 0.28 0.00 0.28Maharashtra 2.11 0.01 0.00 0.01Orissa 2.37 0.27 0.00 0.27Tripura 2.22 0.12 0.00 0.12Uttarakhand 2.55 0.45 0.00 0.45West Bengal 2.27 0.17 0.00 0.17Category III StatesArunachal Pradesh 3.03 0.93 0.18 0.75Bihar 4.00 1.90 0.70 1.20Jharkhand 3.31 1.21 0.32 0.89Madhya Pradesh 3.12 1.02 0.22 0.80Manipur 2.83 0.73 0.07 0.66Mizoram 2.86 0.76 0.09 0.67Meghalaya 3.80 1.70 0.58 1.12Nagaland 3.74 1.64 0.55 1.09Rajasthan 3.21 1.11 0.27 0.84Uttar Pradesh 3.82 1.72 0.59 1.13Source: Estimates Of The Total Fertility Rate Are From National Family Health Survey, 2005-06.182 THE IIPM THINK TANK

P OLICY PERSPECTIVESKerala, Tamil Nadu, Andhra Pradesh, Karnataka, Punjab,Himachal Pradesh, Goa and Sikkim. In these states, populationwill continue to increase in the first quarter of the currentcentury because of the demographic momentum built in theage structure of the population. It is estimated that increase inthe population of these states will account for 15 percent of theincrease in the population of the country in the first quarter ofthe present century.In category II states, on the other hand, the wanted fertilityis already below the replacement level but current fertility ishigher than the replacement level because of the unwantedfertility. These states are Jammu and Kashmir, Delhi, Tripura,Assam, West Bengal, Orissa, Gujarat and Maharashtra. Populationincrease in these states during the first quarter of the presentcentury will account for about 37 percent of the increase in thepopulation of the country as a whole. Concerted efforts in termsof the provision of affordable quality contraceptive services withinformed choice in these states can ring about the desired resultstowards reducing the unwanted fertility.Finally, in category III states fertility remains well above thereplacement level because the wanted fertility is well above thereplacement level fertility and unwanted fertility is substantial.These states will account for 48 percent of the increase inIndia’s population between 2001 and 2026. A holistic approachis required in these states that address both high wantedfertility and substantial unwanted fertility. Reduction inwanted fertility requires improvements in the quality of life ofthe people while elimination of unwanted fertility requiresstrengthening the family planning programme in these states.Issues related to population stabilisation in India shouldtherefore bediscussed in terms of addressing populationmomentum, liminating unwanted fertility and reducingwanted fertility. The current approach to population stabilisation,however, focusses primarily on eliminating unwantedfertility by meeting the unmet need of family planning. Thisapproach may not contribute significantly to hasteningpopulation stabilisation in majority of the states as it does notaddress the issue of population momentum which has relevanceto category I states as well as the issue of wantedfertility in excess to replacement fertility which has relevanceto category III states. Moreover, the demand for contraceptionin the category III states needs to be enhanced because even ifall the unmet need of contraception in these states is met, itwill still not result in the achievement of the replacement fertilityin eight of the ten states in this category.Addressing population momentum, reduction and ultimateelimination of unwanted fertility and reducing wanted fertilityto replacement level are the three essential elements of anystrategy to achieve population stabilisation in India as stipulatedin the National Population Policy 2000. Since differentstates of the country are at different stages of demographictransition, relative importance of the three elements of thestrategy varies from state to state. The scenario appears to bethe most gloomy in the category III states where the wantedfertility is well above the replacement level, unwanted fertilityis substantial and large momentum for growth is in-built in thepopulation.Achieving the National Population Policy goals, therefore,requires two pronged approach. The first component is acomprehensive reorientation of the National Family WelfareProgramme while the second one is the investments in humanbeings. The reorientation of the National Family WelfareProgramme must contribute towards eliminating the unwantedfertility in category II and category III states along withmodifications in other proximate determinants of fertility. Thereorientation of the family welfare programme is also requiredin the context of minimising the impact of population momentumin category I states where thereplacement fertility hasalready been achieved. In order to minimise the impact ofpopulation momentum requires increasing the mean age ofchild bearing by increasing the spacing between successivebirths and raising the female age at marriage. On the otherhand, investments in human beings is necessary to reduce thewanted fertility to the replacement level. Wanted fertilitycannot be reduced just by promoting family planning. Itrequires broader development efforts directed towards humancapacity building and improvements in the quality of life. Thetwo dimensions of the strategy for population stabilisation inIndia complement and reinforce each other. Reduction inwanted fertility through investments in human beings does not,by itself, reduce fertility. Instead, it raises the demand forfertility regulation which, when satisfied, leads to reduction infertility. Conversely, reduction in both wanted and unwantedfertility has been found to be more effective in societies withhigh levels of human development.(The views expressed in the write-up are personal and does notreflect the official policy or position of organisation).THE INDIA ECONOMY REVIEW183

E NVIRONMENTAL ECONOMICSINTELLECTUALPROPERTY ANDCARBON DIOXIDEMITIGATIONTECHNOLOGYTim WilsonInstitute of Public Affairs, Melbourne, Australia184 THE IIPM THINK TANK

C OMMON GOODAbstractThis paper analyses the international debate surroundingthe accessibility and barriers of developing countriesaccessing CO 2mitigation technologies. Internationally acampaign is being run to undermine the patents on CO 2mitigation technologies.This specific campaign is being run by developingcountries and NGOs claiming that patents are increasingthe price of CO 2mitigation technologies beyond the meansof developing countries.These NGOs and developing countries are now advocatingfor amendments to the WTO’s TRIPS Agreement toallow for the compulsory licensing of CO 2mitigationtechnologies. Advocates are using the successful campaignto allow compulsory licenses for essential medicines asprecedent. They are also advocating for the issue to bedebated and included in the next agreement out of theUNFCCC process.But the campaign is based on flawed logic. Numerousstudies have found that IP rights are vital for technologytransfer. IP provides a tradeable right for an intangiblegood. Studies have found that the bigger threat to technologytransfer is not strong IP regimes, but weak ones.Undermining patents discourages patent-holders to tradetheir technology.Because of the importance of the private sector indeveloping the technologies to reduce CO 2emissions,previous international treaties have explicitly acknowledgedtheir role. The Convention for the Protection of the OzoneLayer and the Kyoto Protocol both recognise the role ofprivate property rights in technological diffusion.The ultimate consequence of undermining IP rightswould be to undermine the incentive for investment intoinventing new technologies. Importantly, the industry isvery much in its infancy. Undermining patents will haltfurther research and development and stop the industryreaching maturity.Attacking patents as the main barrier to technologytransfer is also a distraction from the real barriers that exist– tariffs and non-tariff barriers. In the top 15 greenhousegas emitting developing nations, tariff barriers for CO 2mitigation technologies can be as high as 30 per cent.THE INDIA ECONOMY REVIEW185

E NVIRONMENTAL ECONOMICSNon-tariff barriers can be as high as 160 per cent. Ifdeveloping countries are serious about reducing the cost ofCO 2mitigation technologies, they can start by reducingtariff and non-tariff barriers.IntroductionGlobal efforts to reduce CO 2emissions are increasing. Inthe lead up to, and following the Bali UNFCCC Summit,there has been a strong push by developing and developedcountries alike to utilise the benefits of CO 2mitigationtechnology to reduce emissions. One of the core effortsmade by governments has been to promote incentives forinvestors to fund research and development of technologiesthat would deliver environmental and market dividends.Addressing CO 2emissionsthrough technology hasbecome important becausedeveloping country Governmentshave made it clear thatthey aren’t going to slavishlyreduce emissions. Developingcountries have baulked at proposals that would hindertheir efforts to boost economic growth and reduce poverty.Utilising technology is an important solution for developingcountries to reduce emissions while maintainingeconomic growth. Technologies such as wind power, cleancoal, photovoltaic solar panels and fluorescent lamps canall contribute to reducing emissions by:• Replacing existing energy generation;• Cleaning existing energy generation; or• Increasing the energyefficiency of consumers.Yet, most of the technologiesare owned by privateindividuals, not governments.These inventions areprotected by patents thatallow the innovator toexploit their invention forcommercial gain to offsetthe cost of its invention.Recently, NGOs anddeveloping country governmentshave started claimingThe ultimate consequence ofundermining IP rights would beto undermine the incentive forinvestment into new technologiesthat these patents are creating an unnecessary barrier tothe transfer of CO 2mitigation technologies that would helpdeveloping countries reduce their emissions. In response,NGOs and developing countries have begun advocating forthe removal of patents through the use of compulsorylicenses. Doing so could have a very significant effect onthe transfer of these technologies from developed todeveloping countries. It is also likely to undermine longterminvestment in the next round of technologies tofurther reduce CO 2emissions.What Is Compulsory Licensing?Compulsory licensing is intellectual property (IP) jargonfor waiving the property rights that patents confer for aninvention. When a compulsorylicense is issued, anon-patent holder is giventhe right to reproduce theinvention without being inbreach of the patent. Compulsorylicensing is generallyawarded with limited, or no, financial compensation to thepatent holder. Patents are awarded to balance out thesocietal benefit from innovation with the incentives necessaryto promote it. Patents provide investors incentives todirect investment capital toward research and development,with the expectation of a commercial return. The incentiveis provided through a property right that allows the patentholder to exclude others from commercialising theirinvention. There is no one fixed period of time for the lifeof a patent, but the standardis the minimum requirementunder the World TradeOrganisation’s (WTO) TradeRelated Aspects of IntellectualProperty Rights(TRIPS) Agreement oftwenty years.The incentive patentsconfer varies depending onthe industry. For technologyrequiring significant capitaloutlay before there is a returnon the investment, they are186 THE IIPM THINK TANK

C OMMON GOODessential. The cost of developing CO 2mitigation technologyis significant, and rising. 1 As a result, Governments andmultilateral institutions are developing investment programsto incentivise private capital to invest in the researchand development of CO 2mitigation technologies.Many countries have compulsory licensing provisions butthese are designed to only be used in exceptional circumstances.IP is governed by both domestic law and internationaltreaties. While there are a number of IP treaties thatexist, their contemporary enforcement on most countries isachieved through the TRIPS Agreement and the WTO’sdispute settlement process.The TRIPS Agreement binds WTO members to manyinternational IP treaties and their obligations, as well asestablishing a number of additional obligations. TheTRIPS Agreement also provides for compulsory licensing.Section 31(b) of the TRIPS Agreement allows for compulsorylicensing of patented technologies in cases of “nationalemergency or other circumstances of extreme urgency or incases of public non-commercial use”. 2Section 31(b) has been tested on a number of occasionthroughout the debate surrounding TRIPS and publichealth. Since its foundation in 1994 the TRIPS Agreementhas been the source of significant international debateabout the obligations it places on WTO members andwhether they conflict with public health priorities.Many developing countries and non-government organisations(NGOs) have argued that the exclusive rightspatents provide to inventors undermines technologicaldiffusion. In the case of public health they have argued thatpatents increases the price of essential medicines. Theinclusion of Section 31(b) in the TRIPS Agreement wasdesigned to address these concerns. In response, manydeveloping country governments have issued compulsoryTable 1 : Applied Average Tariff And NTBs For Climate Friendly Technologies In The 18 High-GHG-Emitting Developing CountriesCountry Clean Coal Wind Solar Fluorescent LampsTariff NTB Tarff NTB Tariff NTB Tariff NTBChina 15 25 8 0 10 0 8 0Colombia 15 0 10 32 15 0 20 0India 15 0 15 0 15 0 15 102Venezuela 15 0 10 0 15 0 20 0Brazil 14 145 14 87 18 53 18 96Mexico 12 0 15 0 13 62 15 0Bangladesh 6 0 8 0 25 0 19 0Chile 6 0 6 0 6 0 6 0Zambia 5 0 15 60 30 0 30 83Egypt 5 149 6 70 32 0 18 87Nigeria 5 160 0 89 20 70 20 91Philippines 3 119 6 88 15 70 11 93Thailand 1 0 10 0 10 0 20 0Argentina 0 0 14 0 18 57 18 0Indonesia 0 0 10 0 15 0 5 0Kazakhstan 0 0 0 0 0 0 0 0Malaysia 0 93 5 59 18 0 30 85South Africa 0 125 0 0 12 0 17 0High Income OECD countries 1 0 3 0 3 0 4 0Source: WITS Database, Adapted from World Bank, “International Trade and Climate Change: Economic, Legal and Institutional Perspectives”, 2007THE INDIA ECONOMY REVIEW187

E NVIRONMENTAL ECONOMICSlicenses on medicines under the provisions allowed for inSection 31(b).Since then, a series of declarations as part of the DohaDevelopment Agenda has amended the IP protectionrequired by TRIPS. In the 2001 Declaration on the TRIPSAgreement and Public Health countries were given the“right to determine what constitutes a national emergencyor other circumstances of extreme urgency”. 3 Similarly,amendments have been made to allow for the parallelimport medicines of patented medicines when a countrydoes not have the industrial capacity to issue compulsorylicenses to a domestic producer.Numerous governments, notably Thailand and Brazil,have issued compulsory licenses for HIV/AIDS and heartmedicines. While HIV/AIDS medicines are consideredlegitimate targets for compulsory licenses, the compulsorylicensing of heart medicationsis deemed to be anabuse of the obligation toonly be used in cases of“national emergency orother circumstances ofextreme urgency”.Compulsory Licensing And CO 2MitigationTechnologyMany of the advocates for compulsorylicensing are using medicinesas a vehicle to oppose IP regimes.They have used their attack onpatents on medicines to push backagainst the obligations WTOmembers signed up to under theTRIPS Agreement. They are nowusing CO 2mitigation technology astheir next battleground to broadenthe definition of the applicability ofcompulsory licenses. To do so, theyare advocating for amendments tothe TRIPS Agreement and forcompulsory licensing to be includedin the next agreement from the United Nations FrameworkConvention on Climate Change (UNFCCC).Their argument for the inclusion of compulsory licensingPatents awarded to CO 2mitigationtechnologies increase the price oftechnologies beyond the means ofmany developing economiesin the UNFCCC process is essentially the same as thoseused for medicines. Patents awarded to CO 2mitigationtechnologies increase the price of technologies beyond themeans of developing countries. By increasing the pricetechnological diffusion of essential technologies is beinginhibited. As a result, developing countries are unable toaccess the technologies available to reduce their emissionscommitments to avert human-caused climate change.Advocates are using the debate surrounding TRIPS andpublic health as a precedent. At a speech to a meeting ofthe Environment Ministers in the Framework of G-8 + 5Presidency, the Indian Minister of Environment andForest, Shri A. Raja, argued that “an agreement is neededon intellectual property rights on technological efforts indeveloping countries paralleling the successful agreementon compulsory licensing of pharmaceuticals”. 4Likewise, similar sentimentswere voiced by theIndian Prime Minister andother developing countries inthe lead up to the 2007 G-8Summit. The governments ofBrazil, China, India, Mexicoand South Africa released a Joint Position Paper thatincluded a request from the countries for the G8 Summit toconsider “an agreement on transfer of technologies ataffordable costs for acceleratedmitigation efforts”. 5In a press reports leading up tothe Summit, there were also callsmade for “an agreement ... IPRS ontechnological efforts in developingcountries paralleling the successfulagreement on compulsory licensingof pharmaceuticals”. 6 Developingcountries are not alone. In lateNovember last year, the EuropeanParliament passed a French GreenMP’s motion relating to efforts ontrade and climate change, inparticular, calling for a “study onpossible amendments to the WTO Agreement on TradeRelated Aspects of Intellectual Property Rights in order toallow for the compulsory licensing of environmentally188 THE IIPM THINK TANK

C OMMON GOODnecessary technologies”. 7 While the motion also called forany amendments to be “within the framework of clear andstringent rules for the protection of intellectual property”,the intention of the motion is clear.International NGO, Friends of the Earth, has also calledfor the removal of IP on CO 2mitigation technologies.While not calling specifically for compulsory licensing,Friends of the Earth has advocated for “amend(ing) TRIPs… so that developing countries can exclude from patentabilitygreen technologies”. 8 The effect would be similar.The UNFCCC Bali Summit in December 2007 becamethe launching pad for developing countries to advocate forcompulsory licensing in the UNFCCC process. In ahigh-level official side-event on the second-last day of theconference, the Nigerian Environment Minister, HalimaTayo Alao, spoke out against IP as a “barrier” fordeveloping countries to access carbon dioxide (CO 2)mitigation technologies.At the same side event the UN Department of Economicand Social Affairs released a paper arguing for “tieredpricing”. 9 Tiered pricing is also currently used by pharmaceuticalcompanies to introduce different prices in differentmarkets dependent on the capacity of consumers to pay.For tiered pricing to successfully work limitations must beplaced on the import of patented products to ensure thatparallel importation does not occur of cheaper productsinto wealthier countries. Doing so undermines the pricingstructure of the patent holder and removes incentives toprovide cheaper products topoorer consumers.Undermining IP on CO 2mitigation technologieswould cause irreparabledamage to the developmentof the technology necessaryto reduce emissions. The green technology industry is stillin its infancy. The contemporary industry has been comparedto where the semiconductor industry was 35 yearsago or the biotechnology industry was 25 years ago. 10Research and development into CO 2mitigation technologyrequires significant, long-term financial commitments.Such commitments will only come with a guarantee ofproperty rights on the end product and a commercialmarket for its output.Long-term financial commitmentswill only come with guarantee ofproperty rights on the end productand commercial market for outputIP Helps Technology TransferOn the surface, introducing compulsory licensing for CO 2mitigation technologies would appear to aid technologicaldiffusion and assist developing countries in meeting theiremissions reduction targets. But IP is not a barrier totechnological diffusion, it assists it.Developing countries are increasingly relying on IPprotected goods and services to develop their economies,improve living standards and maintain and/or improve theirenvironmental standards. IP provides a tradeable propertyright to transfer technology. Licensing of patented productsis particularly important for technology transfer in developingcountries that have weak IP regimes, where companiesare reticent to use foreigndirect investment (FDI)because of the risks associatedwith enforcement. 11Studies have shown the clearrelationship between weakenforcement and reducedFDI from firms with IP-dependent goods and services. 12Similarly, weak IP regimes also discourage joint venturesbetween businesses in developed countries who ownpatented technologies and businesses in developing countries.The Stern Review on the economics of climatechange found that “joint ventures (are) likely to lead toeffective technology transfer … (and) are an effectivelong-term route to embed local firms into the learningnetwork of transnational corporations”. 13 A study by theTHE INDIA ECONOMY REVIEW189

E NVIRONMENTAL ECONOMICSInternational Energy Agency came to a similar conclusion,citing that one of the main barriers to technology transferwas caused by a lack of IP rights protection. 14The Stern Review also found that “companies withadvanced technologies often cite insufficient IPR protectionin developing countries as a barrier to technologytransfer”. 15 Instead, companies believe “stronger protection… would help them deploy advanced technologies” 16Strong IP regimes are important for commercial licensingthat promotes technology transfer. Licensing is a widelyused method for diffusing patent protected inventions toensure that it accesses aswide a market as possible.Licensing is also importantbecause many contemporaryinventions are now built onthe use of other protectedmaterial. For example,computers are a combination of IP-protected material andcompanies have licensing agreements to allow the use ofprotected materials in a value-added product on the basisof paying royalties from the final product’s sale. 17Compulsory licensing will not supplant the need for IP asa facilitator of technology transfer. Instead it will underminetransfer. A recent World Bank Human DevelopmentReport Working Paper came to similar conclusions aboutthe alleged cost of patents. The working paper argued“much of the knowledge required to develop, produce anddeploy cleaner coal technologies is tacit and is not codifiedin patents”. 18But the recent debate on CO 2mitigation technologies isnot the first time undermining patents has been consideredand rejected in environmental treaties. During the debateon the formulation of the Ozone Layer Convention therewas consideration of, and understanding that, weak IPregimes undermined technology transfer by giving IP rightholder justification to deny access to their technologies. 19Often advocates for reducing carbon dioxide emissionspoint to the 1985 Vienna Convention for the Protection ofthe Ozone Layer as a demonstration of how the globalcommunity can work effectively to respond to increases incarbon dioxide emissions. But on compulsory licensing the1985 Agreement is instructive.The Ozone Layer Conventionclearly identifies that there should be collaboration toLicensing is a widely used methodfor diffusing patent protectedinventions to ensure that itaccesses a wide marketaddress the challenge posed by a diminished ozone layer,including scientific and technical cooperation. Butcompulsory licensing or transfer of technology is notaccommodated in the text. Instead the Convention explicitlystates that cooperation “has to be consistent withnational laws, regulations and practices regarding patents,trade secrets, and protection of confidential andproprietary information.” 20The Ozone Layer Convention is not the only internationalagreement to provide cold comfort to advocates forcompulsory licensing. The 1997 Kyoto Protocol also recommendsefforts for technologicaldiffusion of environmentallysound technologiesthrough “an enablingenvironment for the privatesector, to promote andenhance the transfer of, andaccess to, environmentally sound technologies”. 21 Inessence the Kyoto Protocol promotes protection of privateproperty and recognises the important role that the privatesector plays in innovating and transferring technologies tocombat climate change.Undermining IP Would Undermine InnovationDespite the erroneous claims that undermining patentswould foster technological diffusion, doing so would have avery real and concerning impact on the development of newCO 2mitigation technologies.IP is vital to ensure there is sufficient incentive forinvestors and innovators to provide the capital outlay forsophisticated technology. CO 2mitigation technologies willonly be developed so long as there is a commercial marketfor their use. Governments and multilateral agencies arecurrently developing investment frameworks to incentiviseprivate sector investment in CO 2mitigation technologies.But to do so requires strong IP regimes. This was theconclusion of the Stern Review. The Stern Review identifiedthat “there are a number of measures that governmentscan take to create a suitable investment climate for energyinvestment and the adoption of new technologies, such as… strengthening intellectual property rights”. 22Instead NGOs and developing countries are advocatingfor the reverse and in doing so will undermine investment.190 THE IIPM THINK TANK

C OMMON GOODA UNDP study has found that compulsory licensing ofcarbon dioxide mitigation technology would send a worryingsignal to investors and innovators in a relatively newarea of technology innovation. The study argued that thestage of development of technological development mattersand undermining commercial incentives “may have implicationsin terms of the level of private investment alreadymade in a technology and the level of returns that IPRowners need to derive before they are happy to release theIPR”. 23 The report also argues that “regulations governing... (IPRs) could also help insome cases to build confidenceamongst internationalfirms and encourage them toengage in practices suchas licensing andjoint ventures”. 24The irony is that Governments and multilateral institutionsare currently investing significant resources todeveloping frameworks to incentivise private capitalinvestment in CO 2mitigation technologies. Yet NGOs anddeveloping countries are actively working to undermine theincentives for their development by advocating for removalof patent enforcement. Removal of patents will underminethe creation of new technologies and halt their diffusion.Compulsory Licensing Is A DistractionAdvocating for compulsory licensing is a distraction fromthe real barriers that exist between developing countriesaccessing of CO 2mitigation technologies. The real impedimentto access environmental technologies is not IP, buttariff barriers. 25 The global market for environmental goodsand services is worth between USD$550 billion andUSD$613 billion per annum. Of this figure 35per cent is ingoods and 65 per cent in services. Yet some countriesimpose tariffs of up to 70 per cent on these technologies. 26In Asia and Latin America the average tariff on environmentallysensitive technologies is between 15 and 20 percent. 27 If developing countries want to promote the transferof CO 2mitigation technologies they can do somethingimmediately – remove their tariff barriers.A study by the World Bank supports this conclusion. In2007 the World Bank released its report International Tradeand Climate Change that investigated the role of tariffThe global market forenvironmental goods and servicesis worth between USD$550 billionand USD$613 billion per annumbarriers on ‘green’ technologies. The study found that thediffusion of technologies would increase by betweenseven and fourteen per cent per year based on differentmodels of liberalisation. 28Table 1 identifies the enormity of the barriers imposed bythe top 15 GHG emitting developing countries. Tariff ratesare still high on some technologies, including as high as 30per cent on solar photovoltaic cell technology and fluorescentlamps by Zambia. But even higher NTBs exist formany countries. For example, the Philippines, Nigeria andEgypt all have NTBs over110 per cent on clean coaltechnology. In the case ofNigeria it is 160 per cent.Similarly India has NTBsover 100 per cent on fluorescentlamps. The only countryof the top 15 CO 2emitting nations that can claim any pietyis Kazakhstan with 0 per cent tariffs and NTBs on thesurveyed CO 2mitigation technologies.The World Bank report also found that weak IP regimeswere another form of non-tariff barrier that was underminingthe transfer of climate friendly technologies. 29 Similarconclusions were developed by Professor Barton of StanfordLaw School who recently argued that there were not“significant” barriers to technology transferred caused byIP, but instead tariffs and similar barriers. 30 FurtherBarton identified that one of the potential barriers totechnology transfer was weak IP barriers that providedisincentives for foreign investors. 31Despite its enthusiasm for compulsory licensing, even theEuropean Parliament recognises the damaging effects thattariffs on environmental technologies is having. In itsmotion calling for compulsory licensing it also calls for “theneed to reduce barriers to ‘green’ trade by, for example,removing tariffs on ‘green’ goods at the WTO level”. 32The point has also not been lost on the US. Removal of‘green’ tariffs was the objective outlined in the lead up tothe Bali Summit in a joint proposal put forward by the USand the EU. The proposal to introduce an EnvironmentalGoods and Services Agreement (EGSA) is designed toreduce the tariff barriers and NTBs that exist, mostly in thedeveloping world, on goods and services that will assist inreducing CO2 mitigation emissions. 33THE INDIA ECONOMY REVIEW191

E NVIRONMENTAL ECONOMICSUnder the US/EU proposal there would be a two-tieredeffort to remove barriers on green technologies. The firstwould be to remove tariff barriers on goods, and forcountries to amend their GATs schedules to facilitateservice providers of ‘green’ services. The second tier wouldbe the negotiation of an EGSA to remove all NTBs ongoods and bind existing market access and national treatmentcommitments for services. 34Yet despite the cost of tariffs and NTBs to accessing CO 2mitigation technologies NGO, Friends of the Earth, haveadvocated for their maintenance. In a recent statement theyattacked an earlier EU push to remove tariffs and NTBsarguing they were necessary to “enable developing countriesto build their own supply capacity in developingenvironmental products.” 35Attacks on intellectual property are simply a distractionfrom the root barriers to the trade in CO 2mitigationtechnologies. Compulsory licensing will achieve little topromote technological diffusion. In comparison theremoval of tariffs and NTBs will add significantly to thefree trade of CO 2mitigation technologies to help developingcountries reduce their emissions.ConclusionTechnology is a vital component in the matrix of solutionsto reduce global CO 2emissions. But it is important that inthe process of diffusing the technology to mitigate emissions,policy makers do not lose perspective. It would becounter-productive to remove the incentives that will fosterthe development of new technologies that will replaceexisting technologies as humanity discovers newer, moreefficient ways of mitigating CO 2. Advocates for compulsorylicensing are arguing that it is necessary to promotetechnological diffusion for developing countries who havelimited resources to buy CO 2mitigation technologies.Simplistically removing patents may appear to support thediffusion of CO 2mitigation technologies. But it willactually undermine it. Removing patents will discourageinvestment and undermine the tradable nature of propertyrights that patents confer. Doing so will discourage FDIinto developing countries to transfer technologies andundermining licensing of these technologies. The industryfor environmental technologies is very much in its infancy.It has been compared to the stage that the semiconductorindustry was at 35 years ago, or the biotechnology industrywas at 25 years ago. The long term consequence of underminingpatents will be to undermine innovation in the nextgeneration of CO 2mitigation technologies. The cost ofundermining patents is well understood. Hence previousinternational environmental treaties, including the Conventionfor the Protection of the Ozone Layer and the KyotoProtocol both recognise the contribution that propertyrights play in transferring CO 2mitigation technologies tothe countries that need them. Attempting to underminepatents is also a distraction from the barriers that developingcountries can remove immediately. Tariffs and NTBsaggressively undermine the accessibility of CO 2mitigationtechnologies by dramatically increasing their price. In somecases removal of NTBs would result in more than a 50 percent cut in mitigation technologies. Removing thesebarriers will do far more to increase the accessibility of CO 2mitigation technology than removing patents ever will.EndNotes1Wald, M., “Mounting costs slow the push for clean coal”,New York Times, 30/05/20082World Trade Organisation, “Trade Related Aspects ofIntellectual Property Rights Agreement, 19943World Trade Organisation, “Declaration on the TRIPsAgreement and Public Health”, 14/11/20014“India’s level of energy efficiency in the major energyintensive sector growth are at global levels”, 17/03/2007,cited on 11/04/2008 at http://pib.nic.in/release/release.asp?relid=261065“Joint Position Paper of Brazil, China, India, Mexico andSouth Africa participating in the G-8 Summit”,08/06/2007, cited on 26/02/2008 at http://pmindia.gov.in/prelease/pcontent.asp?id=5916Madhavan, N., “China and India set to make commoncause on global warming”, Hindustan Times, 06/06/2007,cited at http://www.hindustantimes.com/StoryPage/FullcoverageStoryPage.aspx?id=d6e876b4-17c3-453ab29b-c3ece7cec32fG8Summit2007_Special&&Headline=India+hardens+stand+on+climate+change on22/02/20087European Parliament, “Trade and Climate Change”,29/11/20078Raman, M., “Climate and Trade”, Friends of the Earth192 THE IIPM THINK TANK

C OMMON GOODInternational and Malaysia, 27/06/2007, p29Wilson, T., “Low Emissions technology under UNthreat”, IPA Review, 03/2008, p710Israel, C., “Don’t kill the green goose: The Importanceof Stimulating and Rewarding Clean Energy Breakthroughs”,IPI Ideas, n48, 05/2008, p111Maskus, K., “The role of intellectual property rights inencouraging foreign direct investment and technologytransfer”, Paper prepared for the Conference “Publicprivateinitiatives after TRIPS: Designing a GlobalAgenda”, Brussels, Belgium, 16-19/07/199712Maskus, K., Doughtery, S. & Mertha, A., “Intellectualproperty rights and economic development in China” inFink, C. & Maskus, K., “Intellectual Property andDevelopment: Lessons from Economic Research”,World Bank, 2005, pp325-327, cited at http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/TRADE/0,,contentMDK:20360014~menuPK:167375~pagePK:148956~piPK:216618~theSitePK:239071,00.html on01/02/200813Stern, N., “Stern Review on the Economics of ClimateChange”, Part VI, 2006, p714International Energy Agency, “Technology withoutborders: Case studies of successful technology transfer”,United Nations Environment Program & the ClimateTechnology Initiative, 1998, p1315Stern, 2006, p1016Stern, 2006, p1017Gans, J., Williams, P. & Briggs, D., “Intellectual PropertyRights: a grant monopoly or an aid to competition?”,Intellectual Property Research Institute of AustraliaWorking Paper, n07/02, 05/12/2002, p1118Watson, J., MacKerron, G., Ockwell, D. & Wang, T.,“Technology and carbon mitigation in developingcountries: Are cleaner coal technologies a viable option?”,Human Development Report 2007/2008, HumanDevelopment Report Office Occasional Paper, UnitedNations Development Program, 2007/16, p5219Kahn, A. H., “International Legal Framework forProtection of Intellectual Property under the TRIPSAgreement/The WTO & Related Human Rights Issuesof Dissemination & Transfer of Environmentally SoundTechnology – A critique of conflicting rights”, LundUniversity, Autumn 2002, p7220United Nations Environment Program, “The ViennaConvention for the Protection for the Ozone Layer”,Kenya, 198521United Nations Framework Convention on ClimateChange, “Kyoto Protocol to the United Nations FrameworkConvention on Climate Change”, Article 10(c) 200722Stern, N., “Stern Review on the Economics of ClimateChange”, Part IV, 2006, p623Watson et al, 2007, p824Watson et al, 2007, p5125World Bank, “International Trade and Climate Change:Economic, Legal and Institutional Perspectives”, 2007,p1326European Commission, “EU and US propose new WTOgreen trade agreement for Doha Round”, 30/11/2007cited at http://ec.europa.eu/trade/issues/newround/doha_da/pr301107_en.htm on 02/06/200827Office of Environmental Technologies Industries,“Global Environmental Technologies: Trends, marketsand perspectives”, Export America, 11/2002, p2528World Bank, 2007, p5329World Bank, 2007, p5930Barton, J., “Patenting and access to clean energy technologiesin developing countries”, WIPO Magazine,02/2008, cited at http://www.wipo.in/wipo_magazine/en/2008/01/article_0003.html on 27/02/200831Barton, 200832European Parliament, 200733The United States Mission to the European Union,“US., EU announce new climate change initiatives forWTO”, 30/11/2007 cited at http://useu.usmission.gov/Dossiers/Environment/Nov3007_USTR_Environment.asp on 02/06/2008 and European Commission, “EU andUS propose new WTO green trade agreement for DohaRound”, 30/11/2007 cited at http://ec.europa.eu/trade/issues/newround/doha_da/pr301107_en.htm on02/06/200834“Summary of U.S. and EC Proposal for LiberalizingTrade in Environmental Goods and Services in theWTO DDA Negotiations”, 31/11/200735Raman, 2007, p2(The views expressed in the write-up are personal and does notreflect the official policy or position of organisation).THE INDIA ECONOMY REVIEW193

B EHAVIOURAL ECONOMICSIRRATIONALITY UNBOUNDED –MORE RISK, MORE INCENTIVES“We make decisions on the basis of biases thatdon’t reflect real world facts. We allow ourselvesto be driven by hopes and fears, rather thanfacts.”– Gregory CurtisIntroduction To Behavioural EconomicsBehavioural Finance has created a stir over the pastfew decades. Not because psychologists’ DanielKahneman and Amos Tversky have been awarded theNobel Memorial Prize in Economics for the ProspectTheory, but due to the practical applicability ofbehavioural finance to business today. Now more thanever, economists have started to acknowledge theassumption of rational man in financial theory is notalways the same with the man in real life.In the events that unfolded with the sub-primecrisis, it seems instances of Barings Bank, OrangeCounty, National Australia Bank and Société Generalare minuscule. Advent of new risk mitigation techniqueshave been followed by new silos of risks.According to one school of thought, risk can beeffectively managed using quantitative modelling. Theother school, pegs risk on the attitude and culture ofthe organisation. The latter stream is rather interesting,although optimum risk management will be acombination of both. What is the implication ofvarious behavioural approaches and the impactincentives have on the behaviour of the subject(dealers and fund administrators, we would henceforthrefer to them as “agents”) would be the focalpoint of this paper.“We all make mistake, we are only human” – seemsto be the catch phrase for most of the fund administratorscaught on the wrong side of the fence. Interestingly,we have landed ourselves in a Catch 22 situation.On one side of the coin we have high risk emanated194 THE IIPM THINK TANK

T HE HIDDEN SIDE OF EVERYTHINGChiragra Chakrabarty, PricewaterhouseCoopers (PwC), MumbaiAnkan Mondal, PricewaterhouseCoopers (PwC), MumbaiJhuma Banerjee, LKP Securities, Mumbaifrom exposures to exotic financial instruments and onthe other side fund administrators are being givensubstantial incentives to participate in these markets.Do traders’ exhibit overconfidence in their abilities totame the market or is it “gambling with house money”,has been the vortex of debates for decades now. It isperhaps the limited experience of a trader which ispositively related to the tendency of taking more riskafter a recent gain. Gervais and Odean (2001) predictedthat overconfidence declines with experience,as the floor trading population is primarily composedof experienced traders. In the events that unfolded,both the rationales provided seem to contradict.It is interesting to know that in their work Gervaisand Odean (2001) had developed a microstructuremodel with an informed overconfident trader. Theoverconfidence bias, coupled with early success,breeds increased effects of the overconfidence,although over time the individual overconfidencedisappears in their model as traders learn their trueabilities. Daniel and Titman (1999) show how marketanomalies that may be attributable to overconfidentinvestors may be exploited. They term the existence ofthese exploitable anomalies the “lack of adaptiveefficiency”. Overconfidence in these models has acontinuing effect on relative market prices, and leadsto profitable “bottom feeding” strategies. Strangely, ittook Kahneman and Tversky to eventually decipherthe contrary logic on why normal human beings tendto become risk averse while gaining and risk seekerswhen they start losing.Further to the above findings, evidences alsosuggest that if the portfolios are successful in giving adesired return, participants feel emboldened toincrease their positions. This is in conformity with thecurrency derivative positions taken by Indian corporates.Currency Hedging – an exercise, which isTHE INDIA ECONOMY REVIEW195

B EHAVIOURAL ECONOMICSthought to be a cost-reduction technique to protect theportfolio, has turned out to be very expensive. About fouryears ago corporates began taking minor exposures incurrency forwards, swaps and sometimes exotics like embeddedoptions (including barriers). The rationale for swappingtheir Rupee denominated loans to Swiss Franc was to takeadvantage of the interest rate differentials. As these structuresstarted spewing money, they increased their exposuresto significant levels, perhaps, to levels which were beyondtheir controls. With the turmoil in currency markets worldwide,currency hedges have all of a sudden become potentialcataclysm for bankers and corporates alike.From Plain Vanilla Decision- Making To ExoticBehavioural FinanceDo agents behave like a rational economic man does in thereal life? Quantitative methods are always easier to comprehendwhen describingindividuals’ behaviour in themarkets. However, bothpsychological and decisionmakingtheories proposebiases that are measurable inthese markets. In fact, thefield of behavioural finance is firmly rooted on the assumptionthat agents systematically make irrational decisions thatcan be predicted. We would slowly, but eventually see theemergence of risk analysis and denomination from quantitativemodelling to qualitative analysis. The journey of assessingthe risk and reward structure in the markets fromnormative decision theory to theories engrafted withcognitive psychology has already begun. It all startedperhaps with Von Neumann and Morgenstern, when theyformulated the modern theory of choice under uncertainty,“the expected utility theory”.Proponents of this theory argue that people maximise thehighly rational utility which is likely to affect their totalwealth. A decade ago, popular theory on finance assumedthat all participants in the market are rational decisionmakers. “Interdependent decision-making” is used when thepayoff for an agent’s own decision is affected by marketfactors and more importantly, other’s decision within thedealing room. The normative decision theory assumes interalia, that the decision maker is economically rational, i.e. theDecision makers assume andprefer smaller risks to larger ones,provided all other factors (e.g.expected returns) are constantindividual can (a) deduce multiple outcomes, (b) assess theprobability of alternative paths to outcomes, and (c) selectfrom a multiple path an action that yields the most significantoutcome.Enter “Risk” in normative decision making. For an agent(a.k.a. dealer) the risk of a gain is more valuable than that ofa loss. Risk is an uncertainty for which probability distributionis deduced. A risky alternative would typically have alarge variance and along with the expected value of thealternative is used for evaluating a pay-off from the investment.In his paper Arrow (1965), states that decision makersassume and prefer smaller risks to larger ones, provided allother factors (e.g. expected returns) are constant. Today, riskaverse decision makers prefer relatively low risks and arewilling to sacrifice some expected return in order to reducethe variation in possible outcomes.Alternative schools of thoughts have emerged since thedays of Markowitz’s (1952)“Portfolio Theory” andFama’s (1960) “Efficientmarkets Hypothesis”. In reality,agents’ behaviour is muchmore dynamic than thenumbers projected by quantitativemodels. Nonetheless, very often people tend to mix theconcepts of risk and uncertainty. In decision theory a precisedistinction is made between a situation of risk and certainty:we face “risk” when we have all the needed information andwe know how to use it, but choose not to act on the information.If we do not have all information needed and perhapsalso not certain how to use it then we are faced with “uncertainty”.In real life, it would be illogical to assume that weface only economic risk, a case where an outcome can beestimated from an objective perspective, like in the case of alottery. Therefore, in real life, an agent cannot know everythingand that is why he or she starts to trust own perceptionsand make own judgments over different situations.Researchers with various backgrounds have tried toexplain agent behaviour. All over the world, economists havefocused on the “rationality” or “irrationality” of the agent’sdecision-making process. Whereas, psychologists concentrateon agent’s individual characteristics and the culturalbackground. However, the oddment is in finding anomaliesin the behaviour of both the agent and the institution and196 THE IIPM THINK TANK

T HE HIDDEN SIDE OF EVERYTHINGevidence it against the financial theory according to whichall agents are assumed to be economically rational. In theview of behavioural economists today, it is the quality of the“man” (agent) behind the “machine” (trading platform), whois much more important and significant than the numbersthrown by quantitative models. This is an open field andwould qualify for intense research in years to come.Prospect Theory: In Search Of Decision UnderRiskIn their path breaking research, which became the foundationfor behavioural economics, Kahneman & Tversky(1979), crisply identified the gap between actual behaviourand expected behaviour of the agent assuming normativedecision-making as the hypothesis. Kahneman and Tverskyargued that this spread was too wide to be a systematic error– as encrypted by normative science – rather it was explainedNormative decision theory ignoresthe fact that human beings makethese decisions, each agent beinga superset in itselfby cognitive psychology as“simple human errors”.Normative decision theoryignores the fact that humanbeings make these decisions,each agent being a supersetin itself. Simply speaking,normative model constructs an idealised decision makerrather than a real human. The prospect theory, on the otherhand, constructs on behaviour ofdecision makers who face a choicebetween two alternatives.The theory states that agents have anirrational tendency to be less willing togamble with profits than with losses.Thus, it defies the rational agent andrandom walk algorithms of marketanalysis in favour of models of judgementunder uncertainty. Kahnemanand Tversky uncover that agents value again with a higher probability ofoccurrence than a gain with a lowerprobability of occurrence. Kahneman(in an interview) also pointed thatagents’ perception of and reaction torisk is seen and dismissed as emotional.“…our innovation was that we identifiedsome categories of risk that were the result of certaincognitive illusions. […] There is an alternative way of lookingat this that is becoming much more fashionable. The idea isthat the first thing that happens to you is you’re afraid, andfrom your fear you feel risk. So the view of risk is becoming lesscognitive. The shadow cast by a worst case overwhelmsprobabilistic assessment.”In a major finding, March and Shapira (1987) establishedthat managers have a tendency to consider risk if the outcomesare pessimistic. Managers view risk not as a conceptof probability, rather as the expected amount of portfolioerosion or monetary loss. They also identified that thisattitude towards risk was particularly a characteristics ofmanagers who see risk as disjointed from uncertainty, i.e. asbeing defined in terms of the enormity of a projected loss orgain rather than the magnitude weighted by its likelihood.Thaler, Tversky, Kahneman and Schwartz (1997) havesummed-up behaviouraleconomics and particularly,Prospect Theory by empiricallyexamining and concludingthat losses are abouttwice as afflictive as gainsare pleasurable. The cotyloidalcurve for profits and lenticular curve for losses imply thatdecision-makers will be risk averse when choosing betweenprofits, and risk seeking when choosingbetween losses. In the light of the abovedeliberations, we would articulate fewincidences that are a direct consequenceof agents’ irrational behaviourtowards market conditions.Irrationality Unbounded, IncentivesAnd Motivation For RiskTakingWe have come back to the impactincentives have on the behaviour of theagent. The prima donna of more risk,more incentives are perhaps the hedgefunds. Foster and Young (2007) foundthat hedge funds employ the two – tierincentive system. The reason cited isthat the convexity of the fee structureTHE INDIA ECONOMY REVIEW197

B EHAVIOURAL ECONOMICSencourages managers to employ strategies with high variance,which is not always in the best interests of the investors,particularly those who are risk averse. They alsoshow that managers canmimic exceptional performancerecords with highprobability (and therebyearn large fees), withoutdelivering exceptionalperformance in expectation.The findings are perturbing considering the low transactioncost hedge funds incur in contrast to the heavy investmentfees they charge. The industry risks being deluged byagents who are “gaming” the market rather than deliveringhigh returns, which could in the long run, lead to a collapsein investor confidence. Similar studies have found that hedgefund agents generate fake alpha to increase their incentivesand restructure the contracts. With the help of high probabilityand translucency in strategies, they try to “manufacture”a series of systematically higher returns than anytradable benchmarks.Another clamorous example of monetary incentives andhigh risk taking might be seen in the sub-prime fiasco thatswept the financial markets recently. Unit holders are goingto pay the fund manager for seeking the ever reclusive“alpha”, while avoiding more risk. In reality, however, thereare only a few sources of alpha for these agents. Firstly,special abilities are required while identifying undervaluedfinancial assets. Secondly, sources of alpha are derived byMany research studies found thathedge fund agents generate fakealpha to increase their incentivesand restructure the contractsusing financial resources to create, or obtain control over,real assets and to use that control to change the payoutobtained on the financial investment. The final source ofalpha is financial engineering – investing in exotic financialsecurities that are not easily available to the ordinaryinvestor or creating securities or streams that appeal toparticular investors’ taste or preferences.Of course, if enough of these securities are created, theycease to have scarcity or diversification value, and are valuedlike everything else. Thus, this source of alpha depends onthe manager’s constant innovation for staying ahead in therace. Which is what, most of the managers of pension funds,mutual funds and insurance companies did to enhance theportfolio returns. When the markets started going againstthem, they simply started selling these products (which hadone leg in equity and other in debt / currency). Due to theseinterlinkages, most of the markets collapsed. The broaderpicture which is emerging from these analyses is that theincentives of financial marketparticipants played animportant role in the unfoldingof this crisis.Our next example is a littledifferent from the abovementioned exercises, wherethe agents were seeking alpha. There are incidences ofcorporate India taking enormous positions in currencyderivatives in the guise of forward hedging of currency ratesusing currency forwards, swaps and sometimes exotics likeembedded options (including barriers). As these structuresstarted being “in the money”, they increased their exposuresto significant levels, perhaps, to levels which were beyondtheir controls. With the currency markets taking a southernturn, all bets went wrong. The behaviour of the agentsinvolved shows they suffered from “frame dependencesyndrome”. Here, the form – as opposed to substance – wasused in decision-making for the smaller trades. Surprisingly,the agents also inducted “hedonic editing” of the risk tolerancelevels. This conspired into their being emboldened byrecent experiences of profits from smaller foreign exchangederivative trades. For the larger exposures, heavy dependingon “frame preference” was observed.If principals in fact believe that there is an effect resultingfrom incentives, how do the principal perceive the agents’198 THE IIPM THINK TANK

T HE HIDDEN SIDE OF EVERYTHINGbehaviour? Managers should realise that it is not only figureswhich matter. However, when there is a conflict of interestbetween the agent and the principal, the conflict can besolved by giving the agent an incentive which is higher thanhis expected utility.ConclusionOur world is becoming more and more complex, both interms of perception of risks and innovations in financialinstruments to seek or mitigate those risks. It may be safelyput that there exists a gap between the normative financialtheory and the actual behaviour of agents entrusted withinvestors’ money. What adds spice and biases to the decisionmakingprocess of economic agents is “incentives” forseeking as well as transferring the risks. Ceterus peribus,incentives have been linked to indicate the overconfidencebias, frame dependence and house money effect on agents.Further research on the effect of incentives on agents’decision-making process ishighly solicited. Risk,decisions and their pay-offshave endured a long journey.From being just quantitativenumbers, they have morphedinto emotional, rational-computationaland perceptual systems incised in the nervoussystem of man. Behavioural sciences have helped us inunderstanding how an economically rational man can belead to act irrationally and vice versa. As Professor DanielKahneman seeks to probe deeper into the mind of aneconomic agent, it seems the journey may have just begun,“In my current perspective, the question I ask is, what makesthoughts come to mind? And some thoughts come to mindmore easily than others; some really take hard work; somecome to mind when you don’t want them...”Incentives have been linked toindicate the overconfidence bias,frame dependence and housemoney effect on agents• Gervais, S. and Odean, T., 2001. “Learning to be Overconfident”,Review of Financial Studies 14, pp. 1-27.• Daniel, K. and Titman, S., 1999. “Market Efficiency in anIrrational World”, working paper, Financial AnalystsJournal 55, pp. 28-40• Cabral, M., 2000. “Industrial Organisation”, MassachusettsInstitute of Technology.• Arrow, K., 1965. “Aspects of the Theory of Risk Bearing”,Yrjö Jahnssonis Säätiö Lecture Series, Helsinki.• Markowitz, H., 1952. •“Portfolio Selection”, Journal ofFinance, Vol. 7, No. 1, pp. 77-91.• Fama, E., 1970. “Efficient Capital Markets: A Review ofTheory and Empirical Work”, Journal of Finance, Vol. 25,No. 2, pp. 421-423.• March, J. G. and Shapira, Z., 1987. “Managerial Perspectiveson Risk and Risk Taking”, Management Science, Vol.33, No. 11, pp 1404 -1418.• Thaler, R., Tversky, A., Kahneman, D. and Schwartz, A.,1997. “The Effect of Myopiaand Loss Aversion on RiskTaking: An ExperimentalTest”, Quarterly Journal ofEconomics, Vol. 112, No. 2,pp. 647-662.• Thaler, R., 2000. “FromHomo Economicus to Homo Sapiens”, Journal of EconomicPerspectives, Vol. 14, No. 1, pp. 133-141.• Foster, D. and Young, H. P., 2007. “The Hedge FundGame: Incentives, Excess Returns, and Piggy – Backing”,working paper, Brookings University.(The views expressed are those of the authors and do not reflectthe official policy or position of organisations).References• Kahneman, D. and Tversky, A., 1979. “Prospect Theory- An Analysis of Decision under Risk”, Econometrica,Vol. 47, No. 2, pp. 263-292.• Daniel, K., Hirschleifer, D. and Subrahmanyam, A.,1998. “Investor Overconfidence, Covariance Risk andPredictors of Securities Returns”, working paper,University of Michigan.THE INDIA ECONOMY REVIEW199

I NTERNATIONAL ECONOMICSIMF: INCOMPETENCEBY DESIGN OR DEFAULT?The importance of finance in a globalised worldcannot be underestimated. Movement of globalcapital (and not any other factor of production)from one country to the other has often been held byeconomists to be the last mile connectivity of a country inits process of globalisation.In fact for the past few decades no other factor of production– labour or for that matter technology - has invited asmuch attention and discussion at the global level as themovement of finance has. It may not be out of place tomention that having realised the potency of this arrangement,developed countries, notably the US have lostinterest in the Doha Round of trade negotiations under theaegis of the WTO. Why produce, trade, take risks andcomplicate issues when one can profit merely throughmovement of finance?"In this new market billions can flow in or out ofan economy in seconds. So powerful has this forceof money become that some observers now see thehot-money set becoming a sort of shadow worldgovernment – one that is irretrievably eroding theconcept of the sovereign powers of a nation state"– Business WeekM.R. Venkatesh,Chartered Accountant and Columnist, ChennaiOne Who Controls Finance Controls The WorldThe evolution of this global financial architecture can betraced to early seventies when the post World War IIBreton Woods arrangement was given up. That led to thecollapse of the fixed exchange rate mechanism and gave riseto the flexible exchange rate mechanism. All these and itsconsequent impact are well documented to warrant repetitionhere.It may not be out of place to mention that the IMFrepeatedly pontificated on the virtues of financial sectorliberalisation and its calculated effect of rewarding theproductive and the prudent while ruthlessly punishing theunproductive and the profligate. Unsuspecting countries,which approached the IMF for financial assistance underthe structural adjustment programme, were persuaded toliberalise their financial sector.Given such enormous stakes it was therefore of extremeimportance to monitor the global financial architecture,capturing the risks to the movement of global capital as wellas the risks arising of the sudden reversals in the flow of200 THE IIPM THINK TANK

B AD FAITHglobal capital. And the entire global financial architecturehas been constantly monitored and certified by the IMFgiving rise to the collective belief that all is well in the worldof finance. But as events turn out we all now know that ithas been a case of misplaced trust.IMF’s Surveillance ProgrammeCrucially, all these arrangements had the active blessings ofthe IMF through a well-documented agenda. In fact, theIMF constantly encouraged countries to enter into thisgame of speculation, virtual finance and of course digitaleconomy. In fact, this has been the agenda of the IMF sincethe eighties. It is thus no wonder that since then the IMFhas been fixated on this system while simultaneouslyensuring that there are no systemic risks its flow.Readers may note that this monitoring is carried out bythe IMF through a defined surveillance programme – amandate that was given to oversee the internationalmonetary system, assess the economic and financialdevelopments across continents and advise on risks toglobal financial stability as well as to suggest appropriatepolicy adjustments.Yet, despite this overwhelming concern for finance, it isindeed bewildering to note that the entire global financialarchitecture is increasinglycoming under extraordinarystress. In fact, some expertsopine that it has alreadyreached the breaking pointas recent events in the USeconomy and financialmarkets demonstrate.Further, the recent gyrations witnessed in the commodities,currency and stock markets at the global level are allproducts of systemic failures and bad surveillance.The element of surprise is not merely on the size of thecrisis, which in my opinion is secondary. What is galling tonote here is that such serious systemic flaws have crept inundetected for over couple of years despite multilateralsupervision and surveillance.It is in this connection it is indeed perplexing to note thatwhen the IMF – the high priest of supervision of globalfinance has expressed surprise – yes surprise - on the latestcrisis that has engulfed the world of finance, its extent andThe IMF has constantly andcrucially encouraged countries toenter into this game of speculation,virtual finance and digital economythe consequent implications.Has the IMF merely winked at these negative developmentsand proliferation of financial instruments because ofthe some external pressure or does it not have theappropriate competency to carry out the surveillance ofthe global financial architecture? Is it a classical caseof misplaced trust or is it a part of a deliberate design tobe incompetent? Is IMF incompetent or designed tobe incompetent?The GFS ReportThe IMF presents a biannual report titled the GlobalFinancial Stability Report (GSFR) as a part of its surveillanceprogramme. Yet, in its latest GSFR report releasedby the IMF in April 2008, it points out that the events ofthe past six months have demonstrated the “fragility of theglobal financial system” and raised “fundamental questionsabout the effectiveness of the response by institutions.”What is indeed appalling to note here is that the IMFsuggests that the global financial system seems to havecome under increasing strain since “October 2007.”The key and recurrent themes that are captured in thisreport include:• There was a “collective failure” to appreciate the extentof leverage taken on by awide range of institutions.• There was a “supervisoryfailure” to comprehend theevolving risks throughappropriate risk managementsystems, updatedisclosure norms andimprove financial sector supervision so as to meet therapid innovations and shifts in business models.• There was a failure to detect the transfer of risks offbalance sheets by banks. Consequently, as risks havematerialized, it has placed enormous pressures back onthe balance sheets of banks.Naturally, this lack of appropriate supervision and riskmanagement, according to the IMF, encouraged extremeleveraging. And as deterioration of the credit quality“exacerbated the de-leveraging process,” the globalfinancial system is increasingly coming underextraordinary strain.THE INDIA ECONOMY REVIEW201

I NTERNATIONAL ECONOMICSResilience? Gathered Strength? De-risked?Strange as it may seem, especially with the benefit ofhindsight, one can safely state that the IMF has beencompletely oblivious to the negative developments in theglobal financial architecture since the past couple of years.Quite the contrary, the IMF has been virtually certifyingall the developments as positive.In fact the April 2006 GSFR states “The positive assessmentcontained in the September 2005 GFSR that theglobal financial system has yet again gathered strength andresilience has been validated by recent developments.”It does not stop there. It further states “In particular, theemergence of numerous, and often very large, institutionalinvestors and the rapidgrowth of credit risk transferinstruments have enabledbanks to manage their creditrisk more actively and tooutsource the warehousingof credit risk to a diverserange of investors. A widerdispersion of credit risk has “de-risked” the bankingsector.”And wherever it has mentioned the potential risks arisingfrom the lending to sub-prime borrowers or for that matterany other risks, it remained muted and suppressed - akin tothe statutory health warning on cigarette packets. And asevents in 2008 turn out and given the positive language ofassurance contained inthe GSFR 2006 report,one is certain that globaleconomic surveillance ofthe IMF has indeedmisled the world offinance.But this is not anexception. In the pastdecade the world has beenwitness to the six majorfinancial crisis – the EastAsian crisis, the collapseof LTCM, the Russiancrisis, the Argentineancrisis, Dotcom bubble andNaturally, the IMF having designedthe global financial architectureis loath to write a word against itsapparent systemic failuresof course the latest sub-prime crisis of the US And onevery occasion the IMF simply failed to identify the crisiswell on hand.In retrospect it is clear that there was a failure on part ofthe IMF in identifying these risks even as they were manifesting.And now innocently terming the extant crisis as“collective failure” points out to something more than itmeets the eye.But Why?The crucial question that arises from all these is a simpleone–Is the IMF incompetent to monitor or is it a case ofincompetence compounded by a conspiracy.It is in this connection oneis constrained to quoteJoseph Stigtitz. Writing thepreface to his celebratedbook – Globalisation and itsdiscontents – he states,“There are no smoking gunshere. You won’t find hardevidence of a terrible conspiracy by Wall Street and theIMF to take over the world. I don’t believe such aconspiracy exists.” Yet he goes on to add, “The truthis subtler. Often it’s a tone of a voice, or a meeting behindclosed doors, or a memo that determines the outcomeof discussions.”Who are those who by their very tone of a voice or in suchother methods as explainedby Stiglitz are ableto decide the future turnof events. And to understandthe same, a referenceonce again to the USfinancial system and thepower of its corporate isinevitable.It is common sense thatthere would be very littleopportunity for speculativeprofit in a stable financialmarket. The greaterthe volatility of financialmarkets, the greater202 THE IIPM THINK TANK

B AD FAITHopportunity it is for the players in these markets. This viewwas accepted by George Soros himself in a testimony to theBanking committee of the US House of Representatives inearly nineties.The riskier and more destabilising forms of moderninvestments are through the new instruments – popularlycalled the Hedge Funds managed by Soros, GoldmanSachs, Merrill Lynch et al. This process has turned investmentbanks into highly leveraged machines that tradeheavily on their own accounts leveraging investor moneyseveral times over.It is not merely a question of leverage that is central to thediscussion on hand. The potency of these firms and thedisproportionate clout that they wield on the financialmarkets is central to the issue on hand. And it is theseplayers in the US financial markets that dominate theglobal financial architecture.For instance, a recent article in The Economist, quotes astudy of BCA Research, a Canadian economic-researchfirm that traces the rise of the American financial sector.The total corporate profits, the report points out, grewfrom 10% in the early 1980s to 40% last year and its shareof stock market value grew from 6% to 19%. It may befurther noted that financial services account for only for15% of corporate America's GDP and a mere 5% ofprivate-sector jobs.This clearly illustrates the disproportionate influence ofthe financial sector on the US economy and its continuedinterest in ensuring the continuance of the global financialarchitecture–one that allows gyrations, volatility and ofcourse in the process provides significant opportunities tothese players to make profits, even at the cost of taking theentire global economy to the very brink.To amplify, should the US financial system collapse; it isthe developing countries that would lose heavily. After all,developing countries have lent approximately USD threetrillionsto the US Remember, the US is too big for theworld to risk a collapse. And in such a scenario, it is the restof the world that would rush to protect the US and itsDollar. Needless to emphasise, in case of profits, thebeneficiaries would be these few fund managers. Globalisinglosses and privatising profits! And it is this system thatas the sanction nay blessing of the IMF.Given this paradigm, to assume that IMF would actindependently would be churlish to say the least. Naturally,the IMF having designed the global financial architecture isloath to write a word against its apparent systemic failures.It cannot even critique or for that matter even review it.And should it do anything that would remotely destabilisethe system, it could at-once close the flow of funds from thedeveloping countries to the US Powerful vested interests– the beneficiaries of this system, it can be logically concluded,would ensure its continued silence.Globalisation requires global systems and global governance.In the absence of a global government, multilateralarrangement has been worked out a substitute by allnations. But experiences of the past decade now tell us thatthis unaccountable and unsure system is untrustworthy,unworkable and hence unacceptable.That explains the continued diffusion of the IMF whileglobal financial architecture swings from one crisis toanother. Till date, the debate on IMF has primarily been onits incompetence. Time has come to evaluate the conspiracyangle far seriously.(The author is a Chennai based Chartered Accountant. Hecan be contacted at mrv1000@rediffmail.com).THE INDIA ECONOMY REVIEW203

A GRICULTURAL ECONOMICSBackdropThe spate of suicides among the farming community across thecountry since the last decade or so has attracted nationwideattention and has generated frantic debates in the union andstate legislatures. About 1.67 lakh farmers in the country havecommitted suicide between the period 1997 and 2006 and thespiraling of suicide rates are symptomatic of agrarian distressand impoverished condition of farmers. Consequently, thisissue has received considerable media attention and become amatter of great policy concern.A number of studies in different states have been undertakento analyse the causes of farmers’ suicides. Repeated cropfailure, rising cost of cultivation and indebtedness have beencited as the major reasons responsible for the economic204 THE IIPM THINK TANK

C ULTIVATINGDISCONTENTAgrarianDistress AndFarmers’SUICIDEIn India:Focus OnMaharashtraSangeeta ShroffReader, Gokhale Institute of Politicsand Economics, Punehardship and the consequent distress of farmers. Besides theagro-economic factors, a variety of complex socio-culturalfactors have also played a role in suicidal action.In the light of the above, with the help of secondary data, anattempt has been made in this paper to study the causes ofagrarian distress among farmers leading to suicides. Further,after 2004, if there has been any state which has seen a massiveincrease in farmers suicides, it has been Maharashtra. Hence asection in this paper has been devoted towards investigatingthe suicide epidemic in Maharashtra. The paper also aims atsuggesting some policy measures to salvage the situation. Itmay also be mentioned that while suicides may also be due tosocial distress, no attempt has been made in this paper tostudy the social milieu which alienates the individual fromsociety. The focus of this paper is only to study the factorsleading to economic hardships faced by farmers leading to selfinflicted deaths.Causes Of Farmers’ SuicidesShift in cropping pattern to commercial crops such as cotton:An important finding regarding farmers’ suicides is thatsuicides are taking place by cotton farmers especially inMaharashtra and Andhra Pradesh. Farmers in these stateshave shifted their cropping pattern from food crops tocommercial crops such as cotton crop in the hope of gettinghigher prices. With a shift in cropping pattern away from foodgrains to cotton, agriculture became highly intensive in use ofpurchased inputs, leading to increase in working capitalrequirements of farmers. In order to obtain higher yields,farmers generally cultivated high yielding varieties of cotton.These varieties required heavy doses of fertilizers as well asirrigation. To meet their irrigation requirements, farmersfrom all land ownership categories invested heavily in privatewells. Digging wells is a large, lumpy and highly risky investment.Further, cultivation of cotton crop is susceptible to riskas this crop is highly prone to pest attacks. This greatlyincreased the cost on pesticides. Thus given the heavy investmentfor cultivation of cotton, the need for credit increased.It is well known that farmers normally meet credit requirementsfrom both cooperative and other banks in rural areas aswell as from private traders or moneylenders. A large sectionof farmers remain outside the fold of formal credit institutionsand in such circumstances have to depend on informal sourcesof credit. Agricultural moneylenders and private traders havehistorically been important among the non-formal sources ofcredit. To meet the growing need for credit, the privatetraders in seeds, pesticides and output also began to supplycredit. They lend to the farmers in exchange for a promise todeliver the crop at a pre-agreed price discount or at harvesttime when market prices are lowest. These farmers who areresource-poor are forced to go to these traders due to theirTHE INDIA ECONOMY REVIEW205

A GRICULTURAL ECONOMICSTable 1: Area Production And Yield Of Cotton LintIn IndiaYearArea(LakhHectares)Production Bales(Lakh Bales Of170 kgs)Yield Of Line(Kgs PerHectares)1991-92 76.93 102.8 2301992-93 75.41 120.7 2721993-94 74.40 118.6 2711994-95 78.61 117.6 2541995-96 90.63 130.9 2461996-97 91.66 145.3 2711997-98 89.04 113.9 2181998-99 92.87 121.8 2231999-2000 87.31 115.3 2252000-01 85.76 95.2 1902001- 02 87.30 100.0 1862002-03 76.67 87.4 1942003-04 76.30 123.98 276.052004-05 87.86 170.0 329.002005-06 86.77 159.0 311.002006-07 91.58 210.4 390.562006-07 95.03(estimated)300.74 538Source: Directorate of Economics nd Statistics, Ministry of Agriculture, GoI.The traders wrongly advised thefarmers to apply more and morepesticides ,also often sold spuriousseeds to farmersclose personal relations. Thus a contract is made between thefarmer and trader. Often the farmers while taking a loan giveshis land as collateral to the trader.Besides providing credit and other necessary inputs, theprivate traders also provided extension services to the farmers.Farmers lack expertise on scientific farming and are inneed of advice. As mentioned earlier, cotton is very susceptibleto pest attack. Thisproblem was intensified asmore and more farmersmoved away from other cropsto cotton, thus creating cottonmonocultures that are moresusceptible to pest attacks.The private traders often wrongly advised the farmers to applymore and more pesticides and farmers followed their adviceby applying pesticides in an unscientific manner. This led thepests to gradually acquire resistance and stronger pesticideswere used. In the absence of quality control, the traders alsooften sold spurious seeds to farmers with very low germinationrates. Such factors greatly increased the cost of cultivation.Globalisation and cotton economy:In 1991-92 the area under cotton which was 77 lakhhectares gradually increased over the years and was 92 lakhhectares in 2006-07. This can be observed from Table 1. Therewas a sharp increase in area from 78.61 lakh hectares in1994-95 to 90.63 lakh hectares in1995-96. This was also thetime when trade restrictions were lifted and imports andexports were brought under open general license. Thus, thissharp increase in area was obviously influenced by internationalprices from where it can be observed that the cotlook Aindex (Table 2) which is the average of the cheapest fivequotations from a selection of the main uplands cotton tradedinternationally increased rapidly from 70.4 in 1993-94 to 92.6in 1994-95.However, this boom in the international market did not lastfor long and India’s cotton economy became susceptible toprice shocks from the world market. The world cotton yieldshowed an increase while the yield in India showed a decliningtrend. For example, the Indian cotton yield was just 40percent that of China. With increase in world supply of cotton,the international prices of cotton showed a downward trendwhich obviously led to a surge in imports. The prices in thedomestic market accordingly crashed.Thus farmers hoping to gain from favourable internationalprices ended up by suffering losses as their markets contractedunder global competition. From 92.6 in 1994-95, when cotlookA index reached its peak, there was a sharp decline over thenext seven years to 41.8 in 2001-02 – a decline of 55 percent. Itmade only a partial recovery thereafter. It is well known thatthe strong influence given bythe US to its cotton farmershas largely been accepted tobe one of the possible reasonsfor the steep decline in cottonprices at the global level. TheUS expanded its productionin the midst of this price slump by increasing cotton subsidiesand thereby greatly augmenting the world supply.Rising Cost of Cultivation and Indebtedness:The important point to note is that in a closed economy,farmers only face yield risk. If yield is low then farmers arecompensated by higher prices. However, in an open economy,206 THE IIPM THINK TANK

C ULTIVATINGDISCONTENTTable 2: Cotlook Index AYear Cotlook Index A1993-94 70.41994-95 92.61995-96 85.41996-97 78.61997-98 72.21998-99 58.81999-00 52.82000-01 57.22001- 02 41.82002-03 55.72003-04 69.12004-05 53.52005-06 57.04Source: www.cotllook.comfarmers have to face bothyield risk and price risk. A lowoutput may not be compensatedby higher prices incaseinternational prices are rulinglow. Thus in India, when tradebarriers were dismantled,farmers had to face globalcompetition and oftensuffered price shocks. At thesame time they had to adjustto rising cost of cultivationand stagnating yields as alarge part of the output isoften lost due to pest attack.With mounting cost ofcultivation and low prices,cotton farming becameunremunerative and at times the returns were even negative.Agriculture as an economic activity was thus becomingunsustainable, pushing the farmers into a debt trap. TheNational Sample Survey Organisation reveals that 82 percentof farm households in Andhra Pradesh were indebted while inMaharashtra around 55 percent are in debt. Thus rising debtlevels from high working capital requirements but lowrepaying capacity pushes the farmers into a state of distress.In fact, farmers shift to commercial crops such as cotton fromfood crops because they are neck deep in debt and cultivationof low value food grain crops (such as jowar) would onlyprovide them a meagre income which would not suffice theirneeds. However, the cultivation of high value cash crops suchas cotton which would help them to repay their loans alsolanded them into problems by further increasing their debts.The farmers unable to cope up with falling incomes and risingindebtedness and further with their land given as collateral totraders perhaps used suicide as a last resort.The Commission of Farmers Welfare (2005) set up by thegovernment of Andhra Pradesh to investigate the causesbehind the rise in farmers’ suicides concluded that theaccumulation of huge debts and the feeling of hopelessnessregarding future repayments triggered the suicides in mostcases. Increasing reports of this problem led the PlanningCommission and the Union Agricultural Ministry to carry outa comprehensive study in 2003, called the Situation AssessmentSurvey for farmers. This study took a detailed look intothe income-expenditure gaps, as well as debts incurred byfarmers across 6,639 villages in the country. The studyrevealed that the average expenditure on cultivation perhousehold was Rs. 8,791/- while the average gross incomefrom cultivation was Rs. 11,628/-. This meant that the averagenet income per household was Rs. 2,837/- per year. Thisincome when added to other sources of income added up toRs. 25,380/- This clearly showed that farming was proving tobe an unremunerative activity. Further, annual consumptionexpenditure of farmer households was Rs. 33,240/-. Asfarmers were unable to meet their consumption needs theylanded up in debts. As most of them have no access toinstitutional finance, they are forced to borrow from themoneylenders at exorbitant rates which added fuel to the fire.Focus On MaharashtraSince 2004, it is the state of Maharashtra which has seenmassive increase in farmers’ suicides. The number of suicidesin Andhra which were 1,126 in 2004-05 declined to 300 in2005-06 while that in Karnataka declined from 271 to 152 inthe corresponding period and were absent in Punjab (www.indiastat.com). Maharashtra was the only state which began toshow rise in number of suicides during this period which wasas high as 4,453 in 2006. Further, the important point is thatsuicides have been concentrated in Vidarbha which is thecotton belt of Maharashtra. The Vidarbha jan AndolanSamiti, a farmer’s movement reported that between June 2005and December 2006, 1,158 farmers had committed suicide inVidarbha (news.indlaw.com).A brief backdrop of Maharashtra’s agricultural economyTable 3: State Wise Cotton Yields (2003-04 To2005-06) (KG Per Hectare)State 2003-04 2004-05 2005-06Gujarat 417 421 604Punjab 556 697 731Haryana 454 568 437Maharashtra 190 176 187Andhra Pradesh 384 316 347Karnataka 142 224 228INDIA 276 329 311Source: www.indiastat.comTHE INDIA ECONOMY REVIEW207

A GRICULTURAL ECONOMICSThe average expenditure oncultivation per household wasRs.8791 while average grossincome was Rs.11,628 per annumTable 4: Monthly shows that it has highest areaWholesale Price under cotton in the country andIndex Of Cotton this area was mostly concentratedin Vidarbha. Nearly 97 percent ofYear Price Indexthe cotton cultivated in Maharashtrais unirrigated. By and2003 1772004 173large, one-third of the state falls2005 153under rain-shadow region, with2006 165scanty rainfall. The state has theSource: www.indiastat.com distinction of having more than 24percent of drought prone area ofthe country and faces major problems associated with rainfedagriculture, such as low yields, crop uncertainties and failuresdue to erratic rainfall.The state-wise cotton yields during the period 2003-04 to2005-06 indicate that Maharashtra had the lowest yield in2004-05 and 2005-06 among all major cotton producing states.Its average yield of 122 kg per hectare for the period 2003-04to 2005-06 was only 18 percent of India’s leader Punjab.Gujarat experienced rapidly rising yields. An internationalcomparison revealed that Maharashtra’s yield was ten percentthat of China. The cotton farmer in Maharashtra was thus notefficient enough to competein the international markets.These low yields have beenaccompanied by a fall in priceof cotton. The wholesale priceindex of cotton declined from177 in 2003 to 153 in 2005 and165 in 2006 as can be observed from Table 4.In 2004-05, the cost of production for cotton in Maharashtraaccording to the Commission on Agricultural Costs andPrices was Rs. 2,216/- per quintal but the Minimum SupportPrice was Rs. 1,960/- per quintal ( Mishra, 2006). The MonopolyCotton Procurement Scheme which was in operationsince 1972-73 in Maharashtra was supposed to stabilize pricesin Maharashtra but over time ran into problems with heavycumulative losses. The farmers also experienced delayedpayments under this scheme. Thus they also faced problems inmarketingFurther, a study (Mitra & Shroff, 2007) showed that the realcost of cultivation of cotton in Maharashtra from the period2000-01 to 2005-06 increased by 124 percent leading to adecline in profits per hectare. It was only the state of Maharashtrathat had a negative profit per hectare in 2006. The sizeof this negative surplus was substantial and over Rs.1,000/- perhectare at 2000-01 prices.Thus the cotton economy in Maharashtra continued to becharacterized by low yield, low prices and rising cost ofcultivation. The suicide epidemic among farmers in Maharashtrahas also been attributed to widespread adoption of areaunder BT cotton especially in Vidarbha. The notable featureof BT cotton is that it contains a gene which gives protectionto the crop against pestattack (American Bollworm).These seeds are however verycostly and require irrigation.In Vidarbha however,farmers lack irrigationfacilities and depend uponrainfall. Across the country while average cost of cultivation islittle more than Rs.16,000/- per hectare with yield of 460 kgper hectare, in Vidarbha the cost of cultivation couldgowell beyond Rs. 20,000/- per hectare with averageproductivity of 146 kg/- per hectare (www.dnaindia.com).Thus in light of the above factors the yieldof cotton declined making it unprofitable.Other states such as Gujarat benefited from use of BTcotton seeds because of which they experiencedenhanced yields. The farmers in Vidarbha are thuspushed to debt with more than 90 percent of themborrowing from private traders and money lenders.This explains the agrarian crisis in Vidarbha leadingtothe extreme step of suicides.208 THE IIPM THINK TANK

C ULTIVATINGDISCONTENTPolicy InferencesThis paper concludes that the loss in the competitiveness ofthe Indian cotton farmers after lifting of trade restrictionsplayed an important role for the agrarian distress amongfarmers. Overall, three factors contributed to the plight offarmers – low yield exposed to lower international prices afterliberalization, a lack of dynamism in crop yield per hectare andrising cost of cultivation. All these factors made cotton farmingunremunerative, especially in the state of Maharashtra leadingto a suicide epidemic in the state. The use of costly Bt seeds,unaccompanied by irrigation increased the cost of cultivationand did not give the desired yield.Our paper leads us to certain policy implications which cansalvage the situation-Cotton is an important crop in Vidarbha and also in otherstates where farmers have committed suicide. Farmers whocultivate this crop are subject to risk as this crop is highlysusceptible to pest attack which greatly reduces the yield.Farmers lack appropriate advice on pest management due toweak extension system. It is estimated that in Maharashtra, thecotton crop alone accounts for 54 percent of total pesticideconsumption. (www.agri.mah.nic.in). Overuse and misuse ofpesticides not only increasethe costs of cultivation butlead to decrease in yield.Hence extension services tofarmers must be strengthenedto educate the farmers onscientific farming which willreduce their cost of cultivation and increase their yield. Thiswill also make our cotton competitive in international markets.Purity of seeds must also be maintained so that farmers are notcheated by spurious inputs. As farmers are mainly cultivatinghigh yielding varieties, investment in irrigation must be made.Contract farming must be encouraged so that farmers will bein a position to get inputs, extension services as well as anassured market. With respect to contract farming there are anumber of detailed legal issues which need to be framed toenable contract farming to be a transparent and adaptablesolution for farmers and the corporates.Finally, efforts should be made to promote rural- non farmemployment so as to reduce the burden on agriculture as asource of livelihood. In a number of districts in Maharashtra aswell as other states more than 70 percent of the workforce isThe cotton economy inMaharashtra continued to becharacterised by low yield, lowprice and rising costs of cultivationdependent on agriculture. This is often the cause of disguisedemployment. Thus rural non-farm activities will reduce thepressure on land. Overall it can be concluded that whilesuicides are often due to complexproblems,a package of policymeasures as suggestedabove will helpto reduce the economichardships faced by farmerswhich often leads toagrarian distress.References1. Agarwal Rimjim, “Resource Poor Farmers inSouth India- On the Margins or frontiers ofGlobalization?”, Research paper No. 2006/97,September, 2006.2. Busines India, July 30, 20063. Mohanty,B.B. (2001), “ Suicides of farmers inMaharashtra: A Socio- Economic Analysis”,Review of Development and Change, Vol 6. No. 2Pp146-89.4. Mishra Srijit,“Farmers “ Suicidesin Maharashtra”,Economic and PoliticalWeekly, April, 22, 2006, Pp1538-1545.5. Mitra & Shroff, (2007), “ Farmers’ Suicides in Maharashtra”,Economic & Political Weekly, December 8.6. Shiva,V and A.H Jafriet al , Seeds of Suicide: The Ecologicaland Human Costs of globalization of Agriculture, researchFoundation for Science, Technology and Ecology, NewDelhi, 2000.Websites Used1. www.indiastat.com2. news.indlaw.com3. www.dnaindia.com4. www.agri.mah.nic.in(The views expressed in the write-up are personal and does notreflect the official policy or position of organisation. The authorcan be contacted at sangeetashroff@hotmail.com).THE INDIA ECONOMY REVIEW209

I NEQUALITY RE - EXAMINEDEQUITABLE AND INCLUSIVEGROWTH: TOWARDS ANATIONAL AGENDAPrakash LouisBihar Social Institute, Patna210 THE IIPM THINK TANK

T HIS INDIA, THAT INDIAEvery political regime which comes to power in acountry proposes its own agenda for nation building.In India too, whether it is the National DemocraticAlliance of the previous government or the present UnitedProgressive Alliance government have presented CommonMinimum Programme (CMP). This common minimumprogramme was presented as the national agenda by thesepolitical regimes. Like the CMP at the national level, at theglobal level too Millennium Development Goal (MDG) wasevolved by the world leaders as the agenda for global wellbeingand citizenship. Under the leadership of United Nations,world leaders came together in the year 2000 to identify goalsand fix up targets, which would be the guiding force foruniversal development. This has come to be known asMillennium Development Goal. Set in the background of newmillennium, these goals continue to be signposts for engagingin development, for assessing the progress made and forreorienting the goals and targets. Each country and the entireworld reviews the progress made based on the goals andtargets set for the global family.Within the realm of political discourse, citizenship andequal citizenship remained a dominant point of debate.During the freedom struggle as well as in the early phase ofnation building, the moral commitment to equality was thecentral focus of democracy. It is also argued by politicalscientists that to the moral commitment of equality the ideaof citizenship brings additional dimensions. They are three: a)civic citizenship. This refers to equality before law, liberty ofpersons, freedom of speech etc; b) political citizenship. Theright to participate in elections, right to serve in bodiesinvested with political authority etc fall under this category;c) socio-economic citizenship means right to a certainstandard of economic and social welfare etc.A careful reader of the national agenda (in the last fewdecades) would realize that within the democratic paradigmsocial, economic, political and cultural rights and entitlementswere promised. These were supposed to ensure equalityamong the citizens. But in reality instead of equality it ismarginality which seems to be the lot of the poor and theexcluded. Similarly, instead of inclusive growth it is age oldexclusionary principles and practices imposed on the poorand the marginalised. For instance, the tribal domesticworkers are those who continue to believe that they arecitizens of this country but in reality they are reduced to anunequal status. While the elite class who employ these tribalwomen as domestic workers enjoy every aspects of beingcitizens of this country, these are subjected to multiplemarginalities. The fact that there are two types of citizenshipis clearly demonstrated in the day to day lives experienced bythese tribal girls and the members of the families where theyare engaged as domestic help.Both the ordinary citizens as well as the civil societyorganizations are progressively raising the question of equityand inclusion in all aspects of the national agenda. But theyare aware of the fact that in a society and polity which arefoundationally unequal and exclusive, ensuring equity andinclusion is not an easy task. They are also aware of the factTHE INDIA ECONOMY REVIEW211

I NEQUALITY RE - EXAMINEDthat the ruling elite thrives in this country due to inequalityand exclusion. Hence, it has dawned on them that equity andinclusion are not passive formulations but they need to bebuilt into the policy and programmes.Inequality And ExclusionEven a cursory glance at the standard of lives of varioussegments of the population unravels this fact that inequality isrampant. Moreover, inequality is not limited to consumptionor income alone but it encompasses the entire economicaspects. Further, inequality is not only in economic field butin social, political, cultural and educational too. Discussingabout inequality in India, Pranab Bardan states that India’straditional caste system arguably makes it one of the world’smost socially unequal countries. When one combines socialand economic factors, India’s inequality is at the higher end ofthe world scale. Does it matter for economic reform? I believeit does, because social heterogeneity and economic inequalitymake it difficult to build consensus and organise collectiveaction towards long-term reform and co-operative problemsolving.When groups do not trust each other in sharing costsand benefits of long-run reform, there is the inevitabletendency to go for attainable, short-run subsidies and governmenthandouts.Continuing the debate further, Bardan states that thereforms have been halting in India. In the National ElectionSurvey for 2004, the largest social-scientific study on Indianelections, three-quarters of respondents with any opinion onthe subject said that reforms benefited only the rich. Indeed,over the last decade, even ruling politicians who supportedreforms have played them down during election time, and aparty that initiated reforms has been quick to oppose themwhen out of power. The fact of the matter is that for the rulingelite only economic reform matters. Land reform, judicialreform, administrative reform and educational reform areused during the election campaign.The fundamental feature of inequality in India is expressedin the widening gap between the ever growing rich and thefurther deprived poor. P. Sainath argues that, India now ranks8 th in the world in the number of billionaires, but is placed at127 th rank in human development. Our 27 billionaires, Forbesassures us, are the second richest in the planet. Their combinednet worth is bettered only by those of the U.S.A's, forJapan, Australia, Europe, et al, our dads are richer than theirdads. Sainath goes on to argue that the school scene capturesa larger truth. For the top five per cent of the population, thebenchmarks are Europe, the United States, Japan, Australia.For the bottom 40 per cent, the benchmarks can be found insub-Saharan Africa. Nearer home, Sri Lanka has done muchbetter than us in schooling its children. Yet, as Jean Drezewrites: "many development experts in India would be surprisedand interested to learn that private schools have beenbanned in Sri Lanka since the 1960s."Like inequality social exclusion is a powerful form ofdiscriminatory practice. In course of human development,exclusion has taken the form of segregating a group of peoplefrom the social, political, economic, cultural, educational andreligious domains of societal life. But the fundamental socialreality that needs to be exposed here is that social exclusiondoes not limit itself to segregation and deprivation. Socialseclusion and isolation provide base for a sense of superiorityand inferiority among the members of the same society orculture. Further, it also culminates into a system of dominationand subjugation. All these processes ultimately lead tooppression and exploitation. The seminal social fact ofsegregation is that it is justified and legitimized by social and/or religious traditions.According to Arjan de Haan, the concept has two maindefining characteristics. First, it is a multi-dimensionalconcept. People may be excluded, e.g., from livelihoods,212 THE IIPM THINK TANK

T HIS INDIA, THAT INDIAemployment, earnings, property, housing, minimum consumption,education, the welfare state, citizenship, personalcontacts or respect, etc. But the concept focuses on themultidimensionality of deprivation, on the fact that peopleare often deprived of different things at the same time. Itrefers to exclusion (deprivation) in the economic, social andpolitical sphere. Second – less discussed aspect in the literaturebut perhaps morerelevant for the theoreticalcontribution of the concept –social exclusion implies afocus on the relations andprocesses that cause deprivation.People can be excludedby many different sorts of groups, often at the same time:landlords exclude people from access to land or housing; elitepolitical groups exclude others from legal rights; priests inIndia may exclude scheduled castes from access to temples;minorities may be excluded from expressing their identity;labour markets, but also some trade unions exclude people(non-member) from getting jobs; and so on. ExclusionTable 1: Profile Of Dalits And TribalsS. No. Area Dalits –Representation %* Source: Various Census ReportsTribals –Representation %1. Population 16.48 8.082. Literacy - Total 54.69 47.103. Male 66.64 59.104. Female 41.90 34.765. Dropout by High school 79.88 86.726. Cultivators 25.44 54.507. Agricultural Labourers 49.04 32.698. Agricultural & Allied 76.22 87.00Activities9. Household with drinking6.62 3.23water, electricity,toilet facilities19.83%10. Prime Minister of India 0 011. Chief Justice 0 012. Party Leadership 10 1013. In Teaching profession 9.49 7.0314. Below Poverty Line 56.00 54.0015. Manual Scavenging 100 016. Discriminated Against 100 100India now ranks 8 th in the worldin the number of billionaires, butis placed at 127 th rank in humandevelopment indexhappens at each level of society. Group formation is afundamental characteristic of human society, and this isaccompanied by inclusion of some and exclusion of others.The specific concept takes us beyond mere descriptions ofdeprivation, and focuses attention on social relations, theprocesses and institutions that underlie and are part andparcel of deprivation.It is irrefutable that inequalityand exclusion havesocial, cultural and historicalroots. Further, this led tostratification of societyresulting in division of people.But the reason why thesediscriminatory behaviours exerted powerful influence is thatthey were presented as fixed and final and some strove topresent these as ‘divinely ordained’. In extension it has beenargued that since the social stratification is a divine plan, itcannot be altered. But this myth gets exposed when onecomes to realize the fact that unequal division of society is asocietal process and hence policies and programmes need tobe put in place to alter this discriminatory principle andpractice. In the Indian context, the following are theindividuals and groups who are subjected to inequalityand exclusion:Social Groups: Dalits/untouchables/lower castes,Tribals/Adivasis/Indigenous Peoples, religious andlinguistic minorities, the most backward castes, especiallywomen and children among these social groups.Sectoral Groups: agricultural labourers, marginalisedfarmers, child labourers, domestic workers,informal workers/unorganized sector workers, contractworkers, plantation workers, fisher communities,manual scavengers, rural and forest based communities,vernacular speaking social groups, people withdisability etc.Social Exclusion And Everyday Life Of TheExcludedAny discussion on inequality and exclusion spells outthe institutionalized attempts to exclude, to segregateor to cast out a segment of the population from thesocial order. Here one does not deal with a situationwhere a particular individual ‘ill-treats’ another person,THE INDIA ECONOMY REVIEW213

I NEQUALITY RE - EXAMINEDTable 2: Operational Holdings And Area Operated By Various Social Groups In 1980-81 And 1985-86Social GroupsNo. Of Holdings(In Lakh Hec.)Area Operated(In Lakh Hec.)Average Land Holding(In Lakh Hec.)1980-81 1985-86 1980-81 1985-86 1980-81 1985-86Scheduled Castes 100.52 (11.3) 120.41(12.4) 115.22 (7.0) 126.39 (7.7) 1.15 1.05Scheduled Tribes 68.54 (7.7) 76.48 (7.9) 167.04 (10.2) 172.34 (10.5) 2.44 2.25Others 719.77 (81.00) 774.66 (79.7) 1355.71 (82.8) 1346.89 (81.8) 1.88 1.74All Social Groups 888.83 (100.00) 971.55 (100.00) 1637.97 (100.0) 1645.62 (100.0) 1.84 1.69* Source: National Commission for Scheduled Castes and Scheduled Tribes Report, 1996-97but the social processes itself is discriminatory in its principlesand practice. Thus, social segregation is an institutionalizedform of social distancing expressed in physical separation. Itsignifies the convergence of physical and social space and is tobe distinguished from other social forms, which also structuresocial distance in spatial terms.As stated above, in the Indian context, the Dalits/untouchables,the Adivasis/Tribals/Indigenous Peoples, minorities arethe ones subjected to inequality and exclusion. Among thesethe women and children suffer multiple forms of inequalityand exclusion. Let us look at the everyday forms of socialexclusion suffered by these social groups.Dalits and Tribals continue to suffer inequality and exclusion.Whether it is in literacy, land ownership, access to civilamenities, participation ingovernance structure, etc theyare under represented.Table-1 presents the everydayforms of exclusion the Dalitsand the Tribals are subjectedto in many parts of India. Thisalso highlights the inequality that exists between varioussegments of the population.Dalits, Tribals and Backward caste households in ruralIndia are predominantly landless labour or small or marginalfarmer households. Almost 40 per cent of rural ST, 65 percent of SC and 50 per cent of OBC households own a measly0.01-0.40 hectares of land and hence the impact of theinability of agriculture to generate net new jobs is disproportionatelyborne by these social groups. Irrespective of beingengaged in agriculture, they do not have ownership, accessand control over means of agricultural production. Thenature of job-creation in the 1990s also limits their opportunitiesin terms of seeking non-farm employment, because theseAlmost 40 percent of rural ST, 65per cent of SC and 50 percent ofOBC households own a measly0.01-0.40 hectares of landare households with very low levels of education. Hence, greatdebate on non-farm employment does not make any sense tothese communities.It is not the non-availability of production resources whichis the central fact here but unequal distribution of resources,unequal access to these resources. In this regard KarenMichaelson’s argument is noteworthy. When people aredivorced from the means of production, they are left with onlytheir labour to sell. To increase their income, the poor mustproduce more labourers per household. Thus, while the richcan reinvest in capital and get richer, the poor can only ‘getchildren’. High birth rates are therefore not the cause ofcontinued poverty, they are a consequence of it.The Tribals and the Dalits constitute the main backbone ofIndian agriculture. But interms of owner cultivators notlandlords only about 25% ofthe Dalits are returned ascultivators [Table-1]. Thearea of operation under thepossession of the Dalits isonly 7.7%. Similarly, the Tribals have with them only 10.5%of land out of the total cultivable land. But the other castesown over 81.8% of the land (Table 2). But among the Tribalsand the Dalits more than 50% of them are even todayengaged as landless agricultural labourers. In extensions theyeke out a living as rickshaw pullers, construction workers,domestic workers, manual scavengers etc. Only a smallpercent among them are engaged in non-farm employment.These facts and figures go to establish the multiple andcumulative inequality and exclusion the Dalits and the Tribalsare subjected to.Mohanty is of the view that when we bring together thediscussion of the three aspects, that is, castebased inequality,214 THE IIPM THINK TANK

T HIS INDIA, THAT INDIAemployment opportunities and labour force attributes, we canquite comfortably make the following broad generalizations(Table-3). First, given educational attributes and geographicaldistribution, an upper caste person is most likely to hold aregular job in the service sector in urban India. Second, thedecline of self-employment in the generation of net new jobswould tend to affect urban backward castes most and giveneducational attributes, theyhave far fewer exit optionsthan the upper castes. Third,given the changed patterns ofemployment generation andeducational attributes, SCsand STs are more likely thanever to be over-represented in casual labour employment,particularly in urban India. Fourth, if current educationattributes and employment patterns remain unchanged, thenupper caste are most likely to be concentrated in high endservice sector urban jobs and SCs, STs and OBCs are mostlikely to be in low-paying casual labour jobs across agriculture,industry and services in both rural and urban India.Table 3: Structure Of Employment And Level OfEducation By SectorSector Representation Average Years OfEducationAgriculture (57.%)All workers 100.0 2.6Self-Employed 54.9 3.2Casual Labourers 43.6 1.7Regular employees 1.5 7.0Industry (12.4)All workers 100.0 4.5Self-Employed 36.8 4.3Casual Labourers 35.8 2.2Regular employees 27.4 7.9Services (30.3)All workers 100.0 5.8Self-Employed 45.1 4.7Casual Labourers 10.8 2.3Regular employees 44.1 7.9Note: Figures within parentheses refer to per cent shares in total employmentSource: Mritiunjoy Mohanty. Social Inequality, Labour Market Dynamics andReservation.Economic and Political Weekly. Vol. XLI, No. 35, September 2, 2006, Pp 3777 - 3789.SCs and STs are more likely thanever to be over-represented incasual labour employment,particularly in urban IndiaFifth, reservation of jobs in the organised public sector usedto be one mechanism through which SCs and STs could aspireto high quality, regular-waged organised sector employment.However with the public sector shrinking and the privatesector producing all net new jobs in the organised sector, eventhis limited access route has been closed. And, finally, all ofthe above taken together reinforce income inequalities.Further, the incomeinequality once again reinforcesthe educationalinequality, denies socialmobility and deprives ofpolitical representation andparticipation. Hence, inspiteof all rights bestowed in the constitution for the citizens of thecountry, in reality some are more equal than the others. Beingdenied of access and delivery of various schemes, plans andprogrammes, the poor and the weaker sections are condemnedto suffer under inequality exclusion. If incomeequality is established it would have atleast given a blow toage old caste system, feudalism and patriarchy which in turnwould have reduced the scope of exclusion. The Constitutionof India in clear and categorical terms has demanded that allthe citizens of this country should be provided with the basicminimum facilities and their rights should be protected.Article 43 of the Constitution states, “The State shall endeavourto secure, by suitable legislation or economic organizationor in any other way, to all workers agricultural, industrial orotherwise, work, a living wage, conditions of work ensuring adecent standard of life and full employment of leisure andsocial and cultural opportunities and, in particular, the Stateshall endeavour to promote cottage industries on an individualand co-operative basis in rural areas”. If this legal provisionwere to be implemented by the political establishment of thecountry, there would have been two interrelated consequences.On the one hand, productivity, safety and security as wellas economic well being of the entire population would havebeen ensured over the last six decades. On the other hand, itwould have also enabled in reducing the ever-wideninginequality between the resourceful and empowered minorityand resourceless, powerless and marginalized majoritypopulation. This in turn would have paved the way for equityand inclusion.This notwithstanding, the framers of the Constitution ofTHE INDIA ECONOMY REVIEW215

I NEQUALITY RE - EXAMINEDIndia, legally guaranteed affirmative action or positivediscrimination in favour of the weaker sections. “The Stateshall promote with special care the educational and economicinterests of the weaker sections of the people, and in particular,of the Scheduled Castes and the Scheduled Tribes, andshall protect them from social injustice and all forms ofexploitation” [Article 46]. From the perspectives of theframers of the Constitution, the Scheduled Castes and theScheduled Tribes constitute specially marginalized anddiscriminated segments of the population. In the last sixdecades various policies, plans, schemes and acts wereenacted with the stated objective to uplift the weaker sectionsof Indian population. This was part of the national agenda fornation building. But due to strong political will to maintainthe status quo and benefit from it the ruling elite did notimplement any of these and this has led to greater inequalityand exclusion of some segments of the society.Search For AlternativesIn a society and polity where inequality and exclusion arefoundational to its very design, any research for alternativesappears to be a futile exercise. But regardless of variousblockades imposed upon them, the common masses aresearching and finding other alternatives. Few of them arehighlighted here:• At the ideological realms it needs to be stated here thatsome people keep arguing that ensure attitudinal change,then inequality and exclusion issues would be addressed.But those who argue on this line forget the fact that attitudeis an outcome of the social structure we have created. It isthe social location of a person, which guides his or herattitude, and the attitude in turn either reinforces theskewed social order or calls for change. It is essential to domapping of social reality to identify exclusion and discriminationat all levels and respond to do away with them;• It is also crucial to engage in a two-pronged exercise. Alongwith present and continuous inequality and exclusion oneneed to comprehend historical and changed forms ofinequality and exclusion so as to respond in an appropriatemanner. What is argued here is that it is not just the present216 THE IIPM THINK TANK

T HIS INDIA, THAT INDIAforms of inequality or exclusion which deny development ofthe poor and the marginalised but it is also the historicalforms of inequality and exclusion which continue to hauntthem. Hence, both these need to brought under scanner;• The response to inequality is equity and the response toexclusion is inclusion. But this cannot be a passive exercise.Equity cannot be demonstrative but should be built into allaspects of society, economy and polity. Similarly, anydebate on inclusion has to analyse and understand theprocesses and outcomes of exclusion and work out mechanismsfor inclusion. Inclusion also cannot be forced inclusion.For instance, scavenging is 100% reserved for theDalits. This is not inclusion;• One of the most fundamental causes behind inequality andexclusions is to deny ownership, access and control overresources (jul, jungle, zamin). The excluded are realisingthis fact that the reasons for exclusion were invented tokeep away a vast majority of the population from resources.If the Dalits, the Tribals and the backward caste people areentirely dependent upon land, they should have access tothese resources. So, thedemand for ownership,access and control overresources is emerging as acollective claim;• The excluded in South Asiaalso realise that exclusion isa means to deny opportunities. Hence, they are demandingfor Equal Employment Opportunity Act as well as an EqualEmployment Opportunity Commission to implement thisact. This demand has been in the political arena for the lastone-decade or more. But now it has picked up momentum;• The demand for affirmative action both in public andprivate sectors has been in the political arena for a longperiod of time. The government in a time bound mannershould enact an Affirmative Action Act that clearly andcategorically spells out the steps that would be taken toimplement this policy both at the centre and state levels andalso in private sector. Resistance to this demand is anindication of the ruling elite’s plan to continue with inequalityand exclusion;• Two interrelated processes are taking place among themarginalised communities. On the one hand, they arecontinued to be subjected to inequality and exclusion. OnThere is an urgent need for EqualEmployment Opportunity Act andan Equal Employment OpportunityCommission to implement this actthe other hand, they have been protesting against theinequality and exclusion they are subjected to and areasserting their rights to be citizens of the nation andmembers of the society like anyone else. It is these interrelatedprocesses which have led to identity formation andassertion among them. Various stakeholders need to realizethis fact and align with the excluded in their struggle forinclusion and equity. This is all the more true for nationbuilding in the long run.Reference And Additional Thinking• Amartya Sen. Social Exclusion: Concept, Application andScrutiny. Social Development Papers 1.• Arjan de Haan: Social Exclusion: Towards an HolisticUnderstanding of Deprivation. April 1999, unpublisheddocument.• Devanesan Nesiah. Discrimination with Reason? ThePolicy of Reservations in the United States, India andMalaysia. Oxford University Press: Delhi, 1997.• International Encyclopedia of Social Sciences. Vol. 13, TheMacmillan Company, NewYork, 1968, p 144.• Jan Breman. Social Exclusionin the Context of Globalisation.Working Paper No. 18.ILO, Geneva.• Mritiunjoy Mohanty. SocialInequality, Labour Market Dynamics and Reservation.Economic and Political Weekly. Vol. XLI, No. 35, September2, 2006, Pp 3777 - 3789.• Prakash Louis. Scheduled Castes and Tribes: The ReservationDebate. Economic and Political Weekly. Vol. XXXVI-II. No. 25, June 21-27, 2003, p 2475-2478.• Millennium Development Goals and Common MinimumProgramme. Social Action. Vol. 56, No. 3. July-September2006, p 215-227.• Sukhdev Thorat. Caste System in India: Social and EconomicExclusion and Poverty. A Concept Note Preparedfor DFID.• Virginius Xaxa. The Adivasis in India. A Concept NotePrepared for DFID.(The views expressed in the write-up are personal and does notreflect the official policy or position of organisation. The authorcan be contacted at prakashlouis@gmail.com).THE INDIA ECONOMY REVIEW217

G ROUND REALITIESPITCH REPORT:INCLUSIVE GROWTH IMPERATIVESKumkum DasguptaSenior Assistant Editor,Hindustan Times, New DelhiPost-2004 parliamentary election, ‘inclusive growth’has become a popular mantra. A catchy slogan nodoubt, the concept is also central to the Uniongovernment’s Eleventh Five-year Plan (2007-12). PrimeMinister Manmohan Singh has also stressed time and againthat his government’s objective is to ensure that the country’sgrowth process is “inclusive, in all dimensions.” “It hasbeen our endeavour to ensure the long-term stability of thegrowth process, rather than seek short-term gains that may218 THE IIPM THINK TANK

I NDIA BETWEEN WORLDShave socially and politically destabilising consequences,” hesaid at a recent meeting. 1For the purpose of this article on inclusive growth, I havestitched together two news reports I wrote for HindustanTimes and one for Down To Earth in 1999. The 1999 articlemight sound a little dated, but I feel it illustrates the state ofaffairs that exist in many parts of India and why it is soimportant to make our growth process broad-based. Acommon thread runs through the three pieces: first, realisingthe dream of ‘inclusive growth’ will take much morethan strategising and planning ----- the delivery mechanismsneed to be toned up; and second, the present process ofgrowth is being questioned by many people.MAHUA MEMOIRSJagdalpur (Bastar, Chhattisgarh): In 1999, I travelled tothe Naxal-dominated Bastar district of Chhattisgarh, thenMadhya Pradesh, to report on the ‘Imli Andolan’. ReachingBastar from Raipur proved to be a difficult task; no traveloperator wanted to ferry me there because of the fear of theNaxals. After much difficulty, I managed to hire a vehicle.As the jeep crossed the beautiful Keskal range, I wonderedwhy this resource-rich region was so poor and what made ita fertile ground for Naxalism. I found the answers during aninterview with P. Krishn, the then Collector of the districtand the architect of the Andolan.Sitting in his sprawling bungalow at Jagdalpur, the districtHQ, Krishn recounted the incident that prompted him tostart the ‘Imli Andolan’. “During a routine inspection inone of the blocks in the district I caught a trader handingover a bag of salt to a tribal man in exchange of imli (tamarind),a Minor Forest Produce (MFP). 2 To my horror, thelabel on the salt bag said that it was ‘unfit for humanconsumption’. It was the worst form of exploitation I hadever seen in my career,” he told me.After this incident, Krishn realised that any plan toimprove the condition of the tribal communities in Bastarhad to be linked to the natural resource base of the area,especially MFPs like imli, mahua, tora seeds, chironji, kosa,honey and tendu. And, the blueprint of the Andolan wasscripted: ‘Van Dhan Committees’ (VDC) were set up in thevillages. The 1999 season of imli (tamarind) was a watershedin the history of the region. For the first time, the tribalcommunities took charge of the collection, distribution andsale of imli. In the process, they eliminated middlemen fromthe trade and ensured profits to the tribal collectors. TheBastar administration had estimated the tamarind trade wasworth around Rs 1,000 crore.To take care of the marketing needs of the VDCs, Krishnroped in the Tribal Co-operative Marketing DevelopmentFederation of India Ltd (Trifed). The federation startedbuying directly from the VDCs. Village haats were monopolisedby the samitis and only mandis were kept open forTHE INDIA ECONOMY REVIEW219

G ROUND REALITIEStraders. A day after mymeeting with Krishn, I was atKomar village near Jagdalpur.I met Ganga Bai and sheexplained how the tribals wereexploited for years: “Tradersused to come to us before theMFP season and pay us anominal advance. We had noidea that the forest productsthey bought from us atdirt-cheap rates were latersold in the big cities at highprices. Since they used to loanus money during emergencies, especially during the offseason,we never had the guts to fight with them over therates”. At Chamiya village also, the enthusiasm was perceptible.“Local traders used to put pressure on us to sell theforest products to them. But now we sell them to the VDCs.They are from our community, they will not cheat us,”Vishaal Singh, a resident of the village, told me. Sadly, this‘feel-good’ story was short-lived. After a profitable firstyear, market reality struck in 2000-01. The federation hadbought more than it could sell. The scheme ended in 2001.The Collector was transferred and the federation was lefthigh and dry.MINES, NOT THEIRSBicholim: “How would you feel if the government asks youto leave your home because the area where you live ismineral rich? Would you leave?” Pramod Umarye, aresident of Vathadev in north Goa’s Bicholim taluka, asksme angrily. Before I could answer, he fires another salvo:“Industrial growth does not mean development. This is afertile area and agricultural production can increase if thegovernment helps us. On one hand, the government talksabout increasing agricultural productivity and on the other,wants us to give up our land. What kind of policy is this?Make no mistake, I am ready to fight till the end.” Umaryehas reasons to feel angry: he stands to lose his home and hiscarefully cultivated plantation area because of an iron-oremining project.The struggle against the mining project in Bicholimstarted in December 2006 when the villagers learnt thatPanjim-based Zantye and CoPvt Ltd would get the lease formining iron and manganeseore at Sarvona. In January2007, the Gram Sabha (Sarvona-Karapurapanchayat)passed a resolution asking thegovernment not to grantpermission for mining activitiesin the area. If one goes byrulebook, this decision shouldhave been enough. But thegovernment looked the otherway and went ahead with thepublic hearing, a mandatory requirement under the EnvironmentImpact Assessment (EIA) laws, on January 18.Residents allege that the public hearing was illegal becausethey were not given any information regarding the project30 days before the meeting (a legal requirement). Moreover,the company did not provide any disaster managementplan and risk mitigation initiatives for the mining area. Thesecond public hearing was held on March 24 th and theresidents again told the officials that they were against thelease because any mining activity in the area would destroytheir forests, horticulture plantation and contaminate thenatural water source of the area.The company, alleges Ramesh Gauns, who leads theprotest against mining, presented false information to getthe lease. The Portuguese granted this mining ‘concession’in 1953 and it was operational till 1956. A mining leaselapses if is not in operation for two years. To circumvent thisrule, Zantye said there was some mining activity in this areabetween 2001-03. Gauns claims that the Directorate ofMines and Geology also fudged reports to show that 15tonnes of manganese was mined in this period.“Does this area look like there was mining in 2003?” heasks as we walk through the proposed mining lease area.The area is thickly forested and most of the old mining pitshave a thick veil of green cover around them. “The BicholimRiver meets the Mandovi, one of Goa’s main rivers,downstream. The catchment area of the river is rich inbiodiversity. Any mining activity will pollute the river anddestroy 21 perennial wells. In fact, the EIA report submittedby Zantye does not mention Vavati and Vathadeo220 THE IIPM THINK TANK

I NDIA BETWEEN WORLDSvillages, not even the Bicholim river. Moreover, theyconcealed that this is a flood-prone area,” he added. “Thereare many government projects (including watersheddevelopment projects) running in the 72 hectares thatwould be taken over by the company. And, all these projectsare financed by public money. Is anyone bothered?”Questions Umaraye. The case is now with the NationalEnvironment Appellate Authority. “This is the only case inGoa where a company has not been able to start productioneven though they managed to get an environmental clearancealmost a year ago. That says a lot about the convictionof our struggle,” says Gauns. “Goa is considered a developedstate. But scratch the surface, you will see that only afew people (read: owners of mining companies) have all themoney. The economic boom has hardly touched us,” headds ruefully. And, Gauns is not the only one questioningthis trajectory of growth.SAVING ‘NIYAM RAJA’Thousands of kilomtres away,in Orissa’s Kalahandi district,Dongria Kondh tribals arefighting a battle against aUK-based company that wants to mine the bauxite-richNiyamgiri hills. The tribals of the Niyamgiri area claim thatmining would damage the bio-diversity of the region andhave a negative impact on their livelihood opportunities.Moreover, they consider the top portion of the hill, whichthey call ‘Niyam Raja’, sacred. But for the company,Vedanta Aluminum Limited (VAL), Niyamgiri holds hugepromise: it has got enough bauxite to feed the company’srefinery at Lanjigarh for the next two decades. The company’splans in Orissa include a one-million-tonne aluminumrefinery, a smelter plant and a 100MW power plant tobe set up at the estimated cost of Rs 4,000 crore. However,a little examination of the case will throw up some intriguingfacts. Although an environmental clearance was grantedto the project in 2004, in 2007 a Central EmpoweredCommittee (CEC), which was set up by the SC, held that itwas obtained by concealing vital facts. The CEC report saidthat mining the Niyamgiri hills will lead to deforestation,destruct ecosystems and dry up water sources that feed twomajor rivers.It added: “Niyamgiri is a very rich forest from biodiversitypoint of view. A proposal has already been approved in theworking plan to declare this area as a sanctuary. It wasfurther revealed that the State Government has made a proposalto include this area in the proposed new ElephantReserve. Further, the hills form the origin of Vamsdharariver. The rivulets coming across these hills are source ofwater for the local communities. Any mining in this area isbound to destroy the biodiversity and affect the availabilityof water for the local people. The question of pollution ofVamsdhara river is also there. Under these circumstances,alternative sources of ore should be explored for theproject.” Based on this and other reports, the Norwegiangovernment’s Pension Fund-Global decided to sell off itsstake in Vedanta Resources Plc, the parent company ofVAL. The reason: “…the company seems to lack interest inand willingness to do something about the serious andlong-term damage that itsoperations inflict in peopleand environment”. Thefund, which is the secondlargest sovereign wealthfund in the world and hasone of the best disclosurepolicies and ethical standards, had invested around $14million in the company.Yet, the Supreme Court in a ruling in 2007 refused toscrap the mining lease; it only asked for guarantees that theIndian arm of Vedanta Resources Plc, Sterlite Industries,would be involved in the operation of the controversialplant. Referring to Norway’s action against company, thecourt said: “We cannot take the risk of handing over animportant asset into the hands of the company unless weare satisfied about its credibility.” The judges said that itwas “not inclined to clear” the project involving VedantaAluminium. But at the same time, it gave “liberty” toSterlite Industries “to move this court if they agree tocomply with the modalities suggested by this court” for thesame project.But people familiar with the case say that this guaranteedoes not amount to anything because behind the “corporateveil, it is Vedanta Plc which will control the operations”.The company denies that mining will disturb the naturalecosystem and says that it has a multi-crore rehabilitationpackage in place. “There is no basic infrastructure inThere is no denying the fact thatthere are many people out therewho see themselves only as afootnote in the India growth storyTHE INDIA ECONOMY REVIEW221

G ROUND REALITIESKalahandi: no schools and hospitals. We will change theface of the district,” C.V. Krishnan, Head, Business Development,Sterlite Industries, told me.On the rehabilitation package offered by the company,however, the CEC panel had said: “The rehabilitationpackage for the displaced persons given by the user agencyis not in the interest of sustainable livelihood of the localcommunities as no land has been given for grazing purposes,raising agricultural crops and carrying out other incomegenerating activities, etc. The location of the rehabilitationcolony has been decided totally ignoring the interest of theconservation of forests. It is just a few meters away from theNiyamgiri Reserved Forest. Adverse impact of this colonyand the labour force staying near the forest is alreadyvisible. The team saw four stumps of freshly cut sal trees inthe Niyamgiri forests”.A key issue in the case is: do tribals stay in Niyamgiri?“There is no habitation on the hill and therefore there is noquestion of displacement,” Krishnan told me at Lanjigarh.However, when I visited a hamlet located just 200 metersfrom the Vedanta officers’ colony, most talked abouthamlets existing in hill. “Yes, there are tribals on the otherside of the hill. There are small hamlets spread on the otherside of the hill,” says a sharecropper, a ‘stakeholder’ of theregion. In the same breath, he added: “We don’t stay there,but we depend on Niyamgiri for fruits and medicinal herbs.Without trees in Niyamgiri, rainfall patterns will also beaffected”. Recently, the Orissa Pollution Control Board alsopulled up the company for not heeding its advice on numberof issues. In its report, the board observed that the red-mudpond has not been constructed as per design specificationsand there is clear indication of groundwater contaminationin the area. The report says the seepage from waste ponds isalarming and is expected to further deteriorate, when theplant goes into full production. The plant is currentlyoperating at 30% capacity.In another ruling on April 29, 2008, the SC said that themining project should be handed over to a “non-profitcompany” in which the stake of the Vedanta group would beno more than 24.5%. A special purpose vehicle would be setup in which the state government would hold 51 per centstake while the remaining shares would be split equallybetween Orissa Mining Corporation and Sterlite. Theprofits earned by the SPV would not be distributed asdividends to the shareholders but be spent for tribals of thearea”. The final ruling will come sometime in July.This is not the only project that has run into problems. InOrissa itself, there are protests against Posco and UtkalAlumina International Limited. In other parts of thecountry, there have been protests against land acquisitionfor Special Economic Zones, power plants and dams. Manysee these protests as anti-development and stage-managedby certain organisations. Whatever may be the case, there isno denying the fact that there are many people out therewho see themselves only as a footnote in the India growthstory. And, herein lies the need to make the mantra ofinclusive growth a success.Endnotes1http://www.business-standard.com/common/news_article.php?leftnm=lmnu2&subLeft=1&autono=313859&tab=r2Minor Forest Produces are usufructs/utility products ofplant, animal and mineral origin except timber obtainablefrom forests and afforested/domesticated land area. Ifmanaged properly, MFPs like tendu leaves or imli couldbe good revenue earners for states and source of incomefor the people.(The views expressed in the write-up are personal and does notreflect the official policy or position of organisation. The authorcan be contacted at kumkumdasgupta@gmail.com).222 THE IIPM THINK TANK

U RBAN ECONOMICSTOWARDS MORE PRO-POORTOWARDS MORE PRO-POORLOCAL GOVERNMENT INURBAN AREASJharna Pathak *Associate Faculty, Gujarat Institute of Development Research (GIDR), Ahmedabad224 THE IIPM THINK TANK

M ICRO MACRO1. IntroductionUrban poverty is much influenced by what city or municipalgovernments do or don't do; also by what they can or can'tdo. This is often forgotten – as discussions of poverty andways to reduce poverty tend to concentrate on the role ofnational government and international agencies. There is atendency to view poverty only in terms of inadequate incomeand consumption. As we widens the understanding of termpoverty by bringing in its purview poor quality or insecurehousing, inadequate services (water, sanitation, health care),the role of local government has been given little importance,there will be a greater role for the local government tocontribute to poverty reduction.The Constitution (74 th ) Amendment Act, 1992 was aimedat giving a more focused thrust to decentralization and thecreation of a democratic governance structure with theintention that local responsibilities be managed at the locallevel. Since then, the functions of local government haveexpanded to include social and economic development ofcommunities and the promotion of a safe and healthyenvironment. In order to encourage active involvement ofcommunities, Ahmedabad Municipal Corporation (AMC)had started the Slum Up-gradation Project (SUP). A fixedcontribution of Rs. 2,000 is to be paid per dwelling unit bythe community, the NGO is expected to share 30 percent ofthe cost of communitydevelopment @300 perdwelling unit and the rest isborne by the AMC. In thispaper, the aim is to understand• the extent to which a localbody (AMC in the present case) provides services to itsbeneficiaries. This will throw light on efforts that contributeto good governance.• to understand the extent to which intervention by upgradingskills of the slum dwellers would enable them to getbetter livelihood options.Among policy makers, there isalways a tendency to view povertyonly in terms of inadequateincome and consumptionare located in AMC limit, a detailed discussion on the studyarea took place with the officials of the AMC. It was jointlydecided with these officials to take up six slums namely ValiNi Chali, Naseebnagar, Ummed-mukhi ni Chali, Hakim niChali, Juni Chali and Soneria ni Chali for the case study.The aim was to understand the performance of the AMC inproviding basic services to its people. Selection of householdswas based on random sampling method.The total number of households of these slums comes to2,450. Out of these households, Soneria ni Chali is thelargest one comprising nearly half the households containedin the study. A baseline survey was conducted in ten percentof the total households. Households were selected proportionateto the total population of the slums. 259 householdsin all were interviewed in these clusters, which has thepopulation of 1,499. Performance of the AMC in providingvarious services to its people is examined with the help offollowing indicators:• Socio-economic conditions of the people residing in sixslums included in this survey.• Perception of these people about the services provided bythe AMC.• Willingness of the people to pay for the services renderedby AMC;• Their responses regarding the need for new infrastructure• Their responses regardingthe maintenance of theexisting and/or new infrastructure;• Their willingness toparticipate in the activitiesand decisions affecting them;Additionally focussed group discussions were carried outwith slum dwellers and officials of AMC. These discussionsaimed at understanding whether slum dwellerswished to participate in drainage facilities provided byAMC, advantages and disadvantages of participation byslum dwellers and so on.2. Research MethodologyTo understand the above objective, baseline householdsurvey was undertaken of sample households randomlyselected from the six selected slums of Ahmedabad MunicipalCorporation (AMC). In order to ensure whether slums3. Analysis Of Survey DataAnalysis of the survey data is presented in three sections.Section one depicts basic characteristics of the study area.Section two elaborately examines occupational activities,skills possessed by the members of the households includedTHE INDIA ECONOMY REVIEW225

U RBAN ECONOMICSTable 1: Distribution Of Population In The Study AreaNames of Slums Total households ** Totalsamplehouseholds% to total Populationof the ChaliTotal populationof the samplehouseholdsTotal (% tototalpopulation)Averagesize of thehouseholdMale Female TotalVali ni Chali 200 21 54.8 45.2 146 9.7 6.95Naseeb Nagar 100 16 54.4 45.6 103 6.9 7.92Ummed Mukhi ni Chali 100 13 48.3 51. 7 60 4.0 5.45Hakim ni Chali 150 13 52.4 47.6 82 5.5 6.31Sonariya ni Chali 1,200 120 54.9 45.1 637 42.5 4.98Juni Chali 700 76 51.6 48.4 471 31.4 6.93Total (Sum) 2,450 259 53.4 46.6 1,499 100.0 5.90** Source: Data obtained from Ahmedabad Municipal Corporation.in the study. It also examines material possessions likevarious equipments, houses and so on. Perceptions ofpeople about the role of their participation in variousactivities of local body and its impact if any are discussed insection three.3.1 Section IThe baseline survey provides detailed information concerninghouseholds like; religion, major occupations, activitystatus, income earned, skills, training necessary to upgradeskills, migration status, ration card held, family size, amountof loan taken, details of houses and equipments owned andso on.3.1.1. Demographic Characteristics Of The StudyArea (Including Surveyed Households)Table 1 shows that the total population of the 259 householdsis 1,499. Their average size works out to 5.9. It ishighest in Naseebnagar (7.4), and lowest (5.5) in UmmedMukhi ni Chali). Population shows an adverse relationshiptowards females (Table 1). Contrary is the observation inUmmed Mukhi ni Chali where high percentage of femalesto total population (nearly 52 percent) indicates favorablesex ratio.Table 2 shows that 43 per cent of the households areMuslims and the rest Hindus. Soneria ni Chali is the onlyHindu dominated chali. The other chalis are dominated byMuslim households.Table 3 shows that nearly 21 percent of the total populationof the study area is illiterate. Among Hindus illiteratesare almost 17% while among Muslims illiterates constitute24.54% which is a difference of 6.5%. Looking at primaryeducation difference narrows down to almost 4% butcontinues to exist (These figures are arrived by collapsingfigures taken from five chalis excluding Sonariya ni Chali.)Table 4 shows comparative education level of males andTable 2: Percentage Distribution Of The People Residing In Slums By ReligionReligionNames of SlumsVali ni chali Naseeb Nagar Ummed- Mukhini ChaliHakim ni ChaliSonariya niChaliJuni ChaliTotalHindu 100.0(637)Muslims 100.0(146)Total 8.5(146)100.0(103)5.4(103)Note: Figures in parentheses indicate number of observations100.0(60)4.2(60)100.0(82)5.0(82)50.6(637)100.0(471)26.3(471)42.49(637)57.51(862)100.0(1,499)226 THE IIPM THINK TANK

M ICRO MACROTable 3: Percentage Distribution Of Total Persons Residing In Slums By The Level Of EducationEducation levelVali ni chali1-5 th standard 23.97(35)5-7 th standard 19.86(29)7-10 th standard 22.60(33)10-12 th standard 6.16(9)12+ standard 10.27(15)Illiterate 17.12(25)Total (N) 100.0(146)NaseebNagar17.48(18)25.24(26)18.45(19)5.83(6)6.80(7)26.21(27)Ummed- Mukhini Chali18.33(11)16.67(10)30.00(18)11.67(7)1.67(1)21.67(13)100.0 (103) 100.0(60)Names of SlumsHakim ni Chali Sonariya ni Chali Juni Chali Total13.41(11)19.51(16)13.41(11)8.54(7)27.00(172)16.95(108)26.69(170)5.34(34)----- 7.06(45)45.12(37)100.0(82)16.95(108)100.0(637)27.18(128)17.20(81)20.38(96)5.94(28)7.86(37)21.44(101)100.0(471)25.02(375)18.01(270)23.15(347)6.07(91)7.00(105)20.75(311)100.0(1499)Note: Figures in parentheses indicate number of observationsTable 4 : Percentage Distribution Of Males And Female Residing In Slums By The Level Of EducationEducationlevelVali ni chaliNaseeb NagarUmmed Mukhini ChaliNames of SlumsHakim niChaliSoneria nichali Juni chali TotalMale Female Male Female Male Female Male Female Male Female Male Female Male Female1-5 thstandard 25.0 22.72 21.42 12.76 31.03 6.45 11.62 15.38 26.0 28.22 25.10 29.38 24.71 25.355-7 thstandard 18.75 21.21 19.64 31.91 13.79 19.35 18.60 20.51 17.14 16.72 16.87 17.54 17.35 18.767-10 thstandard 31.25 12.12 23.21 12.76 27.58 32.25 13.95 12.82 33.14 18.81 23.45 17.10 28.08 17.4710-12 thstandard 7.5 4.54 8.92 2.12 6.89 16.12 9.30 7.69 8.0 2.09 6.58 5.63 7.61 4.2912+standard 7.5 13.63 10.71 2.12 ------- 3.22 ------- ------- 6.57 7.66 7.81 7.89 6.74 7.30Illiterate 10.0 25.75 16.07 38.29 20.68 22.58 20.68 43.58 9.14 26.48 20.16 20.80 15.48 26.79Total (N)100.0(80)100.0(66)100.0(56)100.0(47)100.0(29)100.0(31)100.0(29)100.0(39)100.0(350)100.0(287)100.0(243)100.0(228)100.0(801)100.0(698)GrandTotal25.0118.0123.146.077.020.74100.0(1499)Note: Figures in parentheses indicate number of observationsfemales in each Chali. It is clear that in all chalis women areless educated. Across communities, only 9.14% Hindu malesare illiterate while among Muslims percentage is as high as20.4%. Illiteracy among women of both communities isalmost equal.Though 25 percent have received education between oneto five standards as per table 4 it appears that women arebetter educated if one looks at education from 1 to 7THE INDIA ECONOMY REVIEW227

U RBAN ECONOMICSare females.Table 5 indicates that of the total households under study,76 (nearly 29 percent) are migrants. Half of them aremigrants from Uttar Pradesh followed by those from otherstates viz Bihar, Rajasthan, Madhya Pradesh and Maharashtra(25%). Nearly 86 percent of the households have migratedin search of work (Table 5). Work is the sole reason formigration reported by migrants in all these challis.standards that is up to primary school only. However, thereis lots of disparity within chalis, e.g. in Ummed Mukhi niChali female education is as low as 6.45% while that ofmales is 31.03%. So it is inadvisable to generalize. Surprisingly,more girls in Ummed Mukhini chali seem to studyup to higher secondary school. But then it is clear that manygirls do not study In Ummed Mukhini chali. The number ofilliterate males and females is almost equal in these twochalis. However, large percentage among all illiterates3.2. SECTION IIThis section presents information about economic conditionof the households. It includes their income generatingactivities and other related issues like property, skillspossessed, other assets etc. To be specific, the informationincludes following items;• Occupational activity• Skills• Type and number of houses• Material possessions (two-wheeler, four-wheeler, implementsand so on)• Need for loan• Ability to save• Membership in saving schemes and other cooperativesTable 5: Distribution Of Migrant Households From Outside Gujarat And Within GujaratMigrants FromVali ni chaliUttar Pradesh 10.0(1)Other states* 50.0(5)Other parts ofGujarat20.0(2)Don’t know 20.0(2)Total 13.2(10)Reasons For MigrationWork 60.00(6)Other reasons 40.00(4)Total 12.7(10)Naseeb Nagar33.3(2)50.0(3)16.7(1)7.9(6)66.67(4)33.33(2)7.6(6)Ummed- Mukhini Chali100.0(1)1.3(1)100.00(1)Hakim niChali50.0(1)50.0(1)2.6(2)Sonariya niChali Juni Chali Total59.6(28)12.8(6)27.7(13)61.8(47)100.00 (2) 93.62(44)0.00 0.00 6.38(3)1.3(1)2.5(2)62.0(47)60.0(6)30.0(3)10.0(1)13.2(10)70.00(7)30.00(3)13.9(10)50.0(38)25.0(19)22.4(17)2.6(2)100.0(76)85.53(65)14.47(11)100.0(76)Note: Figures in parentheses indicate number of observations.* Other states include Bihar, Rajasthan, Madhya Pradesh and Maharashtra.228 THE IIPM THINK TANK

M ICRO MACROTable 6: Percentage Distribution Of Workers In Various ActivitiesSlums Self employment RegularemploymentVali ni chali Male 19.64(11)Female 13.51(5)Total 17.20(16)Naseeb Nagar Male 16.22(6)* Others include music, art and craft, carpentry, plumbing, wood smiths, pottery,** 26 cases are not reportedNote: Figures in parentheses indicate number of observations.7.14(4)4.30(4)10.81(4)Casual laborer Others* Total (N)35.71(20)2.70(1)22.58(21)45.95(17)Female 19.23(5)Total 9.52(6)Ummedmukhi Male 50.00(11)Female 14.2(3)Total 32.56(14)Hakim ni chali Male 45.00(9)Female 22.73(5)Total 33.33(14)Soneria ni chali Male 15.20(45)Female 6.83(17)Total 11.38(62)Juni Chali Male 16.77(28)Female 8.98(15)Total 12.87(43)Total Male 18.39(110)Female 8.62(45)Total 13.84(155)6.35(4)4.55(1)4.76(1)4.65(2)20.00(4)9.09(2)14.29(6)4.39(13)2.39(13)5.99(10)1.20(2)3.59(12)6.02(36)0.96(5)3.66(41)34.92(22022.73(5)28.57(6)25.58(11)15.00(3)4.55(1)9.52(4)42.91(127)17.27(43)31.19(170)40.12(67)16.17(27)28.14(94)39.97(239)15.90(83)28.75(322)37.50(21)83.78(31)55.91(52)27.03(10)80.77(21)49.21(31)22.73(5)52.38(11)37.21(16)20.00(4)63.64(14)42.86(18)37.50(111)75.90(189)55.05(300)37.13(62)73.65(123)55.39(185)35.62(213)74.52(389)53.75(602)**5637933726632221432022422962495451671673345985221,120THE INDIA ECONOMY REVIEW229

U RBAN ECONOMICSTable 7: Percentage Distribution of Earners In Various ActivitiesNames of Slums Tailoring Driving Welding /machinerepairingRolling Incencesticks / makingboxesShopretailerPainter/CarpenterTotal (N)WorkerPopulationRatio(WPR)(% to total N)Vali ni chali Male 40.63(13)12.50(4)34.38(11)9.38(3)3.13(1)32 40.0Female 55.56(5)33.33(3)11.11(1)9 13.6Total 43.90(18)9.76(4)26.83(11)14.63(6)4.88(2)41 28.1Naseeb Nagar Male 41.67(10)20.83(5)16.67(4)4.17(1)16.67(4)24 42.9Female 28.57(2)71.42(5)7 14.9Total 38.71(12)16.13(5)12.9(4)19.35(6)12.90(4)31 30.1Ummedmukhi Male 58.82(10)17.65(3)17.65(3)5.88(1)17 58.6Female 54.55(6)27.27(3)9.09(1)9.09(1)11 35.5Total 57.14(16)10.71(3)10.71(3)14.29(4)3.57(1)3.57(1)28 46.7Hakim ni chali Male 43.75(7)18.75(3)18.75(3)18.75(3)16 37.2Female 50.00(6)50.00(6)12 30.8Total 46.43(13)10.71(3)10.71(3)21.43(6)10.71(3)28 34.1Soneria nichaliMale 30.14(66)12.33(27)31.96(70)4.57(10)8.22(18)12.79(28)219 62.6Female 22.31(27)76.03(92)1.65(2)121 42.2Total 27.35(93)7.94(27)20.59(70)30.0(102)5.29(18)8.82(30)340 53.4Juni Chali Male 25.47(27)15.09(16)32.08(34)8.49(9)4.72(5)14.15(15)106 43.6Female 24.07(13)70.37(38)3.70(2)1.85(1)54 23.7Total 25.00(40)10.0(16)21.25(34)29.375(47)4.38(7)10.00(16)160 34.0Total Male 32.13(133)14.01(58)30.19(125)5.80(24)6.76(28)11.11(46)414 51.7Female 27.57(59)68.69(147)1.87(4)1.87(4)214 30.7Total 30.57(192)9.23(58)19.90(125)27.23(171)5.10(32)7.96(50)628 41.9Note: Figures in parentheses indicate number of observations.230 THE IIPM THINK TANK

M ICRO MACROTable 8: Distribution Of Workers By Income EarnedSlums> or equal to1,0001,001-2,000 2,001-3,000 3,001-4,000 4,000 + TotalVali ni chali Male 14.71(5)41.18(14)23.53(8)2.94(1)17.65(6)80.95(34)Female 62.50(5)25.00(2)12.50(1)19.05(8)Total 23.81(10)38.10(16)21.43(9)2.38(1)14.29(6)100.00(42)Naseeb Nagar Male 10.00(2)65.00(13)20.00(4)5.00(1)86.96(20)Female 33.33(1)66.67(2)13.04(3)Total 13.04(3)65.22(15)17.39(4)4.35(1)100.00(23)UmmedMukhi ni ChaliMale 15.79(3)42.11(8)31.58(6)10.53(2)70.37(19)Female 87.50(7)12.50(1)29.63(8)Total 37.04(10)33.33(9)22.22(6)7.41(2)100.00(27)Hakim ni Chali Male 7.69(1)38.46(5)23.08(3)15.38(2)15.38(2)76.47(13)Female 75.00(3)25.00(1)23.53(4)Total 23.53(4)29.41(5)23.53(4)11.76(2)11.76(2)100.00(17)Soneria ni chali Male 17.65(33)50.27(94)25.67(48)3.74(7)2.67(5)64.26(187)Female 93.27(97)6.73(7)35.74(104)Total 44.67(130)34.71(101)16.49(48)2.41(7)1.72(5)100.00(291)Juni chali Male 17.65(18)49.02(50)19.61(20)5.88(6)7.84(8)68.92(102)Female 76.09358.70(4)10.87(5)4.35(2)31.08(46)Total 35.815336.49(54)16.89(25)5.41(8)5.41(8)100.00(148)All Challis Male 16.53(62)49.07(184)23.73(89)4.80(18)5.87(22)68.43(375)Female 85.55(148)9.25(16)4.05(7)1.16(2)31.57(173)Total 38.32(210)36.50(200)17.52(96)3.65(20)4.01(22)100.00(548)** Non-reporting cases.Note: Figures in parentheses indicate number of observations.THE INDIA ECONOMY REVIEW231

U RBAN ECONOMICSTable 9: Distribution Of Earners Possessing Skills In Various ActivitiesChaliVali ni chali(N=146)Naseeb Nagar(N=103)Ummed Mukhi niChali (N=60)Hakim ki chali(N=82)Soneria Ni Chali(N=637)Juni chali(N=471)All chali(N=1,499)Tailoring/embroideringetc.Male 50.00(7)Female 88.89(8)Total 65.22(15)Male 50.00(1)Female 100.00(2)Total 75.00(3)Repairinggadgets14.29(2)8.70(2)Skills in Various ActivitiesCarpentry/ Welding Others Totalplumbing7.14(1)4.35(1)28.57(4)17.39(4)Male 100.00(1)Female 100.00(6)Total 85.71(6)Male 80.00(4)Female 100.00(5)Total 90.00(9)Male 72.22(13)Female 97.72(43)Total 90.32(56)Male 64.29(9)Female 100.0(27)Total 87.80(36)Male 62.96(34)Female 97.85(91)Total 85.03(125)16.67(3)4.84(3)21.43(3)7.32(3)14.81(8)5.44(8)5.56(1)1.61(1)3.70(2)1.36(2)14.29(1)20.00(1)10.00(1)5.56(1)1.61(1)7.14(1)2.44(1)14.81(8)5.44(8)11.11(1)4.35(1)50.00(1)25.00(1)2.27(1)1.61(1)7.14(1)2.44(1)3.70(2)2.15(2)2.72(4)60.87(14)39.13(9)100.00(23)50.00(2)50.00(2)100.00(4)14.29(1)85.71(6)100.00(7)50.00(5)50.00(5)100.00(10)29.03(18)70.97(44)100.00(62)34.15(14)65.85(27)100.00(41)36.73(54)63.27(93)100.00(147)Non-reporting cases.Note: Figures in parentheses indicate number of observations.232 THE IIPM THINK TANK

M ICRO MACROTable 10: Details Of Types Of Ration Card Owned By HouseholdsType of rationcardVali ni chaliNaseeb NagarUmmed-Mukhi niChaliSlumsHakim niChaliSonariya niChali Juni Chali TotalBelow PovertyLine - BPL33.3(7)43.7(7)45.5(6)23.1(3)14.17(17)23.68(18)22.38(58)Above PovertyLine - APL38.1(8)43.7(7)45.5(6)76.9(10)50.0(60)63.16(48)53.67(139)N.A 28.6(6)12.5(2)9.1(1)35.83(43)13.16(10)23.94(62)Total 8.49(21)6.17(16)5.01(13)5.02(13)46.33(120)29.34(76)100.00(259)Note: Figures in parentheses indicate number of observations.N.A: Not applicable3.2.1. Status of Activity, Occupation and IncomeOut of total workers, 29 percent are casual workers (table 6).About 14 percent are self-employed while only 4 percenthold regular employment. Unlike other chalis, nearly 33percent of workers in Ummed Mukhi Ni Chali and morethan 33 percent in Hakim ni chali are self employed (Table6). Half of them are male workers. Nearly 54 percentworkers are engaged in other activities. Female workers(74.5 percent) are significantly found in this category. Thiscategory comprises of occupations like music, art and craft,carpentry, plumbing, wood smithy, pottery, tailoring, and soon. As the individual frequency for each of these activities islow, all these occupations are grouped into one categorynamed “Others”. The following table shows the distributionof the 'others' mentioned in the table above.Out of totalpopulation of 259 households, nearly 42 per cent are suchworkers (Table 7) Worker Population Ratio (WPR) is higheramong males than females (Table 7). From table 7, it is alsoclear that, 31 percent and 27 percent workers are engaged intailoring and rolling incense sticks (bidis) respectively.Workers in all chalis show a somewhat similar trend. Morethan half (69%) female workers are engaged in rollingincense sticks.Analyses of Income earned by workers show that less thanhalf of them (38 percent) earn less than Rs. 1000/- permonth (Table 8). Among them, nearly 86 percent arefemale workers. Only 8 percent of workers earn more thanRs. 3000/-3.2.2 SkillsCasual workers who depend upon income from tailoring orincense sticks for their livelihood have low income. It isassumed that these workers would willingly diversify to otheractivities in order to supplement their low income from theirprimary activity.Out of the total population, 147 persons possess skills invarious activities. (Table 9) Nearly 85 percent of them possessskills in stitching, embroidery, khatli work for zardozi, patchwork and so on. This is found in all chalis. Among them,females are more skillful in these activities Discussion withmembers of the households also brought out the fact thattraining would assist them in updating their skills, which theyalready possess, and this in turn will supplement their income.THE INDIA ECONOMY REVIEW233

U RBAN ECONOMICSBPL And APL CardsAt present, the Food and Civil Supplies Departmentimplements some welfare schemes sponsored by the Governmentof India such as schemes for households livingBelow Poverty line (BPL) and Above Poverty Line (APL)through its well equipped Public Distribution Networkstretching all over the State. The objective of this welfarescheme is to maintain overall stability of general price leveland to ensure adequate supply of essential commodities inthe State. In the study area, nearly half the householdspossess APL Ration Cards, which normally cover the lowermiddle class people of the society (Table 10).Table 11 : Details About Equipments Owned, Amount Of Loans Taken, Ability To Save, Membership InCooperatives Of The HouseholdsDetails aboutEquipmentsOwnedVali ni chaliTV, freeze, cycle 76.2(16)TV and twowheelerTV and fourwheeler14.3(3)9.5(2)Total 10.8(21)NaseebNagar80.0(8)10.0(1)10.0(1)5.1(10)Note: Figures in parentheses indicate number of observations.NA: Not Available, *Others are non-reporting casesUmmed-Mukhi niChali71.4(5)28.6(2)3.6(7)Responses showing whether households have obtained loanYes loan isobtained4.9(3)No did not take 9.9(19)7.3(14)3.3(2)4.7(9)Hakim niChali54.5(6)45.5(5)5.6(11)3.3(2)5.8(11)Sonariya niChali Juni Chali Total63.0(51)34.6(28)2.5(2)41.5(81)80.3(49)39.8(76)N.A 100.0(1)Total 8.7(22)5.5(14)Responses showing the source of obtaining loanBank/LIC/PO 100.0(4)4.3(11)50.0(2)Mahila Mandals 50.0(2)5.1(13)100.0(1)49.8(126)71.0(22)22.6(7)N.A 6.5(2)Total 8.5(4)8.5(4)Responses showing whether households have Capacity to SaveYes 18.2(4)No 81.8(18)Total 8.49(22)100.0(14)5.41(14)36.4(4)63.6(7)4.25(11)2.1(1)7.7(1)92.3(12)5.02(13)66.0(31)23.7(31)76.3(100)50.58(131)72.3(47)23.1(15)4.6(3)33.3(65)8.2(5)68.2(133)27.7(54)4.1(8)100.0 *(195)24.1(61)32.5 (62) 75.5(191)0.4(1)26.5(67)57.1(4)28.6(2)14.3(1)14.9(7)100.0 *(253)68.1(32)25.5(12)6.4(3)100.0 (47)(18 % out of total25911.8 (8) 18.5(48)88.2(60)26.25(68)81.5(211)100.00(259)234 THE IIPM THINK TANK

M ICRO MACROTable 12: Details Of Type Of Houses Possessed By The Householders Under StudyType ofHousesUmmed-Mukhi niChaliSlumsVali ni chaliNaseebNagarHakim niChaliKachcha 3.62.41.2(3)(2)(1)Pucca 11.9 8.85.67.5(19) (14) (9)(12)Total 9.0 5.74.55.3(22) (14) (11)(13)Ownership Status Of Houses Owned By Householders Who Possess One HouseOwn 8.51(16)Rent 8.45(6)Total 8.49(22)5.32(10)5.63(4)5.41(14)3.72(7)5.63(4)4.25(11)5.85(11)2.82(2)5.02(13)Sonariya niChali Juni Chali Total82.1(69)29.4(47)47.5(116)48.94(92)54.93(39)50.58(131)Ownership Status Of Houses Owned By Householders Who Possess The Second HouseOwn 3.7(1)Total 3.7(1)92.6(25)92.6(25)Number Of Rooms In The House Owned By Householders Who Possess One HouseOne room 8.91(18)Two rooms 6.25(3)Three rooms 11.11(1)Total 8.49(22)4.46(9)10.42(5)5.41(14)Note: Figures in parentheses indicate number of observations.* The difference is not reported cases4.95(10)2.08(1)4.25(11)4.46(9)6.25(3)11.11(1)5.02(13)52.48(106)45.83(22)33.33(3)50.58(131)10.7(90)36.9(59)27.9(68)27.66(52)22.54(16)26.25(68)3.7(1)3.7(1)24.75(50)29.17(14)44.44(4)26.25(68)34.4(84)65.6(160)100.0 *(244)72.6(188)27.4(71)100.0(259)100.0(27)100.0(27)78.0(202)18.5(48)3.5(9)100.0(259)3.2.3. Type Of House Structure, Material Possession,Status Regarding Loan, Ability To Save AndMembership In Saving SocietiesIn an attempt to obtain a measure of wealth of the households,questions were asked about the ownership of certainequipments. These include two-wheelers, television, refrigerator,four-wheelers and so on (Table 11). Of the totalhouseholds, 195 (nearly 75 percent) possess these equipments.Among them a majority (68 %) own television,refrigerator and cycle. However, eight percent of the householdsown four wheelers along with television and otherequipments.When asked whether they have taken loan from varioussources, a large majority (75.5%) of them replied in negative.Only about ¼th (24.1%) have done so. The main sources forloans are public sector institutions like banks, LIC and postoffice (68.1%) Consistent with the poor earning capacity ofthe residents of these slums, it is understandable that a verysmall number (18.5%) of them are able to save something.There is no household from Naseebnagar that has savedsome money.In addition, the respondents were asked about the type ofhouses they live in, ownership of houses, number of roomsand number of houses owned by them (table - 12). A fairlylarge number (65.6%) of houses are pucca whereas the restare kachcha ones. Slum wise, it is noteworthy to find that aTHE INDIA ECONOMY REVIEW235

U RBAN ECONOMICSTable 13 : Responses Of The Households Regarding The Functions Of Municipal CorporationResponses regarding Role of theMunicipalityVali ni chaliNaseebNagarUmmed-Mukhi niChaliHakim niChaliSonariya niChaliJuni ChaliTotalDoes not perform its functions,No efforts are made to generateemployment63.6(14)42.9(6)36.4(4)53.8(7)31.3(41)32.4(22)36.3(94)AMC clean gutter, we have tocall private agency for cleaninggutters4.5(1)3.8(5)8.8(6)4.6(12)Responds after repeatedapplications, charges money toclean gutters9.1(1)7.7(1)9.9(13)13.2(9)9.3(24)Comes and cleans the streetsonly27.3(6)35.7(5)18.2(2)15.4(2)40.5(53)20.6(14)31.7(82)Sprays insecticides, givesmedicines4.5(1)21.4(3)36.4(4)23.1(3)14.5(19)25.0(17)18.1(47)Total 8.5(22)5.4(14)4.2(11)5.0(13)50.6(131)26.3(68)100.0(259)Note: Figures in parentheses indicate number of observations.large number (59.5%) of houses in Soneriya ni Chali (whichis exclusively populated by Hindus) are Kachcha.Most of the residential houses (72.6%) are owned ones. Veryfew residents (27 out of 259 or 10.4%) own more than onehouse. Those who posses two houses live in Soneriya ni Chaliand Juni Chali. On one side a majority of houses in SoneriyaniChali are Kachcha and the same chali has some residentsowning more than one house.The houses are very modestin that a large number(78.0%) of them are oneroomstructures. Very few(18.5%) have two rooms andfewer still (3.5%) possessthree rooms.To sum up, a high percentage of people included in oursurvey are casual laborers earning low income. This in turnacts as a constraint to save. Their low economic condition isreflected in other indicators namely households with oneroom, number of houses owned and so on.3.3. Section III3.3.1. Functioning of the Municipal CorporationIn this section, certain variables that indicate efficientfunctioning of AMC are included. They are; satisfaction ofUnder SUP, participation by theslum households is considerablyweak w.r.t sharing of establishmentcost of basic infrastructurethe households towards AMC; efforts made by AMC toincrease people’s participation. Level of satisfaction of thehouseholds for the functioning of AMC is a clear indicatorthat measures latter's performance. Table 13 shows that 36percent of the householders opine that AMC has failed inproviding basic services like water, proper sanitation anddrainage facilities. 31 percent state that giving medicines isthe only work that AMC performs. Some households havecomplained that due to theinefficiency of the AMC,they have to pay money toprivate parties to clean theirdrainage. Apparently,households in our surveyhave not reported high levelof satisfaction with the work of AMC.Service wise analysis shows that 92 percent of the householdspossess water connection (Table 14). A majority ofthem are aware of the water tax that they pay along with theproperty tax. Thus, when asked whether they would like topay more for water, 80 percent households answered innegative. Nearly 68 percent of the households have betteraccess to water supply from AMC (Table 15). This is true forall chalis except Vali ni chali, Naseebnagar and UmmedMukhi ni Chali. Residents of Juni Chali report that they face236 THE IIPM THINK TANK

M ICRO MACROTable 14: Distribution Of Households Indicating Their Willingness To Get Water ConnectionWillingness to take water ConnectionVali ni chaliNaseebNagarUmmed-Mukhi niChaliHakim niChaliSonariya niChaliJuni ChaliTotalYes 28.6(6)14.3(2)18.2(2)7.7(1)1.9(2)5.9(4)7.2(17)No need for the connection 71.4(15)85.7(12)81.8(9)92.3(12)98.1(106)94.1(64)92.8(218)Total 8.9(21)6.0(14)4.7(11)5.5(13)46.0(108)28.9(68)100.0*(235)Distribution Of Households Indicating Their Willingness To Pay Water Charges.Yes 45.5(10)78.6(11)45.5(5)61.5(8)4.6(6)5.9(4)17.0(44)No 7.1(1)9.1(1)4.6(6)3.1(8)We are paying property tax and sodon’t want to pay more54.5(12)14.3(2)45.5(5)38.5(5)90.8(119)94.1(64)79.9(207)Total 8.5(22)5.4(14)4.2(11)5.0(13)50.6(131)26.3(68)100.0(259)Note: Figures in parentheses indicate number of observations.* The difference is not reported casesTable 15: Perception Of The Households Regarding Availability Of Water Adequately And RegularlyDo you get water adequatelyVali nichaliNaseebNagarUmmed-Mukhi niChaliHakim niChaliSonariyani ChaliJuni ChaliYes 42.9 (9) 50.0 (7) 36.4 (4) 23.1 (3) 84.0 (89) 67.6 (46) 67.8 (158)No 57.1 (12) 50.0 (7) 63.6 (7) 76.9 (10) 16.0 (17) 32.4 (22) 32.2 (75)Total 9.0 (21) 6.0 (14) 4.7 (11) 5.6 (13) 45.5 (106) 29.2 (68) 100.0 *(233)Note: Figures in parentheses indicate number of observations. * The difference is not reported casesTotalproblems related to water supply.Of the households who are not satisfied with the watersupply, nearly 55 percent complained about the use of motorpumps by some households. This and leakages due to oldpipelines are reasons for inadequate water supply to otherhouseholds (Table 16). Some of the households face problemof fetching water at night. Concern for bad quality ofwater is voiced by households residing in Juni Chali and Valini Chali (Table 16).A majority of the households possess basic infrastructurefacilities (Table 17). Of the households reporting problemsin accessing various facilities provided by AMC, a majority ofthem face problems concerning connections for electricityand clogging up of big drains (Table 17). Group discussionwith the slum-dwellers showed that Juni Chali face problemswith regard to electricity connection. A majority of thehouseholds are willing to pay electricity charges. (Table 17).Out of the total households who are unwilling to pay for theservices provided by AMC, a majority of them showed theirunwillingness to pay for big drains (Table 17).3.3.2. Health FacilitiesVarious private and public health care facilities are availablein proximity to the study area. From the discussion with thehouseholds it was clear that both private doctors and governmenthospitals are located within the radius of three kilometers.Due to proximity of both types of facilities 41 percentof the households use both of them; the rest use only privateTHE INDIA ECONOMY REVIEW237

U RBAN ECONOMICSfacilities (Table 18).The smooth functioning of AMC depends, among otherfactors on the nature and extent of participation by thecommunities. The very idea of participation was not acceptedby the households residing in slums. This is clear from thenumber of non reporting cases for questions pertaining totheir willingness to participate and its impact felt on theavailable services by AMC. Table 19 shows that 81 percent ofthe households prefer working in groups to making individualefforts to improve the basic services of AMC. When askedwhether residents are willing to share the cost that they areexpected to bear under SUP, majority of the residents ofJuni Chali are not willing to make any effort to improve theservices (Table 19). This was observed at the time of groupdiscussion also. They complained about the inadequateelectricity connections, irregular water supply and lack offacilities of big drains in their area. It was noted in the groupdiscussion that as AMC has failed to meet their basicTable 16: Reasons Given By Households For Not Being Satisfied With The Supply Of WaterReasonsVali nichaliNaseebNagarUmmed-Mukhi niChaliHakim niChaliSonariya niChaliJuni ChaliTotalPeople use motor/supply not reliable/getat night/old pipelines58.3(7)42.9(3)42.9(3)50.0(5)52.9(9)63.6(14)54.7(41)Water quality is bad 33.3(4)14.3(1)20.0(2)17.6(3)22.7(5)20.0(15)Adequate water but not in time 10.0(1)23.5(4)6.7(5)Have private connections whichcosts us more8.3(1)14.3(1)10.0(1)4.5(1)5.3(4)N.A 28.6(2)57.1(4)10.0(1)5.9(1)9.1(2)13.3(10)Total 16.0(12)9.3(7)9.3(7)13.3(10)22.7(17)29.3(22)100.0(75)*Note: Figures in parentheses indicate number of observations.N.A: Not applicable* Rest are satisfied with the water supplyTable 17: Householders’ Responses About Electricity Connection In The Study AreaResponse Supply of electricity Solid waste management Small drains Big drainsDo you possess electricity connection?Yes 90.9(210)No 9.1(21)Total 100.0(231)*Are you willingness to pay for connection?Yes 97.9(232)No 2.1(5)Total 100.00(237)** Non-reporting cases98.8(255)1.2(3)100.00(258)*95.0(245)5.0(13)100.00(258)*93.8(243)6.2(16)100.00(259)99.22(257)0.8(2)100.00(259)91.5(236)8.5(22)100.0(258)*59.1(13)40.9(9)100.0(22)*238 THE IIPM THINK TANK

M ICRO MACROTable 18: Details About Health Facilities Used By HouseholdsType of health facilityVali niChaliNaseebNagarUmmed-Mukhi niChaliHakim niChaliSonariya niChaliJuni ChaliTotalPrivate doctors 7.7(8)6.7(7)4.8(5)5.8(6)53.8(56)21.2(22)40.2(104)Government hospital 8.0(4)4.0(2)8.0(4)28.0(14)52.0(26)19.3(50)Both 9.5(10)6.7(7)3.8(4)2.9(3)58.1(61)19.0(20)40.5(105)Total 8.5(22)5.4(14)4.2(11)5.0(13)50.6(131)26.3(68)100.0(259)Note: Figures in parentheses indicate number of observations.Table 19: Responses Of The Households Indicating Their Preference To Work Jointly / Individually In OrderTo Improve Basic Facilities Of The Municipal CorporationType of effortsVali niChaliNaseebNagarIndividual 2.70(1)Group 10.10(21)6.25(13)Ummed-Mukhi niChali2.70(1)3.85(8)Hakim niChali6.25(13)Sonariya niChaliNone of these 9.09(1)Total 8.20(21)Reasons for individual or groupeffort in worksCost effective 12.37(12)No income/work of AMC 42.86(3)Group work is better 6.00(6)Difficulty to form group/house onrentTotal 8.33(21)5.47(14)5.15(5)7.00(7)4.17(2)5.56(14)3.52(9)3.09(3)14.29(1)5.00(5)2.08(1)3.97(10)5.08(13)7.22(7)14.29(1)5.00(5)5.16(13)75.68(28)Juni Chali18.92(7)49.04 (102) 24.52(51)51.17(131)41.24(40)28.57(2)55.00(55)64.58(31)50.79(128)90.91(10)26.56(68)30.93(30)22.00(22)29.17(14)26.19(66)Total*14.45(37)81.25 (208)4.30(11)100.00(256)*38.49(97)2.78(7)39.68 (100)19.05(48)100.00(252)**Note: Figures in parentheses indicate number of observations.* There are three non-reporting cases; ** there are seven non-reporting casesinfrastructural needs, they had resorted to illegal water andelectricity connections. Each household has paid Rs. 20,000to get connection for water supply. This is likely to haveadverse impact on any effort made by AMC to seek communityparticipation. Responses regarding improvement inbasic services of AMC indicated that 39 percent found thatgroup work was cost effective (Table 19). Almost the samenumber said that due to poor economic condition, they werenot able to share the burden of improving basic servicesprovided by AMC. Table 20 shows that nearly 44 percent ofthe households under study had refused to pay establishmentcost of drains, electricity connections and water pipelines.THE INDIA ECONOMY REVIEW239

U RBAN ECONOMICSTable 20: Responses Of The Households Indicating Their Willingness To Share Various Costs And Participate In VariousActivitiesParticulars Vali ni Chali Naseeb NagarIn sharing establishment costsPartly bear the cost 6.98(3)Will bear the cost if asked by AMC 9.68(6)No will not, it is the work of AMC 7.32(6)Total 8.02(15)In sharing burden of O&M of drainsPartly bear the cost 25.00(3)Will bear the cost if asked by AMC 3.70(2)4.65(2)12.90(8)Ummed-Mukhi ni Chali4.65(2)8.06(5)Hakim niChali9.68(6)Sonariya niChaliNo, will not, it is the work of AMC 73.08(19)Total 5.43(5)Participation in conflict resolutionPartly bear the cost 20(1)Will bear the cost if asked by AMC 90(9)No will not, it is the work of AMC 80(4)Total 5(1)Participation in dealing with other agenciesPartly bear the cost 16.67(1)3.66(3)6.95(13)1.85(1)1.09(1)4.88(4)5.88(11)1.85(1)7.32(6)6.42(12)67.44(29)29.03(18)68.29(56)55.08(103)50.00(6)72.22(39)Juni Chali TotalWill bear the cost as asked by AMC 100.00 (5) 26.32 (5)No will not, it is the work of AMC 100.00 (8) 42.11 (8)Total 5.26(1)1.09(1)69.57(64)20(1)70(14)16.67(1)73.68(14)16.28(7)30.65(19)8.54(7)17.65(33)25.00(3)20.37(11)26.92(7)22.83(21)60(3)10(1)20(1)25(5)66.67(4)21.05(4)22.99(43)33.16(62)43.85(82)100.00(187)*13.04|(12)58.70(54)28.26(26)100.00(92)**25.00(5)50.00(10)25.00(5)100(20)***31.58(6)100.00(19)****Note: Figures in parentheses indicate number of observations.There are 72 non-reporting cases; ** there are 157 non-reporting cases; *** there are 239 non reporting cases; **** there are 240 non reporting cases240 THE IIPM THINK TANK

M ICRO MACROTable 21: Perceived Impact Of Participation With AMC In Providing Basic Services - Responses Of The HouseholdsParticulars Vali niChaliNaseebNagarUmmed- Mukhini ChaliHakim niChaliSonariya niChaliJuni Chali Total*Impact of Participation in Meeting Establishment CostsReduce problems/improve work 50.00(1)Working jointly will be cost effective 10.00(9)Solve problem 33.33(2)50.00(1)4.44(4)No impact 18.52(5)Total 9.60(12)Impact of Participation in meeting O&M costs of drainsReduce problems/improve work 100(3)Will be cost effective 7.27(4)Solves work related problem by private agencies 50.00(1)No impact 76.92(10)Total 6.85(5)Impact of conflict resolutionReduce problems/improve work 100(3)Will be cost effective 25.00(1)Total 14.29(1)Impact of dealing with other agenciesFed up with pvt/reduce problems/improve work 100(1)Will be cost effective 100(4)Solve problem 100(1)Total 100(6)8.00(10)1.82(1)1.37(1)3.33(3)16.67(1)14.81(4)6.40(8)5.56(5)4.00(5)53.33(48)50.00(3)29.63(8)47.20(59)72.73(40)50.00(1)73.97(54)75.00(3)85.71(6)23.33(21)37.04(10)24.80(31)18.18(10)23.08(3)17.81(13)1.60(2)72.00(90)4.80(6)21.60(27)100.00 (125)4.11(3)75.34(55)2.74(2)17.81(13)100.00(73)42.86(3)57.14(4)100.00(7)16.67(1)66.67(4)16.67(1)100(6)Note: Figures in parentheses indicate number of observations. * The difference between total households studied (259) and total responses obtained were due to non-responsesTHE INDIA ECONOMY REVIEW241

U RBAN ECONOMICSPhoto: Mukunda De4. ConclusionThe intention of this paper is not to compare characteristicsof households residing in different slums of Ahmedabad butto draw out main issues in regard to current and potentialrole of urban government in poverty reduction and theinfluence of governance on this. To be effective in providingbasic services, government has started making efforts inestablishing formal lines of communication with communityefforts through SUP. Under SUP, we find that participationby the slum households is considerably weak with regard tosharing of establishment cost of basic infrastructure comparedto operation, maintenance and other costs. Communitieshave recognized that working in groups will have anadded advantage of being cost effective. It is clear from theirresponses that AMC will have to resort to measures thatwould encourage slum dwellers to participate in availing ofbasic infrastructural services. Thus, AMC can encouragecommunity’s participation through its involvement in operationand maintenance activities, conflict resolution anddealing with other agencies. But responses of households ofJuni Chali indicate that apathy of the AMC has led toindifferent attitude of the community towards infrastructure.Proper coordination and awareness about the work would goa long way in increasing participation of the community inmaintenance of the services. This effort will be instrumentalin generating more cohesiveness among the households.Efforts need to be made to increase participation throughregulations. These include implementing system in providingwater, electricity, sanitation and drainage facilities, providingnecessary guidance, inviting communities at the time of R andR works, provision of penalty to stop conflicts among communities,proper monitoring in various services and so on.However 33 percent of them were willing to pay for thesecharges if asked by AMC to do so (Table 20). But peoplewere willing to pay for operation and maintenance cost ofbasic infrastructure (59 percent) only. Same trend isobserved when information was sought about their willingnessto participate in conflict resolution and meetingother agencies.Table 21 shows that out of a total of those who respondedto the question of perceived impact of their participation withAMC in providing basic services, a majority of them opinedthat it would be cost effective to bear the cost jointly.* This paper is based on my work carried out in AhmedabadWomen’s Action Group (AWAG) Ahmedabad on the studysponsored by CARE India. I am grateful to Dr. Ila Pathak,CEO of AWAG and CARE-India for providing me with theopportunity to work in the study. I am extremely grateful to Dr.Ila Pathak, Dr. Masihi for their comments and helpful suggestions.I gratefully acknowledge the able research supportprovided by Ms. Madhavi Mehta. Usual disclaimers apply.The views expressed in the write-up are personal and does notreflect the official policy or position of organisation. The authorcan be contacted at fmjharna@yahoo.com242 THE IIPM THINK TANK

I MMIGRATION ECONOMICSEducation,Entrepreneurshipand Immigration:America's New Immigrant Entrepreneurs244 THE IIPM THINK TANK

B EST AND BRIGHTESTVivek Wadhwa,Executive in Residence, Pratt School ofEngineering, Duke UniversityBen Rissing,Research Scholar and Project Manager, PrattSchool of Engineering, Duke UniversityAnnaLee Saxenian,School of Information,University of California, BerkeleyGary Gereffi,Director, Center on Globalization, GovernanceAnd Competitiveness, Duke University*Introduction And OverviewSkilled immigrants provide one of America’s greatestadvantages. They contribute to theeconomy, createjobs, and lead innovation. In January 2007, wepublished a report titled “America’s New ImmigrantEntrepreneurs,” 1 which showed that immigrants arefuelling the creation of hi-tech business across thenation and creating a wealth of intellectual property.Our research produced some startling statistics: in25.3 percent of technology and engineering companiesstarted in the United States from 1995 to 2005, atleast one key founder was foreign-born; in California,this percentage was 38.8; in North Carolina, thepercentage was only 13.9. Our analysis of SiliconValley and Research Triangle Park (RTP) showedgreater concentrations of immigrant founders. InSilicon Valley, 52.4 percent of companies had animmigrant as a key founder, as did 18.7 percent ofRTP. Nationwide, these immigrant-founded companiesproduced $52 billion in sales and employed4,50,000 workers in 2005.This research raised a number of questions.Whatwas the education background of these immigrants?What brought them to the United States? Was there acorrelation between education, immigration, andentrepreneurship? Was it just the elite universities inIndia and China that were graduating these companyfounders? Was there any correlation betweenentrepreneurship and immigrant populations intechnology centers?To get a better understanding of these issues, weconducted three new sets of surveys of engineeringand technology companies founded from 1995 to2005. Of these more than 28,000 startups :1. We conducted in-depth interviews with 144 immigrantcompany founders on their educational attainment,degree types, reasons for entering the UnitedStates, and other factors related to their entrepreneurialactivities.2. We interviewed eighty-seven Indian, fifty-sevenChinese, and twenty-nine Taiwanese companyfounders to ask where they received their undergraduateeducation.3. We surveyed 1,572 companies in eleven of theTHE INDIA ECONOMY REVIEW245

I MMIGRATION ECONOMICSleading centers of technology in the United States to determinewhether a key founder was foreign-born and, if so, thatfounder’s country of birth.Our FindingsWe found a strong relationship between educational attainment(particularly in science, technology, engineering, and mathematics),entrepreneurship, and innovation among foreignbornfounders of U.S.-based engineering and technology firms. Inaddition, our findings reinforce earlier research showing the tendencyof immigrant entrepreneurs to be geographically concentratedin established technology clusters. Our findings includethe following :Education Levels OfImmigrant Founders OfEngineering AndTechnology CompaniesImmigrant founders are verywell-educated, with higherdegrees in science, technology,engineering, and mathematics(STEM)-related disciplines.• 96 percent held bachelor’s degrees and 74 percent heldgraduate or postgraduate degrees (26.8 percent held PhDsand 47.2 percent held master’s degrees).• 75 percent of their highest degrees were in STEM fields:applied sciences (10.2 percent), engineering (43.5 percent),mathematics (2.8 percent), and computer science and informationtechnology (18.5 percent).The largest non-STEM degree field was business, accounting,and finance, which primarily includes MBA recipients.Proportion Of Immigrant Founders Of Engineering AndTechnology Companies Educated In The United StatesMore than half (53 percent) of the immigrant founders ofU.S.-based technology and engineering companies completedtheir highest degrees in U.S. universities.Motivation And Timing Of Immigrant Founders Of EngineeringAnd Technology Companies Who Move To The UnitedStatesThe majority of immigrant founders came to the United Statesas students. They ended up staying in the United States aftergraduation, and they founded companies an average of thirteenyears after their arrival.• 52.3 percent of immigrant founders initially came to the53% of the immigrant foundersof U.S.-based technology andengineering companies completedtheir highest degrees in U.SUnited States primarily for higher education, 39.8 percententered the country because of a job opportunity, 5.5 percentcame for family reasons, and only 1.6 percent came to start abusiness.• 76.7 percent of immigrant founders in this study entered theUnited States after 1980.Undergraduate education in India, China, and TaiwanThere is a common belief that most Indian and Chineseentrepreneurs in the United States are graduates of a smallcadre of elite institutions in their native countries such as theIndian Institutes of Technology (IITs) in India, and Peking andTsinghua Universities in China. In reality :• 91.3 percent of Indian founders completed their undergraduatedegrees in their homecountry, as did 35.1 percent ofChinese and 96.5 percent ofTaiwanese founders.• Indian and Chinese foundersgraduated from a diverseset of schools in their nativecountries, many of which areconsidered second- or third-tier universities.• Only 15 percent of Indian founders were graduates of the IIT.• Chinese founders who were educated in China were somewhatmore likely to hold degrees from Peking University (20percent) or Shanghai Jiao Tong University (15 percent) thanother Chinese universities.• A majority of Taiwanese entrepreneurs (55 percent)receivedbachelor’s degrees from two elite universities (NationalTaiwan University and National Chiao Tung University.)A more nuanced proposition that we were not able to testin this research might be that the alumni and entrepreneurialnetworks from these elite institutions are either moreeffective or more influential than those of their less highlyranked counterparts.Immigrant Entrepreneurship In Technology CentersOur research supports earlier findings that immigrant-foundedcompanies, like their domestic counterparts, are more likely tobe located in technology centers than elsewhere in the UnitedStates.• 31 percent of the startups in tech centers had an immigrantkey founder, compared with the national average of 25.3percent.• Technology centers with a greater concentration of immigrant-246 THE IIPM THINK TANK

B EST AND BRIGHTESTfounded companies than the nation include SiliconValley (52.4 percent), New York City (43.8 percent), and Chicago(35.8 percent).• Three technology centers with the lowest average rate ofimmigrant-founded companies: Portland, Ore. (17.8percent),Research Triangle Park, N.C. (18.7 percent), andDenver (19.4 percent).Methodology : Immigrant Key FoundersWe conducted three distinct sets of interviews to learn moreabout the role of U.S.-immigrant entrepreneurs in engineeringand technology companies established from 1995 to 2005.For all three of these research projects, our team made use ofcorporate records tracked inDun & Bradstreet’s (D&B)Million Dollar Database.Through this database, weobtained a listing of theengineering and technologycompanies founded from 1995to 2005. These listings containU.S. companies with more than $1 million in sales, twenty ormore employees, and company branches with fifty or moreemployees.91.3% of Indian founderscompleted their undergraduatedegrees in their home country asdid 35.1% of Chinese foundersDefinitionsEngineering And Technology FirmsFor the purposes of our study, the phrase “engineering andtechnology” indicates that the main work of the companyfocuses on design, manufacturing, or services. Our definition ofengineering and technology firms thus includes the followingindustry groups, defined with threeand four-digit U.S. GovernmentStandard Industrial Classification (SIC) codes : semiconductors,computers/communications, biosciences, defense/aerospace, environmental, software, and innovation/manufacturing-relatedservices. A full listing of the SIC codes associatedwith each industry group is present in Appendix A. Theseengineering and technology SIC codes also were used inSaxenian’s “Silicon Valley’sNew Immigrant Entrepreneurs”(1999) and Duke’s“America’s New ImmigrantEntrepreneurs” (2007). Pleasenote that some professionalservices SIC codes that wereincluded in Saxenian’s 1999study have been excluded from subsequent studies because theywere outside the purview of engineering and technologydisciplines.Key FounderIn most engineering or technology companies,the key founders are the president/chiefexecutive officer or the head of development/chief technology officer. An individual cansimultaneously perform both of these roles.Other roles such as finance, marketing,human resources, and legal can be veryimportant in startups. For the purposes of ourresearch, however, we chose to use a narrowdefinition of key founder and exclude thelatter roles.U.S. Immigrant And Immigrant-FoundedCompanyAn immigrant is a person who was born as acitizen of another country and subsequentlymoved to the United States at some point inhis or her lifetime. Immigrant-foundedcompanies are those having one or moreimmigrants as key founders.THE INDIA ECONOMY REVIEW247

I MMIGRATION ECONOMICSFigure 1: Highest Completed Degree By Immigrant Founders Of Engineering And Technology CompaniesTwo Year Diploma0.7 %High School Diploma2.8%Doctorate 26.8%Bachelor's22.5 %Master's47.2 %Source : Master of Engineering Management Program, Duke Universtiy; School of Information, U.C. Berkeley; Kauffman Foundation; 2007Study 1–Immigrant Entrepreneur BackgroundsThis research consisted of 144 follow-up interviews withimmigrant-founded companies that had responded to our2007 “America’s New Immigrant Entrepreneurs” survey,with a response rate of 85.2 percent. During these interviews,we spoke directly with a company’s key founder or anexecutive assistant. We gathered information on the founder’scountry of origin, highest degree level, type of degreeattained, country in which his or her highest educationwas completed, and reason for entering the United States.In some cases we also were able to gather information on theyear a given founder entered the United States and on the typeof entry visa.Study 2–Undergraduate Degrees Of Indian, Chinese,Taiwanese FoundersWe interviewed 87 Indian, 57 Chinese, and 29 Taiwanese keyfounders to gather information on where they had obtainedundergraduate degrees, whether in their home countries or inthe United States. Our goal was to determine whether companyfounders were disproportionately graduates of a small group ofelite universities. The founders we interviewed were randomlyselected from the list of companies that we had previouslyidentified as having key founders from these countries.Study 3–U.S. Technology CentersOur team made unsolicited phone calls to thousands of engi-248 THE IIPM THINK TANK

B EST AND BRIGHTESTFigure 2: Fields Of Highest Degree By Immigrant Founders Of Engineering And Technology CompaniesArt & Humanities0.9 %Healthcare1.9%* Applied Science10.2 %Multiple Fields5.6 %* Engineering43.5 %Business,Accounting,Finance16.7%* STEM Fields75%* Computer ScienceInformation Technology18.5 %* Mathematics2.8%Source : Master of Engineering Management Program, Duke Universtiy; School of Information, U.C. Berkeley; Kauffman Foundation; 2007neering and technology startups located in eleven major U.S.technology centers and achieved a 92.7 percent response rate.These technology centers and their surrounding suburbs wereidentified by their zip codes. A full listing of the zip codes usedfor each technology center is present in Appendix B. Corporatelistings obtained through our D&B records were scannedagainst these zip codes to identify the startups located in eachtechnology center. Startups within each technology center werethen randomized and contacted via telephone. After our firstrounds of data-gathering were completed, we over-sampled fourtechnology centers (Denver, Boston, Portland, and Austin) toensure that each center gave a minimum of 100 responses.During phone calls, we asked whether a company had one ormore immigrant key founder; if the answer was “Yes,” we alsoobtained the founder’s country of origin. Ultimately, weobtained 1,572 responses from the following eleven technologycenters :• Austin, Texas• Boston, Massachusetts• Chicago, Illinois• Denver, Colorado• New York, New York• Portland, Oregon• Research Triangle Park, North Carolina• San Diego, California• Seattle, WashingtonTHE INDIA ECONOMY REVIEW249

I MMIGRATION ECONOMICSFigure 3: Where Immigrant Founders Of Engineering And Technology Companies Received Their HighestDegreesThe US andAnother Country6.3 %Outside theUS, 41.3 %Inside theUS, 52.4 %Source : Master of Engineering Management Program, Duke Universtiy; School of Information, U.C. Berkeley; Kauffman Foundation; 2007• Silicon Valley, California• Washington, DCOur FindingsImmigrant Founder Education LevelsThe purpose of our research was to gather more detailedinformation about the immigrant entrepreneurs involved inengineering and technology startups.We conducted 144 follow-up interviews with immigrantfoundedcompanies that had responded to our January 2007“America’s New Immigrant Entrepreneurs” survey. Ourinterviews showed that immigrant founders are among the mosthighly educated of the immigrant population. A reakout of theeducational backgrounds of immigrant founders appears inFigure 1. Of the immigrant founders we interviewed, 96percent had completed college, and 74 percent had completedgraduate school.Immigrant founders of technology and engineering firms alsohave strong backgrounds in science, technology, engineering,and mathematics (STEM) fields. We found that 75 percent hadcompleted their highest degree in a STEM field. The largestnon-STEM degree field was business, accounting, and finance,which primarily includes MBA recipients. These data suggestthat STEM education plays a large role in business foundationand new-technology generation. Figure 2 shows the fields inwhich immigrant founders of technology and engineering firms250 THE IIPM THINK TANK

B EST AND BRIGHTESTFigure 4: Educational Attainment Of Select Immigrant Groups (2000 U.S. Census)100%90%Highest Completed Education Level80%70%60%50%40%30%20%10%0%India Taiwan China UnitedKingdomGermanyJapanAll ForeignBornNativeUSImmigrant GroupHigh school graduate or lessBachelor's degreeSome college or an associate's degreeGraduate or professional degreeSource: U.S. Census Bureau (2000) 2,3,4,5,6,7,8,9received their highest degrees.Immigrant Entrepreneur Education BackgroundAnd LocationWe found that 53 percent of immigrant founders of engineeringand technology firms received their highest degree from auniversity inside the United States. See Figure 3. The list ofU.S. universities at which immigrant founders studiedincludes dozens of large and small public and private universitiesacross the nation, including those in the top tier like theMassachusetts Institute of Technology, Berkeley, and Stanford,and many in the second and third tiers. No single U.S.school dominated this list.Educational Attainment Of Select Immigrant Groups (2000U.S. Census)Our January 2007 study showed that immigrants from India, theUnited Kingdom, China, Taiwan, Japan, and Germany were theleading immigrant founders of technology and engineering companiesestablished from 1995 to 2005. Indians founded morecompanies than the next four nationalities combined.Comparing these data with data from the 2000 U.S. Census,we can observe that these immigrants are also disproportionatelyfounders of engineering and technology companies relativeto their representation in the national population. Indianimmigrants, for example, were only .36 percent of the U.S.population in 2000, but started 6.57 percent of all technologyTHE INDIA ECONOMY REVIEW251

I MMIGRATION ECONOMICSFigure 5: Primary Reason For Which Immigrant Founders Of Engineering And Technology CompaniesCame To The United StatesEntrepreneurship ,1.6%Family Move,5.5%Other's0.8%Work,39.8%Education52.3%Source : Master of Engineering Management Program, Duke University; School of Information, U.C. Berkeley; Kauffman Foundation; 2007and engineering companies founded between 1995 and 2000.Likewise Taiwanese immigrants were 6.9 percent of the population,but they started 1.46 percent of total engineering andtechnology firms.Census data also show that immigrants from India, the UK,China, Taiwan, Japan, and Germany tend to be bettereducatedthan native U.S. citizens. Immigrants from Indiaand Taiwan are the most highly educated of these immigrants,eflecting immigration patterns that are biased toward thewelleducated. This contrasts, for example, with Chineseand European immigration, which has historically drawnfrom aignificantly wider range of socioeconomic andeducational strata.In 2000, less than a quarter of all native U.S.- and foreignbornresidents held a bachelor’s degree or higher, while 69.1percent of Indian immigrants held such degrees, as did 66.6percent of those from Taiwan and 42.7 percent from China. (SeeFigure 4 for more detail).Why They Came To The United StatesVery few immigrant key founders of engineering and hightechnologycompanies say they entered the United Stateswith the express intention of starting a new company. Wefound that 52.3 percent primarily came to study, 39.8percent because of a job opportunity, and only 1.6 percententered the United States for the sole purpose ofentrepreneurship .(See Figure 5). Those founders whowere willing to disclose their entry-visa information citedthe F1 student academic visa and the H1 temporaryworker visa.252 THE IIPM THINK TANK

B EST AND BRIGHTESTFigure 6: U.S Immigrant Founders Of Engineering And Technology Companies Year Of Entry2000-Present1990-1999Year Of Entry1980-19891970-19791960-19690.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%Percentage Of RespondentsSource: Master of Engineering Management Programme, Duke University; School of Information, U.C. Berkeley; Kauffman Foundation; 2007When They Came To The United StatesThe majority of the key founders who established engineeringand technology businesses from 1995 to 2005 entered thecountry from 1980 to 1999. Moreover, a substantial majority(76.7 percent) entered the United States after 1980.(See Figure 6).Together, these responses paint an interesting portrait ofAmerica’s immigrant entrepreneurs. These are individuals whoinitially entered the United States either as students or asemployees of corporations that sponsored their visas, buteventually they created new businesses. These founders are verywell-educated, particularly in STEM disciplines, suggesting thatresearch, technical education, and thought leadership aredrivers of new business generation. Additionally, we found anaverage 13.25-year lag between a key founder’s arrival in theUnited States and firm formation.Undergraduate Education Of Immigrant FoundersFrom India, China, And TaiwanImmigrant groups from India, China, and Taiwan are ofparticular interest because of their strong presence within theU.S. engineering and technology workforce. Moreover, thesegroups are unique in terms of their educational and professionalattainment. U.S. Census data reveal that the medianhousehold income for foreign-born individuals living in theUnited States is $39,000, while Indian, Taiwanese, and Chineseforeign-borns enjoy median household incomes of$69,000, $59,000, and $46,000, respectively. Thus this group isalso relatively affluent.There is a common belief that most Indian and Chineseentrepreneurs are graduates of a small cadre of elite institutionsin their native countries. In reality, top-tier universities in thesecountries, such as the Indian Institutes of Technology (IIT)and Chinese universities such as Tsinghua and Fudan,produce only a small fraction of each country’s engineering andtechnology graduates.THE INDIA ECONOMY REVIEW253

I MMIGRATION ECONOMICSFigure 7: Undegraduate Education Of Chinese, Indian, And Taiwanese Founders Of Engineering AndTechnology Companies100%Bachelors Education In Country Of Birth90%80%70%60%50%40%30%20%10%0%ChinaIndiaTaiwanCountry Of BirthUS UniversityUniversity in Country of BirthSource: Master of Engineering Program, Duke University; School of Information, U.C. Berkeley; Kauffman Foundation; 2007Our research team interviewed eighty-seven Indian, 57Chinese, and 29 Taiwanese executives whom we had previouslyidentified as key founders of U.S engineering and technologycompanies founded from 1995 to 2005, and we asked wherethese individuals received their undergraduate education.We found that a significantly greater number of Chinesefounders received their education in the United States thanthose from Taiwan and India. This is due in part to the effects ofthe closure of all of the universities in China during the CulturalRevolution (1966–1976). University entrance exams werereinstated in the late 1970s, but it took decades to rebuilduniversity faculty and programs.Of those we interviewed, 64.9 percent of Chinese foundershad received their undergraduate education in the UnitedStates, compared with 12 percent of those from India and 3.5percent of those from Taiwan. A full breakdown of thesestatistics can be found in Figure 7.The list of universities at which these immigrant foundersreceived their U.S. education was as broad and diverse as the listof U.S. universities we observed for all immigrant groups.No single U.S. school dominated this list. We saw a similarpattern in India and to a lesser extent in China.India :We found that India-born company founders of technology andengineering firms had received their education at a wide varietyof universities in India. Only 15 percent had received theirundergraduate education at one of the seven IIT campuses. The87 Indian founders surveyed accounted collectively for forty-two254 THE IIPM THINK TANK

B EST AND BRIGHTESTFigure 8: Undergraduate Education Of Indian Founders In IndiaIIT Bombay University7%Delhi University7%Other University86%**Each university is less than 5% of the total: Bangalore University,BITS, Bombay University, Gujarat University, Hyderabad University,IIT Delhi, IIT Madras, KurukshetraUniversity, Madras University,Osmania University, Pune University, University of Mysore, plus 28 other universities.Source : Master of Engineering Management Program, Duke Universtiy; School of Information, U.C.Berkeley; Kauffman Foundation; 2007different institutions across the country, many of which areconsidered to be second- or third-tier universities. See Figure 8(which excludes those with U.S. undergraduate degrees).China :China-born founders of technology and engineering companiesare more likely than their Indian counterparts to hold undergraduatedegrees from a small group of elite universities, with 20percent graduating from Peking University and ten percent eachfrom Nanjing, Shanghai Jiao Tong, and Tanjin University. Thisreflects the more centralized nature of the Chinese higher-educationsystem .Nevertheless, the founders we surveyed who hadearned bachelor’s degrees from Chinese institutions representedthirteen different universities. (See Figure 9 for details)Taiwan :A majority (55.2 percent) of Taiwanese founders receivedundergraduate degrees from two elite universities. NationalTaiwan University alone graduated nearly half (44.8 percent) ofthe company founders we interviewed. Nevertheless thediversity of educational institutions represented by the Taiwanesefounders is striking for a nation of only 23 million people.(See Figure 10).These statistics reflect the differing educational systems inChina, Taiwan, and India. India is home to a multitude ofaccredited and non-accredited colleges and universities. Anambitious undergraduate will likely be able to find entry intoone of the country’s many technical colleges. Though manyundergraduate opportunities exist in India, 10 master’s programsare far fewer in number, and doctoral offerings are small andTHE INDIA ECONOMY REVIEW255

I MMIGRATION ECONOMICSFigure 9: Undergraduate Education Of Chinese Founders In ChinaPeking University20%Other Universtiy50 % *Nanjing Universtiy10%Shanghai Jiao University10%Tianjin University10%*Each university is less than 5% of the total: Beijing Institute of Technology,Changsha Institute of Technology, Fudan University, Harbin InstituteUniversity, North China Universityof Water Conservancy and Electric,Power, Shanghai Tongji University, University of Science and Technology of China, Xizmen University, Zhengzhou UniversitySource : Master of Engineering Management Program, Duke Universtiy; School of Information, U.C. Berkeley; Kauffman Foundation; 2007limited to the most exclusive universities. 11,12 As a result, moreIndian key founders enter the United States to pursue graduaterather than undergraduate degrees.China has invested aggressively in expanding universityenrollments in recent years. This accelerated expansion, alongwith the lasting effects of the closure of universities during theCultural Revolution, means that educational quality is quiteuneven among all but the top institutions. The graduates oflower-tier universities are often considered unemployable bymultinational firms and may have difficulty in gaining admissionto U.S. colleges. This helps explain why many students choose tocome to the United States for undergraduate as well as graduateeducation. Taiwan’s top universities provide high-qualityundergraduate education that prepares them for both highereducation and work in the United States.Immigration Patterns In Technology CentersOur previous report showed that Silicon Valley and ResearchTriangle Park (RTP) had significantly higher concentrations ofimmigrants than their state averages. Census data show rapidincreases in immigrant populations in these and other leadingU.S. technology centers. We wanted to analyze this trendnationwide and establish a basis for future research.From 1995 to 2005, more than 28,000 engineering andtechnology startups were created in the United States. Byanalyzing the address associated with each of these startups’headquarters, we were able to determine startup contributionsat a state level. Figure.11 graphically portrays the umber of256 THE IIPM THINK TANK

B EST AND BRIGHTESTFigure 10: Undergraduate Education Of Taiwanese Founders In TaiwanOther University45%*National Taiwan University45%National Chiao Tung University10%*Each university is less than 7% of the total: Chinese Cultural University,Eternal-life Christ College, Taiwan, Fun-Jen Catholic University, Hsiuping Institute of Technology,National Chengchi University, National Cheng Kung University, National Chung Hsign University, Taipei Vocational Commercial School, Taiwan Taugtong UniversitySource : Master of Engineering Management Program, Duke Universtiy; School of Information, U.C. Berkeley; Kauffman Foundation; 2007startups associated with each of the fifty U.S. states from 1995 to2005.We examined engineering and technology startups in elevenof the largest centers of technology activity in the United States.Figure.12 shows a dot-density map, by county, of the 28,000engineering and technology companies founded from 1995 to2005, along with the location of the eleven technology centers weanalyzed.The U.S. Census tracks foreign-born individuals living incounties throughout the country. Using the same zip code andcounty definitions employed to identify our 11 target technologycenters, we tracked the growth in foreign-born populations from2000 to 2005. These data, presented in Figure 13, show a twopercent to five percent growth in the foreign-born populations inour target technology centers from 2000 to 2005. California’sSilicon Valley and San Diego have the largest 2005 percentageof foreign-born populations, at 32.6 percent and 31.5 percentrespectively. North Carolina’s RTP had the lowest foreign-bornpopulation of the group, at 12 percent. A breakdown of thesestatistics by county can be found in Appendix D.Our team interviewed representatives of more than 1,500engineering and technology startups in eleven technologycenters to learn whether one or more of the company’s keyfounderswere immigrants. We found that, on average, 31.4percent of the startups located in these technology clusters hadan immigrant key founder, compared with the national averageof 25.3 percent.Silicon Valley leads the nation in immigrant entrepreneur-THE INDIA ECONOMY REVIEW257

I MMIGRATION ECONOMICSFigure 11: Distribution Of Engineering And Technology Companies Founded From 1995 To 2005Numberof Companies21-6061-120121-250251-451451-800801-1400140121006000-6200Source: Dun & Bradstreet address data; National Atlas (http://nationalatlas.gov/)ship: 52.4 percent of its technology and engineering firms haveimmigrant key founders. Silicon Valley is followed by New YorkCity at 43.8 percent and Chicago at 35.8 percent. The technologycenters with the lowest immigrant key founder presence wereDenver at 19.4 percent, RTP at 18.7 percent, and Portland at 17.8percent. A visual representation of these statistics can be foundin (Figure 14).We compared these statistics with state-wide data that wegathered in our January 2007 study. The results in Figure.15show that startups in and around major technology centersusually have a higher concentration of immigrant-foundedstartups than their state average. These data underscore theimportance of the localized clusters of technology and engineeringactivity in both attracting and supporting immigrant startupactivity. The notable exceptions are Denver and San Diego. Inboth centers, a significant proportion of the technology andengineering activity is related to military activities, from whichimmigrants are often excluded.Summary Of Findings And ConclusionsSkilled immigrants have achieved great success in startingengineering and technology companies in the United States,and they contribute significantly to the country’s economicgrowth over time. The purpose of this study was to understandin greater detail the educational backgrounds and careertrajectories of these immigrant entrepreneurs, as well as toidentify lessons for enhancing the competitiveness of the U.S.economy. Census data show that the immigrants who are mostlikely to start engineering and technology businesses—fromIndia, the UK, China, Taiwan, Japan, and Germany—are bettereducated than their native-born counterparts. Our researchshows that these company founders are also better-educatedthan the norm in their respective immigrant groups. In fact, 96percent of all immigrant entrepreneurs involved in engineering258 THE IIPM THINK TANK

B EST AND BRIGHTESTFigure 12: The Location Of Engineering And Technology Companies Founded From 1995 To 2005510,000-1,90,0001,90,000-5,250,0005,250,000-11,570,00011,570,000-23,100,00023,100,000-36,550,000*= Company LocationSource : Dun & Bradstreet address data; National Atlas (http://nationalatlas.gov/)and technology in our study have completed a bachelor’s degree,and 74 percent hold master’s or PhD degrees. The great majority(75 percent) of their highest degrees are in science, technology,engineering, and mathematics-related fields. Immigrantfounders were educated in a diverse set of universities in theirhome countries and across the United States. No single U.S.institution stands out as a source of immigrant founders.Similarly, those who received their undergraduate degrees inIndia or China graduated from a diverse assortment of institutions.Even the famed Indian Institutes of Technology educatedonly 15 percent of Indian company founders. More than half ofthe foreign-born founders of U.S. technology and engineeringbusinesses initially came to the United States to study. Very fewcame with the sole purpose of starting a company. Theytypically founded companies after working and residing inAmerica for an average of thirteen years. Immigrant entrepreneursare concentrated in the nation’s leading technologycenters. The regions with the largest immigrant populations alsotend to have the greatest number of technology startups. Onaverage, 31 percent of the engineering and technology companiesfounded from 1995 to 2005 in the eleven technology centersthat we surveyed had an immigrant as a key founder. Thiscontrasts with the national average of 25.4 percent. Technologycenters with a disproportionate percentage of immigrantstartups relative to their state averages include Silicon Valley,with 52.4 percent compared with a state average of 38.8 percent);New York City with 43.8 percent (vs. 26 percent); Seattlewith 23.4 percent (vs. 11.3 percent); and Research Triangle Parkwith 18.7 percent (vs. 13.9 percent).Our research confirms that advanced education in science,technology, engineering, and mathematics is correlated withhigh rates of entrepreneurship and innovation. The U.S.economy depends upon these high rates of entrepreneurshipand innovation to maintain its global edge.THE INDIA ECONOMY REVIEW259

I MMIGRATION ECONOMICSFigure 13: Foreign-Born As Percentage Of Tech-Center Populations35%30%25%20%15%10%Source: U.S. Census (2000 and 2005) 13,14; *2005 is currently unavailable for many Washington DC and metro countiesAustin Portland RTP13.9% 12.9% 12.0%12.4% 11.5% 9.8%Foreign-Born % Of Tech Center Population0%SiliconValleySanDiegoNewYorkDenver DC * Chicago Boston Seattle2005 *32.6% 31.5% 28.2% 18.9% 0.0% 18.4% 16.0% 14.7%200030.3%31.0% 26.4% 17.4% 17.3% 16.9% 13.7% 12.1%260 THE IIPM THINK TANK

B EST AND BRIGHTESTFigure 14: Immigrant-Founded Engineering And Technology Companies As Percent Of Total Startups In Tech Centers55%50%45%40%35%30%25%20%Immigrant Founded Startups15%10%Portland RTP DenverSeattle Austin DC Boston San Chicago New SiliconDiego York Valley17.8% 18.7% 19.4% 23.4% 24.3% 26.2% 31.0% 31.6% 35.8% 43.8% 52.4%Source: Master of Engineering Management Program, Duke Universtiy; School of Information, U.C. Berkeley; Kauffman Foundation; 2007THE INDIA ECONOMY REVIEW261

I MMIGRATION ECONOMICSFigure 15: Immigrant-Founded Engineering And Technology Companies In Tech Centers Vs. State AveragesSilicon ValleyNew YorkChicagoSan DiegoBostonDC areaAustinSeattleDenverRTP10% 20% 30% 40% 50% 60%Percentage Of Startup With Immigrant FounderRTP Denver Seattle Austin DC Boston San Chicago New SiliconDiegoYork ValleyTech Center18.7% 19.4% 23.4% 24.3% 26.2% 31.0% 31.6% 35.8% 43.8% 52.4%State13.9%21.2% 11.3% 18.8% 24.6% 29.3% 38.8% 27.3% 26.0% 38.8%Source: Master of Engineering Management Program, Duke University; School of Information, U.C. Berkeley; Kauffman Foundation; 2007. Insufficient data were available for the stateof Oregon for a Comparison With Portland.262 THE IIPM THINK TANK

B EST AND BRIGHTESTAPPENDIX A:High Technology IndustryDefinitionU.S. Government-defined Standard Industrial Classification (SIC)CodesIndustrySICSemiconductorsSpecial industry machinery 3559Semiconductors and related devices 3674Instruments for measuring and testing electricity and 3825electrical signalsEnvironmentalIndustrial and commercial fans and blowers and airpurificationequipment3564Service industry machinery, n.e.c. 3589Sanitary services 495Scrap and waste materials 5093Computers/CommunicationsElectronic computers 571Computer storage devices 3572Computer peripheral equipment, n.e.c. 3577Printed circuit boards 3672Electronic components, n.e.c. 3679Magnetic and optical recording media 3695Telephone and telegraph apparatus 3661Radio and television broadcasting and communications3663equipmentCommunications equipment, n.e.c. 3669BioscienceDrugs 283Surgical medical and dental instruments and 384suppliesMedical laboratories 8071Laboratory apparatus and analytical, optical,measuring, and controlling382 (except instrument3822,3825 and 3826SoftwareComputer programming services 7371Prepackaged software 7372Computer-integrated systems design 7373Computer processing, and data-preparation and -processing7374servicesInformation-retrieval services 7375Innovation/Manufacturing-Related ServicesComputers and computer peripheral equipment and software(wholesale trade)5045Electronics parts and equipment, n.e.c. (wholesale trade) 5065Computer facilities management services 7376Computer rental and leasing 7377Computer maintenance and repair 7378Computer-related services, n.e.c. 7379Engineering services 8711Research and testing services 873Defense/AerospaceSmall arms ammunition 348Electron tube 3671Aircraft and parts 372Guided missiles and space vehicles 376Tanks and tank components 3795Search, detection, navigation, guidance, aeronautical, 381and nautical systems Instruments and equipmentNote: Our SIC listings differ slightly from those employed by AnnaLee Saxenian inher 1999 report “Silicon Valley’s New Immigrant Entrepreneurs.” Our presentresearch focuses strictly on engineering and technology companies. As a result, wedid not analyze professional services companies (SIC 275, 276, 279, 731,732, 733, 736,81, 8721, 8713, 872, and 874), which were included in Saxenian’s 1999 study but wereoutside the purview of the engineering and technology disciplines.THE INDIA ECONOMY REVIEW263

I MMIGRATION ECONOMICSAPPENDIX B:Technology Center Zip CodesChicago, IllinoisCook CountyBerwyn 60402Blue Island 60406, 60827Burbank 60459Calumet City 60409Chicago 60601-26, 60628-34, 60636-41, 60643-47, 60649, 60651-57, 60659-61, 60663-64, 60666, 60668-70, 60673-75,60677-82, 60684-91, 60693-97, 60699, 60701-02, 60706-07, 60712, 60803-05, 60827Chicago Hght. 60411-12Ctry Club Hill 60478Des Plaines 60016-19Elgin 60120-21, 60123-24, 60192Evanston 60201-04, 60208, 60209Harvey 60426, 60428Hickory Hills 60457North Lake 60164Oak Forest 60452Palos Heights 60463Palos Hills 60465Park Ridges 60068Rolling Mdws 60008DuPage CountyAdisson 60101Aurora 60502-07, 60568, 60572, 60598-99Bartlett 60103, 60133Batavia 60510, 60539Bensenville 60105-06, 60399Bolingbrook 60439-40, 60490Burr Ridge 60527Carol Stream 60116, 60122, 60125, 60128, 60132, 60188, 60197,60199Clarendon Hls 60514Darien 60516Downers Grv. 60515-17Elk Grove Vlg 60007, 60009Elmherst 60126Glen Ellyn 60137, 60138Glendale Hght 60137, 60139Hanover Park 60133Hinsdale 60521-22, 60570Itasca 60143Lisle 60532Lombard 60148Naperville 60540, 60563-67Oak Brook 60521-23, 60561, 60570Oakbrook Trc 60181Roselle 60172Schaumburg 60159, 60168-69, 60173, 60179, 60193-96St. Charles 60174-75Villa Park 60181Warrenville 60555Wayne 60184West Chicago 60185-86Westmont 60559Wheaton 60187, 60189Willowbrook 60527Winfield 60190Wood Dale 60191, 60399Woodridge 60517Lake County 60002, 60010-11, 60015, 60020-21, 60030-31, 60035,60037, 60040-42, 60044-51, 60061, 60069, 60073-74,60079, 60083-85, 60087, 60089, 60092, 60096, 60099,60102Will County 60401, 60403-04, 60408, 60410, 60417, 60421, 60423,60431-36, 60439-42, 60446, 60448, 60449, 60451,60468, 60481, 60490-91, 60544, 60585-86, 61841, 62707Lake County 46303, 46307-08, 46311-12, 46373Gary 46401-11Hammond 46319-27, 47854, 46342, 46356,46405, 46410-11, 46321,46342,46375-76, 46373, 46394Kenosha County 53102, 53104, 53109, 53128,53140-44, 53150, 53158-59, 53168, 53181Silicon Valley, CASanta Carla County AllAlameda CountyFremont 94536-39, 94555Fremont 94555Union City 94587Newark 94560San Maten CountyMenlo Park 94025Atherton 94027Redwood City 94061-65San Carlos 94070Belmont 94002San Mateo 94400-03Foster City 94404264 THE IIPM THINK TANK

B EST AND BRIGHTESTEast Palo Alto 94303Santa Cruz CountyScotts Valley 95066-67Research Triangle Park, NCApex 27502Carborro 27510Cary 27511-13, 27518-19Chapel Hill 27514-17, 27599Apex 27523, 27539Morrisville 27560Wake Forest 27587-88Raleigh 27601-26Durham 27701-13, 27715, 27717, 27722Denver, CODenver 80299, 80295-93, 80291-90, 80281-79, 80274-73,80271, 80266-59, 80257-56, 80252-46, 80244-43,80241, 80239-14, 80212-01, 80127, 80123, 80033,80031-30, 80022, 80014, 80012, 80002Seattle, WAKing CountyAlgona 98001Beaux Arts 98004Bellevue 98004-09, 98015Black Diamond 98010Bothell 98011-12, 98021, 98028, 98041, 98082, 98146, 98148,98166, 19168Carnation 98014Clyde Hill 98004Covington 98042Des Moines 98148, 98198Duvall 98019Enumclaw 98022Federal Way 98001, 98003, 98023, 98063, 98093Hunts Point 98004Issaquah 98006, 98027, 98029, 98075Kenmore 98028Kent 98030-32, 98035, 98042, 98064, 98089Kirkland 98033-34, 98083Lake Fst Park 98155Maple Valley 98038Medina 98039Mercer Island 98040Mill Creek 98012, 98082Newcastle 98056, 98059Normandy Prk 98148, 98166, 98198North Bend 98045, 98068Pacific 98047Redmond 98052-53, 98073, 98074Renton 98055-59Seatac 98148, 98158, 98168, 98188, 98198Seattle 98101-19, 98121-22, 98124-27, 98129, 98131-34,98136, 98138-39, 98141, 98144-46, 98148, 98151,98154-55, 98158, 98160-61, 98164-66, 98168, 98170-71, 98174-75, 98177-78, 98181, 98184-85, 98188,98190, 98194,98195, 98198-99Shoreline 98133, 98155, 98177Skykomish 98288Snoqualmie 98065, 98068Tukwila 98108, 98138, 98168, 98178, 98188Woodinville 98072, 98077Yarrow Point 98004Kitsap CountyBainbridge 98110Bremerton 98310-12, 98314, 98337Port Orchard 98366-67Poulsbo 98370Pierce CountyBonney Lake 98390-91Buckley 98321Carbonado 98323Dupont 98303, 98327Eatonville 98328Edgewood 98371-72, 98390Fife 98424Fircrest 98466Gig Harbor 98329, 98332, 98335Lakewood 98409, 98439, 98492, 98496-99Milton 98354Orting 98360Puyallup 98371-75Roy 98580Ruston 98407South Prairie 98385Steilacoom 98388Sumner 98352, 98390-91Tacoma 98401-19, 98421-22, 98424,98430-31, 98433,98438-39,98442-48, 98450,98455,98460,98464-67, 98471, 98477,98481, 98490, 98492-93,98496-99Univ. Place 98464, 98466-67Wilkeson 98396Snohomish CountyTHE INDIA ECONOMY REVIEW265

I MMIGRATION ECONOMICSArlington 98223Bothell 98011-12,, 98021,98028,98041,98082,98036Darrington 98241Edmonds 98020, 98026Everett 98201, 98203-08, 98213Gold Bar 98251Granite Falls 98252Index 98256Lake Stevens 98258Lynnwood 98036-37, 98046, 98087Marysville 98270-71Mill Creek 98012, 98082Monroe 98272Mountlake Ter. 98043Mukilteo 98275Snohomish 98290-91, 98296Stanwood 98282, 98292Sultan 98294Woodway 98020Austin, TXBastrop CountyBastrop 78602Elgin 78621Smithville 78957Caldwell CountyLockhart 78644Luling 78648Martindale 78655Hays CountyBuda 78610Dripping Sprgs 78620Kyle 78640Mountain City 78610Niederwald 78640San Marcos 78666-67Uhland 78640Wimberley 78676Woodcreek 78676Travis CountyAustin 73301, 73344, 78701-05, 78708-39, 78741-42, 78744-69,78772, 78778-81, 78783, 78785-86, 78788-89,78798-99Briarcliff 78669Creedmoor 78610Jonestown 78645Lago Vista 78645Lakeway 78734, 78738Leander 78641, 78645, 78646Manor 78653Pflugerville 78660, 78691Rollingwood 78746San Leanna 78748Sunset Valley 78735, 78745The Hills 78738Webberville 78621, 78653W. Lake Hills 78746Westlake 76262Williamson CountyCedar Park 78613, 78630Florence 76527Georgetown 78626, 78627-28Granger 76530Hutto 78634Jarrell 76537Leander 78641, 78645, 78646Liberty Hill 78642Taylor 76574Thrall 76578Weir 78674San Diego, CASan Diego CountyCarlsbad 92008-11, 92013, 92018Chula Vista 91909-15, 91921Coronado 92118, 92178Del Mar 92014El Cajon 92019- 22, 92090Encinitas 92023-24Escondido 92025-27, 92029-30, 92033, 92046Imperial Bch. 91932, 91933La Mesa 91941-44Lemon Grove 91945-46National City 91950-51Oceanside 92049, 92051-52, 92054-57Poway 92064, 92074San Diego 92101-24, 92126-40, 92142-43, 92145, 92147, 92149-50,92152-55, 92158-79, 92182, 92184, 92186-87, 92190-99San Marcos 92069, 92078-79, 92096Santee 92071-72Salona beach 92075Vista 92081, 92083-85Ramona 92065Rancho Santa 92067, 92091Cardiff 92007266 THE IIPM THINK TANK

B EST AND BRIGHTESTSpring Valley 91976-79La Jolla 92037-39, 92092-93Imperial CountyBrawley 92227Orange CountyIrvine 92602-04, 92606, 92612, 92614,92616-20, 92623, 92650, 92697, 92709-10Riverside CountyWlidomar 92595Murrieta 92562-64Palm Dessert 92210-11, 92255, 92260-61San Bernardino CountyChino 91708, 91710Los Angeles CountyLos Angeles 90001-84, 90086-89, 90093-96,90099, 90101-03, 90189, 90230, 91331Portland, ORMultnomah CountyFairview 97024Gresham 97030, 97080, 97089Happy Valley 97015, 97086, 97089, 97266Maywood Prk. 97220Portland 97086, 97201-33, 92736, 92738-41, 92751, 92753-56,92758-59, 92766-69, 92771-72, 92780-83, 92786, 92790-94, 92796, 92798-99Troutdale 97060Wood Village 97060ClackamaCountyCanby 97013Damascus 97009, 97015, 97030, 97080, 97089,97236Estacada 97023Galdstone 97027Lake Oswego 97034-35Milwake 97222, 97267, 97269Molalla 97038Oregon City 97045Sandy 97055West Linn 97034, 97068Wilsonville 97070Washington CountyBanks 97106, 97109, 97125Beaverton 97005-08, 97075-78Cornelius 97113Durham 97224Forest Grove 97116Gaston 97119Hillsboro 97006, 97123-24King City 97224North Plains 97133Sherwood 97140Tigard 97223-24, 97281Tualatin 97062Tillamook CountyTillamook 97107, 97118, 97130-31, 97136, 97141,97147,97135Yamhill CountyYamhill 97101, 97111, 97114-15, 97127-28,97132, 97378, 97396, 97148New York, NY,New York & Suburban10001-07, 10009-41, 10044-45,10048, 10055, 10060, 10069,10090,10095, 10098-99, 10103-07,10110-12, 10115, 10118-23,10128,10151-55, 10158, 10161-62,10165-78, 10199, 10270-71,10278-82, 11201-49, 11251-52,11254-56, 10451-75,1030112,10314, 11351-52, 11354-75,11377-80, 11385-86, 08817,08820,08837, 08899, 07102-08, 07112,07114, 07083, 07470,10601,10603-11, 08618-20, 08628-29,08638, 08641, 08648, 08690-91,08618, 08628, 08638, 08014,06901-03, 06905-07, 06910,06850-51, 06853-55, 06810-12,06497, 06614-15, 06510-15,06510-15,06517-19, 06524-25,06460-61, 12601, 12603, 12550,12553, 10940,10941, 12401,06790-91Boston, MAGreater Boston & Suburban Areas02108-11, 02113-22, 02124-36,02163, 02199, 02203, 02210,02215,02222, 02283-84, 02301-02, 01840-41, 01843, 01850-52,01854,02138-39, 02140-42, 02163,02445-46, 01830, 01832-33, 01835,02458-62, 246465, 02169-71,01701-02, 01420, 02148, 02155,00801, 02184, 01880,02127,02451-53, 02143- 45Washington, DCWashington DC & Suburban Areas20001-12, 20016-20, 20024, 20032,20036-37, 20045, 20260,20374,20376, 20388, 20391, 20398Arlington 22201-09Alexandria 22301-15, 2233132Reston 20190-91, 20194, 20170-71,20190-91,20194,22401, 22405-08Bethesda 20814-17, 20901-06, 20910,20912,20877-79,20882, 20886, 21701-04,20851-55, 20500THE INDIA ECONOMY REVIEW267

I MMIGRATION ECONOMICSAPPENDIX C :T-tests for the Equality of MeansThis appendix contains a series of independent sample t-teststhat our group calculated to measure the similarity betweenour survey populations and the larger universe of startups.Our records from Dun & Bradstreet (D&B) contain informationon engineering and technology startup companies’2005 sales, total employees, and employees working atcompany headquarters. We utilized these statistics tocompare the statistical similarity of our pool of startupsurvey respondents with the larger body of startups at thenational, state, and tech-center level.Table C.1 displays the similarity between all 1995–2005startups listed in the D&B database and the 144 that sharedin-depth founder data with our group. Based on the 2005sales, total employees, and headquarter (HQ) employees,these two groups appear to be statistically similar.C.1 In-Depth Founder Interviewst-test for the equality of means, equal variance assumed2005 Sales t(26,963) = 0.24, p = 0.811Employees at HQ t(26,964) = -.033, p = 0.739Total Employees t(26,964) = 0.21, p = 0.833The C.2 tables contain t-tests comparing our startup respondentsin a given technology center with the full populationstartups in each area. Based on the 2005 sales, totalemployees, and HQ employees, the survey respondents foreach of our eleven target tech centers are statistically similarto the larger body of startups in the area.The C.3 tables contain t-tests comparing statistical comparisonsof data presented in our 2007 study “America’s NewImmigrant Entrepreneurs.” Based on 2005 sales, totalemployees, and HQ employees, we show that our surveyrespondents at a state level are statistically similar to thelarger population of state startups. Here we highlight thefollowing states used in Figure 15 of this paper: Texas,Massachusetts, Illinois, Colorado, New York, Oregon, NorthCarolina, California, and Washington State. Please note thatno t-test was conducted for Washington D.C., because itssuburbs extend into both Virginia and Maryland areas.C.2 Austin, TXt-test for the equality of means, equal variance assumed2005 Sales t(350) = -0.55, p = 0.586Employees at HQ t(350) = -0.37, p = 0.716Total Employees t(350) = -0.53, p = 0.596C.2 Boston, MAt-test for the equality of means, equal variance assumed2005 Sales t(491) = 0.67, p = 0.505Employees at HQ t(491) = 0.53, p = 0.599Total Employees t(491) = 0.11, p = 0.909C.2 Chicago, ILt-test for the equality of means, equal variance assumed2005 Sales t(857) = 0.41, p = 0.680Employees at HQ t(857) = -0.19, p = 0.850Total Employees t(857) = -0.60, p = 0.549C.2 Denver, COt-test for the equality of means, equal variance assumed2005 Sales t(272) = 0.01, p = 0.995Employees at HQ t(272) = 0.50, p = 0.619Total Employees t(272) = -0.15, p = 0.883C.2 New York, NYt-test for the equality of means, equal variance assumed2005 Sales t(1,241) = -0.62, p = 0.535Employees at HQ t(1,242) = 0.38, p = 0.701Total Employees t(1,242) = -0.48, p = 0.630C.2 Portland, ORt-test for the equality of means, equal variance assumed2005 Sales t(326) = 0.41, p = 0.976Employees at HQ t(326) = -0.40, p = 0.691Total Employees t(326) = -0.13, p = 0.896C.2 RTP, NCt-test for the equality of means, equal variance assumed2005 Sales t(289) = -0.86, p = 0.393Employees at HQ t(289) = -0.72, p = 0.475Total Employees t(289) = -0.58, p = 0.562C.2 San Diego, CAt-test for the equality of means, equal variance assumed2005 Sales t(1,297) = 0.81, p = 0.420Employees at HQ t(1,297) = -0.50, p = 0.618Total Employees t(1,297) = -0.91, p = 0.364268 THE IIPM THINK TANK

B EST AND BRIGHTESTC.2 Seattle, WAt-test for the equality of means, equal variance assumed2005 Sales t(578) = -0.26, p= 0.793Employees at HQ t(578) = 0.28, p = 0.781Total Employees t(578) = -0.37, p = 0.714C.2 Silicon Valley, CAt-test for the equality of means, equal variance assumed2005 Sales t(413) = 0.43, p = 0.669Employees at HQ t(413) = -0.01, p = 0.989Total Employees t(413) = 0.23, p = 0.820C.2 Washington DCt-test for the equality of means, equal variance assumed2005 Sales t(882) = 0.19, p = 0.847Employees at HQ t(882) = 0.61, p = 0.543Total Employees t(882) = 1.06, p = 0.291C.3 Texast-test for the equality of means, equal variance assumed2005 Sales t(2,052) = -0.72, p = 0.467Employees at HQ t(2,052) = -0.66, p = 0.510Total Employees t(2,052) = -0.80, p = 0.422C.3 Texast-test for the equality of means, equal variance assumed2005 Sales t(2,052) = -0.72, p = 0.467Employees at HQ t(2,052) = -0.66, p = 0.510Total Employees t(2,052) = -0.80, p = 0.422C.3 Massachusettst-test for the equality of means, equal variance assumed2005 Sales t(1,264) = -0.50, p = 0.615Employees at HQ t(1,264) = -0.18, p = 0.854Total Employees t(1,264) = -0.30, p = 0.772C.3 Illinoist-test for the equality of means, equal variance assumed2005 Sales t(1,010) = -0.57, p = 0.570Employees at HQ t(1,010) = -0.39, p = 0.693Total Employees t(1,010) = -0.64, p = 0.521C.3 Coloradot-test for the equality of means, equal variance assumed2005 Sales t(636) = -0.07, p = 0.944Employees at HQ t(636) = 0.52, p = 0.604Total Employees t(636) = -0.01, p = 0.996C.3 New Yorkt-test for the equality of means, equal variance assumed2005 Sales t(1,800) = -0.37, p = 0.715Employees at HQ t(1,800) = 0.10, p = 0.918Total Employees t(1,800) = -0.19, p = 0.848C.3 Oregont-test for the equality of means, equal variance assumed2005 Sales t(306) = -0.71, p = 0.478Employees at HQ t(306) = -0.13, p = 0.894Total Employees t(306) = -0.39, p = 0.728C.3 North Carolinat-test for the equality of means, equal variance assumed2005 Sales t(595) = -0.02, p = 0.982Employees at HQ t(595) = -0.02, p = 0.981Total Employees t(595) = -0.11, p = 0.910C.3 Californiat-test for the equality of means, equal variance assumed2005 Sales t(6,203) = -0.61, p = 0.542Employees at HQ t(6,203) = -1.30, p = 0.193Total Employees t(6,203) = -0.71, p = 0.474C.3 Washington Statet-test for the equality of means, equal variance assumed2005 Sales t(679) = -0.42, p = 0.672Employees at HQ t(679) = -0.81, p = 0.415Total Employees t(679) = -0.26, p = 0.798*T-test data in C.1 – C.3 tables exclude companies with fewer than two percent of theirtotal employees locatedin their HQ location.THE INDIA ECONOMY REVIEW269

I MMIGRATION ECONOMICSAPPENDIX D:Methodology For January 2007 Study–America’sNew Immigrant EntrepreneursData AcquisitionTo quantify the economic contributions of immigrantentrepreneurs to the U.S. economy, we sought to identify thedirect involvement of immigrants in the founding of engineeringand technology companies. We obtained a list of allsuch companies founded in the United States in the last tenyears (1995-2005) from Dun & Bradstreet’s (D&B) MillionDollar Database. This contains U.S. companies with morethan $1 million in sales; twenty or more employees; andcompany branches with fifty or more employees. Thisdatabase is commonly used by researchers and is considereda source of reliable data.This D&B database search produced a listing of 28,766companies. A very small portion of these were older companieswith recent changes in control or corporate restructurings/mergers,so these were omitted from our datasetIncluded below is a list of key data that D&B provides:• Company name• Type of company• City, state, zip code• Phone number• Company Web site• Sales• Total number of employees• Select executive officer information• Primary standard industrial classificationFor the purposes of our study, the words technology andengineering indicate that the main work of the company is touse technology or engineering to design or manufactureproducts or services. Our definition of engineering andtechnology firms thus includes the following industry groups,defined with three- and four-digit U.S. Government StandardIndustrial Classification (SIC) codes: semiconductors,computers/communications, biosciences, defense/aerospace,environmental, software, and innovation/manufacturingrelatedservices. A full listing of the SIC codes associatedwith each industry group is present in Appendix A. These arethe same engineering and technology SIC codes used inSaxenian’s original research. We excluded some professionalservices SIC codes, that were included in Saxenian’s 1999study but were outside the purview of the engineering andtechnology disciplines.Company entries within each SIC code were randomizedusing a Microsoft Excel randomnumber assignment. Researcherswere then assigned random listings of 500 companies,with representative entries from each of the mainengineering and technology industry groups.Our research team then made thousands of unsolicitedphone calls to these companies. We asked whether one ormore immigrant key founders had established the company,and if so, what their nationality was. This became the sourceof the data presented in this report.Definition Of Key FounderIn most engineering or technology companies, the keyfounders are the president/chief executive officer or the headof development/chief technology officer. Other roles such asfinance, marketing, human resources (HR), and legal can bevery important in startups. For the purposes of our research,however, we chose to use a narrow definition of key founderand exclude the latter roles.Definition Of An Immigrant And Immigrant-Founded CompanyAn immigrant is a person who was born as a citizen of anothercountry and subsequently moved to the United States atsome point in his or her lifetime. Immigrant-foundedcompanies are those having one or more immigrants as keyfounders.Data CollectionA team of fifteen graduate students and research assistantstelephoned CEOs, HR managers and other knowledgeablecompany employees. After a two-sentence introduction ofthe student researcher, Duke University, and the researchproject, they were asked:• Were any of your company’s key founders immigrants tothe United States? If “Yes” they were asked:• In what country was he or she born?They followed the first question with the definition of “keyfounder” and “immigrantfounded company.”Quality Assurance And Data AnalysisAfter all of the data had been collected, we performed270 THE IIPM THINK TANK

B EST AND BRIGHTESTquality assurance on our records. Two criteria in particularwere chosen to ensure the veracity of the collected data.First, companies listed in the D&B database with zeroemployees at their U.S. headquarters were omitted fromconsideration. Second, companies with 2005 sales greaterthan $100 million were double checked to make certain thatthey had been founded after 1995.Bibliography1Download at www.kauffman.org/immigrants2U.S. Census Bureau (2000). Profile of Selected Demographicand Social Characteristics for the Native Population:2000. Census 2000 Special Tabulations (STP-159).Available on theWorld Wide Web at: www.census.gov/population/cen2000/stp-159/native.xls3U.S. Census Bureau (2000). Profile of Selected Demographicand Social Characteristics for the Foreign BornPopulation: 2000. Census 2000 Special Tabulations(STP-159). Available on the World Wide Web at: http://www.census.gov/population/cen2000/stp-159/foreignborn.xls4U.S. Census Bureau (2000). Profile of Selected Demographicand Social Characteristics: 2000, PopulationUniverse: People Born in India. Census 2000 SpecialTabulations (STP-159). Available on the World Wide Webat: www.census.gov/population/cen2000/stp-159/STP-159-india.xls5U.S. Census Bureau (2000). Profile of Selected Demographicand Social Characteristics: 2000,Population Universe: People Born in China. Census 2000Special Tabulations (STP-159). Available on the WorldWide Web at http://www.census.gov/population/cen2000/stp-159/STP- 159-china.xls6U.S. Census Bureau (2000). Profile of Selected Demographicand Social Characteristics: 2000, PopulationUniverse: People Born in Taiwan. Census 2000 SpecialTabulations (STP-159). Available on the World Wide Webat www.census.gov/population/cen2000/stp-159/STP-159-taiwan.xls7U.S. Census Bureau (2000). Profile of Selected Demographicand Social Characteristics: 2000, PopulationUniverse: People Born in The United Kingdom. Census2000 Special Tabulations (STP-159). Available on theWorld Wide Web at: www.census.gov/population/cen2000/stp- 159/STP-159-United_Kingdom.xls8U.S. Census Bureau (2000). Profile of Selected Demographicand Social Characteristics: 2000, PopulationUniverse: People Born in Japan. Census 2000 SpecialTabulations (STP-159). Available on the World Wide Webat: www.census.gov/population/cen2000/stp-159/STP-159-japan.xls9U.S. Census Bureau (2000). Profile of Selected Demographicand Social Characteristics: 2000, PopulationUniverse: People Born in Germany. Census 2000 SpecialTabulations (STP-159). Available on the World Wide Webat: www.census.gov/population/cen2000/stp-159/STP-159-Germany.pdf10All India Council for Technical Education (numerousyears). Annual Report and Audited Accounts.11Wadhwa, V., Gereffi, G., Rissing, B., Ong, R. (2007).Where the Engineers Are. Issues in Science and Technology.Vol XXIII, num 3. 73-84.12Natrajan, R. The Evolution of Postgraduate EngineeringEducation and Research in India.13U.S. Census Bureau (2000). Assorted 2000 Fact Sheets.Census 2000 Demographic Profile Highlights. Availableon the World Wide Web at: http://factfinder.census.gov/home/saff/main.html?_lang=en14U.S. Census Bureau (2005). Assorted 2000 Fact Sheets.2005 American Community Survey Data Profile Highlights.Available on the World Wide Web at: http://factfinder.census.gov/home/saff/main.html?_lang=en* Student Research Team:Jyothi Kanuri, Lokesh Mrig, Liayo Wan, RamakrishnanBalasubramanianPart-Time Student Researchers:Marine Raoux, Fanny Kientz, Batul Tambawalla, GloriaGyamfi, Rahul Shetty, Raj Bhortake,Vaibhav Jain, Archana Ranawat, Omkar Kunur, SrikanthVadlamaniSpecial Thanks: Peter Lange, Kristina Johnson, MattRissing, John P. Harvey, Tarun Wadhwa(This research was funded in part by the Ewing Marion KauffmanFoundation. The contents of this publication are solely theresponsibility of the authors. The reader can contact the authorat vivek@wadhwa.com).THE INDIA ECONOMY REVIEW271

Reliving TheGreatIndianDreamOb'SEZ'sionSEZ Scenario In India272 THE IIPM THINK TANK

C OMMENTARYAkshay Dhume,Assistant Professor of Economics,Foundation for Liberal and ManagementEducation, Pune1. IntroductionIndia became one of the first Asian countries to set-upExport Processing Zones (EPZs) by setting up its firstEPZ at Kandla in 1965 in order to boost exports (http://sezindia.nic.in/HTMLS/about.htm). Export ProcessingZones are special areas of a country where some tradebarriers such as tariffs and quotas are eliminated andbureaucratic requirements are lowered in hope of attractingnew business and foreign investments (http://en.wikipedia.org/wiki/ EPZ).During late 1979, early 1980, People’s Republic ofChina (henceforth PRC) decided to set-up Special EconomicZones (SEZs) to promote exports. SEZ is a geographicalregion that has economic laws that are moreliberal than a country's typical economic laws (http://en.wikipedia.org/wiki/SEZ).The central government of PRC gives SEZs specialpolicies and flexible measures, allowing SEZs to utilizedistinct business environment and regulatory set-up.SEZs in PRC enjoy special tax incentives and greateramount of independence pertaining to internationaltrade as well as foreign collaboration. Market forcesdrive economic activities and government exercises littleor no interference with the working of SEZs.Kun Kai-Sing (1985) suggests that SEZs in Chinawere established to help win confidence of investors inthe institutional structure, given the political and economicturmoil experienced by China in the past, as wellas achieve the mission to claim back control of HongKong and Taiwan.SEZs in PRC are located in provinces of Guangdong,Fujian, Hainan, and Shanghai.In April 2000, following in the Chinese footsteps, Indiaintroduced the SEZs Act. The policymakers hopethat the Act turns out to be an engine for economicgrowth, and development of world-class infrastructurewithout much fiscal disturbance (except revenues foregone),through large foreign investments. 12. Structure Of SEZs In IndiaAreas within a SEZ are demarcated as processing andnon-processing areas. Units – entities that undertakeTHE INDIA ECONOMY REVIEW273

Reliving TheGreatIndianDreamFigure 1: Demarcated AreasDomestics Tariff AreaNon-Processing UnitProcessing Unitmanufacturing activities, provide services, or indulge intrade or warehousing - are set up in the processing area.On the other hand non-processing areas are utilized foractivities like housing, etc. The SEZ Act exempts goods orservices exported 2 out of orimported 3 into, or procuredfrom the Domestic TariffAreas 4 (henceforth DTA)by a Unit in the SEZ or theDeveloper – a person whoor the State Governmentwhich, has been granted aletter of approval by the Central Government a letter ofapproval – from payment of taxes, duties or cess. Figure-1illustrates the different areas demarcated in a typical SEZ.The SEZ Act also defines an administrative and approvalstructure for setting up of a SEZ. Figure 2 below showsthe administrative hierarchy of SEZs.Figure 2: Administrative LayoutDeveloper andCo-DeveloperBoard of ApprovalThe administrative layout is a three-tier structure. Atthe apex of the administrative layout is the ‘Board of Approval’which is chaired by an officer not below the rankof an Additional Secretary to the Government of Indiain the Ministry or Department of Central GovernmentOut of the 234 SEZs, 80 involvelabour-intensive manufacturingunits. 63 notified SEZs projected16 lakh additional jobsApprovalCommitteeSEZ Unitsof India dealing with Commerce. The rest of the Boardconsists of Joint Secretary from ministries or Departmentsof Economic Affairs, Science and Technology, Small ScaleIndustries, Agro and Rural Industries, Home Affairs, Defense,Law and Justice, Overseas Indian Affairs, etc. aswell as a professor from Indian Institute of Management(IIM), or Indian Institute of Foreign Trade (IIFT), andnominee of the respective State Government. The Boardis responsible for granting of approval, rejecting, or modifyingproposal, foreign collaborations and FDIs, providinginfrastructure facilities, and suspending the letter of approvalif the Developer is unable to meet the terms andconditions of the contract.The second tier consists of Developer (and/or Co-Developer), and ApprovalCommittee. The developer(the Central Government,State Government, or anentrepreneur) may individuallyor jointly submit theproposal for a SEZ to theBoard of Approval eitherdirectly or through the State Government. In case the proposalis directed through the State Government, the StateGovernment has to forward the proposal to the Board ofApproval with its suggestion within forty five days. Thedeveloper or co-developers provide infrastructure facilitieswhich set the stage for development of processing andnon-processing units.The other side to tier two is the Approval Committee.The Approval Committee is chaired by a DevelopmentCommissioner – officer not below the rank of DeputySecretary to the Government of India. The DevelopmentCommissioner shall guide the entrepreneurs for settingup of Units in SEZs, take steps to effectively promote exports,liaise between Central, or State Government, monitorthe performance of the Developer and Unit, and performfunctions as directed by the Central Government, orthe Board. The rest of the committee consists of officersnominated by the Central Government dealing in revenue,economic affairs, and representatives of State Governmentas well as the Developer. The Approval Committeeapproves and monitors imports of goods or services fromDTA, or from outside India, as well as utilization of goods274 THE IIPM THINK TANK

C OMMENTARYand services, and warehousing andtrading. It also approves, modifies,or rejects proposals for setting up ofUnits in SEZs.3. DiscussionGovernment of India (henceforthGoI) has faced difficulties financinglarge-scale economic activities.The primary motive in setting up ofSEZs, is to generate economic activities,promote exports of goods andservices, attract investments fromforeign and domestic sources, createemployment opportunities, and developinfrastructure with or withoutpublic-private partnership. Accordingto GoI, setting up of SEZs willattract enlarged investment flows forbuilding infrastructure facilities. This will generate economicactivities and would lead to an increase in employmentopportunities.According to the data till May 2007, out of the 234SEZs, 80 involve labor-intensive manufacturing units. 63notified SEZs projected 16 lakh additional jobs. SEZs likeNokia, Flextronics, Gems, Apache, and Brandix Apparelprojected employment for more than one lakh workers.NASSCOM had projected 12.5 lakh jobs in IT/ITESSEZs.According to the updated information by the Ministryof Commerce, Governmentof India (website: http://sezindia.nic.in/HTMLS/about.htm), out of 439 approvedSEZs, 150 approvalsare for labor-intensive unitslike Textile and Apparels,Leather Footwear, AutomobileComponents, etc. which will result in large employmentopportunities for the unskilled or semi-skilledrural youth population including women, especially thosewho either do not have any land holding or have had theirlands acquired for setting up of an SEZ. Nokia and FlextronicsSEZs located in Sriperumbudur have providedCurrently, almost 50% of the SEZsformally approved are locatedin Andhra Pradesh, Karnataka,Maharashtra, and Tamil Naduemployment to 9,645 and 2,069 people, majority of whichare women. Gems SEZ in Hyderabad, has employed 1,200women and 800 men, and is projecting an additional employmentof 30,000. Appache, a shoe manufacturing SEZalso located in Andhra Pradesh, has currently employed4,500 persons, and in order to meet the target of one millionpairs of shoes plans to recruit another 20,000 persons.Sri Lankan FDI project, Brandix Apparel, projects anemployment to 60,000 workers over a span of three years.Thus, establishment of SEZs is seen to have achievedfaster rates of growth in the labor-intensive sectors. Further,due to similar productproducing companies beinglocated in proximity of eachother has led them to enjoythe economies of scale thatwill reinforce their bottomline.Thus, rather than havingto set-up one warehousefor each company, one can build a warehouse three timesas big at less than three times the cost. Some of the existingunits located in Export Processing Zones or ExportOriented Units plan to relocate themselves as SEZs whichwill protect established export capacities.In India, SEZs attract certain incentives. Firstly, exemp-THE INDIA ECONOMY REVIEW275

Reliving TheGreatIndianDreamtions on export earned income from taxable income. Forthe first year 100% of the income from exports is exemptedfrom taxation, and 50% for the second year. 50% ofthe ploughed back profits from exports for the third yearare exempted from taxes.Secondly, they may also acquire external commercialborrowings up to USD 500 million in a year without anymaturity restrictions through recognized banking channels.Thirdly, imports and domestic procurements of goodsand services for development, operations, and maintenanceof units in SEZs are exempt from customs andexcise duties as well as sales tax. However, sales made toDTAs are subject to customs duty (including additionalduty equivalent to excise, anti-dumping, countervailing,and safeguard duties and sales tax) under the CustomsTariff Act, 1975.Although SEZs appear to be engines of economicgrowth, there has been some skepticism pertaining to thesuccess of SEZs in India. Speculative real estate acquisition,potentially operative in these schemes, has become akey issue of debate. Department of Commerce, Governmentof India, asserts that the 439 approved SEZs requireonly 596 Sq.km and 195 notified SEZs require 260 Sq.km,out of the total land area of 29,73,190 Sq.km. However,GoI does not specify whether the 856 Sq.km of land utilizationby SEZs is a part of 16,20,388 Sq.km of agriculturalland or 13,52,802 Sq.km of non-agricultural land. GoI onlyspecifies agricultural land, and not cultivable land. Thus,entire agricultural land may not be cultivable, and henceone must look at what part of the cultivable land is beingused by SEZs and GoI for developmentof civic infrastructure.Some analysts have expressedconcerns over Central Governmentrestricting the size of aSEZ to 5,000 acres (with a minimumof 50% of the total areareserved for processing units),and giving the State Governmentthe discretion to revisethis ceiling downwards. If sizeof SEZ is reduced, business willnot be able to enjoy economiesof scale, which will hamper theirprofitability. If the Developer/Co-Developer decides to engagemost of the land for processingunits, then residential facilitieswill have to spring-up in neighboringareas, which will requireadditional land acquisition, andwill add to the pressure on surroundingareas.Another area of concern rises from the decision of thegovernment to stay out of price negotiations. GoI hasasked the farmers and entrepreneurs to directly negotiateland prices. This has raised the issue of a ‘fair’ price beingarrived upon. Very high land prices will discourage manyentrepreneurs from investing in SEZs, whereas very lowprices will lead to farmers not cooperating with the stateauthorities and entrepreneurs, potentially leading to politicaland social turmoil as in the case of the bloodbath,which occurred in Nandigram, West Bengal.While considering compensation, one must take into276 THE IIPM THINK TANK

THE HUMAN FACTORD 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 wMay-July 2008, Volume 1 Issue 4Innovatorswww.iipm.eduw . i i p m p u b l i c a t i o n s . c o mRs.100Scripting transformationalblueprints08INSIDE THIS ISSUESTRETCHING THINKING STRATEGIES AND ORGANISATIONALDESIGNS : JERRY WIND, WHARTON SCHOOL OF BUSINESSA proof that successfully acheiving stretch objectivesmeans setting more than just higher target goals18STRATEGY DIRECTOR – SOLDIER OR RESERVE GENERAL? :SOTIRIOS PAROUTIS, WARWICK BUSINESS SCHOOLRaising burning questions about the roles of the StrategyDirectors. Are they really contributing to the firm?32DOES THE BEST ALWAYS WIN? : ANDY ADCROFT, PROFESSOR,SCHOOL OF MANAGEMENT, UNIVERSITY OF SURREYWhen does one decide that a firm is going to make it?Will just one ‘good’ strategy decide the ultimate goal?52 MICRO-CREDIT OR EMPLOYMENT? : ANEEL KARNANI, PROF.,ROSS SCHOOL OF BUSINESS, UNIVERSITY OF MICHIGANWinning strategieswithin a volatilemarket & withoutvulnerable boundariesUnveiling the vulnerabilities of Muhammad Yunus’Grameen Bank and suggesting alternative ways to it68 PRIVATE EQUITY FIRMS – LOCUSTS OR HONEY BEES? :ROBERT CRESSEY, PROFESSOR, BIRMINGHAM UNIVERSITYMuch has been talked about PE firms and their aggressivebuyouts. But do these moves make strategic sense?AN IIPM INTELLIGENCE UNIT PUBLICATIONAugust-October 2005285 | An IIPM Intelligence Unit Publication

Reliving TheGreatIndianDreamconsideration the present return on landholding;Figure 3: Formal Approvalsthe future expected in-4 %5 %come or equivalent price; and theAndhra Pradeshtime profile of payment.5 %GoaFarmers believe that they wouldGujaratbe able to enjoy high appreciationHaryanarates on their land holding onceKarnatakaneighboring farm-lands are sold, 13 %and non-agricultural developmentKeralagathers steam, i.e. onceprocessing units are set-up,demand for residential developmentwill increase and will raisethe prices of their land. Thus,they hold on to their lands, orquote an exorbitant price, dissuadingentrepreneurs from proceedingwith the intended project. However,Madhya PradeshMaharashtraOrissaPunjabRajasthanTamil NaduUttar PradeshWest BengalOtherssince most farmers follow thisstrategy, only a small amount of land actually becomesavailable for non-agricultural purposes. Thus, due to Paradoxof Aggregation, high levels of appreciation in value ofland-holdings may remain a mere mirage.Farmers also consider the loss in continuous flow ofincome to present and future generations, while pricingtheir land. They are also reluctant to part with their land,as they lose the right ofentering SEZs lie in their understanding of the market,cultural and social structure, and their set-up in overseasmarkets.Currently, almost 50% of the SEZs formally approved,are located in the states of Andhra Pradesh, Karnataka,Maharashtra, and Tamil Nadu. However, only 2% of thetotal number of SEZs areownership to the plot oflocated in Rajasthan – largeststate in India. Thus fromLabour nowadays is rather mobile,land which has psychologicaland social implications. and will move from less developed Figure 3 below we roughlyFinally, consideration must regions to SEZ regions, resulting in see the Chinese experiencebe given to whether compensationis made in onetime period, or over severaldemographic imbalances being replicated for India,where SEZs are coming upin the proximity of ports, ortime periods, as well as the amount of compensationmade in monetary terms as against non-monetary terms.Thus, thought must be given to situations where, the unitacquires only a part of the land paying hard cash, and remainingthrough a pseudo-lease that will require the farmerto provide complementary services to the business unit.This will help the farmer maintain the stream of incomethat he would have enjoyed as the owner of the farm-land.There are certain skeptics of the proposition that, FDIswill drive exports. According to them success of FDIsdeveloped areas as against developing areas.This phenomenon will help development of certain regions,but will leave the other regions underdeveloped.Labour nowadays is rather mobile, and will move fromless developed regions to SEZ regions, resulting in demographicimbalance. Such imbalance can aggravate waterand power shortage issues – issues that the governmentsare struggling to resolve.Another issue involves the amount of interaction requiredwith officers with government agencies. Although2 %2 %2 %18 %3 %3 %15 %9 %2 %8 %9 %278 THE IIPM THINK TANK

Reliving TheGreatIndianDreamSEZ Act has introduced ‘Single Window Clearance’mechanism, procedures involved in setting up of a SEZrequire a great deal of interaction with various governmentofficials. An increase in such interactions may leadto rent-seeking, bureaucracy, and red tapism, which canbe detrimental for productivity and efficiency of SEZs.Finally, a question that is being asked is, ‘Are SEZs beingestablished to boost exports through development ofindustrial activity, or a mechanism to circumvent WTOobligations (of abolishing income tax exemptions on domesticproduction) which India will have to adhere to by2010?’ According to some, the answer is the latter. SEZsare not treated as a part of sovereign India for purposes oftrade and commerce, and taxation thereof, and hence anyexemptions extended to SEZs will not amount to subsidiesextended by GoI. This will maintain the compatibility ofIndia’s export policy withWTO obligations and disciplines.We see that SEZs mayrender an impetus to India’sexports. However, theAct may also result in thegovernment incurring lossesfrom the revenue foregone. Thus we need to ask, “WouldIndia be able to sustain the deficits she will suffer as a resultof exemptions promised to SEZs?”, “Will the presentvalueof benefits from increased exports and employmentexceed the costs of forgone revenue, as the Ministry ofCommerce envisages?” Objections to the scheme raisedby Ministry of Finance suggest contrary.Are SEZs being establishedto boost exports throughdevelopment of industrial activityor to circumvent WTO obligations?(iii) supplying goods, or providing services, from one Unitto another Unit or Developer, in the same or differentSEZ3Import means:(i) bringing goods or receiving services, in a SEZ, by aUnit or Developer from a place outside India by land,sea or air, or by any other mode, whether physical orotherwise;or(ii) receiving goods, or services by, Unit or Developerfrom another Unit or Developer from another Unitor Developer of the same SEZ or a different SEZ4Domestic Tariff Areas constitute the whole of India (includingthe territorial waters and continental shelf)but does not include the area of SEZ.References And AdditionalThinking[1] Kung Kai-Sing, James(1985), “The Origins andPerformance of China’sSpecial Economic Zones”.Asian Journal of PublicAdministration, Vol. 7,Number 2[2] Mitra, Siddhartha, "Special Economic Zones in India:White Elephants or Race Horses”. Available at SSRN:http://ssrn.com/abstract=969274[3] The Gazette of India, Extraordinary, Part II-Section I,June 23, 2005, Ministry of Law and Justice (LegislativeDepartment)Endnotes1The Gazette of India, Extraordinary, Part II-Section I,June 23, 2005, Ministry of Law and Justice (LegislativeDepartment)2Export means:(i) taking goods, or providing services, out of India,from a SEZ, by land, sea or air or by any other mode,whether physical or otherwise;or(ii) supplying goods, or providing services, from DomesticTariff Area to a Unit or Developer;orWebsites[1] http://en.wikipedia.org/wiki/ EPZ[2] http://en.wikipedia.org/wiki/SEZ[3] http://sezindia.nic.in/HTMLS/about.htm(The author would like to thank Prof.Pradeep Apte forhis valuable comments in course of preparation andcompletion of this article. The views expressed in thisarticle are those of the author and do not necessaryrepresent those of the Foundation for Liberal andManagement Education and The IIPM Think Tank,Pune. Readersmay contact the author at akshay.dhume@yahoo.com).280 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 !www.iipm.eduSTRETCHING THINKING STRATEGIES AND ORGANISATIONALDESIGNS : JERRY WIND, WHARTON SCHOOL OF BUSINESSSTRATEGY DIRECTOR – SOLDIER OR RESERVE GENERAL? :SOTIRIOS PAROUTIS, WARWICK BUSINESS SCHOOLDOES THE BEST ALWAYS WIN? : ANDY ADCROFT, PROFESSOR,SCHOOL OF MANAGEMENT, UNIVERSITY OF SURREYMICRO-CREDIT OR EMPLOYMENT? : ANEEL KARNANI, PROF.,ROSS SCHOOL OF BUSINESS, UNIVERSITY OF MICHIGANPRIVATE EQUITY FIRMS – LOCUSTS OR HONEY BEES? :ROBERT CRESSEY, PROFESSOR, BIRMINGHAM UNIVERSITYThe human factorSubscription Formother IIPM journalsPlease enter my subscription for The India Economy ReviewLENG-14186/29/1/2004-TCV o l u m e 3 I s s u e IM A K E W E A L T H W H I L E O T H E R S T H I N K O F I TN EED T E D OUGH?J a n u a r y - M a r c h 2 0 0 8 V o l u m e 3 I s s u e I www.iipmthinktank.comPRIVATE EQUITYSPECIALRs. 100The India Economy Review For India and SAARC Region Non SAARCSubscriptionCountriesPer Issue INR 100 uSD 31 year (4 issues) INR 520 USD 13N e e d t h e D o u g h ?J a n u a r y - M a r c h - 2 0 0 8PITFALLS INVALUATION OFPRIVATE EQUITYINVESTMENTSA N I I P M T H I N K T A N K P U B L I C A T I O N2 years (8 issues) INR 720 uSD 213 years (12 issues) INR 1020 USD 27I am enclosing my cheque/DD no. __________ dated __________ for INR/USD ________on bank ________________________ branch ____________________ drawn in favour of“The Indian Institute of Planning and Management”.Strategic InnovatorswMay-July 2008, Volume 1 Issue 4w w . i i p m p u b l i c a t i o n s . c o mINSIDE THIS ISSUEA proof that successfully acheiving stretch objectivesmeans setting more than just higher target goalsRs.100Scripting transformationalblueprints0818My Personal Details (IN BLOCK LETTERS)Name ______________________________________________________________________Designation _________________________________________________________________Organization ________________________________________________________________Address ____________________________________________________________________32Raising burning questions about the roles of the StrategyDirectors. Are they really contributing to the firm?City ________________________________ State __________________________________52When does one decide that a firm is going to make it?Will just one ‘good’ strategy decide the ultimate goal?Country _______________________________ Pin (mandatory) _____________________Winning strategieswithin a volatilemarket & withoutvulnerable boundaries68Unveiling the vulnerabilities of Muhammad Yunus’Grameen Bank and suggesting alternative ways to itMuch has been talked about PE firms and their aggressivebuyouts. But do these moves make strategic sense?Tel ______________________Mobile __________________ e-mail ___________________A N IIPM INTELLIGEN CE UNIT PUBLIC ATIO NAge Below 25 25-35 35-50 Above 50Education Graduate MBA CA/CFA OtherTHEH UMANF A C T ORContemporary | Actionable | Cutting-EdgeSignature (Mandatory) _______________________Please Mail it to:The india economy review, The IIPM Think Tank,86 Opinion Piece by S.Y. Siddiqui of Maruti SuzukiRS.100 OnlyHR @empowered &Dr. Sahni on Jindal’s revolutionarypeople practices that fuel thecompany’s drive to the topShweta Shukla (Asst. Manager-Subscription)Satbari, Chandan Haula, Chattarpur, Bhatimines Road, New Delhi-110074Contact Details: 9811895267/9810459839 or E-mail: shweta.shukla@iipm.eduIIPM reserves the right to accept subscriptions. For any another queries please write to10 HR Consulting 13 Talent shortage 40 Vivek Gupta, Chairmanof A.T. Kearneyexpected to grow atmakes Indian consultingunique, sayson growth areas for15%, says ArvindPandit of The HayAvantika Susan ofindependent consultantsin GroupHewitt AssociatesIndiam.chaitanya@iipm.eduAn IIPM Intelligence Unit Publication | 282 August-October 2005

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