THE INDIA ECONOMY REVIEW 2010 - The IIPM Think Tank

THEINDIA ECONOMY REVIEW2010Volume VII | Quarterly Issue: 31st March 2010www.iipmthinktank.comwww.gidf.orgINDIA: GROWTHSANS DEVELOPMENTRETHINKEDIFYDELINEATEINSIDE THIS ISSUELessons Not LearntSlippery SlopesNeed To KnowRenascent IndiaA 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, itsworld class research and its commitment to alternative national economic planning process.It can be said, without much oversimplification that there are no ‘underdeveloped economies’. There are only ‘under managed’ countries.Japan 140 years was ago was an underdeveloped country by every material measurement. But it very quickly produced management of greatcompetence, indeed of excellence. The policy inference is that ‘management’ is the prime mover and ‘development’ is the consequence. AtIIPM, every one considers that development is a matter of human energies rather than economic wealth. And the generation and directionof these human energies is the task of ‘management’. Accordingly, we formed The Great Indian Dream. Unlike any other dream, this isone dream which each one of us are determined to realise and that too in our own lifetimes. Each bit of cynicism and condemnation frompessimists makes us evolve even stronger and determined.All our endeavours and initiative is towards realisation of this dream, where in we produce committed ‘bare foot’ managers andentrepreneurs who are needed by nation, on an insistent basis. As an educational institute, we aim at initializing a three dimensionalpersonality 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 andmotivation to look beyond their own industry to the larger issues of the global economy. It has set before it the twin tasks: to reorient educationand research towards the needs of both the private and public sectors and to establish the link between the National Economic Planningand the development of private enterprises in Indian economy. IIPM dares to look beyond, and understands that what we teach today, otheradopt tomorrow. IIPM’s service output (education, research and consulting,) is a unique combination of two distinct disciplines: economicsand management. Through this integration, IIPM helps guide business and policy leaders in shaping the Indian and global economy, bringingtogether the practical insights of industry with broader national and global perspectives.A hall mark of IIPM is that it is armed with the comparative advantage of engaging the committed, passionate and brightest managementpost graduates and undergraduates, who pursued the education at IIPM and subsequently joined it, to realise the dream. IIPM alumni, spreadacross the globe, holding crucial decision-making positions in the corporate sector, are bonded by the one ideology of making a positivedifference, turning that ideology into a movement itself.The India Economy Review is another humble initiative towards the realisation of the same and more distinctly, engaging the broaderpublics and pertinent stakeholders.SEARCH, SIEVE, SCHEME...In economics, like in everyday existence, it is imperative to hear, perceive and consider what others have to say. Each issue of The IERbrings together a selection of important contributions on a particular theme, authored by some of the brightest minds in different areasof Indian economics. The provocation for publishing these issues arises from the fact that over the years economic journals have becomecopious, exclusive and expensive. Most of the journals and a good many of the books have gone beyond the cerebral and financial reach ofgeneral students and other scholars. It is for them that these issues are primarily being raised and debated here.Much about India is transparent enough. One does not require detailed criteria, cunning calibration or probing analysis to pinpointIndia’s problems and recognise its antecedents. There is in fact much that is perceptible about India. But not everything about India is even ifsimplistic is so simple. The learned reader would appreciate the fact that India is like an elephant that looms too large to be grasped withina distinct structure and paradigm the constituent parts of which would fail to reveal the entirety. Obviously and observably, no suggestedsolution to any protracted and complex socio-economic problem will satisfy all sides and stake-holders evenly. Consequently, there exists anenormous diversity in economic thinking and perspectives, as is also reflected in the viewpoints of different expert contributors in this issue.The intended outcome of this exercise is to facilitate the invention, improvement, deliberation and dissemination of innovation in economicthinking and national economic planning, insisting merely on well-grounded, open and unbiased debates, without predetermined outcomes.It is impossible to do justice to the entire field of Indian economics in a single issue. The topics selected for this issue are those which are ofcritical and immediate importance to India. Majority of them were freshly and exclusively written. Encapsulated, it is a constructive attemptaimed at helping India actualise its promises and potential. The editors hope that this issue of IER proffer the reader a flavour of dynamismand excitement and persuade her/him to participate in the journey towards realising ‘The Great Indian Dream’. At the same time, it illuminatesthe terrible, practical problems of India and Bharat.ACKNOWLEDGEMENTSThe IIPM Think Tank likes to thank all the internal faculty who have been instrumental in coordinatingwith many authors all across India and according their unstinted support. The assistance of Prof. R.Krishnan(IIPM Chennai), Prof. Amlan Ray (IIPM Lucknow) and Mr. Robin Thomas (IIPM Ahmedabad) has been morevaluable than, perhaps, they realise.

CREDITSFounderDr. M. K. ChaudhuriEditor-in-ChiefArindam ChaudhuriManaging EditorPrasoon.S. MajumdarDeputy EditorM.N.V.V.K. ChaitanyaConsulting EditorPrashanto BanerjiResearch FellowsPathikrit PayneSray AgarwalAkram HoqueMrinmoy DeyH.Divya SharmaMufaddal PoonawalaGroup Design DirectorSatyajit DattaSenior DesignerDinesh ChandelkarDesignerSaurabh Mishra,Parvesh Kumar Swami,Sujit SinghSenior IllustratorShantanu MitraProduction ManagerGurudas Mallik ThakurProduction SupervisorsDigember Singh ChauhanSoumyajeet GuptaSatbir ChauhanChief Marketing AdvisorAmit SaxenaMarketing & SalesShweta ShuklaIER OnlineNeel Verma, Anil Kumar Sheoran,Christopher ManiPrincipal 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 toknow more about IIPM Publications. You can e-mail onshweta.shukla@iipm.edu or alternatively call Ms.Shwetaat 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 WordAspiring Change: Will Past Be A Prologue Of The Future?Dear Reader,India has come a long way in terms of economicgrowth. Softer indicators – aspirations,health, and literacy – are all registeringdiscernible improvements. We live in ageneration of relative abundance now.While for the Western world it is going tobe a demographic winter, we in India withsome effort should be reaping a demographicdividend. It is an India full of goodies–better consumption and lifestyle are inattendance all around. Spending power, opportunities,and the splurging propensityhave been shooting up. So free marketsworking for profits have delivered? Well,poverty ratios have gone down, the percapita income is growing, the economy isexpanding at a fast pace. So where is theproblem? Well, poverty ratios have gonedown, not the number of poors. Poors stillremain vulnerable, largely unprotected –socially, economically, or legally. And, mostsignificantly, India has definitely performeddismally as far as inclusive growth is concerned.The shift to inclusive growth as aleitmotif of policy discourse is of recent vintage.This shift marks a broadening of concernsabout inequality. The focus has beenon how the excluded groups can participatein aggregate growth. This takes policy discussionsto the domains of education,health, basic infrastructure, agriculturalproductivity, basic urban services and so on.Let’s emphasize that without addressingthose issues, India’s longer term developmentprospects would be in jeopardy. Struc-Prasoon.S MajumdarManaging EditorM.N.V.V.K.ChaitanyaDeputy Editortural inequalities in India are not onlydeep and persistent, they are also intimatelylinked with institutional structuresin the political, social, and economicdomains – and they are likely toimpede the transformations necessaryfor long term growth too. One can identifystructural inequalities as witnessedin oligarchic capitalism, group based inequalities,spatial differences, interstatedisparities, and education and skill baseddifferences. And what could be the possibleremedial actions? These incidentlyare the sub themes we pursued in thisissue– can turn future sustained highgrowth into a unique opportunity tobuild a more equitable and cohesive society.You are invited to participate inthe discussion. Happy Reading.BestPrasoon.S.MajumdarM.N.V.V.K. Chaitanya

(F)ACT SHEETCover Design: Saurabh MishraPROBLEMS & PERSPECTIVES:The Beautiful TreePrivate Sector and Quality ConcernsAmit Kaushik 08PROBLEMS & PERSPECTIVES:Demographic DilemmasIndia’s Demographic Transition:Dividend or a Disaster?Anand Teltumbde 12PROBLEMS & PERSPECTIVES:Emerging IndiaGlobal Financial Crisis andIndian EconomyG. Thimmaiah 20PROBLEMS & PERSPECTIVES:Indigenous IndiaTrade, Corporate Market andIndigenous PeopleGoldy M. George 28PROBLEMS & PERSPECTIVES:Indian IndigenceImpact of Environmenton Poverty in IndiaT. Koti Reddy 32PROBLEMS & PERSPECTIVES:Inclusive IndiaFinancial Inclusion: EnablingInclusive GrowthSwati Raju 42PROBLEMS & PERSPECTIVES:Whither India?Growth Sans Development ?B.K. Thapliyal 50PROBLEMS & PERSPECTIVES:Growth GoalsIncome and Inequality in IndiaJoydeep Goswami andSubrata Bandyopadhyay 56PROBLEMS & PERSPECTIVES:A Long Road AheadIndia: Economic Growth SansDevelopmentT S Mohanchandralal 66PROBLEMS & PERSPECTIVES:An Actionable AgendaIndia : Growth Sans DevelopmentTushar Kanti Das 72PROBLEMS & PERSPECTIVES:Profound PrioritiesIs there any Relationship betweenEconomic Growth and HumanDevelopment? Evidence fromIndian StatesSacchidananda Mukherjee andDebashis Chakraborty 80PROBLEMS & PERSPECTIVES:Crucial ConvergenceIndia and the Crisis of Civilization:Potential Impacts of ConvergingEcological, Economic and EnergyCatastrophesNafeez Mosaddeq Ahmed 90PROBLEMS & PERSPECTIVES:Food FirstFood Security in North-EastIndia in the Post Globalisation EraUtpal Kumar De 98ENERGY ECONOMICS:Fuelling GrowthIs LPG a Sustainable Cooking Fuelfor India? A Study in ManagerialEconomicsDebesh C Patra 110ENVIRONMENTAL ECONOMICS:Gandhian GoodGandhian Model for SustainableForest ManagementG Bhalachandran 116HEALTH ECONOMICS:An Economic DiagnosisProblems and Solutions of Shortageof Physicians in the USA and itsImpact on Developing CountriesShamim Mohammad 128INTERNATIONAL ECONOMICS:Change For GoodGlobal Economic Uncertainties:Essential Coordinated GovernanceK. U. Mada 134POLITICAL ECONOMY:MicroMacroPolitics, Governance, PoliticalEconomy of Development orStagnation: West Bengal 2009Amiya K. Chaudhuri 144WELFARE ECONOMICS:MicroMacroCreating Jobs for Rural Youth inAndhra Pradesh, IndiaMeera Shenoy, Smriti Lakhey andParmesh Shah 160MANAGERIAL ECONOMICS:MicroMacroRetailers’ Preferences for Coca Cola:A Case Study With Special Referenceto the Kolkata RegionRuma Kundu, Indraneel Mandal andMithun Chakraborty 168MONETARY ECONOMICS:Price PuzzlesInflation and Its CuresMadhusudan Raj 174CARE ECONOMICS:Pilgrims & ProgressReligion and Economics:An Empirical AnalysisAtanu Sengupta and Krishanu Nath 182WHAT NEXT: A Long Road AheadWhen Nationalism is SocialismPathikrit Payne 190

P ROBLEMS & PERSPECTIVESPRIVATE SECTOR ANDQUALITY CONCERNSThe last two or three years have witnessed a fairlyvigorous debate in the education space over the roleof the private sector in education, particularly at theelementary level, and its merits and/or otherwise. Thesomewhat contentious provisions of the then Draft Right toEducation Bill, 2005, recently passed as The Right ofChildren to Free and Compulsory Education Act, 2009, alsocontributed to this debate. Among other things, the Actstipulates that even unaided schools under private managementwould be responsible for providing free education todisadvantaged children between the ages of six and fourteenyears from their immediate neighborhood, at least to theextent of 25 percent of their strength in the entry class.Although the Act has yet to be notified, not surprisingly,this provision has managements of recognized private schoolsup in arms. Joining them, albeit for very different reasons,are the proprietors of the unrecognized private schools, whorisk monetary fines and jail terms if they continue to operatetheir schools without seeking recognition as prescribed underthe Act. Ironically therefore, an Act that seeks to universal-8 THE IIPM THINK TANK

T HE BEAUTIFUL TREEAmit KaushikChief Operating Officer, Pratham Education Foundation, Delhi Area, Indiaize elementary education for children in India has succeededin alienating a significant proportion of those who areengaged in contributing to that very objective.While the numbers offered by different sources varyslightly, it does appear to be more or less agreed that private(recognized) schools in India account for anything between15-25 percent of available schools. The District InformationSystem for Education (DISE) data for 2007-08, released inNovember 2009, places the number of schools under private,unaided management at 173,282 out ofa total of 1,250,775 schools in India 1 , orabout 14 percent. If one adds thenumber of aided schools under privatemanagement, we arrive at a figure ofnearly 20 percent. According toNCERT’s 7 th All-India EducationalSurvey based on figures for 2002,enrolment in such private schools was15 percent and 19 percent at theprimary and upper primary stagesrespectively. While NUEPA andNCERT data capture the picture as related to recognizedschools, ASER only notes the fact of private school enrolmentwithout distinguishing between recognized or otherwise,thus providing the slightly higher figure of 21.8 percentchildren enrolled in private schools in 2009.While there are minor variations in the private schoolenrolment indicated by ASER between 2007-2009, it wouldseem to be fairly clear that roughly one-fifth of elementaryschools in India are under private management. If one addsthe number of unrecognized private schools, about whichlittle data is available, the percentage of children enrolled inwhat may be called non-government schools may be conservativelyassumed to be between 25-30 percent, if not more. Astudy in 2006 showed that even in rural areas, almost 28percent of the population had access to fee-charging privateschools 2 . In 2009, ASER data indicates that nearly 44percent villages have access to private schools, and it wouldseem safe therefore to assume that this is a sector that is nowLiberalizing theschool sectorwould result inthe emergenceof educationalentreprenuers anda new marketwell established.At the same time, it may not be correct to presume thatprivate schools are coming up in the absence of governmentschools; in many cases, they come up in areas with poorgovernment school performance 3 . Various studies haveshown that while the private school sector has grown inrecent years, leading to a decline in the relative enrolment ingovernment schools, the former do not necessarily competewith the latter in terms of addressing unmet demand.Rather, in establishing themselves inareas where government schoolsalready exist, these private schoolsmeet differentiated or quality demand,attracting children from higher-incomegroups or from advantaged socialgroups 4 .Many years ago, when MiltonFriedman first postulated his conceptof vouchers in schools, he was convincedthat liberalizing the schoolsector would result in the emergence ofa market where none existed, with educational “entrepreneurs”entering the market to take advantage of opportunitiesoffered and in turn, to offer quality school services 5 .While the effectiveness of voucher programmes remains amatter of some debate, it does seem true that the desire ofparents to find an alternative to poorly performing governmentschools may have led in recent years to a growth in thenumber of available private schools, under both recognizedand unrecognized management. In his book, The BeautifulTree 6 , James Tooley argues quite convincingly that notwithstandingthe costs involved, poor parents in urban areas arechoosing to vote with their feet and move their children fromfree government schools into private (and in many cases,unrecognized) schools, thus setting off an increase in thenumber of such schools.It is certainly true that there is greater interest in establishingprivate schools today than there was earlier; nolonger viewed as a purely philanthropic activity, the settingTHE INDIA ECONOMY REVIEW9

P ROBLEMS & PERSPECTIVESup of private schools is now attracting more and morecorporate firms who see this as a potential business. In thecase of some real estate developers, it is even being seen asanother form of forward integration, making the purchase ofapartments in their developments more attractive by virtueof guaranteeing a “good” school in the neighborhood; a casein point is the recent announcement by a well-known realestate group, of a chain of 150 CBSE schools to be set up allover India. Similarly, the provisions of The Right of Childrento Free and Compulsory Education Act, 2009, requiring theearmarking of 25 percent seats for children from disadvantagedfamilies, are being viewed by many in the privatesector as an opportunity to invest in setting up schools, inorder to take advantage of the “guaranteed” reimbursementof costs by government.The government’s proposal to establish 2500 “model”schools in various districts through thePublic Private Partnership (PPP) modehas also generated significant interestin the private sector, with severalcorporate houses exploring options ofinvesting in the sector. Thus, thecreation of educational “entrepreneurs”does appear to be taking place to somedegree, even though the numbersremain comparatively small.But what of quality in these privateschools? As ASER 2008 showed, when various variablessuch as family background, income and others are controlledfor, the difference in learning levels between governmentand private schools becomes marginal 7 . Similarly, EducationInitiatives (EI), India’s largest private sector testing organization,found that “any lead that private schools show in theirlearning outcomes over government schools can be completelyexplained away by... (1) Students’ socio-economicbackground, (2) students’ initial levels, (3) rote/proceduralnature of learning tested. In other words, if you control forfactor 1, look for improvements between say, Grade 3 andGrade 7 (to nullify any initial advantage), and the test is notrote/testing procedural knowledge only, private schools (donot) show any advantage over government schools” 8 . In partof course, the trouble arises on account of the usual assumptionin reference to private schools—they are generally seento be high-end private schools of the likes of say, a DelhiUnlike thegovernmentschools, all privateschools ensureaccountabilityamongst theteaching staffPublic School in New Delhi or a Cathedral in Mumbai. Thereality however, is that a majority of private schools are onlymarginally different from their counterparts in government;the major difference lies in their ability to ensure accountabilityamongst the teaching staff.In fairness, it must be said that this is an area that remainsopen to debate and further research. Tooley for instance,records a difference of 16-17 percentage points in thelearning levels of children in private schools in urban areas,as compared to their counterparts in government schools 9 ,but it is not clear whether this is after controlling for factorsof the nature mentioned in the preceding paragraph. Hisfindings are clearly in contradiction to findings elsewhere, sothere is certainly a case for deeper examination of theunderlying causes.Given that ASER 2009 data reconfirms what has beenobserved in earlier years in respect ofenrolment, finding only about fourpercent children in the 6-14 year agegroup still out of school, the questionof what happens to the 96 percentchildren in school acquires greatsignificance. Since this year’s data hasbeen discussed in some detail elsewherein this report, let us take just oneexample, that of reading ability; on anoverall basis, ASER 2009 finds thatnearly 47 percent children in Class 5 are unable to read aClass 2 text. More worryingly, at the national level, thepercentage of children in Class 5 unable to read a Class 2text actually shows an increase between 2008 and 2009, from44 percent to 47 percent. Regardless of how the differencebetween government and private schools is explained, thefact remains that these are unacceptably high numbers.Going forward, two conclusions would appear to beinescapable; first, private management participation in theschool sector is only likely to increase over time, and it maybe wise to develop policies that address this situation. It mayeven be time to move away from our traditionally hypocriticalapproach to private investment, which insists that suchinvestment should be on a not-for-profit basis, thus compellingschool operators to find alternatives by which they canmake a return on their capital, to a regime that activelyencourages private investment within a regulated environ-10 THE IIPM THINK TANK

T HE BEAUTIFUL TREEment. Second, action is urgently required to improve qualityin our classrooms, whether these are in government orprivate schools. A failure to address this need will lead toincreasing numbers of children going through the schoolsystem without learning very much, something that no nationcan afford.The most significant thing that ASER has done over thelast five years has been to focus attention on the need toimprove learning outcomes. Greater public awareness andparental demand, improved infrastructure and more resourceshave brought us to a point where enrolment isreasonably satisfactory. But we would be failing futuregenerations if we do not take this to the next logical step,improving what children do once they’re in the classroom. Itis to that—regardless of whether the child is in a governmentor private school—that we must now turn our attention.Public Interest, Robert A Solo (Ed), New Brunswick, NJ:Rutgers University Press.6Tooley, James (2009), The Beautiful Tree, New Delhi:Penguin Books India.7Wadhwa, Wilima (2009), “Private Schools: Do TheyProvide Higher Quality Education?”, in Annual Status ofEducation Report (Rural) 2008, Mumbai: PrathamResource Centre.8Sarangpani, Padma (2009), “Quality, Feasibility andDesirability of Low Cost Private Schooling”, in Economic& Political Weekly, Vol. 44 No. 43, October 24 th - October30 th , 2009, New Delhi9Tooley, James (2009), op cit.(The views expressed in the write-up are personal and do notreflect the official policy or position of the organization.)Endnotes andAdditional Thinking1Mehta, Arun C (2009), ElementaryEducation in India,Where Do We Stand? StateReport Cards 2007-08, NewDelhi: National University forEducational Planning andAdministrationn2Muralidharan, Karthikand Kremer, Michael(2006), “Public c and PrivateSchools in India”, Harvard sity, Boston.Univer-3bid.4Tilak, Jandhyala B.G. and Ratna M.Sudarshan (2001), 01), Private ing in Rural India, NCAERWorking Paper No. 76, NewSchool-Delhi: National Council forApplied Economic search.Re-5Friedman, Milton(1955), “The Role ofGovernment inEducation”, inEconomics and theTHE INDIA ECONOMY REVIEW11

P ROBLEMS & PERSPECTIVESINDIA’SDEMOGRAPHICTRANSITION:DIVIDENDOR ADISASTER?Anand TeltumbdeManaging Director, Petronet India Limited, MumbaiAsection of the intellectual class which has chosento sing paeans to the ruling class policies has beenstriving to cover up the ugly reality of India with athick coat of nationalistic fervor that India will emerge as asuperpower in this century. It tried showing India’s neoliberalreforms in brighter light chanting the success story ofGDP growth while they were devastating the countrysideand were creating a crisis of livelihood for majority ofpeople. Under the load of negative evidence, they loweredtheir pitch and began painting bright future for India alongthe superpower theme. The demographic transition, whichmay be viewed as a cyclical phenomenon created by asynchronoustrends of fertility and mortality experienced byevery country in the developmental context, some time orother is being noted as India’s ‘demographic dividend’,which will give it a unique competitive edge over manycountries and realize her superpower ambition.12 THE IIPM THINK TANK

D EMOGRAPHIC DILEMMASIndia’s Demographic TransitionDemographic transition is the change societies undergo from apremodern regime of high fertility and high mortality to apostmodern regime of low fertility and low mortality as observedin the case of European and American population history during1930s. This shift is typically seen from short lives and largefamilies to where people tend to live longer lives and raisesmaller families. Observed trends suggest that both size and agestructure of the population in all countries tend to change overtime because of this transition. About one-third of the world’scountries have completed this transition and another third of allcountries are in the transition’s early or middle phases. Most arein sub-Saharan Africa and the Middle East, while others arescattered across southern Asia and Latin America.American demographer Warren Thompson presenteddemographic transition in three stages. The first stage depictedrise in proportion of young people in the population. The secondstages marked significant increase in the working age populationwhile the proportion of young people declined and that of theTable 1: India’s Demographic AdvantagePeriod1950-19551960-19651970-19751980-19851990-19952000-20052010-20152020-20252030-20352040-20452045-2050TotalFertilityPopulationgrowthRateCrudeBithRateCrudeDeathRateLife Expectancyat Birth(Both Sexes)5.91 1.79 43.4 25.5 37.95.82 2.06 40.5 19.9 44.05.26 2.21 37.3 15.2 50.44.50 2.24 34.4 12.0 56.03.86 2.01 30.7 10.4 58.83.11 1.62 25.4 8.9 62.02.52 1.27 21.0 8.1 65.22.12 0.92 17.2 7.9 68.11.86 0.58 14.2 8.3 70.51.85 0.37 13.0 9.2 72.41.85 0.25 12.4 9.7 71.4Source: Population Division of the Department of Economic and Social Affairs of the United NationsSecretariat, World PopulationProspects: The 2008 Revision, http://esa.un.org/unpp, Tuesday, March 02, 2010; 1:10:56 PM.THE INDIA ECONOMY REVIEW13

P ROBLEMS & PERSPECTIVESTable 2: Working Age Population andDependency Ratiosrate, life expectancy provided in the table are consistent with thispositive demographic transition.Population aged 15-59Dependency ratioYear (Thousand) (percentage) Total Child Old-age1950 212 418 57.1 68 63 51955 227 258 55.9 73 68 51960 242 336 54.1 78 72 51965 263 130 53.0 82 76 61970 296 395 53.6 79 73 61975 335 649 54.4 77 71 61980 380 171 54.9 75 69 61985 429 113 55.4 73 67 61990 482 844 56.0 71 65 71995 542 673 56.9 69 62 72000 607 532 58.3 65 58 72005 677 099 59.9 60 53 72010 748 653 61.6 56 48 82015 810 563 62.6 52 44 82020 868 259 63.5 49 40 92025 918 679 64.2 47 36 112030 961 653 64.8 45 33 122035 993 795 65.0 44 30 142040 1 011 317 64.6 44 28 152045 1 014 055 63.6 45 27 182050 1 004 176 62.2 47 27 20Source: Population Division of the Department of Economic and Social Affairs of the United NationsSecretariat, World Population Prospects: The 2008 Revision, http://esa.un.org/unpp, Tuesday, March2, 2010old increased modestly. The third stage represented a decline inthe proportion of working-age along with the rise of old people.Japan and parts of Western Europe are already past the secondstage while most of East and South-East Asia, having enjoyedthe second stage for more than four decades is soon followingsuit. India, in contrast, is just entering the second stage and itsshare of the working age population is expected to increase until2035 and beyond.Table 1 provides the demographic trend from 1950-2050,which illustrates that India’s fertility has been consistently fallingfrom the peak 5.91 percent in the first decade after independenceto 2.76 percent today and expected to fall further to 1.85percent. Even the death rate (per 1000) also likewise showsconsistent decline from its peak of 25.5 in 1950-55 to 8.5 todayand to the lowest of 7.9 in 2020-2025, which then looks up andgoes on rising to a moderate value of 9.7 in 2050. Even the dataon other parameters like population growth rate, crude birthEconomic Pay-Off of ‘Demographic Transition’Economic advantage of demographic transition to the countriesmaterializes through a number of mechanisms. The mostimportant are labour supply 1 , savings, and human capital.Labour supply is increased in two ways: maturation of babyboom populations to the working age of 15 to 59 and inductionof women into the workforce as family size declines. 2 Thedemographic transition leads to the growth of savings in twoways. One, through the reduction of dependency ratio, which isthe ratio of non-working age population (all the children untilthey reach the working age and all the old people who are pastthe working age) to the population actually in the workforce.Two, the behavioural effect insofar as the working peoplerelatively consume far lesser than the non-working ones, i.e.,their propensity to save is more than that of the non-workingpeople. 3 The third mechanism is increase in human capital,which may be the least tangible, but most consequential incontributing to economy. The population that lives longer andstays healthier through demographic transition entails bettereducation, and experiences deep-rooted changes in its culturewhich brings in great productivity benefits. Both the quantitativeas well as qualitative increase in productivity ultimately spiralsup savings in economy thereby investment and thence economicgrowth in a mutually-reinforcing manner.It is estimated that during the 30-year period beginning withthe mid-1960s, policies designed to take advantage of thefavourable demographic phase contributed nearly two-fifths toone-third 4 of the total economic growth in the successful SouthEast Asian countries. 5 The Celtic Tiger, the present-day Ireland,which also attained rapid economic growth, appears to beanother powerful illustration of the same phenomenon. Theworking-age population in East Asia grew nearly four timesfaster (an average of 2.4percentage a year) than its dependentpopulation between 1965 and 1990. A virtuous spiral was thuscreated: population decline pushing up income and increasedincome further pushing down population growth. This is a majorexplanation, among others, of the phenomenal increases innational saving rates in East Asia in the last three decades to 30percent or more.The demographic transition on its own does not spell adividend; it needs congenial policy intervention to become one.14 THE IIPM THINK TANK

D EMOGRAPHIC DILEMMASIn absence of such a policy intervention it could well turn out tobe a threat. For instance, Latin America’s demography reflectsclose similarity with East Asia’s. In 1965 Latin America and EastAsia both had life expectancy in the upper 50s. Both followedsimilar improvements in public health to raise it to above 70years today. There has been similar reduction in infant mortalityin both the cases: Latin America’s 32 deaths per 1,000 live birthsas against East Asia’s 34 in 2000. The fertility rate has also fallento the present level of 2.5, for many countries such as Brazil,Chile, and Uruguay, it being just above replacement levels (2.1children per woman). Despite these similarities in favourabledemographic changes with East Asia, Latin America could notsee the economic growth of the former. While East Asia had aper capita annual growth rate between 1975 and 1995 of 6.8percent, the growth rate for Latin America over the same periodwas one-eighth of that, at 0.7 percent. It clearly illustrated theimportance of policy in capitalizing the opportunity throughdemographic transition. 6 Military juntasand dictators ruling much of LatinAmerica for most of the 20 th century, untilthe late 1970s, could not provide thepolicy framework that the democraticregimes of East Asia could.India’s Demographic DividendTable 2 provides the working age population(15-59 years) from 1950-2050 alongwith dependency ratios, for both pre andpost working age. The data clearly revealsthat the working age population had begun to rise from itslowest level of 53 percent in 1965 to the current 61.6 percent andwould reach its peak in 2035 at 65.0 percent before decliningthereafter. In 2050, it is estimated to be at 62.2 percent. This isperfectly reflected in the total dependency ratio. The latter,when seen in terms of its two components, viz. child and old age,however gives a different picture. While child dependencyconsistently declines from its peak of 76 percent in 1965 to 27percent in 2050, the old-age dependency rises right from itslowest value of five percent in 1950 to its alarming level of 20percent in 2050. Although this dependency pattern poses aserious challenge to our policy makers, India enjoys its preponderanceof young age population for almost four decades.Indeed, India would be one of the youngest nations, with itsmedian age lying between 25 and 30 over the next 15 years (2010India has awhopping 61million stuntedchildren. Threeout of ten world’sstunted childrenare in Indiato 2025). 7The UN Population Division estimates that, over the next 10years, India’s working age population is set to grow by a cumulative120 million, significantly greater than the expected increaseof 33 million in China or 12 million in the US and rather declineof eight million in Japan and 18 million in Europe. By 2020, itappears that the US will be short of 17 million people of workingage, China by 10 million, Japan nine million and Russia sixmillion. India in contrast will have a surplus of around 47million. In face of it, this demographic scenario provides awindow of great opportunity for the country. As explainedbefore, this opportunity is just one-shot and could pass us by ifwe are not prepared to grab it. Since, we are already in the zoneof demographic transition; it would be pertinent to see our stateof preparedness to exploit this opportunity.India’s State of PreparednessThe basic premise behind the discourse ofdemographic dividend is that the ‘bulge’in our population pyramid is absorbed inour workforce and it comprises peoplewith good health, education and skills tobe productive over their working age. Itimplies that the current children whomature into our workforce are healthy,educated and skilled and our economywill provide them suitable employment.Viewed in this perspective, we are boundto get shiver down the spine looking atthe pathetic state we still are in.Child HealthIndian children are still in dismal state of health and nutrition.According to the NFHS 3, 78.9 percent of Indian children of sixto 35 months suffer from anaemia. In fact, most children areborn anaemic as their mothers suffer from anaemia - 56.2percent married and 57.9 percent pregnant women between 15to 49 years suffer from anaemia. According to a Unicef report,‘Tracking progress on child and maternal nutrition’ 8 , the countryhas a whopping 61 million stunted children, the largest in anycountry-- three out of 10 world’s stunted children are in India.Stunting is associated with developmental problems and is oftenimpossible to correct. A child who is stunted is likely to experiencea lifetime of poor health and underachievement. The sameTHE INDIA ECONOMY REVIEW15

P ROBLEMS & PERSPECTIVESreport further tells us that there were 54 million underweight, 25million wasted and over eight million severely wasted children inIndia. The large incidence of poverty in the country, some 77percent people living off Rs. 20 per day income, is the root causeof the widespread nutritional deprivation in children. There isplethora of data that clearly establishes that a vast majority ofour children with serious health deficiency will constitute ourworking age population.90% of collegesand 68% ofuniversities acrossIndia were ofmiddling or poorquality, on almostall indicatorsEducationIn recent years considerable progress is made in terms ofenrolment at all levels of education though it still falls short ofthe needs of demographic transition. The gross and net enrolmentratios at the primary education were at 108 and 86 percentin 2007, thanks to Sarva Shiksha Abhiyan and the mid-day mealscheme. The same at the pre-primary level was however at just 47percent, reflecting a lack of attention of the government to thepreparatory phase of children, consideredcrucial in their capacity building. Thesecondary and tertiary level enrolmentsdrastically drop to 53 and 12 percentrespectively, way behind the comparablecase of China which has it at 75 and 24percent. And this is just the quantitativeaspect; in terms of quality, the educationsituation is far more disturbing. From1980s, with increasing commercializationof education, the overall standard hasconsistently fallen to appalling levels. It istaken for granted that quality education needs to be paid forextra and hence has been the monopoly of the upper classes. Themajority being poor should live with poor quality.Annual Status of Education Report 2005 based on thenationwide survey conducted by Pratham had revealed disturbingpicture of our elementary education against the claims ofquantitative improvements. 34.9 percent of all school goingchildren in 7-14 year age group could not read even a short, easyparagraph (class 1 level) and 51.9 percent could not read asimple story (class 2 level). The current Annual EconomicSurvey (February 2010) states that over 47 percent childrenstudying in class 5 cannot even read Class 2 textbooks. While thispercent shows a decline from 56.2 percent in 2008 to 52.8percent in 2009, the report expresses concern about the worseningstandards of education. With much of emphasis on elementaryeducation to expand markets in recent years, the secondaryeducation has been grossly neglected as revealed by a WorldBank study –‘Secondary Education in India: UniversalizingOpportunity’ 9 . While it caters to fewer students, qualitatively itis not any better than the elementary level. As per the first-everofficial assessment of the higher education system (123 universitiesand 2,956 colleges across India, estimated 60 percent ofthem being private), conducted by UGC’s Bangalore-basedNational Assessment and Accreditation Council (NAAC), 90percent of colleges and 68 percent of universities across thecountry were of middling or poor quality on almost all indicators- faculty standards, library facilities, computer availability,student-teacher ratio and so on. 10 According to an ASSOCHAMEco Pulse Study based on twenty quality parameters relating toprimary, secondary, tertiary and higher education system, Indiacame out last but one (just above Indonesia- score 2.68) amongthe seven countries with a score of 3.3 out of 10. Russia was atthe top with score of 7.28 followed byChina with 6.77, Brazil with 5.57, Mexicowith 5.42 and South Africa with 3.29. 11Our education system represents hugeinequity. While a tip of it may comparewith the best in the world, the rest is justnowhere. The recent Right to EducationBill with lofty proclamations on paperformalizes the existing iniquitous basis ofeducation and is callous about the overallquality of education. In utter ignorance ofthe Kothari Commission (1966) recommendationsto have equitous universal and state fundededucation in line with what was envisaged by the Constitution, itsought to promote neoliberal principle of public-private partnershipin the education market which could only be detrimental tothe interests of the bulging mass of youth.EmploymentThe state of health and education has a serious implication tothe quality of workforce, which essentially determines whetherthe demographic transition will prove boon or bane to us. Thenutrition deficiency extensively prevalent among children doesimpair their physical as well as cerebral capacities. The deficiencyof our education system is reflected in the low skill level ofour young people. The overwhelming majority of the work forcenot only in rural areas but also in urban areas, does not possess16 THE IIPM THINK TANK

D EMOGRAPHIC DILEMMASTable 3: Unemployment Rates among Young Peopleand Overall PopulationMalesUsualStatusCurrentDailyStatusFemalesUsualStatusCurrentDailyStatusany identifiable marketable skill. Only 19.6 percentage of maleand 11.2 percentage of female workers in urban areas and 10percentage of male and 6.3 percentage of female workers inrural areas possessed marketable skills. The percentage ofyounger members of the workforce (age group 20-24) havingvocational skills is just five percent in India whereas in industrialcountries it varies between 60 percentage and 80 percentage,except for Italy, which is 44 percentage. The percentage forKorea, which has recently been categorized as an industrializedcountry, is at whooping 96 percentage. Even the developingcountries have better score than India: Mexico at 28 percentageand Peru at 17 percentage. 12In recent years the Indian economy has been undergoingdrastic structural change in favour of Services at the cost ofAgriculture. The current contribution of Agriculture, Manufac-1993-941999-002004-051993-941999-002004-051993-941999-002004-051993-941999-002004-05Rural IndiaUrban India15-19 20-24 All 15+ 15-19 20-24 All 15+3.3 4.9 2.0 11.9 12.6 5.45.5 5.2 2.1 14.2 12.8 4.87.9 6.2 2.1 14.0 12.5 4.49.0 10.3 5.6 16.2 17.0 6.713.1 11.7 7.2 19.0 17.1 7.315.0 12.9 8.0 18.4 15.8 7.319.0 2.8 1.3 12.8 21.7 8.33.2 4.9 15.0 13.2 19.4 7.16.7 9.3 3.1 15.6 25.8 9.18.3 8.2 5.6 18.6 28.5 10.412.8 12.1 7.0 18.0 25.9 9.412.6 14.9 8.7 16.4 27.3 11.6Source: Jayati Ghosh and C.P. Chandrasekhar, Economic Growth and Employment Generation in India:Old Problems and New Perspectives.http://www.networkideas.org/feathm/mar2007/fa10_Jayati_Ghosh.htmturing and Services is 17, 20 and 63 percent respectively, withapprox 56, 21 and 23 percent workforce engaged in them. Most ofthis workforce (94 percent) is in unorganized sector, without anysecurity of tenure whatsoever. Its growth in recent years impliesthat the quality of employment is deteriorating fast. Given India’sbaby boomers joining the workforce by millions each year, thecountry’s economy needs to create 10-20 million new jobs eachyear. Our performance however has been dismal on this frontwhich is evidenced by the rising percentage of self-employedpeople. The government’s employment guarantee schemes likeNREGA notwithstanding, the official rate of unemployment hasbeen rising in recent years as shown in the Table 3. 13We are already in the midst of the demographic transition andhence the necessary institutional and policy framework to reapits benefits should have been already in place demonstrating itsefficacy. But unfortunately that is still not visible. The time ispassing us by and with it our problems are only leaping skywards.It is certain that we will not be able to absorb the burgeoningworking age population, least provide them worthwhile jobsover the next two decades. As such, with falling employmentelasticity world over, this is the larger challenge to the mankindand India cannot be an exception. Surely, those from the upperclasses endowed with market oriented educations and skillswould be in short supply given the global demand, but most ofthe rest would face acute crisis of living. This is bound to poseserious civic and political challenge which could jeopardize oreven reverse the economic dynamic towards utter uncertainty.Some Qualifying ConcernsNotwithstanding the above analysis, what is claimed as India’sdemographic dividend may not look the same if one takes amicro look at the composition of demographic transition. Table4 and 5 provide population projections for the North and SouthIndia. These two tables clearly shows that South India hadentered the favourable demographic phase in the 1990 and israther expected to exit it in the next 15 years time. On the otherhand the North will enter this phase in the next 10 years andremain in this phase until 2025. By the year 2025 the populationof South India would have begun to grey. The median age of thepopulation would have gone up from 26 years in 2000 to 34 yearsin 2025, and nine percent of the population would be of age 65years and over. On the other hand, the North India would have arelatively young population with a median age of 26 and onlyfour percent of the population aged 65 and over. What we see asTHE INDIA ECONOMY REVIEW17

P ROBLEMS & PERSPECTIVESTable 4: Key Results of Population Projection forNorth India, 2000-2025Demographic Indicators 2000 2005 2010 2015 2020 2025Total Population (millions) 450 498 547 597 649 699Population Density (per 319 353 388 424 461 496sq. km)Share of All-Indiapopulation (%)45 46 47 48 49 50Females per 1000 males 924 920 918 917 918 919Growth rate for preceding5-years (%)Total population 2.17 2.02 1.88 1.78 1.66 1.47Population age 15-64years2.23 2.45 2.39 2.24 2.04 1.82Percent 0-14 years 38.1 36.6 34.9 33.3 31.8 30.2Percent 15-64 years 57.6 58.9 60.4 61.8 63 64.1Percent 65+ years 4.3 4.5 4.7 4.9 5.2 5.7Median age 21 22 23 24 25 26Dependency ratio(percent):Child (0-14) 66 62 58 54 50 47Elderly (65+) 8 8 8 8 8 9Total 74 70 66 62 59 56Population 6-14 years(millions)97 105 111 115 120 125Crude Birth Rate(per 1000)Crude Death Rate(per 1000)Crude Growth Rate(per 1000)32.4 29.9 27.8 26.4 24.4 21.911.3 10.5 9.7 9.2 8.6 8.121.1 19.4 18.1 17.2 15.8 13.8Net Reproduction Rate 1.68 1.57 1.45 1.35 1.26 1.15Source: P.N. Mari Bhat, Indian Demographic Scenario, 2025. Population Research CentreInstitute of Economic Growth, Delhi. June 2001the potential demographic advantage of India is rather theresultant of these two profiles, mostly pertaining to the relativelyundeveloped North. Having nearly squandered the advantageassociated with South, we would rather face more challengingsituation emerging in North created by expanding population ofyoung people with relatively low endowment.Finally, the bulge enters the old age bracket, as is happeningin the developed countries, epitomized by Japan currently. Thehigh savings, high investment and high growth associated withthe positive democratic transition have to reverse as the dependencyrises, particularly old-age dependency, unless productivityincreases neutralize the demographic deficit. Table 2 indicatesthat India’s old age dependency in 2050 is at 20, certainly one ofthe lowest in the world; China being at 38, Brazil and Mexico at36. However, just this ratio does not make a good measure ofactual dependency, which rather arises from the combinedinfluence of physiology, culture, institutions, and economicchoice, in ways that we take as given. 14 In India, 50.78 percentrural and 57.35 percent urban old-age people are totallydependent and 15.20 percent rural and 13.71 percent urbanold-age people are partially dependent on others. The incidenceas well as intensity of old-age dependency in India is thus farhigher than anywhere in the world. It could have seriousdampening effect on savings and thereby economy unless mitigativeinstitutional and policy measures are taken in time.Table 5: Key Results of Population Projection forSouth India, 2000-2025Demographic Indicators 2000 2005 2010 2015 2020 2025Total Population (millions) 220 232 242 251 258 265Population Density 346 365 381 394 406 417(per sq. km)Share of All-Indiapopulation (%)22 21 21 20 19 19Females per 1000 males 988 987 987 988 989 991Growth rate for preceding5-years (%)Total population 1.26 1.05 0.86 0.7 0.61 0.53Population age 15-64years1.79 1.67 1.39 1.15 0.83 0.55Percent 0-14 years 30 27.5 25.3 23.2 21.7 20.5Percent 15-64 years 64.4 66.4 68.2 69.8 70.5 70.6Percent 65+ years 5.6 6 6.5 7 7.8 8.9Median age 26 27 29 31 32 34Dependency ratio(percent):Child (0-14) 47 41 37 33 31 29Elderly (65+) 9 9 9 10 11 13Total 55 51 47 43 42 42Population 6-14 years(millions)40 39 38 36 34 33Crude Birth Rate (per1000)Crude Death Rate (per1000)Crude Growth Rate (per1000)20.7 18.3 16.4 15.1 14.5 13.78.6 8.6 8.6 8.7 8.7 8.812.1 9.7 7.8 6.4 5.8 4.9Net Reproduction Rate 1.03 0.95 0.87 0.83 0.84 0.85Source: P.N. Mari Bhat, Indian Demographic Scenario, 2025. Population Research CentreInstitute of Economic Growth, Delhi. June 2001.18 THE IIPM THINK TANK

D EMOGRAPHIC DILEMMASConclusionIndia has tremendous potential advantage in its demographictransition although its temporal mismatch in its developed(South) and undeveloped (North) parts might substantiallyreduce it. Such demographic advantage however is the one timegift to the countries which needs to be capitalized with thebacking of appropriate economic, social and political institutionsand policies. Otherwise, it could easily lead to higher levels ofunemployment and give rise to social unrest. Moreover, if it isallowed to slip off without capitalization, it soon turns into risingliability on account of rising old-age population. India’s apparentlow ratios of dependency mislead one into ignoring thismounting burden. They may be escalated substantially to betruly comparable with others.India has already allowed much of this advantage to lapse.There is no indication yet in the policy trend that it would catchup with it before it lapses. On the contrary, this advantage ismanifesting into a grave unemployment crisis. Its run after theneoliberal mirage of economic growth at the cost of distributivejustice has already done significant damage to the economy.Much of its advantage is currently being monopolized bythe increasingly smaller numbers of the elite to make it thefastest producer of Dollar billionaires in the world while themajority is faced with crisis of survival. This growing inequalityis bound to feed the fury of the majority of youth which isgetting pushed into nowhere in absence of jobs. If our policymakers realize the incipient danger through this demographictransition, which is fast passing us by, and shun their elitistpolicy myopia, it would prove to be the greatest dividend to usthrough this demographic learning.Endnotes and Additional Thinking1Bloom, Canning, and Sevilla (2000), Labor Force Dynamicsand Economic Growth, paper presented at the August 2000Summer Institute of the National Bureau of EconomicResearch, Labor Studies Program.2See http://www.ilo.org/public/english/bureau/stat/newsletr/nine.htm. [Last Accessed: 4 th March 2000]3C.H. Paxson (1996), “Savings and Growth: Evidence fromMicro Data”, European Economic Review, Vol. 40, pp.255-288; and A. S. Deaton A.S. and C. H. Paxson (1997),“The Effects of Economic and Population Growth onNational Savings and Inequality”, Demography, Vol. 34, pp.97-114.4D. E. Bloom and J. G. Williamson (1998), World BankEconomic Review, 12 (3), 419. D. E. Bloom, D. Canning, P. N.Malaney (2000), Population Development Review, 2000,Supplement to Vol. 26, pp. 257-290.5Bloom, D. and Williamson, J. (1998), Demographic Transitionsand Economic Miracles in Emerging Asia. World BankEconomic Review 12, 419-56; Bloom, D., Canning, D., andMalaney, P. (2000), Demographic Change and EconomicGrowth in Asia, Population and Development Review. Vol.26, supp., pp 257-290.6Inter-American Development Bank (2000), DevelopmentBeyond Economics, IDB 2000 report, Washington DC.7During 2010 to 2025 China’s median age will rise from 34 to39. In the US, Western Europe and Japan it will rise from 37,42 and 45 to 39, 46 and 51, respectively.8United Nations Children’s Fund (UNICEF) (2000), ‘Trackingprogress on child and maternal nutrition: A survival anddevelopment priority’, November 2009.http://www.unicef.de/fileadmin/content_media/mediathek/AR_046_Tracking_Progress_Nutrition_2009.pdf.[Last Accessed: 4 th March 2000]9http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTEDUCATION/0,,contentMDK:22339000~menuPK:282424~pagePK:64020865~piPK:149114~theSitePK:282386,00.html.[Last Accessed: 4 th March 2000]10Shubhajit Roy (2007), Higher education, lowest standards,Indian Express, Jun 10 th , 2007.11Assocham Eco Pulse Study (2008), “Comparative Study ofEmerging Economies on Quality of Education”, November2008. www.assocham.org/arb/aep/quality-of-education_nov_2008.pdf. [Last Accessed: 4 th March 2000]12Shailendra Sharma, Employment (vision 2025), PlanningCommission: http://planningcommission.nic.in/reports/sereport/ser/vision2025/emp2025.PDF.[ [Last Accessed: 4 th March2000]13The rate of unemployment has risen from 7.3 percent in1999-2000 to 8.35 percent in 2004-05, as the Labour andEmployment Minister Oscar Fernandes informed the RajyaSabh on 18.03.2008.14Martin, L.G., and Preston, S.H. (1994). Demography ofAging, National Academy Press, Washington.(The views expressed in the write-up are personal and do not reflectthe official policy or position of the organization.)THE INDIA ECONOMY REVIEW19

P ROBLEMS & PERSPECTIVESGLOBAL FINANCIAL CRISIS AG. ThimmaiahHonorary Visiting Professor,Institute for Social and Economic Change, BangaloreGlobal financial crisis is an important economic eventwhich engulfed the entire world towards the end of2008. It resulted in the economic meltdown of USAand Europe It proved the Marxian prediction of the inevitablecollapse of capitalism. It also revived the interest in the longforgotten Keynesian solution of government intervention ineconomic activity to save the western capitalist economies.How is India affected by this global financial crisis? How hasthe government managed the impact of the global financialcrisis on the Indian economy?Genesis of Global Financial CrisisIt is generally believed that the US housing bubble was themain cause for the US financial crisis of 2007. That financialcrisis spread to other parts of the world through the interconnectedglobalized financial markets. How did the US housingbubble emerge? Easy availability of mortgage loans for housebuyers in general resulted in profligate lending by mortgagebanks to people who were previously refused housing loans onthe basis of their low credit rating, (‘sub-prime’ borrowers, asthey were not having regular income). But when there waseasy availability of refinance at low rates of interest fromcommercial banks and investment banks, mortgage banks20 THE IIPM THINK TANK

E MERGING INDIAAND INDIAN ECONOMYoverstretched their lending to prime borrowers and later toeven ‘sub-prime’ borrowers. In order to replenish their funds,the house mortgage banks started securitizing their housemortgage loans and selling the securitized mortgage loans at adiscount to investment banks, hedge funds and insurancefirms. These securitized mortgage loans were rated for theircredit quality by US credit rating companies like Standard andPoor, Moody and Fitch. Such credit rating encouraged thecommercial and investment banks to take risk mainly guidedby sheer greed of making profit. They in turn packaged thosesecuritized house mortgage loans which they had purchasedfrom the mortgage banks and sold them to insurance firms andforeign banks through globalised capital markets. The totalhousing mortgage loans so packaged and sold amounted to awoofing $10.5 trillion by mid-2007. The US Wall Street playeda major role in transacting these securitized financial instrumentswhich were issued on the basis of house mortgage loans.When the foreign financial institutions started purchasingpackaged mortgage loans, mortgage banks started lendingmore to housing companies who in turn used that money forconstruction of more and more houses and selling them tofinancially unviable buyers. However, the house mortgagebanks, the original sinners, started facing delinquency in loanrepayment from the ‘sub-prime’ borrowers and were forced todeclare foreclosures, (public auction of houses), as they couldnot absorb the massive defaults of loans. When the mortgagebanks and other financial institutions failed to sell thesesecuritized houses to other buyers, they became toxic assets onTHE INDIA ECONOMY REVIEW21

P ROBLEMS & PERSPECTIVESWhat was worse,the bank losseswere transmittedto other countriesthrough theglobalizedfinancial marketstheir balance sheets. Such bad loans entered into the balancesheets of almost all financial institutions which had participatedin the sophisticated process of mortgage financing.There was another factor which led to this kind of recklesslending resulting in housing loan defaults by the ‘sub-prime’borrowers. After the great depression of 1930’s severalbanking regulations were introduced in USA. But those wereignored during and after the SecondWorld War. But after the savings andloans banks failure in the USA in the1980’s, more regulations were imposedon the operation of all types of financialinstitutions like banks, mutual funds,hedge funds, mortgage banks, insurancefirms and stock markets. They stabilizedthe America financial system and USAexperienced one of the longest growthtrend during 1990’s. However, whenthere was world wide revival of theideology of free market capitalism, Reagan administrationscrapped most of the regulations of the USA financial system.This encouraged American financial intermediaries likecommercial banks, investment banks, mortgage banks, mutualfunds, hedge funds, stock markets, broking firms to innovatenew instruments of trading in financial assets like shares,debentures, and commodities like oil, food grains, metals andother raw materials. They devised new forms of derivatives,financial futures, credit default swaps and used them insophisticated futures trading. When the USA economy wasbooming in the early 2000’s, these financial institutionsencouraged the commercial banks, investment banks, insurancefirms and hedge funds to trade the securitized housingloans through these newly created financial instruments. Whatis more, such repackaged mortgage loans were sold to commercialbanks, mutual funds and insurance companies outsideUSA. Many European, British, Canadian, Australian, Japaneseand South Korean banks purchased them hoping to makeprofit through capital appreciation.Once the commercial banks, investment banks and insurancefirms which had purchased securitized repackagedmortgage loans found these as good as useless, they startedfacing huge losses on their balance sheets. Once this negativefinancial impact started, many big financial firms like BearStreans, investment banks like Lehman Brothers and Insurancecompanies like AIG and even federally owned refinancinginstitutions like Fannie Mae and Freddie Mac faced hugelosses and started laying off their employees. This led to fall inconsumer demand through multiplier effect. All this led to thecollapse of both investment and consumer confidence in theAmerican economy by mid-2007. What was worse, such banklosses were transmitted to other countries through theglobalized financial markets and led tochain reaction all over Europe andEngland where Royal Bank of Scotlandand Barclays bank faced severe losseswhich forced them to cut their labourforce. This process spread to MiddleEast, Asia and even to Australia.Thus, excessive lending by housemortgage banks to ‘sub-prime’ borrowershoping to make more profit fromhouse sales created housing bubble.Failure of house buyers to repay theirloans to mortgage banks because of absence of regular incomeforced the banks to resort to public auction of houses. Failureto realize the invested amount from the securitized mortgageloans led to enormous losses to the financial institutions whichhad invested in securitized loans. In order to minimize theirlosses, they laid off thousands of workers. This created suddenfall in domestic demand for not only domestic products butalso for the products imported from many European, Asianand Middle East countries. Many Asian countries like Singapore,Malaysia, and Taiwan who were dependent on theirexports to USA suddenly faced sharp decline in their exportearnings. This is evident from the following Table 1:Table 1: Growth Rates of World Exports and ImportsDuring Recession Years(Goods and Services) % Change2008 2009 2010 (Projected)I. Exports From :1. Advanced Economies 1.8 -12.1 5.92. Emerging Economies 4.4 -11.7 5.4II. Imports Into:1. Advanced Economies 0.5 -12.2 5.52. Emerging Economies 8.9 -13. 5 6.5Source: Economic Survey, 2009-10, GOI22 THE IIPM THINK TANK

E MERGING INDIASuch decline in the demand for exports did not spare evenemerging economies like China and India. This resulted inreduction of work force employed in export units. That in turnreduced domestic demand in their economies which resultedin fall in the growth rates of their GDP.Even the financial sector was not free from such globalisedimpact. As soon as the stock markets collapsed in USA andEurope, there was panic in the Indian stock markets. Theforeign institutional investors who had invested in Mumbaistock market suddenly withdrew their investment. Thisnaturally dipped the BSE sensex. The value of sensex whichreached 17,578 on February 2008 declined to 16,371 on March28 th , 2008. It further declined to 14,043 on July 6 th , 2009because of the net selling by the foreign institutional investors(FIIs). Such decline was noticed in many other Asian stockmarkets also. Table 2 shows the change in the equity indexvalue of share indices of major Asian countries in major AsianStock Markets after the US financial crisis. It may be observedthat the downward pressure on the share values was severe in2008. However, in 2009 share values recovered in some Indianand Chinese stock markets because of economic stimulusmeasures announced by their governments.It may be observed from Table 3 that the Foreign InstitutionalInvestors sold more than they purchased in theirportfolio investment in India in 2008 resulting in net disinvestmentin Indian equity and debt in 2008 when the financialcrisis was deep. This obviously resulted in loss of share valuefor the Indian companies whose shares were purchased by theFIIs. This was the only impact of the US financial crisis on theIndian financial system. There were no bank failures in Indiaas it happened in USA and Europe. It has been estimated thatthe value of shares of international companies melted down by$14.5 trillion in 2008 which was more than the GDP of USA,Table 2: Cumulative Change of Equity Index Over2003 Level in Asian Stock Markets (Points)Equity Index 2007 2008 2009BSE Sensex (India) 247.4 65.2 199.1Hang Seng Index (Hong Kong) 121.2 1.1 74.2Nikkei 225 (Japan) 43.4 -22.9 -5.3TSEC Weighted Index (Taiwan) 44.4 -25.2 32.3SSE Composite Index (China) 251.5 43.7 116.9Source: Economic Survey, 2009-10, GOITable 3: FII Investment in Equity and Debt Instrumentsof Indian Companies. (Rs. in Crores)FII Investment 2007 2008 2009Gross Buying(B) 846295 769625 736010Gross Selling (S) 765380 810841 648023Net Investment (B-S) 80915 -41216 87987Source: Economic Survey, 2009-10, GOIwhich was $13.8 trillion.The financial crisis created by US house mortgage bankswas transmitted to the real economy through the mechanismof financial losses forcing large scale lay off of their workerswhich in turn reduced consumer demand both for domesticand foreign products. This ultimately shrank the GDP of thecountries which were connected through financial globalizationas well as international trade. The real economy of USAstarted melting down which was in turn transmitted to Europeanand Asian economies in the form of falling exports,falling domestic and foreign demand and ultimately fall in thegrowth rates of their GDP. The globalized interdependenteconomies started facing fall in their growth rates of GDP.This was the economic meltdown which originated from theUS housing financial crisis. It was estimated that the worldoutput would grow by three percent in 2008 but likely todecline to a mere 0.8 growth rate in 2009. It was also estimatedthe advanced economies will grow only by 0.5 per cent ascompared to negative growth in 2007 and their growth mayimprove only in 2009.Impact of Global Financial Crisis on Indian EconomyThough the financial crisis started in USA in August 2007,its impact on the real economy started manifesting only bySeptember 2008 all over the world. When the process offinancial crisis was evolving in USA and Europe, Indianpolicy makers argued that since Indian financial system waswell regulated and not closely integrated with the globalfinancial system,(in the absence of full capital accountconvertibility of Indian rupee), its impact would be veryminimal. However, Indian financial system could not escapecompletely from the impact of the US financial crisis. SomeIndian banks were exposed to the toxic assets of the mortgagebanks of USA. One big private bank namely, ICICIbank, was exposed to the American toxic assets substantially.THE INDIA ECONOMY REVIEW23

P ROBLEMS & PERSPECTIVESIt is true that the Reserve Bank of India had supervised theIndian banking system effectively and ensured adequatecapital base for the banks. Their loan policies were alsocarefully watched which prevented any substantive impact onthe Indian financial system. As a result, Indian financialsystem did not adversely impact the real economy of India.The macroeconomic fundamentals were reasonably inbalance and hence the real economy was saved from anypossible adverse impact from the well insulated financialsystem.Notwithstanding such prudent management of the Indianfinancial system, the Indian economy could not escape fromthe adverse impact of the meltdown of the real economy inthe west. After the introduction of structural reforms, Indianeconomy got integrated into the global economy. Globalizationprocess integrated the Indian economy with the economiesof the west, which enabled India to move on to a highergrowth path and reduce poverty. But that global economicintegration itself exposed the Indian economy to adverseimpact of the economic meltdown of the western countries.In other words, though the financial crisis of USA did notspread to Indian financial system, the meltdown of the realTable 4:Sectoral Growth Rates of GDP in India inPre-Melt Down and Meltdown Years. (At 2004-05Prices) PercentPre-Meltdown Years Meltdown YearsSector 2006-07 2007-08 2008-09 2009-101.Agriculture, Forestry& Fishing3.7 4.7 1.6 -0.22. Mining & Quarrying 8.7 3.9 1.6 8.73. Manufacturing 14.9 10.3 3.2 8.94. Electricity, Gas &Water Supply8.5 10.0 3.9 8.25. Trade, Hotels & Restaurants11.2 9.5 5.3 8.36. Construction 10.6 10.0 5.9 6.57. Transport, Storage &Communication8. Finance,Insurance,Real Estate & BusinessServices9. Community,Personal& Social ServicesTotal GDP of Indiafrom all sectorsNote: Included under item 8.Source: CSO /Economic Survey,2009-10, GOI12.6 13.0 11.6 Note14.5 13.2 10.1 9.92.6 6.7 13.9 8.29.7 9.2 6.7 7.2economy of USA and Europe impacted the real economy ofIndia. This is evident from Table 4:It may be observed from the data presented in Table 2,that of all sectors of the Indian real economy, only miningand manufacturing sectors and to some extent trade wereaffected from 2007-08 by the economic meltdown of thewestern economies. This was obvious because of the fall inthe demand for India’s iron ore and also due to the decline inexports particularly garment exports. Even then the Indianeconomy sustained an impressive growth rate of 9.2 percentin 2007-08. This was the second highest growth rate nextonly to China in the whole world. And this is in contrast tothe shrinking of the real economies of many western economies.However, the Indian economy could not withstand theimpact of the global meltdown beyond 2007-08. In 2008-09there was an all round decline in the growth rates of GDPfrom almost all sectors except from community, personaland social services. Consequently, the GDP of the countrycould grow only at 6.7 per cent in 2008-09, a decline of 2.5percent over the previous year. What became alarming wasthe sudden decline of the growth of exports from 29 percentin 2007-08 to 13.6 per cent in 2008-09, a negative growth of20.3 per cent in 2009-10. All these declining economic activitiesresulted in lay off of workers. It was estimated by BibekDebroy (2009), that Indian export sector had created aboutsix million direct jobs and another nine million indirect jobs.Of these, two million jobs were lost owing to the decline inexports. In the manufacturing sector about 25 percent of theworkers were laid off. In the construction sector of Gulfcountries about 20,000 workers, mostly from Kerala, losttheir jobs. About 40,000 workers in engineering industry(cycle and hand tools), lost jobs though from all over Indiabut mainly from Punjab and Tamil Nadu. In Gujarat aboutone lakh gems and jewellery workers were laid off. Thegarment industry laid off about five lakh workers mainly inPunjab (Ludhiana), and Tamil Nadu (Tirusur). Job lossesspread even to sun rise sectors like IT and BPO services. It isnecessary to remember that whereas in western countrieslaid off workers get social security benefit for almost sixmonths until they get new jobs, in India out of 50 croreworkers only about four crores are in organized sector wheresocial security benefit is provided. The rest the workers whoare mainly in the unorganized sector have to fend for24 THE IIPM THINK TANK

E MERGING INDIAthemselves. The only social security for them is MNREGSwhich has come into effect only for the last five years. Mr.Pranab Mukherji has made a beginning to provide them pensionand insurance benefits in his budget for 2010-11.The efforts of the successive governments after theintroduction of economic reforms to reduce poverty byachieving higher growth rates of GDP were made ineffectiveby the decline in the growth rate of GDP and large scale joblosses on account of the meltdown of the real economy ofIndia.Policy Response toEconomic Meltdown and Its ImpactThe above narrated economic melt down alarmed the UPAgovernment in 2008 itself though the Union Finance Ministerasserted that it will not have much impact on Indianeconomy as it was well insulated fromglobal economic events. However, thecountry was expected to face Parliamentaryelections in middle of 2009which added political weight to theplight of the unemployed. Alarmed bythese ground realities, the policymakers swung into action. So onDecember 6 th , 2008 the Prime MinisterDr. Manmohan Singh, who was temporarilyholding the finance portfolio,(after the exit of Shivraj Patil as HomeMinister which resulted in shifting of P. Chidambaram asHome Minister), announced a very bold 14-point stimuluspackage to revive the Indian economy. These 14- points werefourteen stimulus measures. They were:1. Additional plan expenditure was increased by Rs. 20,000crores for infrastructure development during next fourmonths from December 2008 to March 2009.2. Authorised Infrastructure Investment Finance corporationto raise an additional amount of Rs. 10,000 crores byissuing tax-free bonds for spending on infrastructuredevelopment.3. Excise duty reduced across the board by four percent.4. Public sector banks were asked to lend housing loans upto Rs. 20 lakhs at seven to eight percent interest.5. Rs. 350 crores were allocated for providing exportincentives to revive exports.The Indian exportsector had createdabout six milliondirect jobs andanother ninemillion indirectjobs in 20096. Backup guarantee was announced for ECGC for up toRs. 350 crores.7. Two percent interest subvention was announced forlabour intensive exports.8. Rs. 1,100 crores were announced to ensure full refund ofexcise duty.9. Additional Rs. 1,400 crores of assistance was announcedfor textile sector under TUF ( Technology UpgradationFund) scheme.10. The guarantee cover for loans to SMEs was doubled toone crore rupee.11. The lock-in period for such collateral-free loans wasreduced.12. Government departments were allowed to take upreplacement of vehicles.13. Export duty on iron fines was eliminated.14. Import duty on naptha for use inpower sector was eliminated.In addition to these fiscal stimulusmeasures, the Reserve bank of Indiaalso announced monetary measures toincrease the liquidity available in theeconomy particularly for export sector,housing sector, auto sector andconstruction sector. The RBI reducedthe Repo rate from 7.5 to 6.5 andReverse Repo rate from six to fivepercent. The RBI also enhanced therefinance capacity of SIDBI to Rs. 7,000 crores and of NHBto Rs. 4,000 crores.Thus the stimulus measures targeted power sector,exports, housing, automobile, SME and infrastructuresectors to revive the economy from recession. These stimulusmeasures coupled with anti-cyclical fiscal deficit measureannounced in the Union budget for 2008-9 created positiveimpact on the economy. Growth rate of exports whichsuffered sharp fall in 2008-09 started recovering from thethird quarter of 2009-10 as may be seen in Table 5.When the Union Finance Minister Mr. Pranab Mukherjipresented only the interim budget for 2009-10 in February,because of the ensuing Parliamentary elections, he did notwant to announce major policy decisions on the ground thatthe government did not have the mandate to do so as theParliamentary elections were due in the middle of 2009.THE INDIA ECONOMY REVIEW25

P ROBLEMS & PERSPECTIVESAfter the return of the UPA government to power followingthe Parliamentary elections, Mr. Pranab Mukherji presentedthe full budget in July 2009 in which he increased the planexpenditure by 14.9 percent, non-plan expenditure by asmuch as 17 percent and overall government expenditure by13.3 percent. The non-plan expenditure included the sixthpay commission recommendations on the pay scales ofgovernment employees. He also extended the exemption ofexport earnings of IT companies under STPI by one moreyear. He increased the exemption limits of income tax. Allthese measures increased the fiscal deficit of the governmentbeyond the limit prescribed under Fiscal Reform andBudgetary Management Act. Such increased fiscal deficitwas justified as a counter-cyclical fiscal measure which wasneeded to stimulate the recession stricken economy exports.In addition to these fiscal stimulus measures, the Reservebank of India also announced monetary measures to increasethe liquidity available in the economy particularly forexport sector, housing sector, auto sector and constructionsector. The RBI reduced the Repo rate from 7.5 to 6.5 andReverse Repo rate from six to five percent. The RBI alsoenhanced the refinance capacity of SIDBI to Rs.7000 croresand of NHB to Rs. 4000 crores.Thus the stimulus measures targeted power sector,exports, housing, automobile, SME and infrastructuresectors to revive the economy from recession. These stimulusmeasures coupled with anti-cyclical fiscal deficit measureannounced in December, 2008 created positive impact onthe economy. Growth rate of exports which suffered sharpfall in 2008-09 started recovering from the third quarter of2009-10 as may be seen in Table 5.It becomes clear from the foregoing data that growth ratesof both exports and imports went on declining until themiddle of 2009-10. By that time most of the export specificstimulus measures started stimulating the exports and as aTable 5: Quarterly Growth Rates of Exports andImports (Percent)2008-09 2009-10Q1 Q2 Q3 Q4 Q1 Q2 Q3Exports 57.0 39.5 -4.0 -20.3 -38.6 -21.0 6.0Imports 38.7 73.8 7.4 -24.0 -35.0 -33.6 1.2Source: Economic Survey, 2009-10, GOIresult the growth rate of exports turned positive at sixpercent in the third quarter. It may be mentioned here thatthe Union Finance Minister Mr. Pranab Mukherji hascontinued most of the stimulus measures specifically providedto export sector. This continuation will further pushup the growth rate of exports in the next quarter and thereafter.As far as the recovery of other sectors is concerned, datapresented in Table 4 indicate that they have started recoveringfrom 2009-10. In view of this recovery of sectoral growthrates of GDP, the Union Finance Minister Mr. PranabMukherji has rolled back partially some of the fiscal stimulusmeasures to reduce the fiscal deficit from 6.9 percent to 5.5percent in his recent budget for 2010-11. This is intended tomoderate the inflationary pressure in the economy which hasstarted showing up in food grains prices. He has increasedthe excise duty on non-petroleum products by two percent.He has also restored the basic custom duty on petroleumproducts. But he has increased plan expenditure on infrastructureand rural development to ensure adequate domesticdemand for the economy..Thus the Indian economy started recovering from theslowdown towards the end of the fiscal year 2009-10. This isevident from the 7.2 percent growth rate of GDP. Exceptagriculture which suffered a negative growth rate of 0.2percent and transport, real estate, finance and communityand social services, all other sectors have shown recovery.Notably, mining, manufacturing, construction and electricitygeneration have shown remarkable recovery. Thus the Indianeconomy which was negatively impacted by the meltdown ofthe western economies for one year has started recovering.The Union Finance Minister has projected a growth rate ofGDP of 8.5 percent for the coming fiscal year 2010-11.Thiswould mean that the Indian economy will return back tonine percent growth path by 2011-12. Let us hope that thisexpectation will be realized in the coming years.References and Additional Thinking• Debroy, Bibek, “Global Downturn and Its Impact”, inGlobal Financial Crisis: It’s Impact On India’s Poor,(2009), UNDP, India(The views expressed in the write-up are personal and do notreflect the official policy or position of the organization.)26 THE IIPM THINK TANK

P ROBLEMS & PERSPECTIVESTrade,Corporate Marketand Indigenous People28 THE IIPM THINK TANK

I NDIGENOUS INDIAGoldy M. GeorgePhD Research Scholar,School of Social Sciences,Tata Institute of Social Sciences, MumbaiThe Copenhagen drama is over. Nothing came out ofit. It was predicted the same by many expert andmany intellectuals, activists, professional expertskept a distance from this proscenium. But what is thatconcerns the ordinary people of this nation? How does marketand market values related with people at large and particularlythe Dalits, Adivasis and the exploited sections of Indiansociety? What is the correlation between trade, corporates,market and indigenous communities of this land who still havethe noble quality of surviving on a minimum basis?A Competition of UnequalsIn March 2009, European Parliamentcame up with a resolution on EU-IndiaFree Trade Agreement, where one of themajor concerns raised was the inabilityof India to contain with the problems ofDalits and Adivasis. The reason identifiedwas the lack of administrative andpolitical will of the government, whichunderlines the existence of an unjustsocio-political divide. Apparently thisstratifies the inability of Dalits and Adivasis to coup up withthe situation under free trade formula particularly in thecontext of unjust caste system.In October 2008, the Director General of WTO, PascalLamy said, “All of the models suggest that the gains todeveloping countries will be larger the more they open theirmarkets to trade.” Citing specific cases, he said, “sinceopening their economies, Asian giants like China and Indiahave together lifted more than 440 million people out ofpoverty, an economic success.” While trade has been anengine of aggregate economic growth, Lamy did not considerthe unmitigated displacement of traditional sectors and theuneven development that has led to an alarming rise inincome inequality both socially and geographically withineach country.Industrialization has today proved to be the worst form ofWhat is thecorrelationbetween trade,corporates, marketand indigenouscommunitiesof this land?development with unchecked exploitation, particularly withWTO taking the centre stage of all sorts of trade relatedagreements and transactions. Trade is no longer buying andselling of goods and services but it encompasses issues likeIntellectual Property Rights, exploitation of resources,maintenance of supremacy, mobilizing capital, controllingshare market etc. Prophets of free trade argue that it maximizeseconomic output but what has been witnessed is acompetition of unequals – diametrically opposite to theseclaims.Corporates Trading IndigenityThe symbiotic relationship between the forest-based communitiesand the forest Eco-system is an eternal truth. Their lifecannot be segregated into watertight compartments such associal, economic, political, religious, cultural, administrative,intellectual, spiritual, etc. UndoubtedlyAdivasis, live in close relationship withthe forest and have the greater dependencyon it. There are many Dalit artisanand craftsman communities like Kuravain Kerala, Mala communities in AndhraPradesh, Basod in Madhya Pradeshdependent on the forests. However theircustomary rights were either curtailedor ignored by every ruler – both Colonialand National.Undeniably the past policies led tounchecked forest destruction, affecting people’s lifestyle andstuck at the very survival. People’s control over NaturalResources was further reduced with the direct intervention ofWorld Bank in funding forest projects. Biodiversity, bionetworkgenealogy, natural knowledge, medicinal herbs etc. aretreasure of wealth in forests. With land, forest and water in theopen market, life and culture turns corporatized, slowlylegitimizing an unquestionable political and social controlover people.State has turned out to be an implementation tool of thecorporatehood. For instance private participation in miningsector is widely open in Chhattisgarh. The State’s MineralPolicy has created conducive business environment to attractprivate investment with simplified procedures. The state isinterested to provide resources and manpower such astailor-made programs in geology, geophysics, geochemistry,THE INDIA ECONOMY REVIEW29

P ROBLEMS & PERSPECTIVESmineral beneficiation, mining engineering, land procurement,financial support, recommend for mining operations in forestsarea, etc. For the people, their dependency on land and forestis not just as a productive asset but as a symbol of theirself-determination, co-existence, community feeling anddignity.Displaced & DislocatedMining projects, power plants, dams, defense projects,wildlife management, botanical gardens, bio-experiments,eco-tourism, etc has displaced large population across thecountry. For example in Chhattisgarh alone almost 17 lakhacres demarcated for wildlife conservation consisting of 250villages with an approximate population of 50,000 had alreadybeen cleared off. Ten major dams acquired 2,57,032.585 acresof land affecting 238 villages and their rehabilitation has notyet been done. Thirty medium projects impacted 123 villageswith an acquisition of 32,745.13 acres. These statistics are of2000, which has gone several multiple by now.Sarguja, Raigarh and Bilaspur districts are the coal zones. Itis estimated that more than 72,000 acres was leased to SECLfor coal mining, dislocating hundreds of villages. Nearly20,000 acres have been occupied for mining steel in Bailadeelaand Dalli Rajhara area of Bastar and Durg districts withsome of the rare quality of steel. In Raipur, Durg and Bilaspur,there are 10 big cement plants and its auxiliary units.Huge diamond deposits in Devbhog (Raipur) and Bastar arealso in the eyes of the MNCs. In all for cement industry 2,990acres, 14,530 acres for rice mills, 7,665 acres for steel industry,for ferry alloys 940 acres and 285 acres for re-rolling millswere already acquired till 1998. Apart from these 18,652.377acres of land has been given for mining.Within the last two years, Chhattisgarh has signed 61 MoUswith Independent Power Producer (IPP) to generate 50,000MW of electricity with an investment of nearly Rs. 2,50,000crores. National Thermal Power Corporation signed anagreement last July to set up a 4,000 MW plant needing30,000 hectares. 16 power projects are to be established inJanjgir-Champa district alone with an approximate estimationof 80,000 acres of land for unit establishment, ancillarydivisions and blocks, overburden dumping, fly-ash, staffquarter, road, and other infrastructure.Between 2005 and 2007 Jindal alone had applied for theprospecting licence (PL) and mining licence (ML) for 6,110.95sq km and another 1,559.172 hectare (3,852.66 acres) inDantewada, Bijapur, Narayanpur, Rajnandgoan, Bilaspur,Janjgir-Champa, Raigarh, Jashpur and Surguja districts. Thisgives a glimpse of displacement or possible dislocation. Asurvey by a Delhi based NGO revealed that over 1.5Jharkhandi Adivasi girls/women are domestic workers inDelhi. Over half of them are found to be from displacedgroup. Non-recognition of land rights implies land alienationwhich further leads to depeasantisation.Seeking Market or Alternatives?Under the impact of corporate market the lifestyle, cultureand ethos of indigenous people change forcefully. Land isturned into a commodity with concentration on corporatecapital. People’s rights are systematically and strategicallybypassed, excluded or isolated, while a new army of easilydisposable domestic refugees emerge. The historic omissionand betrayal continues multifold. It is a conflict betweensurplus and survival, subsistent economy and market economy,between community life and competition.Devastating development based on industrialism andwasteful growth is the root cause of this. Developing countriesmust be allowed the policy flexibility and political space tocreate national development strategies to increase incomesand secure livelihoods. Policies should create employmentand raise productivity, especially in the agricultural andinformal sector along with progressive taxation system, landreform and equitable access to education, health, credit andtechnology.Hence a reorienting of economies from production forexport to production for the local market is required. Deemphasizegrowth and maximize equity in order to radicallyreduce environmental disequilibrium. Global policymakersneed to understand not only the economics of aggregategrowth, but the socio-economic impact of globalized flows onthe distribution of income aligning welfare of human beings.One needs to come out of the socio-political inferiority andimpotence, which prevents them from identifying the dehumanizingsituations, and restricts them to magical explanationsand limits the activities to passive acceptance andresignation.(The views expressed in the article are personal and do not reflectthe official policy or position of the organisation.)30 THE IIPM THINK TANK

P ROBLEMS & PERSPECTIVESIMPACT OF ENVIRONMENTON POVERTY IN INDIAT. Koti ReddyFaculty in Economics, ICFAI Business School, Hyderabad32 THE IIPM THINK TANK

I NDIAN INDIGENCEIntroductionEconomic growth is a prerequisite for poverty reduction, butthat a sustainable development strategy will also need to takeinto account the impacts of growth on the environment. Rapideconomic growth over the past two decades has createdunprecedented opportunities for poverty reduction in India.Sustained growth, allied to policies that tackle deep socialdisparities, is a basic requirement for overcoming the country’slarge human development deficit (UNDP 2007-08). Thechallenge of reducing widespread poverty in India remains atthe centre of the development paradigm for the country. Theprocess of development inevitably involves the use of naturalresources in economic activities, it has become increasinglyclear in recent years that for any poverty reducing growthstrategy to be sustainable, it must address environmentalconcerns and sustainable utilization ofgenerally limited natural resources(Charles Leyeka Lufumpa 2005). This isparticularly the case for India where themajority of poor live in rural areas andtheir livelihoods are critically dependenton the exploitation of natural resources.Improvements in the economic wellbeingof the population can only besustained in the long run if the naturalresources are utilized in a sustainablemanner.The average growth rate of the Indian economy over aperiod of 25 years since 1980-81 has been about six percent - asignificant improvement over the annual growth rate of 3.5percent over the previous three decades from 1950-51 to1979-80. In the more recent period, the Indian economy hasentered a high-growth phase with the growth rate averaging8.6 percent in the last four years and over nine percent perannum during the last two years. The Reserve Bank of Indiahas projected the Indian economy to expand by 7-8 percentduring the current fiscal year ending March 31 st , 2009. Themain reason for the fall in the overall expansion during theperiod under review (July-September 2008) was a low fivepercent growth in the manufacturing sector as opposed to 9.2percent in the like period of last fiscal. Similarly agriculturealso logged a significantly lower growth of 2.7 percent asopposed to 4.7 percent, while Hospitality, transport andcommunications expanded the best 10.8 percent as against 11Low productivityper hectare andlow productivityper worker arelargely a resultof technologicalbackwardnesspercent during the second quarter of fiscal 2007-08. Financialservices, realty and business services also registered a notablegrowth of 9.2 percent against 12.4 percent, given the circumstanceswhere real estate companies have been complainingabout a major slow down (CSO 2008).Issues like global warming and the resultant climate changehave gained importance in international discussions. Globally,carbon trading has grown rapidly in recent years. There is aneed to balance the harmful effects of human activity onglobal warming against the need for poverty reduction andeconomic growth in developing countries like India. The issueof global social justice cannot be delinked from the issue ofglobal public goods like the atmosphere.Climate change may affect people’s health both directly andindirectly. For example, heat stress and other heat relatedhealth problems are caused directly byvery warm temperatures and highhumidity. Indirectly, ecological disturbances,air pollution, changes in foodand water supplies, and coastal floodingare all examples of possible impacts thatmight affect human health. How peopleand nature adapt to climate change willsubstantiate how seriously it impactshuman health. Generally, poor peopleand poor countries are likely to sufferthe most.There are at least three key reasons why poverty and theenvironment should be addressed as a twin problem in India.First, the main problem in India is the high level of birth ratescoupled with a falling level of death rates. The fast rate ofgrowth of population necessitates a higher rate of economicgrowth in order to maintain the same standard of living of thepopulation. Second, the majority of the population dependson low-productivity, rain fed agriculture for their livelihood.The low productivity per hectare in Indian agriculture and thelow level of productivity per worker in agriculture andindustry are largely a consequence of technological backwardness.Third, inadequate economic policies increase the risksrelated to farming, thereby inhibiting the use of enhanced andmore efficient agricultural technologies.2.Poverty in IndiaThe combined poverty ratio is declined from 54.9 percent inTHE INDIA ECONOMY REVIEW33

P ROBLEMS & PERSPECTIVESTable 2.1 International Poverty Lines and GDP per Capitafor Selected Countries2009, inspite of the absolute value of thehuman development index (HDI) for IndiaCountryPopulation Populationimproving from 0.577 in 2000 to 0.611 in 2004GDP HDISurvey Below$1.25a Below$2 aPer capita Rank and further to 0.612in 2007, the relativeYear Day % Day %(PPP US$) (2007)(2000-07) (2000-07)ranking of India has not changed much.India 2007 41.6 75.6 2753 134The strength of the relationship betweengrowth and poverty is usually measured by theKenya 2007 19.7 39.9 1542 147poverty elasticity with respect to per capitaNigeria 2007 64.4 83.9 1969 158GDP. Our estimate of poverty elasticity is inEritrea 2007 --- ----- 626 165the range of -0.86 to -0.77.There has been noEthiopia 2007 39.0 77.5 779 171significant acceleration in the process ofSierra Leone 2007 53.4 76.1 679 180 poverty reduction during 1980-2005 despiteNiger 2007 65.9 85.6 627 182 an acceleration in the growth of per capitaSource: Human Development Report 2009GDP. There is now a growing consensus thatthe poverty reduction strategy must also rely1973-74 to 36 percent in 1993-94. The poverty ratio declinedby nearly 10 percentage points in the five year period between1993-94 to reach 26.1 percent in 1999-2000. While theproportion of poor in the rural areas declined from 56.4percent in 1973-74 to 27.1 percent in 1999-2000, the decline inthe rural areas has been from 49 percent to 23.6 percentduring the same period. In absolute terms, the number ofpoor declined to 260 million in 1999-2000, with about 75percent of these being in the rural areas.Incidence of poverty is estimated by the Planning Commissionon the basis of quinquennial large sample surveys onhousehold consumer expenditure conducted by the NationalSample Survey Organization (NSSO). The Uniform RecallPeriod(URP) consumption distribution data of NSS 61 stRound yields a poverty ratio of 28.3 percent in rural areas,25.7 percent in urban areas and 27.5 percent for the country asa whole in 2004-05. The corresponding poverty ratios fromthe Mixed Recall Period (MRP) consumption distributiondata are 21.8 percent for rural areas, 21.7 percent for urbanareas and 21.8 percent for country as a whole. The URP uses30 day recall/reference period for all items of consumption,the MRP uses 365 day recall/reference period for five infrequentlypurchased non-food items, namely, clothing, footwear,durable goods, education and institutional medical expensesand 30 day recall/reference period for remaining items. Theaverage per capita consumption expenditure for rural andurban population as per 61 st Round (2004-05) is Rs. 558.78and Rs.1, 052.36 respectively (Economic Survey 2007-08).As per the UNDP’s Human Development Report (HDR)on direct measures since the present high growth, given itssectoral composition and degree of inclusiveness, may noteradicate poverty completely even by 2015.It is clear from the Table 2.1 that the income inequalities arelarger in underdeveloped countries. If we compare the shareof national income accruing to the poorest 60 percent of acountry’s population with that of the richest 20 percent as arough measure of income inequalities, we could see thatunderdeveloped countries have considerable degree of incomeinequality. The proportion of people living below $1.25 and$2 a day in a number of developing countries, demonstratesEthiopia’s achievements with regard to individual poverty:while ranking definitively fourth in terms of GDP Per capita(PPP US$) it is second(out of seven) in terms of incidence ofpoverty(measured as having less than $1.25 a day) and third interms of the incidence of poverty (measured as having lessthan $2 a day).India witnessed a mere one percent hike in wages against afive percent growth in productivity during the last two decadesto employees (ILO 2008). India has ranked ninth in the list ofcountries offering highest disparity in wage and productivitygrowth between 1990 and 2007. China has offered among thebest wages to its workers with its productivity to wage growthratio standing at 9:10. While Brazil was the worst, with itsproductivity to wage growth ratio standing at a dismal 3.5: - 3.5.Inequality in India owing to high food prices which haverisen by nine percent compared with 6.3 percent for non-foodprices. This is predicted to have a negative effect on thepurchasing power of all urban households. A decline in34 THE IIPM THINK TANK

I NDIAN INDIGENCEpurchasing power of urban Indian households varies from 5.1percent to 3.5 percent owing to rise in food prices which are amajor area of spending for lower and middle income groups.The poorest households in urban India experienced anestimated drop in purchasing power of over five percent, whilethe richest in urban areas in 2007 experienced only a drop of2.2 percent.Another reason attributed for the income inequality hasbeen pointed to a rise in temporary jobs rather than permanentjobs and India’s status was noted to be bleaker than LatinAmerican countries.”Temporary jobs pay, on average 20percent less than permanent jobs. In Latin America, workerswith informal jobs earn, on average 43 percent less thanworkers with formal jobs, while in India, casual workers (whoform the bulk of informal employment) earn 45 percent lessthan regular employees(The FinancialExpress 2008).3. Deforestation and Land DegradationDeforestation is driven by many forces.In some cases, poverty is the driver, withagricultural populations collecting fuelwood or expanding the frontier forsubsistence agriculture. In others,opportunities for wealth generation arethe main engine of destruction. TheCasual workers,who form thebulk of informalemployment inIndia earn 45percent less thanregular employeesexpansion of national and international markets for productssuch as beef, soybeans, palm oil and cocoa can create strongincentives for deforestation. Commercial pressure on rainforestsis unlikely to dissipate in the near future. Croplands,pastures, plantations and logging are expanding into naturalforests across the world. Population growth, rising incomes andopportunities for trade create incentives for deforestation-asdoes market failure on a global scale (UNDP 2007-08). Forestsare ecological resources that generate wide-ranging public andprivate benefits. They are the home and basis of livelihoods formany poor people and a source of potential profit for largecommercial interests. One of the challenges in forest governanceis to balance the demands of competing interests withvery difficult levels of power. International cooperation onclimate change alone can not resolve the wider problemsdriving deforestation. Respects from the human rights ofindigenous people, the protection of biodiversity and conservationare issues for national political debate. There is significantpotential for creating triple benefits from climate changemitigation, to adaptation and sustainable development.Out of the total 329 million hectares of geographical area174 million hectares or 53 percent of the total land area inIndia is suffering from serious degradation. Of this, areasubject to water and wind erosion amounts to 144 millionhectares and area degraded through special problems likeravines, salinity, water logging etc., accounted for another 30million hectares. Area degrade through special problemsincludes Waterlogged area (eight million hectares), alkalinesoil(four million hectares) and saline soil (5.5 million hectares)etc. It is estimated that the total flood prone area is 40million hectares but the annual average area affected byfloods is eight million hectares and the annual averagecropped area affected by floods is fourmillion hectares. One-third of our landunder forests, nearly two-thirds of landunder agriculture and nearly all culturablewaste lands, permanent pasturesand grazing lands are in urgent need ofconservation measures (K.G.Tejwani1982). The effects of haphazard grazingon the environment are alarming. Landdegradation due to overgrazing has ledto desert like conditions in many partsof the country. Besides, depletion ofvegetative cover, overgrazing is hardening the soil, preventingforest regeneration and causing soil erosion in many parts ofthe country. In addition to ecological destruction, there isgrowing hostility from farmers against the graziers who aregenerally nomads. Infact, many nomadic groups have given upnomadism and have become landless labourers. The Indianplanners are completely ignorant about afforesting publiclands with fodder species and regenerating grasslands and arenot even aware of the fact that there is immense potential forgrazing lands in India. In Rajasthan alone, cultivable wastelandsare estimated at 9.5 million hectares which even ifmoderately developed can support a large livestock population.This is an addition to permanent pastures estimated at4.5 million hectares.There is probably no other area of India’s environment thathas been viciously attacked and destroyed since independencethan the country’s forests. India was supposed to have lost 3.4THE INDIA ECONOMY REVIEW35

P ROBLEMS & PERSPECTIVESmillion hectares of forest land between 1951 and 1972 alone;over 72 percent of forest area was lost to agriculture(2.4million hectares) another 17 percent was lost to river valleyprojects, industries and roads and communications(0.6million hectares); and another 11 percent(0.4 million hectares)was lost to miscellaneous purposes. The process ofdeforestation has continued till today at the current annualrate of 1.3 to 1.5 million hectares. India has lost nearly 2.5million hectares of mangrove forests in this century alone.These remarkable forests can grow on marginal lands, andsurvive soil infertility, water logging and salinity and highwinds (International Union for the Conservation of Nature andNatural Resources).In India, one of the basic reasons for the degradation offorests has been over use of its resources. Poverty and pressureof population has made the ruralpopulation increasingly dependent onforests. Over harvesting of industrialwood has also caused tremendousdamage to forests. Cattle’s grazing isanother important stress factor forforests. The industrial pollution ofsulphuric oxides and nitric oxidesemission are also a source of great riskfor forests. These pollutants often affectforests located at a long distance fromthe source of pollution.4. Water Stress and ScarcityChanging climate patterns will have important implicationsfor water availability. Large areas of the developing world facethe imminent prospect of increased water stress. Flows ofwater for human settlements and agriculture are likely todecrease, adding to already acute pressures in water-stressedareas. Water is vital to the health and well-being of householdsand an essential input into agriculture and other productiveactivities. Rapid population growth, industrialization,urbanization and the need for irrigation water to feed agrowing population are already placing immense pressure onwater resources.Water availability is uneven across regions in India. 71districts in different states are drought prone. At presentagriculture and livestock account for 93 percent of freshwater use in this country and out of the remaining sevenThe process ofdeforestationhas continuedtill today at thecurrent annualrate of 1.3 to 1.5million hectarespercent the domestic consumption accounts for three percentand industrial use and powers generation four percent. Thesupply of fresh water for human activity comes partly fromsurface water and partly from ground water sources. Indiahas now reached a stage of development where 32 percent ofits replenishable ground water is available for use. However,the ground water resource has been over used in certainregions. The overuse of ground water over the years has madeagricultural operations particularly in the green revolutionbelt unsustainable. Another major cause of water deficiencyhas been water pollution. Most of the water pollution in Indiais domestic sewage, industrial effluents and agriculturalchemical inputs like pesticides and fertilizers. In India,almost 90 percent of all wastes is discharged without treatmentin rivers.5. BiodiversityIn respect of biodiversity India has richheritage of species and genetic form. Ithas a share of six percent of the worldspecies. However, rapid growth ofpopulation, urbanization and industrializationhave seriously impaired theecological balance of flora, fauna andforest. At the same time it is ratherdifficult to quantify the biodiversity lossfor the simple reason that reliableinformation is not available about the species that are found atany given time. The extinction of species and organisms affecthuman society through the destruction of ecosystem services.All plants, animals and micro-organisms exchange gases withatmosphere and the biotic composition thus contributes to themaintenance of mix of gases in the atmosphere. Destructionof biodiversity may result in such change in the gas mix in thelong run which may end up with rapid climatic change andagricultural crop failure (Ramprasad Sen Gupta 2001).If loss of diversity is considered inconsequential for futuredevelopment, then consumeristic life style which is destructivefrom the ecological point of view will persist without anyrestraint. It is important to conserve plants and animal speciesand they should not be threatened of extinction due tooveruse. Economic rationality demands that biodiversityshould be protected all the time failing which sustainability ofdevelopment and human well being will be seriously impaired.36 THE IIPM THINK TANK

I NDIAN INDIGENCEChanges in ecosystem biological diversity, evolution ofparasites and invasion by exotic species all frequently result indisease outbreaks such as cholera which emerged in 1992 inIndia. The frequency of AIDS/HIV is increasing. In 1996about 46,000 Indians out of 2.8 million (1.6 percent of thepopulation) tested were found to be infected with HIV (BurnsJF 1996).The Tenth Plan as asserted clearly that “the sustainable useof biodiversity is fundamental to ecologically sustainabledevelopment”. India is identified as one of the 12 majorbiodiversity countries of the world. However, since 1951industrialization has put severe strain on the ecosystemaltering and even destroying it. The loss of biodiversity arisesfrom the destruction of the habitat, extension of agriculture,filling up of wetlands, conversion of rich bio-diversity areas forhuman settlement and industrialdevelopment, destruction of coastalareas and uncontrolled and unregulatedcommercial exploitation. A series ofsteps have been in recent years toprotect and conserve biodiversity. Theseinclude (Datt and Sundharam K.P.M2004 P.114):* Establishment of 88 national parksand 490 wildlife sanctuaries;* The setting up Indian coral reefmonitoring work for the conservationand management of mangroves and coral reefs;* Deceleration of five sites as world heritage sites;* Project tiger reserves and project elephants have been setup to ensure long time survival of tigers and elephants intheir natural habitats; etc.6. Low Productivity in Indian AgricultureProductivity of crops in India is not only low relative to othercountries, there are considerable inter-state variations. TheEleventh Five Year Plan observed that not only the yieldsdiffered across the States, there was a significant gap betweenthe performance and potential as revealed by actual yield andyield with improved practices adopted by farmers. Agriculturein India has continued to be a gamble in the monsoons: failureof rainfall in some parts of the country and excessive rains andconsequent floods in certain other areas of the country. Since1961 the emphasis shifted to the use of seed-fertilizer-waterThe share of agrisector’scapitalformation in GDPdeclined from1.92% in early1990s to 1.28% inearly 2000stechnology known as the new agricultural strategy. But thenew strategy succeeded only in wheat and to a small extent inrice; other food and non-food crops did not show perceptibleimprovement in production. Dry land cultivation was nottouched at all by the new agricultural strategy. Public investmenton agriculture has been declined. The worrying aspect isthat private investment in agriculture is almost completelyconcentrated in the northern regions particularly Punjab,Haryana and Western Uttar Pradesh and almost completelyabsent in other parts of the country. The share of agriculturalsector’s capital formation in GDP declined from 1.92 percentin the early 1990s to 1.28 percent in the early 2000s due todecline or stagnation in public investment in agriculture sincethe middle 1990s. Due to decline in public investment thegrowth of irrigation has slowed down. The situation withrespect to minor irrigation has beenrelatively better but there is overexploitationof ground water by rich farmers.Public expenditure on agriculturalresearch and extension was low at 0.49percent of GDP(on average developingcountries spend 0.7 percent and developedcountries two to three percent). Itis important to recognize that theresearch requirements are high in viewof substantial variations in agro-climaticconditions that warrant region-specificand crop-specific technologies, compatible with the endowmentsof the farm community (S.Radhakrishna and S.Chandrasekhar2008).Many regions in India had continued to be poor andbackward indicating the necessity for a balanced growth ofagriculture as between different regions. Indian agriculturedisplayed another type of imbalance in the form of disparitiesin growth between foodgrains and non-foodgrains andbetween different foodgrains. The agricultural productionwith growing farmer’s suicides all over the country has createda sense of panic in the country. Unprecedented hoarding ofcereals and pulses by traders and huge rise in the prices ofarticles of daily consumption has forced the Government ofIndia to resort to import of wheat for the first time in nearlythree decades.The Report of the Expert Group on Agricultural Indebtedness(GOI 2007) has highlighted the twin dimensions of theTHE INDIA ECONOMY REVIEW37

P ROBLEMS & PERSPECTIVEScurrent widespread agricultural crisis- an agricultural developmentcrisis and an agrarian crisis. The root cause of theagricultural development crisis is the neglect of agriculture indesigning development programmes and ineffective implementationof agricultural programmes at the micro level. Onthe other hand, the agrarian crisis is characterized by the highdependence of rural population on farm incomes which aretoo meager to withstand weather and price shocks and arealso vulnerable to technological risks. In addition to lowgrowth and declining productivity, the failure of growth increating adequate productive employment outside agricultureunderlines the agrarian crisis.A major area of concern is the sluggish growth of institutionalcredit. Agriculture’s share of about 10-11 percent inthe institutional credit was way below the stipulated targetof 18 percent. Half of the farmers had no access to institutionalfinance in 2003; institutional agencies accounted for57.7 percent of the outstanding loan amount of farmers,followed by money lenders (25.7 percent) and traders(5.2percent). It suggests heavy dependence of farmers oninformal sources of finance. Inadequacy of formal credit,enormous delays in obtaining credit from scheduledcommercial banks, and cumbersome documentation havecompelled farmers to avail of high-cost credit from informalsources (Shettey).A comparison of productivity levels in Indian agriculturewith the levels in other countries shows how low the productivityin Indian agriculture is. Table 6.1 compares the productivityof some crops in India with their productivity in someother countries. As is clear from this table, productivity ofRice in India is about 29.59 percent of the productivity inEgypt. It is 37.17 percent of the productivity in comparison toUSA. As far as wheat is concerned productivity in India is64.52 percent of the Productivity in China and 35.06 percentof the Productivity in UK. As far as maize is concernedproductivity in India is 12.08 percent of the productivity inUSA and 22.44 percent of the productivity in China. Productivityof cotton in India is about 41.44 percent of the productivityin China and 60.52 percent of the productivity inPakistan. As far as major oil seeds is concerned, productivityin India is 40 percent of the productivity in China and 80.0percent of the Productivity in Nigeria. Information on India’sglobal rank in major agricultural crops is still more revealing.India happens to be one of the Larger growers and producersof most of the agricultural crops but ranks very low in termsof yield.Productivity of crops is not only low relative to othercountries, there are considerable inter-state variations. Theproductivity of wheat in 2005-06 varied from a low level of1,393 kg per ha in Maharashtra to a high of 4,179 kg in Punjab.The steering Committee on Agriculture for the Eleventh FiveYear Plan has observed that not only the yields differed acrossthe States, there was a significant gap between the performanceand potential as revealed by actual yield and yield withimproved practices adopted by farmers (Economic Survey2007-08).Table : 6.1 - International Comparisons of Yield of Selected Commodities – 2004-05(In Metric tonnes/Hectare)Rice / paddy Wheat Maize Cotton Major oilseedsEgypt 9.8 China 4.25 U.S.A 9.15 China 11.10 Argentina 2.51India 2.9 France 7.58 France 7.56 U.S.A 9.58 Brazil 2.48Japan 6.42 India 2.71 India 1.18 Uzbekistan 7.98 China 2.05Myanmar 2.43 Iran 2.06 Germany 6.69 India 4.64 India 0.86Korea 6.73 Pakistan 2.37 Philippines 2.1 Brazil 10.96 Germany 4.07Thailand 2.63 U.K 7.77 China 4.9 Pakistan 7.60 U.S.A 2.61U.S.A 7.83 Australia 1.64 -- -- Nigeria 1.04World 3.96 World 2.87 World 3.38 World 7.33 World 1.86Source : Ministry of Agriculture and Co-operation38 THE IIPM THINK TANK

I NDIAN INDIGENCE6.2 Agricultural CreditA major area of concern is the sluggish growth of institutionalcredit. Agriculture’s share of about 10-11 percent in theinstitutional credit was way below the stipulated target of 18percent. Half of the farmers had no access to institutionalfinance in 2003; institutional agencies accounted for 57.7percent of the outstanding loan amount of farmers, followedby money lenders (25.7 percent) and traders (5.2 percent). Itsuggests heavy dependence of farmers on informal sources offinance. Inadequacy of formal credit, enormous delays inobtaining credit from scheduled commercial banks, andcumbersome documentation have compelled farmers to availof high-cost credit from informal sources (Shettey). Theinterest rate is undoubtedly important, but more important isthe efficiency and speed of lending that is totally absent ingovernmental lending agencies, that is atthe root of much farmers distress.Rural Indebtedness in India is a resultof the social system or the relations ofproduction prevailing in Agriculture.The problem of indebtedness of thefarmers continues in the post- independenceperiod. The proportion of indebtedfarmers were 22.3 percent in 1981 and itrose to 25.9 percent in 1991 and it hasincreased now sharply to 57.2 percent.The situation with respect to minorirrigation has been relatively better but there is overexploitationof ground water by rich farmers.6.3 Agricultural Marketing in IndiaThere was a large chain of middlemen in the agriculturalmarketing system like village traders, kutcha arhatiyas, puccaarhatiyas, brokers, wholesalers, retailers, money-lenders etc.As a result, the share of farmers in the price of agriculturalproduce was reduced substantially. Farmers obtained onlyabout 53 percent of the price of rice, 31 percent being theshare of middlemen (the remaining 16 percent being themarket cost). In the case of vegetables and fruits, the share offarmers was even less – 39 percent in the former case and 34percent in the latter. The share of middlemen in the case ofvegetables was 29.5 percent and in the case of fruits was 46.5percent (A.S.Kahlon and M.V.George 1985).In addition to presence of a large number of middlemen andIndian farmersobtained onlyabout 53 percentof the price ofrice, 31 percentbeing the shareof middlemenwidespread prevalence of malpractices in the mandies- therewere a number of other problems as well. For instance, therewas absence of proper warehousing facilities in the villages.As a consequence, the farmer was compelled to store hisproduce in pits, mud-vessels, kutcha storehouses etc. Theseunscientific methods of storing led to considerable wastage.Transportation facilities were also highly inadequate and onlya small number of villages were joined by railways and puccaroads to mandies. Most of the roads were kutcha roads not fitfor motor vehicles and the produce was carried on slowmoving transport vehicles like bullock-carts.The weakest link in India’s agricultural efforts is its totallyinefficient extension services. Only 0.9 percent of the farmersmake use of the hundreds of Krishi Vigyan Kendras (KVKs)spread across the length and breadth of the country. Close tohalf-a-lakh of village and block-levelextension workers with no knowledge ofthe advances in technology are but afinancial burden on the exchequer (K.V.Prabhakaran Nair).7. Policy RecommendationsIn India, besides industrial activitycausing damage to natural environmentland use, water use, deforestation andforest degradation, loss of biodiversity,energy production, and exploitation ofnon-energy materials have resulted in environmental damageand all these in turn have adversely sustainability of development.Policy makers need to have better knowledge of theexogenous factors influencing various economic activities suchas farming, forestry, grazing or fishing and how to managethem and ensure efficient use of resources. There is a scopefor faster farm growth, based on the gap that exists betweenthe yields that the farmers actually get and the yields that thefarmers actually get and the yields that are shown to beobtained using better practices, not in laboratory conditionsbut actually on the field. The state governments have to beencouraged to undertake additional expenditure on agricultureover a baseline level and the centre has to share thatadditional expenditure. Recognizing growing disparitiesbetween the agricultural and non-agricultural sectors anddeterioration of the quality of the public services in ruralIndia calls for a radically different approach to make the farmTHE INDIA ECONOMY REVIEW39

P ROBLEMS & PERSPECTIVESsector improve its growth performance (Vaidyanathan).Thereis a need to raise farm productivity especially in the vast rainfed areas. If India’s Gross Domestic Product is to rise by ninepercent a year, agriculture must grow by at least four percent.Improved seeds can play an important role in increasingproductivity. Use of improved seeds and fertilizers requiresproper irrigation facilities. Farmers should be educated in themethods of sowing, manuring, and irrigating the new highyielding varieties of seeds.The socio-economic development consideration needs arational and efficient management of water resources. Forsustainable development water problem is to be tackled bygiving overriding priority to augmenting water supply andtreating effluent waste to control pollution. From sustainabilitypoint of view hydel power should receive far greaterattention than what it has been accordedso far. Recycling of used products oftenhelps in conserving raw materialreserves. However, if the scope forrecycling of raw material wastes islimited, their sustainability wouldrequire lengthening the life time of theproduct. This implies that obsolescencerate of the product is to be lowered bydiscouraging too frequent changes infashion. Products are to be made moredurable and repair services are to beorganized to handle damage.Food security remains a global challenge today and faminesstill threatens several parts of the globe. Many scientists believethat new plants developed using modern biotechnology willplay an important role in increasing our ability to produceenough food. Often called the Gene Revolution, advances inbiotechnology are having dramatic impacts on global agriculturalproduction. Biotech crops were planted on over 100million hectares last year by 10 million farmers in 22 countriesand the results have been well documented. In all countrieswhere farmers have access to biotech crops, yields are higherand production costs are lower, making farmers more efficientthan ever before. Since 2003, when biotech Bt cotton wasintroduced, India’s cotton output has almost doubled to 27million bales weighing 170 kilograms each, and average yieldsare up around two-thirds, largely because of lower rates of pestinfestation in the hardier Bt cotton varieties.Biotech cropswere planted onover 100 millionhectares last yearby ten millionfarmers in twentytwo countriesGovernment has to take steps for modernizing irrigationsystems in a phased manner like that of efficient watermanagement, adequate maintenance of canals and distributionsystems, surveys and investigations for preparation ofnew projects, developing a National Grid system to ensurewater supply from water surplus areas to water deficit areasand etc. For increasing the agricultural growth communityfarming (i.e. a place where farmers in an area coming togetherto cultivate a common crop) should be encouraged. Properuse of fertilizers and pesticides should be pressed upon,especially encouraging use of organic manure like vermincompost and bio fertilizers to minimize input cost andincrease yield.Besides crop farminga, equal amount of stress need to belaid on promoting livestock farming, horticulture, and fodderplantation and grassland development.A multi-layered approach would beadopted with proper financial andtechnical support so that the farmersare protected from the vagaries ofnature and employment generated inrural areas. The situation of womenneeds special emphasis in rural areas.Women are by far the biggest contributorsto production in the countrysideand also the main gathers of food, fueland water. Expansion of electrificationprogrammes in rural areas, via simple environmentallyfriendly technologies, could also reduce the rate of exploitationof the natural resource base, particularly forests (CharlesLeyeka Lufumpa).To remove the defects of rural marketing the marketsshould be very near to the villages with adequate facilities forgrading, weighing and storage of all commodities. Theregulated markets should be strengthened in terms of adequatemarket yard, market functionaries, ware housing andstorage facilities etc., Extension education in marketingshould be improved through regulated markets, primary co– operative marketing societies and farmer’s servicing societies.An efficient marketing system helps to increase thedisposable incomes of rural people and this in turn generatemarket for manufactured products.To make agricultural credit services more effective there is aneed of co-ordination between various financial institutions in40 THE IIPM THINK TANK

I NDIAN INDIGENCEorder to avoid multiple financing. The banks should educate thefarmers and get them into the habit of regular repayment.Large investment in agriculture is required for the growth ofinfrastructural facilities like irrigation, rural roads, market,power, cold storages etc. The Eleventh Five Year Plan (2007-2012) should aim at reducing poverty and the disparities acrossregions and communities. The pattern of funding also shouldhave the objective of making States more self-reliant. Propermonitoring and evaluation against the laid down benchmarksalong with the use of modern technology like e-governance canhelp in ensuring the higher outlays result in better outcomes andmore inclusive growth. Policy makers should be able to comparehow various growth strategies impact on poverty and theenvironment. Sustainable poverty reduction is attainable only inconditions where the development strategy generates aneffective demand for environmental quality and for the sustainableuse of natural resources. Along with higher economicgrowth and poverty reduction there should be an improvementin many important social indicators like life expectancy, infantmortality rate and gross enrolment ratios at primary level ofeducation. However, disparities continue at the State andregional level. Better governance and improved service deliveryare essential to ensure that leakages are plugged and the fundsunder the welfare schemes reach the intended beneficiaries tothe maximum extent. Local governments, Panchayat RajInstitutions and Non Government Organizations can play animportant role in this area. It is essential that these higheroutlays result in better outcomes.References and Additional Thinking• Ashok Gulati and Seema Batula, 2002, Capital Formationin Indian agriculture, Trends composition and implicationsfor growth, NABARD, Occasional Paper-24• Ashok Gulati, Kelly, Tein 1999, ‘Trade liberalization andIndian Agriculture’, Oxford University Press, New Delhi.• Burns JF. 1996. Denial and taboo blind India to the horrorof its AIDS scourge. New York Times, 22 nd September.• Charles Leyeka Lufumpa 2005: “The Poverty-EnvironmentNexus in Africa”, African Development Review,Vol.17,No.3December 2005• Government of India 2005, “Economic Survey 2004 - 05”,Ministry of Finance,Oxford university press, New Delhi.• Government of India 2006-07: “Economic Survey”,Ministry of Finance, Oxford University Press.• Government of India 2006: “An approach to the 11 th fiveyear plan”, Planning Commission, Page No. 18 & 19• Government of India 2008: “Agriculture and food management”,Economic Survey 2007-08, Ministry of Finance,Oxford University Press, P.161.• Kahlon A.S. and George M.V.1985: “Agricultural and PricePolicies”, New Delhi 1985,Table 4.1. p.39.• Ministry of External Affairs, 2007 (GOI) ‘India in Business’FICCI-BISNET• Misra S.K.& V.K. Puri 2004 ‘Indian Economy’, HimalayaPublishing House, New Delhi.• Prabhakaran Nair 2007: “Indian Agriculture at Crossroads”,The Hindu, August 15 th• Ramprasad Sen Gupta 2001: “Ecology and Economics-Anapproach to Sustainable Development”, New Delhi, 2001,P.175. R. Datt & K.P.M. Sundaram 2004 ‘India Economy’,S.Chand & Company, New Delhi.• R.S.Sidhu and Sucha Singh Gill 2006 ‘Agricultural Creditand Indebtedness in India : Some Issues’ Indian Journal ofAgricultural Economics’ Vol. 61 No. 1 January - March2006, Page No. 25• Mohua Roy 2006: A review of Bank lending to Priority andRetail Sector’s, Economic and Political weekly 18 th Mar2006 Page No. 1036• Misra S.K.& V.K. Puri 2004 ‘Indian Economy’, HimalayaPublishing House, New Delhi.• Gulati, Ashok, Kelly, Tein 1999, ‘Trade liberalization andIndian Agriculture’, Oxford University Press, New Delhi.• R. Datt & K.P.M. Sundaram 2004 ‘India Economy’,S. Chand & Company, New Delhi.• R.Radhakrishna &S.Chandrasekhar,“Overview Growth:Achievements and Distress”, India Development Report,Indira Gandhi Institute of Development Research, Oxford,2008.• Shetty S.L., 2006 “Monetary Policy and Financial SectorLiberalization”, in Macroeconomics of poverty Reduction:India Case Study, Report submitted to UNDP, IGIDR,Mumbai, April 2006.• Vaidyanathan 2005 “Farmer’s Suicides and the AgrarianCrisis”, Economic and Political Weekly, Vol.XLI, No.38,23Sep,PP.4009-13.(The views expressed in the article are personal and do notreflect the official policy or position of the organisation.)THE INDIA ECONOMY REVIEW41

P ROBLEMS & PERSPECTIVESFinancial Inclusion: Enabling InclusiveGROWTHIntroductionInclusive growth and financial inclusion have emerged as buzzwords in most discussions on economic growth in recenttimes. India has witnessed a GDP growth rate of over ninepercent since 2005-06 with a significant slowdown to 6.7percent in 2008-09 on the back of a global recession. Much ofthe benefits of this high growth, however, have not beenequitably shared. Data reveals that while the economywitnessed unprecedented high growth, according to theestimates of the Tendulkar Report aggregate poverty was at37.2 percent while 41.8 percent of rural population and 25.7percent of urban population was below the poverty line (BPL).The Planning Commission estimates vary and give a slightlylower figure of aggregate poverty of 27.5 percent and peg ruraland urban poverty and 28.3 percent and 25.7 percentrespectively (by 61 st round of NSS data for 2004-05).Irrespective of the estimate it’s worthwhile to notethat more than a quarter of our population livesbelow the poverty line. It is imperative therefore, thatgrowth must be inclusive and must be viewed as a tool toalleviate poverty. Growth is inclusive when it createseconomic opportunities along with an equal access tothose opportunities. The Planning Commission definesInclusion as ‘a process of including the excluded, asagents whose participation is essential in the very design ofthe development process and not simply as welfare targetsof development programmes’ (Government of India, 2007).The Economic Survey 2009-10 (p.22) rightly notes that‘policies promoting growth need to be complemented withpolicies that ensure that there are mechanisms in place tore-distribute some of the gains to those who are unable topartake in the market process and hence get left behind’. Thiswould require a new thinking as regards the role of thegovernment, from being a provider to being an enablingSwati RajuLecturer, Department of Economics,University of Mumbai42 THE IIPM THINK TANK

I NCLUSIVE INDIAgovernment where in the government does not directly participatein the provision of goods but creates an enabling environmentwhere markets operate within well-defined incentivecompatible rules and also intervenes directly when it needs toensure its functions as a welfare state (Economic Survey2009-10). The Eleventh Five Year Plan (2007-12) formallyintegrated the concept of inclusive growth with overalleconomic growth so as to make the growth process broadbased and reduce fragmentation in society. The plan documentstates, ‘the development of rural India is an imperativefor inclusive and equitable growth and to unlock the potentialof the population that is presently trapped in poverty with itsassociated deprivations’. The plan document envisaged a twopronged approach through huge investments in social andphysical infrastructure which in turn would generate incomeand employment and also finance social programmes thatwould enable inclusive growth.Achieving inclusive growth, however,faces several challenges, viz., increasinggrowth in agriculture and allied sectorswhich would in turn create a market forgoods and services provided by manufacturingand services sector; the hugerural-urban migration which has put asubstantial pressure on urban infrastructure;large investment would berequired to adequately train and skillthe young population and enable us toexploit the demographic dividend since growth has beendriven by the knowledge and services sector. Thus, sustainedhigh growth would require huge investments in social andphysical infrastructure and in turn would create an increaseddemand for diverse financial instruments. The role of thefinancial sector in achieving inclusive growth would be pivotalas apart from institutional investment there would be a needat an individual level to have easy access to credit from formalsources accompanied by effective and efficient credit-deliverytaking us to a related and an important facet of inclusivegrowth, namely, financial inclusion. Financial inclusiontherefore emerges as the crucial link towards achievinginclusive growthFinancial Inclusion: DefinitionFinancial inclusion, simply put, refers to taking bankingSustained higheconomic growthwould create anincreased demandfor diverse andseveral financialinstrumentsservices to the common man or in other words, the transferencefrom elitist/class banking to mass banking. Moreimportantly, financial inclusion is not just restricted to creditbut involves extending a wide array of financial products andservices like saving accounts, insurance, remittance and otherfacilities to the under-privileged and the poor in rural,semi-urban and urban areas. It is important to note that thedefinitional emphasis of financial inclusion varies acrosscountries and depends on the level of socio-economic andfinancial development of the concerned country. The definitionshence vary with regard to dimensions such as ‘breadth’,‘focus’ and degree of inclusion/exclusion. The Reserve Bankof India in its Report on Currency and Finance (2003-08,volume V) provides a compendium of definitions. To note afew major definitions, Leyshon and Thrift (1993) focusedlargely on social exclusion and the geographical access tofinancial services, in particular bankingoutlets while Ford and Rowlingson(1996) and Kempson and Whyley (1998)point out that the debate is no longerrestricted to just geographical accessbut has widened to include all types ofpeople who make little or no use offinancial services. The Asian DevelopmentBank (2000) defines inclusion ‘asthe provision of a broad range offinancial services such as deposits,loans, payment services, money transfersand insurance to the poor and low income householdsand their micro-enterprises’. The Treasury Committee, Houseof Commons, UK (2004) defines financial inclusion as ‘abilityof individuals to access appropriate financial products andservices’. The World Bank (2008) expresses financial inclusionas the broad access to financial services implies an absence ofprice and non-price barriers in the use of financial services; itis difficult to define and measure access because access hasmany dimensions. The United Nations (2006) notes, ‘afinancial sector that provides ’access’ to credit for all ‘bankable’people and firms, to insurance for all insurable peopleand firms and to savings and payments services for everyone.Inclusive finance does not require that everyone who iseligible use each of the services, but they should be able tochoose to use them if desired’. The Committee on FinancialInclusion in India (2008) indicates that financial inclusionTHE INDIA ECONOMY REVIEW43

P ROBLEMS & PERSPECTIVESimplies ‘the process of ensuring access to financial servicesand timely and adequate credit where needed by vulnerablegroups such as weaker sections and low income groups at anaffordable cost’. To summarize, the two focal points thatemerge from the different definitions are the access tofinancial services and affordability (Reserve Bank of India,2008).approach wherein awareness about financial products andservices, financial counselling including debt counselling andaffordable credit is made available to those excluded. Banksthus, emerge as the key players on the supply side and canenable the poor and the socially disadvantaged as well as thesmall and medium enterprise sector to gain access to formalsources of credit (Thorat, 2007).Factors Affecting Financial Inclusion in IndiaFinancial exclusion is the inverse image of financial inclusionand is multi-dimensional. Financial exclusion on the demandside arises because of (i) low income and asset holdings (ii)the high information barriers and low awareness regardingfinancial services in rural areas and also among women andon the supply side (iii) the lack of access to financial serviceswhich arises because of an absence of formal financialinstitutions such as banks (which couldnot extend outreach on account of highcost of operations, or unviable due tothe small ticket size of the transactionsso there are fewer branches) (iv) unsuitablefinancial products (v) cumbersomedocumentation and procedures (vi) inthe case of primary agricultural cooperativesocieties where participationis restricted those who have landownership (such societies do not providesaving and insurance facilities to theirmembers). (vi) the failure of financial co-operatives in severalStates has had an impact on the outreach of financial servicesin rural areas. (vii) the lack of financial education and counselling.Finally, financial exclusion is often related to the issueof social exclusion which gives access to financial services andfinancial literacy a complex socio-economic dimension.Consequently, the financially excluded comprise of marginalfarmers, landless labourers, share croppers or oral lessees, selfemployed and unorganized sector enterprises, slum dwellers,migrants, socially disadvantaged groups and women. Thesefactors accompanied by the easy availability of credit frominformal sources such as money lenders (where there is nocumbersome documentation) makes borrowing from informalsources though costly but popular.Widening financial inclusion or in other words, overcomingthe problem of financial exclusion would require a holisticFinancial Inclusion: Initiatives and MeasurementThough the Reserve Bank of India used the term FinancialInclusion explicitly for the first time in its Annual PolicyStatement of 2005-06, the objective of banking/financialpolicy has always been inclusive. The process of financialinclusion began in 1969 with the nationalization of banks andcan be broadly classified into three broad phases. Phase I(1969-1990) which was characterized by State control over thebanking system, a directed lendingprogramme with a system of administeredinterest rates. This phase of bankexpansion was propelled by socialistthrust /intentions and saw massiveexpansion of bank branches in rural andsemi urban areas and priority sectorlending. Consequently, scheduledcommercial branches increased from8,262 in June 1969 to 64,608 branches asof end-March 2009. The averagepopulation serviced per branch alsodecreased from 64,000 to 15,000 and the share of ruralbranches increased from 22.2 percent to 31.04 percent overthe same period. Priority sector lending was enhanced to acompulsory 40 percent of total lending. Regional Rural Banks(RRBs) were set up in 1975 in backward and tribal areas tocater to the needs of the weaker sections. National Bank forAgriculture and Rural Development (NABARD) wasestablished as an apex body for the agriculture sector andprovided concessional refinance for lending done by the ruralco-operative sector. Industrial Development Bank of India(IDBI) was similarly set up for the industrial sector. Thecredit outstanding against small borrowal accounts of ScheduledCommercial Banks (SCBs)which cover agriculture,industry, trade, personal loans and professionals and otherservices showed an increase of about 18.69 percent in 2008while the rural sector also saw an equal increase of 18.2644 THE IIPM THINK TANK

I NCLUSIVE INDIApercent over the same period. Of the total credit outstandingagainst small borrowal accounts at the All-India level nearly82.1 percent of the accounts are held by males (rural areasmales - 80 percent) while 14.4 percent (rural areas femaleshold 17.6 percent) of the accounts are held by females as ofend March 2008. Deposits held in SCBs as of end March2008, just about 15-16 percent of the deposits are from ruralareas. However, irrespective of the geographical locationalmost 70 percent of all deposit accounts are held by malesand about 20 percent by females bringing out the genderdisparity dimension of financial inclusion with regard to bothcredit and the deposit side.Phase II (1990-2005) coincided with the period of financialsector reform, higher allocation of credit to the private sector,dismantling of the administered interest structure, strengtheningof the banking sector through the stringent monitoringand the introduction of regulatory and supervisory norms forcapital adequacy, tier I capital. This phase also saw increasedcompetitiveness with the entry of new private sector banksand listing of public sector banks on stock exchanges alongwith a consolidation of the banking system and the scope ofpriority sector lending was widened. The developments of thisphase emphasized that financial strengthening and inclusivebanking need to go together. Financial inclusion in this phasesaw the introduction of Self-Help Group (SHG) – Banklinkage programme (SBLP) launched by NABARD in 1992.A SHG is a small homogenous group of about 15-20 people(usually women) who join together to address common issues.Pooled savings are used to make interest bearing loans togroup members. SHGs aid in financial intermediation apartfrom inculcating the quality of thrift amongst members.Besides the transaction costs are low and SHGs can reach outto both the smallest unit in villages. The Reserve Bank ofIndia allowed banks to open savings account for SHGs(despite the fact that they have no legal form) once the grouphad stabilized and thus gain access to credit and financialservices from the formal sectorTable 2 presents the results of the SBLP programme andshows the savings of SHGs with banks and the amount of bankloans disbursed to SHGs. It can be observed that commercialbanks lead in both savings held by SHGs as well as in loandisbursement and are followed by RRBs. Another importantstep during this Phase which aided inclusion was the introduc-Table 1: Credit Outstanding against Small BorrowalAccounts and Deposits (Scheduled CommercialBanks) (Rs. in Crore)Credit OutstandingMarch2007March2008March2007DepositsMarch2008Rural 87675 103690 224047 261654Semi-Urban 75466 87443 272633 335978Urban 115753 139889 862330 1090730All- India 278894 331022 1359020 1688362Source: Basic Statistical Returns of Scheduled Commercial Banks, March 2008Table 2: SHGs - Savings with Banks and BankLoans Disbursed (Rs. in Crore) (As of March end)SavingsLoans Disbursed2007-08 2008-09 2007-08 2008-09Commercial Banks 2078 2773 5404 8061RRBs 1166 1990 2652 3193Cooperative Banks 541 783 794 999Total 3785 5546 8849 12254Source: Report on Trends and Progress of Banking in India 2008-09Table 3: Number of Kisan Credit Cards Issued (inmillions) (As of end of March)YearCooperativeBanksRRBsCommercialBanks1 2 3 4 5Total1998-99 0.16 0.01 0.62 0.781999-00 3.59 0.17 1.37 5.132000-01 5.61 0.65 2.39 8.652001-02 5.44 0.83 3.07 9.342002-03 4.58 0.96 2.70 8.242003-04 4.88 1.27 3.09 9.252004-05 3.56 1.73 4.40 9.682005-06 2.60 1.25 4.16 8.012006-07 2.30 1.41 4.81 8.512007-08 2.09 1.77 4.60 8.462008-09 1.34 1.41 5.83 8.58Total 36.2 11.5 37.0 84.6Percentage 42.7 13.5 43.8 100.0share in TotalSource: National Bank for Agriculture and Rural DevelopmentTHE INDIA ECONOMY REVIEW45

P ROBLEMS & PERSPECTIVESTable 4: Credit Outstanding to MSE Sector(Rs. in Crore) (As of end of March)Bank Group 2007 2008 2009(P)Public Sector Banks 1,025(24.40)Private Banks 131(26.05)Foreign Banks 116(38.04)1,511(47.38)469(257.12)155(33.10)P – Provisional. Figures in parentheses indicate growth rate over the previous yearSource: Report on Trends and Progress of Banking in India, 2008-09.1,913(26.58)479(2.14)181(17.10)tion of Kisan Credit Cards (KCCs) for providing credit tofarmers. There has been a multifold increase (Table 3) in thenumber of KCCs issued since its inception in the late 1990sand the percentage share of both co-operative banks and commercialbanks in the issuance of KCCs is above forty percentrespectively with RRBs having a share of just about 13.5percent.Apart from the different measures aimed at expandingfinancial inclusion, it was recognized that inclusive growthwould need huge investments in rural infrastructure and inthe small scale industries sector (Micro, Small and MediumEnterprises) which assumes importance because of itsemployment generation potential and wide regional spread.Consequently the Rural Infrastructure Development Fund(RIDF) was launched under NABARD in 1995-96 with aninitial corpus of Rs.2000 crores with the motive of creatingadequate infrastructure in agriculture and later extended todevelop rural infrastructure such as roads and bridges.Likewise a similar fund was created for the industrial sector– Small Industries Development Fund (SIDBI). There areabout 1.3 crore MSEs and they employ about three crorepeople and the main source of credit to this sector are thepublic sector banks followed by the private sector banks andforeign banks. Table 4 presents the credit outstanding to theMSE sector by various bank groups while Table 5 gives thedisbursements under various tranches of RIDF which as ofend of March 2009 stood at Rs.56,052 crore.Phase III (2005 onwards) saw financial inclusion introducedexplicitly as policy objective and several initiatives wereundertaken to extend bank penetration and outreach with afocus on the credit needs of agriculture and small enterprises.Consequently, banks were advised by the Reserve Bank ofIndia in November 2005 to introduce ‘no-frills’ accounts. Suchaccounts would have very low or nil minimum balance, 5-10free transactions per month and an ATM facility. Besides allmaterial used by such customers would be printed in theregional language. Further to enable inclusion, Know YourCustomer (KYC) norms were simplified for accounts withbalances not exceeding Rs.50,000/- and credit limits notexceeding one lakh rupees in a year so that people belongingto the low income groups both in urban and rural areas do nothave to face cumbersome procedures whilst opening accounts.It can be observed that there has been a massive increase ofabout 7.28 times in the number of no-frills accounts openedby SCBs over the period of three years - March 2007 to March2009, and the maximum number of accounts have beenopened with Public Sector Banks given the comparativeadvantage they enjoy with their vast branch network in ruraland semi-urban areas. Besides, banks, increasingly, havestarted looking the basic ‘no-frills’ accounts as a huge businessopportunity that can emerge as a viable business model overtime.Further, the Raghuram Rajan Committee on FinancialSector Reform suggested that the opening of basic or ‘nofrills’accounts be encouraged so as to provide 90 percentTable 5: Disbursements under RIDF (Rs. inCrore) (As of end of March 2009)All - IndiaRIDF I 1761RIDF II 2398RIDF III 2454RIDF IV 2482RIDF V 3055RIDF VI 4071RIDF VII 4052RIDF VIII 5141RIDF IX 4871RIDF X 6200RIDF XI 5725RIDF XII 5775RIDF XIII 5057RIDF XIV 3013Total 56052Source: Report on Trends and Progress of Banking in India, 2008-09.46 THE IIPM THINK TANK

I NCLUSIVE INDIATable 6: Number of No-Frills Accounts Openedby SCBs (As of March 31 st )Bank Group 2007 2008 2009Public Sector 5865419 13909935 29859178Private Sector 860997 1845869 3124101Foreign 5919 33115 41482Total 6732335 15788919 33024761Source: Report on Trends and Progress of Banking in India, 2008-09.Indians access to the formal financial system and that theseaccounts may be used for the payments made under NREGSand other government programmes. Besides, banks have alsobeen advised by the Reserve Bank of India to introduce aGeneral Credit Card (GCC) apart from KCCs with a creditfacility of up to Rs.25, 000/- at their rural and semi-urbanbranches. This facility would providerevolving credit and allow the holder towithdraw up to the sanctioned limitwhich in turn is determined after anassessment of the household’s cash flow.Interest rate on this facility is completelyde-regulated and 50 percent of GCCloans can be denominated as prioritysector lending which acts as an incentivefor the bank. This phase also saw anexpansion of the priority sector toinclude high employment sectors suchas agriculture, small enterprises, retail trade, educationalloans, microfinance, low cost housing and venture capital.A major contribution to inclusive banking in recent timeshas been the role of microfinance institutions (MFIs) whohave emerged as major node in the expansion of outreach ofthe formal financial sector. In January 2006, the ReserveTable 7: Bank Loans Disbursed to MFIs(Rs. in Crore) (As of end of March)Bank Group 2007-08 2008-09Commercial Banks 1969 (497) 3719 (522)Regional Rural Banks 2 (8) 13 (59)Cooperative Banks 0.04 (13) - (0)Total 1970 (518) 3732 (581)- indicates nil/negligible. Figures in parentheses indicates number of MFIs.Source: Report on Trend and Progress of Banking in India,2008-09, RBIFinancialeducation andcredit counselingare importanttools to enablepeople overcomeindebtednessBank of India permitted banks to utilize the services of MFIs/NGOs/ SHGs for expanding the coverage of financial andbanking services through the Business Facilitator (BF) andBusiness Correspondent (BC) models and it can be observedfrom Table 7 that commercial banks have again emerged asthe largest lenders to the MFI sector.In April 2008, the list of BCs was extended to includeretired bank employees, ex-servicemen and governmentemployees so as to provide banking facility to rural populationat an accessible location or put differently, takingbanking to the doorstep. The Raghuram Rajan Committeeon Financial Sector Reform also suggested the expansion ofthe BC model. The Working Group set up to review the BCmodel has submitted its Report in August 2009 and hasrecommended the expansion in the list of BCs in rural andsemi-urban areas to include retired teachers, kirana/medical/fair price shop owners, and authorizedfunctionaries of SHGs among manyother such representatives. The Reportalso suggests that banks be permitted tocollect a reasonable service charge fromthe customer in a transparent mannerdepending upon the profile of thecustomer along with providing adequaterisk-mitigation measures. Apartfrom such standardized approaches inthe formal sector, there are a largenumber of innovative experiments doneby MFI and SHGs that serve local requirements and indicatethat there exists a market at the bottom of the pyramid.Although, financial exclusion is a major problem in ruraland semi-urban areas it is important to acknowledge theprevalence of exclusion in urban areas as well particularly inthe case of informal sector workers such as artisans, labourers,small businessmen, migrants, slum dwellers etc. who donot have bank accounts and whose knowledge of bankingservices is limited. Efforts along lines to overcome financialexclusion in rural areas will have to be undertaken by bothSCBs and Urban Co-operative Banks (UCBs) to expandfinancial inclusion in urban areas. For instance, Indian Bankopened a core banking branch (using smart card basedbanking) along with ATM facility in Dharavi, Asia’s largestslum, in Mumbai and extended doorstep banking to residentsof this slum. A similar model has now been extended for theTHE INDIA ECONOMY REVIEW47

P ROBLEMS & PERSPECTIVESurban poor by Indian Bank in Guntur, Andhra Pradesh andTharamani, Chennai.Besides, several others initiatives have been undertaken tomake access to the financial sector inclusive, namely, adoptinga decentralized strategy wherein the State Level Bankers’Committee (SLBC) identifies one district in each State for100 percent financial inclusion (whereby all those whowanted to open a bank account were provided with one byallocating villages to different banks), conditional approvalfor opening of new bank branches wherein at least half ofsuch new branches are opened in under banked areas asnotified by the RBI, strengthening and reviving RegionalRural Banks and Co-operative banks which being localinstitutions are best adapted to achieve financial inclusion,improvements in the payments system, exploiting the vastnetwork of post offices and the trust reposed by the localpopulation in the postman - banks are using post offices asagents for branchless banking under BC models, strengtheningprimary agricultural credit societies, reviving the LeadBank Scheme (Reserve Bank of India, 2008; Thorat, 2008;Chakrabarty, 2009).On the recommendations of the Committee on FinancialInclusion, the Government constituted two Funds withNABARD – the Financial Inclusion Promotion and DevelopmentFund (FIPF) and the Financial Inclusion TechnologyFund (FITF) with an initial corpus of Rs.500 crore each. TheFIPF would focus on capacity building and promote ruralentrepreneurship, farmers service centres while the FITFwould focus on funding low cost technology solutions(Government of India, 2008).Financial Literacy and Credit CounsellingEfforts at financial inclusion will meet with success whenaccompanied by an awareness of the available financialproducts and services, especially of the risks and rewards sothat an individual can make an informed choice. Financialeducation and credit counseling are seen as important toolsto enable people overcome indebtedness. In India the needfor financial education is well borne out given the low levelsof overall literacy and that a large section of populationcontinues to be out of the purview of the banking andfinancial sector. Credit/Debt Counselling can be defined as‘counselling that explores the possibility of repaying debtsoutside bankruptcy and educates the debtor about creditbudgeting and financial management’. In other words, itexamines ways to solve current financial problems, explainsthe costs of misusing a credit and encourages distressedpeople to access the formal financial system. Counsellingcan be preventive wherein people are made aware of thepitfalls of misuse of credit, making borrowers aware oftheir repayment capacity while it can be curative and helpdistressed people in generating effective debt managementplans (Chakrabarty, 2009b). A model scheme on financialliteracy and credit counseling centres was formulated andcirculated by the Reserve Bank of India to all ScheduledCommercial Banks and Regional Rural Banks in February2009 with the advisory that such centres be set up asseparate entities at arms length from the bank so that suchfacilities can be availed by customers of different banks(Reserve Bank of India, 2009).Other measures undertaken by the Reserve Bank of Indiais the creation of a multi-lingual link on its website in 13Indian languages on all matters concerning banking in June2007, taking financial education to children by adopting thecomic books format that explain the basics of banking,finance and central banking to children, promote financialawareness through essay competitions for school children.Further, the RBI has undertaken a project entitled ‘ProjectFinancial Literacy’ with the objective of creating awarenesson general banking concepts and the central bank to differenttarget groups and to be operated through the mass media,banks, local government machinery and NGOs. Financial48 THE IIPM THINK TANK

I NCLUSIVE INDIAliteracy programmes are being launched in each State withthe active involvement of the government and SLBC (ReserveBank of India, 2008a).efficient delivery mechanism along with financial awarenessand a co-operation between financial institutions, governmentand civil society organizations.Roadmap for the FutureThe principle of financial inclusion indicates that bankingand financial services are to be viewed as public goods andhence have to be equally enjoyed by all. All efforts at financialinclusion validate the issue of access and support theargument of taking banking services to the last mile. Adirection for the future would be the increasing use of ITenabled solutions which would reduce costs of financial transactions,improve the allocation of financial resources,increase competitiveness and take financial products andservices to the general masses in under banked rural andsemi-urban areas. The use of smart cards, mobile ATMs withinstructions and commands in regional languages (like thee-Choupal project) and the coverage of post offices underelectronic payments network could facilitate financialinclusion. Another tool could be the use of mobile telephonywhose use is widespread across all strata of society. Themobile phone can function as a multi-application smart card,thus extending banking services to every mobile phone user.Projects have been initiated in several States using smartcards for opening bank accounts with bio-metric identificationand the link to a mobile or a hand held connectingdevice ensures that the transactions are recorded in bankbooks on a real time basis (Chakrabarty, 2009a; Thorat,2007).As suggested by the Raghuram Rajan Committee on FinancialSector Reform that a nationwide electronic financialinclusion system (NEFIS) be created by linking the ‘no-frills’accounts to facilitate electronic transfer of funds into theseaccounts from various government social security programmes.In conclusion, the approach to financial inclusion needs tobe comprehensive and holistic as opening of a no-frillsaccount which would ensure the safety of savings and accessto affordable credit would encourage the individual toembark on a continuous process of access to differentfinancial products and services which lead to wealth creationas also to seek insurance. The success of financial inclusionwould ultimately depend on a collaborative strategy whereinthere is an adequate supply of correctly priced and appropriatefinancial products and services accompanied by anReferences and Additional Thinking• Chakrabarty, K.C. (2009): Banking: Key Driver forInclusive Growth, Reserve Bank of India Bulletin,September.• Chakrabarty, K.C. (2009a): Technology, Financial Inclusionand Role of Urban Cooperative Banks, Reserve Bankof India Bulletin, September.• Chakrabarty, K.C. (2009b): Furthering Financial Inclusionthrough Financial Literacy and Credit Counselling,Reserve Bank of India Bulletin, December.• Government of India (2007): Towards Inclusive Growth:The Gender Dimension, Planning Commission, November15 th 2007.• Government of India (2008): Eleventh Five Year Plan– 2007-2012, Planning Commission, Oxford UniversityPress, New Delhi.• Government of India (2008a): Report of the Committeeon Financial Inclusion.• Government of India (2008b): Report of the Committeeon Financial Sector Reforms.• Government of India (2010): Economic Survey 2009-10.• Ramesh, S. and P. Sahai (2007): Universal FinancialInclusion in India: The Way Forward, CAB Calling, July -September 2007.• Reserve Bank of India (2008): Report on Currency andFinance 2003-08, Volume V.• Reserve Bank of India (2008a): Concept Paper on FinancialLiteracy and Counselling Centres.• Reserve Bank of India (2009): Report on Trends andProgress of Banking in India, 2008-09.• Reserve Bank of India: Basic Statistical Returns ofScheduled Commercial Banks, various issues.• Thorat, U. (2007): Financial Inclusion – The IndianExperience, Reserve Bank of India Bulletin, July.• Thorat, U. (2008): Inclusive Growth: The Role of Banks inEmerging Economies, Reserve Bank of India Bulletin,March.(The views expressed in the write-up are personal and do notreflect the official policy or position of the organization.)THE INDIA ECONOMY REVIEW49

P ROBLEMS & PERSPECTIVESGROWTH SANSDEVELOPMENT ?B.K. ThapliyalFormer Professor and Head at National Institute ofRural Development (NIRD), Hyderabad50 THE IIPM THINK TANK

W HITHER INDIA?Economic Growth and DevelopmentEconomic growth and economic development are often usedsynonymously. When progress takes place gradually andreflected in quantitative changes, it should be considered aseconomic growth. Growth leads to more output, saving andinvestment. Development involves not only quantitativeincrease in the economy but also qualitative changes. Economicgrowth implies a gradual change in the economy.Economic development may not be steady, and some times itmay be abrupt and uneven changes. From this point of viewdevelopment is more dynamic than growth. It has a broaderperspective. It not only stands for “more output” but also“changes in the technical and institutional arrangements bywhich it is produced”. Such changes are not automatic.Further, it implies change in technological and institutionalorganization of production as well as in distributive pattern ofincome. Hence, compared to the objective of development,economic growth is easy to realize by alarger mobilization of resources andraising their productivity and outputlevels. The process of development is farmore extensive. Apart from a rise inoutput, it involves changes in compositionof output, shift in the allocation ofproductive resources, and eliminationor reduction of poverty, inequalities andunemployment. Lastly, economicdevelopment is not possible withoutgrowth but growth is possible withoutdevelopment.An economy grows because it accumulates factors ofproduction, like physical and human capital, because itslabour effort grows, or because it improves the efficiency withwhich it uses the factors of production. The variables thatappear most frequently in economic growth include: savings,investment, technological change, structure of capital,consumption, etc. The conventional “neoclassical” theory ofgrowth had held that economic growth was a result of theaccumulation of physical capital and an expansion of thelabour force – combined with an “exogenous” factor, technologicalprogress that makes capital and labour more productive.In addition to an expanded view of the relationshipbetween economic growth and human capital, there now is adeeper understanding of the relationship between growth andEconomicdevelopmentis not possiblewithout growth.But growth ispossible withoutdevelopmentequity. Human capital has more impact on growth, forexample, if it is equitably distributed.It may be pointed out that economic development is not thesame as economic growth. Economic development involvessomething more than economic growth. While economicgrowth involves expansion of an economy through a simplewidening process, economic development incorporatesgrowth as well as essential qualitative dimensions appearingin the form of improved performance of the factors ofproduction and improved techniques of production. Anotherqualitative change may appear in the form of development ofinstitutions and changes in values and attitudes. Thus, whileeconomic growth refers to sustained increase in per capitaproduct, economic development refers to growth plusprogressive changes in the socio-economic structure of anation.National income is one of the most commonly usedeconomic phrases and from thatviewpoint it appears to have a fairlysimple meaning, viz., it represents theaggregate income of a nation as againstthe income of an individual. A numberof specific problems or issues arisewhen we try to define and measure thenational income of any country.However, to begin with, we may definenational income as the aggregate moneyvalue of the annual flow of final goodsand services in the national economy.Some aspects of this definition deserve special mention. Forinstance, it may be noted that national income is an aggregativevalue concept. It makes use of the value determined bythe measuring rod of money as the common denominator forthe purpose of aggregating the diverse outputs resulting fromdifferent types of economic activities.Another aspect of this definition that should be noted isthat national income represents the aggregates value of finalproducts rather than the total value of all kinds of productsproduced in the economy. The distinction arises becausethere are a number of products, which in turn are used in theproduction of several other products. The output of the latterwill, therefore, include as its components the entire output ofthe former. For instance, since flour is used in making bread,the total value of bread includes the value of flour also. HenceTHE INDIA ECONOMY REVIEW51

P ROBLEMS & PERSPECTIVESif we add the value of the former to that of the latter whilemeasuring national income, we will be indulging in what isknown as "double counting". Obviously the measure ofnational income should be free form double counting. Toemphasize this aspect, the word ‘final" has been used in theabove definition to specify the type of goods and services, thevalues of which are to be aggregated to derive nationalincome. It indicates that national income is an unduplicatedtotal that does not involve any double counting.Philosophically speaking, there aretwo opposing views of development.One is a consumerist view, whichregards the human being primarily as aconsumer of goods and services.Basically, ‘development’ is seen in thisview as an expansion of the flow ofconsumption. For a time, developmentwas identified with aggregate economicgrowth to bring about a progressivelyhigher flow of aggregate of consumptionirrespective of its distribution (the‘reactionary‘ view). Gradually, the interpersonal distributionquestion was raised, in terms of who benefits from suchdevelopment as consumers (the ‘liberal’ view)(Rahman,1992:172).In 1955 Lewis defined the purpose of development aswidening the “range of human choice”. However, Lewistended to equate wider choice merely with greater income -and had more faith that economic growth would inevitablylead to human development. Proponents of economic growth,argue that without such growth, ‘development’ in the broadersense of human well-being would be impossible to achieve.They recognize, of course, that economic growth is a ‘means’rather than an end in itself, but tend to agree that achievingeconomic growth is the first priority (Kabeer 1994:74).Economic development is not concerned only with economicgrowth but also with progress in human societies.Development is a process of economic, social, and technologicalchange by which human welfare is improved. Anythingthat raises the level of human welfare contributes to development;anything that reduces the welfare is anti-developmental,a subtraction from development (Higgins,1992:27). Amajor goal of development policy and planning, say Adelmanand Morris(1973:192-93), ‘should be to guarantee socialGrowth must bejudged not bythe abundanceof commodities itproduces, but byhow it enrichespeople’s livesjustice to those in need, and that any pattern of economicgrowth is unjust that fails to improve the standard of living ofmajor segments of the population. Anything contributing toextreme inequality in standards of living is morally unacceptable’.A similar point is raised in the HDR, 1996, “Is economicgrowth a meaningful goal? Or is human development thereal objective? If it is human development, growth should bejudged not by the abundance of commodities it produces, butby how it enriches people’s lives”(UNDP: 1996:43).Table 1 : Sector Wise Growth Pattern in IndiaPeriod Agriculture Industry Services All1950-60 3.0 6.2 4.3 3.91960-70 2.3 5.5 4.8 3.71970-80 1.5 4.0 4.4 3.11980-90 3.4 7.1 6.7 5.61990-2000 2.5 5.6 7.6 5.62000-2006 2.8 7.7 8.9 7.31950-80 2.3 5.2 4.5 3.61980-2006 2.9 6.4 7.7 6.01950-2006 2.6 5.8 6.0 4.7Source : World Bank Central Database, May 2007.Economic Growth and Developmentin IndiaThe economic growth and developmentpattern in India has been very interesting.From the beginning of First FiveYear Plan (1952-53) till Eighth FiveYear Plan (1991-92) India followedsocialistic pattern of development withdominance of public sector in allspheres of economic and social development.The government had control overmost of the factors of economic growth and development. Itwas mainly a closed economy and markets had very limitedrole. During 1950 to 1980, the GDP grew between three andfour percent. Prof. K N Raj, an eminent economist named itas “Hindu Rate of Growth”. During the decade of eighties,there was some opening of the economy, which helped inbreaking the barrier of Hindu Growth Rate and the GDPgrew between 5-6 percent.It was during 1991-92 when the government realized that52 THE IIPM THINK TANK

W HITHER INDIA?restructuring and liberating from the control of the governmentis essential to achieve higher growth in the economy ThusNinth Five Year Plan onwards, the government allowed privatesector and the markets to play their role and started minimizingstate control on the factors of production and business.This upturn in the growth rate can definitely be attributedto the economic reforms. After 2001, the growth rate furtherjumped to cross seven percent and during 2007-08 it movedabove nine percent. Table 1 provides compounded growthrate decade wise from 1950 to 2006.There are two aspects of development.One is increase in income of thepeople by the expansion of gainfulemployment leading to increase in theirconsumption and also help in thereduction of poverty. Another isexpansion of roads, power supply, morehospitals, school and colleges, safedrinking water and sanitation, etc.,which reflects in the increase of literacyand quality education, reduction inInfant Mortality Rate (IMR) and Maternal Mortality Rate(MMR), increase in expectancy of life and so on. In otherwords, development can be measured in terms of improvementin all aspects of human development. In fact theultimate objective of development is to improve the quality oflife of the people in the country.Economic Growth and EmploymentLet us first compare the growth trends with the employment.The trickle downeffect of growthand inclusivedevelopment willbe possible whenemploymentexpands massivelyTable 2 given below provides data on the growth rate ofemployment from 1983 to 2005. It can be seen from the tablethat during 1983-84 and 1993-94 annual compounded growthrate of employment was 2.1 while in the corresponding periodeconomic growth rate was 5.6. Between 1993-94 and 1999-2000, while the growth rate was improving over the previousdecade, the employment rate declined to 1.0 percent. Howeverthe employment rate increased to 2.8 during 1999-2000to 2004-05 but the economic growth rate was above sevenpercent during the correspondingperiod. This clearly indicates that higheconomic growth has not been helpfulin expanding employment.Economic Growth and PovertyReductionOne of the important indicator ofdevelopment is reduction in poverty. Itis the basic presumption that wheneconomy grows, every one gets thebenefit, but in proportion to his/hercapacity and capability. Thus those with high capacity andcapability would get higher share of growth while those withpoor capacity and capability get poor share. In other wordsthe rich become richer while the poor remain poor. Thissituation will continue unless a mechanism is devised whichenables the poor to derive “little more than proportionatebenefit” from the economic growth.Poverty reduction in India has been one of the dominantdevelopment policies. A number of rural developmentTable 2 : Employment Growth Rates by Sectors (Annual Compound Growth Rates)Sectors1993-94 over1983-841999-2000 over1993-942004-05 over1999-20002004-05 over1993-941. Agriculture 1.4 0.1 1.5 0.72. Mining & Quarrying 3.7 -2.8 2.4 -0.43. Manufacturing 2 1.6 5 3.14. Electricity, gas, water, etc. 4.8 -4.8 3.1 -1.25. Construction 5.7 6.4 8.2 7.26. Trade, hotel & restaurant 3.8 6.3 3.9 5.27. Transport, Storage and Communication 3.4 5.3 4.9 5.18. Other services – Financial, Insurance, Public and Personal services, etc. 3.9 -0.7 3.6 1.29. All sectors 2.1 1 2.8 1.9Source : NSS Employment and Unemployment Surveys adjusted for population Census. Employment is measured by number of workers by UPSS status.THE INDIA ECONOMY REVIEW53

P ROBLEMS & PERSPECTIVESTable 3 : Population Below Poverty Line(as per expert group)Region 1973-74 1983-84 1993-94 1999-2000 2004-051.Rural 56.4 45.7 37.3 27.1 28.32.Urban 49 40.8 32.4 23.6 25.73.Total 54.9 44.5 36 26.1 27.5Source : Planning Commission, Press Release, March 21, 2007.programmes with substantial budgetary allocation wereintroduced from the First Five Year Plan . From Ninth Planonwards, the budgetary allocation has been increased bymany times. In addition during these periods India has beenon high trajectory of growth, but it has little or no effect onthe rate of poverty reduction as can be seen from Table 3.Between 1973-74 and 1983-84, when the growth rate wasbelow four percent, the percentage of population ‘belowpoverty line (BPL)’ declined from 54.9 to 44.5, averagingabout one percent per year. The decade between 1983-84 and1993-94 when the growth rate broke the barrier of HinduGrowth Rate and crossed five percent, the BPL populationwas reduced to 36.0 percent from 44.5percent, registering less than onepercent annual decline in poverty. From1993-94 to 1999-2000 when the growthrate was above six percent, povertydeclined by annual average of onepercent. However, this was the periodwhen there was a quantum jump in theallocation for poverty alleviationprogrammes. Unfortunately, thegreatest tragedy is that between1999-2000 and 2004-05, poverty hasrather increased over the previous period in spite of the factthat economic growth was above seven percent and investmenton rural development programmes were increasingphenomenally.Economic Growth and Human DevelopmentThe overall indicator of development has to be reflected interms of the human development. The United NationsDevelopment Programme (UNDP) organisation in 1990started bringing out human development report on all nationsof the globe. Based on the various indicators of humanDuring 2004and 2005 Indiaimproved in HDIrank and stood at127. Then again itdived to 139 HDIrank in 2009development a composite index was developed which is calledHuman Development Index or HDI and based on it all thenations are ranked. It is interesting to note that according toHuman development Report 1990, India was placed at 123 inHDI rank. In 1992 it climbed two steps up at 121. Howeverfrom 1993 it sided down to 134 and reached its lowest at 139during 1998. It was this period when the economic growth inthe country was rising above six percent. During 2004 and2005 India improved in HDI rank and stood at 127. Therewas again a surprise that India dived to 139 HDI rank in2009. These figures clearly indicate that the high economicgrowth rate did have least effect on the HDI Rank of India.Then can we conclude that there was growth but no development?ConclusionThe facts provided above in respect of the economic growthpattern and some vital factors like employment, povertyreduction and human development (which are important indicatorsof development) have helped the government tomobilise more resources and accordingly the governmentdevelopment, clearly explain thateconomic growth not necessarily leadto development. Economic growth hasincreased investment on social developmentand poverty alleviation by manyfolds, unfortunately, these have not yetshown encouraging results. There aremany causes for this situation, howeverthere are three main causes whichneutralise the efforts being made fordevelopment. These are : (1) High rateof population growth; (2) Inability totransfer labour from agriculture to non-agriculture sectors ona larger scale; and (3) High level of corruption.If we want that high growth rate is translated to development,there is a need to promote inclusive development. Thetrickle down effect of the economic growth and inclusivedevelopment will be possible when there is mass expansion ofemployment in industrial and service sectors. In all thedeveloped countries, the percentage of workers in agriculturesector and its share in GDP is much less than 10 percent whilein India more than 60 percent of the workers are in agriculturesector though its share in GDP is around eighteen54 THE IIPM THINK TANK

W HITHER INDIA?percent.In the ultimate analysis it can be concluded that economicgrowth is necessary so that more resources can be mobilised,but it can be translated into development only when all theconcerned, government as well as corporate sector makesincere efforts to improve the factors contributing to humandevelopment both in quantity and quality.References and Additional Thinking• Adelman, I. And Morris, C.T.(1973) ‘ Economic Growthand Social Equality in Developing Countries’.(California:Stanford University Press), pp.192-93• (1992) ‘What is the Evidence on Income Inequality andDevelopment?', in Donald J. Savoie and Irving Brecher ed.Book ‘Equity And Efficiency in Economic Development'(London: Intermediate Technology Publications), p.121-46..• Ahluwalia, M. (1976) ‘Inequality, Poverty, and Development’.Journal of Development Economics, 6:307-42• Bardhan, Pranab. (1995) ‘Research on Poverty andDevelopment twenty Years after Redistribution withGrowth',. in Michael Bruno and Boris Pleskovic (eds.)‘Annual World Bank Conference of Development Economics,1995,( Washington D.C.: theWorld Bank• Chenery, Hollis, Montek S. Ahluwalia,clive Bell, Hohn H. Duloy, and richardJolly. (1974). ‘Redistribution withGrowth’. (New York: Oxford UniversityPress)• Colman, D and Nixson, F. (1994).‘Economics of Change in Less DevelopedCountries’. (New York: HarvesterWheatsheaf), p. 100• Fields, G.S. and G.H. Jackbuson. (1993).‘ New Evidence on the Kuznets Curve’.Yale Economic Growth Centre, NewHaven, Conn.• Fishlow, A. (1995) ‘Inequality, Poverty,and Growth : where Do We Stand?', inMichael Bruno and Boris Pleskovic (eds.)‘Annual World Bank Conference ofDevelopment Economics, 1995', (WashingtonD.C.: The World Bank• Higgins, B. (1992) ‘Equity and Efficiency in Development:Basic Concepts’, in Donald J. Savoie and Irving Brechered. Book ‘Equity And Efficiency in Economic Development'(London: Intermediate Technology Publications), p.37-8.• Lewis, W.A. (1976) ‘Development and Distribution’, in A.Cairncross and M.Puri (eds.) Employment, IncomeDistributed and Development Strategy, Macmillan.• Rahman,A. (1992) ‘People’s self-development’ , in PaulEkins and Manfred Max- in Paul Ekins and ManfredMax-Neef (ed). Real-Life Economics: Understandingwealth Creation (London: Routledge) p,172• Todaro, M.P. 1997. ‘Economic Development’ (London:Longman) p. i70UNDP (1996) Human DevelopmentReport (New York: OUP)• Watkins, Kevin. (1998). ‘Economic Growth with Equity:Lessons from East Asia’,. (Oxford: Oxfam).• World Bank. (1993) ‘The East Asian Miracle: EconomicGrowth and Public Policy- A World Bank Policy ResearchReport.’ (New York:OUP)(The views expressed in the write-up are personal and do notreflect the official policy or position of the organization.)THE INDIA ECONOMY REVIEW55

P ROBLEMS & PERSPECTIVESINCOMEANDINEQUALITYIN INDIA56 THE IIPM THINK TANK

G ROWTH GOALSJoydeep GoswamiConsultant, National Council of Applied EconomicResearch, New DelhiSubrata BandyopadhyaySenior Research Manager, ICMR, New Delhi1. IntroductionIndia being the home to 1.1 billion people with a median ageof 25 years has the phenomenal potential for growth. Withreal per capita income growing in excess of seven percent perannum, together with an increased willingness to cooperateas well as compete with the rest of the world, the country isemerging as a major player in the global economy. Sixty yearshave passed since India gained independence, and it is afascinating time to review the country's economic performanceover these last few decades, and to assess futureprospects and potential.The economy of India is the twelfth largest economy in theworld by market exchange rates and the fourth largest by purchasingpower parity (PPP) basis. The economy was characterizedby extensive regulation, protectionism, and publicownership, leading to pervasive corruption and slow growthtill the last part of eighties. Since 1991, continuing economicliberalization has moved the economy towards a marketbasedsystem. Indian economy has moved from the traditionaleconomy depending primarily on agriculture toindustrialized economy and is on the threshold of emerging abig player in the world economy. India has been one of thebest performers in the world economy in recent years, butrapidly rising inflation coupled with ever increasing inequalityin income is posing a serious threat to the growth path.This is a matter of debate whether inequality is greater in acountry when the vast majorities are poor and a few peopleare very wealthy with a small middle class or when there is aconsiderably larger middle class with the number of richpersons, few of them sumptuously wealthy, increased byseveral multiples. The latter situation has a lower inequalitybut makes more visible to the poor.The main objective of this paper is to examine the incomeTable 1: Growth Rates in GNP, NNP and Per-Capita NNP in Different Plan Period (in percent)Plan PeriodGross National Product atFactor CostNet National Product atFactor CostPer Capita NNPAt Current PricesAt 1999-00PricesAt CurrentPricesAt 1999-00PricesAt CurrentPricesAt 1999-00PricesFirst plan period (I951-56) 1.8 3.7 2.0 4.4 0.2 2.6Second Plan period (1956-61) 8.8 4.0 8.7 3.8 6.5 1.7Third Plan Period (1961-66) 9.6 2.8 9.6 2.6 7.2 0.4Annual Plan (1966-69) 12.3 3.9 12.3 3.9 9.9 1.6Fourth Plan (1969-74) 11.1 3.4 10.8 3.1 8.3 0.8Fifth Plan (1974-79) 10.7 5.0 10.3 4.9 7.9 2.6Annual Plan (1979-80) 9.4 -5.0 8.3 -6.0 5.7 -8.2Sixth Plan (1980-85) 15.4 5.4 15.2 5.4 12.8 3.1Seventh Plan (1985-90) 14.1 5.5 13.8 5.5 11.4 3.3Two Annual Plans (1990-92) 15.7 3.2 15.6 3.1 13.3 1.0Eighth Plan (1992-97) 16.4 6.6 16.5 6.7 14.2 4.5Ninth Plan (1997-2002) 10.8 5.5 10.6 5.3 8.5 3.3Tenth Plan (2002-07) 12.6 7.8 12.5 7.8 10.8 6.1Note: Growth rates from 2000-01 based on New Series with base year 1999-2000Source: Economic Survey 2007-08, Ministry of Finance, Government of India, 2008THE INDIA ECONOMY REVIEW57

P ROBLEMS & PERSPECTIVESand inequality in India across states and regions and variousregional groupings. Our main focus here is to measureincome inequality among the rural and urban households inIndia by states and various groupings. The levels of inequalityhave been measured using Gini Coefficient. Anotherimportant aspect of income dynamics for a country likeIndia is large spatial variation. In this paper we have capturedspatial variation in household income by states andvarious regional groupings. We have also looked at relativeincome inequality across various income groups, sources ofhousehold income, religion as well as levels of education.The rest of the paper is organized in the following fashion.In the next section we have mentioned the sources of data onwhich the analysis has been carried out. Section 3 mentionsthe broad outline of the Indian economy and growth whileHousehold and per capita income and inequality by variousstakeholders is taken up in Section 4. Section 5 makes theconcluding remarks of the results and findings.2. Data and MethodologyFor the analysis of income and inequality we have usedTable 2: India’s Growth Performance per YearPeriodTotalGDPGrowthNote: Growth rates from 2000-01 based on New Series with base year 1999-2000Source: Economic Survey 2008-09, Ministry of Finance, Government of India, 2009Sectoral Growth of GDP (%)Agriculture Industry Services1970-72 to 1980-81 (average) 3.2 2.0 4.0 7.21981-82 to 1990-91 (average) 5.7 3.8 7.0 6.71991-92 1.4 -1.5 -0.1 3.51995-96 7.3 -0.2 12.2 9.41996-97 8.0 9.1 7.3 7.21992-93 to 1996-97 (average) 6.7 4.6 8.0 7.61997-98 4.3 -1.6 4.3 7.91999-2000 6.4 2.7 4.7 9.32001-02 5.8 5.9 2.8 6.41997-98 to 2001-02 (average) 5.4 2.3 4.5 7.82004-05 7.5 0.7 10.5 8.72005-06 7.9 14.0 9.6 11.12006-07 8.2 15.2 9.8 12.52007-08 7.6 14.6 9.3 12.12008-09 6.7 NA NA NAIHDS survey carried out by NCAER for the year 2004-05.The surveys was carried out for the households located in allStates/Union Territories of India in both rural and urbanareas and information about their sources of income, incomeearned by each one of earners in the household along withother demographic characteristics. Income survey wasdesigned around a three stage stratified sampling designwhich is similar to that used by the NSSO in its HouseholdBudget Surveys (HBS). 1 Sampling was done independentlywithin each state/UT with objective of generating estimatesat state/UT level.3. Indian Economy at Broader PerspectiveThe structural transformation that has been adopted by thenational government in recent times has reduced growthconstraints and contributed greatly to the overall growth andprosperity of the country. Indian economic policy afterindependence was influenced by the colonial experience andhas strongly led to the exposure to Fabian socialism. Policytended towards protectionism, with a strong emphasis onimport substitution, industrialization, state intervention inlabor and financial markets, a large public sector, businessregulation and central planning paradigm.An adoption of the development strategyhelped the country to escape from the massiveilliteracy, recurrent famines, fertility rates ofabout seven children per woman, and secularstagnation prevailing before Independence.The adverse economic situation during thelater part of 1980s and the first part of 1990smade the Government of India review thepolices followed in the preceding four decades,take a "U" turn and try to pull the economyfrom the brink of disaster and the verge ofbankruptcy. The terms Liberalization, Privatizationand Globalization (the new LPG) amplysummaries the crucial aspects of the reformsstarted in 1991. The stabilization policiesinitiated in 1991 were highly contractionaryand were designed to reduce inflation from thelevel of 16 percent, improve precarious balanceof payment situation, reduce fiscal deficit andhelp pick up drooping industrial growth.The liberalization of the Indian economy58 THE IIPM THINK TANK

G ROWTH GOALSduring the early nineties provides increasing hopes to theagricultural sector. But what is different is that there hastaken place a notable deceleration in the growth rate of grossproduct from agricultural during the nineties, which deceleratedfor 3.94 percent per annum during 1980-81 to 1990-91to only 1.9 percent per annum during 1990-91 to 1998-99.The fruits of liberalization reached their peak in 2007,with India recording its highest GDP growth rate of ninepercent. With this, India became the second fastest growingmajor economy in the world, next only to China. An Organizationfor Economic Co-operation and Development(OECD) report states that the average growth rates 7.5percent will double the average income in a decade and morereforms would speed up the pace. Indian governmentcoalitions have been advised to continue liberalization. Indiagrows at slower pace than China. McKinsey states thatremoving main obstacles "would free India’s economy togrow as fast as China’s, at 10 percent a year". The GDPgrowth rate for the 2008-09 periods has been 6.7 percent.Despite improvement in many areas it is true that poverty,inequality and unemployment are major stumbling blocks tothe nation’s development.4. Household and Per-Capita IncomeThe share of household income to the GDP is an indicatorTable 3: Basic Characteristics of Indian Economyby LocationVariables Rural Urban All IndiaEstimated Population (Million) 741.5 260.9 1002.5Estimated Household (Million) 138.2 53.7 191.9Household Size 5.4 4.9 5.2Estimated Household Income (Rs.) 45135 77410 54160Estimated Per-Capita Income (Rs.) 8413 15915 10366Estimated Poor Household (%) 24.0 22.0 23.5Gini (Inequality) 0.48 0.48 0.51Source: Calculated by the author from IHDS databased on consumption levels, is often used, but other indicatorsare needed to capture other dimensions of poverty. Thelevel of household income is an important indicator determiningthe level of inequality. This section explains the levelsof household income and per capita income by variousregional groupings. In the beginning we present the estimatedcharacteristics of Indian economy such as population,household size, household income and the proportion ofpoor household by the place of location to find out the levelof inequalities at the broader aspects.The household income estimated from the surveys datashows that the mean household income in among the ruralFigure 1: Average Annual Per-Capita Income by Income GroupsAverage Annual Per Capita Income (Rs.)350003000025000200001500010000500022912284437144556816698111327116702955732816RuralUrban0Q1 Q2 Q3 Q4 Q5Household Income GroupsTHE INDIA ECONOMY REVIEW59

P ROBLEMS & PERSPECTIVESand urban area is significantly different (Table 3). However,the rural-urban differences are far less pronounced when wecompare the per capita incomes. The significant point to behighlighted is that the rural-urban difference in householdincome and per-capita income is striking. The survey revealsthat rural household in India is earning 42 percent less thanurban household. The CSO estimates suggest that the percapita net domestic product at current prices for 2004-05vary about five times between the rich and the poorer states.Shukla (2007) reports that 48 percent of the Indian live inthe low income states while about 31 percent come from themiddle income states.A significant way of looking at the inequalities is bydividing the households ranked by their incomes. We havedivided the households on the basis of their incomes into fivegroups called quintile where Q1 correspond to the householdsat the bottom of income range and Q5 representing thehouseholds at the top. Differences across quintiles arestriking. This shows that the share of income of the householdfor Q1 is just 10 percent of the household income of Q5.This disparity is independent irrespective of rural and urbanareas but marginally better in rural areas.The per capita income by quintiles shows a more conspicuousfact as the per capita income for the household belongingto Q5 is about 13.6 times more than the per capita income ofhousehold belonging to Q1. The difference by place ofresidence is again prominent. In rural areas, the Q5-Q1 ratiois 12.9 while in the urban sector the ratio difference is aboutTable 4: Household and Per-Capita Income byQuintilesQuintiles (Rs.)IncomeAllQ1 Q2 Q3 Q4 Q5IndiaHHY 13568 24080 35699 57300 140166 54160PCY 2290 4385 6856 11449 31172 10366Gini 0.19 .08 .08 .09 0.31 0.51Source: Calculated by the author from IHDS data14.4. These differences arise due the fact that the householdsin lower income groups tend to have larger household size.Again capturing the spatial variations in income thehousehold income and per capita income is determined byregions. 2 The northern regions experienced a more balanceddevelopment in terms of Industry and agriculture. Moreover,urbanization has flourished at a fast rate in the northernregion compared to the other regions of the country. Thewestern regions are blessed by various industries due to easyavailability of the raw materials.The Northern region is having highest mean householdincome followed by the states in the hill areas (Mountain).The households in four out of seven regions on an averageearn less than the all India average (Figure 2). The lowestmean household income is in the region comprising of statesof Eastern and North Eastern States. The mean householdincome in Northern region is more than two times to that ofTable 5: Household and Per-Capita Income by QuintilesRegionsRural Urban AllHHY PCY Gini HHY PCY Gini HHY PCY GiniMountain 75834 12958 0.43 101065 19312 0.45 80658 14067 0.44North 93185 15603 0.48 88383 18302 0.44 90846 16775 0.47UP-UT-Bihar-Jharkhand 39283 6387 0.43 75611 13232 0.51 45530 7495 0.47Rajasthan-MP-Chhattisgarh 44849 7767 0.46 66562 12399 0.49 49983 8803 0.48East & NE 38274 7675 0.47 81803 18724 0.46 47994 9898 0.51West 53150 10264 0.49 85534 17324 0.44 66491 13091 0.49South 42917 9639 0.49 69666 15835 0.48 51499 11611 0.51All India 45135 8413 0.48 77410 15915 0.48 54160 10366 0.48Source: Calculated by the author from IHDS data60 THE IIPM THINK TANK

G ROWTH GOALSFigure 2: Average Per-Capita Income by Regions20000158351732415603183021872419312Per Capita Income (Rs.)15000100005000776712399638713232963910264767512958RuralUrban0Rajasthan-MP-ChhattisgarhUP-UttarakhandBihar-JharkhandSouth West North East &North EastMountainmean household income in the East and North EasternStates. The disparities in the household earnings become significantwhen we look at the income by place of residence.The difference is quite significant in the East and NorthEastern States as rural household in these states earns morethan two times less than their urban households. In Northernregion the household in rural areas earn five percent morethan the households in the urban areas though the per-capitaincome of the household in urban areas is about 14 percentmore than the household in the rural areas. However, it mayhere be mentioned that income inequality as indicated byGini coefficient has been higher in the East and North-Eastregion along with Southern Indian States though inequalityhas been much lower in the Hill (Mountain) states (Table 5).In the urban areas of the plain region of Uttar Pradesh,Uttarakhand, Bihar and Jharkhand the inequality has beenhigher though inequality in income in rural areas has beenmuch lower in these states.It is believed that about 68 percent of the people in Indiastill depend on agriculture while in recent time there hasbeen exemplary shift of occupational pattern in the countrydue to rapid industrialization on one hand and fast increasein the service sector. It is expected that there has been shiftof income from the traditional agriculture to the servicesector in the form of regular salary and wages.The survey findings suggest that the regular salary andTable 6: Household and Per-Capita Income by Principal Source of Household IncomeOccupationsRural Urban AllHHY PCY Gini HHY PCY Gini HHY PCY GiniRegular Salary/Wages 73486 13606 0.44 100534 21259 0.41 89677 17940 0.44Self employment inNon-Agriculture46700 8714 0.45 79030 15342 0.49 62152 11817 0.49Labour 25536 5096 0.36 35255 7111 0.34 27369 5473 0.36Self-employment in Agriculture 57113 9680 0.51 94713 16026 0.55 57944 9821 0.51Others 45573 10903 0.48 72044 17481 0.49 56316 13550 0.50All India 45135 8413 0.48 77410 15915 0.48 54160 10366 0.51Source: Calculated by the author from IHDS dataTHE INDIA ECONOMY REVIEW61

P ROBLEMS & PERSPECTIVESwages households in India earn on an average of Rs. 89,677per annum while the household engaged as self-employed innon-agriculture earns Rs. 62,152 per annum. The householdbelonging to manual labour on an average earns about 3.2times less than the household engaged in regular salary andwage. The disparity between the rural and urban areas forthe household engaged as self employment in non agriculturehas been quite significant as it isunderstood that the household engagedin non-agriculture have wider scope ofearning in an urban areas than in ruralareas.The per capita income closely followsthe similar pattern like householdincome among the various occupationaldistributions. However, the noticeabledifferences emerge in case of urbanareas where the per capita income ofthe other occupation is higher than theper capita income of the household engaged as self employmentin agriculture. This is understood that in urban areasthe scope of agriculture as occupation is very much limited.Talking about inequalities in income distribution byoccupation pattern of the household, the household whosemain occupation is labour (agriculture and non-agriculture)Indianpopulation ischaracterisedby distincttexture withsocio-cultural andreligious structurehave lower inequalities while inequalities has been very highamong the household income whose main occupation isself-employment in non-agriculture. This is equally true bythe place of location though the household in urban areaswhose main occupation is salary and wages has lowerinequality compared to rural areas.The Indian population is characterized by a distinctivetexture with socio-cultural and religiousstructure. Institutionally there isno reason why income will have anycorrelation among the caste andreligion of a household. However, it isknown that Indian case is exclusive inits traditional organization where casteand/or religion play an important partin determining the scope of occupation.Despite greater access to educationand positive action on the part ofIndian Government, there are studiesthat show that the caste groups who were traditionally at thelower ranking were also economically worse off.Over the years, social scientists have investigated therelationship between religion and social inequality. Researchershave focused on issues such as the impact ofinequality on religion, the effect of religion on inequality,Figure 3: Average Per-Capita Income By Socio-Religious Groups25000226362195324121Per Capita Income (Rs.)20000150001000050001226981111431963131179362051620673689793RuralUrban0High CasteHindusOBC Dalit Adivasi Muslim OthersSocio-Religious Groups62 THE IIPM THINK TANK

G ROWTH GOALSTable 7: Household and Per-Capita Income by Socio-Religious GroupsReligious GroupsRural Urban AllHHY PCY Gini HHY PCY Gini HHY PCY GiniHigh Caste Hindu 66339 12269 0.47 102581 22636 0.46 81382 16135 0.49OBC 43754 8111 0.46 68100 14319 0.45 49732 9495 0.48Dalit 32655 6313 0.42 59046 11793 0.42 38309 7457 0.44Adivasi 31338 6205 0.48 79189 16206 0.47 36141 7180 0.51Muslim 43796 7368 0.46 56124 9793 0.44 47945 8165 0.46Other Religion 107607 21953 0.55 107911 24121 0.47 107740 22855 0.52Total 45135 8413 0.48 77410 15915 0.48 54160 10366 0.50Source: Calculated by the author from IHDS dataand the relationship between religion and socio-economicstatus. In order to justify the income inequality by religiousgroups, we have estimated the household and per capitaincome by various socio-religious groups.Among the various religious groups, the survey resultreveals that on an average, household from other religiousgroups in India earns Rs. 1,07,740 per annum followed by thehousehold belonging to High Caste Hindus earns on anaverage Rs. 81,382 (Table 7). This may be due to the fact thatagriculture has flourished in NorthEastern Region. It may also be mentionedhere that a household on anaverage earns Rs. 91,557 in Punjabwhich is considered as among the richstate in India. Strikingly, the householdincome of Muslims is lower than thenational average while that of thehousehold income of the Adivasis is thelowest and worse off among othersocio-religious groups.There is not much difference in thetrend in household income by the place of residence. Inurban areas, the Hindus households are better off than theirChristians counterpart. The per capita income of thehousehold belonging to other socio-religious groups hasbeen highest followed by high caste Hindus. This is understoodthat Sikhs are more prone to Punjab and are muchbetter off. Interestingly in urban areas, Adivasis are betteroff than Muslims, Dalit and OBCs while in rural areasMuslims are better off than these groups.Inequality ofIncome is said tobe higher amongthe adivasis thoughmean householdincome of thisgroup is lowestThe Gini coefficients by various socio-religious groupssuggest that inequality has been higher among the otherreligious groups followed by higher inequality among theAdivasis. However, inequality has been lowest among theDalits. The same scenario persists by the place of residence.With the changing economic structure brought about byindustrialization and large scale development in socialstructure, education sector has done quite well in providingbasic education to the Indian masses. It is believed thateducation makes a big difference toearning level for the Indian households.About 17 percent of the householdin India do not have a singleliterate. This is about nine percent inurban areas and about 24 percent inrural areas. On the other hand, we findthat about 20 percent of the head of thehouseholds are graduates or havehigher degree. The proportion is about30 percent in urban areas and about 10percent in rural areas.As expected the mean household income increases withthe increase in education level. On an average, a householdof illiterates in India earns almost 5.7 times less than theGraduate household. However, urban households are quitebetter off in earning by all level of education. On the otherhand, an illiterate Indian on an average earns about 3.8times less than a graduate but this inequality has beenslightly less in rural areas compared to that of urban areas inthe country.THE INDIA ECONOMY REVIEW63

P ROBLEMS & PERSPECTIVES5. ConclusionVarious studies have shown that the marginal productivity inagriculture is zero if not negative. Indian agriculture is overburdened and this is suggested from the fact that the growthrate in the agricultural sector has been very slow. Sinceagriculture is concentrated to the rural areas, there seems tobe large inequality in the distribution of income betweenrural and urban areas. Our resultssuggest that on an average a householdin the rural areas earns about 60percent less than the household in theurban areas. This disparity is muchlesser in the south Indian states.While standard political economytheories suggest a moderating effect ofdevelopment and growth on incomeinequality, empirical literature hasfailed to uncover any such robustrelationship. After about six decades ofplanning with various incentives of growth, inequalityremains the most shameful scar on the face of Indian society.The rising income accompanied by rapid growth of population,per capita income has been increasing at a slow pace.The growth of urbanization and rapid industrialization in thecountry is leading to a shift in occupation structure coupledUrbanization isleading to shiftin occupationalstructure andleading to a risein inequality inincomewith rising inequality.The household size is an important determinant in thedetermination of per capita income in the country. It isexpected that the larger the household size lower is theper-capita income. However, the survey results shows thatnorthern region with higher household size tops the listamong the other regions in terms of per capita income. Onthe other hand, though the westernIndia regions have higher householdincome compared to the southern Indiaregion, but with higher household size,the per capita income for the west islower than south.Inequality also persists among thestates and regions in India. Thedevelopment process has not beenuniform across states and regions. Ourresults suggest that the northernregions are quite better off in terms ofhousehold income though inequality in income is higheramong the household in these states. The central Indianstates is yet to catch up with the development effort showinglow level of household income and higher poverty ratioscompared to the other regions. However, these states showlower level of inequality in income among the households.Figure 4: Average Per Capita Income by Education Level of Head of Household250002195720000Per Capita Income (Rs.)15000100005000594350066338783610542133340IlliteratesLowerPrimaryPrimary Middle Matric HigherSecondaryGraduation& Above64 THE IIPM THINK TANK

G ROWTH GOALSAnother sign of income inequality is observed between thehigher and lower income groups. This inequality is observedirrespective of the place of residence though marginallybetter in rural areas. Inequality in income also persists byvarious religious groups in India. It was observed thathouseholds which belong to other religious groups are quitebetter off though income inequality among these householdis quite high.To conclude, we observed that with higher income therehas been higher income inequality though the poverty ratiohas been lower. The household size is lower for the householdwith higher income though there is no direct relationshipbetween level of income inequality and poverty ratio.There seems to be inequality in the distribution of income byregions and by place of residence. The northern regions arequite better off though these regions are characterized byhigher income inequality. The disparity in income distributionhas been more severe in eastern and north eastern Indiaby rural and urban areas though this region is not worse offcompared to central plains of India.Endnotes1See GOI (2004) for detailed on sampling design and otherrelated issues in NSSO surveys during 2004-05.2The regions are group of states classified based ongeographical location and physical proximity.References and Additional Thinking• Bhalla, Surjit S (2003): ‘Recounting the Poor: Poverty inIndia, 1983-99’, Economic and Political Weekly, January25-31.• Bhagwati, Jagdish (2001): ‘Growth, Poverty and Reforms’,Economic and Political Weekly, March 10 th .• Bhaumik, S.K. and Chakraborty Manisha (2006): EarningsInequality in India: Has the Rise of Caste andReligion Based Politics in India Had an Impact?, IZADiscussion Paper No. 2008, Bonn, Germany.• Chadha, G K and Alakh N Sharma (1997): Growth,Employment and Poverty: Change and Continuity inRural India, Vikas, Delhi.• Deaton, Angus and Jean Dreze (2002): ‘Poverty andInequality in India: A Re-examination’, Economic andPolitical Weekly, September 7 th .• Deaton, Angus (2003): ‘Prices and Poverty in India,1987-2000’, Economic and Political Weekly, January25-31.• Dubey, A. and Gangopadhay, S. (2000): Counting thePoor, Indian Statistical Institute, New Delhi• Kaplinsky Raphael (2005): “Globalization, Poverty andInequality: Between a Rock and a Hard Place” PolityPress, Cambridge, UK.• Narayan, D., with R. Patel, K. Schafft, A. Rademacher,and S. Koch-Schulte. 2000. Voices of the Poor: CanAnyone Hear Us? New York: Oxford University Press.• GOI, (2007): Poverty Estimates for 2004-05, PressInformation Bureau, New Delhi.• GOI (2008): Employment and Unemployment Situation inIndia – 2005-06, NSSO 62 nd Round, Ministry of Statisticsand Programme Implementation.• Sen, Abhijit (1996): ‘Economic Reforms, Employment andPoverty: Trends and Options’, Economic and PoliticalWeekly, Special Number, September.• Sen Amartya (2006): Inequality Re-examined, OxfordUniversity Press, New Delhi• Shukla, R.K. (2007): How India Earns, Spends and Saves,NCAER, New Delhi.• Sundaram, K (2001): ‘Employment and Poverty in the1990s: Further Results from NSS 55 th Round Employment-UnemploymentSurvey 1999-2000’, Economic andPolitical Weekly, August 11-17.• Sundaram, K and Suresh D Tendulkar (2003): ‘PovertyHas Declined in the 1990s: A Resolution of ComparabilityProblems in NSS Consumer Expenditure Data’, Economicand Political Weekly, January 25-31• Sundaram, K and Suresh D Tendulkar (2003): ‘Poverty inIndia in the 1990s: Revised Results for All-India and 15Major States for 1993-94’, Economic and Political Weekly,November 15-22.• Upadhyaya Umesh (2008): Ending Poverty & Inequality- The Context of South Asia Presentation in South AsianWoman Trade Unionists Conference Organized byGEFONT-3F Partnership, Kathmandu.• World Bank (2000): World Development Report 2000-2001: Attacking Poverty. New York: Oxford UniversityPress.(The views expressed in the write-up are personal and do notreflect the official policy or position of the organization.)THE INDIA ECONOMY REVIEW65

P ROBLEMS & PERSPECTIVESINDIA: ECONOMIC GROWTHSANS DEVELOPMENTT S MohanchandralalVisiting Faculty, IIPM ChennaiEconomic Growth Versus Economic DevelopmentEconomic growth is quantity centric. It indicates a rise in GDPor GNP of a nation which focuses on the quantity of goods andservices produced without mentioning how they are produced,and how they are distributed among the people across of thecountry. Positive economic growth implies expansion of economicactivities in terms of increased production etc, whilenegative growth suggests it’s down turn; recession culminatinginto depression. Income per capita of various countries iscompared through purchasing power parity which compensatesfor changes in the value of money. Hence GDP and GNP arealso given in inflation adjusted terms along with their nominal orcurrent figures.Economic development is quality centric too. In a morecomprehensive way it describes a rise or fall in the share ofagriculture in GNP and a steady rise or decline in the shares ofindustries, trade, banking, construction and other services. It isinclusive of the changes in technological and institutionalarrangements of production and their distributive pattern amongthe people. It is not very difficult to achieve economic growththrough mobilization of resources, raising their productivity, andoutput level. But the process of development is quite challeng-66 THE IIPM THINK TANK

A LONG ROAD AHEADing. It involves not only a rise in output but also changes in theircomposition, shifts in the allocation of productive resourcesamong the various sectors of the economy, and elimination orreduction of poverty, inequalities and unemployment. In thewords of AmartyaSen development requires the removal of themajor sources of poverty, filth, squalor, poor economic opportunities,and denial of basic facilities to the people as well asintolerance of the repressive activities of the states.India’s economic growth is amazing but her development isappalling and hence the over all performance is not appealing.India has achieved economic growth in substantial measures inalmost all the sectors of the economy. Production in the primarysector has gone up. The secondary sector has diversified wellwith increasing output. The tertiary sector is becoming prominentin India’s GDP. But in the process of achieving economicgrowth, India is facing many challenges in the form of ruralurbandivide, growing income inequalities,price inflation, shrinking employmentopportunities in the rural side,sectoral and regional imbalances, stockmarket scams etc. All these issues that areassociated with economic developmenthave to be tackled effectively to see thatthe benefits of economic growth reach allthe sections of the society.Indian Economy:Growth DimensionsIndian economy has grown at the rate of 8.8% for the past fouryears save 2005. It reached 9.6% in 2006, the highest rateattained in the last 18 years. Structural transformation fortifiedby the policy of liberalization has contributed to the overallgrowth the economy. During this period the performance of theservice sector grew at 11.2% and the industrial sector at the rateof 10.6%.An upcoming manufacturing sector has provided the environmentfor the country’s excellent growth momentum. Its growthrate sprang up steadily from nine percent in 2005 to 12% in 2006.The storage and communication sector also posted an impressivegrowth rate of 16.6% in the same year. High savings ratesbacked by sustained investment provided the right environmentfor this dramatic transformation. Hence India’s GDP jumpedfrom 22.8% in 2001 to 35.9% in 2006. Further, the gross rate ofsavings as a proportion to GDP registered a solid growth fromThe food sectorthat is valued atUS$ 200 billionat present isexpected to growat $310 billion bythe year 201523.5% to 34.8% for the same period.Today the manufacturing sector accounts for more than 80%of industrial production and its growth is indicative of the vibrantindustrial health of the economy. Six Indian corporations: IOC,RIL, BPCL, HPCL, ONGC, and SBI have gone into the FortuneGlobal 500 list for the year 2006. Construction growth rate roseto 10.7%. Trade, hotels, transport and communication registereda 12% growth rate. Financing, insurance, real estate, andbusiness services recorded a telling growth rate of 11% duringthis period. The passenger vehicles sector grew by 11.6% in 2007.Electricity, gas & water supply posted an 8.3% growth rate.Community, social and personal services witnessed a decentgrowth rate of 7.6%. Agriculture forestry and fishing, and miningand quarrying, grew at 3.8% and 3.2%, respectively during2007-2008.Exports grew by 18.1% and the imports shoot up by 34.3%during 2007-2008. India's foreign exchangereserves sans gold and SDRsstood at $219.8 billion at the end of 2007.The food sector that is valued at US$ 200billion at present is expected to grow at$310 billion by 2015. Stocks of food-grainsgrew by 13.1% to 17.7 million tonnes. Theannual inflation rate was 4.5% in 2007.After a high dose of price rise in the pastcouple of years, now it is on the moderateside. India's balance of payments isexpected to remain comfortable, withmerchandise exports witnessing substantial growth. In recentyears due to global recession there may be setbacks in ourexports, but compared to countries such as China, the fall maynot phenomenal.The productivity trends of different sectors of our economyand its subsequent growth is estimated to be around eightpercent and above until 2020. At this rate, India will become thesecond largest economy in the world after China. IMF ranksIndia 4 th in the world with only the USA, China and Japan aheadof it in terms of purchasing power parity. World Bank estimatesfor 2006, ranks India 12 th in the world with a GDP of $906,268million. It has also ranked India as one of the top economicperformers of the world.AgricultureIndian agriculture in terms of GDP is fast losing ground to theTHE INDIA ECONOMY REVIEW67

P ROBLEMS & PERSPECTIVESservices sector. In the second plan period our agriculture with60% of our labour force contributed only 18.6% of the country'sGDP. In 2006 with less percentage of labour force it contributed19.9% of our GDP. While the services sector accounted for60.7% of our GDP, our industry’s share was 19.3% of GDP.Thus agriculture is no longer the keystone of our economy, as itwas for about 30 years since the 1960. It reflects the structuralchanges of an emerging economy. Today our primary agriculturalproduce include milk, tea, ginger, cashew nuts, blackpepper, turmeric, wheat, rice, tobacco, oilseed, cotton, jute,sugar, sugarcane, groundnut, inland fish and cattle. Morecommercial crops have entered the list. Their outputs havebeen on the steady rise, thanks to the green revolution andwhite revolution.Trade and InvestmentIndia's exports have been steadily risingsince liberalization. Our foreign exchangereserves rose in 2005-06 from an impressive$141 billion, to $200 billion in recentyears. Thanks to this welcome development,our dependence on externalassistance and commercial borrowingshave started moving southward since1991-92, and since 2002-03, we havestarted paying back our external debts.India's exports stood at $125 billionduring 2006-07, as against the $187.9billion imports. Today our major trading partners are the USA,China, the UAE, the UK, Singapore, Hong Kong and the EU. Inthe past our trade was mostly confined to the UK and the US.Besides skilled manpower, now our main exports constituteengineering goods, gems and jewellery, textile products, chemicals,and leather products. Our main imports include crude oil,fertilizers, chemicals, machinery, and gemstones.Outsourcing HubIndia's service sector is witnessing an unprecedented growth,with great promises for the new - generation professionals whoare knowledge workers. This unenviable position has pushedIndia to the status of a knowledge superpower. With less than1/3 rd of India's labour force; today it generates more than half ofIndia's output. With its huge supply of skilled and cheap manpower,India has become the most sought after destination forIndia is theworld's 6 th largestenergy consumeraccounting forabout 3.5% of theworld's annualenergy usage'back office' operations of many prominent global conglomeratesin the world. All these have sparked an outsourcing boom in thewest, with its main base in India. In 1950 the service sectorcontributed only 15% to our GDP, whereas in 2005, it contributionsprang up to 53.8% toward our GDP.The services sector, as a whole, contributed as much as 68.6%of the overall average growth in our GDP between the years2003 and 2007. Our software and services industry with its strongvalue chain, gives us formidable brand equity in the globalmarkets. Our Business Process Outsourcing sector has emergedas a key driver of growth for our economy. India is the world's 6 thlargest energy consumer accounting for about 3.5% of theworld's total annual energy consumption. It is the 8 th largestcrude steel producing country in the world. Our cement industryuses the latest technology and we are the second largest manufacturerof cement in the world. These outstanding performanceshave let loose a number of formidablechallenges to India which areassociated with economic development.Agriculture and rural- urban divideThe sharp rise in rural-urban disparitiesin India after decades of planned economicdevelopment is appalling. Ourplanning process instead of narrowingdown such disparities accelerated it.Rural India with about 70% of the India'spopulation is characterized by low incomelevels, poor quality of life and a weak basefor human development. Nearly 1/3 rd of our national incomecomes from villages, but there is a sharp rural-urban divide.Agriculture supports about 50% of the workforce. But a lion'sshare of our national resources is directed to the non-agriculturalsector. Our agriculture has been growing at less than half thepace of the other sectors. During the 7 th Plan agriculture andallied sectors grew at the rate of 3.4% while the nationaleconomy grew at six percent. In 1997-98 our agriculture experienceda negative growth of two percent, as against a five percentgrowth of the national economy.This dismal performance agriculture has serious implicationsfor the rural-urban relationship. The GDP per agriculturalworker was Rs. 2443 in 1950-51, followed by Rs.3196 in 1970-71and Rs. 3627 in 1995-96 whereas GDP per non-agriculturalworker rose sharply from Rs. 4470 in 1950-51 to Rs. 9179 in1970-71 and to Rs. 16715 in 1995-96. This problem remains more68 THE IIPM THINK TANK

A LONG ROAD AHEADor less the same even after the Structural Adjustment Programmeof the central government. While the GDP per agriculturalworker moved up marginally from Rs. 3545 in 1990-91 toRs. 3627 in 1995-96, the GDP for per non-agricultural workerrose from Rs. 14660 to Rs. 16715 during the same period. Ourliberalisation policy has hit hard the non-farm employment inrural areas. In 1997-98, the annual increase in non-farm employmentin rural areas was four percent. In 1983-84 it was 3.3%.During 1999-2000 it came down to 2.1%. The consequence is avery slow reduction in rural poverty. In 1993-94 it was 39.4%,and in 1999-2000 it came down marginally to 36.4%.The neglect ofagriculture isapparent fromthe budgetaryallocation. It hasnever been morethan 20 percentNSSO on Rural povertyThe survey report of NSSO is revealing. Investment in agriculturehas been about 10% of the total investments of the country.The neglect of agriculture and allied sectors is apparent from thebudgetary allocation. It has never beenmore than 20%. In 1997-98 the Centraland State governments spent about Rs.12,000 crores on agriculture and alliedactivities. The average income of an urbandweller is four times higher than that of arural dweller. The neglect of rural India isclear if one examines the data on ruralIndia's contribution to the GDP and whatthe rural areas get back from the nation.With 27% of the GDP coming from ruralIndia, the return is just five percent. AHuman Development Report of India (1999) points out that therural per capita per month consumption expenditure was Rs. 486in 1999-2000 while it was Rs. 855 for urban areas.Data collected by the NSSO also show that the mean expendituregap between the urban and rural areas has widened by overeight percent points between 1988 and 2001. This increase in thedisparity level will be great during drought periods. AnotherNSSO data points out that while 75% of the country's populationin 2000-01 resided in rural areas, they accounted for less than62% of the total consumption expenditure.The disparities in the social development sector too are quitedisturbing. In 2001, the urban literacy rate was 80% while it was59% for rural India. In percentage points the disparity is 20.9. Astudy by the Planning Commission shows that illiterate peopleaged 15 years and above but not beyond 60 years, in rural areasconstitute 56% and it is 25% for urban areas. Of the schoolgoingchildren in the age group of 5-14 years, 82% live in urbanareas. The rural figure is 63%. Kerala has brought down thisdisparity to a significant extent.Rural India is Classically Backward in Basic AmenitiesThe NSS 5 th round data show that 70% of the urban dwellershave access to piped water, as against just 19% of the ruralpopulation. Public health facilities are so poor in rural areas thatthe death rate per 1,000 is 10% while it is six percent in urbanareas. In rural areas the infant mortality rate is 77 per 1,000 butin urban areas it is 45 per 1000. Again 84% of rural householdsare devoid of toilet facilities as against 23% in urban areas. In1991, such facilities were made available to nine percent of ruralhouseholds as against 64% for urban households. A HDR 2002report indicates that only 31% of rural households had electricityas against 76% for urban areas. All these disparities are wellreflected in the Human DevelopmentIndex of the planning commission. Theindex is 0.34 for rural India and it is 0.51for urban India. The Human PovertyIndex for rural India is 42 and it is 44 forurban India.Gandhiji wanted that the engine ofIndia's development must roll down fromthe villages. Time and again he emphasizedthat regeneration of rural economyalone save India from classical backwardness.A strong rural India can lay the royalroad for urban progress and prosperity. But the planners felt thaturban India with a modern-mind set can provide the spark forsustained economic development which will in due coursepercolate into the rural India. This misplaced emphasis has beenresponsible for the present day rural-urban divide.The Need of the HourThere is little doubt that our rural economy cannot growwithout a strong and well diversified agriculture. This calls forbottom up approach to development. Reconstruction of therural economy poses one of the greatest challenges for India.We have to start from scratch. Effective land reform is the needof the hour. It must be backed by uninterrupted supply of farminputs and implements to the peasants at reasonable prices.Here commercial banks can play a constructive role to bringbought economic transformation in rural India. FinancialTHE INDIA ECONOMY REVIEW69

P ROBLEMS & PERSPECTIVESinstitutions and industries can give life again to village adoptionscheme. Their participation can result in an increase inagricultural productivity, besides commercialisation of agricultureand disagriculturalisation.Apart from improving basic facilities such as health, sanitationand education in the villages, the local bodies with the support ofthe state and central Government must launch time bound cumtask-oriented programs for the development of rural infrastructuresuch as roads, rural housing and marketing facilities foragro and agri-products. There is a great need for employmentgeneration, which can better the living style of the rural population.We must put in place a long-term policy with multileveltargets, keeping in mind the immediate requirements of the ruraland urban areas and the technologies available to fulfil theirneed. The government must demonstrate that there will be noad-hocism in our developmental policy and planning exercises.Such an approach will instill confidenceamong the rural population.Technology Can Reduce the RuralUrban DivideTechnology can be effective to containthe growing rural-urban divide througha) high connectivity, b) renewable energyfor Power, and c) multiple economicopportunities for income generation. a)The Private Service providers can exploitthe vast unexplored market of rural Indiafor connectivity. Reliance has made a beginning and reachedthe rural corridor. Others can follow suit. Tremendous effort isneeded to bring telecommunication facility to the remotestarea with internet technology and other related IT enabledtechnologies. This will bridge the gap in information flow andknowledge between the rural and urban India. E governancecan bring about transparency and prevent the exploitation ofthe rural folks.The rural sectors can be self sufficient in power supply bybanking on renewable energy in bio mass, solar and gas fireddigesters that can lessen the urban dependence. Since the ruralsector is rich in natural resources this can be made easilyadaptable on large scale.Rural BPO with great employment opportunities has caughtup in Tamil Nadu with IIT Madras spinning several novelsuccessful ventures under the leadership of Prof Junjunwala.At least 25% firmslisted on the BSEand 28% firmslisted on the NSEhave manipulatedtheir financialstatementsThis can be imitated by the entire country. The quality educationthrough online education portal provided by Tutorvista can beextended to the rural areas too. This will make the rural folksmore confident in their career profile. It promotes employabilityand generates quality employment options. Apart from theirtraditional occupation the rural population can also workthrough the tale- networking projects by sitting at home. Thiswill increase their per capita income. Besides selling theirservices, they can also sell produce and products online.Technology development hubs once set up in rural areas canpromote technical skill among rural masses which can besuccessfully employed for rural industrialisation. This can alsocry halt their migration to urban areas. For example, TitanWatch factory at Hosur was responsible for the development of anew generation of work force from the surrounding rural areas.It has built up a talent pool there with precision delivery systemsparticularly with the women population.Bio-technology can be used to promotecontract farming which can give anadditional revenue base for the rural folksbesides their traditional income. Agribusiness will generate great income if thetraditional organic methodology is used incultivation of crops and vegetables. ANon-Government Organization namedDevelopment Alternatives has been usingGIS spatial mapping for locating wetareas and ground water levels for buildingwatershed management systems in rural arid areas. This haschanged there the method of cultivation on modern lines.With numerous employment options and good income choiceavailable via technology applications there is no reason for therural mass to migrate to the urban centres in search of employment.This will bring about a holistic development between theurban and rural areas by reducing the divide considerably.Modern technologies can be of great help for the reconstructionof rural India. Urban development in a country like India has todovetail with rural development.Corporate Frauds: Appalling DisclosuresNow turning to the urban issues, a serious problem which needsimmediate attention is how to fight out the recurring stockmarket scams engineered by greedy and self seeking professionals.This menace enervates the small investors from entering the70 THE IIPM THINK TANK

A LONG ROAD AHEADstock market with their tit bits of savings. A recent survey by theIndia Forensic Consultancy Services brings to light manyshocking revelations on corporate frauds. The study points outthat at least 25% companies listed on the BSE and 28% companieslisted on the NSE have manipulated their financial statementsto woo the gullible investors. They include almost allindustries belonging to manufacturing and service sectors. Themanufacturing sector, which contributes about 28% of India'sGDP, is fraught with fraudulent activities largely due to thepeculiar nature of their business and the underlying proceduralcomplexities of this sector. Real estate and Puss are in no wayinferior to the former in manipulations.73% of 340 Chartered Accountants (CAs) who participated inthe survey, admits that they are forced to manipulate accountingstatements to exceed the expectations of stock market analysts.Credit-greedy firms force the auditors to manipulate theirfinancial data in their applications to qualify for easy credit atconcessional rate of interest. Most of the investors apprehendthat financial fraud will be on the rise in the years to come. It ismost unfortunate that the personnel in the accounts departmentsof companies, auditors and directors of companies,promoters and others benefit more from the financial frauds atthe expense of the ordinary investors. These fraudsters if gounchecked in due course may make quick money through insidertrading too.Checks and BalancesDespite multilevel inbuilt checks and balances in the form ofinduction of independent directors, independent audit committees,and certifications on the genuineness of the financialstatements by chief executive officers and chief finance officersof companies and finally the inspection of the Department ofCorporate Affairs of the Government of India, it is reallyastounding to see that at least 20% of the listed companies havesuccessfully managed to come out unscathed with fraudulentfinancial statements. There are some strategies worth trying tocontain this menace. The government must see to it that thecompanies publish their balance sheets and profit and lossaccounts on quarterly basis instead of the present system ofannual publications so that the investors will get a better pictureof the companies before they flow their funds in the stockmarket. The Institute of Chartered Accountants on India shouldalso take strong penal action against the fraudulent charteredaccountants concerned. Once a fraudulent cover up is unearthed,SEBI should immediately start investigations in thetransactions of shares of the tainted companies to discover casesof insider trading etc. Once the crime is proved SEBI must comeout with strong deterrent action. The stock market regulatormust also carefully evaluate the roles of the independentdirectors in their depth and breadth and also their share in thefinancial misappropriations for suitable deterrent action. Toprevent the future financial managers, auditors and otherprofessionals from falling prey to corporate frauds, institutionsoffering professional courses must include corporate ethics as animportant program in their education.ConclusionIf the fraudulent activities are not nipped in the bud it willultimately ruin the future of corporate world and that of thestock market. Therefore the need of the hour is to send a strongmessage to the fraudsters through strong penal action once theirfraudulent activities are exposed. If we want a strong India, ahealthy and vibrant economy, and a cheerful society, we muststrive for rural and urban integration to bring about a reasonablebalance between their income levels. We also crush corruptionand financial frauds in stock market with iron hand. It is really anuphill task, but there is no escape.The holy words of Bhagvad Gita rightly say: “yat tad agrevisam iva pariname amrtopamam tat sukham satvikamproktam” Ch 18-36. The happiness which appears as poison inthe beginning and nectar in the end is said to be dominated byclarity of mind.References and Additional Thinking• http://www.echeat.com/essay.php?t=28127• http://en.wikipedia.org/wiki/Economic_development• http://news.indiamart.com/news-analysis/india-s-growth-perfo-3236.html• http://www.thehindu.com/fline/fl2114/stories/20040716002009000.htm• http://timesofindia.indiatimes.com/india/Wide-rural-urbandivide/articleshow/41299654.cms• http://content.msn.co.in/MSNContribute/Story.aspx?PageID=ac33d999-5ab7-4538-adc9-19469168c4e7• http://www.indiaforensic.com/corporatemaster.htm(The views expressed in the write-up are personal and do not reflectthe official policy or position of the organization.)THE INDIA ECONOMY REVIEW71

P ROBLEMS & PERSPECTIVESINDIA :Growth SansDevelopmentTushar Kanti DasLecturer, Department of Business Administration,Sambalpur UniversityIntroductionFor last several years the performance of Indian economicgrowth is remarkable (praiseworthy). But when it comes tosocial indicators such as health and education performanceof India is limited. Inequality is often blamed for the poorlinks between economic growth and human development.Gross Domestic Product (GDP) in US dollar for India is1217.49 billion in 2008. The annual GDP growth rate was4.0% in 2000. It increased to 9.4% on 2005 and 9.1% in2007. In the year 2008 the annual GDP growth rate of Indiawas 7.1% as compared to US which had 1.1%. On the otherextreme, between 1980 and 2007 India’s Human DevelopmentIndex (HDI) rose by 1.33% annually from 0.427 to0.612 today. During the same period US’s HDI rose by0.25% annually from 0.894 to 0.956.“India is a country with many poor people but is not apoor country 1 ”. It is a country of population just over onebillion (1139.96 million in 2008 approx) of which about 300million live below the poverty line. It is the largest democracyin the world and one of the most important countries interms of meeting global development goals. In the pastdecade, India has accelerated economic growth, improvedmost MDGs and maintained a vibrant democracy. It hasalso emerged as a global power – the fourth largest economyon purchasing power parity terms and a leading player ininformation technology, telecommunications and businessprocesses outsourcing.72 THE IIPM THINK TANK

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P ROBLEMS & PERSPECTIVESWith economic liberalization in 1991, India began to focuson private sector investment led growth, engendering anopen and competitive economy. A massive introduction ofnew services and manufacturing drove its global competitivenessand growth. Software exports, telecommunications,Information Technology, the outsourcing of businessprocesses, the financial sector, housing and retail servicesall helped in the rise of the services sector.The Eleventh Five Year Plan (2007-12) aims to achieve aGDP growth rate of nine percent and double the per capitaGDP within 10 years. Achievement of this target andcontinued growth of 10% in the 11 th plan would lead to adoubling of per capita income over thenext two plans (Planning Commission,2006). The structure of growth shouldalso be such as to promote a wide spreadof benefits. Doubling agricultural GDPgrowth to around four percent is particularlyimportant in this context. Theapproach paper is also of the view thatdoubling agricultural GDP growth toaround four percent is very important.This must be combined with policies topromote rapid growth in non-agriculturalemployment so as to create jobopportunities. The approach paper hasalso identified areas where new policyinitiatives are needed to achieve thenine percent growth target and itsdesired sectoral composition.The reform process that began in1991 was gradual. As a result reformshave become relatively endogenous with much betteraccountability for results. It is important to note the growingrole played by states with greater competition to performincreasing accountability. In India’s deregulated and openeconomy, those states in which governments have deliveredbetter governance and public services have attracted greaterand more private investment. Conversely those states wherepolitical leaders have not done so have been punished by aflight of both capital and people. The challenge is to improvethe prospects of the poorest and low income states.Investment rates, backed by growing savings and led byprivate investment have now increased close to 40% of GDPAn appositedefinition ofinclusive growthimplies a directlink between themacro and microdeterminantscompared to about 24% a decade ago. Foreign DirectInvestment grew rapidly until the global financial crisis in2008. Fiscal deficits have remained high but prior to theIndian Fiscal Year 2008 were on a declining track under thefiscal responsibility acts at the center and the states. Povertyhas fallen to about 28 percent although the momentum ofdecline may have slowed. Growth has helped considerably inprogressing towards the Millennium Development Goals(MDGs) but delivery of public services to India’s 300 millionpose major challenges.Investment as a growth engine for India was running outof steam in 2008 when bottlenecks in the economy becameincreasingly apparent. In addition, highinternational commodity prices andrising interest rates in response toinflationary pressures lowered corporateprofitability. In the last quarter of 2008large capital outflows put pressure onreserves and the rupee. The governmentreacted to the slowdown with swift easingof monetary policy and a sizeable fiscalstimulus.Thus, on the one hand a rapiddevelopment trajectory and on theother the progress is much slower,caught in a low level development trap.Significant differences persist inpoverty levels and human developmentindicators along gender, ethnic andregional lines. In response the centraland state governments have stepped uptheir attention to programs that helpthe poor and disadvantaged. At the state level there aregrowing initiatives to support spending on water, old ageand disability pensions and rural livelihoods and credit.Economic GrowthEconomic growth is the most powerful instrument forreducing poverty and improving the quality of life indeveloping countries. The goal of development is toimprove human well-being in a sustainable way, withparticular emphasis on less well off. Rapid and sustainedeconomic growth, though not sufficient for eliminatingpoverty, is certainly a necessary condition for improving74 THE IIPM THINK TANK

A N ACTIONABLE AGENDAliving standards.India’s economic growth has received potential attention inrecent years. It is also evident that the India’s growth hasaccelerated over the past two decades. Sweeping economicreforms that commenced in 1991 have included the de-licensingof most industries, deregulation of industries earliermonopolized by the public sector, liberalization of foreigntrade through a steady reduction in tariffs and freeing up ofthe foreign investment limits in nearly all industries. Thesemeasures have had far reaching consequences and today,India has a strong, vibrant and fast-growing economy which israpidly integrating with the global economy (Ernst & Young,2006). India is forecast to become the third largest economyin the world, after China and the US, by the year 2050 overtakingall other developed economies (Wilson and Purushothaman,2003).Now the policy challenge for India isnot to raise growth from 8-10 percent.Rather the primary challenge is tosustain rapid growth while extendingrapid growth and its benefits to moreregions, sectors and people. Questionshave been raised about the distributionof the benefits of growth on incomegroups, especially the poor. A keyconcern is the perception of twoIndians, one shinning and the otherbleak, referring to the large gap in theliving standard of the rich and the poor (World Bank, 2006;Kohli, 2006).High growth rate of India can be sustained only if necessarypolicies are adopted for removing binding constraintslike poor infrastructure, stagnant agriculture and lack offiscal space (Kumar, Palit & Singh, 2007). India’s post-independenceleadership had undertaken to abolish masspoverty remains only partially fulfilled. Half the battle stilllies ahead. The challenge for policy makers today is tobalance the growth momentum with inclusionary policies(Ahmed and Varshney, 2008). The eventual prospects formaking India’s growth process more inclusive are notencouraging. If rapid growth continues, some of this willnecessarily ‘trickle down’ and help the poor. Beyond that thescope for hastening this trickle via deliberate redistributionis limited (Kohli, 2008).The primarychallenge is tosustain rapidgrowth, whileextending rapidgrowth benefits tomore regionsEvidence suggests that income inequality is rising and thegap in average per capita income between the rich and poorstates is growing. In the agriculture based country likeIndia, agriculture is essential to growth, which in turnnecessary to reduce poverty and food insecurity. As thelargest sector of the economy agriculture has an importantrole in providing resources for the development of theoverall economy.Theory of Inclusive GrowthThe strategy of ‘inclusive growth’ combines empowermentwith entitlement and investment. Education empowers,improved health care empowers, employment guaranteeentitles, fulfilling quota obligations entitles. Through acombination of offering entitlement, ensuring empowermentand stepping up public investment the growth process canbe made more inclusive. Inclusivegrowth also means empowering thedisadvantaged. The strategy forinclusive growth is to provide access tobasic facilities such as health, education,clean drinking water, etc. to thecommon people. In the short run theseessential services impact directly onwelfare, in the long run they determineeconomic opportunities for the future.Inclusion implies not only reductionin absolute poverty but also in incomeinequality across income groups and geographical regions.A variety elements and dimensions are involved in determiningwhether growth is inclusive. The most importantdimension is the improvement of the livelihood of the poor.The general consensus is that for growth to be inclusive itmust be pro–poor i.e. growth that is not pro-poor is definitelynot inclusive.Inclusive growth allows people to contribute and benefitfrom economic growth. Rapid pace of growth is necessaryfor substantial poverty reduction. For this growth to besubstantial in the long run it should be broad based acrosssectors and inclusive of large part of the country’s labourforce. This definition of inclusive growth implies a directlink between the macro and micro determinants of growth(Ianchovichina and Lundstrom, 2009). The micro dimensioncaptures the importance of structural transformation forTHE INDIA ECONOMY REVIEW75

P ROBLEMS & PERSPECTIVESeconomic diversification and competition. Inclusive growthrefers both to the pace and pattern of growth which isconsidered interlinked and therefore they should be addressedtogether. For achieving a sustainable growth recordas well as poverty reduction both the pace and pattern ofgrowth are critical.The Commission on Growth and Development in theirreport Growth Report: Strategies for Sustained Growth andInclusive Development (2008) stated that ‘inclusiveness’ isan essential ingredient of any successful growth strategy.Inclusiveness is a concept that includes equity, equality ofopportunity and protection in market and employmenttransitions. The Commission considerssystematic inequality of opportunity willbe toxic and it will derail the growthprocess through political channels orconflicts.The extent to which growth reducespoverty depends in the degree to whichthe poor participate in the growthprocess and share in its proceeds. Thus,both the pace and patterns of growthmatter for reducing poverty. India’smost recent development plan has twomain objectives: raising economicgrowth and making growth moreinclusive.Growth DiagnosticsLast 25 years has seen considerabledevelopments in thinking on developmentpolicies. The standard policyreforms included in the Washington 2 Consensus have thepotential to be growth promoting. Many countries haveadopted the Washington consensus, i.e., the enforcement ofproperty rights, maintenance of macroeconomic stability;integration with the world economy and creation of a soundbusiness environment. However, experiences of last 15 yearshave shown that impact of these reforms is heavily dependenton circumstances. Growth strategies are likely to differaccording to domestic opportunities and constraints. Thedisappointments with the Washington Consensus led to theBarcelona consensus 3 of 2004. The key recommendation ofthe Barcelona consensus is that the growth strategiesHigher realincomes leadto higher foodconsumptionlevels, implyingmore pressureon demandrequire a sense of priorities. This has led to the developmentframework for growth diagnostics (Hausmann, Rodrik andVelasco, 2005), i.e., a strategy for figuring out the policypriorities.Growth diagnostics require in depth knowledge of theeconomy that is being analyzed (Leipziger and Zagha, 2006).The strategy is aimed at identifying the most bindingconstraints on economic growth such as limitations inmobilizing sufficient domestic or foreign finance, low levelsof human capital and technological capabilities, weaknessesin governance structures and the poor functioning ofinstitutions that regulate markets or provide public goodsand social services. The importance andrelevance of these constraints tend tovary from country to country.The implementation of the ‘growthdiagnostics’ framework aims to give themeta-steps that a persuasive growthdiagnosis should have, and elaborates onthe strategies and methods that may beused (Hausmann, Klinger and Wagner,2008). Rather than a step-by-stepinstruction manual or handbook itsuggests how to think about theproblem of identifying a country’sconstraints to growth. Analyzingconstraints does not necessarily make‘growth diagnostics’ an advocate ofeconomic growth. Countries shouldfind the trade offs, if any, betweengrowth and other goals through anappropriate political process 4 .Actionable PoliciesWithout higher agriculture growth, India's ten percenteconomic growth target will be impossible to achieve. Inaddition, higher real incomes lead to higher food consumption,implying more pressure on demand. Historically,India's agriculture growth has fallen short of growth in theoverall economy. In fact, long-term average growth inagriculture has been close to two percent. India's populationhas been growing at 1.4%. Consequently, it has just managedto maintain its per capita growth in food and non-food cropproduction. Given such a precarious demand-supply76 THE IIPM THINK TANK

A N ACTIONABLE AGENDAIt is imperativeto enable thepoorer statesto strengtheninfrastructure toharness theirrich resourcesposition, one year of drought leads to food prices shootingup. This is what we are seeing at this time of the year. Withgrowth in per capita incomes, the supply constraints will hitIndia even harder in the future. If the growth story in Indiais to be inclusive, farm productivity has to rise for incomelevels to increase (Narang and Santnalika, 2010).One vital policy decision the government should takewhile choosing between two different sectors. Suppose thereis a multipurpose dam project. The farmers in the peripheryare producing two / three crops in a year using the waterfrom the canal of the dam. Many often the farmers complaininsufficient water is released through the canals which is notsufficient for sustainable agriculture. This results in lowproductivity of agricultural commodities. Water is also usedby the different heavy industries which are present in theselocalities. The announcement by the heavy industries toincrease capacities to different degrees,e.g. double the capacity in somecases, makes the situation complex.Thus these heavy industries are goingto suck more water from the reservoir.Obviously the water share of agricultureis bound to reduce. Inclusivepolicy demands with the existingallocation of water between differentvital sectors, the government shouldnot reduce the share of water toagriculture, as agriculture is the key toinclusive growth.To make the growth process inclusive, it is necessary toenable the poorer states to raise infrastructure levels toharness their rich resources and compete with their developedpeers (Rao, 2009). The shift in focus towards inclusivegrowth in the Tenth Plan and increased emphasis on thesame in the Eleventh Plan are important to ensure that thepoor participate in the market activity and the growthprocess in a meaningful manner. However, the strategy hasbeen mainly to provide this section with some measure ofconsumption security through various employment programsand / or writing off farm loans. While these areimportant in the short term, the inclusive growth strategyrequires linking the poor rural population to the market andundertaking measures to increase their skill levels andproductivity. Considering the fact that the poor are concentratedin less developed areas of the country, the growthstrategy, to be inclusive, should shift the focus to lessdeveloped areas.Providing infrastructure and connectivity in these areascan go a long way not only in bringing these regions withinthe fold of market activity, but also in breaking their institutionalimpediments. A lasting solution to poverty andbackwardness in the country cannot avoid focusing onpoorer regions. These regions—comprising Bihar, Chattisgarh,Madhya Pradesh, Orissa, Jharkhand, Rajasthan,Uttarakhand and Uttar Pradesh —with 45 percent of thetotal population account for just about 22 percent of incomegenerated in the country. Almost 60 percent of the poorreside in these states. The human development ratio in thesestates is substantially below the national average, andinfrastructure like road and transportation facilities,agricultural marketing and coldstorage as well as power supply isabysmal. Many of these states, Biharand Orissa in particular, suffer fromperiodic floods, controlling of which isbeyond their capacity or realm.Growth without development willdeepen inequality and have dangeroussocio-political consequences that couldundermine the very essence of freedomand democracy. If economicgrowth is achieved without socialdevelopment at the grassroots level, it will not only wideninequality but also give rise to socio economic paranoia,socio-political unrest and instability. The biggest constrainton rapid growth in the years ahead will be the lack ofphysical infrastructure and its poorer quality. Both thecenter and the states have responsibility in this area asdifferent types of infrastructure (roads, ports, railways,airports, electric power system and various types of urbaninfrastructure) fall under different jurisdiction. The strategyfor infrastructure development must therefore encouragepublic private partnerships (PPP). The PPP strategy must bebased on principles which ensure that PPPs are seen to be inthe public interest in the sense of achieving additionalsupply at reasonable cost. PPPs must serve to put privateresources into public projects and not the other way round.Labour markets in India are characterised by underutili-THE INDIA ECONOMY REVIEW77

P ROBLEMS & PERSPECTIVESsation of labour which manifests itself in unemployment andunder employment. Improving labour market opportunitiesfor workers is the key to poverty reduction and improvingstandard of living (Felipe and Hasan, 2006). The cause ofunemployment and under employment in developingcountries is lack of capital equipment and productivecapacity. Only sound policies geared toward full employmentwill create the foundation for inclusive growth.Unemployment and underemployment as the fundamentalcauses of lack of inclusiveness are unethical states of amalfunctioning economy (Felipe, 2009). The objective ofachieving full employment has to be complemented with theobjective of creating productive employment and ensuringdecent employment. Full employment requires the government’scommitment to attaining and maintaining it. Theprivate sector has neither the commitment nor the tool toachieve it. Full employment requires close coordinationbetween private and public sectors.The National Rural Employment Guarantee Act nowrenamed Mahatma Gandhi National Rural EmploymentGuarantee Scheme, guarantees 100 days of employment atthe state's minimum wage. The Mahatma Gandhi NationalRural Employment Guarantee Act (MGNREGA) enactedin 2005 with the objective of enhancing the live hoodsecurity of people in rural areas by guaranteeing hundreddays of wage-employment in a financial year to a ruralhousehold whose adult members volunteer to do unskilledmanual work. Now the question arises how far theMGNEGA is helpful in achieving full employment.In the Right to Education Act 2009 under Sarva ShikshaAbhiyan government allocated Rs 1.71 lakh crores. It isexpected that the government should do effective socialsector spending. Funds should be set aside in the budget forsupport functions that improve the implementation of suchprograms. Sarva Shiksha Abhiyan, that is educationalprogram which started in 2001, should improve the qualityof learning and ensuring access to upper primary classes.National Rural Health Mission started in the year 2005.Here the problem lies in the shared responsibility betweenthe states and the center. Government has also initiated theNational Rural Livelihood Mission. Here the government isinviting private players to work alongside the state machinery.The government bears the cost of training on thecondition that private parties will provide jobs to the trainedworkers. It is expected that the government will identifymore such areas where private sectors participation can beleveraged in development.Social services institutions should not be concentrated insome specified areas. The inclusive growth policy will bemore appropriately implemented if these institutions aremore diversified throughout the sub-national governmentjurisdiction. The objective of the government should notonly to create more such social institutions but to maintainefficiencies in the existing institutions.The Long Road AheadStructural inequalities are deep and persistent. They arealso intimately linked with institutional structures inpolitical, social and economic domain. These are likely toimpede the transformation necessary for long term growth.The appropriate Indian policy for growth with developmentis inclusive growth and inclusive development, as appropriatelyadopted by Eleventh Five Year Plan.A necessary next step is to look at more specific policyinstruments and for each instrument calculate a ratio of theadditional growth potential associated with this instrumentwith respect to the cost of implementing the correspondingpolicy. This in turn would enable us to “rank” the reforms,that is, to get a more precise view as to what should beundertaken first, or as to which reforms should be implementedjointly because of complementarities in theirgrowth impacts.Endnotes1As stated by His Excellency Mr. M. Hamid Ansari, VicePresident of India.2The concept and name were first presented in 1989–1990by John Williamson, an economist from the Institute forInternational Economics, Washington DC. The WashingtonConsensus contained a set of 10 recommendationsthat synthesized the policies considered necessary for therecovery of Latin American economies from the financialcrises of the 1980s and cycles of high inflation and lowgrowth.3Sixteen leading economists, gathered in Barcelona inSeptember 2004 to discuss effects of economic reforms,lessons for future policy making, and performance ofinternational economic systems, and issued a consensus78 THE IIPM THINK TANK

A N ACTIONABLE AGENDAon growth and development.4To set up an appropriate growth diagnostic exercise(which the authors named as differential diagnostics), it isuseful to follow the following five step process: i) Describethe growth process and determine a relevantquestion; ii) Go through a differential diagnosis; iii) Posita syndrome; iv) Test further implications, corroborateevidence of the syndrome and v) Iterate on (iii) and (iv)until you converge.Reference and Additional Thinking• Aghion, P. and Durlauf, S. (2009), ‘From Growth Theoryto Policy Design’, Commission on Growth and Development,Working Paper No. 57.• Ahmed, S. and Varshney, A. (2008), ‘Battles Half Won:The Political Economy of India’s Growth and EconomicPolicy since Independence’. Working Paper No.: 15.Commission on Growth and Development, WashingtonDC• Badoni, S. R. and Nadkarni, P. (2010), ‘Effective SocialSector Spending Needed’, The Wall Street Journal,February 25 th .• Commission on Growth and Development (2008),Growth Report: Strategies for Sustained Growth andInclusive Development, the World Bank.• Ernst & Young (2006), Doing Business in India, Ernst &Young Private Limited, New Delhi• Felipe, J. (2009), Inclusive Growth, Full employment andStructural Change: Implications and Policies for DevelopingAsia, Anthem Press.• Felipe, J. and Hasan, R. (2006), ‘The Challenge of JobCreation in Asia’, ERD Policy Brief No. 44, AsianDevelopment Bank, Manila, Philippines, April• Hausmann R., Klinger, B. and Wagner, R. (2008), ‘DoingGrowth Diagnostics in Practice: A ‘Mindbook’, WorkingPaper No. 177, Center for International Development,Harvard University, September.• Hausmann, R., Pritchett L., and Rodrik D. (2004),‘Growth Accelerations’, Harvard University, May.• Hausmann, R., Rodrik, D. and Velasco A. (2005),‘Growth Diagnostics’, John F. Kennedy School of Government,Harvard University, Cambridge, MA, March.• Ianchovichina, Elena and Lundstrom, Susanna (2009),‘Inclusive Growth Analytics: Framework and Application’,World Bank Policy Research Working Paper 4851,March.• Kohli, Atul (2006), ‘Politics of Economic Growth inIndia, 1980-2005, Part I: The 1980s’, Economic andPolitical Weekly, April 1 st , pp 1251-1259 and ‘Politics ofEconomic Growth in India, 1980-2005, Part II: the 1990sand Beyond’, Economic and Political Weekly, April 8 th , pp1361-1370.• Kohli, Atul (2008), ‘State and Redistributive Developmentin India’, Working Paper, Princeton University• Kumar, R., Palit, A. and Singh, K. (2007), ‘Sustainabilityof Economic Growth in India’, Working Paper No. 25,Center for International Governance Innovation, Ontario,May.• Leipziger D. and Zagha R. (2006), ‘Getting Out of theRut’, Finance & Development, Vol. 43, No. 1, pp 16-18.• Narang, S. and Santnalika, S. (2010), “Agriculture: TheKey to Inclusive Growth”, The Wall Street Journal,February 24 th .• Planning Commission (2006), “Towards Faster and MoreInclusive Growth; an Approach to the 11 th Five year Plan(2007-2012)”, Government of India, Yojana Bhavan, NewDelhi, December p. 97.• Rao, M.G. (2009), ‘Regional Development for InclusiveGrowth’, Business Standard, New Delhi, October 6 th .• UNDP (2009), Human Development Report 2009, NewYork• Wilson, D. and Purushothaman, R. (2003), Dreamingwith BRICs: The Path to 2050, Goldman Sachs GlobalEconomics, New York, Paper No. 99.• World Bank (2005), Economic Growth in the 1990s:Learning from a Decade of Reforms, Washington, DC.• World Bank (2006), Inclusive Growth and ServiceDelivery: Building on India’s Success, DevelopmentPolicy Review, Washington, DC• World Bank (2009), India: Country Strategy (CAS)2009-2012, www.worldbank.org.in, accessed on 18/1/2009• World Bank (2009), IDA at Work, India: Using IDAEffectively in a Large Country, July.• World Bank (2009), World Development IndicatorsDatabase, Washington D.C., September(The views expressed in the article are personal and do notreflect the official policy or position of the organisation.)THE INDIA ECONOMY REVIEW79

P ROBLEMS & PERSPECTIVESIS THERE ANY RELATIONSHIPBETWEEN ECONOMIC GROWTHAND HUMAN DEVELOPMENT?EVIDENCE FROM INDIAN STATESSacchidananda MukherjeeConsultant, National Institute of Public Finance andPolicy, New DelhiDebashis ChakrabortyAssistant Professor, Indian Institute of Foreign Trade,New Delhi1. IntroductionThe economic reform process initiated since 1991 has playeda major role in determining India’s overall economic growthpath. Among the major changes undertaken during thisperiod, shift in emphasis on export-oriented economicphilosophy, encouragement to FDI inflow, unshackling ofindustrial licensing system, ongoing tariff reforms (unilaterallyas well as part of WTO obligation) need to be mentioned.The collective influence of these measures has ensured asteady growth path for the country over the last decade.The enhanced economic growth (EG), thus generated, ishowever likely to create important repercussion effects in theeconomy, which would further propel the growth trajectoryin the long run. For instance, the rising income level wouldbe instrumental in expanding the capacity of the governmentto raise the general level of human development (HD) in thecurrent period (through provision of health and educationalachievements), which in turn would influence the future EGpotential positively.Over the last decade, India has initiated a number measuresfor augmenting HD. For instance, the Sarva ShikshaAbhiyan started for universalising elementary educationacross the States has been a commendable initiative. Similarly,the goals of National Rural Health Mission (2005-12)includes: reduction in Infant Mortality Rate (IMR) andMaternal Mortality Ratio (MMR), universal access to publichealth services such as women’s health, child health, water,sanitation & hygiene, immunization, and nutrition, preventionand control of communicable and non-communicablediseases, including locally endemic diseases etc. The introductionof National Rural Employment Guarantee Schemesin rural areas and introduction of Bills like Right to EducationAct and Food Security Act in the Parliament are in theright directions to empower the people with right to employment,food and education. All these measures are expectedto enable India to move closer to fulfillment of the relatedMillennium Development Goals by the stipulated deadline,2015. On the economic front, the growing size of the healthyand educated population in the working age group wouldenable the country to reap the benefits of DemographicDividend more vigourously.In this background, on the basis of a secondary dataanalysis, the current paper attempts to analyze the relationshipbetween EG and HD for 28 major Indian States duringfour time periods ranging over last two decades: 1983, 1993,1999-00 and 2004-05. The objective of this exercise tounderstand to what degree and extent the per capita income(as an indicator of economic growth) has influenced thehuman development achievements across Indian States. Tounderstand the rural – urban disparity in the realization of80 THE IIPM THINK TANK

P ROFOUND PRIORITIESTHE INDIA ECONOMY REVIEW81

P ROBLEMS & PERSPECTIVEShuman development, the Human Development Index isconstructed for rural and urban areas separately for each ofthe States. While 1983 marks the pre-liberalization era, 1993captures the scenario shortly after initiation of the reformexercises. Though the reform process was almost a decadeold during 1999-00, the EG in the preceding period wasinfluenced by several external and internal events (e.g.Southeast Asian Crisis during 1997-98, three successiveGeneral Elections over 1996-99 etc.). On the other hand,2004-05 marked a period of relative stability.The paper is organised as follows. A brief literature surveyon the relationship between EG and HD is followed by adiscussion on the methodology adopted in this paper, theresults and the policy observations respectively.Figure 1: The Relationship between Per Capita GDPand HDI Score: 2007HDI Score-20071.11.00.90.80.70.60.50.4Per Capita GDP (PPP USD) 2007 vs HDI Score_2007:Cross-Country Analysis0.30 10K 20K 30K 40K 50K 60K 70K 80K 90KPer Capita (GDP) (PPP USD)Source: Computed by Authors based on UNDP (2009) data2. Economic Growth and Human DevelopmentThe existing literature suggests atwo-way relationship between EG andHD, implying that nations / States mayenter either into a virtuous cycle of highgrowth and large HD gains, or a viciouscycle of low growth and low HD improvement(Ranis, 2004). Higher initiallevel of HD may also lead to positiveeffects on institutional quality andindirectly on EG (Costantini and Salvatore,2008). India displays a two-waycausality between EG and HD, indicating possibilities ofvicious cycles (Ghosh, 2006). The relationship patternbetween Per Capita GDP (in PPP USD) and HDI score(UNDP 2009) is presented in Figure 1. The figure shows that,from cross-country perspective, as per capita income increasesthe HDI score increases upto a level and then it remainsconstant. This non-linearity in the relationship between EGand HD has been reported by Mukherjee and Chakraborty(2009). Therefore, from cross-country perspective per capitaincome is necessarily an ingredient for achieving a higherlevel of human wellbeing. From cross-country perspective,Mukherjee and Chakraborty (2010) observed that HD ispositively related to both democracy and income level,indicating that the countries characterized by higher levels ofincome and better democratic set up are likely to witnesshigher HD achievements. The regression results on therelationship between HD and corruption confirms presenceFrom cross countryperspective, percapita income isnecessarily aningredient forachieving a higherlevel of well-beingof a non-linearity and suggests that withdecline in corruption, HD level rises, butdeclines marginally for a few countriescharacterized by a less corrupt regime(Mukherjee and Chakraborty 2010).The UNDP annually publishesan extensive analysis of global HDsituation in the Human DevelopmentReport (HDR) along with countryrankings. While India remained in thelow HD category throughout nineties,in 2002 it graduated to medium HD category. In 2005 itsecured a composite HDI score of 0.619, as compared tothe corresponding figure of 0.439 in 1990. India’s globalHDI rank has also improved from 132 in 1999 to 134 in2007, while the number of countries covered also increasedduring this period. Recently in association with UNDP, theGovernment of India has started analysing the State-wiseHD status. The National Human Development Report 2001(Government of India, 2002), brought out by the PlanningCommission following the UNDP methodology, is worthmentioning in this regard. While the report ranked Kerala,Punjab and Tamil Nadu as the toppers; Bihar, MadhyaPradesh and Uttar Pradesh were at the other extreme inHD scale. The alternate index developed by Guha andChakraborty (2003), in line with Nagar and Basu (2001),however showed that inclusion of other socio-economicvariables changes the State rankings to some extent.82 THE IIPM THINK TANK

P ROFOUND PRIORITIES3 Methodology and Data3.1 Human Development Index (HDI)Following the principle of the NHDR 2001 methodology,for calculation of the Human Development Index (HDI)for Indian States, the current paper consider threevariables, namely - per capita consumption expenditure;and composite indices of educational attainment and healthattainment respectively. With this formulation, followingthe HDI method, the HDI score for the j th State is given bythe average of the normalised values of the three indicators,namely - inflation and inequalityadjusted per capita consumptionexpenditure ( ); composite indicatoron educational attainment( ) and composite indicator on healthattainment ( ). The normalisation isdone by dividing the difference betweenany variable( ) within these categories and theminimum value of to the differencebetween the maximum and theminimum value of .Although UNDP considers Real GDP Per Capita inPPP USD for generating the HDI, the NHDR 2001 haspreferred inflation and inequality adjusted average monthlyper capita consumption expenditure (MPCE) of a Stateover that for the analysis. Here the monthly per capitaconsumption expenditure data, obtained from NationalSample Survey Organisation (NSSO)’s quinquennialsurveys (38 th Round: 1983, 50 th Round: 1993-94, 55 th Round:1999-2000 and 61 st Round: 2004-05), first adjusted forinequality using State-wise Gini Ratios (also provided inthe quinquennial rounds), and further adjusted for inflationto bring them to 1983 prices by using deflators derived fromState specific poverty line (Government of India, 2002). Theadjustment was done in the following manner. If (GR ij)isthe Gini Ratio for the j th State for the ith period and MPCE ijis the average monthly per capita consumption expenditurefor the j th State for the i th period, inequality adjustedaverage monthly per capita expenditure for the j th State forthe i th period (IMPCE ij) is expressed as (1-GR ij) XMPCE ij,where.After adjustment for inequality for eachof the states, we carried out adjustment for inflation. If PL ijis the poverty line (in Rs. per capita per month) for the j thOne importantpolicy response forthe Governmentwould be toensure balancedgrowth processacross the StatesState for the i th period and PL 1983jis the poverty line of thej th State for 1983, then inflation and inequality adjustedaverage monthly consumption expenditure for the j th Statefor the i th period (IIMPCE ij) is expressed as (PL 1983j/PL ij)XIMPCE ij. 1 Hence inflation and inequality adjusted MPCEof a State is considered as an indicator of consumption () to construct HDI. The analysis carried out for rural andurban areas of a State separately.The composite indicator on educational attainment( ) is arrived at by considering two variables, namely:literacy rate for the age group of sevenyears and above (e 1) and adjustedintensity of formal education (e 2). Theidea is that literacy rate being an overallratio alone may not indicate the actualscenario, and the drop-out rate, needsto be incorporated in the formula.We consider the data on literacy ratefor three periods – 1981, 1991 and2001 corresponding to the PopulationCensus. The adjusted Intensity ofFormal Education data is used for four periods – 1978(4 th All India Educational Survey, NCERT, 1982); 1993 (6 thAll India Educational Survey: NCERT, 1999), 2002 (7 th AllIndia Educational Survey: NCERT, 2002) and 2005-06. For2005-06, we have taken the Intensity of Formal Education(IFE) from NCERT (2002) and used the Total EnrolmentFigures as given in Government of India (undated). 2 Theentire analysis is carried out for rural and urban separately.Estimation of State-wise population between 6 to 18 agegroup (rural and urban separately) has been taken fromthe data released by the Registrar General of India andCensus Commissioner (RGI&CC 2006) for 2001. It is tobe mentioned here that RGI&CC (2006) data does notprovide population data for 6-18 age group for rural andurban separately, so we used the rural and urban 6-18 agegroup population ratio in 2001 and estimated the Statewiseprojected rural and urban 6-18 age group populationfor 2002 and 2005. The current analysis assigns weightageof 0.35 to e 1and 0.65 to e 2to estimate , in line with theNHDR 2001 methodology.The Intensity of Formal Education (IFE) is estimatedas a ratio between Weighted Average of Enrollment(WAE) of students from class I to class XII (where weightsTHE INDIA ECONOMY REVIEW83

P ROBLEMS & PERSPECTIVESTable 1: State-wise Human Development Index (HDI) Scores & RanksState Name1983 1993 1999-00 2004-05Rural Urban Urban Rural Urban Rural UrbanAndhra Pradesh 0.245 (17) 0.303 (16) (17) 0.151 (26) 0.248 (18) 0.223 (20) 0.255 (21) 0.336 (20)Arunachal Pradesh 0.178 (20) 0.247 (19) (21) 0.399 (12) 0.177 (22) 0.322 (18) 0.289 (19) 0.305 (26)Assam 0.274 (13) 0.266 (17) (19) 0.418 (11) 0.165 (23) 0.369 (15) 0.294 (18) 0.407 (15)Bihar 0.085 (23) 0.165 (24) (23) 0.202 (21) 0.098 (28) 0.129 (27) 0.146 (26) 0.146 (27)Chhattisgarh 0.071 (25) 0.204 (20) (27) 0.167 (24) 0.127 (25) 0.179 (25) 0.133 (28) 0.360 (18)Goa 0.721 (2) 0.642 (3) (2) 0.577 (4) 0.663 (2) 0.578 (5) 0.626 (3) 0.718 (3)Gujarat 0.366 (7) 0.419 (11) (10) 0.325 (16) 0.329 (12) 0.326 (17) 0.312 (17) 0.468 (10)Haryana 0.501 (5) 0.507 (7) (7) 0.398 (13) 0.442 (7) 0.372 (13) 0.506 (5) 0.397 (16)Himachal Pradesh 0.412 (6) 0.582 (4) (12) 0.509 (6) 0.553 (3) 0.687 (2) 0.626 (2) 0.791 (2)Jammu & Kashmir 0.214 (19) 0.098 (26) (14) 0.279 (18) 0.393 (10) 0.295 (19) 0.493 (6) 0.363 (17)Jharkhand 0.085 (23) 0.165 (24) (23) 0.202 (21) 0.111 (26) 0.209 (22) 0.187 (24) 0.407 (14)Karnataka 0.332 (10) 0.501 (8) (15) 0.315 (17) 0.309 (14) 0.371 (14) 0.326 (16) 0.500 (8)Kerala 0.840 (1) 0.722 (1) (1) 0.778 (1) 0.834 (1) 0.728 (1) 1.000 (1) 0.954 (1)Madhya Pradesh 0.071 (25) 0.204 (20) (27) 0.167 (24) 0.103 (27) 0.171 (26) 0.138 (27) 0.356 (19)Maharashtra 0.364 (8) 0.520 (6) (8) 0.482 (8) 0.417 (8) 0.490 (6) 0.421 (12) 0.665 (4)Manipur 0.340 (9) 0.266 (18) (13) 0.262 (19) 0.208 (20) 0.444 (9) 0.279 (20) 0.327 (21)Meghalaya 0.249 (16) 0.352 (15) (18) 0.550 (5) 0.325 (13) 0.454 (8) 0.452 (10) 0.431 (13)Mizoram 0.519 (4) 0.661 (2) (4) 0.745 (2) 0.477 (6) 0.650 (3) 0.488 (7) 0.608 (5)Nagaland 0.315 (11) 0.407 (13) (5) 0.586 (3) 0.478 (5) 0.613 (4) 0.438 (11) 0.565 (6)Orissa 0.159 (21) 0.185 (23) (20) 0.225 (20) 0.191 (21) 0.190 (23) 0.219 (23) 0.325 (22)Punjab 0.668 (3) 0.567 (5) (3) 0.480 (9) 0.522 (4) 0.413 (11) 0.587 (4) 0.467 (11)Rajasthan 0.144 (22) 0.193 (22) (22) 0.179 (23) 0.211 (19) 0.211 (21) 0.236 (22) 0.319 (24)Sikkim 0.257 (15) 0.410 (12) (16) 0.478 (10) 0.275 (16) 0.391 (12) 0.382 (13) 0.319 (23)Tamil Nadu 0.268 (14) 0.387 (14) (6) 0.387 (15) 0.412 (9) 0.432 (10) 0.458 (9) 0.564 (7)Tripura 0.306 (12) 0.466 (9) (11) 0.506 (7) 0.301 (15) 0.466 (7) 0.340 (15) 0.466 (12)Uttar Pradesh 0.064 (27) 0.010 (27) (25) 0.019 (27) 0.133 (24) 0.015 (28) 0.182 (25) 0.097 (28)Uttarakhand 0.064 (27) 0.010 (27) (25) 0.019 (27) 0.251 (17) 0.181 (24) 0.341 (14) 0.306 (25)West Bengal 0.237 (18) 0.443 (10) (9) 0.392 (14) 0.338 (11) 0.364 (16) 0.465 (8) 0.469 (9)Note: Figure in the parenthesis shows the rank Source: Calculated by the Authorsbeing assigned 1 for Class I, 2 for Class II and so on) tothe Total Enrolment (TE) in Class I to Class XII. IFEis multiplied with the proportion of Total Enrolment toPopulation in the age group 6-18 (P c) (Government ofIndia, 2002). According to the formula suppose E ibe thenumber of children (rural and urban combined) enrolled ini th standard in 2002, i = 1 for Class I to 12 for Class XII).Then Weighted Average of the Enrolment (WAE) fromClass I to Class XII is calculated as the weighted average ofenrolment (E i) in a particular Class where weights are i = 1for Class I to 12 for Class XII.Now, suppose E iis the total enrolment of Children fromClass I to Class XII in 2002. Then the Intensity of FormalEducation (IFE) for children (rural and urban combined)in 2002 becomes WAE expressed as a percentage of TE.Suppose P crepresents the Population of Children (ruraland urban combined) in the age group 6-18 years in 2001.Then we can determine the Adjusted Intensity of formaleducation (AIFE) for children (for rural and urbanseparately) in 2002, as the ratio of IFE multiplied by TEand the Population of Children in the age group 6 to 18years in 2001.84 THE IIPM THINK TANK

P ROFOUND PRIORITIESFinally the Composite indicator on health attainment( ) is arrived at by considering two variables, namely LifeExpectancy (LE) at age one (h 1) and the inverse of InfantMortality Rate (IMR) as the second variable(h 2). For h 1, which measures the life expectancy at age one(Person – rural and urban separately), the four data periodsconsidered for our analysis are: 1981-85 (for 1983), 1991-95(for 1993-94), 2000-04 (for 1999-00) and 2001-06 (for 2001-05). For the first two periods we have taken data (rural andurban separately) from Government of India (2002) andfor other two periods we have taken data from Ministry ofHealth & Family Welfare and the Office of the RegistrarGeneral (1999). The data on IMR (per thousand) for ruraland urban is considered for four data points, namely – 1981(for 1983), 1991 for (1993-94), 1999 for (1999-00) and 2004(for 2004-05). The IMR data for 1981 and 1991 are takenfrom Government of India (2002) and for other two datapoints we have taken data from SRS Bulletins (RGI 2001).The current analysis assigns weightage of 0.65 and 0.35 toh 1and h 2respectively to determine the composite indicator( ), in line with the NHDR 2001 methodology. The entireanalysis is carried out for rural and urban separately.3.2 Economic Growth (EG)Table 2: Per Capita Gross State Domestic Product (at Constant 1999-00Prices) (1999-2000 Series) (Rs.)State Name 1981-82 to 1983-84 1992-93 to 1994-95 1998-99 to 2000-01 2003-04 to 2005-06Andhra Pradesh 9,439 (M) 13,252 (M) 17,358 (M) 22,247 (M)Arunachal Pradesh 7,836 (L) 13,935 (M) 15,246 (M) 20,119 (M)Assam 11,441 (M) 12,983 (M) 13,335 (L) 15,413 (L)Bihar 5,259 (L) 5,929 (L) 6,553 (L) 7,208 (L)Chattisgarh 8,275 (M) 12,600 (M) 13,168 (L) 16,225 (M)Goa 18,782 (H) 31,315 (H) 46,919 (H) 53,485 (H)Gujarat 11,467 (H) 17,101 (H) 22,068 (H) 28,719 (H)Haryana 14,501 (H) 20,662 (H) 25,182 (H) 33,728 (H)Himachal Pradesh 12,554 (H) 17,567 (H) 23,573 (H) 29,749 (H)Jammu & Kashmir 12,332 (H) 13,815 (M) 15,992 (M) 17,644 (M)Jharkhand 5,259 (L) 12,101 (M) 13,245 (L) 14,192 (L)Karnataka 8,832 (M) 13,253 (M) 19,090 (M) 22,858 (M)Kerala 11,336 (M) 16,520 (H) 21,592 (M) 28,447 (H)Madhya Pradesh 8,275 (M) 10,572 (L) 12,911 (L) 13,777 (L)Maharashtra 12,368 (H) 20,050 (H) 25,278 (H) 31,011 (H)Manipur 9,296 (M) 11,922 (L) 13,800 (M) 15,712 (L)Meghalaya 9,787 (M) 12,634 (M) 15,963 (M) 19,679 (M)Mizoram 11,441 (M) 12,983 (M) 16,562 (M) 21,014 (M)Nagaland 11,441 (M) 16,196 (M) 15,992 (M) 19,467 (M)Orissa 8,164 (L) 10,042 (L) 11,629 (L) 14,924 (L)Punjab 17,134 (H) 23,697 (H) 28,016 (H) 31,273 (H)Rajasthan 8,202 (M) 11,842 (L) 14,979 (M) 17,337 (M)Sikkim 11,441 (M) 14,687 (M) 17,648 (M) 22,794 (M)Tamil Nadu 9,800 (M) 15,999 (M) 21,783 (H) 26,222 (M)Tripura 7,456 (L) 10,351 (L) 15,255 (M) 21,487 (M)Uttar Pradesh 7,543 (L) 9,460 (L) 10,734 (L) 11,797 (L)Uttarakhand 7,543 (L) 14,786 (M) 15,877 (M) 21,738 (M)West Bengal 9,009 (M) 12,487 (M) 17,010 (M) 21,126 (M)Quartile 1 8,193 12,056 13,684 16,097Quartile 3 11,448 16,277 21,640 26,778Note: (H) implies High Income State (PCGSDP is higher than third quartile); (M) implies Middle Income State (PCGSDP lies between first and second quartile);and (L) implies Low Income State (PCGSDP lies below First Quartile).Source: Authors’ own estimation based on EPWRF (2009)EG in the current analysis ismeasured by the Per CapitaGross State DomesticProduct (PCGSDP) atconstant (1999-00) prices(Comparable 1999-2000Series), as reported byEPW Research Foundationdatabase (EPWRF 2009). Tounderstand the size of theeconomy and growth patternof each of the States, wehave classified them in threecategories with respect totheir PCGSDP at constantprices in the followingmanner: high income States(PCGSDP: greater than 3 rdQuartile), medium incomeStates (PCGSDP: 1 st to 3 rdQuartile) and low incomeStates (PCGSDP: less than1 st Quartile).4. Results and PolicyObservationThe overall HD scoresfor the States generatedfollowing the abovemethodology is presentedin Table 1. It is observedfrom the table that HDTHE INDIA ECONOMY REVIEW85

P ROBLEMS & PERSPECTIVESTable 3: Average Per Capita GSDP and Average HDIScore across Income GroupsYear CriteriaLowIncomeMiddleIncomeHighIncomeF-stat1983 PCGDP (Rs.) 7,008 9,858 14,163 29.354 *Gini Ratio ofMPCE (Rs.)HDI ScoreRural 0.272 0.279 0.266 0.180Urban 0.307 0.299 0.284 0.292Rural 0.134 0.297 0.464 6.541 *Urban 0.178 0.380 0.477 6.017 *1993 PCGDP (Rs.) 10,017 13,694 20,988 26.731 *Gini Ratio ofMPCE (Rs.)HDI ScoreRural 0.238 0.241 0.279 2.150Urban 0.284 0.284 0.320 1.085Rural 0.163 0.254 0.488 8.434 *Urban 0.223 0.363 0.507 4.774 **1999-00 PCGDP (Rs.) 11,654 16,597 27,546 21.519 *Gini Ratio ofMPCE (Rs.)HDI ScoreRural 0.227 0.214 0.247 2.503Urban 0.313 0.273 0.311 3.122 ***Rural 0.133 0.345 0.477 11.868 *Urban 0.180 0.408 0.471 8.278 *2004-05 PCGDP (Rs.) 13,289 20,711 33,773 31.065 *Gini Ratio of Rural 0.236 0.251 0.302 4.633 **MPCE (Rs.) Urban 0.329 0.315 0.365 1.435HDI ScoreRural 0.206 0.364 0.583 13.633 *Urban 0.295 0.422 0.637 10.854 *Note: +, ++ and +++- implies F-stat for Mean Equality Test is significant at 0.01, 0.05 and 0.10 levellevel is consistently high for States like Kerala, Goa,Mizoram, Himachal Pradesh etc. On the other hand,Chhattisgarh, Uttar Pradesh, Uttarakhand, Bihar,Orissa etc. have always been among the bottomliners. Some interesting movement across the Statesis noticed over the period of analysis. For instance,Punjab and Haryana started with an appreciable HDscenario in 1983, but their performance in the urbanareas decline considerably during the last observedperiod. A similar worsening effect is noticed forArunachal Pradesh at the bottom of the scale as well.On the other hand, Jammu & Kashmir and WestBengal has managed to improve their HD level tosome extent over the period. Interestingly Jharkhandhas shown marked improvement in terms of HDachievements after separation from Bihar.The changing income scenario across the Statesis explained with the help of Table 2. The incomequartiles during the years under observation aredefined and the States falling under different incomecategories during a period are mentioned in theparenthesis. It is observed from the table that whilePunjab, Haryana, Goa, Gujarat and Maharashtraremained in the high income category throughout theperiod, Bihar, Orisa and Uttar Pradesh stayed on theSource: Calculated by the AuthorsTable 4: Regression Results on the Relationship between HDI and PCGSDPDependentVariable:IndependentVariableConstantLog (Per CapitaGSDP)Number ofobservationsLog (Human Development Index Score)1983 1993 1999-00 2004-05Rural Urban Rural Urban Rural Urban Rural Urban-19.724 -17.301 * -15.901 * -11.773 * -13.835 * -12.957 * -10.889 * -9.663 *(2.150) (5.274) (2.822) (4.169) (1.729) (3.952) (1.462) (1.820)1.988 1.737 * 1.510 * 1.103 ** 1.290 * 1.209 * 0.987 * 0.882 *(0.229) (0.560) (0.289) (0.429) (0.178) (0.399) (0.147) (0.182)28 28 28 28 28 28 28 28Adjusted R2 0.607 0.212 0.331 0.117 0.634 0.311 0.571 0.522Durbin-Watsonstatistic2.142 1.667 2.24 1.471 1.847 1.75 1.859 1.541F-statistic 42.724 8.256 14.372 4.591 47.828 13.192 36.927 30.53Prob(F-stat) 0.000 0.008 0.001 0.042 0.000 0.001 0.000 0.000Note: Figure in the parenthesis shows the White heteroscedasticity-consistent standard error for the corresponding estimated coefficient*, ** -implies estimate coefficient is significant at 0.01 and 0.05 level respectively86 THE IIPM THINK TANK

P ROFOUND PRIORITIESFigure 2: Relationship between HDI andPCGSDP (1983)HDI Score vs PCGDP : 19830.9000.8000.7000.6000.5000.4000.3000.2000.1000.0000 5K 7K 9K 11K 13K 15K 17K 19KPer Capita (GDP) (RS.)Rural Urban Log (Urban) Log (Rural)Source: Computed by Authors based on UNDP (2009) dataHDI Score-2007other extreme. States witnessing a growth in the servicesector of late, i.e., Andhra Pradesh, Karnataka, TamilNadu and West Bengal have remained in the mid-incomecategory throughout the period of study. The position ofKerala kept fluctuating between high and middle-incomecategory. A fluctuating trend between low and middleincomecategory is noticed for some Northeastern Statesas well. It becomes clear that liberalization exercise hasaffected the growth path of the States in different manner.Before exploring the relationship between HD andEG, a deeper analysis on the quality of income growthacross Indian States would not be irrelevant here. Theconcern here is that the inequality in the growth processmay adversely influence the pace of HD formation in aState. Table 3 compares the HD level of the States in theFigure 3: Relationship between HDI and PCGSDP(1993)HDI ScoreHDI Score vs PCGDP : 19930.9000.8000.7000.6000.5000.4000.3000.2000.1000.0005K 10K 15K 20K 25K 30KPer Capita (GDP) (RS.)Rural Urban Log (Urban) Log (Rural)rural and the urban belt with the respective Gini ratios.It is observed from the table that the rise in income levelover the study period is associated with rise in inequalityin the high income States during 1983 to 1993 (both forrural and urban). For high income States, the inequalitymarginally fall (both for rural and urban) during 1993 to1999-00, but again gone up during 1999-00 to 2004-05.Except for urban areas under low income States during1993 to 1999-00, the inequality (both for rural and urban)gradually declined during 1983 to 1999-00. However, urbaninequality is found to be gone up for low income Statesduring 1993 to 1999-00. For all income States, both forrural and urban, the inequality has gone up during 1999-00to 2004-05. Understandably, the increase in the HDI scorefor the low income States over 1983 to 2004-05 has beenmoderate as compared to the corresponding figures forthe high-income States. Average HDI score of the Statesis significantly different across income categories. Theexisting literature suggests that the rising inequality hasaffected the growth process and livelihood of the citizens ofdifferent States differently, though HD level has improvedacross all income groups. However, the improvement isnot smooth. For middle income States, both for rural andurban categories, HDI score in 1993 is lower than thecorresponding 1983 level. For lower income States, forurban areas, HDI score in 1999-00 is lower than the 1993level and for high income States, for rural and urban areas,the HDI score in 1999-00 is lower than the corresponding1993 level.In order to understand the relationship between EGand HD, a regression analysis has been undertaken here,involving the logarithm of the HDI score as dependentvariable and the logarithm of the PCGSDP of the Statesas independent variable. The cross-section regressions areseparately estimated for the four periods under study andfor the rural and urban areas separately.It is observed from the reported results in Table 4 thatthe HDI formation process of the States is positivelyinfluenced by the growing income levels, as reflected fromthe positive value and significance level of the coefficientsof log (Per Capita GSDP). It is observed that, the value ofthe coefficients of the log (Per Capita GSDP) (it measuresthe income elasticity of human development), both for ruraland urban areas, is declining over the period. This impliesTHE INDIA ECONOMY REVIEW87

P ROBLEMS & PERSPECTIVESFigure 4: Relationship between HDI and PCGSDP(1999-00)HDI ScoreHDI Score vs PCGDP : 1999-20000.9000.8000.7000.6000.5000.4000.3000.2000.1000.0005K 10K 15K 20K 25K 30K 35K 40K 45Per Capita (GDP) (RS.)Rural Urban Log (Urban) Log (Rural)Source: Computed by Authors based on UNDP (2009) datathat per capita income (as an indicator of economic growth)is not translating into human well being more effectivelyin the recent period. This in another way may signify therising influence of other variables in determination of theHD achievements of a State. This indicates that there ismuch scope for further investigation to understand theunderlying factors (other than per capita income) whichinfluence human development of a State. Moreover, weobserve from the table that except in 1999-2000, for all theother years the income elasticity of human developmentis higher for rural areas as compared to urban areas. Thisimplies that an increase in per capita income results higherhuman development in rural areas as compared to theirurban counterparts. This has a major policy implicationgiven the fact that around 70 percent of the population stillFigure 5: Relationship between HDI and PCGSDP(2004-05)HDI Score vs PCGDP : 2004-20051.0000.9000.8000.7000.6000.5000.4000.3000.2000.1000.0005K 10K 15K 20K 25K 30K 35K 40K 45K 50K 55KPer Capita (GDP) (RS.)Rural Urban Log (Urban) Log (Rural)Source: Computed by Authors based on UNDP (2009) datareside in the rural areas.Figures 2-5 pictorially depict the cross-State relationshipbetween HD and EG during the four periods underobservation across the States. The rural and urban incomelevels and HD achievements are considered separately inthe diagrams. A couple of observations emerge from thefigures. First, the positive relationship between EG andHD holds good for all four periods under consideration.Second, the relationship between EG and HD is nonlinearin nature; rising level of income is associated withlesser degree of increase in terms of HD achievements.Third, despite rising income inequality in the last periodunder consideration (2004-05), as reflected from thedivergence of the rural and urban curves, this non-linearstructural relationship is not affected in any significantmanner. Except for a few States, the urban HDI scoreis higher than rural HDI score for all the periods of ouranalysis. For Goa, a high income State, rural HDI scoreis higher than urban HDI score for 1983, 1993 and 1999,but it is opposite in 2004-05. For high income Stateslike Punjab and Haryana (1999-00, 2004-05), rural HDIscore is higher than urban HDI score. The same is truefor middle income States like Kerala, Jammu & Kashmir,Andhra Pradesh (1993, 1999-00) and low income StatesUttar Pradesh and Uttarakhand.Over the last decade the contribution of the servicesector in India’s GDP has increased tremendously. Healthand education is part to that growth in a two-way process,on one hand they form part of the service sector, and onthe other hand healthy and educated population standto augment the GDP in a more productive manner notonly in the service sector but also within agriculture andmanufacturing segment. It is observed from the currentanalysis that EG and HD levels in India are positivelyrelated. While this is a comforting observation, indirectlyimplying that the HD formation process resulting from therising income level in the current period would continueto provide growth impetus in the subsequent period, therising inequality level and the weakening of the incomeelasticity of HD in the recent period are among the majorareas of concern. One important policy response for theGovernment would therefore be to ensure a balancedgrowth process across the States on one hand, and tobridge the gap between the rural and urban areas within88 THE IIPM THINK TANK

P ROFOUND PRIORITIESa State on the other. Only then the benefits of the EG andHD augmentation process would cumulatively lead tosustainable economic development path.Endnotes1State-specific poverty lines for the three periods (1983,1993-94 and 1999-00) have been taken from Governmentof India (2002) and for 2004-05 we referred the estimatesprovided by Himanshu (2009).2For 2005-06, we estimated the adjusted intensity offormal education as on September 30 th , 2005.References and Additional Thinking• Costantini, Valeria and Salvatore Monni (2008),"Environment, human development and economicgrowth", Ecological Economics, Vol. 64, No. 4, pp. 867-880.• EPWRF (2009), “Domestic Product of States of India :1960-61 to 2006-07”, EPWRF, Mumbai.• Ghosh, M. (2006) “Economic growth and humandevelopment in Indian States”, Economic and PoliticalWeekly, Vol. 41, No. 30, pp.3321–3329.• Government of India (undated), “Annual Report- 2007-08”, Department of School Education andLiteracy, Department of Education, Ministry of HumanResources Development, Government of India, NewDelhi.• Government of India (2002), “National HumanDevelopment Report 2001”, Planning Commission,Government of India, New Delhi.• Guha, A. and D. Chakraborty (2003), “Relative Positionsof Human Development Index Across Indian States:Some Exploratory Results”, Artha Beekshan, Vol. 11,No. 4, pp. 166-181.• Himanshu (2009), “Towards new poverty lines for India”,Chapter 3 in Report of the Expert Group to Reviewthe Methodology for Estimation of Poverty, PlanningCommission, December 2009.• Mukherjee, S. and D. Chakraborty (2010), “Is thereany Relationship between Environment, HumanDevelopment, Political and Governance Regimes?Evidences from a Cross-Country Analysis", MPRAPaper 19968, University Library of Munich, Germany.• Mukherjee, S. and D. Chakraborty (2009),“Environment, Human Development and EconomicGrowth: A Contemporary Analysis of Indian States”,(Co-authored with S. Mukherji), International Journal ofGlobal Environmental Issues, Vol. 9, No. 1 & 2, pp. 20-49.• Nagar, A.L., and Basu, S. R. (2001), “Weighing Socio-Economic Indicators of Human Development: A LatentVariable Approach”, National Institute of Public Financeand Policy, New Delhi.• NSSO (1986), “Levels and Pattern of ConsumerExpenditure”, NSS 38 th Round (January 1983 –December 1983), NSSO, CSO, MoS&PI, GoI, New Delhi.• NSSO (1996), “Levels and Pattern of ConsumerExpenditure”, NSS 50 th Round (July 1993 - June 1994),Report No. 402, NSSO, CSO, MoS&PI, GoI, New Delhi.• NSSO (2002), “Levels and Pattern of ConsumerExpenditure”, NSS 55 th Round (July 1999 - June 2000),Report No. 457, NSSO, CSO, MoS&PI, GoI, New Delhi.• NSSO (2007), “Levels and Pattern of ConsumerExpenditure”, NSS 61 st Round (July 2004 - June 2005),Report No. 508, NSSO, CSO, MoS&PI, GoI, New Delhi.• Ranis, G. (2004), “Human development and economicgrowth”, Center Discussion Paper No. 887, EconomicGrowth Center, Yale University, May, Available at:http://www.econ.yale.edu/growth_ pdf / cdp887.pdf• Registrar General of India & Census Commissioner(2006), “Report of the Technical Group on PopulationProjections Constituted by the National Commissionon Population”, Registrar General of India & CensusCommissioner, Government of India, New Delhi.• Registrar General of India (1999), “Compendiumof India’s Fertility and Mortality Indicators 1971 to1997, based on Sample Registration System”, RGI,Government of India, New Delhi.• Registrar General of India (RGI) (2001), “SampleRegistration System (SRS) Bulletin”, Volume 35, No. 2,October 2001, RGI, Government of India, New Delhi.• United Nations Development Programme(UNDP) (2009), “Human Development Report2009 - Overcoming barriers: Human mobility anddevelopment”, New York: Palgrave Macmillan.(The views expressed in the write-up are personal and do notreflect the official policy or position of the organization.)THE INDIA ECONOMY REVIEW89

P ROBLEMS & PERSPECTIVESIndia and the Crisisof CivilizationPotential Impacts of Converging Ecological,Economic and Energy CatastrophesNafeez Mosaddeq AhmedExecutive Director, Institute for PolicyResearch & Development, LondonThe first decade into the new millennium has seenIndia rise dramatically onto the world stage as amajor economic and geopolitical force, both regionallyand globally. The trend has been long anticipated,as articulated by the CIA in its 2005 report, Mapping theGlobal Future. The report noted that by 2020 India’s GDPwould “have overtaken” or would be “about to overtake Europeaneconomies.” Rather than the21 st century constituting a new ‘Americancentury’, the report observes, it“may be seen as the time when Asia,led by China and India, comes into itsown.” But the report also includes thefollowing crucial caveat: “Barring anabrupt reversal of the process of globalizationor any major upheavals inthese countries, the rise of these newpowers (China and India) is a virtualcertainty.” 1Needless to say, the global financial crisis which hasplunged the world into a recession whose overall outcomeremains uncertain, was certainly one such “major upheaval”that was never anticipated by the US intelligencecommunity, nor even the financial community. Indeed, thespate of banking collapses in 2008 took the vast majority ofneoliberal economists, including those working for nationalgovernments, by complete surprise. The inability to foreseePoverty hasremained aserious problemwhich, contraryto conventionalwisdom, hasactually worsenedthe financial crisis is only one factor suggesting that themore optimistic conventional scenarios for Asia should beapproached with some caution. Other “major upheavals”that both security and financial experts have largely missedinclude issues like climate change, energy scarcity and foodproduction – all of which are likely to have significant,converging impacts on India in particular.That is not to say the future is necessarilybleak. To the contrary, worldclassexperts across India are cognizantof all these issues, and working furiouslyto address them. But the fact remainsthat as these global crises intensify, Indiawill face escalating challenges thatare likely to exacerbate her as yet unresolvedinternal and external problemswithout sufficient mitigating, preventiveand transformative measures.Social-Structural Inequalities:Neoliberalism in Crisis?The Indian economy has been frequently cited as a primeexample of the success of the model of development proposedby institutional agents of neoliberal globalization suchas the IMF and the World Bank. But over the last decades,poverty has remained a serious problem which, contraryto conventional wisdom, has actually worsened under the90 THE IIPM THINK TANK

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P ROBLEMS & PERSPECTIVESimpact of neoliberal reforms. The landmark 2007 report ofthe Indian government’s National Commission for Enterprisesin the Unorganized Sector (NCEUS) clarifies thisbeyond doubt, finding that 77 percent of the entire populationlives on less than half a dollar a day. The report put torest earlier government claims that India’s poverty rate hadstabilised at around 30 percent. 2 The report further showsthat out of the 457 million people (nearly 42 percent of thepopulation) in employment, only 34 million were employedin the organized sector (including industries directly linkedto India’s economic growth such as IT, textiles, heavy industry,and so on). The vast majority of new jobs createdhave been in the organized urban sector, and even here,most jobs have accrued to ‘informal workers’ who lack jobsecurity and social security benefits. 3 Moreover, 88 percentof rural workers earn less than Rs. 66 per day – the LabourMinistry’s norm for rural incomes. As Dr Abraham George,managing trustee of the Indian charity,The George Foundation, points out:“1-2% of the country’s population inthe private organized sector is reapingmuch of the fruits of the recent rapideconomic growth. Increased wealthand income remain mostly within thissmall minority; the gap between themand the rest of the nation is wideningby the day. Those who have accumulatedimmense wealth are in a positionof power and influence to further enhanceit, often without sharing much with anyone else. Theeconomic and social system seems to be inequitably structuredand in the end, most Indians are unable to partake inthe benefits of the aggregate growth in the economy.” 4The World Bank, however, has repeatedly taken India’sprevious highly questionable official statistics at face value tolend support to the claim that neoliberal policy reforms andtrade liberalization have contributed to poverty reduction.In its 2006 World Development Report, for instance, theBank uncritically reproduced now thoroughly discreditedofficial Indian figures suggesting that poverty declined from37.3 to 27.4 percent between 1993 and 2000. 5 Yet as notedby Utsa Patnaik, Professor of Economics at the Center forEconomic Studies and Planning, Jawaharlal Nehru Universityin New Delhi:1-2% of India’spopulation in theprivate organizedsector is reapingmuch of the fruitsof the recent rapideconomic growth“... over exactly the same period a number of crucial andinter-related indicators of rural well-being have worsened:crop growth rates have halved in the 1990s compared to the1980s, rural development expenditures have gone down as ashare of National Product and in real per head terms. Ruralemployment growth has dropped sharply and open unemploymenthas been growing fast. Bank credit to farmers hasdeclined and there is higher dependence on private usuriouscredit. Price declines have been severe for many crops, andfood grains absorption per head has declined sharply toreach levels prevalent fifty years ago. Mounting un-repayablefarm debts have led to loss of land reflected in a sharp risein landlessness, and to the historically unprecedented situationof many thousands of farmer suicides in widely separatedareas in different states (Andhra Pradesh, Karnataka,Vidarbha in Maharashtra, Punjab, and Kerala) and thesesuicides are continuing. All these indicators of acute agrariandistress are quite inconsistent withthe claims of decline or constancy ofpoverty. These indicators suggest thatas a ground level reality rural povertyis high and rising in many areas.” 6Other studies indicate that availablefigures cannot easily prove that povertyhas drastically reduced or increased inthe last decade. However, Deaton andDreze argue that there has been “anintensification of regional disparities”between historically poorer and affluentstates, with some poorer states such as Assam and Orissiaexperiencing “virtually zero growth of average per capitaexpenditure” between 1993-94 and 1999-2000. This is partof “a broader pattern of increasing economic inequality inthe nineties”, evident for instance in “rising rural-urban disparitiesin per capita expenditure” and “rising inequality ofper capita expenditure within urban areas in most states.” 7Indeed, widening inequalities in India are also part of alarger global pattern throughout the world, linked directlyto neoliberal macroeconomic policy prescriptions. A 2006United Nations Department of Economic and Social Affairs(UNDESA) report on the impact of IMF-World Bankreforms in the South for the period 1980-2005 found that:“The past quarter-century has seen a sharp decline inthe rate of growth for the vast majority of low and middle-92 THE IIPM THINK TANK

C RUCIAL CONVERGENCEincome countries. Accompanying this decline has been reducedprogress for almost all the social indicators that areavailable to measure health and educational outcomes... [A]t least some of the policy changes that have been widelyimplemented over the last 25 years have contributed to thislong-term growth and development failure.” 8The report points out that the isolated growth-gains inIndia and China are more likely to be linked less to neoliberalreforms, than to specific government interventionssuch as high levels of protection, currency controls, and soon. 9 While the neoliberal model therefore cannot be easilyabsolved from the entrenchment of social structural inequalitiesin India, it clearly must take responsibility forthe devastating impact of the 2008 financial crisis. NDESAestimates that the number of India’s poor was 33.6 millionhigher in 2009 due to declining growth rates in the aftermathof the crash. 10Global warmingwould also lead togreater episodesof heat crampsand heat stroke,largely affectingpoorer classesClimate Change: Probable RisksExperts project further economic lossesdue to the impact of global warmingover the coming decades. Althoughclimate ‘sceptics’ have had a field dayover the discrediting, due to a case ofsloppy referencing, of the claim in theIPCC’s Fourth Assessment Report thatthe Himalayan glaciers are in dangerof completely disappearing by 2035,the peer-reviewed scientific literatureconfirms that the glaciers are nevertheless melting rapidly.A 2008 study in Geophysical Research Letters notes, forinstance, that:“Naimona’nyi is the highest glacier (6050 masl) documentedto be losing mass annually suggesting the possibility ofsimilar mass loss on other high-elevation glaciers in low andmid-latitudes under a warmer Earth scenario. If climaticconditions dominating the mass balance of Naimona’nyiextend to other glaciers in the region, the implications forwater resources could be serious as these glaciers feed theheadwaters of the Indus, Ganges, and Brahmaputra Riversthat sustain one of the world’s most populous regions.” 11This is part of a wider global trend of “unbroken acceleration”in melting of the majority of glaciers around the worldover the last 10 years according to the World Glacier MonitoringService – such that even on a “medium scenario” ofglobal warming, 70 percent of the Alps and a 100 percent ofmountain ranges like the Pyrenees would be ice free. 12Other impacts of global warming on India could be equallydeleterious. Scientists project that sea level will rise atthe rate of 2.4 millimetres (mm) per year in India, reaching38 centimetres (cm) by mid-century. This would “inundatelow-lying areas, drown coastal marshes and wetlands, erodebeaches, exacerbate flooding and increase the salinity ofrivers, bays and groundwater.” As a quarter of Mumbai compriseslow-lying areas, those most detrimentally affected bythese impacts will be “low-income groups and poor residentsliving in vulnerable locations (accounting for nearly 50% ofMumbai’s population).” 13Flooding would be exacerbated by increased precipitation.In 1989, Mumbai’s average rainfall was 2129 mm, increasingby 50 percent by 2005-2006 to 3214 mm. Globalwarming is likely to continue intensifying“extreme precipitation” over thewestern coast and west central India,with the summer monsoon increasingby as much as 20 percent by 2008 inall states except Punjab, Rajasthan andTamil Nadu. Inadequate drainage andsewage infrastructure, sanitation andhygiene would in this context exacerbatedanger of disease outbreaks. 14Global warming would also lead togreater “episodes of heat cramps, heatexhaustion and heat stroke” largely affecting poorer classes.Heat stress would weaken immune systems and furtheramplify “susceptibility to diseases”, mainly for three majorillnesses – diarrhoea, malaria and leptospirosis. Increasedheat can also increase the range of vector-borne diseaseslike malaria, thus facilitating the spread of pathogens. 15Flooding could also be as damaging as drought in termsof agriculture, and in this regard has already detrimentallyaffected 20 million people in India. In the 2007 monsoonalone, for instance, nearly 8,000 square miles of agriculturalland had been inundated; more than 130,000 housesdestroyed; and 1,428 people killed. 16By 2009, however, the monsoon failed, most likely due tothe El Niño Southern Oscillation. 17 Vandana Shiva reportsthat the failure had “impacted two thirds of India, especiallyTHE INDIA ECONOMY REVIEW93

P ROBLEMS & PERSPECTIVESthe bread basket of India’s fertile gangetic plains. Bihar hashad a 43% rainfall deficit, Jharkhand - 47%, Uttar Pradesh- 64%, Haryana - 61%, Punjab - 26%, Himachal Pradesh -63%, Uttarakhand - 42%.” 18Food Insecurity: from Scarcity to Calamity?Overall, climate change is likely to increase the frequency offloods and droughts in India, along with Himalayan glaciermelt,which together will dramatically affect agriculturalproductivity. Already in India, per capita food grain hasfallen from 177 kg in 1991 to 155 kg in 2001. Wheat productionin India’s breadbasket is projected to drop by 50percent in 2050, putting 200 million further people at riskof hunger. Agriculture will be worst affected in the mostfertile coastal regions of Gujarat andMaharashtra. 19But the escalating food crisis is notsimply a function of climate change,but part of a deeper systemic crisis inthe nature, structure and methods ofcorporate-industrial food productionand distribution. As Patnaik argues,rising levels of hunger in India havelargely been not due to unavailabilityof food, but due to increasing inequality:“... the average Indian family of five in 2005 was consuminga staggering 110 kg less grain per year comparedto 1991, reflecting divergent trends: a sharp rise in intakefor the wealthy minority, outweighed by a large decline forthe majority. Not only has calorie intake per capita fallen,there is also a steep decline in protein intake for four-fifthsof the rural population over the period 1993-94 to 2004-05 according to the National Sample Survey Reports onNutritional Intake (NSS).” 20Yet she acknowledges that this does not obviate the factthat growth rates for food grains have “slowed sharply inevery developing country, including India and China, and inmany countries, there has been an absolute decline in grainoutput.” 21 Indeed, during seven of eight years prior to 2008,world grain consumption exceeded production. 22She urges that this global food production crisis, and itslink to the massive food price hikes of 2008, must be understoodin the context of the enforcement of the neoliberalWheat productionis projected todrop by 50% in2050, putting 200million furtherpeople at riskof hungerparadigm which eschews Southern food self-sufficiency inproduction for export crops to Western markets. This hasled to:“... an intensification of the international division of laborin agriculture, where tropical lands are increasinglyrequired to produce the relatively exotic requirements ofadvanced country populations, keeping the supermarketshelves in the North well-stocked with everything from winterstrawberries to edible oils and flowers. The resultingfood grain deficits of developing countries, as they divertmore land to export crops and specialized crops for internalconsumption by the wealthy, are supposed to be met by accessingthe global market for grains, which is dominated bythe United States, Canada, and the European Union withArgentina and Australia as smallerplayers.” 23The problem is that the majoritypoor cannot afford to buy expensivefood imports from the West, and thatthe system of global agribusiness issystematically degrading its own conditionsof production. Maps releasedin December 2005 by scientists at theCenter for Sustainability and the GlobalEnvironment (SAGE) at the Universityof Wisconsin-Madison show thatthe Earth is “rapidly running out of fertile land” and that“food production will soon be unable to keep up with globalpopulation growth.” 24 As US structural geologist Dave AllenPfeiffer argues, the principal problem is that modernindustrial agriculture in its current structure is simply unsustainable.In the US alone, it takes 500 years to replaceone inch of topsoil lost to industrial methods, and erosionis reducing productivity by up to 65 percent each year. Formerprairie lands, which constitute the breadbasket of theUnited States, have lost one half of their topsoil after about100 years of farming. Overall, the soil is eroding 30 timesfaster than the natural rate of reproduction. 25The over-dependence of industrial food production onfossil fuels exacerbates this problem. Currently, the modernfood system consumes ten calories of fossil fuel energy forevery calorie of food energy produced. 26 Yet a growing consensusamong oil industry experts suggests that the world iseither precariously close to exhausting half the world’s con-94 THE IIPM THINK TANK

C RUCIAL CONVERGENCEmost likely already peaked. 31 Saudi Arabia, for instance, isstruggling to maintain 2008 levels of production, with 2009and 2010 production levels falling consecutively. 32 Given thatIndia’s oil imports are projected to triple by 2020 from 2005levels to meet rising demand, this potentially poses a seriouscrisis since it is unlikely the oil will actually be there. 33ventional oil reserves, or may alreadyhave done so – a phenomenon knownas ‘peak oil’.Energy Depletion – Scaling thePeakIndia is currently the world’s fifth largestenergy consumer, importing about70 percent of its crude oil requirements.This is likely to increase to around 85percent by 2012 due to growing energydemand and a lack of alternative domesticenergy sources coming online. Saudi Arabia is India’slargest crude oil supporter, followed by Iran. New importswill continue to arrive from these Middle East suppliers,along with Abu Dhabi, Iraq and Kuwait. 27Yet world oil production may well have already peaked.From 2005, world oil production stopped rising, remainedroughly flat for three years, and then began to decline in2008, and now continues to decline. 28 Although a studiouslyoptimistic estimate by Cambridge Energy Research Associates,whose chair is close to Saudi elite circles, puts theannual decline rate at about 4.5 percent, 29 the InternationalEnergy Agency noted that the “natural annual rate of decline”as of 2008 has been 9.1 percent. This decline has onlybeen temporarily ameliorated due to the slow-down of worlddemand in the context of global recession. Recent estimatesput the coming oil supply-crunch at around 2015. 30Indeed, for India, the prospects are grim, given that its twomajor Middle East oil suppliers, Saudi Arabia and Iran, haveIndia is currentlythe world’s fifthlargest energyconsumer,importing about70% of its crudeoil requirementsBeyond State FailureThe rising challenges India faces are by no means unique.The convergence of global ecological, economic and energycrises will increasingly undermine the capacity of allstates to maintain territorial integrity, deliver goods andservices, and provide security. This, in turn, will intensifythe vulnerability of increasingly disenfranchised classes toresort to violence; while also increasingstates’ willingness to attempt to exertsocial control through military means.It is no accident, in this context, thatMaoist revolts began to break-out ineastern parts of India in late 2009. Thisemerging conflict cannot be defusedwith counterinsurgency initiatives – asymptom-led approach – but throughaddressing root structural causes.The reality is that this and many otherviolent conflicts are symptomatic of adeeper systemic crisis striking at the heart of the structure,values and ideology of modern industrial civilization.There is no need to look upon these worsening trendswith extreme pessimism, even though necessary pragmatismentails recognition that social dislocations and evencatastrophic short-falls may well be inevitable. Despite this,the window of opportunity – albeit closing fast – still remainsfor India to play a pioneering role in undertakingthe wide-ranging social, political, economic, and culturaltransformations essential to effectuate a successful transitionto a social form which is truly sustainable and prosperousin the long-term. Such a transition requires, ultimately,a rejection of the failed neoliberal model, whose doctrine ofunlimited growth through deregulation and liberalization,has proven to be intimately bound up with the destructionof the environment, the exhaustion of the soil, the unsustainabledepletion of resources and raw materials, and theunrestrained unbalancing of the Earth’s complexly inter-THE INDIA ECONOMY REVIEW95

P ROBLEMS & PERSPECTIVESdependent ecosystems. India has already proven that it hasthe technological, cultural, spiritual and human resourcesto successfully pursue this transition. In the words of Britishenvironmentalist Martin Wright:“India’s economic growth may have fuelled pollution, butit is also producing a massive expansion in renewable energies...Across the country, I’ve seen some truly dramaticgrassroots innovations in agriculture, energy and water management.India’s long traditions of self-reliance and ‘rightliving’, as expounded by Gandhi, and still embodied in thedetermination and commitment of community leaders andinnovators across the country, could be a powerful sourceof strength to meet the sustainability challenge. Everythingdepends on the choices India’s leaders make in the comingfew years.” 34Indeed, India, as well as the world, is at a crossroads.Without massive mitigating, preventive and transformativemeasures, the convergence of global crises threatens thecontinuity of civilization into the 21 st century. Yet India isuniquely positioned, both in terms of its meteoric ascensionas a major economic power as well as its abundant domesticcivilizational resources, to play a leading role in transitioningtoward a form of social organization that is more equitable,just, sustainable and harmonious than hitherto evenconceivable.End Notes and Additional Thinking1Jonathan S. Landay, “Report foresees gains by China,India”, Knight Ridder Newspapers (14 th January 2005)2NCEUS report, Conditions of Work and Promotion ofLivelihoods in the Unorganised Sector (New Delhi:National Commission for Enterprises in the UnorganisedSector, 2008) pp. 1-133Ibid.4Abraham George, “Is India’s Prosperity TricklingDown?” Uncovering the Truth Behind Poverty (17 thAugust 2007) 5World Bank, World Development Report 2006 (NewYork: Oxford University Press, 2006) p.278, Table A16Utsa Patnaik, Poverty and Neo-liberalism in India (NewDelhi: Center for Economic Studies and Planning,Jawaharlal Nehru University, February 2006) p. 27Angust Deaton and Jean Dreze, “Poverty and Inequalityin India: A Re-Examination”, Economic and PoliticalWeekly (7 th September 2002) p. 37458Mark Weisbrot, Dean Baker and David Rosnick, TheScorecard on Development: 25 Years of DiminishedProgress (New York: United Nations Department ofEconomic and Social Affairs, September 2006) p. 179Also see Robert Wade, “Is Globalization ReducingPoverty and Inequality”, World Development (2004,Vol. 32, No. 4) pp. 577-589. Available at 10Rukmini Shrinivasan, “No financial crisis impact?India’s poor grew by 34 mn”, Times of India (10 thFebruary 2010) Also see Rajiv Kumar et.al, Global Financial Crisis: Impact on India’s Poor –Some Initial Perspectives (New Delhi: United NationsDevelopment Programme India, 2009) 11Natalie. M. Kehrwald, et. al. “Mass loss on Himalayanglacier endangers water resources,” GeophysicalResearch Letters (November 2008, Vol. 35) L22503,doi:10.1029/2008GL035556 12Juliette Jowit, “World’s glaciers continue to melt athistoric rates”, Guardian (25 th January 2010) 13Rakesh Kumar, Parag Jawale and Shalini Tandon,“Economic impact of climate change on Mumbai,India”, Regional Health Forum (2008, Vol. 12, No. 1)pp. 38-3914Ibid.15Ibid.16Somini Sengupta, “Climate change threatens foodproduction in India, UN expert warns”, New YorkTimes (8 August 2007) 17K. Krishnar Kumar, “Unravelling the Mystery of IndianMonsoon Failure During El Niño”, Science (October96 THE IIPM THINK TANK

C RUCIAL CONVERGENCE2006, Vol. 314, No. 5796) pp. 115-119. Also see SteveConnor, “In India, the monsoon fails. In Europe, itrains without mercy. Is this more than a coincidence?”Independent (13 th September 2002) 18Vandana Shiva, “Climate Change, Drought and India’sLooming Food and Water Crisis”, ZNet (15 th August2009) 19Anita Chaudhary and P. K. Aggarwal, “Climate Changeand Food Security in India” National Workshop onClimate Change and its Impact on Health (New Delhi:World Health Organization India, 26 th -27 th November2007) pp. 39-40 20Utsa Patnaik, “Origins of the Food Crisis in India andDeveloping Countries”, Monthly Review (July-August2009)21Ibid.22Lester R. Brown, ‘World facing huge new challenge onfood front: Business-as-usual not a viable option’, PlanB Update 72 (Washington DC: Earth Policy Institute,16 th April 2008) 23Patnaik “Origins of the Food Crisis”, op. cit.24SAGE Press Release, ‘New Map Reveals True Extent ofHuman Footprint on Earth’ (San Francisco: Center forSustainability and the Global Environment, Universityof Wisconsin-Madison, 5 th December 2005) ; Kate Ravilous,‘Food crisis feared as fertile land runs out’, Guardian(6 th December 2005) 25Dale Allen Pfeiffer, ‘Eating Fossil Fuels’, From TheWilderness (3 rd October 2003) 26Richard Heinberg, ‘Threats of Peak to the Global FoodSupply’, Museletter (July 2005, No. 159) 27“India’s dependence on oil exports to grow 85% by 2012:report,” Financial Express (New Delhi: 17 th August2007); Piyush Pandey, “India expected to increase oilimports from Mideast”, Emirates Business (Dubai: 11 thFebruary 2010)28Oilwatch Monthly (Amsterdam: Association for theStudy of Peak Oil, December 2008) 29Reuters, “World’s oil fields declining at 4.5 pct – CERA”(17 th January 2010)30“World oil output declining faster than thought”Telegraph (29 th October 2008) ;Simon Roberts (ed.) The Oil Crunch: A wake-up call forthe UK economy (London: UK Industry Taskforce onPeak Oil & Energy Security, February 2010) 31Werner Zittel and Jorg Schindler, Crude Oil: TheSupply Outlook (Berlin: Energy Watch Group, October2007, EWG-Series No. 3/2007) pp. 5–17 Also see summary of USgeologist Jeffrey J. Brown’s Export Land Model (ELM)in David Galland, ‘What the Export Land Model Meansfor Energy Prices’, Casey Energy Speculator (19 th May2008) 32MENAFN, “Saudi oil production still below 2008levels” (Amman: Middle East North Africa FinancialNetwork, 3 rd March 2010) 33“China and India: A Rage for Oil”, Business Week (25 thAugust 2005) 34Forum for the Future, “India’s future – sustainability orbust?” (31 st January 2008) (The views expressed in the write-up are personal and do notreflect the official policy or position of the organization.)THE INDIA ECONOMY REVIEW97

P ROBLEMS & PERSPECTIVESFOOD SECURITYIN NORTH-EASTINDIA INTHE POSTGLOBALISATIONERAUtpal Kumar DeDepartment of Economics,North-Eastern Hill University, ShillongBackgroundFood and nutrition security is directly related to the well-beingof human population as it directly affects the physical andworking ability of the people. The problem of food and nutritionsecurity has become more important in the trade liberalizationand globalisation regime and now even the staple food hasbecome the political good in the developing country like India.It has become more important in the developing countries notonly because it is essential for the survival of the people wholive under poverty but also for its social and political consequences.The problem is much more significant in North-Easternregion of India that has been lagging far behind the otherstates in respect of agricultural production especially of fooditems, industries and the development of human capital.Basically these states are food deficit states and for meeting therequirements of the inhabitants these states depend on importedfood articles from other regions of the country to a great98 THE IIPM THINK TANK

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P ROBLEMS & PERSPECTIVESextent. Whereas, assurance of food and nutrition security is alsoimportant from the point of view of human capital growth andalso the productive capacity of human being in the region.The decade of 1990s, observed rising concerns of the peopleabout the question of food security at the local, regional,national as well as international level. People have becomemore concerned about the problem of persistent food insecurityespecially the chronic insecurity that is observed during theperiod of natural calamities like drought, flood etc. and war andcaused the loss of human lives, which is a common seen of manycountries in Asia and Sub-Saharan Africa. The internationalcommunity has been discussing the issue at different internationalforum for preparing guidelines to make provisions foradequate food for everyone in order to meet their nutritionalrequirement so that they are able to lead a smooth healthy life.The Agenda 21 of Rio Earth Summit in1992, emphasis on Nutrition in Romeconference 1992, Cairo conference onPopulation and Development, 1994 andWorld food summit in Rome 1996 are afew to name. The primary concern of allthose summits was the level of povertyand food security and how to enable thepoor to acquire their purchasing powerso that everybody can obtain the basicfood requirement to lead a healthy life ina sustainable environment and no one dieof starvation. Technological improvement was also given thepriority for raising the production of food-grains and that hasyielded much during the last few years but added anotherquestion of sustainability of land productivity.At the same time, continuous efforts have been there tointegrate the world economy and deregulate the economies infavour of free trade and to allow the market to work freelywithout any interference. Here opinions are formed in neoclassicalline that if the markets are allowed to work freely thenefficient results would come and there will automatically a flowof food items from the surplus to deficit regions. It will flourishthe world economy; economic activities and opportunities willincrease and free trade will benefit every country through thebest utilisation of their comparative advantages. Free marketoperation was supposed to enable the system to tickle down thebenefits of technological advancement and developmenttowards the poorer section of population all over the world.The assurance offood and nutritionsecurity is alsoimportant fromthe point ofview of humancapital growthHowever the globalisation programmes operate under theGATT agreement in which there is the clause of patent right,intellectual property right and sui-generis system to give aspecial benefit to the inventors of different technologies andvarieties of crops i.e., to those having an advantage of developingnewer improved varieties of food and other items of humanwelfare. This system allows the already developed nations achance of harvesting extra benefits through their monopolypractices in many cases and cause twist in balance of power ofexploitation in favour of developed nations. Also negotiationsare going on for the reduction in food and agricultural subsidy(under WTO agreement) and the gradual removal of PublicDistribution System (PDS) in the developing countries (especiallyin Asia and Sub-Saharan Africa) that would cause furtherfood insecurity in the deficient production zone and havingsubstantial number of people underpoverty. Thus we observe severe conflictbetween the lobby of less developednations who want to protect their rightand interest against the hitherto unequalcompetition as well as avoid precariousfood security condition and the richnations who still provide heavy farmsubsidy, export subsidy etc in order toprotect their farmers’ profiteeringinterest. Therefore, the Doha round(2001), Cancun meet (2003) weremarked by strong disagreement and concluded without anyconcrete resolution.However, one cannot deny the welfare implication of PDS ina developing country like India where still now more than 26percent of population are poor. That is more chronic inNorth-East India with about one-third of its population is underpoverty and thus is not entitled to acquire their basic needs.Similarly, the poor farmers in many cases, because of imperfectionsin market structure, financial obligations and having nocontrol over market are compelled to follow distress sell of theirproducts at meagre prices and thus lose economic access tonecessaries in the lean seasons when consumer price index goup and they turn out to be the essential buyer of the sameproduct. Therefore, a strong public policy is required to arrangefor procurement and proper distribution of essential items tomeet the necessaries of general public at their affordable priceand fulfil their nutritional requirements (De, 2000). In spite of100 THE IIPM THINK TANK

F OOD FIRSThaving a low level of per capita SDP and being a food deficitstate Kerala through its wide coverage of PDS to benefit theunder-privileged section of society has been able to reduce theimpact of poverty and achieve a notable growth in human development(Dreze & Sen 1995; Govt of Kerala 1994). On the otherhand, at the same time despite being a relatively richer state;Maharashtra (in terms of per capita SDP) has not been successfulin reducing rural poverty and a substantial part of itspopulation is still suffering from shortfall of calorie intake inboth rural and urban areas (Suryanarayana, 1999). Thoughsome developed countries followed the policy of importrestriction (price policies and quota) to encourage their ownfarmers to grow more and attain self-sufficiency in foodproduction and support producers’ income; they also supply theurban consumers cheap food at some stable prices and try toprovide the rural poor masses the staplefood items at some standard affordableprices (Anderson 1994). India alsoadopted a targeted Public DistributionSystem since 1997 to tackle the problemof the target groups (severely poorpeople) who suffer from chronic foodinsecurity in terms of their entitlement.In North-East India, around 40 percentof population (most of those live in ruralareas) are directly or indirectly dependenton nature, especially forest resources.But due to degradation of forest in terms of quality andquantity, productivity of forest and thus availability of forestproduces have been declining over the years. Also a largenumber of farmers follow jhum cultivation with traditional technologyfor their subsistence that without technological progressand due to rise in population or declining land per headcoupled with falling fallow period led to decline in crop productivity.Moreover, adverse changes in terms of trade of theirsmall or marginal farm produces make the situation worse forthose vulnerable sections.ObjectiveAn effort is made in this paper to examine the changes in foodsecurity situation in the region in the post globalisation erafrom both the supply as well as demand side.Agricultural Liberalisation, Globalisation and FoodReduction infood subsidiesand gradualwithdrawal of PDShas increaseddependence onopen marketsSecurityAgricultural trade liberalisation has led to the rapid commercialisationof agriculture in India and therefore diversificationof crop production has taken place more in favour of the highvalued cash crops or non-food crops from the production offood crops. Reduction in food subsidies and gradual withdrawalof PDS has increased peoples’ dependence on the open marketfor their basic food requirements. During 1990s foodgrainoutput growth in India has fallen short of population growthrate. Foodgrain output growth has decelerated to 0.58 percentannual compound rate, where as during the same period thoughpopulation growth rate has declined than earlier, annualcompound rate was still 1.95 percent. Therefore it is very likelyto reduce the per capita availability of foodgrains from theindigenous production to 139.07 kg per year (estimated by theauthor for the year 2001).During the age of trade liberalisationand globalisation the deficit of food itemcan be met by importing food items fromabroad and thus the thrust on export ofagricultural produce has resulted in apolicy induced changes in the productionof oilseed, cotton and other horticulturalcrops. But due to the adverse change inthe exchange rate and due to the absenceof strong tie among the developingnations, the price of export item hasfallen. Where as the developed countries operate in a system ofcartel and thus the price of importing items have increasedcompared to the exporting items that has therefore added tothe problem of food insecurity. The first time, the lobby ofdeveloping countries tries to put pressure on their developedcounterpart in Cancun meet of WTO, Mexico in September2003 for the maintenance of agricultural subsidy and publicdistribution system and the effort continued till now.Moreover during the period of 1990s there is a drastic fall inacreage and production of coarse grains, especially of coarsecereals and coarse pulses, which are the main food item of thepoorer section of population. An estimated 4.6 million hectaresdecline in area under food-grains cultivation has been observedin India during 1991 to 2000. Gross area under coarse grain fellby nearly seven million hectares during that period. Area underpulses fell by 2.4 million hectares. Though there is a rise in areaunder rice by 1.9 million hectare (especially because of rise inTHE INDIA ECONOMY REVIEW101

P ROBLEMS & PERSPECTIVESarea under boro rice cultivation) and rise in area under wheatcultivation by 4.4 million hectares has taken place, the netfood-grains production growth has been decelerated. Thatphenomenon has added to the hardship of the people lyingbelow poverty line.Scenario of Food Security in North-East IndiaPer capita income and disparities or inequality of incomedistribution, price level, availability of food items are the majorindices of food security in a region. According to FAO (1980)food security implies that “all people at all times have bothphysical and economic access to the basic food they need”. TheWorld Bank (1986) extended the idea to “access by all people atall times to enough food for an active, healthy life. Its essentialelements are the availability of food and the ability to acquireit”. Similarly there are the concepts of chronic and transitory ortemporary food insecurity. The first one means continuousfailure to acquire adequate diet caused by the inability to buyfood or to produce by them. The transitory insecurity howeverarises because of temporary failure to access enough foodeither due to sudden price rise, crop failure and householdincome, which is experienced time to time by different parts ofthe country (George, 1999).The process of agricultural liberalisation and globalisationstarted in 1991 in a significant way. Therefore the growth offood-grains production and other changes during nineteeneighties are compared with that of post globalisation period.The triennia average figures presented in table-1 show thatthough production of total food-grains in India had increased atan annual compound rate of 2.93 percent during 1980-82 to1990-92, the rate declined significantly during 1990-92 to2000-02. In North-East India also, the annual compoundgrowth rate declined from 2.68 percent in 1980s to 1.84 percentin the following decade and the trend continued till now. Butthe changes are associated with significant interstate variationin the region.Except Manipur and Meghalaya all other North-Easternstates recorded the similar trend. Production of total cereals aswell as the staple food, rice also recorded a similar trend likethat of total food-grains across all the North-Eastern states(Table-2 & Table-3). But during the previous period, growth ofpaddy production was relatively higher than that of cereal orfood-grains, whereas during the latter period growth of staplefood i.e., paddy (which is the basic food grain of the people ofeastern and North-Eastern India) declined at a faster rate thanthat of cereal or total food-grains. It indicates slightly higherrate of growth of other cereal items in comparison to paddy inthe region.On the other hand, at all India level during the decade of1980s growth rate of paddy production was relatively higherthan the total cereal, which was again significantly higher thanthe total food-grains. In the following decade however the rateof growth of production of total cereal was significantly higherthan that of paddy, in spite of the fact that the rate of growth ofall has declined. It is an indication of relatively faster growth ofother cereals and that indicates a faster deceleration in thegrowth of staple food (rice) production. The deceleration inNorth-Eastern region has however been associated with thedecline in inter-state variation in growth rate, which is observedfrom the significant decline in coefficient of variation in growthrate in the later period.Unlike all India aggregate, rice is the primary food-grain ofthe North-Eastern region. Allocation of land towards paddy issignificantly higher in all the North-Eastern states than that ofall India average. From Tables 4 to 6 it is evident that percentageof area allocated for the production of food-grains, cerealsas well as staple food item paddy has declined in all the North-Eastern states since 1976, which shows the shift of attention ofthe farmers towards the non-food crops. Whatever, rise inproduction has been observed was therefore due to the rise inyield but that was also insufficient owing to the fall in long runrate of growth of yield of crops as a result of lack of investment.Diagram-1 shows that except Manipur and Tripura all theNorth-Eastern states lie below the all India average yield offood-grain. Also growth of yield in the region followed deceleratedgrowth over the years and thus raised question of sustainableavailability of food-grain from internal production.However, one may argue that the decline in percentage ofarea allocated for food-grains has been observed throughoutthe period before and after the globalisation and economic aswell as agricultural reform in India and thus it is not the effectof globalisation. But it should be remembered that gross areaunder cultivation has increased over the years and henceincreasingly people allocated their enhanced area undercultivation towards non-food crops as well as horticultureactivities. Area under horticulture fruit crops together hasincreased from 56.831 thousand hectares in 1979 to 262.124thousand hectares in 1990 and further jumped to about 21060102 THE IIPM THINK TANK

F OOD FIRSTTable-1: Production of Food-grains and its Growth in the North-Eastern Region during 1980-82 to 2000-02Source: 1. North Eastern Council, Basic Statistics of NER, Various Issues2. Government of India, Economic survey, Various Issues.Production in ’000 Tonnes Annual Compound Growth Rate (%)State 1980-82 1990-92 2000-02 1980-82 to 1990-92 1990-92 to 2000-02Arunachal 139.33 209.5 222 4.16 0.58Assam 2632.70 3422.67 4028.33 2.66 1.64Manipur 261.97 304.23 385.00 1.51 2.38Meghalaya 154.40 151.03 215.87 -0.22 3.64Mizoram 40.33 90.53 126.50 8.42 3.40Nagaland 113.73 209.90 333.00 6.32 4.72Tripura 393.57 485.53 559.33 2.12 1.43NER 3739.37 4873.53 5850 2.68 1.84All India 130815.8 174695.3 185052 2.93 0.58Coefficient of Variance in Growth Rate 83.30 57.06Table-2: Production of Cereals and its Growth in the North-Eastern Region during 1980-82 to 2000-02Source: Same as table-1Production in ’000 Tonnes Annual Compound Growth Rate (%)State 1980-82 1990-92 2000-02 1980-82 to 1990-92 1990-92 to 2000-02Arunachal 139.33 206.23 216 4.00 0.46Assam 2582.00 3371.70 3965.67 2.70 1.64Manipur 260.27 304.23 383.50 1.57 2.34Meghalaya 152.87 148.63 212.37 -0.28 3.63Mizoram 40.07 85.03 122.00 7.82 3.68Nagaland 111.97 198.77 312.50 5.91 4.63Tripura 391.37 479.17 553.93 2.04 1.46NER 3681.03 4793.90 5747 2.68 1.83All India 119485.5 161730.83 174148 3.07 0.74Coefficient of Variance in Growth Rate 80.98 58.15Table-3: Production of Rice and its Growth in the North-Eastern Region during 1980-82 to 2000-02Production in ’000 Tonnes Annual Compound Growth Rate (%)State 1980-82 1990-92 2000-02 1980-82 to 1990-92 1990-92 to 2000-02Arunachal 93.27 134.17 139.50 3.70 0.39Assam 2447.23 3255.70 3863.67 2.90 1.73Manipur 248.53 294.67 372.00 1.72 2.36Meghalaya 126.90 118.30 179.00 -0.70 4.23Mizoram 34.20 72.93 106.50 7.87 3.86Nagaland 99.57 162.10 215.50 4.99 2.89Tripura 383.23 471.30 547.80 2.09 1.52NER 3436.27 4509.17 5404.00 2.75 1.83All India 51331.73 74044.70 78762.00 3.73 0.62Coefficient of Variance in Growth Rate 83.98 55.81Source: Same as table-1THE INDIA ECONOMY REVIEW103

P ROBLEMS & PERSPECTIVESTable-4: Changes in Percentage of Gross CroppedArea Allocated for FoodgrainsState\Year 1976-77 1988-89 1995-96 2000-01Arunachal 81.77 76.03 75.04 69.96Assam 74.59 69.97 69.24 67.77Manipur 92.69 91.10 86.26 78.47Meghalaya 61.91 57.87 53.16 47.29Mizoram 92.67 83.97 71.65 64.89Nagaland 89.74 77.17 84.39 67.20Tripura 81.68 65.19 57.39 59.35NER 76.50 70.47 69.10 68.90All India 74.41 70.89 64.86 64.05Source: Same as table-1Table-5: Changes in Percentage of Gross CroppedArea Allocated for CerealsState\Year 1976-77 1988-89 1995-96 2000-01Arunachal 81.77 76.13 72.54 67.68Assam 71.77 66.64 66.52 64.87Manipur 89.95 91.10 86.26 78.47Meghalaya 61.18 56.61 51.82 45.49Mizoram 92.29 83.09 67.52 62.77Nagaland 85.74 74.09 79.60 61.78Tripura 80.23 63.33 55.42 57.01NER 73.11 67.69 66.49 66.21All India 66.66 58.03 52.92 53.34Source: Same as table-1thousand hectares in 2000 in the region. Also area under teahas increased from merely 194.5 thousand hectares in 1977-78to 236.475 thousand hectares in 1989-90 to further 282.403thousand hectares in 2002-03. Similar is the case for otherplantation crops. Even if area under food crop increased insome states in the 1990s the growth of absolute area under ithas declined (except Manipur) significantly compared to itsprevious decade, which is clear from the Tables-7 and 8 respectively.Moreover, the small subsistence farmers who aresubstantial in number in the region compelled to grow somestaple food for their survival but that is insufficient to meet thegrowing total requirement.Table-10 and 11 reveals that except Manipur, Meghalaya andMizoram all other North-Eastern states and the region as awhole observes a fall in the per capita production of cereal aswell as total food-grain during 1990s though the growth waspositive during the previous decade in most of the states. It isdue to the rapid growth of population compared to the growthof food-grain production like that of all India trend. Though percapita production in Mizoram has increased marginally in the1990s, growth rate declined at very faster rate. Table-10 alsoshows that the estimated deficit of cereal per capita thoughdecreased during 1981 to 1991 it increased again after 1991 dueto rising gap between production and the requirement. Therefore,there is a rising dependence on import of food-grainsespecially coarse cereal from other region of the country. Butthe country as a whole is becoming food deficit on an averageand thus the situation indicates rising food insecurity especiallyfor those who cannot afford the imported food articles. Theprice of imported food from other regions becomes costlier inTable-6: Changes in Percentage of Gross CroppedArea Allocated for PaddyState\Year 1976-77 1988-89 1995-96 2000-01Arunachal 54.62 51.98 48.65 45.25Assam 69.03 62.98 63.57 62.41Manipur 85.19 87.95 84.83 77.03Meghalaya 51.67 45.90 42.11 37.18Mizoram 88.67 74.41 60.37 55.32Nagaland 58.70 62.63 61.40 46.50Tripura 79.04 62.56 54.34 56.31NER 68.67 62.66 61.74 61.89All India 23.05 23.17 22.96 23.19Source: Same as table-1the region due to heavy transportation cost. Also due to rise inprice of fertiliser, HYV seeds etc. when transported from themain land, many of the small and marginal farmers cannotafford to adopt such technologies and hence modernisation ofagriculture is very slow even after globalisation or marketintegration and hence the growth of productivity is slow anduncertain. Therefore, globalisation process fails to acceleratethe process of modernisation through the expansion of tradeand improve food security position in the region.If we look at the index number of prices in India, food pricesare found to increase at a faster rate than the non-food andmanufacturing articles since 1981-82. However, growth of foodprices during 1990-91 to 2000-01 (i.e., in the post-globalisationperiod) was much faster than that of previous decade i.e.,1981-82 to 1990-91 (Table-12). Though rise in food prices iscomparatively lower during 2000-01 to 2004-05 than the104 THE IIPM THINK TANK

F OOD FIRSTDiagram 1: Growth of Yield of Foodgrains in North-Eastern States on India3.53Arunachal2.521.510.501975-761977-781979-801981-821983-841985-861987-881989-901991-921993-941995-961997-981999-002001-02MT Per HectareAssamManipurMeghalayaMizoramNagalandTripuraNERIndianon-food and manufacturing articles, food prices have escalatedswiftly in recent past even when there is a recession worldover. The process of diverting corn output for the production ofethanol or bio-diesel in USA (that reached about 20 percent ofits current production and there is a target to increase to 30percent by 2010) and EU (where the target is to divert 10percent of their crop output for the purpose and reduce thedependence on fossil fuel) has added fuel to this fire. Recently,Indian Government has also taken decision to allow thegeneration of ethanol and bio-fuel from corn in order to solvethe problem of petroleum and that is supposed to complicatethe situation further unless food production rises to over-compensatethe loss.A simple question may arise that if food prices have increasedat faster rate why the farmers switched over to other crops. Ithas been experienced that the farmers do not receive the exactprice at the time of harvest that is reflected through indexbecause of market imperfection and local conditions andespecially in North-East India where markets are disintegrated.Also, a large number of farmers here practice Jhum cultivationfor self-sustenance and hence marketed surplus is very low.Moreover, there is fall in relative price of food with respect tonon-food or manufacturing items since 2000-01 when the effectof globalisation is more visible (Table-12). Therefore thefarmers in the region prefer to switch over to relatively moreremunerative crop like potato and horticulture crops whereprofit depends not only on the price but also on the yield rate ofthe respective crops. The rise in price of food crops ratherincreases their cost of living, as there is deficiency of output.If we look at the per capita income, which shows the standardof capability of the people on an average, it is observed thatannual compound rate of growth of per capita NSDP in all theNorth-Eastern states has increased during 1990s compared toits immediate previous decade except in Assam and ArunachalPradesh (Table-13). But if one looks at the recent past rise inprice level across all the commodities including food items, thepurchasing power of the average people is bound to affectadversely. After the integration of world market the localfinancial markets respond to the changes in world market veryfast, where as commodity prices (that those people sale) variesmore depending upon the availability in the indigenousmarkets. Whatever rise in NSDP in North-Eastern region hasbeen observed during 1990s was not mainly due to integrationwith the world market as these economies are mostly based onthe natural resources with little export orientation of manufacturedarticles. The growth here has been due to the exploitationTHE INDIA ECONOMY REVIEW105

P ROBLEMS & PERSPECTIVESTable-7: Growth of Triennia Average Area under Foodgrains during 1981 to 2001Area under Foodgrains in ‘000 Hectares Annual Compound Growth Rate (%)State\Year 1981 1991 2001 81-91 91-01Arunachal 133.17 184.90 190.00 3.34 0.27Assam 2529.50 2734.10 2797.33 0.78 0.23Manipur 182.43 159.60 167.00 -1.33 0.45Meghalaya 130.97 132.77 133.17 0.14 0.03Mizoram 43.97 65.73 65.00 4.10 -0.11Nagaland 127.60 180.00 209.50 3.50 1.53Tripura 302.00 273.97 255.47 -0.97 -0.70NER 3449.63 3731.07 3857.00 0.79 0.33All India 126966.50 124179.00 115638.60 -0.22 -0.71Source: Same as table-1Table-8: Growth of Triennia Average Area under Cereals during 1981 to 2001Area under Cereals in ‘000 Hectares Annual Compound Growth Rate (%)State\Year 1981 1991 2001 81-91 91-01Arunachal 133.17 181.13 184 3.12 0.16Assam 2410.9 2620.97 2683.67 0.84 0.24Manipur 177.93 159.6 164 -1.08 0.27Meghalaya 128.47 129.5 128.7 0.08 -0.06Mizoram 43.43 62.87 61.5 3.77 -0.22Nagaland 123.87 169.17 186 3.17 0.95Tripura 296.67 262.77 246.67 -1.21 -0.63NER 3314.07 3586 3695.5 0.79 0.30All India 103922.1 101079.2 95600.5 -0.28 -0.56Source: Same as table-1Table-9: Growth of Triennia Average Production of Foodgrains per Capita in North-Eastern States during1981 to 2001Source: Same as table-1Annual Production per Head in Kg Annual Compound Growth Rate (%)State\Year 1981 1991 2001 81-91 91-01Arunachal 220.46 242.20 202.37 0.94 -1.78Assam 145.93 152.70 151.13 0.45 -0.10Manipur 184.35 165.61 177.75 -1.07 0.71Meghalaya 115.57 85.09 93.13 -3.02 0.91Mizoram 81.65 131.21 142.45 4.86 0.83Nagaland 146.75 173.47 167.34 1.69 -0.36Tripura 191.70 176.11 174.85 -0.84 -0.07NER 151.09 154.48 152.68 0.22 -0.12All India 191.44 206.42 179.88 0.76 -1.37106 THE IIPM THINK TANK

F OOD FIRSTof natural resources and its export and partly due to the growthof service sector a fraction of which is the export of labourservices in the BPOs which has of course been confronting thesevere problem in the last few months due to the set back inworld financial market and bankruptcy of many foreign companiesand instability in the fossil fuel market. Even there is degradationof natural resource base and hence its productivity thatraise question about the sustainability of such rise in NSDP.Moreover, even after globalisation, look-east policy of thegovernment of India we do not observe notable progress inTable-10: Growth of Triennia Average Production of Cereals per capita in North-Eastern States during1981 to 2001Source: Same as table-1Table-11: Growth of Triennia Average Production of Paddy per capita in North-Eastern States during1981 to 2001Source: Same as table-1Table-12: Variation in Index Number of Prices of Food, Non-food and Manufacturing Articles in Indiasince 1981-82Source: Same as table-1Area under Foodgrains in ‘000 Hectares Annual Compound Growth Rate (%) Annual Deficit per Head in KgState\Year 1981 1991 2001 81-91 91-01 1981 1991 2001Arunachal 220.46 238.42 196.90 0.79 -1.90 -91.88 -84.57 -86.22Assam 143.12 150.43 148.78 0.50 -0.11 -51.84 -69.39 -57.95Manipur 183.16 165.61 177.05 -1.00 0.67 -120.58 -151.26 -143.38Meghalaya 114.42 83.74 91.62 -3.07 0.90 -153.89 -111.76 -97.61Mizoram 81.11 123.24 137.39 4.27 1.09 -90.53 -70.73 -77.96Nagaland 144.47 164.27 157.04 1.29 -0.45 -44.37 -61.20 -61.84Tripura 190.63 173.80 173.16 -0.92 -0.04 -86.27 -83.04 -85.01NER 148.73 151.96 149.99 0.21 -0.13 -60.14 -43.90 -65.72All India 174.86 191.10 169.28 0.89 -1.21 -14.54 3.42 -38.10Production of Paddy in ‘000 Tonnes Annual Compound Growth Rate (%)State\Year 1981 1991 2001 81-91 91-01Arunachal 147.57 155.11 127.16 0.50 -1.97Assam 135.65 145.25 144.95 0.69 -0.02Manipur 174.90 160.41 171.75 -0.86 0.69Meghalaya 94.99 66.65 77.22 -3.48 1.48Mizoram 69.23 105.70 119.93 4.32 1.27Nagaland 128.47 133.97 108.29 0.42 -2.11Tripura 186.67 170.95 171.24 -0.88 0.02NER 138.84 142.93 141.04 0.29 -0.13All India 75.12 87.49 76.56 1.54 -1.33YearGrowth during1981-82 1990-91 2000-01 2004-05Item 1981-2 to 1990-1 1990-1 to 2000-1 2000-1 to 2004-5Food 100 200.6 484.9 529.8 100.6 141.7 9.25Non-food 100 194.2 364.9 467.3 94.2 87.9 28.1Manufacturing 100 182.8 344.6 404.4 82.8 88.5 17.4THE INDIA ECONOMY REVIEW107

P ROBLEMS & PERSPECTIVESTable-13: Per Capita NSDP and Annual Compound Growth Rate during 1980s at 1980-81 pricesState 1980-81 1990-91 2000-01 Annual Compound Growth Rate (%)Rs Rs Rs 1980-1 to 1990-1 1990-91 to 2000-1Arunachal 1516 2443 3708 4.58 4.26Assam 1200 1790 2541 4.08 3.57Manipur 1429 1736 2527 1.97 3.82Meghalaya 1361 2020 3474 4.03 5.57Mizoram 1289 1985 4383 4.41 8.24Nagaland 1448 2233 4179 4.42 6.46Tripura 1323 1525 3616 1.43 9.02C-V 7.82 15.85 20.81 36.37 36.98Source: Economic Survey, various issues.Table-14: Changes in Poverty in North-East IndiaIncidence in PercentageChanges in PercentageState\Year 1983 1993-4 1999-00 1983 to 1993-41993-4 to 1999-001983 to 1999-00Arunachal 40.38 39.35 33.47 -2.55 -14.94 -17.11Assam 40.47 40.86 36.09 0.96 -11.67 -10.82Manipur 37.02 33.78 28.54 -8.75 -15.51 -22.91Meghalaya 38.81 37.92 33.87 -2.29 -10.68 -12.73Mizoram 36.00 25.66 19.47 -28.72 -24.12 -45.92Nagaland 39.25 37.92 32.67 -3.39 -13.84 -16.76Tripura 40.03 39.01 34.44 -2.55 -11.71 -13.96Source: Planning Commission, Government of IndiaTable-15: Inflation and Inequality Adjusted MonthlyPer Capita Consumption Expenditure (Rs)State\Year 1983 1993-4 1999-00Arunachal -- 104.71 (14) 129.38 (12)Assam 93.84 (11) 96 (17) 99.81 (21)Manipur 101.06 (8) 112.89 (9) 130.88 (10)Meghalaya -- 124.55 (5) 145.65 (7)Mizoram 119.82 (3) 174.47 (1) 202.99 (2)Nagaland -- 164.15 (2) 228.04 (1)Tripura -- 119.53 (8) 125.92 (14)All India 86.59 97.53 111.28Source: Planning Commission, Government of India, National Human Development Report, 2001. Note:Note: Figures in the parentheses represent ranking among all the Indian states.industrial activities in the region except the tertiary activitiesthat cannot sustain growth process without improvement inproduction activities.Moreover, the increase in NSDP is associated with thedecline in incidence of poverty but still now it is much higherthan the national average (Table-14). About one-third ofpopulation is still suffering from the lack of entitlement toacquire their basic necessities. Therefore, the growth of percapita NSDP is not showing the actual improvement of entitlementrather there is the lack of economic entitlement andinequality in income.Inflation and inequality adjusted monthly per capita consumptionis another index of welfare and condition for humandevelopment in any region. In this case of course all theNorth-Eastern states except Assam are much ahead of thenational average. The condition of Arunachal though betterthan all India average it ranked 12 among all the states in1999-2000. Here it may be pointed out that though per capitaconsumption is adjusted with the general inflation level, at anypoint of time, general price level in any North-Eastern state ismuch higher compared to the national average (Basic Statistics108 THE IIPM THINK TANK

F OOD FIRSTof NER 2006, P. 416) and there is large scale variation in priceswithin each North-Eastern state especially in Mizoram, Tripura,Nagaland and Meghalaya due to poor infrastructure and if thatcan be considered the actual conditions would not show muchbetter. Moreover, inequality in actual consumption in the ruralareas is observed to increase during 1990s (National HumanDevelopment Report, 2001) in all the North-Eastern statesexcept Arunachal, Meghalaya and Tripura.Concluding RemarksIn terms of availability of coarse food-grains, scarcity in theNorth-Eastern region of India has increased after the globalisationof Indian economy and that has raised the dependence onimport. More market-oriented approach has led to the growthof non-food crops at the cost of food crops.Income of the people on an average has increased due to theexpansion of economic activities especially in the tertiary sectorand thus raised the capability to acquire food security. But thathas been associated with the large-scale uncertainty, which isclear from the recent devastation of the world financial economy.Also the growth in NSDP has not been able to reducepoverty substantially and therefore a large section of populationis excluded from the growth process and still suffering from economicas well as food insecurity due to lack of entitlement.Moreover, globalisation and other economic reforms havenot yet contributed to the industrial progress of the region(which is clearly visible from the sluggish industrialisationfigures in the region) so that the income and entitlement of thepeople would increase. Rather opening up of market hasaccelerated the import of consumer durables from outside andthus in order to meet their aspirations for such goods exploitationof natural resources like forest has taken place at fasterrate during 1990s that further caused decline in productivity ofsoil and the problem of food insecurity deepened (De, 2003).Therefore, from both supply as well as demand capability sidethe globalisation movement has necessitated the institutionalarrangement like PDS more in order to balance the requirementof food and nutrition across different sections of thesociety. Even though money income has increased on anaverage the benefit has not yet reached to all the sections in thesociety and that also involves uncertainty for the future of thosebenefited temporarily unless production activities increasesustainably.Finally, it should be noted that here data were available upto 2001-02 only. If the recent past information is considered; itwill definitely reflect a further grey picture of food securityposition in the region. As of now, globalisation has not beenfound to be a great path towards the achievement of betterfood security in the absence of much focus on the industrialisationin the region.References and Additional Thinking• Anderson, K. (1994): “Food Price Policy in East Asia”, AsiaPacific Economic Literature, Vol. 8, No. 2, Pp. 15-30.• De U. K. (2000): “Food Security and PDS in Tripura: APolicy Intervention” Paper presented at the National LevelSeminar on Food, Nutrition and Food Security – PublicDistribution System in North-East India organised byNEICSSR from 27 th to 28 th , November, 2000.• De, U. K. (2003): “Economic Incentive and EnvironmentalManagement: A Study of Forestry in North-East India” in Z.Husain (ed) Environmental Issues in North-East India,Regency Publications, New Delhi, Pp. 170-188.• Dreze, J. and A. K. Sen (1995): India: Economic Developmentand Social Opportunity, Oxford University Press,Delhi.• FAO (1980): Conference 24 th Session, Evaluation of FoodSecurity Assistance Scheme, Rome, C 87/8-Sup 3.• George, P. S. (1999): “Some Reflections on Food Security inIndia”, Indian Journal of Agricultural Economics, Vol. 54,No.4, Oct.-Dec., Pp. 465-489.• Government of Kerala (1994): Eighth Five Year Plan1992-97: Final Outlay, Approved by the Planning Commission(Summary Feature), State Planning Board, Thiruvananthapuram.• Planning Commission, GOI (2001): National HumanDevelopment Report, 2001.• Singh, R. P. (1999): “Strategies for Rural Prosperity: SomePolicy Interventions”, Yojana, June, Pp. 12-17.• Suryanarayana (1999): “Poverty, Food Security and Levels ofLiving: Maharashtra”, Journal of Indian School of PoliticalEconomy, Vol. 11, No.1, January-March, pp.77-100.• World Bank (1986): Poverty and Hunger: Issues and Optionsfor Security in Developing Countries, (Washington D.C.,World Bank).(The views expressed in the write-up are personal and do not reflectthe official policy or position of the organization.)THE INDIA ECONOMY REVIEW109

E NERGY ECONOMICSIS LPG ASUSTAINABLECOOKING FUELFOR INDIA?A STUDY INMANAGERIALECONOMICSDebesh C PatraPh. D. (Petroleum Economics)Chief Manager (LPG),Bharat Petroleum Corporation, MumbaiIntroductionLPG is an item of cooking fuel for urban middle class Indianfamilies. Currently 55 percent of country’s household use LPGin their kitchens. The UPA-II Government at the Centre iscommitted to take this number up to 75 percent during nextfive years. This would essentially mean penetration of LPGinto rural areas and high growth in demand. Currently LPGfor domestic consumption is subsidized to the extent of 25%.20% of LPG consumed in the country is being imported.Under these conditions, market is supply driven and demandmay be unsustainable at some point. This paper attempts toexamine this issue.Demand for LPGIn 1965 the country consumed only 43 thousand metric ton(TMT) of LPG; 10 years later in 1975 it was a meager 281TMT against the level of 11,700 TMT in 2008-09. Consumptionof LPG literally boomed during 1980s at the rate of 19%per annum, primarily being boosted by availability fromnatural gas sources. During 1990s, LPG consumption grew at10% annual average rate, a spectacular growth, being boostedby: a) availability from natural gas (40%); and b) importedsource (20%). From 2000 onwards, during last eight years,consumption grew at annual average rate of seven percent;supply source supported by refinery production (57%), fromnatural gas condensation (24%) and balance (18%) fromimport. Despite growth in domestic refining throughput (146million in 2006-07) and high LPG yield from Crude (4.3%),LPG supply is becoming import intensive as import componentis as high as 21% (average of last decade).LPG is primarily used as a cooking fuel. Household sectorconsumes about 86% of total LPG consumed in the country;nine percent goes to commercial, industrial including manufacturingsector. By 1999-2000, 54 out of every 1,000 ruralhouseholds used LPG for cooking, which scaled up to 86households by 2004-05 and to 93 by 2005-06. In urban area,out of every 1,000 households, 571 used LPG as cooking fuelby 2005-06, which was 442 by 1999-2000. This shows that 39110 THE IIPM THINK TANK

F UELLING GROWTHhouseholds (per 1000) have adopted to LPG cooking duringlast six years in rural area, where as in urban area, the adoptionrate is 129 per 1000. The incremental adoption is proportionatelyhigher in rural area (72%) than in urban area (29%).Supply of LPGLPG is always seen to be in short supply. LPG is preferred fuelfrom health and environment points of view. 57% of urbanhouseholds pan India (2005-06) use LPG as cooking fuel. Instates like Punjab, Assam, Haryana, Madhya Pradesh andMaharashtra, it is above 65%.There is high degree of correlation between quantity of LPGconsumed and country’s national income (NNP at currentprice). The correlation coefficient is 0.9945 for 34 years(1974-2006). The coefficient was highest in 1990s (0.9959). Itwas low (0.9878) during 1980s and further low (0.9673) during2000s.Average household consumes 112 kg LPG per year. After2000, consumer base has been increasing at 11% per annumand supply is lagging behind. That is getting reflected inreduced consumption to 102kg per year during 2000s, from alevel of 114kg per year recorded during 1990s.Private final consumption expenditure on LPG in thecountry (Rs 18,625 crores in 2006-07) constitutes only 0.8% oftotal private consumption expenditure. Its annual growthslowed down from 2001-02 onwards to 13%, from level of 54%recorded in 2000-01 and 49% in 1993-94.• What are the challenges of marketing LPG in India, underthe given conditions?Demand for LPG: Long Term ProjectionCurrently 86% of demand for LPG emanates from householdsector. In the near term future, the same household sector willcontinue to remain the principal consuming segment; however,there will be increasing penetration into rural area. Inthe long term, demand will be generated from commercialapplication like auto LPG, cooking and heating requirementfrom hotels and hospitals, catering to high income clientele.LPG demand has been projected under three scenarios: a)Base Case, b) Most Likely Case, and c) Optimistic Case. ‘BaseCase’ is a conservative projection, where a subset of existingcustomers belonging to one (out of three) company is takenfor projection and its projected numbers are proportionatelyapplied for the whole Industry. The ‘Most Likely Case’ followsprojection done for the whole Industry. ‘Optimistic Case’takes into account more of auto LPG application and higheconomic growth scenario where more of commercial applicationof LPG will pull the LPG demand up.Methodology for Base Case2007-08 and 2008-09 has been taken as base year. Demandestimation for 2009-10 and 2010-11 has been done as perfollowing method:IssuesIn the light of demand and supply scenarioas presented above, economic and managerialissues that are to be studied are thefollowing:• How much will be the estimated demandfor LPG by 2015, taking into account: a)the expansionary policy stance of UPA IIGovernment; b) substitution of LPG byCNG; and c) substitution of liquid fuel byLPG.• How much of demand will be met byindigenous source and how much will beimported and whether the demand issustainable from the supply point ofview?Chart 1: LPG Consumption (1980/81 - 2008/09)Thousand ton1400012000100008000600040002000081Annual average growth• during 1980s = 19%• during 1990s = 11%• during 1980s = 7%83858789Lowest Growth @ 2.1% (05-06)Quantum jump @ 20% (1999-2000)91939597990103054% growthper annum55% of country's household is covered underLP Gas for cooking till now; By 2015, 75%planned to be covered0709THE INDIA ECONOMY REVIEW111

E NERGY ECONOMICSChart 2: Supply Sources Matching Most Likely Demand20181614121086420• Import is the balancing source• Globally supply is available.07-08 .08-09 .09-10 .10-11 .11-12 .12-13 .13-14 .14-15 .15-16Fractionators Refineries ImportTable 1: Demand Supply Balance (Figures in Million ton)07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16realistic assessment of:1. (i) Customer base, (ii) newconnection as per ‘Vision 2015’ ofGovernment of India, (iii) percapita consumption, (iv) ruralurban composition of customerpopulation, existing and conformingto ‘Vision 2015’ stipulation2. Rural and urban figure for eachstate has been aggregated for thetotal of state for domestic consumption.3. Non domestic consumption hasbeen considered to be 10% ofdomestic.4. All states have been aggregatedto arrive at all India figure.DemandBase Case 11.17 11.52 12.28 13.11 13.94 14.82 15.76 16.66 17.60 Projection till 2015-16Most Likely Case 11.16 12.08 12.80 13.57 14.38 15.25 16.16 17.13 18.16 Projection till 2015-16 has beenOptimistic Case 12.29 12.67 13.51 14.42 15.33 16.30 17.34 18.32 19.36 done on the basis of CARGSupplygrowth assumed for the followingFractionators 2.14 2.14 2.14 2.14 2.14 2.14 2.14 2.14 2.14 landmark period:Refineries 6.55 7.40 8.55 9.91 10.04 10.80 10.80 10.80 10.80 2011-12 to 2013-14Import 2.47 2.53 2.10 1.51 2.20 2.30 3.21 4.18 5.21 2014-15 to 2015-16Total Supply 11.16 12.08 12.80 13.57 14.38 15.25 16.16 17.13 18.16 Different growth assumptionsSource: Author's Own Calculationhave been applied for the ruraland urban segment of each state2009-10Newly enrolled customers of 70 lakhs have been apportionedacross the states in proportion to their distribution in 2008-09.Consumption of a particular state has been split into rural andfor the first two periods. These assumptions captures thegrowth potential, market forces like ingress of alternative gasand policy directives flowing from ‘Vision 2015’ of Governmentof India.urban on the basis of rural urban ratio of respective state.New enrolment for each state (rural and urban separately)has been added to the customer base of previous year. Totalcustomer of each state has been converted into consumptionnumber by applying the per capita consumption of that state,rural and urban separately.Methodology for Most Likely CaseThis is based on Industry approach, where assumed growth isapplied for the whole Industry for different years. The assumedgrowth rate for the year captures market potential andgovernment policy based on historical growth.2010-11Same method has been followed for estimating consumptionfor each state (rural and urban separately) by taking the newenrolment at 80 lakhs.Thus estimation for 2009-10 and 2010-11 has been done withMethodology for Optimistic CaseIn the ‘Optimistic Case’, consumption is assumed to be higherby 10% on the volume of ‘Base Case’. This high growth willemanate from the following sources:a) Higher per capital consumption in household segment than112 THE IIPM THINK TANK

F UELLING GROWTHassumed in the ‘Base Case’. It is assumed that per capitaconsumption of rural consumers will grow along with higherincome earned by average rural household in coming years.b) Auto LPG will make a difference, as more hybrid vehicleswill be manufactured and more and more auto LPGdispensing stations are provided by private marketers inupcoming metropolis.c) Optimistic Case primarily assumes a high commercialconsumption scenario based on high economic growth(double digit growth for next 10 years), leading to highcommercial application of LPG in hotels and hospitalsalong with the growth of real estate development and lifelevel from 2012-13 onwards. Production of LPG from fractionatorshas been assumed to remain same at the currentlevel of 2.1 million ton for the whole period. This assumptionis a limitation of the exercise; however, variation of supplyunder this heading will be counterbalanced by variation inimport. Import has been taken as the balancing supply source.The existing and planned import handling capacities till2010-11 will support the projected import volume till 2014-15.Beyond 2014-15, additional import facilities have to be builtup to match the demand. Supply has been balanced with the‘Most Likely Case’ demand projection. Deficit demand isassumed to be imported.style consumption.Demand for LPG under the three scenarios has beenprojected in the Table ‘Demand Supply Balance’.Global Availability of LPGLPG production has been rising in every region of the world.In 2007, global supply was about 229 million tons, up by 2.4%Supply SideLPG is known for its multi source availability and multi modaltransportation. These features make LPG a more dependablegas, vis-à-vis natural gas. LPG is produced as a stream ofrefinery yield; it is also produced from natural gas fractionationand it can be imported by ocean tankers. This makesavailability of LPG more flexible. LPG transportation can beoptimized by a suitable combination of road, rail, pipeline andocean tanker.from 2006 level. During 2000 to 2006, supply grew at averagetwo percent per year. LPG production and exports haveramped up, associated with higher crude oil and LNG productionrates. Because LPG is a byproduct of oil and gas, LPGproduction is unlikely to be reduced, despite a surge in supplyand probable reduction in LPG prices relative to crude.Natural gas processing continues to be the largest supplysource of LPG, accounting for nearly 60% of worldwideproduction during the last 10 years. A fundamental change inSupply of LPG has beenestimated from theproduction number of all Chart 3: Volatility in International Market - Integration with Indian Marketthe refineries till 2015-16.Each refinery LPG productionInternational Price Trend of LPGhas been put togetherin line with their expansionplan and new refinery1000900800capacity also has been700factored in. Two newPrice600refineries (Bhatinda information inNorth and Paradeep in 500internationalmarket isEast) production has beena complex400processadded from the year3002012-13 onwards. Known200expansion plan of otherrefineries has been takenApr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Marinto account till 2011-12,and maintained at that2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 5 yrs avg- Data for 2009-10 is up to 31st Dec. 09- LPG Price is Saudi Aram co CP based on 60:40 butane/propane ratioTHE INDIA ECONOMY REVIEW113

E NERGY ECONOMICSthe market will occur during the next few years as LPG isrecovered from LNG. Most propane and butane available inthe raw gas streams for LNG production will be separatedfrom the LNG upon liquefaction. The growth in LNG facilitiesaround the world will increase LPG production accordingly.LPG demand has also increased around the globe. Abouthalf of LPG demand comes from the residential-commercialmarket for heating and cooking. Within limits, base demandthat consists of residential-commercial demand and a significantfraction of other LPG demand is relatively insensitive toprice. Consequently, any LPG supply that exceeds this basedemand will need to be consumed by the more elastic demandcoming mainly from petrochemical plants or possibly storedfor later consumption when the market adjusts.The global LPG surplus is building even while crude oil andpetroleum product prices are strong. As a result, LPG pricerelationships have been affected. Global LPG markets areexperiencing high absolute LPG pricelevels, which are supported by highcrude oil and natural gas prices, butrecent LPG prices have also beenrelatively weak compared to crude.Markets for LPG substitutes such asethane, light naphtha and certain fuelsare also affected by changes in LPGsupply and pricing. For example, inJapan, Fuel Oil has traditionally been amore economical industrial fuel thanLPG. In recent years, however, LPG hasbeen the more economical industrial fuel except during peakseasonal LPG demand.Pricing IssuesDuring last six years, LPG prices have exhibited such highvolatility as was not seen earlier, as depicted in the figurebelow. Prices have oscillated between 300 USD per MT and800 USD per MT.Contrast to this volatility, domestic selling price of LPG hasremained more or less fixed, leading to un-recovered costbeing borne by the LPG marketing companies, which arefinanced by upstream companies and by the Government. Thesubsidy has made LPG business unattractive for privateplayers. Therefore, the business has largely remained in thedomain of public sector marketing companies. SubsidyCurrently LPGfor domesticconsumption issubsidized to theextent of 25% and55% of country’shousehold use itfinancing is a larger issue, involving financial health of oilmarketing companies in particular and country’s budget ingeneral.Subsidy Administration – A Managerial ChallengeLPG Market in India is characterized as:• Plural market (customers of all income classes coexist in ageographical unit); overlapping market segment; hard tosegregate geographical areas based on any parameter, be itincome, per-capita expenditure, family size, spending habitsetc.• Subsidized LPG has number of stakeholders (vestedinterests) across the distribution chain; it distorts the valuechain as a cylinder gets marketed to the end consumer;• A LPG cylinder is an item of low price and high significance;customer demands the item, does not pay for thevalue of it.• Market is largely concentrated inurban area and rural market is largelydisconnected and unviable at most of theplaces.• Generally there is no substitute toLPG as a domestic fuel in cities; but infew cities, piped natural gas (PNG) isemerging a substitute product.• Consumption is supply driven; highdemand at current price; there is tradeoff between volume and price; enoughvolume is not available at currentartificially low price level.Profile of an Indian LPG Consumer is:• Customer is a subscriber; he is not free to buy his productfrom any where; he is a directed customer. Most of the time,he enjoys it; but at times, he resents it.• LPG connection is mark of household identification; it is notmerely a commercial transaction; a connection in thehousehold has a legal status. It makes marketing a bitdifficult. (like a trade off between ‘hospitality’ and ‘security’)• Customer is price sensitive; (both as an individual and inpolitical sense); it restricts the freedom of the marketingcompany to recover the cost of marketing. It makes marketinga rationing job.• Customer feels unsecured; he has underlying fear that in a114 THE IIPM THINK TANK

F UELLING GROWTHRs. Per cylinderChart 4: Un-recovered Cost300250200150100500130.0262.2767.75Subsidy on Domestic LPGUnder recovenes to Oil companiesSubsidy from fiscal budgetTotal susidy to consumer134.7289.5445.18147.47124.89175.04178.66152.89 156.0822.58 22.58 22.58 22.58 22.58 22.582002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Apr-Sept'09(Prov.)• How is thisun-recoveredcostfinanced?• What arethe macroeconomicimpacts?situation of scarcity, he may not get a cylinder. The scarcitysyndrome has not got off the psych of Indian consumer.• Generally customers are not sensitive to safety; they do notappreciate that a cylinder is a pressurized vessel filled withexplosive gas.From a managerial perspective, marketing a product with dualpricing under the above stated market condition and consumerpsyche, is a complex job of serving the customer on the onehand and regulating his consumption on the other.ConclusionGrowing LPG market in India is constrained by supply. Supplyin the country is balanced by import from internationalmarket, where LPG is available for trading. However cost ofimported product is not getting recovered by the domesticselling price, as domestic selling price is a regulated price. Dueto larger interests like price stability, environmental protectionand social equity, selling price of LPG is subsidized. That hasrobbed the market its equilibrating mechanism. Therefore thehigh potential demand is not being supported by a flexiblesupply line.References and Additional Thinking• Chakraborty Atanu (2005) ‘Status of Gas in India’s FuelBasket’, Economic and Political Weekly, April 2 nd , 2005,pp. 1424 – 1427236.63214.05257.46234.88131.61109.03• Hart Walt, Ken Otto, Ron Gist and S. Craig Whitley(2007) ‘Global Markets Facing Adjustment to Surge inLPG Supply’, Oil & Gas Journal, June 18 th , 2007• Hart Walt, Ken Otto, Ron Gist and S. Craig Whitley(2008) ‘Global LPG Markets React to High Oil Prices’, Oil& Gas Journal, June 23 rd , 2008• Lal, Deepika (2007) ‘LPG Supply Crunch’ IndianInfrastructure, June, 2007, pp. 60 - 61• Patra, D.C. (2004) ‘Oil Industry in India: Problems andProspects in Post APM Era’, Mittal Publications, New Delhi• Patra, D.C. (2005) ‘How much Gas would India consumein 2050?’ Hydrocarbon Asia, March / April 2005, pp. 12-18• Patra, D.C. (2005) ‘LPG Subsidy in India 2005’, Oil Asia,International Edition, Vol. 25, No. 4, Jul-Aug. 2005. pp.46-54• Patra, D.C. (2006) ‘Retail Marketing of LPG: An EntrepreneurialView, with Special Reference to Mumbai’, inPATH, by Mathew Thomas (ed.) St. Francis Institute ofManagement and Research, Mumbai, pp. 203-213• Patra, D.C & Parag Diwan. (2008) ‘Where is Oil inNational Reforms?’ Excel Books, New Delhi• Patra, D.C. (2009) ‘Tariff on Petroleum Products: A Casefor Fiscal Consolidation in India’ in ‘Contemporary Issuesin Energy Sector’, Anand Neeraj (ed), TechnologyPublications, Dehradun• Patra, D.C. (2009) ‘LPG Marketing in India: A Trade offbetween Price & Volume – A Consumer’s Perspective’Reprints of technical papers in CD ROM by PETRO-TECH 2009• Petrofed (2005) ‘Fuelling India’s Growth: Past Trends andScenarios 2011-2012’, Petroleum Federation of India, NewDelhi• Petrofed (2005) ‘Fuelling India’s Growth: Vision 2030’,Petroleum Federation of India, New Delhi• Petrofed (2009) ‘Aspiring Change – Suggestions for 100day Agenda for Government for the Oil & Gas Sector’,Petroleum Federation of India, New Delhi• Sreenivas, Ashok, Girish Sant and Daljit Singh (2007)‘Emerging Issues in the Indian Gas Sector: A CriticalReview’, Economic and Political Weekly, August 25 th ,2007, pp. 3465 – 3474(The views expressed in the write-up are personal and do notreflect the official policy or position of the organization.)THE INDIA ECONOMY REVIEW115

E NVIRONMENTAL NMENTAECONOMICSE OMICSGandhianModel ForSustainableForestManagementIntroductionPlanet Earth was covered with diverse natural vegetation in anestimated area of six billion hectares 1 prior to the humandomestication of plant species and invention of agriculture. Onaccount of human habitation, urbanization and developmentin agriculture, industry and tertiary sectors, this pristine gift ofnature, called forest, is just reduced to about thrity per cent ofthe land surface of the Earth 2 . This resource is a heterogeneouscollection and this plays a vital role in maintaining theecological balance, in preserving soil fertility and in tamingclimates. These are the non-marketable services of forests.But, forests do supply a lot many harvestable products whichhave direct use value. In other words, they provide rawmaterials for a range of industries which contribute to thegrowth of a country. In addition, forests supply the essentialsfor the rural poor and support them in several ways 3 . It hardlyrequires any emphasis to say that the socio- cultural andeconomic benefits derived from forests enhance the quality oflife and sustain it for long.Destruction and degradation of forests is one of the majorenvironmental crises of the world today 4 . This has led to thespecies extinction worldwide 5 . Moreover, its negative impactcan be seen in the form of heavy soil erosion, greenhouseeffect, silting of rivers and dams, flooding, landslides, denudedupland, degraded watershed, and even destruction of corals11616THEIIPM I THINK TANK

G ANDHIAN AGOODO G. BhalachandranDepartment of Economics,Sri Sathya Sai University,Prasanthinilayam, Andhra Pradeshalong the coast.If one surveys the Indian forest scenario, the picture is notdifferent and quite depressing too. India’s forest cover accountsfor 21.02 per cent of the geographical area of thecountry 6 in 2009 with a marginal increase of 0.03 per centduring 2007-’09, which is, of course, far from the Government’srecommended resolution of 33.3 per cent 7 . The interstatedistribution of forests is also quite skewed 8 . The deforestationprocess, though started even before the British periodmainly to expand the agriculture, a large scale destruction offorests was recorded during the Colonial Rule on account ofits commercial policy in general and the owner ship policy inparticular. This impact continued even after Independence.Recently, the globalization and liberalization have workednegatively on the forest development. Precisely, the polarizationof development strategies in the reform- period, unplannedurbanization, mad consumerism and depressing trendin agricultural sector insensitively alienated the communitiesliving in the forests deprived them of their basic sources ofsurvival and made them refugees in their own land.At this juncture, Sustainable Forest Management (SFM) isrecommended as the remedy for the maladies. At the Sixthsession of UNFF, four global objectives 9 on forest managementwere spelt out. They are relevant to India as well in allrespects. They happen to be:(a) To reverse the loss of forest cover and increase the effortsto prevent forest degradation;(b) To enhance the multiple benefits derived from forests andimprove the livelihoods of forest-dependent people;(c) To increase the protected and other areas under SFM andthe proportion of forest products from sustainably managedforests and(d) To reverse the decline of official development assistanceand mobilize new and additional financial resources forSFM.SFM concept has its origin in the World Commission onForests and Sustainable Development, which was set up followingthe Earth Submit in Rio in 1992 10 . The Commission cameTHEINDIAIAECONOMY OREVIEWEW11717

E NVIRONMENTAL ECONOMICSout with its sets of recommendations to improve the life ofpeople who depend on forests for their livelihood. In addition,the Commission underscored the need to improve the ecologicalbalance by projecting the social importance of forests. Forthis purpose, it emphasized SFM as a plausible approach with aview to initiating bold political decisions and initiating new civilsociety institutions to bring in transparency and accountabilityin forest management. It takes into account some of theimportant human issues like that of improvement in livingconditions, social equity, poverty reductions, power relations,gender roles, etc. along with involving civil society and communitiesliving in forests in the process of decision making. Inshort, sustainability can be ensured in forest management onlyif government and forest communities work in unison with asense of participation and commitment. This was reiterated inthe Millennium Summit of United Nations Conference onEnvironment and Development (UNCED) in 2000 11 in additionto the fixing of quantitative andtime-bound targets coupled withensuring and securing forest communities’rights and accessibility to forestresources. This gave proper direction tomany countries to work on strengtheningthe process of forest governance and toimprove the living conditions of theirforest communities 12 .In essence, SFM must ensure ecological,economic and socio- culturalwell-being 13 . It is not out of context forone to dwell upon the concept of sustainability as it has to beproperly linked with forest management. This concept is verycomprehensive and at the same time it encompasses manyspheres of activity related to human life with the support ofNature. This implies a pattern of development which ensureswelfare to the present generation along with an assurance tothe future generation that their life would be as comfortableas that of present generation 14 . When one thinks of SustainableForest Management, especially with reference to India,the socio- economic, political, cultural, geographical andclimatic factors are to be considered in addition to thehistorical developments that had influenced the people,governance and practices in the country. These factors mustbe considered when a theoretical frame work is designed forthis concept. In this study, an attempt is made to provide aResearch literaturepoints that thesustainable forestmanagementwas ingrained inthe way of life ofancient Indiasimple, but an enduring theoretical structure drawn fromMahatma Gandhi’s Model of Sustainable Development whichis idealistic and at the same time practical in several respectsin the present context.Forest Management in Ancient IndiaA survey on Forest Management in Ancient India is useful inthis context not only to admire the ancients’ forethought andwisdom on forestry but to pick up the thread from them toinitiate a sustainable and at the same time, long lasting andpractical approach in Forest Management in India. Theavailable literature on ancient Indians’ approach to ForestManagement reveals that sustainable forest management wasingrained in the way of life of ancient India. The main reasonfor this was that forests had played an influential role inshaping their social, political, economic and cultural life 15 andhence they integrated them in their regular course of life.Even during the Vedic period (4500-1800 BC), productive and protectiveaspects of forests were emphasized 16 . Inthe latter Vedic period (1000- 500 BC),Aranyakas (work on forests), Upanisads(especially Brahadaranyaka Upanisad),Smrities, etc. contain wealth of informationon the use and management offorests. To be precise, each village thenwas attached to a forest 17 . The conceptof Participatory Forest Management wasin vogue and village committeesmanaged and maintained forests. Moreover, agriculturebecame a dominant economic activity during this period. As aresult, concept of cultural landscapes promoting sacredforests and groves, sacred corridors, ethno- forestry practices,etc. was developed 18 .The Himalayas was the treasure house of medicinal plantsduring the Vedic period. This practice was prevalent evenduring Emperor Asoka’s time 19 ( 273-232 BC). This led tothe practice of growing medicinal plants at residentialdwellings by assigning sanctity to them 20 . This practice iscontinued even today in many parts of this country. Inessence, Religion in Ancient India was more to promotesustainable practices by protecting environment and attuningeach one’s life to the Nature.One can observe here that the environmental conscious-118 THE IIPM THINK TANK

G ANDHIAN GOODness in Ancient India was holistic in approach and it camefrom the Upanishads’ Gospel, Vasudhaiva Kutumbakam,which proclaims that all beings of the entire universe belongto one family 21 .Arthasastra (the end of the Fourth Century BC.) 22 , anauthentic treatise on the socio- economic, political, environmentaland cultural aspects of the Mauryan period, has anelaborate discussion on forestry and its management. Itsapproach in this regard, is the direct assimilation of thewisdom and practices prevailed in ancient India and adoptingthem for sustainable development 23 . Kautilya, the author of thismaster- piece, pinned the responsibility of protecting, preservingand conserving forests with the State 24 in a plannedmanner 25 . In addition, he wanted this to go with well designeddwellings in a scintillating environment 26 . He expected thatevery citizen must have a sense of belonging 27 and commitmentin society for realizing the goal of total welfare with thesupport of the State. At the same time, he did not want tospare the rod in the case of defaulters 28 . When he dwelt uponthe disaster of many kinds, he preferred prevention to cure 29 .In essence, Kautilya wanted to instill the faith and awarenessin every individual that he/ she was a part of the Whole and hewanted the activities of individuals/ society/ State to beregulated in such a way that the development of economy is aharmonious and integrated one with the support of the Nature.If one looks at the problems of environment and morespecifically of forests of today, they are several folds larger/severe/ complicated than that of those in Kautilyan period.Then, the approach to the present crisis must be deeper with abetter sense of understanding, commitment and coordinatedefforts. This cannot be achieved overnight. For this, a selflessdirection with avowed objectives through a planned mechanismsuitable to the people in the modern context is called for.This study notes that the Ancients in India were successfulin bringing sustainability in forest management because it hada strong theoretical background, of course unwritten, butassimilated in practice and adopted as a way of life. This canbe termed Ancient Indian Model of Sustainable Development30 . The Ancients in India used the concept, Dharma,which includes both the means and end in itself 31 , to refer tothe concept of Sustainable Development (SD). This word, whichhas been in vogue from time immemorial in India, has noequivalent in any other tongue. But, it encompasses andsynthesizes all the healthy, lofty, profound practices that theconcept of SD stands for. Moreover, this concept was used as atouch-stone 32 in thought, word and deed and hence, it was easyfor any one in Ancient India to weigh the pros and cons ofevery one of his/ her actions and choose only those actions thatwould produce welfare. For this, every individual requires aconstant training from cradle to tomb. Indian Culture, whichsurvives in its prop-roots and practiced sporadically today inmany parts of India and elsewhere, vouches for this. Many ofthe nationalists in India, including the Father of the Nation,Mahatma Gandhi, who had their deep-roots in Indian wisdom,derived inspiration and found solutions to their problems theyfaced during the British Rule by translating the directives ofthe Ancients of India into practice. One can find the silverlining in dark clouds that the tool-box of ancient Indianwisdom would never let us down when the country faces crisisof any kind. Needless to say that the strategies of developmentadopted in India and elsewhere in the modern time arewanting in quality and application.Critical Review of Forest Management in India:Forestry in India is the second major land use productiveactivity, after agriculture. It is estimated that India has 2.5 percent of the world’s geographic area and 1.8 per cent of theworld’s forests. Forestry contributes 1.7 per cent of India’sNational Income 33 . Moreover, one ha of forest plantation cancreate 630 man-days of employment. According to the IndiaState of Forest Report- 2009 34 , (Table 1) forest and tree cover ofthe country happened to be 78.37 m.ha in 2007, which was23.84 per cent of the geographical area. It includes 21.02 percent forest cover and 2.82 tree cover. The decadal increase i.e.,between 1997 and 2007 was 3.13 m.ha.(4.75 per cent). Theincrease in forest cover in hill and tribal districts stood at66,300 ha and 69,000 ha respectively compared with theprevious assessment in 2005-‘06. The seven north- easternstates of India had nearly one fourth of country’s forest cover.This region gained 59,800 ha of forest cover in the two year’stime. Almost, 97 per cent of forest cover is owned and maintainedby the Government of India 35 . It is an established factthat India, which is a rural biased economy, has over 1.7 lakhvillages with a total population of 200 million are located inthe vicinity of forests.The forest cover assessed was classified into four canopydensity classes:(a) Very dense forest (VDR) – more than 70 per cent.THE INDIA ECONOMY REVIEW119

E NVIRONMENTAL ECONOMICS(b) Moderately dense forest (MDF) – 40 to 70 per cent.(c) Open forest (OF) – 10 to 40 per cent.(d) Shrub, which is classified as degraded forest, had a canopydensity less than 10 per cent.One could see the inter-state variations in the incrementprocess of the forest cover. While some states like Jharkhand,Manipur, Mizoram, Meghalaya, gained more than 0.5 percent forest cover, states like Haryana, Tripura and Nagalandhad lost more than 0.5 per cent forest cover during theassessment period.This report succinctly points out that the Government’sprogressive national forestry legislations and policies in Indiasupported conservation and sustainable management offorests in the last two decades and transformed India’s forestsinto a significant net sink of CO 2. It is estimated that the CO 2absorption by India’s forest and tree cover is right now enoughto neutralize the 11.25 per cent of India’s total green house gas(GHG) emissions. In other words, India’s forest and tree coveris a main mode of carbon mitigation for India 36 .The Thirteenth Finance Commission (TFC) was asked in itsterms of reference 37 by the President of India to consider theneed to manage ecology, environment and climate changeconsistent with SD while making its recommendations. It is tobe noted that environment was explicitly made an importantarea of study in the federal mechanism for the first timekeeping in view the value of India’s forest and tree cover as anational asset.Table: 1: Forest and Tree Cover in 2007ClassForest CoverArea(million ha)% ofGeographic Area• VDF 8.35 2.54• MDF 31.90 9.71• OF 28.84 8.77Total Forest Cover 69.09 21.02Tree 1 Cover 9.28 2.82Total Forest & Tree Cover 78.37 23.84Scrub 4.15 1.26Other Non-forest 246.21 74.90Total Geographical Area 328.73 100.001Tree cover is defined as tree patches less than 1 hectare with canopy density above10%Source: India State of Forest Report- 2009, p.6.It is to be noted that a majority of Indian populationdepends on forests directly for its fuel 38 , sustenance 39 , fodderfor its cattle 40 , timber for its construction, medicine for itshealth 41 , etc. On account of the change in the consumptionpattern at home and in abroad, demand- supply gap of forestproduce has emerged. The fuel- timber ratio remains at 7: 3. Itis to say that forests in India have to put up with five timesmore pressure 42 which is certainly abortive. This has led to anover exploitation of the forest resources and resulted indeforestation. With a view to containing this, the Governmentof India initiated, a strategy, under the banner of the NationalCommission on Agriculture, to use forest lands for thecommercial production of timber and a massive drive onsocial forestry programme in unused fallow lands for the ruralpopulation to meet their timber, fuel and fodder requirements.It was an old practice in new vigor to make the villageadministration and people to conserve and judiciously use thenatural resources around. This scheme was put forth in thenames of farm- forestry, community forestry, extensionforestry and agro-forestry. This picked up well at an averagerise in the coverage of one million hectares per year. However,this project had not yielded the desired results since thepeople continued to mount their pressure on forests and forestdegradation could not be mitigated as desired. In addition, theconflicts between the forest communities and the forestofficials posed severe problems.Knowing full well of the need to have a revamped forestpolicy in tune with the major shift towards a more centralizedand people oriented forestry in many parts of the world 43 , theGovernment of India introduced Joint Forest Management(JFM) programme in 1988 with a view to giving emphasis toconservation and meeting the demands of forest communitiesby keeping revenue generation as a secondary objective. It wasrealized that any programme on forest management would besuccessful only if the forest communities are the directbeneficiaries. Under this programme, it is mandatory for theforest department and the forest communities to enter into anagreement to jointly protect and manage the forest lands inwhich these communities have accessibility and share benefitsthey accrue. The village community is expected to be representedby a committee 44 (commonly known as Forest ProtectionCommittee) nominated for this purpose. Moreover, each stateis privileged to have one’s own resolution to accommodate thelocal needs. This initiative has led to a better accessibility and120 THE IIPM THINK TANK

G ANDHIAN GOODcontrol on forest resources for the forest communities thusmaking them more committed towards rehabilitation andextension of forests. This is the first step towards SFM in India.According to the JFM cell, Ministry of Environment andForests (MEF), this programme has been extended to 22 percent of country’s forest land, covering 17.33m ha of India’sforest area 45 through 84,642 JFM committees up until 2003 46 .The MEF has also initiated a project entitled, National ForestProgramme- India (NFP) under the aegis of National ForestPolicy and it has very well accepted the JFM programme as apart and parcel of it and projected a target of 33 per cent offorest- tree cover for India by 2020 47 . It has to be noted thatthere are many state- sponsored organizations and NGOsincluding women- self- help groups, which have also beeninvolved in the participatory management of forests at presentalong with the JFMP.This programme is credited with many positive impacts.They happen to be,a) It has brought the forest officials andforest communities closer to work fora common goal 48 .b) This coordinated effort has reallyimproved the conditions of forests 49 .c) Reduction in encroachment orwithdrawal from encroached areas isobserved 50 .d) There is an increase in the income offorest communities since severalexternal assisted projects have offered employments 51 .e) This has led to an increase in the involvement of manyNGOs in the forest- sector although there is significantvariation from state to state.But, there are several issues related to this programmewhich have to be critically looked into. They are:a) Many intra- community conflicts have emanated in manyparts of the country on account of unequal distribution ofcost- benefits observed in several pockets under JFM 52 . Thiswas not foreseen when this programme was initiated. This isquite depressing.b) In a programme of this kind, where large amount of fundsare poured in through several projects, transparency atevery stage is expected. But, this was in stake in severalplaces that led to untoward incidences 53 .c) From time immemorial, there have been several thousandsThe Forestcommunities findit worth while tohave a share inNTFPS than evenin timber underJFM programmeof village communities who own and manage forests inseveral parts of the country 54 wherein JFM would be a fifthwheel in the coach.d) Normally, JFM is extended to degraded forests (crowncover less than 25 per cent). Forest communities in highcrown cover area are not benefited.e) Of late, JFM programme has become a project- driven one.This has resulted in skewed development within a forestarea since a project could cover only a portion of a forestjurisdiction. Moreover, after the completion of a project, itis not sustained 55 .f) Forest communities find it worth while to have a share inNTFPS than even in timber under JFM programme. But aclear policy measure has not come out of the state governments56 .g) The forest community is entitled to have only 20 per cent ofthe revenue accrued annually 57 which is believed to be onthe lower side. There is no viable modelfor JFM, adaptable to the localneeds.h) JFM programme is not properlylinked with market. As a result, thesupply of forest products is ill- organizedand their demand is notproperly tuned 58 .i) Corporate sector has not been drawninto JFM programme. If due placeis given to them, they would besupportive in production, processing and marketing.j) There is no proper legal backing in this programme. It waspushed through by issuing an administrative order in manystates. So it is not properly focused in the States’ plan.k) Panchayats are not legally linked with this programme. Thiswill not only strengthen the activities of JFM programmebut also support the forest communities involved throughgovernments’ welfare measures 59 .l) A macro outlook of this programme is lacking.m) Several national and international agencies have beendrawn into this programme. But it lacks proper channelization.In short, one can find that the Forest Management Programmein India lacks a sound theoretical base and a vision forthe future. If one examines the cause for this, It is due to thefact that it is not properly linked to the country’s developmentTHE INDIA ECONOMY REVIEW121

E NVIRONMENTAL ECONOMICSstrategy. But the pity is that the country is yet to choose a pathof development that is of her own and at the same timesustainable and conducive to her people, their attitudes andliving conditions. China and East Asian countries feel proudto declare that their development strategies owe their origin tothe Confucian Ethics 60 and they are even patenting them. Ithardly requires any over emphasize that Mahatma Gandhihappened to be the binding force in India’s past, present andfuture through his stature, contribution, dedication andexemplified life. He proved through his life that what he taughtcould be practiced with no special effort. More over, he couldprophesize the ills that would befall on this country and haddesigned a model of development for this country to emergegreat, grand and glorious for ever. This study attempts topresent his model of SD as the befitting theoretical back groundfor the sustainable forest management programme the countryproposes to have.Gandhian Model of SustainableDevelopmentMahatma Gandhi had his roots deeplysoaked in the Ancient Indian Philosophy61 . Though he was not an economistby profession, he had a total grip on thesocio- economic, political and culturalproblems that India faced during thepre- Independence days, on account ofseries of invasions she suffered overcenturies and the wrath of subjugationfrom the British. The model of sustainable development that hedesigned at that time was to grant Purna Swaraj 62 or to ensurea better quality of life to the people of his country. His modelthat he outlined 1930s had interwoven several concepts neededin his angle for the reconstruction of India.First, one must be aware that this model presupposes thespread of a certain set of attitudes to economic life andeconomic action 63 and these attitudes themselves will lead foreconomic progress. It is a rare combination of idealism mixedwith practical approach. Above all, it was time- tested in thesense that Gandhiji himself proved the success of his model inhis personal life. His model is verily an alternate to individualismand socialism. In essence, his model promotes the conceptthat an individual or a society can improve his/ her or itsquality of life only through collaboration and co-operation. It isBlind use ofmachines andtechnologicaldevelopmentwould destroythe value-systemcherished in Indiathe duty of society to inculcate these values through trainingand practice 64 . He wanted the required institutional structureand the instruments for economic reconstruction to be workedout through a planned approach from below.It is a wide spread belief even today that poverty in less- developedcountries (LDCs) is due to the inadequate modernizationof their economic system. Gandhiji asserted that thepoverty in these economies was due to the direct result of theexcessive and indiscriminate preference for technical modernizationin advanced countries 65 . This startling paradox is the keyto the analytical treatment of the Gandhian model. Hispremise has life even at present when the concept of globalization,which the advanced countries have pushed through inLDCs with a selfish motive in its back-drop, is claimed to be afailure, according to the Nobel laureate, J. E. Stiglitz, from thepoint of view of development perspective 66 .Indian economy which has adopted incrementalizmbordering on stagnation as its dominantdevelopment strategy 67 has no doubtproduced impressive results in differentspheres during its plan- period. But, ifquality deflators are applied, itsachievements seem to be gloomy. Inother words, the managers of thecountry are unable to sustain itsdevelopment process in totality.Gandhiji’s fundamental question whichis considered as a bench- mark todetermine the viability of progresshappens to be, does moral progress increase in the sameproportion as material progress? 68 . The short point is thatGandhiji linked SD with the improvement in the quality oflife, which is a buzz-word today.When Gandhiji wrote his manifesto entitled, Hind Swaraj orIndian Home Rule 69 , way back in 1908, India was under the gripof the materialistic and the cultural influence of the west. Atthe same time, the teachings of Swami Dayanand Saraswathi,Swami Vivekananda, Bladavasky, etc. had sown the seeds ofthe Indian Renaissance. The Indian National Congress, whichled the freedom movement in the country, had nurtured twoapproaches to the future constitutional set-up for the country,in the beginning of the 20 th century. One was supported byGopalakrishna Gokhale and his followers, which believed inthe Parliamentary form of government practiced in England 70 .122 THE IIPM THINK TANK

G ANDHIAN GOODThe other was propounded by Bipin Chandra Pal and hissupporters which wanted a village to be the primary basic unitof governing system for the country 71 . Gandhiji was convincedof the latter’s view and converged the national opinion towardsthe village Swaraj. His purpose then was to reestablish the lostcivilization by promoting mutual co-operation, simple livingand high thinking and the force of love 72 to envelope thethought, word and deed. The Mahatma was emphatic to saythat Indians were the inheritors of rural civilization 73 . In hisopinion, it could neither be uprooted nor substituted by anurban civilization. He dreamt that by removing the ills in thepresent village system and equipping the village communitiesfor self- governance with minimum external interference 74 ,village swaraj could become a reality. One has to pick up thethread to argue that this concept should be the strong basis forsustainable forest management in India.Gandhiji analyzed the negative effect of the British industrialismon the development of the Indian Economy in thelong-run. He understood that it was based on three weakpremises: unabated wants- growing use of complicatedmachines- wrong method of distribution. This resulted in thematerial comfort of a few; unrest in the rest of the economyand above all, total negation of moral progress. Gandhiansolution to this was born out of his own philosophy of life 75 . Herealized that the blind use of machines and technologicaldevelopment would destroy the value- system cherished in thecountry. He was in favor of production by masses in the placeof the modern craze for mass production. He understood thatthe problem of Indian’s economic development is not merelyone of growth but also of rehabilitation and arresting of theinfluence of shocks. Above all, his interest was more on adecentralization of productive activities and an integration ofrural and urban economies to ensure orderly productionaccording to needs. This concept was much lauded by economistslike G.D.H. Cole 76 .The village Swaraj model is to antidote the wide spreadabject poverty prevalent in villages. The Mahatma was clearthat to the hungry millions, their God was bread 77 . From thisone can infer that his primary consideration was man and hiswell being. More over, one could find in his writings that hewelcomed labor- saving and employment – generating machines.He believed that such a venture could drive awayIndia’s pauperism and idleness 78 and pave the way for self- sufficiencyand self-reliance.In essence, the Gandhian Model of Sustainable Developmenthas potentialities for social reconstruction for perennialsocial and human progress locally, nationally and globally 79 . Inother words, it is a non- materialistic, non- violent, harmonistic,egalitarian and value- driven model.The unlimited growth model of the western economists hassupported the maximization of utility and profit and thusencouraged irresponsible and continuous exploitation ofnatural resources and environment beyond the threshold ofresilience of the eco- system 80 . This has resulted in an unsustainabledevelopment process. Gandhiji’s model is verysensitive to this issue. It calls for an effective resource managementby having a check on the pace of development, rate ofconsumption and restraint over insatiable demand for goodsand services 81 . This model is against the over exploitation ofresources, disruption of ecological balance and deteriorationof environment since these are considered as a form ofviolence .It is convinced that the all pervasive greed that isprevalent in every sphere of activity prompted by homooeconomicus 82 approach of modern man is the basic cause ofall crises the humanity encounters today. Gandhiji wanted thateconomics must have its roots in ethics 83 and his philosophy ofSarvodaya, the welfare for all, aimed at the overall developmentof every individual, which he called, the micro unit ofdevelopment 84 .In the past, the industrial development in India was a partand parcel of her proud heritage. During the British time, itreceived a death blow. It was a pathetic story of intriguesexploitation and day light plunder. Physical brutalities werealso perpetuated by the British rulers on Indian weavers andartisans of extra-ordinary dexterity, unheard in human history,with the sole purpose of delinking them from their ancestraltraining and support from local rulers. This pained Gandhiji alot and he ingrained rural industrialization as the axis of hismodel. He wanted the village and cottage industries, maintainedby the village communities, to co-exist with heavyindustries in urban areas 85 . It is more to ensure zero structuralunemployment. He visualized that the decentralization ofproduction would lead to decentralization of economic andpolitical power, paving the way for a classless, unexploited,egalitarian society 86 .In egalitarian society, ensuring economic equality is thepre- condition. In the gamut of non- violent model, Gandhijiprescribed trustee-ship as a plausible remedy to achieve thisTHE INDIA ECONOMY REVIEW123

E NVIRONMENTAL ECONOMICSgoal. By trustee- ship, he meant that people, who possesswealth of any kind, may be material wealth or gift of God, musthold it as its trustee for the welfare of mankind. By caring andsharing, one’s human dignity gets elevated, he stressed.Gandhiji was inspired by the dictum of Ishavasyopanishad andhe was convinced that wealth in the hands of a few was unjust.In other words, this concept is based on the Law of Non- possession87 .This study feels that this simple model has a universalmessage. Gandhiji’s much cherished symbol, the SpinningWheel (Charkha), aptly represents his vision and sustainablemodel of development. No doubt, this wheel is for the weal ofhumanity, upholding the dignity of labour. The strong woodenbase of the Spinning Wheel denotes the well structured societywithout which no development is possible. The giant wheelrepresents life, full of dynamism. The pole- stands that holdthe wheel and facilitate its rotation are to connote two basichuman values, Sathya (Truth) and Santhi (Peace).The handlethat propels the wheel is the chosen activity, properly plannedand executed. The axis of the wheel affirms that Dharma(righteousness) is the basis of all purusharthas (the aims of life,according to the ancients of India) and the spokes of the wheelindicate togetherness (collaboration and co-operation neededfor the promotion of high quality of life). The activating threadconnecting the wheel and the spindle represents the force oflove, revealed through the sense of belonging. The groove onwhich the thread runs, symbolizes non- violence. The spindle inCharkha exhibits simple living and high thinking. The yarnproduced is the out come of all the efforts undertaken i.e.,welfare of society.Gandhian Model of Susutainable Development andForest Management in IndiaGandhiji felt that his mission was not merely securing freedomfor India, but more to ensure equal rights for every one 88 . Heconsidered himself as a humble servant of humanity 89 . Hisconcept of Swaraja was born out of him with the objective ofuplifting the downtrodden. His concern for the forest tribes wasspecial which fructified into the establishment of All IndiaAdim Jati Seva Sangh at the first instance and several organizationsunder the stewardship of Thakkar Bappa to work for thebenefit of forest communities 90 with the support of thousandsof volunteers later. Many NGOs too were inspired and joinedin this venture. Later, Kadhi and Village Industries (KVI)took a leading part in establishing the link between tribal andurban communities for a mutual support. When the Kadhi andVillage Industries Commission (KVIC) were established in1961, many programmes were charted out for the uplift offorest- dwellers. The National Forest Policy- 1988 initiated theJFMP which is controlled and regulated by MEF.How does the Gandhian Model work as a theoretical basefor the sustainable forest management?• JFMP is a joint venture between the government and forestcommunities. Trust and co-operation must guide them forbetter results. The leader of the programme must be trainedto be selfless and committed to the welfare of the community.• Government might be the owner of the forest wealth. But, itmust act as a facilitator in the case of the functioning ofJFMP.• Each one in this programme must be trained in the Gandhianprinciples and live harmoniously.• Village reconstruction works must be undertaken by theforest officials and each forest village must be self- containedand self- sufficient.• Village Swaraj concept must be made a reality and selfgovernance must give confidence and support to remove thebottlenecks of any kind in the path of development of forestcommunity.• If these communities are strong in their values, externalitiesand shock variables dare not to enter and dissuade theirfaith and misguide them.• These communities can be trained in modern techniquesand modes of production; but, they should see that none isunemployed.• It is suggested that these communities could have their ownco-operatives for marketing so that the link with theconsumers be direct and the income earned would berelatively larger.• Any project accepted by the community must go with theirlife- style and functioning of the community. The independenceor the identity of these communities need not besacrificed at any cost.• There must be a legal sanction of this model for JFMP togain value among the forest communities to come forwardand organize themselves for their benefit and growth.• It will be highly desirable if the Centre could design thisprogramme, implement and monitor it for the sake ofuniformity.124 THE IIPM THINK TANK

G ANDHIAN GOOD• Any support from external agencies could be properlyweighed and canalized for effective results.ConclusionThe attempt made in this paper is to show that new vistas canbe opened if one thinks of a remedy for the maladies of forestmanagement. There might have been some difficulties encounteredwhen someone attempted this model in a community. Itis not due to the deficiencies in the model. It is certainly due tothe deficiencies in the understanding and implementation ofthis model. One cannot ignore the success of the OperationFlood programme in this country which is based on this model.To be precise, each one in this programme must think that he/she is a Gandhi and implements it with faith. Old habits diehard. If these communities are grooved in certain unhealthytradition and approach, it would take some time to get rid ofthem and get convinced about this model and accept it for theirbenefit. Above all, this model took birth in this soil and practiced.There is no way for this model to be unsuccessful andmisleading at any time. It is up to the stakeholders to see thatthis is workable, contributive, beneficiary and elevating.End-notes and Additional Thinking1Ramprasad Sengupta, (2002), Ecology and Economics: AnApproach to Sustainable Development, Oxford, NewDelhi, p. 157.2B.C. Field, (2001), Natural Resource Economics- AnIntroduction, McGraw Hill, New York, p. 222.3It is estimated that approximately 60 million indigenouspeople are almost wholly dependent on forests in theworld. See, CBD, (2010), Sustainable Forest Management:Biodiversity and Livelihoods, IUCN, Montrea, p. 3.4Everyday at least 80,000 acres of forest vanish from Earth.See, www.articleonramp.com, site visited on January 27 th ,2010.5In 20 th Century alone, nearly two million species becameextinct. See,en.wikipedia.org/wiki/Holocene_extinction, sitevisited on January 27 th , 2010.6See, timesofindia.indiatimes.com dated December 1 st , 2009,site visited on January 27 th , 2010.7This happens to be the desirable norm of FAO too, quotedin K.T.Acharya, (1985), Integrating Forestry with HumanNeeds, Institute of Rural Management, Anand,p. 2.8FSI, (2003), State of Forest Report-2003, Forest Survey ofIndia, p. 13.9Peter Csoka,(2008), International Symposium on SustainableForest Management, UNFF Secretariat, Beijing, p.2.10Subhabrata Palit,(2006), Sustainable Management ofForest, in Chandreyee Das and Dipankar Ghosh, (ed.),(2006), Eye on Development, Sampark, Kolkata, p. 144.11See, http://www.un.org/millennium/declaration/ares552e.htmSite visited on February 9 th , 2010.12See, Ahuja Chopra and Shivanji Sharma, (2008), ForestManagement in India, Legal Service India.com, Site visitedon February 9 th , 2010.13See,Tajbar S. Rawat, B.L. Menaria ,D. Dugaya and P.C.Kotwal, (2008), Sustainable Forest Management in India,Current Science, Vol. 94, No. 8, April 25 th , 2008.14Michael P. Todaro, (2000), Economic Development, 7ed.Addision- Wesley, Delhi, p. 766.15Arjun Das, (1986), Economic Philosophy of Ancient India,Agam Kala Prakashan, Delhi, p.30.16B. M. Kumar, (2008), Forestry in Ancient India: SomeLiterary Evidences on Productive and Protective Aspects,Asian Agri- History, Vol. 12, No. 4, p.299.17R. Prime, (2002), Vedic Ecology: Practical Wisdom ForSurviving the 21 st Century, Mandala Publishing Group,Novata, California, USA., p.157.18D.N. Pandey, (1998), Ethno-forestry: Local Knowledge forSustainable Forestry and Livelihood Security, Himansu/AFN, New Delhi, p. 91.19See, http://www.cs.colostate.edu20This practice had its beginning even during the Indus- Valleycivilization (3000- 1700 BC).See, B. M.Kumar, (2008),op.cit., p.304.21See, Mahaupanisad, Chapter 6, verse 72.22R.P. Kangle, (1986), The Kautiliya Arthasastra, MotilalBanarsidass, Delhi, p.59.23See, M.B. Chande, (2004), Kautilyan Arthasastra, Atlantic,New Delhi,p. 5.24Arthsastra, 2.2.5.25ibid., 2.1.39, 2.2.4, and 2.2.5.26ibid. 2.4.1.27Ibid., 2.36.15 and 4.3.8.28ibid., 4.10.4 and 5.29ibid., 4.3.6 and 7.30See, G.Bhalachandran, (2004), Ancient Indian Model ofSustainable Development, Proceedings of the All IndiaTHE INDIA ECONOMY REVIEW125

E NVIRONMENTAL ECONOMICSEconomics Conference of Indian Economic Association,Varanasi. (Unpublished)31See, R.P. Kangle, (1986), op.cit., p.69.32See, G.Bhalachandran, (2011), Kautilya’s Model ofSustainable Development, Humanomics, Vol. 27: 2(Accepted for publication)33R.M.Singhal , Sudhir Kumar and V Jheera, (2003), Forestaand Forest Research in India, Tropical Ecology, 44(1): p.57.34See, Forest Survey of India and Ministry of Environmentand Forest, India State of Forest Report-2009, Governmentof India,35Sushil Saigal, (2001), Joint Forest Management: A Decadeand Beyond, www.rupfor.org , Site visited on February 1 st ,2010.36ibid., p.8.37See, fincomindia.nic.in site visited on February 13 th , 2010.38In India, 70 per cent of rural and 50 per cent of urbanpopulation use fire-wood as fuel. In other words, 40 percent of energy requirements in India are met ny forests. Forthis purpose, 131 mmt of wood is cut from forests. See,Sushil Saigal, (2001), p.239(a) Many landless families and marginal farmers aroundforests depend on forests for their sustenance. See, M.Ahmed, (1997), In Depth Country Study –India. Asia – PacificForestry Sector Outlook Study. Working paper No.APFSOS/WP.26.Food and Agriculture Organization ofthe United Nations (FAO). Rome/ Bangkok, October 1997.(b) As per an estimate made in West Bengal, an averageincome of Rs. 2270/- per ha in a year from NWFPs couldbe earned. See, R.M.Singhal , Sudhir Kumar and VJheera, (2003), p. 57.40India has the world’s largest livestock population of 1.3 b,according to the 18 th Livestock Census- 2009, of which 25per cent depend on forest for fodder and grazing. See,en.wikipedia.org Site visited on February 13 th , 2010.41The herbal medicines prepared and used in India are from8200 species of medicinal plants from forests.See,R.M.Singhal , Sudhir Kumar and V Jheera, (2003), p. 59.42R.M.Singhal , Sudhir Kumar and V Jheera, (2003), p.58.43In the Asia- Pacific region, community based forestmanagement programme is widely practiced. See,RamPrasad, Forest Management, Extension Digest, www.manage.gov.in p.1 Site visited on January 28 th , 2010.44These communities prefer to call themselves by specificnames to create an identity for each one of them. See,Sushil Saigal, (2001), op.cit.45The area covered under JFM can be compared with that ofunder National Parks and Sanctuaries (15.60 mh). See,Sushil Saigal, (2002), Regenerating India’s Forests, TheDeccan Herald, dated March 26 th , 2002.46N.H. Ravindranath and P. Sudha (ed.), (2004), Joint ForestManagement in India: Spread, Performance and Impact,University Press, quoted by Subhabrata Palit, (2006),Sustainable Management of Forests, in Chandreyee Dasand Dipankar Ghosh, (ed.) (2006), Eye on Development,Sampark, Kolkata, p. 144.47See, Ram Prasad, Forest Management, Extension Digest,www.manage.gov.in p.3. Site visited on January 28 th , 2010.48For instance, in Andhra Pradesh, 20987 training campswere organized in two decades period. See, S.D. Mukherjee,(2001), Status of JFM in Andhra Pradesh. Draft paperprepared for a book on Joint Forest Management byCommonwealth Forestry Association (India Chapter) incollaboration with Winrock International India and FordFoundation, New Delhi.49See,A. Ghose, (2001), ibid.50See, S.D. Mukherjee, (2001), ibid.51In Gujarat, the Nisana village has registered an increase inmilk production from 40000 litres to two lakhs litres. See,P.Khanna, and J.Prasad, (2001), ibid.52See, Sushil Saigal, (2001), op.cit., p.6.53See, Samatha and CRYNet. (2001), Joint Forest Management- A Critique Based on People's Perspectives, (Unpublished).54In the seven north-eastern states, only about 45 % of therecorded forest area is under government control and restis controlled by different community institutions. See,J.P.Yadav, (2001), Status of JFM in North-East India,Draft paper prepared for a book on Joint Forest Managementby Commonwealth Forestry Association (IndiaChapter) in collaboration with Winrock International Indiaand Ford Foundation, New Delhi.55See, Ecotech Services, (2000), Study on Management ofCommunity Funds and Local Institutions. New Delhi:Ecotech Services (Mimeo.).56In Andhra Pradesh, the Government allowed 50 per centshare NTFCs revenue since 1999 and it really enhancedthe revenue of the forest communities. See, S.D. Mukherjee,(2001), ibid.126 THE IIPM THINK TANK

G ANDHIAN GOOD57See, Ahuja Chopra and Shivanji Sharma, (2008), op.cit.58See, S. Saigal, H.Arora, and S.S. Rizvi. (2001), ForestryBeyond Bureaucracy: Role of Private Enterprise in theIndian Forestry Sector, International Institute for Environmentand Development and Ecotech Services, London.59See, S.D. Mukherjee,( 2001), op.cit.60See, V.V. Bhanoji Rao, (2001), East Asian Economies: TheMiracle, A Crisis and the Future, McGraw Hill, Singapore,pp.131-135.61See, Rajni Bala Sharma, (1998), Gandhi’s World View andIndustrial civilization, Printwell, Jaipur, pp. 1-24.62See, Pyarelal, (1965), Mahatma Gandhi: The Last Phase,Navajivan Publication House, Ahmedabad, Vol. I, Book-I,p.182.63Amritananda Das, (1979), Foundations of GandhianEconomics, Allied Publishers (P) ltd., New Delhi, p.4864M.K. Gandhi, The Harijan, Dated February 23 rd , 194765M.K. Gandhi, Young India, October 7 th , 1926.66See, J. E. Stiglitz, (2002), Making Globalization Work,Amazon.com67Hiten Bhaya, (2006), Sustainable Development and theIndian Perspective, in Chandrayee Das and DipankerGhosh, (ed.), op. cit., p.6.68A.J. Patel, (ed.), (1997), M.K. Gandhi’s Hind Swaraj andother writings, Cambridge University Press, London, p. 157.69See, M.K. Gandhi,(1939), Hind Swaraj or Indian HomeRule, Navajivan Publication House, Ahmedabad,70See, Gopalakrishna Gokhale, (1916), Speeches ofGopalakrishna Gokhale, Natesan and co., Madras, p.1213.71Annie Besant, (1915), Self- Government in India, TheosophicalSociety Publishing House, Madras, p. 7.72(a) Gandhiji asserts that the universe would disappearwithout the existence of this force. See, M. K. Gandhi,Hind Swaraj, op.cit., p. 77.(b) Bhagawan Sri Sathya Sai Baba of Puttaparthi elaboratesthe concept of Love further:Love as speech is Truth;Love as action is Dharma;Love as thought is Peace;Love as understanding is Non-violence.See, Sri Sathya Sai News Letter, Summer, 1994, p.34.73A. J. Patel, (ed.), (1997), op.cit., p.157.74S. K. Lal, (1981), Gandhiji and Village, Agricole PublishingAcademy, New Delhi, p. 49.75See, Ramjee Singh, (1988), Gandhi and the Modern World,Classical Publishing Co., p.155.76Quoted in G.M.Bhat and Shabir Ahmad Padder, (2007),Economics of Mahatma Gandhi: Challenges and Development,The Indian Economic Association- 90 th Conference,Vol. I, p. 220.77M. K. Gandhi, Young India, Dated October 15 th , 1931.78M. K. Gandhi, Young India, Dated November 3 rd , 1921.79T.K.N. Unnithan, quoted in Sachinandan Sau, (2007),Gandhian View of Sustainable Development: Some Issues,The Indian Economic Association- 90 th Conference, Vol. I,p. 172.80B. M. Sanyal, (2006), Sustainable Development: CertainCritical Observation, in Chandreyee Das Dipankar Ghosh(ed.), op. cit., p.89.81To draw a parallel, Bhagawan Sri Sathya Sai Baba ofPuttaparthi too advocates ceiling on desires as the remedyfor the ills of modern economic problems. See,http://www.saibaba.ws/teachings/ceilingondesires.htmSite visited on February 19 th , 2010.82See, Homo Oeconomicus, www.wikipedia.org , Site visitedon February 19 th , 2010.83B.G. Gokhale, (1961), Indian Thought Throughout theAges, Asia Publishing House, Bombay, p. 72.84Amritananda Das, (1979), p.49.85Gandhiji believed in harmony between small and big. See,M. K Gandhi, The Harijan, Dated August 27 th , 1930.86M. Maharajan, (1998), Economic thought of MahatmaGandhi, Discovery Publishing House, New Delhi, p. 62.87See, Y Kesavulu, Gandhian Trusteeship as an Instrumentof Human Dignity, http://www.mkgandhi- sarvodaya.org/articles/trusteeship.htm Site visited on February 19 th , 2010.88See, U. S. Mohan Rao, (1968), The Message of MahatmaGanghi, Publication Division, Ministry of Information andBroadcasting, New Delhi, pp.125-127.89K.P. Saksena, (1981), Gandhi and International concernwith Human Rights, in K.P. Misra and S.C. Gangal, (ed.),Gandhi and the Contemporary World: Studies Peace andWar, Chanakya Publications, Delhi, p. 153.90Y.A. Panditrao, (1992), Gandhian Approach to EconomicDevelopment, Himalaya Publishing House, Delhi, p. 122.(The views expressed in the write-up are personal and do notreflect the official policy or position of the organization.)THE INDIA ECONOMY REVIEW127

Problems and Solutionsof Shortage of Physiciansin the USA and its Impacton Developing CountriesShamim Mohammad(International Ford Fellow)Member, Managing Committee,Samajik Seva Vikas Sansatha

A N ECONOMIC DIAGNOSISOverview of the Problem:Health workers are all people whose main activities are aimedat enhancing health (WHO, 2006). They include the peoplewho are directly or indirectly involved in rendering healthservices such as doctors, nurses, pharmacists, laboratorytechnicians, management and support workers. According tothe World Health Report (2006) there are 59.8 million healthworkers worldwide. About two-thirds of them (39.5 million)provide health services; the other one-third (19.8 million) aremanagement and support workers. They are responsible forprevention and treatment of diseases and advances in healthcare globally. There are fifty-seven countries, most of them inAfrica and Asia continents, which are facing a severe healthworkforce crisis. The global profile presented below in theTable I shows that there are more than 59 million health workersin the world, distributed unequally between and withincountries. They are found predominantly in richer areaswhere health needs are less severe. Their numbers remainwoefully insufficient to meet health needs, with the totalshortage being in the order of 4.3 million workers worldwide.It is a challenging impediment in the way of achieving publichealth priorities such as reducing child and maternal mortality,increasing vaccine coverage, and battling epidemics suchas HIV/AIDS. Bridget, M.K. (2007). The world is facing aserious health workforce shortage and without prompt action,the shortage will worsen.Though, Table I demonstarte that the American region hasthe highest concentration of health workers, which is 24.8 perthousand residents whereas the rest of the world has only 9.3per thousand residents. Despite this, USA is experiencing asevere shortage of physicians in critical areas, which has beenwidely documented and is expected to last through 2050Table I : Global Health Workforce, by DensityWHO Region Number(In Millions)Density(Per 1000 Population)Africa 1.6 2.3Eastern Mediterranean 2.1 4.0South East Asia 7.0 4.3Western Pacific 10.1 5.8Europe 16.6 18.9Americas 21.7 24.8World 59.2 9.3Source: World Health Report (2006)THE INDIA ECONOMY REVIEW129

H EALTH ECONOMICS(NRHA, 2003). Merritt, Hawkins & Associates (2004)reported that there is a growing demand for health professionalsin the United States in the face of stagnant supply. It isestimated that the United States could be short of 808,000nurses and 85,000 to 200,000 physicians by 2020.Health Professional Shortage Areas (HPSAs):Sensing the shortage of Physicians, USA had created theHealth Professional Shortage Areas (HPSAs) in 1978, with apurpose to identify areas and populations that neededphysicians the most than other areas. It is used by a number ofFederal programs to make decisions about financial andmanpower support to the needy states.It has an in-built rationing system in it.This program is administered by the,Health Resources and Services Administration(HRSA). Its role is to designateHPSAs based on the ratio ofpopulation, to the number of primarycarephysicians and other factors, suchas the area's infant mortality rate, thepercentage of the population below thepoverty level, or the area's birth rate.HRSA then gives each HPSA a score based on specificcriteria that ranks shortage of primary-care providers or otherneeds, relative to other HPSAs. Each HPSA is ranked from0-25. A low score can disqualify an HPSA for certain Federalaid programs.A report on the status of officially designated HealthProfessional Shortage Areas (2006) from the GovernmentAccountability Office provides some basic figures on theshortage throughout the United States, of primary-carephysicians. Looking at the deficit for geographic areas andpopulation groups, 831 counties were designated as HPSAs,while another 815 consisted of service areas within counties.Table II: Doctors per Thousand ResidentsSl.No. Doctors per 1000 Residents Nos. of State1 Below 2 82 2-3 353 3-4 64 Above 4 1Source: USA Today (2005)United Statescould be shortof 808,000 nursesand 85,000to 200,000physicians by theyear 2020There is no state that does not have some HPSA designation.The GAO estimates concluded that 6,941 additional full-timeprimary-care physicians are needed to achieve ratios thatwould eliminate HPSA designations; this is based on a ratioof one physician for every 3,500 people in a geographic area,and 1:3,000 persons in a population group.USA Today (2005) reported the distribution of the physiciansby density in the USA, which is depicted in Table II,shows that there are eight states having less than two doctorsper thousand residents whereas 35 states have 2-3, six stateshave 3-4, and only one state has more than four doctors perthousand residents. These findings indicate that physicianstend to concentrate in urban areas andthere is problem for the rural Americanin accessing health services. There isshortage of physicians as well as maldistributionto provide needed healthservices in rural areas. This problem isespecially serious in remote frontiercommunities, many of which are locatedin the Western region of the UnitedStates of America (NRHA, 2003).Shortage of Physicians in Critical Areas:The recent workforce studies indicate that the United States ofAmerica already faces current and future shortages in manyspecialties. The studies cited below explore the extent andcritical areas of shortages such as Psychiatry, Immunology,Pulmonology, Cardiology, Dermatology, Endocrinology,Geriatrics, Genetics, Neurology, Neurosurgery, and Pediatrics.The Center for Health Workforce Study located in Albanyin 2000 concluded that within 10 years, there will be ashortage of allergist/immunologists. The supply of newphysicians will not be able to keep pace with the currentretirement rate of practicing allergists and immunologists asdemand is rising very fast. The American College of Cardiologyin (2004), reported that the USA is facing a seriousshortage of cardiologists. It is estimated that by 2020, therewill be a 20% decrease in the age-adjusted supply of cardiologistsat the same time, there will be a substantial increase inthe incidence and prevalence of cardiovascular diseases dueto the aging of population, the epidemic of obesity and,diabetes.The Department of Health and Human Services (1990)130 THE IIPM THINK TANK

A N ECONOMIC DIAGNOSISconcluded that the nation should have over 30,000 childpsychiatrists but there are less than 7,000 currently practicing.Further, a similar study published in 2003 revealed that theactual growth and supply of child and adolescent psychiatristshas been very slow. The Committee on Manpower for Pulmonaryand Critical Care Societies (2004) stated that there willbe increased demand for intensivists and pulmonologists dueto the aging of the population while the supply of thesespecialists will remain near constant. This will result in ashortfall of specialists by 35% by 2030. The CHEST (2004)predicted that the shortage will become severe as early as2007. This shortage is expected to worsen as hospitals move toincrease the use of intensivists asrecommended by the Leapfrog Group.The Journal of the American Academyof Dermatology (2004) indicatedthat there is an inadequate supply ofdermatologists to meet the currentdemand. The Journal of ClinicalEndocrinology & Metabolism (2003)reported that the supply of newlytrained endocrinologists will not besufficient to offset retirements andfuture increases in demand. As it stands, current demandexceeds supply by 15% and the aging of the populationcompounded with physician retirements will exacerbate thesituation. A report from the American Geriatrics Society(2004) suggested a “severe and worsening shortage.” Thereare only 7,000 practicing geriatricians with around 65%unmet needs. The Alliance for Aging Research estimatedthat another 14,000 geriatricians are needed to adequatelycare for the existing elderly population.The Banbury Summit Meeting on Training of Physicians inMedical Genetics (2004) stated that “the medical geneticsworkforce situation is critical.” The scope of practice forgeneticists has increased manifolds. They are not onlytreating rare pediatric disorders but also common healthproblems such as cancer and a number of neurological andcardiovascular disorders. According to a study published inthe February 2005 in an issue of the Journal of Neurosurgery,the nation is encountering a severe decline in the number ofactive neurosurgeons. However, at the same time there hasbeen a significant increase in the demand for neurosurgeons.The Department of Health and Human Services (2003)Empirical evidenceindicates thatthere will be adeficit of 90,000to 200,000physicians by theyear 2020reported the shortage of the pediatricians. It said thatchildren with special needs have problems in accessing toappropriate subspecialty care. As a result, many children withjuvenile arthritis and other serious autoimmune conditionsare often forced to seek care from adult specialists because ofa lack of adequately trained pediatric providers. Further, astudy published in (2003) revealed that the current psychiatricworkforce supply trends indicate that the present supply ofPsychiatrists is not enough to keep up with the rate of growthof demand. Furthermore, a workforce report published inAmerican Journal of Roentgenology in (2002) found out thatthe demand for radiologists over the next three decades willbe difficult to meet.International Physicians Alonewill not Solve the Problem:There is overwhelming empiricalevidence which indicate that there willbe a shortage of 90,000 to 200,000physicians by 2020. The average waittimes for medical specialties are likelyto increase dramatically beyond thecurrent range of two to five weeks.Various factors, including the demise of managed care, theaging of the population, changing practice patterns, increasingregulation and paperwork are some of the reasons for theimpending shortage. Many American believes that thepresent healthcare system is poorly distributed, offers littleprotection to patients, to support long term health management,and it is expensive to the point of inaccessibility formany Americans. Moreover, at the moment it providesinconsistent and fragmented care.The sustainable solutions to this problem have to emergefrom within, but the U.S. is relying more and more on InternationalMedical Graduates as its generalist physicianproviders, especially in designated underserved areas (L.Table III: Who is Located Where?Geographical Location IMG USMGLarge Rural 69.6% 62.4%Small Rural 80% 70.6%Isolated Small Rural 84% 73.4%Source: Health Affairs (2007)THE INDIA ECONOMY REVIEW131

H EALTH ECONOMICSTable IV: J-1 Visa Waiver Physicians PlacedThrough the Conrad Program, By SpecialtySpecialtyInternalmedicineFamilypracticeCountryof OriginPercentPercentType of Facility43% India 25% Private practice/clinicPercent45%13 Pakistán 19 FQHC/CHC 18Psychiatry 11 Philippines14 Rural hospital 10Pediatrics 10 Lebanon 5 State facility 6Obstetrics 2 Syria 5 Local health 2departmentSurgery 2 Colombia 4 Other 13Other 19 Romania 4Source: Health Affairs (2008)Gary H.L., et al., 2001). After the terrorist attacks of September2001, the visa and immigration rules were made morestringent, and it has now become more difficult for manyforeigners to enter and work in the country. If the number ofIMGs eligible to work in the U.S. in future years is reducedbecause of these restrictions, access to primary care may befurther limited for underserved populations of the country.However, in the present health care system IMGs are playinga great role in delivering health services in the underservedareas. Since World War II America's physician workforce hasbeen significantly infused with foreign-trained internationalmedical graduates (IMGs) (Hagopian A.,2008).Presently, approximately 180,000 IMGs are practicing inthe USA. Majority of IMGs working in the United Statescome from seven countries: 32,822 (20.3 percent) from India,17,357 (10.7 percent) from the Philippines, 10,049 (6.2 percent)from Mexico, 7,310 (4.5 percent) from Pakistan, 5,311(3.3 percent) from China, and 4,300 (2.7 percent) from theRepublic of Korea. India and Philippines have remained thelargest contributors since 1981, but the rankings of othercountries have changed (Gary, L.H., et al., 1981).Table III, shows that the most of the International Physiciansare placed in large, small, and isolated small rural areaswhereas the US physicians are placed significantly less innumbers in remote and rural areas. Under the ConradProgram, IMGs are granted waivers of a visa rule, in return ofa commitment to practice at least three years in a HRAs. ThisJ-1 visa waiver allows foreign-born, nonimmigrant physicianson exchange visas to remain in the United States during aperiod of obligated service employment; many subsequentlyapply for permanent residency status. As of February 2002forty-one states and the District of Columbia were participatingin this program. This program allows each jurisdiction torecommend up to twenty physicians for J-1 visa waivers eachyear. Hagopian A., (2006)According to a survey conducted under Conrad Program in2002, mentioned above in Table IV shows that 43% InternationalPhysicians were practicing Internal Medicine, 13%were involved in Family practice, and 11% Psychiatry, 10%Pediatrics, two percent Obstetrics, two percent Surgery, and19% were from other specialty. These findings reveal thatshortage in critical areas such as Immunology, Pulmonology,Cardiology, Dermatology, Endocrinology, Geriatrics, Genetics,Neurology, and Neurosurgery will remain unmet as long asustainable solution is not found.Proposed SolutionsThe situation warrants a multipronged and urgent response.Several areas of the USA and several medical specialties arealready reporting shortages. The number of elderly Americansis growing far more rapidly than supply of physicians andthe large Baby Boom generation will begin to reach age 70 in2015. This will burden the health care system further. Thephysician workforce is also aging: In 2003, 205,000 doctors,29% of all active US physicians were over 55 and Physicianmigration from poor countries to the USA has slowed downdue to rigid visa policies. Moreover, migration trends ofInternational Physicians suggest that the shortage in criticalareas will remain unchanged. Furthermore, how ethicallycorrect it is to poach physicians from poor countries as itcontributes to worldwide health workforce imbalances thatmay be detrimental to the health systems of source countries(Hagopian A. et al., (2008)). In addition to that there isempirical evidence which suggest that younger physicians arechoosing to work shorter hours than their predecessors.There is a need to relook into policies which warrantreforms, how J-1 visa waiver and immigration policy reformsmay increase the numbers of International Physicians. Howschool enrollment can be increased in Medical ScienceStudies? In addition to that more funding to increase physicianresidency positions and specialty mix, and the NationalHealth Service Corps numbers can be considered. The other132 THE IIPM THINK TANK

A N ECONOMIC DIAGNOSISprograms affecting physicians supply should also be relookedinto (Gary, H.L., 2001).The Association of American Medical Colleges recentlyrecommended that US medical colleges increase their outputof new doctors by 15% over the next 10 years, and thatresidency programs increase the number of training slotsavailable for new graduates. If medical colleges start implementingthis recommendation of AAMC, USA will be able toproduce about 2500 more MDs a year by 2015 than the 16,000produced currently.Are these numbers adequate? A lot will depend on whathappens to the American healthcare system in time to come.If some forms of severe managed care restriction on use ofphysician services are brought into effect, supply couldovershoot the mark. But, if fewer international physiciansenter the American health workforce, it may still need evenmore of its own physicians to meet the country's needs. Thesetrends need to be monitored closely so that additional adjustmentcan be made as per requirements (Jordan J. C., 2005).The Critical Care Workforce Partnership (2006) proposedsolutions to alleviate the current and future burden imposedby the critical care workforce shortage. It suggested that thisproblem can be resolved through legislative and regulatorychanges. Among the solutions, the Partnership recommendedspecific steps to increase the efficiency of the current criticalcare workforce, increase the future supply of critical careprofessionals, and address the patient demand for critical careservices. The challenge for meeting the future demand is toclearly communicate with policymakers, educators, medicalstudents, and the medical community the importance of awell-trained, adequately equipped, and equitably distributedfamily physician workforce for America. AAFP, (2007).References and Additional Readings• American Academy of Family Physicians. (2007).Match Summary and Analysis. Retrieved February 28 th ,2008, from http://www.aafp.org/online/en/home/residents/match/summary.html• Center for Workforce Studies, Association of AmericanMedical Colleges. (2006). Recent Studies and Reports onPhysician Shortages in the US. Retrieved March 1 st , 2008,from http://www.aamc.org/workforce/rcntwrkfce.pdf• Cohen, J. J. (2005). Help wanted: More doctors for theUnited States. Retrieved February 15 th , 2008, fromhttp://www.medscape.com/viewarticle/506845• Cauchon, D. (2005). Medical miscalculation createsdoctor shortage. Retrieved February 15 th , 2008, fromhttp://www.usatoday.com/news/health/2005-03-02-doctorshortage_x.htm• Hart, L. G., Skillman, S. M., Fordyce, M., & Thompson,M. (2007). International Medical Graduate Physicians InThe United States: Changes Since 1981. HEALTH AF FAI R S, 26(4), 1159-1168.• Hagopian, A. D., Thompson, M. J., Fordyce, M., &Johnson, K. E. (2004). The migration of physicians fromsub-Saharan Africa to the United States of America:Measures of the African brain drain. Human Resourcesfor Health, 2(17).• Hagopian, A., Thompson, M. J., & Kaltenbac, E. (2008).Health Departments’ Use Of International MedicalGraduates In Physician Shortage Areas. RetrievedFebruary 20 th , 2008, from http://content.healthaffairs.org/cgi/reprint/22/5/241• Hagopian , A., & Friedman, E. (2006). Ethical Restrictionson International Recruitment of Health Professionalsto the U.S. Retrieved March 2 nd , 2008, fromhttp://www.apha.org/programs/globalhealth/section/advocacy/globalihtest2.htm• Kuehn, B. M. (2007). Global Shortage of Health Workers,Brain Drain Stress Developing Countries. JAMA,298(16), 1853-1855.• The Critical Care Workforce Partnership. (2006). RecommendedSolutions to Critical Care Workforce Shortage:Stemming a Crisis. Retrieved February 19 th , 2008, fromhttp://www.chestnet.org/downloads/practice/gr/HRSABackgrounder.pdf• National Rural Health Association. (2003). Health CareWorkforce Distribution and Shortage Issues in RuralAmerica. Retrieved February 11 th , 2008, fromhttp://www.nrharural.org/advocacy/sub/policybriefs/WorkforceBrief.pdf• World Health Organization. (2006). The World HealthReport 2006. Retrieved February 25 th , 2008, fromhttp://www.who.int/globalatlas/default.asp(The views expressed in the write-up are personal and do notreflect the official policy or position of the organization. He isreachable at this email id: sm270906@gmail.com)THE INDIA ECONOMY REVIEW133

I NTERNATIONAL ECONOMICSGLOBAL ECONOMICUNCERTAINTIES: ESSENTIALCOORDINATED GOVERNANCE134 THE IIPM THINK TANK

C HANGE FOR GOODK. U. MadaEconomist & Management Specialistand former Executive Director, I.D.B.I.The recent global meltdown has brought into sharperfocus the embedded threats to the world economy.The political, geopolitical, social, economic andfinancial issues influence, and be influenced, by economicand financial affairs. “There are a number of key unknowns,but one of the most vexing is political uncertainty”, saysSmick. 1 With risks ingrained in coalition governments inpower in nations like India, Pakistan, Germany and France,the reconciliation of competing and conflicting views tendsto be more complex and tardy. Also, globalization generatesuncertainties. Themes of anti-globalisation have gainedsupport with rising discontents among people 2 . In globalisedeconomy, economic affairs often go beyond nationalfrontiers. As Robert Kagan underlines,“the new geopolitics runs along an arcfrom North-east Asia through theSouth-east and into Central Asia,where the interests and ambitions ofChina, Japan, India, Russia, and theUnited States all overlapand collide.” 3 All thisadds to greateruncertainties.Hence, governmentsand markets have, perforce, determinedtheir own space in different economies.Government and Market ParticipantsIn capitalism, government is sovereign but the communityat large and non-governmental organizations are themovers and shakers. They establish relationshipsbased on individual freedom and security, creatingopportunities for citizens to grow to their potential.Traditionally, market economies had threeingredients viz. prices, private property, andprofits; firms which operate therein aim at achievingleast-cost combinations to maximize their profits. AsPaul Krugman says, “efficient markets have been veryhard to kill”. 4 However, when faith in self-regulatingWhen faith inself-regulatingmarkets is shaken,governmentintervention for atemporary periodmay be requiredmarkets is shaken, government intervention for a temporaryperiod may be required. Adam Smith’s invisible handguiding the market to efficient outcome is guided by governmentinterventions to make the market participants betteroff. Increased transparency is crucial to decide the timingfor government interventions. If operatives in the marketsare at fault, intervention by a balancing force is desirableand also unavoidable if information is asymmetric. Peoplehave their likes and dislikes, preferences, angularities andprofit motives. Government should, as political supremo,reconcile conflicting views of the parties concerned. Themarkets are at the centre of the economy and the government’srole is limited. Depending on socio-economic needs,it is necessary for “reinventing government”and “markets” to make themefficient. Detailed information andtransparency lead to enlightenedpolicies.The role that trust and faith plays ina democracy reflects in the communityorganizations or non-governmentalorganizations (NGOs) which searchfor consensus on issues of deeperconcern. Their function is to have, asBarack Obama says, “some influenceon the public debate”. 5 In public affairs, individuals by themselvescannot influence policies, except the few who are invantage points. In view of this, the Non-GovernmentalOrganizations (NGOs) become an integral part of thecommunity. The budgetary supports extended by governmentsin developing economies do not reach the targetbeneficiaries. They are leaked in the delivery process. Thepoor might be ignorant of their entitlement but could notdemand due to their weakness. The cost of delivery mechanismsis large due to the structural deficiencies. NGOs couldunderstand what should work in a specific location and howto improve the services by targeting the deserved ones. Ithas been the experience that states like Kerala were successfulin setting up appropriate delivery mechanisms whereasTHE INDIA ECONOMY REVIEW135

I NTERNATIONAL ECONOMICSUttar Pradesh could not. Research studies reveal that inKerala, with better infrastructure facilities, women livelonger, infant mortality was lower and births per womanwere lower. Over 70 percent of primary school teachers werewomen. And, there was better awareness of the governmentfacilities. Compared with the position in Kerala, UttarPradesh had relatively poor indicators and performance. 6NGOs could play an important role in correcting themissing links. The strengthening of NGOs paves the way forefficient functioning of market economies.The government should take action to build institutionalframework at national, state and district levels. Also, thelegal and regulatory framework should be built/strengthenedto enforce contracts, resolve commercial and socialdisputes, and settle matters arising from commercialdealings. To make them effective,trained and dedicated local leaders areto be involved in the NGOs. Thepreventive supervision and regulationover the local institutions could reducethe need for intervention by them tothe irreducible minimum. At the sametime, the leadership of NGOs shouldbe effectively monitored for they couldmisuse the privileges and start playingpartisan games.International Trade NegotiationsThanks to the prosperous Dutch Republic and the spread ofaffluence in the 17 th century, a new dynamic and capitalistsociety emerged. It generated innovations in finance,technology, marketing and communications. This developmentover 400 years infused the culture of growing worldtrade and gaining power status. 7 In 1776, Adam Smith saidin The Wealth of Nations that markets would create surpluses.Accelerated technological advances have made suppliersto produce an unprecedented array of products and servicesleading to supply exceeding demand which further accentuatedthe trend towards globalization.“As trade barriers between nations and regions dismantledand as information on products and prices becameinstantly and globally available, niche markets and havensfor monopoly continued to disappear”, say Chan Kim andMauborgne. 8 As part of trade negotiations, the GeneralThe governmentshould takeaction to buildinstitutionalframework atnational, state anddistrict levelsAgreement on Tariffs and Trade (GATT) succeeded inlowering tariffs. The World Trade Organisation (WTO)provided a forum for trade negotiations. Capitalist economiessupport free trade but if an exporting country wants toexport a commodity, domestic “protectionist interests aregalvanized”. This mix of labour and business interests uses“fair trade laws” to construct barbed-wire barriers toimports and makes out a case of “dumping” i.e. sellingbelow cost without substantive evidence and protects itselfby levying “dumping duties”. 9The new round of trade negotiations agreed in November2001 at Doha, Qatar, characterized as the “developmentround” to open up markets further, to rectify imbalancesand to have more open discussion on “poverty”. Despite thehigh hopes, there was skepticism. The Americans andEuropeans protect agriculture andspecific industries. As the negotiationswould be about the maximum permitted(“bound” tariff rates) by globaltrade rules, the Doha round cannotdramatically change the world’sfortunes. What persists is the use ofnon-tariff barriers, such as overnightimport taxes or surcharges or impositionof time-consuming, expensive andcomplex quality controls. With strongintegration of supply-chains, multilateralnegotiations may not be popular. The symbolic significanceof the talks is important inasmuch as their failurebodes ill for future multilateral cooperation. Also, suchfailure could lead to more of regional and bilateral tradedeals. The Doha talks failed because emerging economieslike China and India desired to maintain the right to impose“safeguard” tariffs to protect their agriculture and foodsecurity. Food self-sufficiency is socially and politicallyimportant for India and China. The developed world makesreference to trade restrictions on the grounds of control ofcarbon emissions. Arguments in favour of trade marks,economic security and key industries reign supreme. WithChina and other Asian countries growing, it is argued, therecould be a long-term trend of over-capacity in manufacturingand in services which could lead to greater shortage ofnatural resources (copper, iron ore, oil, zinc, etc.).There is a view that global integration may be causing136 THE IIPM THINK TANK

C HANGE FOR GOODwage stagnation, widening inequality and greater insecurity.Eminent economists like Alan Blinder and Larry Summersdoubt the benefits of globalization for the American middleclass. Trade restrictions and controls over carbon emissionscould be other setbacks. Global talks should concentrate onfears over “security” of food, energy, environment, incomeand oil production quotas. 10 The Doha Talks failed onaccount of irreconcilable differences in trade, patents,subsidies, professional services and tariffs between thedeveloped and the emerging economies.The resultant inward-lookingattitude will be another embeddedthreat to the world economy.Reshaping InternationalInstitutional ArchitectureThe thinking of shaping the internationalinstitutions began with the ParisPeace Conference in 1918, followed bythe London Conference in 1933 toreestablish fixed parities for a widerrange of currencies, the Bretton Woods Conference in1944, the decision to end of fixed exchange ratesin 1971-73, oil-price shocks in 1973-74 andsubsequently by the call for a newBretton Woods in the 1980s andonwards. The several discussionsthat followed eventually resulted inthe adoption of Multilateral DebtRelief Initiative and the IMF’sPolicy Support Instrument in 2005.According to James M. Boughton,IMF historian, on the basis of thedevelopments and crises over these years,there were three lessons. They are:some goals be set but theycannot be fully achieved; ifrevision of the rulesdominates the agendaother issues would not getfull attention;and majorparticipants infinancial markets couldThe resultantinward-lookingattitude of failedDoha Talks willbe an embeddedthreat to theworld economydevise rules for finance but they cannot devise rules fortrade in commodities, climate change or extreme poverty. 11As a sequel to the World War I, huge reparations paymentshad to be made by Germany to Great Britain andother allied countries. With hindsight this looked unfair.Taking this cue, the victorious nations after the World WarII decided to ensure the reconstruction of the war-devastatednations in the western Europe under the American-sponsoredMarshall Plan. Europe, which had technology andknowledge of management, rebuilt theeconomy. The reconstruction ofdeveloped countries, it was felt, shouldbe supplemented by development ofunderdeveloped countries to ensurepeace, stability and prosperity. Aninternational conference, convened atBretton Woods, New Hampshire, SanFrancisco, in July 1944, had participantsfrom 44 countries. A majoroutcome of their deliberations was thesetting up of the InternationalMonetary Fund and the InternationalBank for Reconstructionand Development (IBRD) or TheWorld Bank. The conferenceparticipants had at the back oftheir mind the great depressionof the 1930s. The IMFwas to identify countrieswith balance ofpayments problems,especially “fundamentaldisequilibrium” so that‘collective action at the globallevel’ could be taken. 12 The World Bankwas for assisting industrial, agriculturaland infrastructure projects and forpromoting development bankingnetwork and development inunderdeveloped economies. 13The IMF, the WorldBank and also theWTO, set up laterin 1991 for trade negotia-THE INDIA ECONOMY REVIEW137

I NTERNATIONAL ECONOMICStions, have come to occupy the centre stage in economic andfinancial affairs.The World Bank is headed by a representative of the USGovernment and the IMF, by convention, is by a representativefrom Europe. The professional staff has been drawnfrom all over the world. It is felt that the IMF does not seemto fully appreciate the diversity in the socio-economicstructures in developing countries. The IMF assistance hasrigorous conditionalities. This briefly means providing fundsonly if assisted countries could strictly adhere to prescribedpolicies like reduction in expenditures and deficits, raisingtaxes and interest rates, devaluation of currencies, andlowering inflation. These conditionalities came to be knownas “Washington consensus”. These prescriptions led tocontraction of the economies of the assisted countries andlimited their operational freedom not only in terms ofutilizing the assistance provided butalso in management of the economiesin general.This situation differed from whatJohn Maynard Keynes had envisagedfor adoption of expansionary measuresby depressed economies by largerexpenditures for increasing consumptionand undertaking projects. Eventhe broad-based structural adjustmentloans had rigorous built-in conditionalities.14 Apart from prima facienational diversities, such prescriptions require in-depthunderstanding of the life of people in the assisted countries.Exchanges of experiences were not strong points of internationalinstitutions. Thus, the IMF and the World Bank havehad only a mixed success.It goes without saying that the world, in the six and halfdecades, has had far-reaching changes. Several countrieslike Japan, South Korea, and Taiwan have emerged asexport-led economies. West Germany became a strongindustrialized country. China and India followed theirgrowth paths. The rest of Asia pursued its own strategies tomake quantum jumps in economic progress. Known as theAsian tigers, they did well because of business, technologicaland financial collaborations and the flow of foreign directinvestments. Oil-producing countries are another majorblock in the world economy. Africa, however, remains to beThe signingof SAFTA is aprecursor to thegradual process ofAsian integrationtowards acommon currencybrought into the mainstream of growing world.The organizational structures of the IMF and the WorldBank were designed by the post-World War II powers tosatisfy the needs and aspirations of the then victoriousnations without giving much thought to possible futuredevelopments. An important post-World War II developmentwas the emergence of a number of independent nationssince the colonial rule to which they were subject came to anend. For instance, at the time of its independence, India hada not insignificant share of world trade. Compared toFrance, Germany and the U.K., countries like Japan, India,China, South Korea, Eastern Europe and Brazil have grownrelatively fast.As a matter of immediate recognition of the changedsituation, India and some others have been demanding arevision of their SDR shares. There has been no in-builtadjustment mechanism to effectstructural changes after 1944. Thus, asof now, there is an absence of accommodativespirit and effective voice forthe emerging economies. This is anobvious lacuna. The set pattern of the“Washington consensus”, influencedand nurtured by Wall Street stalwartsturnedpoliticians, European leaders,and persons without proper groundingin “inclusive”, welfare-based growthperspectives and ways of life, havebeen ruling over the global affairs. These institutions havebecome less and less relevant for the current world economy.Now that the far-reaching changes have taken place worldover, the entire international financial architecture needundergo change to be of contemporary relevance. “Theinternational architecture which is six and half decades oldrequires drastic reorganization”. 15 Emerging economies likeIndia and Brazil could contribute significantly to thedecision-making process in the fields of climate change,global security, food security and economic and financialissues. In this evolving scenario, Brazil, India, and Russialook for occupying their rightful places. In equity andfairness, therefore, there should be changes in quotas ofmember countries and representations on the boards ofdirectors with appropriately-designed and consensus-basedorganizational and policy changes. Incidentally, the signing138 THE IIPM THINK TANK

C HANGE FOR GOODof SAFTA is a precursor to the gradual process of Asianintegration towards a common currency on the lines of theEuropean Union.The G-20 leaders who met in November 2008 and April2009 agreed to impose stronger restraints on hedge funds,credit rating companies, and executive remunerations. Also,they agreed to establish a new Financial Stability Fund tounite regulators and join the IMF in providing early warningsof potential threats. The summit increased IMF rescuefunds to $ 750 billion from $ 250 billion. Japan, EuropeanUnion and China will provide the first $ 250 billion. As theG-20 leaders encouraged the IMF and the World Bank, theyshould reorganize these institutions to make them morerepresentative of the composition of the G-20 and the rest ofthe nations. Such global coordinated actions should be seton a long-term basis and on an even keel.The diverse viewpoints for nationalsovereignty and global capital marketslimit the room for an overhaul. Nocountry is agreeable to cede sovereigntyto a global regulator. Dr. DanRodrik (Harvard) is opposed to havingany international supervision whileGordon Brown (U.K.) had a proposalto have a “college of supervisors” tooversee the biggest financial firms.Despite the recent excesses in thebanking field, Dr. Rodrik is notconvinced of the need for international control. 16 In a recentinterview, Paul Krugman says, we “need to have somethinglike traditional bank regulation extended to any financialproduct if it is capable of generating a crisis” 17 .Significance of U.S. RoleThe USA being the dominant country could be a moderatoras well as a source of threats. As other economies grow therewould be dynamic changes. The USA, the western parts of theEuropean Union and to some extent Australia attract immigrantsfrom the rest of the world. Immigration takes placebecause of employment opportunities, educational facilitiesand better ways of life in the prosperous regions. Viewed fromthe immigrant-receiving nations, the immigrants shouldcontribute and make positive contributions to their economiesand cultural settings. The receiving countries should publicizeThere is a need tohave somethinglike traditionalbank regulationextended to anyfinancial productto contain crisistheir expectations from the immigrants so that the latter couldprepare themselves to cope with them. If the receivingcountries refuse to accept immigrants, it would be a retrogradestep for the processes of world integration and thebalancing of global economic resources. Similarly, the USAmight set up investment barriers to foreign ownership of U.S.assets. This could provoke other countries to take retaliatorymeasures with the result that transfer of technology and flowof human resources and capital would be hampered to thedetriment of global welfare. Further, if the Doha Talks fail,emerging markets might not respect patents or guaranteedpayments on anything considered “public good” (pharmaceuticals,water treatment facilities, etc.) and the USA mightretaliate. This will result in trade melt down. Another possibilitycould be that the developed world might restrict crossbordermovement of intellectual property and also banintellectuals, scientists, and students,seeking best possible intellectualenvironment to pursue their researchprojects. This will restrict freedom ofthinking, innovative spirit, researchoutput and consequential world prosperityfor want of cross-fertilisation ofideas and research findings. The USAmight become less innovative.So also any regulatory change theUSA might make on the U.S. Treasurymarket might cause a decline in valueof T-bills and this could drive the U.S. bond markets intochaos. The heavy investment in U.S. Treasury bills itself isan embedded threat perception. In case the U.S. restricts orprohibits, for any reason, investments in the Treasury bills,there could be an anomalous situation. Concentration ofhuge funds in one country and in one reserve currency,however safe it is, could be a built-in weakness in theinternational monetary system. Political or economic eventsmight lead to a situation in which the investors from the restof the world could feel unsafe. Another instance could bethat if the US and Europe join together and impose tax onimported goods based on high carbon emissions, countrieslike China might retaliate resulting in a major Wall Streetmeltdown. 18 Recently, a Chinese company preferred to go infor initial public offering (IPO) to the Dubai financialsources, ignoring the New York and London financialTHE INDIA ECONOMY REVIEW139

I NTERNATIONAL ECONOMICScentres. In this context, “America is at risk of losing itsperceived uniqueness as a trusted repository for globalinvestment”, says David M. Smick. 19 Implicitly, the centres ofliquidity and financial services will change over time.The US dollar as reserve currency has its built-in uniqueness.The US is the repository of savings of the rest of theworld, especially in its Treasury bills. In turn, the funds takethe form of international flows of funds for investment andfinancing. If this flow is restricted, global liquidity may dryup and interest rates soar with consequential adverse results.Another development of significance is that at recentinternational fora, China and Russia have been talking ofreplacement of US dollar as reserve currency. The BRICcountries also referred to the scope for having a “morediversified” monetary system. There is also a view that theAsian region could evolve a single Asian currency so thatthe trade between Asian countriescould accelerate. Asia’s share of world’smerchandise exports went up from10% in 1985 to 26% in 2003 and theyare on the rise; during this period,intra-regional Asian trade grew at anaverage of 14 %. A single Asiancurrency unit, it is pointed out, can bean incentive for integration of Asia.The issue of reserve currency could bepart of the agenda for reshaping theinternational financial architecture.Demographic Somersault or UptickThe rich world has fewer children than the poor world. Indiaand China have more people below the age of 35; Japan andEurope have more beyond the age of 35 with shrinkingpopulation. As economies grew, they experienced demographictransition with fertility dropping from eight children borneby a woman to one and a half. With this reproductive collapsecombined with increased life expectancy, population in thedeveloped world has shrunk with an increase of older people.Fertility goes down on account of family planning, womenentering the work-place, rising cost of raising children,presence of social security systems and falling rates of childmortality. Psychologically, the thinking seems to be to bringfewer children into an uncaring world in unstable environmentsand, instead, to have a few progeny and extend greaterAsian region couldevolve a singleAsian currencyso that thetrade betweenAsian countriescould acceleratecare and dote on them more effectively.Recently, Dr. Mikko Myrskyla and his colleagues write inNature that as development continues, the demographictransition goes into reverse. With relatively high standardsof living, fertility rates are now approaching two childrenper woman. The nadir of fertility is reported to be 1.3children requiring 1.5 immigrants to remain static. It ispointed out that the introduction of female-friendly employmentpolicies in the most developed countries allow womento have best of both worlds. Abundance enhances theinstinct to lavish care on offsprings without compromisingon continued care of those the parents already have. 20Accounting Standards and IFRSAfter the Enron and WorldCom debacles, there is a relookat corporate accounting standards. In a globalised world, allcountries should adhere to the globallyaccepted accounting standards. TheUS Generally Accepted AccountingPractices (US-GAAP) is more quantitativewhereas the Internationalstandards are based on “fair value”concept. The US companies “mixmark-to-market values with the moretraditional practice of carrying assetsat their cost and impairing them onlywhen managers and auditors think fit.There are also several different ways ofrecognizing losses. The result is that the balance sheets ofdifferent banks are not always directly comparable”. 21 Thediscretion allowed scope for window-dressing. However,when proposal for merger of the international and Americanpractices under an independent body is mooted, the America’srule-maker, the Financial Accounting Standards Board(FASB) is not enthusiastic. Simply stated, mark-to-marketmakes the accounting process dance to the tune of marketfluctuations as on a given date in a year.If International Financial Reporting Standards (IFRS)are introduced on a world-wise basis, it would facilitateinvestment, trade and banking transactions, besides uniformityin record-keeping and comparability. Countrieswhich do not follow uniform Accounting Standards andfollow historical methods/standards might get isolated.Moreover, there will be differences in procedures for140 THE IIPM THINK TANK

C HANGE FOR GOODprovisioning which will open up differences in tax liabilities.Hence, the entire financial edifice and reporting systemsbuilt over the existing multi-standards in accounting willrequire in-depth reviews as to identification of deficienciesand likely implications. This being a matter of wide impact,there should be consensus not only in the accountingprofession but also among economists, entrepreneurs,business executives, bankers/financiers and financialexperts. Deviations in Accounting Standards will leaveissues unresolved. The Institute of Chartered Accountantsof India indicated that major public interest entities in Indiashould follow IFRS after April 1 st , 2011. Such companieshave to organise preparatory work for having comparativedata for the previous accounting year as well. Under IFRS,depreciation (cost minus the residual value) of property andplant and equipment would have to be provided after themanagement completes the task of determining the residualvalue. Hence, timely and sufficient preparatory work isessential before switchover to international accountingprinciples and standards. 22Utilization of Sovereign Wealth FundsOwing to huge accumulation of foreign currency arising outof oil exports and large and consistent trade surpluses, manya country has emerged in recent times as a source of investmentfinance and a keen player in international currencyand stock markets. It is of course a moot point whether thesecountries could have invested some of these funds domesticallyto enhance social welfare, economic well-being andsecurity of their own citizens. Be that as it may, the substantialforeign exchange earnings and internally-generatedresources have led to the creation of new stars on globalfinancial firmament, the Sovereign Wealth Funds (SWFs).Investment funds owned by about 12 state-owned entitiesin countries like Saudi Arabia, United Arab Emirates,Dubai and Russia controlled roughly $ 2.5 trillion in 2007. 23The McKinsey Global Institute report (2007) describes fournew “power brokers” of the global economy viz. oil-exportingnations, Asian central bankers and their SWFs; hedgefunds; and private equity funds. Their assets have tripledsince 2000 to nearly $ 10 trillion. 24 If the new “powerbrokers” (SWFs, oil producers, hedge funds, and privateequity firms) withdraw from their global investments andmove into cash, there might be volatility in the global stockmarkets. Despite having an effective game plan and roadmap, the job of minimizing growing global imbalances andsmoothing inherent conflicts and tensions between powersthat be, could pose problems. There should be a credibleapproach geared to the opportunities and risks of SWFinvestments. The US Congress Committee on ForeignInvestment in the US could void foreign investment in theUSA on national security concerns. 25SWFs could increasingly become significant in future.THE INDIA ECONOMY REVIEW141

I NTERNATIONAL ECONOMICSRecently, some SWFs supported meltdown-affected banksbut they became overawed by the huge losses. The currentaccountsurpluses of oil exporters and Asian countries havebeen recycled. The foreign financial assets controlled bygovernments went up to reach $ 9.5 trillion in late 2008, ofwhich, it was estimated, one-fourth was held by SWFs. If oilprices rule high and global boom resumes, in a decade or so,SWFs could become as influential in stock markets as hedgeor pension funds. However, based on experiences in Russia,China, Qatar, Japan and other Asian countries, it has beenestimated that the SWFs might not become as big as hadbeen projected. Since the credit crisis, SWFs are morerisk-averse, especially China. There is a viewpoint that theymay gradually move out to safe investments like US Treasurybonds instead of riskier equities and alternative assets.Saudi Arabian Monetary Authority, with $ 500 billion-oddassets, has raised its holdings in gold, cash and deposits. AbuDhabi Investment Authority is reducing its equity allocation.Even Singapore is cautious. Russia and South Koreaprefer to buffer reserves with risk-free liquid assets, preferablyin dollars. It is stated that the SWF investments havedeclined from a torrent to trickle. 26 Also, the savings-surpluscountries require funds for growth and for meeting theircontingencies.In the beginning of 2008, the advanced countries were notcomfortable with the large-scale investments through SWFs.The host countries were desirous of monitoring and regulatingthe investments. They clamouredfor greater accountability inthe home countries, including theconsideration of a voluntary code ofconduct. In India, in view ofcomfortable forex reserves, oneview was that internal SWFs,specifically created out of forexreserves, could be used for infrastructuredevelopment through theIndia Infrastructure FinanceCorporation Ltd. as a specialpurpose vehicle under the supervisionof the RBI. However, the RBIwas not in favour of creation ofSWFs 27 .Conclusions and SuggestionsThe recent developments have been pressing for earlydecisions on global supervision over fiscal, monetary andbanking affairs. The G-20 world leaders underlined theneed for corrective measures. The rising Asia and LatinAmerica are looking up to the developed world for equityand fairness in resolving the outstanding global issues sothat the world-wide discontents would be contained/minimized.Conclusions and indicative suggestions are presentedbelow :(1) Political hot-spots require closer attention by the U.N.,the Security Council and other agencies combined withmore engaging and effective representation to the mostpopulous region of the world, South Asia, the oil-richMiddle East, Latin America and Africa; also, complexsubjects be considered in-depth by specifically constitutedworking groups to make recommendations to the appropriatebodies.(2) In international trade negotiations, both the developedand emerging world should adopt give-and-take attitudeswithout resorting to beggar-thy-neighbour policiesseeking immediate, short-lived gains from trade.(3) In the context of the demand of China, Russia andoil-exporting countries, the U.S. dollar as a reservecurrency and preferred medium of international tradewould require joint evaluation by academicians andpractitioners. This is a crucial subject for creating a new142 THE IIPM THINK TANK

C HANGE FOR GOODworld order.(4) Reshaping the international financial architecture callsfor drastic reorganization at the Board, executive, professionaland supporting staff levels and that equal opportunitybe extended to citizens of all countries in the world inthe selection of CEOs of the IMF and the World Bank.Also, the quotas be refixed on the basis of current positionof each member country so as to reflect the realities.(5) The USA, as a world leader, has to adapt itself to thechanged world and avoid abrupt policy changes and helpbuilding a cohesive world.(6) With BRIC countries and the rest of Asia assuming theirplace in terms of their GDP, level of industrialization,modernization, educational and research attainments,and the place of major currencies, the US dollar might getslowly and subtly replaced as the reserve and/or commonlydenominated international currency in the world; withmore intra-regional and international deals in trade andmoney, more than one single currency might occupy theirplace as reserve currencies which may prove beneficial toworld trade.(7) Demographic changes in the world markedly reveal thatJapan, Russia and Europe have relatively aged population,and China, India, the rest of Asia, and Africa haverelatively young demographic profiles and this situationnecessitate a relook at the immigration policies and thepopulation policies (incentives, etc.) in all these countries.(8) With the world coming closure in many respects andcross-border transfers of labour, capital and enterpriseare gaining ground; and, further with the experiencegained in monitoring frauds and risks, uniformity willhave to be ensured in the Accounting Standards, so thatthe wired world will be able to adjust freely and fully tothe emerging business needs and concerns.(9) Countries that have come to own Sovereign WealthFunds out of their surpluses in commodity trade andsavings could find appropriate investment opportunities,lest the funds might get converted into gold, cash etc.; thissubject requires specific considerations from the angle ofsecurity, misuse of funds, transfer of funds etc.(10) There should be in-built mechanisms to sort out issuesat global level in respect of situations where a strongcountry or a group of countries dominate the trade worldand resort to the banning of trade unilaterally.Endnotes and Additional Thinking1Smick, David M. : The World is Curved, Portfolio, 2008,p.25.2Stiglitz, Joseph E. : Globalisation and Its Discontents,W.W.Norton, N.Y.,2003.3Kagan, Robert, Ibid, p.37.4Krugman, Paul : Interview, The Economic Times, 11 thAugust 2009.5Obama, Barack : The Audacity of Hope, Crown Publishers,NY, 2006,p.359.6Make the Service Work for the Poor, Southern Economist,15 th July 2009.7Mead, Walter Russel, Ibid, p.89.8Kim, Chan W. and Mauborgne, Renee : Blue OceanStrategy, Harvard Business School Press, 2005, Boston,Massachusetts, U.S.A.9Stiglitz, Joseph E. : Ibid, p.172.10The Economist : A special report on world economy, 11 thOctober 2008, pp.28-30.11Boughton, James M. : Finance and Development, IMF,March 2009, pp.44-46.12Stiglitz, James E. : Ibid, p.120.13Mada, K. U. : A Journey Through Development Banking,Mumbai, p.1-2.14Stiglitz, James E. : Ibid, p.12-14.15Mada, K. U. : More Effective Global Financial Regulation,The India Economic Review, 31 st May 2009, p.121.16Ibid, p.12117The Economic Times, Mumbai, 11 th August 200918Smick, David M. : Ibid, p.31.19Ibid, p.35.20The Economist London, 8 th August 2009.21The Economist London, 18 th July, 2009, p.66.22Agarwal, Sanjay : “It’s time to act on IFRS”, BusinessLine, 18 th June 2009.23Smick, David M. : Ibid, p.32.24Ibid, p.61.25Ibid, p.32.26The Economist London, 24 th January 2009.27Reddy, Y.V.: India and the Global Crisis, Orient Black-Swan, 2009, p.34(The views expressed in the article are personal and do notreflect the official policy or position of the organisation.)THE INDIA ECONOMY REVIEW143

P OLITICAL ECONOMYPolitics, Governance,Political Economy ofDevelopment or Stagnation:West Bengal 2009Amiya K. ChaudhuriSenior Fellow, Maulana Abul Kalam Azad Institute of Asian Studies, KolkataPolitics of the Left PartiesCertain common properties, either inherent or constitutionallycontrived, characterize the working of the process of statepolitics in India. Achievement of good governance throughdemocratic means for realizing political modernization anddevelopment objectives has been the coveted goal. Besides,the securing of equal opportunity and special provisions fordeprived social groups find a special place in this overallobjective. Whether and to what extent this objective and thevalues underlying it are or can be realized depends upon theway the political parties in India-both national and regional,have conducted state affairs.Differential endowments in respect of political space andterritorial size as also the magnitude and the density ofpopulation are, of course, important components. However,socio-political ethos, which differs from state to state, constitutesthe most important factor. The interaction of all thesefactors has been instrumental in the prolonged rule of the LeftFront (LF) government in West Bengal. Of late, however,there have been definite signs of its decline throwing up thepossibility that it might be driven out of power in the next stateelection. It is against this background that the question of howthe LF, particularly, the Communist party of India (Marxist),the CPI (M), came into power, ruled for more than threedecades, and is now showing definite signs of its decline,assumes importance.In West Bengal, anti-Congressism has been the mainstay ofthe Marxist political parties. The refugees who had to migrateto West Bengal after Partition were more educated 1 and theMarxists targeted them to side with the oppositions; theirexistential conditions made them susceptible to the leftistideology and propaganda.If their existential condition turned them against theCongress government in the state, their education helpedthem to relate themselves meaningfully to leftist ideology.This made it easier for the left parties to mobilize a largenumber of the refugees against the Congress governmentdirectly and indirectly through culturally mediated popularmovements. The cinema shows and musical programmesdepicting the miserable plight of the uprooted people helpedthe process. Numerous refugee camps and colonies were builton government khas lands and on lands left behind by theMuslims around the state capital, Calcutta, and many of thesuburban areas including North Bengal. The left partiescontinuously highlighted the problems. But the activities ofthe Communist Party of India (undivided till 1964) were aimednot so much at redressing the deplorable conditions of theuprooted people from the erstwhile East Pakistan. Theirobjective was to as to gain political advantage. Successiveelection campaigns and electoral manifestos and electionresults of the state from 1952 to 1967 would prove the point. 2Add to it the fact that there existed a deep-seated feelingamong the people of West Bengal that the Central government,instead of following the strict principles of federalism,144 THE IIPM THINK TANK

M ICROM ACROpaid little attention to the prevailing regional situation, as wellas the socio-political perspective and the legitimate aspirationsof the people.Like other states, West Bengal too had several small partiesconfined to the state. As their presence favoured the Congressparty electorally, the CPI (M), a new avatar of the Communistparty since the split in the communist movement in 1964, andCPI, were contemptuous of other smaller parties. For opportunisticreasons, however, they did speak of some sort of a leftunity highlighting the Communist thesis of “United Front” 3strategy. But they did not care to recognize the pragmaticnecessity of establishing some equation between the powerfuland the smaller parties for the purposes of coalition making.In West Bengal, specific politics revolving around the Marxistparties seems different from that of the other states. TheMarxist very intelligently used their thesis that West Bengalwas discriminated both politically and economically by thesuccessive central governments. The Marxist parties, whenthey came into power, exploited both the situations; when theCentral government was strong, it raised the bogey of discriminationand in the case of a friendly but weak Centre, itsdemands for autonomy for the regional parties 4 became quitestrident and often met with success.The well calculated expediential relationship of the CPI (M)with the Congress is nicely illustrated by its decision in July2008, when the LF (with its 61 MPs) withdrew its support fromthe United Progressive Alliance (UPA) government. This wasmeant to express its opposition to the Indo-US civil nuclearagreement. The UPA government, however, survived becauseit received support from the Samajbadi Party (SP) of MulyamSingh Yadav with 38 MPs, while Mayawati and her BahujanSamaj Party (BSP) did not oppose. The CPI (M)’s political calculationwas to further emasculate the Congress at the statelevel in West Bengal and Kerala. At that juncture they thoughtit prudent to distance the LF from the Congress with a view toenhancing its image as Caesar’s wife, more honest and peopleoriented in their traditional bastions of West Bengal andKerala.Holding its strategy very close to the chest, the CPI (M)wanted to carve out an exit route in view of their future courseTHE INDIA ECONOMY REVIEW145

P OLITICAL ECONOMYof actions to maintain their electoral hold in Bengal. They didnot like to give up even an inch to the Congress and theTrinamool Congress (TMC) in state politics. Rather, they dideverything possible to keep the Congress and the TMC atloggerheads with each other. But this time, a large sections ofmiddle class, several groups of civil society, the refugees livingstill in the colonies, the Muslims and the Scheduled Castes andTribes, -the mainstay of social coalition that sustained the LFso long, appeared sternly to turn their back against the LF. TheLF was overbearing towards the Congress since the UPAseemed to it to be dependent on its support to remain inpower. This belief was reinforced by their success in fleecingtheir strategic pounds from the central government. Theintellectuals, artistes, singers and a number of literati, sidingwith the CPI and CPI (M), were appointed or nominated toimportant academic and other policymakingbodies in the state.These state institutions are veryimportant and their members are oftenregarded as part of the think-tank of thegovernment. It was quite characteristic,even though uncharitable, for thehighest leadership of the CPI (M) tosay: “the UPA coalition governmentsurvives on the LF’s support. Therefore,if we want them to stand up or sit downthey must do that.” 5 The other side ofthe coin is the decided unwillingness of the LF to shareresponsibility when the UPA government did unwittinglycommit mistakes. Actually, a large number of people in WestBengal did not like this sort of vocabulary.The LF led by the CPI (M) had to withdraw support fromthe UPA government for tactical reasons. They were to go infor parliamentary election next year in 2009 and do whateverwas possible to save its most important red bastion. If it hadmade the decision earlier, it would have been wiser. This is sofor the reason that its support base had already begun erodingbecause of its contradictory political stance: a pragmaticsupport for the Congress at the Centre and throwing, at thesame time, electoral challenges to the party in West Bengal.Note also the fact that the main opposition party, the TMC,earlier made a sustained campaign against the Congress Partyas a team ‘B’ of the CPI (M) in the state after its split from theCongress on January 1 st , in 1998. The TMC was now inThe refugeesexistentialconditions madethem susceptibleto the leftistideology andparty propagandaalliance with the Congress for the second time before 2001Assembly election. Also, the CPI (M)’s duplicity 6 in supportingCongress at the Centre and mock fight against the Congressat the same time in the state was perceived by the peoplequite ridiculous. Some of the left leaders thought that the LFshould have withdrawn its support much earlier to tidy up itshome turf. Its failure to do so is amply reflected in 2009parliamentary election results.The middle class people, possibly for reasons of their pasthistory, are in the habit of thinking that they are uncompromisinglyradical. 7 The communists and the ever-increasingband of their supporters considered themselves to be asuperior species. They considered themselves as ideologicallyprogressive having a correct socio-political and economicperspective. They continued to believe that the politics theywere engaged in, was guided by asuperior social ideology and politicalobjective as compared to other politicalparties in different states of India.More often than not they claim thatthe LF led by the CPI (M) stands for thepoor and is more democratic and peopleoriented than other political parties.They also claimed that the caste,communal divides and features that areparamount in other Indian states areabsent in West Bengal. However, a closelook at social situation in West Bengal suggests this idea to bea myth. This is confirmed by their mode of selecting candidatesfor contesting elections at all the levels. But once thecharm of left ideology wore out, social divisions came to havea large impact on how the people voted. It should also benoted that the life styles of leftist leaders at all levels haveundergone a sea change since 1977; they began behaving likethe elites of society since long. This elite mentality percolateddown to the most of the leaders down below. Instead ofperceiving society in terms of caste and communal distinctions,the left oriented Bengalee social groups would like todivide it into two classes- bhadarlok (elite) 8 and chhotolok(subaltern). They take it for granted that the subaltern or thechhotolok can, with subtle electoral engineering and politicalmanipulations, be brainwashed by continuous verbal outpourings.Possibly they ignore that the rise of the chhotolok class(in economic term) at certain historical junctures is a predes-146 THE IIPM THINK TANK

M ICROM ACROtined fact of social evolution.To the upper and middle class elites, Mamata Banerjee andTo the upper andmiddle class elites,Mamata Banerjeeand her partyTMC appeared torepresent the ruralsubalternsher party TMC appeared to represent the rural subalterns.They failed to realize that soon after the Assembly election inthe state in 2006, she would be able to mobilize the ruralmasses on the basis of their fear against the government’s landacquisition and Special Economic Zone (SEZ) relatedindustrial policies. In fact people begin to be disenchantedwith process of the Governance the LF led by the incumbentchief minister Buddhadeb Bhattacharjee. Unchallenged in theelectoral politics for such a long period, Bhattacharjee wentahead of his illustrious predecessor to obliterate the democraticdistinction between the party and the administration.He proceeded to think in terms of total equation between theparty run state and the civil society. According to RossMallick, 9 this government put partyinterest above the people. No otherIndian state, not even Kerala, anotherCPI (M) bastion, is guided by such amind-set. As he says, “Given this recordof failed reforms, non-reforms, andregressive policies, the question remainsas to how such a singularly unsuccessfulgovernment was able to achieve theworld record for being the longest rulingdemocratically elected Communistgovernment in history”. 10And, finally, the LF’s focused tirades against the Centralgovernment’s discriminatory attitude and actions, whether realor imagined, meant for popular consumption, have beenhabitual. They also claim that people’s rights to equality of lifeand liberty are better ensured in West Bengal than anywhereelse. But the fact of the matter is that the CPI (M)’s organizationaldominance in Bengal, particularly in the rural hinterland,for the last three decades has alienated even its importantpartners, the Revolutionary Socialist Party (RSP) and theForward Bloc (FB). The CPI (M)’s policy prescription and itsimplementation of the recent land and industrial policies 11kept them in the dark.The question then arises as to why the partners of the LF,despite their sense of alienation born of deprivation of realpolitical power, still cling together. An important ministerbelonging to the RSP underlined the reason: “It is simpleelectoral arithmetic and to a great extent of certain politicoelectoralcompulsion. If any of the major partners comes outof the left fold the result would be disastrous not only for anyindividual partner but the LF as a whole. The CPI (M) wouldalso suffer a political paralysis for years to come.” 12 And thisperception has refused to die even when the people of WestBengal nurture the sore caused to the people on differentoccasions. Note that the people still remember that the threeleaders, who had a hand in massacring the Sain brothers, inBardhaman on 17 th March 1970, 13 the day after the secondUnited Front fell, are actively alive and leading the CPI (M)from the front. The then chief minister, Ajoy Kumar Mukherjee,while submitting the resignation of his ministry, characterizedhis own 2 nd United Front government as “uncivilized andbarbaric,” 14 pointing to the partisan use of the police administrationby the then deputy chief minister, Jyoti Basu.Another instance of the LF’s totalindifference to the well being of thepeople they claim to serve is provided bythe tragic case of the refugees settled inMarichjhapi, an Island near Sundarvanin undivided 24 Parganas from early1978 to May 16 th , 1979. The refugeescame over to Sundarvan from Dandakaranyawhere they were originally settledin the arid areas of Madhya Pradesh andOrissa. They built up a colony atMarichjhapi. The CPI (M) committee ofrefugee organization in the island and around asked them totake the membership of the CPI (M). They refused and thegovernment retaliated harshly. The CPI (M) governmentstopped the supply of drinking water and food and committedthe sin of murdering many of the helpless and innocent secondtime refugees by burning their hutments and sinking theirboats while they were collecting food and drinking water, andultimately when they were fleeing from the island.This left an indelible dark spot on the history of the firstphase of the LF government in West Bengal. 15 Several privateindividuals have meticulously documented the stories. 16 Nextwere the Bijon Setu (the Ballygunj Station Flyover) murders inwhich the CPI (M) hoodlums burned alive 17 Sanyasis(including a woman). 17 The Bantala incident at South 24Parganas was gruesome; but the then the chief minister JyotiBabu took no serious note of it and commented: “These arenothing extraordinary; occasionally it may happen.” 18 AnotherTHE INDIA ECONOMY REVIEW147

P OLITICAL ECONOMYincident concerns the murder of Anita Deoyan. The other ladyof the same team was brought back to Calcutta seriouslywounded and mentally traumatized, unable to speak about theincident. 19 All these incidents, heinous as they were, shouldhave stirred the people out of their passivity. They did not doso for long. If the partners of the LF were worried about theirelectoral fortunes, why did not the people of West Bengalreact to these atrocities perpetrated by the LF supporters andactivists? They seem to have never confronted this reality. Ascholar piquantly answered the question, which should havestirred the earlier generations of the ever-protesting Bengalis:“Bengalis have adjusted remarkably well with the reality. Theyhave opted to coil up and seek comfort in pursuing the simpleart of making money.” 20 Another gruesome incident, whichoccurred at Khandua, Arambag in Howrah, involved the CPI(M) resorting to its method of politicallycontrolling the entire western belt ofrural West Bengal. It was some sort of apolitical cleansing.Atrocities like these paved the way forthe overwhelming victory of the LF inelections after elections particularlysince 1987. 21 On 21 st July 1993, the policebarricaded a Youth Congress processionled by its president Mamata Banerjee tosymbolically encircle the Writers’Buildings. When the younger restiveactivists attempted to cross over the police barricade, thepolice fired mercilessly without any heed to the police manual.Thirteen people were killed on the spot and many moreinjured. Thereafter, the police fired at the procession of theSocialist Unity Cente (SUC) near Curzon Park. One personwas killed and a few others suffered heavy injuries. The CPI(M) cadres mercilessly beat Mamata Banerjee, while still aYouth Congress leader, near Hazra Road, while protestingagainst a bundh called by the CPI (M). She had to be hospitalizedwith serious head and abdominal injuries for quite a long.Such attacks on Ms Banerjee were mounted frequently evenwhile she was in the Congress as a Central minister. Sheformed her own party, the Trinamool Congress (TMC) in 1998after serious differences with the state Congress leadership.Land reforms, with which the LF is credited and rightly so,but only initially in the earlier phase of the LF rule, have cometo a halt in 1986. In fact, a reverse process started by 1988. TheBy providingmuscle andmoney powers tothe leaders theurban real estatepromoters beganto rule the roostpanchayat system as a spearheaded by the LF to spread itstentacles to the remotest part of the rural areas, became bynow all “political panchayats,” 22 and was totally centralizedpolitically and administratively by the CPI (M). The power atall the three tiers came to be concentrated in the hands of thelocal and regional committee leaders. The urban bodies andtheir extended areas around urban conglomeration arecontrolled by the central party apparatchik at district headquarters.By providing muscle and money powers to theleaders the urban real estate promoters began to rule the roostwith the connivance of the party. Scholars from abroad, whostudied the functioning of panchayat bodies under the LFfront government, eulogized the LF government for its goodwork in rural areas. 23 However, D. Bandyapadhyay andNirmal Mukerji 24 and Pranab Bardhan and Dilip Mukherjee 25were down to earth in their assessments.Even those, who had benefited mostfrom the patronage of the government,could not believe the extent of theerosion of democratic values and theprevalence of corruption among the LFfunctionaries at different levels.What has helped the CPI (M) maintainits hegemonic dominance almost allover the state, was the policy of terrorizationin most of the rural hinterlandsand distribution of largesse to theaspirant elite sections including the government employees,trade unionists, rich peasants and teachers of all categories.The higher echelon of the government officials and high-rankingpolice personnel, who ever preferred status quo, was happybecause it was tension free for the reason 26 that the oppositionswere too emasculated to throw any challenge to thepowerful regime. The successive LF governments wereparticularly impatient and often vindictive against the oppositionTMC. Ultimately Ms Mamata Banerjee emerged as acharismatic mass leader. To the popular perception, she wasthe only uncompromising main opposition political leader tochallenge the “social fascist party i.e. the CPI (M)” 27 and the“misrule of the LF government.” 28 The chief minister, JyotiBasu, refused to meet Ms Banerjee--a central minister at thattime, when she went on a deputation to seek justice for a deafand raped victim of the CPI (M) cadres. She waited in front ofthe chief minister’s chamber. The police evicted her forcibly148 THE IIPM THINK TANK

M ICROM ACROand put her in the Lal Bazar jail. The police released her at thedead of night without any protection on her way home. Suchbehaviour from the police officer and ordinary constables wasa regular feature during the last 33 years of the LF rule.Misbehaviour with women by the CPI (M) leaders, theirconstant ridicules and frequent ill treatments encouraged thepolice administration to heckle Mamata Banerjee who hadendeared herself to the oppressed people of the state. 29Ms Banerjee began her fight for Maa, Mati, Manush(mother, earth and men) during Singur land acquisitionincident. It was a magical symbol and a slogan that helped theunderprivileged Scheduled Castes, Scheduled Tribes and theMuslim community at large to rally around the TMC. Shefasted for twenty-six days against the acquisition of themulti-cropped 997 acres of agricultural lands of the sufferingpeasants at Singur acquired for the Tatasby the government agency, West BengalIndustrial Development Corporation(WBIDC). Meanwhile, brutal killingstook place at Nandigram by the policeand the CPI (M)’s hired killers in policeuniforms. The Governor of the state,Gopal Gandhi characterized it as a “coldhorror.” 30 A very important civil societygroups took up the cudgel and played avery important role to expose the“fascist method of the BuddhadebBhattacharjee regime” 31 . After these two serious incidents forthree long decades, the people began shedding off their fearand came out in the open to seek a “change.” 32Against this backdrop of the explosion of the desire for achange, the parliamentary election was held in 2009. Theresults of the election were absolutely “demoralizing for theCPI (M) and signaled its decline after years of its control in allaspects of life in the state.” 33 The social coalition that createdthe LF was the product of a reality prevailing in the beginning.The Muslim, scheduled caste, scheduled tribes, the differentlayers of middle classes, a large numbers of intellectuals and alarge section of Trade Union leaders etc, constituted the socialcoalition, the LF was banking on. The LF began vaunting itssuperiority as a party with progressive socio-political values.Demonstrating its skill at showmanship, it began propagatingthat only it could give good governance to the people. Marxistsof their brand posed that only they understood the “nature ofThe successiveLF governmentswere particularlyimpatient andoften vindictiveagainst theopposition TMCIndian State.” 34 They claimed that they were better able topursue political economy of development. 35 The Chinesedevelopment pattern, rather than the US and Westerneconomic institution’s imperialistic model, would safeguardthe sovereign decision-making process and serve Indianinterest better, 36 the CPI (M) was supposed to claim. But theleaders always deceived the people knowing it well that it wasnot possible until and unless the Marxists of the West Bengalvariant were able to guide the total decision-making process ofthe government of IndiaThe Left Front Coalition Government has been continuingsince 1977. Only the Chief Minister was changed just sixmonths before the Assembly election in 2001. The youngergeneration of leaders of the Communist Party of India(Marxist) or CPI(M), in the face of a genuine electoralchallenge of the newer generation of theCongress and the Trinamul Congress(TMC), as evident from electoral data(1996 Assembly election and1998, 1999parliamentary elections) to a largeextent thought that the leadership ofJyoti Basu as the longest continuingChief Minister in the state might not beas fruitful as before. BuddhadebBhattacharjee, took over to face thechallenge of two combined oppositionParties. In the late 1990s the CPI(M)’syounger leaders began to be assertive. The other partners ofthe Left Front wanted Jyoti Basu to continue. They were usedto think that the coalition structures both at its social andpolitical levels were safe with the leadership of Jyoti Basu. Buttheir arguments did not cut much ice with the CPI(M) centralcommittee. The coalition partners demanded to create a postof the deputy chief minister, and a core group of ministers todiscuss important policy matters before they were brought tothe public domain. The CPI (M) was lukewarm or to beprecise quite unwilling. The idea, however, did neithermaterialize nor did the LF coalition face disintegration evenafter the election when the CPI(M) was reduce only to a singlemajority party of 143 MLAs rather than a predominant singleparty majority in the coalition as earlier.This coalition establishment is a unique experiment inIndian states as also at the Centre where the coalition cultureis yet to crystallize or institutionally mature.THE INDIA ECONOMY REVIEW149

P OLITICAL ECONOMYWhat are the factors that have tilted the balance in favour ofthe a state to maintain a coalition system for such a longperiod of time when the facts remain that the coalitiongovernment in its very nature is unstable be it in Europeancountries or in any country belonging to Asia Africa and LatinAmerica. This problem requires to be addressed empiricallywith the seriousness it deserves, and if possibly theoreticallyalso with the existing tools we have had in the already exploredparadigm by the western scholars.The post emergency Assembly election in 1977 served as thewatershed in the politics of West Bengal both in its electoraland political processes. The Jyoti Basu-led Coalition Governmentthat came into power in 1977 has been continuing stillwith only a change of the Chief Minister in 2000. The CommunistParty of India (Marxist) has been the predominantpartner. Coalition partners have becomemore important since the 2001 Assemblyelection. The three major coalitionparties-- Forward Bloc (FB), RevolutionarySocialist Party (RSP) andCommunist Party of India (CPI)—theoreticallynow have more bargainingpower in the system. However, the otherfive smaller parties are absolutelydependent on the CPI(M). In 2006Assembly election the CPI(M) regainedits earlier position of preeminence in theLF coalition. Therefore, governmental stability hasn’t becomean issue. Congress Party, by contrast, appeared to be almostdecimated in the aftermath of the emerging socio-politicalscenario since 1977.The Contributing Factors of StabilityA number of factors contribute to the unique stability of theLeft Front regime in West Bengal. The CPI(M) and otherFront partners have to learn the lessons of history they had tocome through. It taught them to maintain courteous publicrelations with the people at large. All the left parties particularlythe CPI (M) have acquired power through a series ofpolitical movements that brought them closer to the people.Measures of land reforms, reviving the system of rural selfgovernancethe way to get near to real power base, takingsome genuine popular policy decisions sometimes populistthough, determination not to go in for inter-party rivalries to aBy virtue of itscapacity for“direct andmediated” socialmobilization, theCPI (M) becamepredominantbreaking point despite provocations, always to keep alertagainst the politics of the opposition and building up offormidable party organizations and spreading them to thegrassroots levels, trying to nurse the electoral bases, andcreating a congenial environment to foster a coalition culture,are some of the important components of the leftist politics inthe state.The Left Front Regime has been dominant for the last 28years having won six consecutive elections. Predominance ofthe CPI (M) is one major reason for this unique record inIndia. By virtue of its capacity for “direct and mediated” 37social mobilization the CPI (M) became the predominantMarxist political party. The CPI (M) itself held the majority ofthe Assembly seats from 1977 to 1996. Again the CPI(M)came back to its original position having won 176 in 2006Assembly election. The party’s Assemblyseats began declining from the 1996election, but its percentage share ofvotes remained about the same. The leftparties came to realize from theirexperience that the voters in the statewere in favour of anti-establishmentpolitics of the mainstream left parties. Itappeared to any unattached politicalobserver, Marxist ideology or not, asocial coalition in the sense of societalspaces being as they were, was takingplace within. This indicated the mandate for the Left Frontwith CPI (M) in government making. 38 In earlier times, otherpartners of the Left Front like FB and RSP were seen to bequarrelling with CPI(M) regarding portfolio-sharing and otheroffice seeking claims. But that was only to a certain point. Theconflicts are dormant even now. The new developments arethat frequently in rural areas the smaller partners have hadclashes with local CPI(M) leaders. They seem to engineer splitwithin each of the smaller parties. The tendency of CPI(M) inthis process of having a horizontal spread in the electoral basesof the minor partners is frequent in recent years. Noticeablyduring elections all the partners putting aside their conflictingattitudes come to depend on CPI (M). The junior partnersrealize that without the support of the CPI(M) and its organization,their electoral forte is not secured. The secretary of thestate committee of the FB declared frequently that they are toguard the “unity of the Left Front as the apple of eye.” 39 The150 THE IIPM THINK TANK

M ICROM ACROleft parties did not repeat the mistakes, they failed to assess inthe late 1960s. They used to talk about left consolidation in the1930s and casually attempted to put together in the mid 1950sand 1960s. But ideological rigidities and angularities amongthemselves, despite their adherence to principles in a broaderframework of Marxism, stood in the way. Till then the Marxistparties were not sure about the efficacies of western parliamentaryliberal democracy. Before 1977 they never “imagined”to form a government themselves as a combination ofleft parties. 40 The political coalition of the left parties is theoutcome of a series of past socio-political movements. 41Ideologically all the left parties were on the same side of thespectrum but before 1977 they could not come to put together.For the first time they realized the impact of trying to sociallymobilize the people directly as also through programmes oftheir frontal organizations.The scholars have written volumesabout Bengal’s radicalism and sought tojustify CPI(M)’s rise to power. Thequestion to be seriously addressed is theLeft Front’s outstanding stability andelectoral successes for such a longperiod of time. In all other Indian statesincluding Kerala, endemic politicalinstability, social fragmentation in termsof castes, ethnicity and religions, crisis ofgovernance and electoral reverses arecommon features.The Left Front government was firmly established in 1977.Electoral arithmetic indicates that the vote share of the leftparties together never came down below 50% till the parliamentaryelections in 1998. It is said that the left parties withCPI(M) in the lead have been holding on in the crest ofBengal’s proverbial radical politics. The politics of anti-Centrismoften put the left parties nearer. Having a weak governmentat the Centre helped CPI(M) further strengthening itselectoral bases. It became successful to maintain its societalspaces among the rural masses irrespective of castes, communitiesand economic class divisions. Caste distinctions andCommunal hatred do not play significant role in West Bengalas elsewhere in other Indian states.The millions of refugees that crossed over to West Bengalboth at Partition and after continued to support the politics ofthe left parties. Earlier the left parties used to highlight NehruThe questionto be seriouslyaddressed is theLF’s outstandingstability andelectoral successesover a long periodgovernment’s discrimination against West Bengal in regard toits policy of refugee rehabilitation in comparison with what itdid in Punjab. The Centre’s policy of freight equalizationdepriving Bengal of her natural advantages and industriallicensing policy discrimination “against West Bengal” are twoother planks of the left politics that greatly influenced a largesection of people in the state. The influx of displaced personsboth Hindu and Muslim during the Bangladesh War in 1971supported the Congress governments at the Centre and thestate run by Siddhartha Roy. Some of them mostly Muslimswent back after the liberation of Bangladesh. The people whostayed back began to side with the left parties later. TheMuslim community 42 possibly, because of minority syndromeused to always support the establishment. The Congress as thelargest Indian party used earlier to enjoy their electoralsupport. Gradually the Left Frontgovernment was gaining in the state.With the rise of the Bharatiya JanataParty (BJP) in Indian politics, theMuslim population stood solidly behindthe coalition of the left parties in WestBengal. 43 The people mostly Muslimscrossing over the border by stealth foreconomic reasons, are patronized bymajor secular political parties. Most ofthem now constitute the support base ofthe Left Front. 44Several scholars studied the politics of West Bengal andmade out incisive analysis from different perspectives. 45 Asobserved now, the idioms of West Bengal politics in earlierdecades were different. The styles and moorings have beenchanged. The politics of a Congress dominant system withmultiple political parties competing with one another andagainst the Congress on the other was a shade different fromthat of the Left Front coalition. The number of politicalparties has been reduced, paradoxically to the advantages ofthe Left Front.The Left Front government initially took very fruitfuldecisions and sincerely sought to implement the same. Thosewere the programmes of land reforms through “OperationBarga” and secondly, to make the land reforms programmeeffective in the rural hinterland. The government overhauledthe moribund Panchayat system. Following the recommendationsof the Asok Mehta Committee Report, the three-tierTHE INDIA ECONOMY REVIEW151

P OLITICAL ECONOMYPanchayati raj system of rural self-governance was introduced.The first election of Gram Panchayat, PanchayatSamiti and Zilla Parishad, was held in 1978. It was a massiveexercise and people in rural areas began enthusiasticallyparticipating in local governance. It was in fact the first butdetermined effort on part of the New Leftist regime to spreadits politico-electoral tentacles to the rural areas. The lastelections in all the three tiers were held in 2003, the LFwinning the largest ever majorities 46 . In respect of landreforms and “operation barga”, the LF government did notcommit the same mistake of alienating the rich and middlepeasants of the village communities, which it did in theUnited Front eras. The Left Front government acquired morethan 1.30 million acres of benami (registered in other’s name)lands and distributed the same to the poorer and marginalpeasants. Pranab Bardhan and DilipMukherjee write, “A party with Leftistideology is more likely to have acquiredthe political will”. The governmentappears to have political will to undertakea measure of land reforms andremove several legal and administrativehurdles in the way. The authorscontinue, “Alternatively, intrinsic policypreferences of elected officials mayderive from the partisan interests oftheir electoral constituencies, andadditionally be subject to moral hazard wherein implementationrequires effort on the part of the officials. Second, theelectoral competition or populism can matter; land reformsmay be motivated by the need to expand vote shares”. 47 On asound judgment it transpires that the efficacies and claims ofpolicy implementation, later in the 1990s the claim of implementationfaced criticisms on several points.The urban and semi-urban middle classes were alreadysympathetic to the politics of the left parties. From its earlierunited front experience, CPI (M) learnt an important lesson.Through different channels it attempted to bring the membersof the staff of general administration as also police administrationin the side of the leftist organizations. To make its policiesand objectives acceptable to the larger sections of peopleCPI(M) attempted to woo the largest number of middle classemployees in different organizations and professionals. ItMore than 1.3million acres ofbenami landswere acquiredand distributed tothe poorer andmarginal peasantsallowed, unofficially though, the registered left orientedGovernment Employees Coordination Committee to haveexercised supervision not only over the ordinary employeesbut also over the officers. The employees of the governmentand semi-government institutions like government undertakings,cooperative societies, factories, schools, colleges andeven universities financially aided by the government weremostly won over by the LF government, by way of changingtheir service manuals, enacting laws for their security ofservices and increasing the salary packets. 48 Even the nongazettedpolice personnel were allowed to form association oftheir own and began functioning as members of trade union,as it were. In the beginning the chief minister Jyoti Basu madesuch concessions and even allowed the ordinary police unionmembers in a meeting to criticize against their superior IPSofficers 49 in the presence of the CalcuttaPolice Commissioner, IGP, DGP etc.All these policies brought about enormouselectoral dividends to the LeftFront regime making it as stable asnever before. Most of the governmentemployees were happy with the newdispensation. The Left Front governmenteven allowed its employees to goon strike to press their demands 50 anditself supported occasionally the politicsof Banglaband (All Bengal strikes) orBharatband (All India strikes) and Chakkajam (stopping railmovements) when directed against the “anti-people policies”of the “inconvenient” Central governments. The Left Frontregime undertook a large number of populist measures anddid not give sufficient thought about their economic sustainabilityresulting in the near fiscal collapse later in the 1990s.This prompted the government to roll back some of theirearlier political decisions after 2001.The Finance Minister, Asok Mitra announced unemploymentallowances without going into the long-term question offeasibility. The government started a large number of primaryschools, later colleges and even Universities in the state. Salaryhikes were made not only for the government employees butalso for teachers of all categories, education workers, and theemployees of the panchayat bodies and municipalities. Thegovernment implemented free education from primary to the10+2 level. To reduce the number of dropouts in schools, at152 THE IIPM THINK TANK

M ICROM ACROthe instance of the Left Front Committee the governmentabolished English teaching in government aided schools up toclass six but this policy had to be discarded in the face ofsevere criticisms after more than two decades. The rural poorand the larger peasantries were already supporting the LeftFront. After the panchayat elections the middle and richpeasants also crossed over, to support the new government.Regular municipal elections began to be held from 1982 to theadvantages of the LF. These factors helped the Left Frontconsolidating their politico-electoral bases for years to come.The main opposition parties were in a shambles. The Janataparty government at the Centre failed in the middle of 1979.The state unit of the party was split into factions. The honestcoins among them went out of circulation and the rest joinedthe Left Front.The Congress party was almostdecimated till it gained a little in1996Assembly election. A little later theparty was vertically split. MamataBanerjee led the split away party theTrinamul Congress (TMC). The Congressand TMC came closer withseat-adjustment before 2001 Assemblyelections. Allegations were made thatCPI (M) manipulated some of thecongress leaders to make the adjustmentinfractuous. 51 The people disenchantedwith CPI (M) are yet to find a powerful opposition politicalparty or a coalition of parties. Moreover the organizationalstrength of CPI (M) is fearfully imposing. The frontal organizations52 of CPI(M) continuously work for the party in allseasons. The members of all the opposition parties have beencrying hoarse about electoral malpractices of CPI(M). Thisallegation is borne by all the opposition parties and crosssectionsof ordinary people. A few prestigious newspapers anda section of intellectuals find some grains of truth in thistheory of politico-electoral engineering. 53Nossiter points out that “First the CPI (M) and the LeftFront have succeeded in identifying themselves with Bengaliresentment at what is perceived to be chronic central neglectof the difficulties of the State”. He continues, “Whateverdeficiencies there have been in the performance of the LeftFront, it is perceived as having a mission, discipline andleadership”, and “Last, the CPI (M) and its partners haveHistorically,West Bengal istruncated statewith problemspeculiar to itsown. It is denselypopulatedshown a capacity to learn from past mistakes”. 54 The foreignscholars are really enamoured with the remarkable stability ofthis Marxist regime within with a framework of parliamentarydemocratic system. But after more than three decades of itsexistence this factor of stability for various reasons particularlyactions, inactions and complacence of the big partners,CPI(M) the stability factors have been subjected to seriousscrutiny. Why did the coalition government even during theJyoti Basu regime for twenty three and a half years fail todeliver what the LF pledged to do? No new industry, risingunemployment, deterioration of educational standard, poorheath system but increasing party dominance in aspects ofpublic life became the signpost of the LF regimes. EvenBuddhadeb Bhattacharjee could not stem the rot. The stabilityof the LF rather stood in the way to political modernization,economic underdevelopment andinvisible social harmony. Therefore eventhe exemplary stability during the longyears in Bengal under the Marxists aseulogized by the leaders within thecountry and around failed improve thelife and living of teeming millions. Theywere mile to walk to redeem the pledgeof establishing equity with social justice.A newspaper banner head line, “Stabilityof Stagnation” 55 began jolting thediscerning people of the state.Demographic Feature and Cultural AttributesThe politics of a state is the product of a combination ofseveral factors, like history, geography, density of populationand the cultural differences within and lastly its format tointeract with geographic neighbours. Historically, West Bengalis truncated state with problems peculiar to its own. It is adensely populated border state. The borderline is porous andinfiltration is difficult to check. The state is having the largestMuslim population of 25.25%. 56 The Scheduled Castes andScheduled Tribes constitute 23.02% and 5.50% of the totalpopulation respectively.The cultural attributes of the population in differentregions of the state are varied. The cultural traits, traditionoriented family vis-à-vis social norms, mores and rituals,linguistic characteristics and style of dialects have been foundto be different from one region to another. The state ofTHE INDIA ECONOMY REVIEW153

P OLITICAL ECONOMYeconomic development, occupational engagements and eventhe idioms of politics as observed in the past do also vary quiteperceptively. In the recent years since the state-wise rise of leftideological politics attempts have been made to usher in amodernized secularization in the regions and the state at largein an ideological baggage.Process of GovernanceA unique experiment and steady political process comes toprevail. It is a period of accommodation among the partnersof the ruling Left Front. Political sanity among the warringleaders of the earlier United Fronts has been obtaining. Thenew process of governance follows.To a great extent the claims of a government shedding asidetheir earlier rigidities of Marxist ideological strapping arejustified. It was really possible for the simple reason that theCPI (M) did not commit the political mistakes that werecommitted during the late 1960s and early 1970s. Theabsolute power, the CPI (M) was mandated for, to run thestate, cooled down the political temperature of the party. Itwas a single party majority win for the CPI (M) along withother left parties.Secondly, predominant partner CPI (M) has a completesway over the rural areas. Maintaining a liberal democraticfaçade the CPI (M) began exercising its party dictum of“democratic centralism”, from the very beginning. Introducingdemocratic decentralization in running the panchayatsystem of governance in the vast rural hinterland, the party hasbeen exercising a centralized control. Therefore, the question,the party secretary himself stated above that the “Left Frontaims at growth with equity”, remains to be addressed. Havingruled the state unhindered without any disrupting oppositionmovements in social and political spaces for more than threedecades, the Left Front could have done better in its twinobjectives of growth and equity. 57 Enough central funds havebeen available for removing illiteracy, programmes for genderequality, health and sanitation, rural housing scheme (IndiraAbasan Yojana) and alleviating rural poverty in the form ofissuing BPL cards (people living below poverty line). 58 But it isshown frequently in comptroller and auditor general’s (CAG)Reports that the government could not utilize the totalamount of the funds released by the Centre for defaultingmatching grants by the state government facing financialcrunch for several years now.Political Economy of DevelopmentThis study to a significant way may reflect the socio-culturaland political economy of the diverse elements of the state’sprevailing political perspectives. A number of foreign andIndian scholars in their effort to carry on micro studies ondemocratic decentralization were offered to choose selectedpanchayat bodies. Most of them were engrossed with thechange of rural faces as a result of the economic activities ofthe Panchayati raj system in a Marxist state, pragmaticallydiluting its earlier rigid theoretical framework of “democraticcentralism, class struggle, social revolution etc,” Theycompacted their research findings of field survey data inWestern theoretical paradigm to highlight the politico-economicdevelopments within a liberal democratic frameworkof politics.Bardhan and Mukherjee are clear, and nearer the truthwhen they observed that only those panchayat bodies, 80 innumber they surveyed, were looking well to the expectationsof the people of those areas where political party competitionswere apparent; or in other words, “Land reform and implementationwas highest in villages where local governmentswere more evenly contested between the Left and Rightistparties”. 59 The panchayat bodies took off well in the developmentprocess of rural Bengal and continued with remarkablesuccess during the 1980s. The Left Front led by CPI(M), stillsporting its ideological strapping of “people’s democratic revolution”in a diluted form though, resorted to its formula of“democratic centralism”. The local party leaders that increasedby leaps and bounds over the years adapted themselvesin their area of control to the “bourgeois liberal method”of combining the western process of modernization anddevelopment. The consequences are many. As expected thecentralized control of the party spreads all over. In the processa paradoxical reverse took shape in rural governance. Thelocal satraps of the party took over the Panchayats at thelevels- Zilla Parishad, panchayat samiti and Gram panchayat.It was but natural in a state where influential rich and middlepeasants were used often to change their side in villagepolitics. In the last two decades many of the CPI (M) leadersin local levels were seen to become the “party unto them.”This was mostly felt in disjointed belt of underdevelopeddistricts of North Bengal, the Western belts of Purulia,Bankura, and Midnapur. The story of death by hunger inAmlasole 60 in southwest of Midnapur, in some tribal villages of154 THE IIPM THINK TANK

M ICROM ACROTable 1: Human Development Indices of District in West BengalDistricts Health Index Income Index Education IndexHuman developmentIndex (HDI)HDI RankDarjeeing 0.73 0.49 0.72 0.65 4Jalpaiguri 0.61 0.38 0.60 0.53 10Koch Bihar (Cooch Bihar) 0.50 0.41 0.65 0.52 11Dinajpur 0.62 0.39 0.53 0.51 13Malda 0.49 0.36 0.48 0.44 17Murshidabad 0.57 0.29 0.52 0.46 15Birbhum 0.53 0.27 0.61 0.47 14Bardhaman (Burdwan) 0.74 0.47 0.71 0.64 5Nadia 0.65 0.41 0.66 0.57 9North 24-Parganas 0.72 0.49 0.76 0.66 3Hugli (Hooghly) 0.77 0.46 0.67 0.63 6Bankura 0.67 0.26 0.62 0.52 11Purulia 0.61 0.18 0.55 0.45 16Medinipur (Midnapore-east& westtogether)0.68 0.45 0.74 0.62 7Haora (Howrah) 0.77 0.58 0.75 0.68 2Kolkata 0.82 0.73 0.80 0.78 1South 24-Parganas 0.71 0.40 0.68 0.60 8West Bengal 0.70 0.41 0.69 0.61 8*Source: West Bengal Human Development Report 2004, Govt. of West Bengal, Kolkata,Purulia, Nadia and eastern part of Murshidabad might besymbolic but the facts are undeniable. In many tribal areas thelocal leaders did not care to distribute the “Below PovertyLine” (BPL) cards to the genuine poor. 61 Even today, thegovernment itself admitted that a total number of 4612 villageshave been marked “under-developed”. The poor peoplemiserably living below poverty line number 4.6 millions asreported in West Bengal Human Development Report 2004. 62The phenomenal growth of a communist party with all of itsfrontal organizations is both a strength and weakness in thisstate. In electoral politics the opposition parties like TrinamulCongress (TMC), Congress (CONG), Bharatiya Janata Party(BJP) or smaller parties like Socialist Unity Centre (SUC) andothers separately or even in a ramshackle combination wereno match for CPI (M) in this regard. The growth of theMaoists and People’s War Group (PWG), Naxals, activelyengaging in the western belt of Purulia, Bankura, Birbhum andsouthwestern part of Midnapur or Lalgarh to be exact appearedto be disconcerting. The other “secessionist” leaders of“Kamtapuri movement”, Gorkha National Liberation Front(GNLF) led by Subhas Ghising, now reoriented Gorkha JanaMukti Morcha GJMM) led by Bimal Gurung and the movementsfor “Greater Cooch Behar demand” in North Bengalwere not so conspicuous even a few years back.Politico-electoral management by the party organizationdoes not go hand in hand with the governmental managementof the economy in the state. Recession in industries like jute,smaller iron factories, manufacturing and engineering industries,tea processing units of the North Bengal region isalarming. Absence of agro-industries and moribund villageindustries, are plaguing the state. Scarcely there are wellrunning small-scale industries to provide alternative opportunitiesfor employment. Retrenchment of the workers, evenvery low-paid workers and unemployment in other sectors areincreasing. Among the staggering unemployment of more 7.5millions, there are a large number of educated unemployedTHE INDIA ECONOMY REVIEW155

P OLITICAL ECONOMYthat tops the list among all other Indian states. Thegovernment has made a survey and found that the povertystricken villages have a spread all over the state. 63 Despitea unique political stability of the regime for the last severalyears and political management skill of the Left Front, theinference that the government often failed to redeem itspledges, is quite apparent.Politics: Redefined or Stagnating?Indirectly, due to this weak electoral presence of the politics ofopposition, the politics of the CPI (M) itself sometimes appearto be stagnating. The party organizations could not launch anymovements against any shortsighted policies of governmentthey have been supporting. The industrial stagnation began.Basu to revive the industrial sickness and rope in the foreigninvestors or NRI visited different countries, but of no avail withany visible results. The CPI (M) affiliated Centre for Indiantrade Unions (CITU) keeps quiet when workers of publicundertakings, several Jute Mills, industrial houses, Tea gardens,Tea industries in North Bengal lost their jobs. Despite severallacunas in the education policy, the students’ community underthe leadership of the Student Federation (SFI) remains mostlysilent as never before in the past. So is the Kisan Sabha, theCPI (M)’s peasants’ organization. In the mean while groups ofmiscreants under the patronage of some of the party high-up bystealth entered the party folds. Real estate business under theparty backed promoters, land dealers, suppliers and contractorswere having free hands in exchange for whatever wasdemanded. It is all visible and can not escape the notice of eventhe ordinary public but nobody has to do anything. Watching allthe circumstances around, one of the tallest leader of theCPI(M) and minister of land revenue, Benoykrishna Chowdhurywas pained to comment, “It has become a contractorsraj,” or a regime of the contractors. The Chief Minister Basuretorted, “in that case why he is the government,” 64 BenoyChowdhury did not quit because it was not easy for a man likehim to quit the government of a communist party.The party functionaries and office bearers of panchayat andurban civic bodies were mired in different types of corruption.Many Newspaper stories and even administrative reportsmentioned this aspect of corruption often frequently. Corruptionsseemed to be seeping in almost visibly into differentlayers of the party. But at least some consequences werereflected in the voters’ choice in the 1996 elections. Thenumber of the seats the CPI (M) was gaining in all the previousAssembly elections was drastically reduced to 150 only, and thetotal number of seats gained by the Left Front, as a whole was203 as compared with 246 seats in 1991. The 1996 parliamentaryelection provided a unique opportunity to Jyoti Basu. Thepartners on consensus of the makeshift coalition at the Centreoffered the post of the prime minister to Basu. Basu was willingbut his younger party colleagues prevented him from acceptingthe offer. Basu was debarred on the plea that such unstablecoalition with a Marxist leader at the head on the mercy of theCongress party “still then a political enemy of the Marxists”would do more harm than good to CPI(M). The objectivecondition was not ripe enough for a communist party to acceptthe offer. Basu did not suppress his frustration and commentedthat “it is a historic blunder” 65 on the part of the CPI (M). Therise of Mamata Banerjee over-shadowing other leaders of thestate congress party indicated another phase of revival of thecongress party at the state level. Secondly, in 1997, MamataBanerjee came out of the party and founded her own Trinamulcongress (TMC) and joined the National Democratic Alliance(NDA) as a partner. She came of a lower middle class backgroundand within a very short period acquired some charismaticcharm to mobilize enormous crowd around her. Herjoining the NDA and her capacity to attract large sections ofthe people both rural and urban, who were dissatisfied with theMarxist regime, sent a danger signal to the CPI (M). Theyounger leaders of the party began thinking that Basu wouldnot fit in the bill in the emerging context. Buddhadeb took overas the new chief minister. He was supposed to be the leader ofthe younger generation. Since 1977 he was in the cabinet ofJyoti Basu and Bhattacharjee was supposed to deliver whenBasu was failing. Looking back even Bhattacharjee could not fitin the bill in the late 1990s and early 2000-2009s. Leaving asidethe result of the 2001 election, the parliamentary election resultin 2004 went in favour of the new chief minister, which alsoreflected Assembly election for the CPI(M) in a massive way.Possibly that were the turning point in three decade long LF’selectoral fate.ConclusionDuring the last three years since 2006, a change has overtakenthe politics of the CPI (M). Due to their faulty industrial policyignoring the land interest of the poor peasants, peasants tookplace in several places in the state. The civil society groups156 THE IIPM THINK TANK

M ICROM ACROsupported it. Not to speak of good governance BuddhadebBhattacharjee appears to stumble over in respect of both thegeneral and the police administration. The main oppositionleader Mamata exploited this unique opportunity by formingan alternative coalition with smaller left parties and severalother civil society organizations. Her latest attempt to make anear perfect seat adjustment with the Congress Party beforethe Panchayat Raj elections in 2008 and Parliamentary electionin 2009 gave her unprecedented dividends. Now oppositionparties mostly led by Mamata Banerjee and her TrinamoolCongress Party gather enough strength to challenge theMarxist monolith. The way the CPI (M) wanted to suppress thepeasants’ revolt in different places of the state and the popularmovements against the police and the cadres of the CPI (M)atrocities became counter-productive. If things continue likewhat it is now and the Buddhadeb Bhattacharjee governmentfails reestablish its legitimacy, popular preference is very likelyto go against the CPI (M).Possibly three tier Panchayat elections in 2008, severalby-elections, the Parliamentary elections in 2009 and severalother local elections as well for the last one year have beenshowing the way West Bengal politics is going to be shaped upin near future.Endnotes and Additional Thinking1West Bengal : An Analytical Study, The Bengal Chamber ofCommerce and Industry, Oxford & IBH Publishing Co,Calcutta, 1971.2Amiya K. Chaudhuri, “Electoral Politics in West Bengal : Apredominant Party in Government”, in Suchandana Chatterjeeedited Asia Annual 2006,Standard Publishers (India),New Delhi, 2007.3Leon Trotsky, General consideration of the United Front,1924; In this connection the Marxists focused on thecontribution of Georgi Dimitrov’s concept of “united andpopular fronts directed against the rising tide of fascism”,Vijay Singh, “Georgi Dimitrov and the United NationalFront in China 1936-1944”, http://www.revolutionary democracy.org/rdv5n2/drimitrov.htm;see also EN.Sivadasan, “Acomparative Study of the CPI(M) and CPI led CoalitionGovernment in Kerala: Politics and Policy Implementation”(unpublished Paper), Department of Political Science, St.Thomas College, Palai, Mahatma Gandhi university, June,1971.4Interview, Jyoti Basu, August 4 th , 2004; this author, interviewedJyoti Babu, in connection with the UPIASI projecton “Coalition Politics in West Bengal”; Sri Basu expressedthis forthright opinion in this private discussion.5During a few LF rallies in the Kolkata Maidan after the UPAcoalition taking over the CM made this comment, TheStatesman, Kolkata, July 12 th , 2008.6Popular perception as found in The Survey Report, WestBengal Chapter, UPAISI, August 2005.7Marcus F. Franda, Radical Politics in West Bengal, MITPress Cambridge, Mass, 1971; Atul Kohli (ed), India’sDemocracy: An Analysis of Changing State Society Relations,Princeton, N.J, Princeton University Press, 1988.8John. Broomfield, Elite Conflict in a Plural Society, Berkeley,University of California Press, 1968. This categorizationof Bengal society in the 1920s among the political leadershipstill holds good in the present day West Bengal society andpolitical classes.9Ross Mallick, Development policy of a Communist government:West Bengal since 1977, Cambridge University Press,New York, 1993.10Ibid, p.214.11Sangbad Pratidin, Kolkata, July 5 th , 2009, it is a very wellcirculated language daily that carries the story, the “RSP’sCentral Committee comes to the conclusion that the CPI(M)has gradually been detached from the people for their landand industrial policies”.12Kshiti Goswami, PWD minister of the LF government toldthe author in a Television (DD, Kolkata centre) interview onMay 16 th , 2009.13The Statesman, Calcutta, March 18 th , 1970.14Udayan Nambudri, Bengal’s Night Without End, India FirstFoundation, New Delhi, 2006.15Jagadish Chandra Mondal, Marichjhapi: NaishabderAntarale( Gana hatyar ek Kalo Itihas)in Bengali people’sBook Society Kolkata 2002.16Udayan Nambudri, Bengal’s Night Without End, op.cit; seealso the book written by Amitva Ghosh, The Hungry Tide,Ravi Dayal, Publisher, New Delhi, 2004.17Niranjan Halder, former assistant editor of Ananda BazarPatrika who lived near the place of this gruesome incidentdescribed the scene most vividly in his occasional writingsand told the author recently in an interview on April 12 th ,2009; see also Udayan Nambudri West Bengal’s Night neverTHE INDIA ECONOMY REVIEW157

P OLITICAL ECONOMYEnds in greater detail, op.cit.18The Statesman, Calcutta, May 18 th , 1990.19Udayan Nambudri, Bengal’s Night without End, op.cit,p393.20Ibid, p85.21Barun Sen Gupta, editor, Bartaman Patrika a languageDaily in post edit wrote extensively about the electoralmalpractices of the CPI(M) after most of the Assembly andParliamentary elections in West Bengal particularly since1987; he even investigated every panchayat and municipalelections and printed pictures to show as to how all thosehappened during the days of elections; see also PrabirGhosal, CPIM-er rigging, (Bengali), Mukherjee Publishing,2005 and a number of researched Bengali publications onthe subject.22D.Bandyapadhyay and N. Mukerji, New Horizon for WestBengal Panchayats 1993, a report, the government of WestBengal commissioned in 1992 but the published report waswithheld for circulation.23Glyn Williams, “Rethinking West Bengal’s Stability : FromParty Organization to Local Practices of Politics” in JohnZavos, et al edited, The Politic of Cultural Mobilization inIndia, OUP, Kolkata, 2004: Arild Engelsen Ruud, Poetics ofVillage Politics : The making of West Bengal Rural Communism,OUP, New Delhi, 2003; Neil Webster, Panchayati Rajand the Decentralization of Development Planning in WestBengal, KP Bagchi & Co, 1992; O.k. Lieten, Development,Devolution and Democracy: village Discourse in WestBengal, Sage Publications, New Delhi, 1996, and a fewothers among them, Nossiter, Marxist State Government inIndia :Politics, Economics and Society, Printer Publishers,London, 1988.24D.Bandyapadhyay and Nirmal Mukerji, op.cit.25Pranab Bardhan and Dilip Mukherjee, “Political Economyof Land Reforms in West Bengal." People.bw.edu/dilipm/wkpap/wbpelref17.pdf26Interview, Jawhar Sarkar, joined as the secretary of Industrybeing transferred from the post of the CEO of West Bengal,November 6 th , 200127Debabrata Bandyapadhyay, the present state GeneralSecretary of the RSP, used the same term while the CPI (M)led by Jyoti Basu took away the Panchayat port folio fromhim and his party after 1987 Assembly election in WestBengal; Shri Bandyapadhyay expressed the same opinionwhile talking to the present author while writing on “TheCoalition Politics in West Bengal” in an interview in August8 th , 2006.28Mahasweta Devi, Dainik Statesman (the Bengali edition ofThe Statesman, Kolkata), July 20 th , 2009.29Tusar Talukdar, this former Calcutta police Commissionerassessed Mamata Banerjee’s rise to the political height thatMamata Banerjee achieved, August 2 nd , 2009.30The Governor, Shri Gopal Gandhi issued the statement inthe night of 14 th March and published in all the leadingNewspaper, March 15 th , 200731Mahasweta Devi, Amitava Chaudhuri (SriNirapeksha),Saoli Mitra, Bivas Chakraborty, Kaushik Sen, Kabir Suman(singer), Nachiketa (singer) and many others took up thecauses and wrote several pieces in different Newspaper,particularly the Dainik Statesman, Kolkata from the verybeginning of the Nandigram incident on March 14 th , 200732Just before the 2009 General Election in India, hoardingsconceptualized, devised by Shuvaprasanna- the renownedBengali artiste. Several faces of eminent Bengali intellectuals,writers, poets, social activists, Professors, cinemadirectors, stage actors, and directors, artistes and singerswere seen in several different places in each of the 42parliamentary constituencies; the theme was “We wantChange”; it appeared to be a surrealistic painting to thediscerning viewers; there were only a dozen faces on thehoarding; on the faces and the ambience created on thecanvas one can imagine more than five crore voters whomight be desiring for a change after a span of 32 years of acartel of political oligopolies. This hoarding might have atremendous influence on the people of the state; the LFparticularly the CPI(M) became shaky and began makingwide allegations that American imperialistic forces and theforeign money of the NGOs had been playing the mostsignificant roles to destabilize a “very well governed Marxistgovernment,” as claimed by the CPI(M) leaders in the state;but the bad logic and the knee-jerk reactions of the CPI(M)did not cut much ice this time around; the people made uptheir minds and exercised their options in West Bengalelection that was unique after 1984 when the oppositionCongress Party was able to garner only 16 seats.33Interviews, with several rational leaders, including Universityteachers, once holding the post of Vice-chancellors, ofthe CPI (M), on different days, 20 th , 25 th May, and July 22 nd ,158 THE IIPM THINK TANK

M ICROM ACRO2009.34Quoting the much earlier document the two commentatorsdilated the phrase; Gene D. Overstreet and Marshall WindMiller, Communism in India, The Perennial Press, Bombay,196035Atin Sarkar, a member of the undivided Communist Party,“Shameless False Propaganda is the forte of the CPI(M),”Dainik Statesman, Kolkata, August 12 th , 2009.36Istehar, Panchadash Lok Sabha Nirbachan, 2009, BharaterCommunist Party,(Marxbadi), [ tran, Manifesto, 15 th LokSabha Election, 2009, Communist Party of India (Marxist)],37Rudolf and Rudolf, “Determinants and Varieties ofAgrarian Mobilization”, University of Chicago (Mimeo)1979, quoted by Rakhahari Chatterji, “Political Change inWest Bengal”, Rakhahari Chatterji (ed), Politics in WestBengal: Institution, processes and problems, World Press,Calcutta, 1985.38Electoral data substantiate the point.39Asok Ghosh, secretary state committee, Forward Bloc,November 5 th , 2004.40Interviews,Jyoti Basu, 4 th September 2004.41Left parties’ popular movements, for refugee rehabilitationwithin West Bengal since 1950s.42Census Report 2001,The Muslim Community constitutes25.25% of the total population in West Bengal.43Survey, CSDS in1999&2001 elections, UPIASI Field survey,2004-05.44Bangladeshi Infiltrations, The Statesman, Kolkata, May-June 2005;The Times of India, Kolkata,May 15 th -20 th , ’05.45Myron Weiner, The Politics of Scarcity, Asia PublishingHouse, Calcutta 1963, Political Development and PoliticalDecay in Bengal, Firma K. L. Mukhapadhyay, Calcutta,1971, Paul Brass, Ethnicity and Nationalism, Sage NewDelhi 1991, Atul Kohli, The State and Poverty in IndiaCambridge University Press 1987; Democracy andDiscontent, Cambridge University Press, 1991; Biplab DasGupta, Naxalite Movement, Bombay, Allied Publishers,1975.46Out of more than forty-eight thousand six hundred seats inall the three tiers, the LF won six thousand eight hundredseats uncontested. There were no opposition candidates inmore than 22 thousand seats in 2003 election. The oppositionparties and the local Newspapers widely reported theallegations that the CPI(M) did not allow the main oppositionparties to file their nomination papers.47Pranab Bardhan and Dilip Mookerjee, “Political Economyof Land Reforms in West Bengal”, Journal of PoliticalEconomy, 110(2) pp.239-89.48Ross Mallick, Development Policy of Communist Government:West Bengal since 1977, Cambridge University Press,1993, chapter 5; The Statesman, Calcutta, February 10 th ,1998,49Interviews, Two IPS officers (retired since), January 15 th ,2004. Dr. Amiya Samanta IPS (Rtd DG) corroborated,interview on August 17 th , 2005.50The Statesman, Calcutta, May 25 th , 1980, Basu agreed togive them right to strike”. See also government sponsoredSrike, Ananda Bazar, Kolkata, September 30 th , 200551Interviews, Even the former chief minister Basu told the thatmany of the congress leaders used to come to him while inoffice for some personal favours, September 4 th , 2004.52Sources, Central Party office, CPI(M) at Alimuddin Street,Kolkata. Memberships of Student Federation, 13 lakh 2thousand, DYFI – 70 lakh 71 thousand, Krisan Sabha – 1crore 32 lakh 778 thousand and CITU – 12 lakh 74 thousand,as of December 2004.53Ibid.54Nossiter, Marxist State Governments in India: Politics,Economics and society, Printer Publishers, London andNewYork, 1988, pp. 138-39.55The Statesman, Kolkata edition, Kolkata, January 16 th , 2010.56Census of India, Report 2001.57The Pratichi Health Report, introduction by Amartya SenNumber 1, 2005, Pratichi (India) Trust, Delhi, 2005.58Aloke Banerjee, “Bengal tops the hunger list” HindustanTimes, Kolkata, July 14 th , 2004.59Bardhan and Mookerjee, op.cit, pp 1-2.60Ananda Bazar Patrika, Kolkata July 27 th , 2005.61Dainik Statesman, Kolkata, July 30 th , 2005.62Ananda Bazar Patrika, Kolkata, August 8 th , 2005.63Jayanta Ghosal, Ananda Bazar Patrika, Kolkata, August 21 st ,2005.64The Statesman, Calcutta, December 10 th , 1995; The Statesman,Calcutta, December 20 th , 1995.65The Statesman, Calcutta, January 2 nd , 1997.(The views expressed in the article are personal and do not reflectthe official policy or position of the organisation.)THE INDIA ECONOMY REVIEW159

W ELFARE ECONOMICSCreating Jobs forRural Youth in AndhraPradesh, India160 THE IIPM THINK TANK

M ICROM ACROMeera ShenoyExecutive Director,Employment Generation and Marketing Mission(EGMM), HyderabadSmriti LakheyJunior Professional Associate,South Asia Sustainable Development Department,World BankParmesh ShahLead Rural Development Special,South Asia Sustainable Development Department,World BankBox 1:The 5 Key Elements of a SuccessfulJob Promotion Strategy1. Aggregating demand of the rural laborforce2. Scanning the Market to Identify EmploymentOpportunities3. Setting up Market-Linked Job Academies4. Matching job seekers with job placements5. Providing Post Placement SupportOne job per poor rural family. This is the goal ofthe Employment Generation & MarketingMission (EGMM), which was established in 2005by the Andhra Pradesh Rural Poverty Reduction Program(APRPRP) 1 . Andhra Pradesh’s unemployment rate (6.7percent) is slightly higher than that of India (six percent),but these numbers do not give the full picture of employmentchallenges. Rural areas are plagued with low incomesand underemployment with many people working in theinformal sector, manual labor or seasonal small scalefarming. EGMM’s mission is to respond to this problem byfacilitating employment in the formal sector — which offersmore stable and higher incomes—for economically underprivilegedrural youth so that poor households can leavepoverty within one generation.EGMM recruits unemployed or under-employed youthfrom poor households by working through the institutionalnetwork of rural self-help groups (SHGs) and their federationsdeveloped by APRPRP. By offering an end to endemployment solution (training —placement — post-place-Table 1: The Scale of EGMMYear No of Youth Trained No of Youth Placed2005-06 12,320 11,2002006-07 38,194 33,8002007-08 74,750 65,0002008-09 101,645 73,891Total 226,909 183,891THE INDIA ECONOMY REVIEW161

W ELFARE ECONOMICSFigure 1: Employment Generation Model of EGMMEmployedYouthJob Placement inPrivate CompaniesZSMonitors the overall program andControls fundsMSVOOversees theAcademyIndentifies youth to be enrolled in the ruralacademy Counsels identified youthEGMM RuralAcademyJobResourcePerson (JRP)Mar k e t S c a nRegisters youth in jobs databaseSHGChildren of SHG members who are educated andlooking for work, but are held back by their povertyment support — alumni network) to rural youth, EGGMenables the poor to find jobs in the organized sector onbetter terms, with better skills, and higher wages. Altogether1,85,784 youths have been trained and linked to jobs.To achieve its goal of generating employment for ruralyouth, EGMM works with the state government, the privatesector, and community institutions of the rural poor.Accurate targeting is an important component of theprogram. EGMM targets rural youth from poor families ofSHGs who are between 18 and 28 years of age. Theireducation levels vary – from having limited ability of justbeing able to read and write to having graduate degrees.Targeting is highly enhanced by a database of unemployedyouth from the poor communities which has been systematicallygathered and updated from remote areas. Of thosewho received training, about 80 percent have been linked tojobs. While the EGMM program started small - and thosetrying to start similar employment generation programsshould perhaps also begin with smaller pilots which willallow them flexibility and customization to local needs-today, EGMM has emerged as the single largest jobsmission for the rural poor in India. Its programs, such asRural Retail Academies command a strong brand name. Infour years of operation, 2,26,909 youth have been trained at450 EGMM training centers that are located in rural andtribal areas. Forty-five percent of these are girls and 37percent are from the most vulnerable groups of scheduledcastes and tribes.162 THE IIPM THINK TANK

M ICROM ACROThe Institutional FrameworkSHG Networks As The Core BackboneEGMM was piloted by Society for Elimination of RuralPoverty (SERP), the implementing agency of APRPRP, toenable the poor households to diversify their sources oflivelihoods. SERP relies upon the extensive network of800,000 SHGs — groups of 10 to 15 poor women who saveand rotate funds together, and carry out various livelihoodsactivities — to target the poorest youth in the communities,disseminate program information and penetrate remotevillage areas. EGMM recruits children of SHG members inits program. Between 2000 and 2006, during the first phaseof the APRPRP program, members of SHGs invested 204percent more in educating their children than before. Thisprogram makes it possible for them to reap the benefits oftheir investments.The institutional platform of the poor and the governancemechanism used by SHGs to run and monitor other communityprograms is used in the jobs program as well.Village Organizations (VOs) — the initial federation ofSHGs within the village — are responsible for overseeingthe identification of youth for employment and for counselingthem. Working with them is anew cadre developed and trained bythe EGMM called Job ResourcePersons (JRP). At Mandal Samakya(MS) level — the first tier at whichVOs federate — a three member “jobcommittee” is formed that discussesand shares experiences of the EGMMjobs program across the villages withthe vision of creating unemploymentfreemandals. The highest level offederation of SHGs at the district level,the Zilla Samakya (ZS), is responsible for monitoringSHGs, VOs, and MSs and it controls the funds fl owingdown to the communities. ZS manages logistics such asproviding bus passes to youth when they travel to cities forjobs and arranging their accommodations. They alsofacilitate parent meetings and counsel parents to send theiryouth, especially girls, to enroll in training centers. Thisthree tiered structure of rural institutions results in abottom-up approach and ensures ownership of the programfrom the community.APRPRP pilotedthe EGMM outof realizationthat there is ahigh demand forformal sector jobsin rural areasBox 2: Recruitment at the HDFC Banks’ RuralBPOHDFC Bank needed to quickly set up deliverables for newcustomers for services such as opening bank accounts,issuing credit cards, etc. The Bank set up back roomoperations in nine larger cities but faced the twin problemsof attrition and the high cost of infrastructure. When theBank decided to set up a rural BPO, it approached EGMMfor manpower. Says A. Gopinath, Vice President, “This isthe best model the Bank has seen in 13 years of its existence.Productivity is 200% higher than other BPOs- they fill 400forms versus 75 in operations based in cities. Absenteeism isminimal. Work ethics taught by EGMM is amazing.”Public-Private Institutional StructureEGMM has an executive committee with senior governmentofficers and an executive director with experience from theprivate sector. In the field, government officers such asDistrict Collectors, Project Directors of the District RuralDevelopment Agencies (DRDA) and Project Officers of theIntegrated Tribal Development Agency (ITDA) support theprogram. A core private sector team in EGMM at the statelevel builds links with the private sectorand incorporates their feedback intothe programs of the academies. Thisunique institutional structure thatincorporates governance mechanismsand knowledge from both the privateand public sectors is critical for amarket-led program like EGMM.Five Key Elements of the JobPromotion Strategy1. Aggregating Demand of theRural Labor ForceAPRPRP piloted the EGMM out of realization that there isa high demand for formal sector jobs in rural areas amongyoung people who are educated but have limited resourcesand information to pursue them. Assessing the nature andvolume of job demands is critical in designing the trainingprograms and the job placements.Job Resource Persons (JRPs) play an important role indemand assessment and demand creation among the ruralyouth. JRPs are also members of SHGs. They raise aware-THE INDIA ECONOMY REVIEW163

W ELFARE ECONOMICSness about the job program in rural areas, facilitate theprocess of identifying the poorest youth eligible for theprogram, counsel them, and recruit them into the EGMMprogram. Trained by the EGMM, these JRPs visit everyhousehold in the villages and compile a database of unemployedand vulnerable youth for monitoring and targetingpurposes. This database is fed into the EGMM software,which assigns a unique registration number for every youth.Based on their qualifications and the job demand in themarket, registered youth are screened and enrolled in thelocal training centers.The VOs play an active role in identifying the eligibleyouth for the job program and counseling them.2. Scanning the Market to Identify EmploymentOpportunitiesBased on secondary source researchand data from market scan reports,growth sectors—industries which areexperiencing relatively higher growthfor next three years— are identifiedand targeted for employment opportunities.EGMM officials visit potentialcompanies for employment with a viewto understand their entry level employmentneeds and their specifications oftrained manpower. Training centerstailor their courses accordingly. Marketscans for assessing the job market are important elements ofthe strategy for creating jobs for rural youth. Trainings forretail, sales, security guards, restaurants business, dataentry, electrical operations, plumbing, sanitation, carpentry,painting and decoration, heavy equipment driving, apparel,etc, have been set up in rural and remote tribal areas.Students are matched for trainings according to theireducation level and interests. For instance, those who havelimited literacy skills are trained in construction and textiles.Meanwhile those with eighth grade to graduate level literacyare linked to new economy sectors such as sales, retail,tourism, hotel industry, business process outsourcing (BPO),and other skilled sectors.3. Setting up Market-linked Job AcademiesRural academies for retail, security guards, English classes,Companies recruitfrom EGMM bothfor the qualityof trainees andsupport offeredto the youthpost-placementwork readiness, and computer operations, have been set upin partnership with industry. A training course typically lastsfrom 15 days to three months. Industry associations helpwith curriculum development and teach at the EGMMacademies as guest lecturers. In addition to the sectorspecific technical trainings in classrooms, techniques such asrole plays, mock job interviews, and grooming of the traineesare necessary and are used to help students fit in their newjob roles. Emphasis is also given to soft skills developmentsuch as grooming, personality development, time and moneymanagement, and goals setting. Local teachers are greatresources who have been trained to become trainers at theseacademies. Meanwhile, involving the private sector increating training modules ensures buy-in from them andmatches the supply of labor produced by the academy to themarket demands. Hence, most youth are placed with jobsimmediately after completion of theirprograms. In just three years’ timeEGMM academies have become aquality brand name among employers.To broaden the range of trainingoffered, use the best resources available,and make strategic placementsthrough well-established networks,partnerships have been developed withother organizations that offer employmenttraining. EGMM has forgedpartnerships with organizations such asTally and National Academy of Construction, among manyothers. EGMM works continuously with partners to improveprogram quality and the curriculum. For example, EGMMtrained all trainers of their 14 partners in all 22 districts in“counseling” and “coping with migration”.4. Matching Job Seekers With Job PlacementsNetworking with reputable private companies that needentry level manpower is an important element of the placementstrategy. The market scan, solicitation with companieswith employment opportunities and trainings designed tomeet the job market needs form a strong platform for theplacement part of the job creation strategy. Job fairs or “jobmelas” are organized in rural training centers creating aplatform for many companies to showcase themselves andmeet their labor needs. EGMM organizes recruitment fairs164 THE IIPM THINK TANK

M ICROM ACROBox 3: Impact on StakeholdersThe Rural Community• Fixed income, new skills, and self confi dence• Remittances for the rural families• Lowering of caste stigma• Eradication of poverty within a generation’s time in a sustained mannerThe Government• Employment creation for rural youth• Poverty alleviation• Prevention of social unrest from high underemployment in rural areasThe Private Companies• Competent, loyal, cost-effective workforce• An opportunity to fulfi ll its social responsibilitiesat EGMM campus locations only. The purpose behind thispractice is to sensitize the companies to EGMM, its visionand mission, and inspire them to bementors of the program.By employing rural youth, privatecompanies take advantage of recruitingin a more cost-effective mannercompared to high urban salaries — arural workforce can be employed at amore competitive price. This modelalso allows companies to fulfill thegovernment mandate of providingemployment to scheduled caste peopleand fulfill their corporate socialresponsibility. Additionally, the comparative advantage of awell-trained and motivated workforce makes hiring EGMMgraduates an attractive option for the private companies.Today EGMM supplies 80 percent of entry level manpowerin Andhra Pradesh to large retail chains like Aditya Birlas,fast food chains like McDonalds and Café Coffee Day, andPureit sales of Hindustan Unilever, among others. EGMM isalso a dedicated manpower supplier to the manufacturingunit of Apache, of the global giant Adidas shoes.Companies recruit from EGMM both for the quality oftrainees and support offered to the youth post-placement,which reduces attrition that is a high cost to companies. Inretail companies, hiring EGMM trainees has reduced theattrition rate from 55 percent to just 5-10 percent.EGMM periodically rates companies according to thesalary offered; benefits extended such as boarding andWhen the newlyemployed youthreturn home,they becomepowerful agentsof recruitmentthemselveslodging, insurance, etc; and the sensitivity ofsupervisors toward their employees. Itblacklists companies with polluting workenvironment—such as scraping of jeans intextile factories, or in companies wheresalaries are below the minimum wagesprescribed by the state, and does not placethe youths in such companies.A month after placement, arrangementsare made for the mothers of the rural youthto visit their children in their workplace inthe cities. The sense of pride they feel isunmatched. This also raises awareness of theprogram and helps in the scaling up process.Additionally, government officials are taken on exposurevisits to understand the changing needs and expectations ofcompanies so that they can providesupport accordingly.Experience has shown that whenthese newly employed youth returnhome, they become powerful agents ofrecruitment themselves. They counseland motivate their friends and familiesto enroll in EGMM. Each returningemployed youth, brings at least ten newtrainees to EGMM. This enables theapproach to become cost effective inthe long run.5. Providing Post Placement Support: Orientation,Microfinance Products, Social Support, andAlumni NetworkOrientation: Once the trainees are offered jobs in companies,EGMM offers them orientation to their new workplaceand the new environment. The module includes moneymanagement, coping with city life, and other counselingservices. Research shows that just placing the trained youthwith companies is not enough. Their transitions from ruralsurroundings to the urban cities need to be carefully managed.Microfinance Products: In many cases in the past, newlyplaced youth quit their jobs within early days of the placementdue to the high expense of city living in the first monthTHE INDIA ECONOMY REVIEW165

W ELFARE ECONOMICSFigure 2: How Households are Using theRemittances (in percentage)discussions with the management to address work issues.This mechanism helps in supporting the new employees andboosting their confidence in the city.Education12Assets19Others8Savings23Clearing Debts38Alumni Network: The EGMM maintain a network of thealumni and keep them engaged as role models for thetrainees. Senior alumni share their experience in thetraining classes as guest lecturers and build the confidenceof trainees before job interviews. Alumni also provide tipson how to deal with customers, cope with city life, and plantheir career or goals for higher education. This is veryeffective for coaching the trainees because most of the youthare first generation white collar workers whose parents areagricultural or other wage laborers, from whom they can getlimited guidance when it comes to city jobs.of employment. They were unable to cope when they had notyet received their salaries. To prevent monetary constraintsfrom being the source of dropping out, EGMM facilitatesprovision of financial tools to smoothen the cost of transitionto the city life. It offers micro-loans through federations ofSHGs to cover living expenses of the first month in the city.The interest on the loan is decided by the federations andpayments are made in small installments.Social Network: Youth are usually placed in groups inprivate companies. Having people with similar backgroundsand similar goals prevent a sense of isolation that youthmight otherwise feel in a new city environment. Additionally,a help line with counselors is established to provide supportand guidance. When necessary, the counselors also facilitateUsing Information Technology to Monitor theProgramMonitoring a program of this scale is a challenge. To overcomethis, EGMM uses transaction based software (www.egmm.ap.gov.in) that gets training, placement and postplacement data from each training centre. This softwareallows EGMM to monitor and analyze its performance evenat the village level. Placement and dropout analysis is doneseamlessly using this EGMM developed software. This ITbackbone has helped bring quality and transparency into theprogram.Impacts of EGMMIncreased Income: On average EGMM trained youth earnan income at or above Rs. 42,000 per year in urban areas andTable 2: Training Cost per Person and ROI (unit: Rs)Training Program Training Cost Monthly Starting Salary Annual Salary ROI (%)Average 8,992.63 3,487.35 41,484.20 365.36Construction 6,178.33 3,564.78 42,777.36 592.38EWRC 9,525.00 3,677.71 44,132.52 363.33IKP Labs 8,450.00 3.149.81 37,797.72 347.31Security 4,390.00 3,730.47 44,765.64 919.72Skylark 10,525.00 5,116.67 61,400.04 483.37Textile 5,416.67 2,934.00 35,208.00 549.99Other Services 10,236.11 3,750.67 45,008.04 339.70Source: EWRC: English Work Readiness & Computer Academy166 THE IIPM THINK TANK

M ICROM ACROBox 4: Future in the Service SectorSudharani is from Old Chintalapudi Village in West Godavari District. She could not complete her college education as herfather an agricultural laborer could not afford her college fees. Her mother, an SHG member told her about EGMM Englishand computer centers. After three months training she was placed at Big Bazaar, the largest retail chain in the countryearning a salary of Rs. 3500 per month as a customer service associate. Recently, she returned to her home district to work asa cashier with Coromandel Fertilizers which brings in Rs. 5,000 per month. Sudharani says, “Now I will complete my graduationfrom the university.” She enrolled both her brothers in the EGMM Academy. Today the three working youths haveenhanced their family income from Rs. 10,000 year to Rs. 144,000 a year.about Rs. 30,000 per year in rural areas. This amount isthree to four times higher than the average income earnedby a rural family in agriculture, which is about Rs 10,000 peryear. Fifty-one percent of trainees received incremental payincreases within six months of employment. The averageincrement of the trainees was about Rs. 550 per month.Remittances: Surveys show that almost all of the workingyouth send 20 percent of their earning back home. Remittanceshave tremendous effect in improving the financialcondition of the families. Those who receive remittances use38 percent of this additional money to clear previous highcost debts at high interest rates. Twenty-three percent isdeposited as savings and 19 percent is used to create assetssuch as adding a room to the house, buying land, coloredtelevisions, etc. Twelve percent is used to educate youngersiblings, and eight percent for other purposes.Improved quality of life: An impact study of youth 2 trainedas security guards placed in a multinational company—G4Securitas—showed that the quality of life of their familieshas improved because of one family member working in thecity. Ninety-four percent of the households say that they areable to afford more nutritious food and 30 percent of thefamilies have invested the money to improve their housingconditions.Less dependency on money-lenders: Financial conditionshave improved since household dependence on moneylenders reduced from 74 to 14 percent among the familymembers. Meanwhile, 92 percent of the households say thattheir dependence on local moneylenders has reduced.Return on Investments (ROI)EGMM invests Rs. 8,992.63 per trainee on average for thejob training program. Each trainee after placement earnsRs. 3,487.35 per month on average. Therefore, ROI is 365.36percent 3 .Creating Intellectual Assets And An InclusiveSocietyThe intellectual assets generated through EGMM makeadditional benefits to the society. The skills and the knowledgegenerated from the training is a permanent asset,components of which are transferable across jobs. The impacton girls is marked with reduction in child marriages in ruraland tribal areas as girls opt for a career in hitherto maledominated sectors like sales. Meanwhile, the rural-urbandivide and the unorganized-organized labor divide reduce asrural youth get trained to work white collar jobs.Endnotes and Additional Thinking1Jointly fi nanced by the World Bank and the Governmentof Andhra Pradesh, the objective of APRPRP is to enablerural poor and their organizations to improve livelihoodsand quality of life. The project invests in building selfmanagedgrass root level institutions and federations ofpoor rural women. Ten million women have been organizedinto 850,000 Self-Help Groups comprising of 10-15women in each.2Intellecap Study of Youth trained and placed by EGMM3Mariko Katsura, Goldman School of Public Policy,University of Berkeley EGMM data(The views expressed in the article are personal and do notreflect the official policy or position of the organisation. Thedocument was reviewed and edited by Natasha Hayward andMelissa Williams of the World Bank.)THE INDIA ECONOMY REVIEW167

M ANAGERIAL ECONOMICSRETAILERS’ PREFERENCESFOR COCA COLA : A CASE STUDYWITH SPECIAL REFERENCE TO THEKOLKATA REGIONRuma KunduLecturer, ManagementInstitute of DurgapurIndraneel MandalLecturer, ManagementInstitute of DurgapurMithun ChakrabortyStudent, MBA Final Semester,Management Institute of DurgapurIntroductionIt is a well recognised fact that India is one of the largest andfastest growing economies in the world. Within the varioussectors that form the building blocks of this enormous entityone of important and ‘evergreen’ sectors is the one occupiedby the so-called Fast Moving Consumer Goods or FMCGs.Finally, a part of this FMCG sector is made up of food andbeverages. Indians belonging to the middle and upper classesby nature invest a substantial amount of time, effort andmoney against food and beverages, which includes snacks, fastfood and soft drinks. Such expenditure is of a discretionarynature and has been observed to rise significantly duringfestivals and traditional holidays. Again, in case of items likeice creams and soft drinks there a seasonal element in theconsumption pattern.This paper intends to concentrate on a specific player in thesoft drinks market (viz., Coca-Cola) so as to evaluate itsperformance vis-à-vis the preference of retailers in certainspecific areas in and around Kolkata in West Bengal, India.After going through a detailed analysis of market behaviourand future prospect, it may also provide an opportunity toCoca-Cola to frame a good future plan to satisfy maximumneeds of the retailers and established its guiding role in themarket of Kolkata city, West Bengal, in particular andthroughout the country as a whole. The study has undertakena detailed view of the tasks, which have been undertaken toanalyse the market of Coca-Cola. The methodology adoptedinvolved the use of questionnaires in order to ascertain thepreferences of retailers regarding the Coca-Cola. The researchareas included Dunlop, Belghoria and Tobin Road inKolkata, West Bengal. It would now be relevant to considerthe salient features of the beverage industry in India.Beverage Industry in IndiaIn India, beverages form an important part of the lives ofpeople. It is an industry, in which the players constantlyinnovate, in order to come up with better products to gainmore consumers and satisfy the existing consumers. Thebeverage industry is vast and there various ways of segmentingit, so as to cater the right product to the right person. Some ofthe possible ways of segmenting this industry are as follows:(a) Alcoholic, non-alcoholic and sports beverages(b) Natural and synthetic beverages(c) In-home consumption and out of home on premisesconsumption(d) Age wise segmentation i.e. beverages for kids, for adultsand for senior citizens(e) Segmentation based on the amount of consumption i.e.high levels of consumption and low levels of consumption.If the behavioural patterns of consumers in India are closelynoticed, it could be observed that consumers perceive beveragesin two different ways i.e. beverages are a luxury and thatbeverages have to be consumed occasionally. These twoperceptions are the biggest challenges faced by the beverage168 THE IIPM THINK TANK

M ICROM ACROindustry. In order to leverage the beverage industry, it isimportant to address this issue so as to encourage regular consumptionas well as and to make the industry more affordable.It has been found that the following strategic elements play astrong role in increasing consumption of the products of thebeverage industry in India:(a) The quality and the consistency of beverages needs to beenhanced so that consumers are satisfied and they enjoyconsuming beverages.(b) The credibility and trust needs to be built so that there is avery strong and safe feeling that the consumers have whileconsuming the beverages.(c) Consumer education is a must to bring out benefits ofbeverage consumption whether in terms of health, taste,relaxation, stimulation, refreshment, well being or prestigerelevant to the category.(d) Communication should be relevant and trendy so thatconsumers are able to find an appeal to go out, purchaseand consume.Review of LiteratureThe literature on the marketing of the soft drinks is quiteextensive though there is lack of sufficient work on thepreference of retailers in the Indian context.Stephen (2008) has stated that while formulating a newbeverage, the new product would need to be differentiated byimproving the sensory characteristics. Four factors wereidentified for the formulation: four colour intensities), threeflavourings, two label types (soft versus hard), and two packsizes (standard versus oversize). By using both quantitative(hedonic testing) and qualitative (focus groups) approaches,the researchers found that the primary factors behind driveconsumer preference for this concept are colour intensity andflavouring.Tepper (1998) has examined the relative contributions oftaste and health considerations on consumer liking andpurchase intent of cola drinks. Davis (2007) has used preferencetests on varieties of cola drinks and orange juices usingthree response protocols: the traditional paired preferenceTHE INDIA ECONOMY REVIEW169

M ANAGERIAL ECONOMICStest with the "no preference" option, a 9-point hedonic scaleand a 6-point hybrid hedonic/ purchase intent scale.According to Smith (2008) brand preference in FMCGproducts and increasing competition, especially due toglobalisation, is motivating many companies to base theirstrategies almost entirely on building brands.Another paper by Snedden (2008) tried to investigate thedegree of brand awareness with regard to various foodproducts in relation to the background and education of thehousehold and the consumption pattern of various foodproducts consumed by respondents in the light of their areas,income levels and education. The study reveals that there islow degree of brand awareness in rural areas, whereas there isa moderate degree of brand awareness in urban India. Thehighly educated rural and urban respondents have highdegree of brand awareness for many food products while theless educated rural and urban respondents have low degree ofbrand awareness for many food products.A recent study involving Danonefound that the intensity of colour andflavour are the key drivers behindconsumer acceptance of beverages.However, packaging and labelling arenot as important for winning overconsumers, according to findingspublished in the Journal of FoodQuality and Preference.Objectives of the StudyBased on the above samples of existing studies, it seemsimperative that the proposed study should be built around thefollowing basic objectives:(i) To study the retailers’ preferences with regard to Coca-Cola(ii) Identifying the factors that are responsible for developingpreference towards accommodating soft drinks of Coca-Cola product in the retail outlet.(iii) Exploring the correlation between the volumes of demandof the product with the overall preference level.(iv) To understand the perception in the minds of the retailerstowards the offered schemes.(v) To ascertain whether the credit policy, profit margin,storing tools etc. are playing a vital role in the preferencefor Coca-Cola products.A research studyinvolving Danonefound that theintensity of colourand flavour arevery crucial inbeverages sectorScope of the StudyThis study consists of the data sources (primary as well assecondary), sampling procedure, detailed analysis andinterpretation of data, methods used in data analysis. Thisstudy may contribute to an understanding of the currentsituation of the company as well as the brand position of theproducts under Cola-Cola portfolio. It may also enabledevelopment of appropriate measures for the various attributeswhich contribute to making Cola-Cola the predominantpreference among the retailers.Research AreaIn order to have an idea of the preference of the retailers’regarding Coca-Cola involved in selling Coca-Cola products,data have been collected by personal interview method on thebasis of a pre-structured questionnairefrom different areas of Kolkata, WestBengal under three distributors. Sincethe areas are large in size and there aremany retail outlets under one distributor,purposive sampling has beenadopted to select the retail outlets undereach distributor. The number of samplesselected from each distributor is 20 andthe total sample size under the threedistributors is 60. The detailed descriptionsabout the locations are givenbelow.Location 1: The 1 st location is Dunlop bridge area consistingof many sub areas, viz., Narendra Nagar, Rabindra Nagar,Dunlop Super Market, B.T. Road, Ashokgarh, Sabeda baganetc. under the Baranagar municipality.Location 2: The 2 nd location is Belghoria consisting Riflerange RD., Nilganj Road, M.G. Road, Bata Gali, Old NimtaRoad, Patna school area, etc. under Kamarhatty Municipality.Location 3: The 3 rd sampling area includes Tobin Road, PalPara, Ananya, Z.B Road,etc. under the Baranagar Municipality.Research MethodologyThe basic research design of this paper has been outlined inthe following table:170 THE IIPM THINK TANK

M ICROM ACROTable 1:TYPE OFRESEARCHRESEARCHQUESTIONSAMPLINGTECHNIQUESSAMPLE SIZESAMPLING AREASPRIMARY DATASECONDARY DATARESEARCH TOOLSUNIT OF ANALYSIS• Explorative, Descriptive and Relationship• Retailers’ preference for Coca-Cola products• Convenience sampling• Stratified sampling• 60 (20 for each Distributor)• KOLKATA-Baranagar & Belghoria• Responses through questionnaire• Personal interviews with the respondents.• Websites• Company sources• Z-test• Analysis Of Variance (ANOVA) test• Chi-Square Test.• Retail outlet owners or the retail keepersHypothesis DevelopmentTo study the retailers’ preference for Coca-Cola products,some attributes were very necessary upon which the frameworkof the study could be designed. We have obtained theseattributes from the literature survey, objective evidencediscussions with the company representatives and lastly, pilotsurveys in our sampling areas. Subsequently, on the basis ofthese identified attributes or factors, we developed hypothesesfor identifying retailers’ preferences. We have developedvarious types of hypotheses for testing the significance ofthose hypotheses, to test the variance between the differentdistributors and to check the dependency between varioustypes of retail outlets with some attributes. This developmentof hypotheses was made on the basis of the identified attributesthat are taken into account for measuring andanalyzing preference of the retailers for Coca-Cola products.The attributes or parameters on the basis of which the projecthas been prepared are as follows:1. Profit margin2. Storage facility (fridge and crate)3. Credit policy4. Schemes5. Behaviour of distributors6. Punctual delivery and7. Communication in between distributors and the retailersThe hypotheses tested are as follows:H1. Profit MarginH1A - Profit margin plays a role in the sale of Coca-Colaproducts.H1B - The perceptions regarding the profit margin in themind of the retailers are same across the distributors.H1C - Profit margin is independent of the types of retailoutlet.H2. Availability of Storage FacilitiesH2A - The storage facility offered by the Coca-Cola Companyplays a role for selling the Coca-Cola products.H2B - The perceptions regarding storing facility offered in themind of the retailers are same across the distributors.H2C - The quality of the storing facility offered is independentof the types of retail outlet.H3. Credit PolicyH3A - The credit offered by the distributors plays a role forthe selling of Coca-Cola products.H3B - The perceptions regarding offered credit policy in themind of the retailers are same across the distributors.H3C - The credit policy offered is independent of the types ofretail outlet.H4. The SchemesHere schemes refer to the extra facilities or the extra bottlesor any type of gift given by the company to the retailers withthe particular purchase.H4A - The schemes offered by the distributors play a role forthe selling of Coca-Cola products.H4B - The perceptions regarding credit policy offered in themind of the retailers are same across the distributors.H5. Behaviour of the DistributorsH5A - The behaviour of the distributors plays an importantrole the sale and retention of Coca-Cola products.H5B - The perceptions regarding the distributor’s behaviourin the mind of the retailers are same.H5C - Distributors’ behaviour is independent of the types ofretail outlet.H6. DeliveryH6A - The punctual delivery plays significant role in the saleof Coca-Cola products.H6B - The perceptions regarding delivery of products by thedistributors in the mind of the retailers are same for all thedistributors.H7. Point of Purchase ToolsH7A - POP tools play a role for selling Coca-Cola products.H7B - The perceptions regarding the POP tools in the mind ofthe retailers are same for all distributors.THE INDIA ECONOMY REVIEW171

M ANAGERIAL ECONOMICSFindingsSl. No. Hypothesis Test Statistic* Result Inference1 Coca-Cola offers a good profit of marginover the competitors.2 The perceptions regarding the profit marginin the minds of the retailers are sameacross the distributors.3 Profit margin is independent of the typesof retail outlets.Z REJECTED There is an iota of dissatisfaction towards the profit marginoffered by Coca-cola in comparison with its competitors.ANOVA REJECTED The profit margin changes with the distributor.2χACCEPTEDThe type of the retail outlet has no impact on the profitmargin.4 Coca-Cola offers a better storage facilities.5 The perceptions regarding the better storagefacility in the mind of the retailers aresame across the distributors.6 The offered storing facility is independentof the types of retail outlets.7 Credit offered by the distributor is satisfactory.8 The perceptions regarding the offeredcredit policy in the minds of the retailersare same across the distributors.9 The credit policy offered is independentof the types of retail outlets10 The schemes offered by the company arevery profitable.11 The perceptions regarding the offeredschemes in the mind of the retailers aresame across the distributors.12 The behaviour of the distributor is satisfactory13 The perceptions regarding the behaviourof distributors in the minds of the retailersare same for all the distributors.14 The behaviour of the distributors is independentof the type of retail outlet.15 The delivery of Coca-Cola is very muchpunctual16 The perceptions regarding the deliverytime in the minds of the retailers aresame for all the distributors.17 Coca-Cola offers advertisement tools forfacilitating the sale.18 The perceptions regarding the delivery ofpoint of purchase tools in the minds ofthe retailers are same for all the distributors.19 The distributor maintains good communication.20 The perceptions regarding the delivery ofpoint of purchase tools in the minds ofthe retailers are same for all the distributors.Z REJECTED There is dissatisfaction in the mind of the retailers regardingthe storage facilities offered by Coca-Cola.ANOVA ACCEPTED As far as storage facilities are concerned, there isno variance among the distributors.2χACCEPTEDThe storage facility remains same acrossdifferent types of retail outlets.Z REJECTED There is scope for dissatisfaction in theminds of the retailers towards the credit offered by thedistributors.ANOVA ACCEPTED There is no variance among the distributorswith regard to the credit policy.2χACCEPTEDThe credit policy offered is same across all typesof retail outlets.Z ACCEPTED Sometimes the schemes offered are profitable.ANOVA ACCEPTED There is no variance among the distributorsthe matter of the schemes offered.Z ACCEPTED Most of the retailers think that the behaviour ofthe distributors is satisfactory.ANOVA ACCEPTED There is no variance among the retailersregarding the behaviour of the distributors.2χACCEPTEDThe type of retail outlet has no impact on the credit policyoffered.Z ACCEPTED By and large, the retailers are satisfied about the delivery ofCoca-Cola.ANOVA ACCEPTED There is no variance among the retailers with regard to thedelivery time of the distributors.Z ACCEPTED Retailers have expressed their moderate disagreement regardingthis statement.ANOVA ACCEPTED There is no variance across the distributors regarding thedelivery of POP tools.Z REJECTED According to the retailers the distributors are not seriousabout maintaining proper contact.ANOVA ACCEPTED There is no variance in the perception regardingthe level of communication maintained by the distributors.* at 5% level of significance172 THE IIPM THINK TANK

M ICROM ACROH8. Communication with RetailersH8A - Communication with the retailers plays an importantrole in the sale of Coca-Cola products.H8B - The perception in the mind of the retailers regardingthe communication maintained by the distributors is same forall the distributors.These hypotheses have been tested using the z-test, analysisof variance (ANOVA) and chi-square testConclusions and RecommendationsDuring the course of the study it was noticed that the retailersanswered the closed end questions willingly without anyadditional encouragement. From the analysis of the datacollected and from the experiences gained during the projectthe following conclusions have been arrived at:Coke is most popular amongst its retailers mainly becauseof the demand of the consumers. It is well known that there isstrong competition between Pepsi and Coca-Cola.In the opinion of the respondents, the most importantparameters affecting the business include profit margin, creditpolicy and diverse schemes.It is worth mentioning that throughout the survey thepreferred soft drink among the ultimate consumers hasturned out to be a product of Coca-Cola. In other words,Coca-Cola has acquired most of the market.When the question was put to the retailers regarding theextent to which the profit margin afforded by Coca-Cola ishigher compared to the competitors, it was observed thatthere was moderate disagreement among the retailers.On the question of flexibility in credit policy the retailersonce again exhibited moderate disagreement.On the basis of the preceding analysis the following recommendationsmay be offered:The Coca-Cola Company is advised to introduce moreschemes in order to maintain their market position.The distributors are advised to make their credit policymore flexible.The company must be aware of and stay up to date on theactivities of its primary competitors.From time to time the company should utilise greater andmore effective systems of word of mouth and POP advertisementsin order to stay competitive in the market.A constant watch should be maintained on the distributors,because in some cases they are found to be cheating theretailers, thus affecting the goodwill of the brand.The company should carry out a detail demand survey atregular interval to know about the unique needs and requirementsof the retailers. It should also resort to various types ofsales promotion to increase its sales volume.The company should take the responsibility to informcustomers about their current as well as about upcomingschemes to the retailers.Lastly, we can say that the Coca-Cola company is on the topof the market according to the consumer’s choice; but in orderto be the retailers’ preferred brands the company and thedistributors should focus on the parameters highlightedabove.References and Additional Thinking• Raz, C., Piper, D., Haller, R., Nicod, H., Dusart, N., andGiboreau, A.; “From sensory marketing to sensory design:How to drive formulation using consumers’ input?”; FoodQuality and Preference; Volume 19, Issue 8, pp. 719-726.• Daniells, Stephen, “Colour and flavour rule consumerpreferences: Study”; Food Navigator.com; 7 th October2008.• Muris, Timothy J, Scheffman, David T and Spiller, Pablo T;“Strategy and Transaction Costs: The Organization ofDistribution in the Carbonated Soft Drink Industry”;Journal of Economics & Management Strategy; Volume 1,Issue 1, pp. 83-128.• Tepper, J.; “Relative Contributions of Taste and HealthConsiderations on Consumer Liking and Purchase Intentof Cola Drinks”; Journal of Food Science and Technology;15 th September 1998; pp. 21-32.• Davis, W.; “Understanding Consumer Choice throughPreference Tests for Cola Drinks and Orange Juices usingThree Response Protocols”; Journal of Food Science andTechnology; July 31 st , 2007; pp. 43-59.• Smith, R.A.; “Study of Factors Responsible for BrandPreference in FMCG Sector”; Journal of IMS; Vol. 5, no.1,January-June 2008; p. 40-49.• Snedden, M.R.; “Consumer Awareness and ConsumptionPattern of Food Products”; Journal of IMS; Vol. 5, no.1,January-June 2008; pp. 64- 71.(The views expressed in the article are personal and do not reflectthe official policy or position of the organisation.)THE INDIA ECONOMY REVIEW173

M ONETARY ECONOMICSINFLATION AND ITS CURESMadhusudan RajMises University Alumni,Ludwig von Mises Institute, Auburn, Alabama, U.S.A.174 THE IIPM THINK TANK

P RICE PUZZLESIntroductionInflation is the most pressing and grossly misunderstoodproblem of our time. The cures of inflation are simple. Theonly difficulty with inflation is that its cures are politicallyincorrect, and thus are never implemented. Political correctnessor incorrectness does not render the study of inflationuseless. Ideas are always important in the long run, and so weneed to understand the problem of inflation and its cureswithout worrying for its political nature. For us its economicnature is of utmost importance than anything else.Inflation and Its CausesA clear definition of inflation is essential to fully comprehendits various facets. This is important because the modernmainstream economics definition of inflation is faulty, andthus completely misguiding. Mainstreamneoclassical economics defines inflationas, an increase in the overall level ofprices in the economy (Mankiw, 2001, p.13). A logical scrutiny of this definitionreveals its serious errors. Traditionally,after the Keynesian revolution [sic] ineconomic thought, inflation is regardedas a macroeconomic phenomenon, andso the term overall level of prices in itsdefinition. But the crucial question hereis, does such phenomenon of overalllevel of prices exist in the market of individual exchanges?And the answer of this question is a definite No. In the marketeconomy there are only individual product prices prevailing ata given moment of time. Adding up all these different prices inone index, and then averaging them out to calculate variousindexes like WPI or CPI is wrong because there is no averageprice here, and there are no average consumers who arepaying this average price. Measurement of purchasing powerof money is an impossible task because, as believed by theeconomists, money never remains neutral. Its value is alwayschanging in the market. Every price of goods and services isdetermined by a unique relationship between demand forgoods and services and money on one side, and their stock onthe other. In every exchange these factors are so intricatelyinterwoven that it is impossible to treat them separately.Goods and services are only expressed and appraised in termsof money, and not measured 1 . Money is not an objectiveThe only difficultywith inflationis that its curesare politicallyincorrect, andthus are neverimplementedstandard of measurement. Moreover, prices do not have anyeconomy wide ‘level’. Different product prices rise and fallseveral times in the market. Prices also do not rise at once sothat we can say that the level of overall prices has risen.Actually when inflation is underway 2 , different product priceschanges step by step as newly printed money spreads throughoutthe economy. This phenomenon was first analyzed byRichard Cantillon in his famous Essays (Cantillon, 2001), andis known as Cantillon Effect after him.Apart from the impossibility of comparing various moneyprices, and the untenability of the concept of level of prices,the mainstream neoclassical definition also focuses solely onthe effects of inflation rather than its true causes. Rise inprices is not a cause of inflation, but is its effect. Focusing theattention on effects of inflation prevents one from knowing thetrue causes of inflation. And unless anduntil the true causes of inflation areknown it is impossible to cure it.Let us then see the true causes ofinflation. To understand the true causeswe must define inflation in such a way sothat its definition focuses on its causesand not on its effects. This correctdefinition was given by the Austrianschool of economics. Henry Hazlittdefined inflation as, ‘an increase in thequantity of money and credit. Its chiefconsequence is soaring prices. Therefore inflation—if wemisuse the term to mean the rising prices themselves—iscaused solely by printing more money. For this the government’smonetary policies are entirely responsible’ (Hazlitt,2004, p. 41).Let us now analyze what happens when the quantity ofmoney and credit increases in the economy.Inflation and Its ConsequencesRising pricesThere are two chief ways in which the quantity of money canincrease in the present day monetary regime of governmentpaper money with its central bank, and the system of fractionalreserve banking. We take each case in succession and see itsconsequences.Money is one commodity in the individual market exchange.This knowledge of money as a commodity was widespread inTHE INDIA ECONOMY REVIEW175

M ONETARY ECONOMICSthe past, but is lost today. Carl Menger (Menger, 2009) demonstratedhow some commodities (e.g. gold and silver) havehistorically evolved as money (a common medium of exchange)from the barter economy. And because money is justanother good/commodity into the market process, its price isdetermined, similarly like the prices of any other good, by theforces of market demand for money and its available stock.Price of money is its purchasing power. Purchasing power ofmoney determines how many goods and services a unit ofmoney can buy in the market. This also determines person’sreal income. We now see how price of money is determined.Figure 1 presents the money relation. On vertical axis is thePPM (purchasing power of money), and on horizontal axis isthe quantity of money. Dm curve represents the total demandfor money to hold, and vertical curve SS presents the totalavailable stock of money in the society. The intersection ofdemand for money and the total available stock of money at Adetermine the initial purchasing power of money at OQ. Now,it can be seen that, as the total quantity of stock increases fromOS to OS1, the purchasing power of money (its price in termsof other goods and services) decreases to OP from the initialhigher level of OQ.This simply means that now a unit of money can buy lessnumber of goods and services. It also means that the realincome of a person, who is having these units of money in hiscash balances, has now declined due to this increase in thequantity of money. Looking from the goods and services side,this means that prices of goods and services have risen! Lessgoods and services are now selling at the same amount ofmoney than before the increase in the quantity of money. Thisprice rise of goods and services is the effect of inflation forwhich we all worry a lot.As our analysis shows, money is just another commoditywhose price is determined by its demand and supply in themarket. The only important difference between moneycommodity and other commodities is, that when price of othercommodities (e.g., Milk) decline it confers social benefit, butwhen price of money declines it results into social misery!Money is a common medium of exchange. Everyone demandsmoney to later exchange it for other goods and services. Noone wants to consume money directly. Precisely because ofthis reason, increase in the quantity of money or statedotherwise, erosion in the purchasing power of money results insocial misery by lowering the real income, and thus standard ofFigure 1 Money Relation (Determination of PurchasingPower of Money)Purchasing Power of Monetary UnitQPOD mQuantity of Moneyliving of the people.Sometimes prices of goods and services do not rise rapidlyor are stable when inflation is underway. This happens becausemost probably the productivity of labor and capital goods isrising with the rise in the quantity of money. But, here again,inflation is eroding the standard of living of people by notallowing the market prices of goods and services to fall due tothe increased productivity of labor and capital goods. Increasedproductivity of factors of production will increase thesupply of various goods and services, which will lower theirprices. We do not see these lower prices because of inflation 3 .What we see is slowly rising prices or stable prices. But thenotion of “stabilization of price” is absurd 4 . Everyone benefitwhen prices fall, and not when they remain stable or when theyare rising. The tendency of prices is to fall in the free market,but government intervention in the free market throughinflation never allows this fall to materialize.Booms and RecessionsRising prices is one menacing effect of Inflation, but not theonly one. Misallocation of resources is another chief evil effectof Inflation. The easy money policies of the government’scentral bank induce entrepreneurs for starting new capitalSSAS 1S 1BD m176 THE IIPM THINK TANK

P RICE PUZZLESprojects. These projects are unsustainable in the long runbecause they are not backed by actual savings of people.Mal-investment results in the capital goods industries due toartificial lowering of interest rates by the central bank. Resourcesmove from the consumer goods industries, where theyare actually required, to the capital goods industries. Thisartificial boom finally ends in a bust 5 . Moreover, if governmentscontinue to inflate during recession time too, thenrecessions turn into great depressions 6 . 1929’s Great AmericanDepression and Japan’s 20 years long depression of presenttime are prime examples of this phenomenon 7 . Such recessionsand depressions bring economic hardship and misery forthe masses.After seeing the dire effects of inflation we now turn ourattention to the chief sources of increase in the quantity ofmoney. Thorough understanding ofthese sources can only enable us ineliminating inflation.Sources of InflationGovernment Money PrintingThrough Central BanksWe live in a world where governmentsaround the world have monopolized theissuance of money supply in the economy.The legal tender laws inhibit anyprivate printing of money. There are twomajor reasons why governments have slowly monopolized themoney market. Both these reasons are related with theincrease in governmental activities in our times. We now turnour attention towards these reasons.Welfare StateStates use to be very limited in old times. Its only activitieswere of protecting life, liberty and property of its citizenry. Thisis the so called police or the night watchman state of the oldentimes. But once monopoly of protection was granted to theState, it slowly expanded its powers and its interventionaryactivities (the problem of, who will watch the watchman?!).The police state became the welfare state of modern times.Today we see that government is involved in almost everyactivity one can think of (except providing protection andjustice to its people 8 !). This expansion in activities is onlypossible when it has resources (e.g. money) to carry them out.Mal-investmentresults in thecapital goodsindustries due toartificial loweringof interest rates bythe central bankAnd these resources it can only have if it has a direct controlover the money supply. This control it gained by slowly monopolizingthe money market. This monopolization wasnecessary because government cannot produce anything toearn money. Government cannot acquire money justly throughthe sell of its production like other individuals. There are threechief ways through which state can acquire resources:1. Taxation,2. Public debt; and3. Money printingFirst two options are limited in its scope for acquiringincreasing amount of resources. Government cannot imposehigher tax rates on its citizens because that will result in publicuproar against the government, and a possible demise of itsrule. Also, as the famous Laffer curve demonstrates, increasedtax rates will result in decreased revenuesfrom taxation. Through publicdebt also it cannot acquire moreresources because those funds areavailable in limited amount, dependingon how many people are voluntarilywilling to buy government bonds. Insuch a situation, only third option isopen for acquiring the endless amountof resources. Printing money is theeasiest and the most hidden way for thegovernment to get hands onto theneeded resources. For this reason, and this reason only, it hasmonopolized the money market. This way, whenever in needof money, it can just give orders to central banks to run theprinting presses day and night 9 . One clear evidence of this isthe endless money which government is printing in thisrecession time to unduly bailout various banks and businesses(the so called stimulus packages). Various governmental plansrequire money, and this money is acquired easily by printing it.This is the one major way in which the quantity of money isslowly expanding in today’s societies. This slowly increasingquantity of money (i.e. inflation) is pushing prices upward inthe economy. Whenever government prints and spends moneyquickly prices soar up quickly, as is happening right now.Prices of various goods and services were much lower 25 or 50years back. We have frequently heard our grandparentscomplaining that in their time things were much cheaper thantoday. We all hear this from our grandparents, but very few ofTHE INDIA ECONOMY REVIEW177

M ONETARY ECONOMICSus try to find out the true reason behind this situation. Ouranalysis tells us that this price rise is due to slowly increasinggovernmental expenditures. As government expanded itsactivities by printing money, it resulted into slowly (andsometimes rapidly) rising prices. We must not forget one fact,which is historically proven, that all governments are inherentlyinflationary in nature.Figure 2 below presents the data of Indian government’stotal expenditure in various years as seen in its budget, and theCPI (consumer price index) with all its defects 10 . Evidence ofthe welfare state inflation (figure A), and its effect (figure B)can be clearly seen.Misallocation of Resources through GovernmentSpending and Rising PricesIncreasing government expenditures result into rising pricesConsumers are enjoying all three fruits in the present time.Now suppose consumer taste changes, and instead of eatingoranges they now want more bananas. They will increase thedemand for banana, and this will increase the price of bananawhich will increase profits of banana farmers. On other sidethe lower demand for oranges will reduce the price of oranges,and thus profit of orange farmers. Seeing the higher profit ofbanana farmers some orange farmers will shift their productionto banana from oranges. Resources will flow in thedirection of banana production instead of orange. This entryof new firms will increase supply of banana which will lowerthe price of banana. This situation will continue until newchanges occur in the underlying market data e.g. consumertaste, their income, natural factors etc. In our dynamic worldmarket thus allocates resources where they are required mostby the consumers. Producers are guided by consumers. ButFigure 2. Indian Central Government Total Expenditure with CPI 11,121200000160Govt. Expenditure1000000800000600000400000200000CPI and Govt. Expenditure14012010080604020001990 1995 2000 2005 2010YearGovt. Expenditure (In Crores of Rupees)1990 1995 2000 2005 2010YearGovt. Expenditure (In Thousand of Rupees)CPI(A)(B)from another way too. This way is misallocation of resourcesby the government. Government squanders the scarce resources;this results into lower supply of those goods andservices which consumers are demanding. Free marketallocates resources exactly where they are needed by theconsumers. For example, suppose in the economy there arethree types of fruits available, banana, oranges and apples.governments do not allocate resources according to theconsumers’ requirements. They allocate resources accordingto the wishes and whims of their central planners, politicians,special interest groups etc. Only handful of such governmentpeople decide where to direct resources. For example,suppose, consumers’ needs are food and clothing but theirgovernment will spend resources in producing gardens and178 THE IIPM THINK TANK

P RICE PUZZLESguns! This will reduce supply of food and cloth because privatesector resources for production of these items are reducedthrough government taxation, debt and inflation. And thisreduced supply of various goods and services will push up theirprices in the economy.Warfare StateIf welfare state is one evil cause of inflation then warfare stateis another sinister cause of inflation. For the state, any activityoutside its own boundaries requires that it somehow gaincontrol over the resources of other nation states. This is onlypossible if they attack them and win their territories 13 . Thisdesire of winning other nation states has resulted into thelongest and bloodiest wars in the history. All these battlesrequire gargantuan amount of resources 14 . Here again,taxation and public debt will be insufficient for acquiring theseresources. Printing money is the only way which enablesgovernments around the world to fight these bloody battles.Without the central banks and their printing machines it isimpossible for any nation state to wage such costly warsagainst other nation states 15 .Figure 3 presents the evidence of increased war spending invarious regions around the world.Indian defense budget is increasing every year. Table 1shows this data. It is evident that the military expenditures arerising with time.Credit Expansion by BanksApart from governments, commercial banks can also increasethe quantity of money without the corresponding increase inproduction of goods and services. This inflation banks bringabout by using their system of fractional reserve banking. Theprocess of creating money out of thin air is famously known asmoney creation 17 . Today’s banks can expand the money supplywithout any efforts because they work (and are legally supportedand allowed to work in this way by the government) onthe basis of the fractional reserve banking system. In thissystem, banks are not required to keep 100 per cent reservedeposits of the depositors with them all the time. They can(and they do) misappropriate money of the depositors, anduse it to lend it to other people for making illegal profit out ofit. Banks evolved basically as the warehouse for keepingpeople’s deposits safe. Their only work was to safe guardpeople’s money 18 . But, as slowly bankers realized that not allFigure 3. World Military Expenditure.Military expenditure, by region, 2008Table 1. Indian Defense ExpenditureYearRegionSpending,2008 ($b.)To allow comparison over time, the above spending figure are in USdollars at constant (2005) prices.Total Defense Expenditure (Rs. in Crores)2005-06 80548.982006-07 85494.642007-08 85494.642008-09 105600Source: Ministry of Defense website (http://mod.nic.in/aboutus/body.htm#as6 16 ).Increase,1999-2008 (%)Africa 20.4 +40North Africa 7.8 +94Sub-Saharan 12.6 +19America 603 +64Caribbean .. ..Central America 4.5 +21North America 564 +66South America 34.1 +50Asia and Oceania 206 +52Central Asia .. ..East Asia 157 +56Oceania 16.6 +36South Asia 30.9 +41Europe 320 +14Eastern 43.6 +174West and Central 277 +5Middle East 75.6 +56World Total 1226 +45Source: SIPRI (Stockholm International Peace Research Institute) Yearbook 2009.the depositors return at a time to withdraw their deposits, theystarted lending these deposit receipts, mixed up with otherfraudulent pseudo-receipts, which are not backed by anyreserves, to other customers in the form of loans and othersuch credit extensions. One example will make this point clear.Suppose, person A deposits 1000 rupees in bank X. Bank Xknows that A is not going to return to withdraw his moneyTHE INDIA ECONOMY REVIEW179

M ONETARY ECONOMICSuntil next two years. In this situation it sees an opportunity ofusing A’s deposits to make illegitimate profit. It lends A’s 500plus extra 500 rupees of pseudo-receipts to person B and C atthe charge of 10 percent interest rate for the period of oneyear. Person B and C will return 1000 rupees plus 100 rupeesas an interest payment to the bank at the end of one year. Inthis way, banks pocketed 600 rupees of profit out of 1000rupees of original deposit. 500 rupees it created out of thin air,without producing anything. This is how today’s banks createinflation.Cures of InflationAfter looking at the true causes of inflation, it is easy to see itscures. In following paragraphs I discuss what we need to do tostop inflation, and its malicious effects of price rise and boomsand busts.We now know that the welfare warfare state is the majorcause of inflation. If anyone is serious about stopping inflation,then s/he must favor a total cut in governmental activities. Anystep in the direction of total cuts in governmental activities willbe an improvement in the direction of halting and eliminatinginflation finally. Unless and until we do this, it is impossible tocure inflation.The fractional reserve banking system is a second majorcause of inflation. This system should be adjudged illegalbecause of its fraudulent nature. All the deposit banksshould function on the basis of 100 percent reserve standard.The activity of lending money to the businessman and needypeople should be left over to the stock markets and/or creditbanks, where explicit contracts about how the bank is goingto use their money are signed between the depositors andthe banks.Central banks should be abolished because this is theinstitution which helps the fraudulent banks to survive whenthey go broke because of reckless embezzlements. In theabsence of central banks and their bailouts, all banks willbehave prudently in keeping their reserves in tact so that theydo not default on their deposit payments. Central bank is alsothe institution which prints money for the welfare warfaregovernment, and thus it should be dismantled as soon aspossible 19 .Today’s paper money standard allows governments, centralbanks and the banking industry to create money out of thin air.The cheap paper money can be printed endlessly. We need tostop this. Adopting the market based commodity money, suchas Gold or Silver, will take the endless paper money sourceaway from the fraud governments and banks. Market basedGold standard with 100 percent reserve requirement is thereal solution of inflation.Above outlined steps can only safeguard people’s standardof living against the vicious inflation. No other options areopen for mankind to stop the inflationary policies of thegovernments, the fraudulent banks and other such moneycranks, who think that by printing money they can makepeople rich! To blame speculator, hoarder etc., for inflation isa trick of the establishment for covering up their sins anddiverting people’s attention 20 . By blaming these people,governments silently continue their inflation. On one side thegovernment (all the parties, without exception) promiseseveryone that it wants to stop inflation, and on other side itcontinually breaks this promise. Populace can never understandthese hypocrisies of government without a soundknowledge of the science of human action i.e., Economics.The Praxeological laws are necessary to understand, and fightinflationary governments and banks. Without this knowledgeour world will never see an end of inflation.Endnotes1For a detailed critique of this mainstream view of ‘moneyas an objective standard of measurement’ and ‘level ofprice’ please refer to, (Rothbard, 2004, pp. 831-851)2We will soon see the correct definition of inflation.3This is the unseen effect of inflation.4And thus absurd are all the central bank and governmentalpolicies of price stabilization. We do not want stable prices.We want falling prices.5For a groundbreaking explanation of this phenomenonplease see, (Hayek, 1967; Mises, 2009).6For a detailed explanation of this phenomenon please referto, (Rothbard, 2000).7Discussion of Japan’s long economic debacle is given in,(Powell, 2002). And the recent Dubai debacle is anothercase at our witness here.8Professor R J. Rummel of the University of Hawaii hasestimated that, governments around the globe have killed26,20,00,000 of its own people (See his website for evidenceand more analysis of this data - http://www.hawaii.edu/powerkills/). This phenomenon is described as Democide by180 THE IIPM THINK TANK

P RICE PUZZLESProf. Rummel. And once we take into account people beingkilled between various nations wars (see next section fordiscussion of this issue) the number reaches to mindboggling heights.9The official words for this process are monetizing debt,market borrowing etc. These fancy words are linguistictricks of government. Governments do not borrow anythingfrom the market i.e., people. Their borrowings comedirectly or indirectly from the Central banks. The complicatedmechanism of issuance of treasury bills (T-bills) etc.,is a hidden way of fooling everyone. To get a clear pictureof central bank as giant counterfeiting machine please readRobert Murphy’s illuminating article (Murphy, 2010).10CPI is used here for the comparison because that is the onlyavailable indicator of rising prices. What we actually need isa time series data of separate product prices. For example,the price of groundnut oil in two different years, say, 300Rs/Ltr in 1980 and 1500 Rs/Ltr in 2009, provides a clearunderstanding of rising prices to the common man, insteadof any index number or a percentage figure.11Source: Union Budget (various years) and KILM 6 software,ILO.12In figure 2 (B) expenditure data is converted into thousandsof rupees to facilitate its comparison with the CPI.13The peaceful way of free trade with other nations again ispolitically incorrect, and so hardly tried by the governments.14For example, Joseph Stiglitz in his famous work, The ThreeTrillion Dollar War: The True Cost of the Iraq Conflict(Stiglitz, 2008) estimates that American cost of Iraq waralone is three trillion dollars.15For the evidence of the sinister role played by the centralbanks in funding state wars see, (Koning, 2009).16Accessed on 1/19/2010 5:47:52 PM.17To further understand how today’s commercial bankscreate money out of thin air through the process of moneycreation, please refer to, (Rothbard, 2004, pp. 805-809).Also see, (Samuelson & Nordhaus, 1998, pp. 477-481).18For a detailed analysis of the vital economic differencebetween a deposit contract and a loan contract please referto Soto’s brilliant work (Soto, 2006). Also see, (Mises, 2009).19For the detailed arguments about dismantling the centralbanks please refer to Ron Paul’s demolition of US FederalReserve, (Paul, 2009).20For a brilliant critique of such attempts of blaming speculatorsetc., for inflation please read Walter Block’s Defendingthe Undefendable (Block, 2008)Reference and Additional Thinking• Block, W. (2008). Defending the Undefendable. Auburn,Alabama: Ludwig von Mises Institute.• Cantillon, R. (2001). Essay on the Nature of Commerce inGeneral. Edison, New Jersey: Transaction Publishers.• Hayek, F. A. (1967). Prices and Production. New York:Augustus M. Kelly Publishers.• Hazlitt, H. (2004). Inflation in One Page. The Freeman,November.• Koning, J. P. (2009). How the Fed Helped Pay for WorldWar I. Mises Daily, Thursday, (November 12 th ).• Mankiw, G. N. (2001). Principles of Economics. Bangalore:Thomson South-Western.• Menger, C. (2009). The Origins of Money. Auburn, Alabama:Ludwig von Mises Institute.• Mises, L. V. (2009). The theory of money and credit.Orlando, FL: Signalman Pub.• Murphy, R. P. (2010). The Fed as Giant Counterfeiter.Mises Daily, February 1 st .• Paul, R. (2009). End the Fed (1 st ed.). New York: GrandCentral Pub.• Powell, B. (2002). Explaining Japan's Recession. TheQuarterly Journal of Austrian Economics, 5(2), 35-50.• Rothbard, M. N. (2000). America's Great Depression (5 thed.). Auburn, Alabama: Ludwig von Mises Institute.• Rothbard, M. N. (2004). Man, economy, and state withPower and market (Scholars edition) (2 nd ed.). Auburn,Ala.: Ludwig von Mises Institute.• Samuelson, P. A., & Nordhaus, W. D. (1998). Economics(16 th ed.). New Delhi: Tata McGraw-Hill.• Soto, J. H. D. (2006). Money, Bank Credit, and EconomicCycles. Auburn, Alabama: Ludwig von Mises Institute.• Stiglitz, J. (2008). The Three Trillion Dollar War: The TrueCost of the Iraq Conflict. New York: W W Norton &Company.(The views expressed in the article are personal and do not reflectthe official policy or position of the organisation. The authorthanks Stéphane Couvreur and Jonathan Mariano for theirvaluable comments. Special thanks to my student DharmeshPatel for preparing the article photographs.)THE INDIA ECONOMY REVIEW181

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P ILGRIMS & PROGRESSRELIGION ANDECONOMICS:AN EMPIRICALANALYSISAtanu SenguptaReader, Economics Department,Burdwan University, BurdwanKrishanu NathResearch Scholar, Economics Department,Burdwan University, BurdwanIntroductionEconomists visualize man as rational. A rational behaviour may beconsistently explained by maximizing behavior (Sen 2003). Howeverrationality does not imply extreme ego-centrism and selfishness. Itpresumes certain value structures that are imbedded in the mind of anindividual (Sen 1973, Arrow 1982, Basu 1983). As Arrow (1982) argues“The model of laissez-faire world of total self-interest would not survivefor ten minutes; its actual working depends on an intricate network ofreciprocal obligations, even among competitive firms and individuals’’.Herein come the role of religious, cultural and social values that constitutea rational psyche-the backbone of modern mainstream economics.Historians often take the view that India is a country, deeply embeddedin a religious fabric. Thus economic activities of human being becomeclosely related with his broader cultural affiliation and the religioustradition of the country. The economic study of religious culture comprisesa variety of sub-fields, which collectively embraces all aspects of theTHE INDIA ECONOMY REVIEW183

C ARE ECONOMICSsocial-scientific study of religion, is known as “The Economicof Religion”. The study, that seeks to explain religiousbehavior from an economic (or “rational choice”) perspective:that is people acquire religion in the same way that theyacquire other objects of choice & also evaluate its costs andbenefits and acts so as to optimize their utility. As in anymarket, the consumers’ freedom is to choose constraints, theproducers of religion. It determines the content of religiouscommodities and the structure, where religion is unregulatedand as a result, a competition among religious firms ispronounced. One can imagine the entire gamut of economicactivities generated by religious activities. It is well noted thatconsumer demand in India are closely related with religiousfestivals (like Diwali, Dussehra, Durga Puja, Id, Christmasetc.).In our study we have selected Tarakeswar- a Hindu pilgrimagesite in West Bengal-an Indian statefor analyzing the interaction betweenthe Economic Culture and ReligiousCulture, especially emphasis on thetemple culture. The flow of pilgrims toany place is strictly determined by thepilgrim’s valuation of this religious site.How the economic development ofsociety is generated by the acts deeds ofreligious culture, i.e., on the basis ofreligious faith, is the matter of discussionof our present study.It is very wellnoted andresearched thatconsumer demandin India is closelyrelated withreligious festivalsConceptIn the Traditional Economics production activity is independenton the consumption activity and they occur atdifferent points of time. In the definition of Care Economics,presented by Arrow (1963), the act of consumption is relatedwith the act of production. In fact the product and the activityof production is identical (Arrow 1963). Shapiro (1960)argued that the physician-patient relation effects quality ofmedical care. There is an element of trust in the relation. Thisimportance of morality faith and placable in the care industryalso have some external effect. Good reputation which resultsfrom positive externality may help to boost-up a doctor’sdemand, while negative externality tends to dampen it. Alsothere is a multiplier effect, because more is the doctor’sdemand, more is the need for attendance and other semiskilledpersons. However, there is requirement of someexternal forces (apart from the market mechanism) to controlthe quality. Otherwise, the negative externality will operateas demand exceeds below a point so as to exhaustive thedoctor’s capacity. The same logic may be applied for amedical institute also. Other care sectors such as education,governance etc. is also falling under this category.Under Cultural Economics there is an extra dimension.Added with the moral restrictions, there is a need for activeparticipation of the consumer, in the generation process.Suppose a classical dancer performs. The demand for such aperformance will depend not only on the positive andnegative externality, but also on the spectator’s readiness toenjoy the performance itself. In the cultural term Aristotlecalled this ‘sympathy’. A process, in which the viewer sympathizeswith the situation that created by the performer. In asense a spectator is also a part of theperformance.Under secular part of care economicsconsumers are passive but producersare active. So we can measure benefits,which arise from the demand-supplyinteraction. On the other hand, undercultural part both the consumers andproducers are active. That is, both theactivities are generated simultaneouslyfrom the market by the active participationof the consumer. Here the benefitis non-measurable. The more consumer participation, thegreater is his/her benefit.This can be shown by the following figure (1). In this figurethe two sets are represented the activity of consumption (C)and activity of production (P). Under Traditional Economicsin figure 1(b) both sets can’t intersect each other, since theyare independent. But both the sets under Care Economicsintersect each other, since the act of consumption is relatedwith act of production and both the activities are generatedsimultaneously in the market, represented by the intersectionof both sets in figure 1(a).Unrevealing the Temple Complex of TarakeswarThe existence of the Temple Taraknath at Tarakeswarchanges considerably the economic pattern of the town. Itdepends upon the occupational structure, standard of living184 THE IIPM THINK TANK

P ILGRIMS & PROGRESSEconomicsFigure- 1Traditional EconomicsCare EconomicsSecularCulturalCPConsumers & Producersboth are independentC = Consumption ActivityP = Production ActivityDiagram 1(a)CPConsumers PassiveProducers ActiveDiagram 1(b)CPConsumers ActiveProducers ActiveFigure- 2Demand SideTemple CultureSupply SideCultural AgentsVisitorBeneficiariesPilgrimsTouristsAssociates of Feligious ActivitiesAssociates of Non-religious activitiesTemple AuthorityTransport AuthorityProvider of local hospitalityMunicipal AuthorityHandicrafts, other cottage industriesDifferent Components of Temple CultureTHE INDIA ECONOMY REVIEW185

C ARE ECONOMICSof the inhabitants, social-economic infra-structural conditionsetc. of the town. The occupational profile reflects that,at Tarakeswer too a substantial portion of population earnstheir livelihood from the Temple and its pilgrims and thenature and extent of dependency vary from one group toanother group. That is some are acquiring more from it byvirtue of their ritual position or by the exclusive nature oftheir occupation, can be represented by a schematic diagram(2).Temple Culture is analyzed from two different aspects;Demand Side and Supply Side. From demand side, thismeticulous culture is consumed by the visitors who arrive tothis place to fulfill their mental and virtuous pleasure. On thecontrary from the supply side, the demands of the visitors area typical consumer of this particular culture under thereligious cultural economics.Now from the supply side the beneficiaries group is dividedinto two categories- the group associated with religiousactivities and the other associated with non-religious activities.The people who are supplying the religious goods andservices to the pilgrims are the former group, which areclassified into three groups. These are Temple Authority,Provider of Local Hospitality and Handy-craft & OtherCottage Industries. Now the later who are providing variousadministrative hospitalities to the devotees in order to fulfilltheir religious requirements in a smooth manner e.g., TransportAuthority and Municipal Authority.The earning of the temple is divided into categories; (a)Figure-3Temple EarningPermanent IncomeSeasonal IncomePayments of annuities by theState GovernmentRent and tax of houses and establishmentInterest from the bank against fixed depositsEntrance fee from pilgrimsEntrance fee from vehiclesSale of gold & precious metalsgifted by the piligrimsLease-out of fishing ponds, stallsGifted & donation of pilgrimsfulfilled by the various types of beneficiaries.The visitors are divided into two categories- Pilgrims andTourists. Tarakeswer has now arrived at phenomenal attitudes;million of devotees are called pilgrims come to thissacred place in long processions every year to fulfill theirreligious desire ness, personal and pecuniary gains and so onfrom far and near. On some auspicious seasons such as, on‘Sivaratri’, ‘Chaitra’ Sankranti’ and ‘Sravani Purnima’, herethis number rises multiple times. In economic sense pilgrim isPermanent Income and (b) Seasonal Income, shown in figure(3). The employees obtained a fixed sum of money or allowancespaid yearly by the State Government to the templeauthority, gifts and donations from the pilgrims & also earnsa lump-sum amount of income as interest from the investmentof these funds in the bank as fixed deposit, rent and taxby keeping houses and other establishment the estate authorityand also by leasing-out fishing ponds, tonsuring center,sites for stalls through auctioning the temple authority earns186 THE IIPM THINK TANK

P ILGRIMS & PROGRESSincome.With these permanent incomes, the temple authority alsoearns a large amount of income seasonally. It collects taxesthrough coupon as a parking charge from the vehicles bywhich the pilgrims come to this sacred place. Especially at thetime of ‘Sravani’, the temple authority also collects entrancefees as service charge through coupon from every pilgrim.Therefore, the people under temple authority depend uponthis economic involvement of temple to maintain theirlivelihood.Local Hospitality Providers group is also divided into twosub-groups- (1) Scared Group like Pilgrim Guide and PrivatePriest, who are working in the religious complex for assistingthe pilgrims to fulfill their ritual demands and (2) SecularGroup like rest house owners, shopkeepers, restaurantowners, barbers, florists, water carriers etc. who are supplyingvarious types of convenience andopportunities to the pilgrims to accomplishtheir religious as well as their owndemand. By providing various types ofgoods & services to the temple as well asto the pilgrimage place, the providersearning income for their subsistenceand also generate some sort of employment.The cult of Taraknath helps todevelop a number of handi-crafts andcottage industries in the neighboringareas at Tarakeswar. Different types of handi-crafts andcottage industries like clay pot making industries, cottonindustries, fruit pickle making industries, armlet makingindustries, manufacturer of portrayed of different Gods etcare separated according their origin of production at Tarakeswar.Conch shell industry, metal and stone image makingindustry, reticulated sling making industry, yoke-poleindustry, manufacturer of plastic clay image industry all arethose regional cottage industries where many people areengaged. Those are engaged with these industries, are livingaway far from Tarakeswar and also obtain economic benefitsfrom the pilgrimage activities of that place.The Associates of non-religious related activities are TransportAuthority and Municipal Authority at Tarakeswar. For along time, Tarakeswar has attracted many people fromdiverse areas near and far from Tarakeswar. Pilgrims come toThe socioeconomicexistence ofTarakeswar townwithout 'BabaTaraknath' isnearly noughtthis place mainly using by various land transport systems likeroad transport (such as by bus, car, tracker, paddle rickshawetc.) and railway transport.On the contrary the law and administration of TarakeswarTown is controlled by Municipal Authority. The authoritytakes a special care for providing the different types offacilities and comforts to the pilgrims to mitigate theirreligious needs. As against this, this authority collectsdifferent ritual taxes from the every pilgrim and also parkingcharges from these pilgrims’ vehicles. It reflects that thereexists a significant impact of temple culture on the economiccondition of the municipal Authority. That’s why the authoritydevelops and modernizes the town Tarakeswar and also toprovides more comfort and amenities to pilgrims that attractthem for visiting this place.From the above discussion, we can say that a wide stretch ofsurrounding areas of Tarakeswarcomprises economically, culturally andsocially linked with the towns theirfeeding center.Information of Secondary ResourcesAnalysis of the Railway AuthorityThe Railway Transport at Tarakeswaris one of the most ancient Broad gagesRailway branch line of Eastern Railwayof India has inaugurated on dated 5 thJanuary, 1884 from Howrah to Tarakeswar. In order toexhibit the flow of pilgrims’ activities, we examine themonthly statistical data of outgoing passengers from terminalstation Tarakeswar to any other stations obtained fromRailway Authority at Tarakeswar as well as the StatisticalDepartment of Eastern Railway, Howrah. Since the figureincludes both the pilgrims and non-pilgrims, do not provide acorrect estimate of the number of pilgrims. Besides these,many people, who come to or left this place by different roadtransports like buses, cars and also by foot and it also coverobviously some non-pilgrims also. Despite all these limitations,the railway data can yield a rough sketch about thetrend of visit of pilgrims on different time periods to Tarakeswar.In Hindu Culture an auspicious lunar day for rituals of anygod is fixed with respect to Bengali months. So we had toTHE INDIA ECONOMY REVIEW187

C ARE ECONOMICSFigure-4: Detrend Value of Railway Outgoing Passengers Corresponding of DifferentMonths of Four YearDETREND VALUE200000150000100000500000-50000-100000-150000BAISHAKHJAISTHAASHARSRAVANBHADRAASSHINKARTICKAGRAHAYANPAOUSMAGHAFALGUNCHAITRAMONTH1404 1408 1411 1413adjust the month wise railway data of year 2002 to 2007 as perBengali Calendar.The periodic movement of the outgoing passenger figurescan be analyzed by applying the method of Time Series. Tofind out the seasonal pattern in the outgoing passengers’ data,we derive the detrend values of these data & by comparingthese detrend values we can say that the flow of pilgrims toTarakeswar among the different months in four years arealmost identical. In every four years, the detrend values of thenumber of outgoing passengers is maximum for the month of‘Sravan’ and also two relative maximum values of detrenddata in the months of ‘Kartick’ and ‘Chaitra’ respectively. It isminimum in the month ‘Agrahayan’. Therefore, the tendenciesfor pilgrimage activities are homogeneous for every yearat Tarakeswar. This analysis can be shown graphically infigure 4 which exhibits the Seasonal Pattern of the outgoingpassengers.Figure (4) represents that in the month of ‘Sravan’ and‘Chaitra’, the two auspicious months of four years, thecongregations of outgoing passengers are maximum and itsseasonal pattern is all most same in all four years.So, it is obvious that in the auspicious months, the congregationof pilgrims would increases and we obtain a seasonaleffect on every year in the flow of pilgrims to Tarakeswar.Figure-5: Month Wise NTDR for Three YearsNTDR VALUE302520151050APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MARMONTH1997-98 2001-02 2004-05188 THE IIPM THINK TANK

P ILGRIMS & PROGRESSAnalysis of the Non-tax Earnings of the Municipal Authority:The economic existence of town Tarakeswar without “BabaTaraknath” is nearly nought. To examine the statement, wehave quantitatively formulated the influence of deity of thetemple and its religious activities on the Municipal Authorityof Tarakeswar. In order to access this, we evaluate the totalnon-tax earnings of Tarakeswar municipality, related with thetemple on the basis of different months.Analytically, we can visualize the total earnings of themunicipality, is coming from two different sources. These areNon-secular or temple related earnings and Secular orGeneral earnings.We define the ratio of monthly Non-secular earnings toyearly total earnings as Non-tax Temple Dependency Ratio(NTDR) of the municipality. It implies that we regard theratio between the municipality’s Non-tax earnings fromdifferent temple related activities for a particular month incomparison to its total Non-tax earnings over the year as theNon-tax Temple Dependency Ratio.The value explores that NTDR is higher in the month ofAugust and July than others. The auspicious month ‘Sravan’consists by taking fifteen days of each of these months. So, inthe month of ‘Sravan’, the maximum percentage earningsobtained from non-tax revenues to total non-tax earningsover the year due to the important fair “Sravani Mela”,implies the greater religious activities by the people in thissacred town. It illuminates the flow of pilgrims would increasein this month compare to other months. The value ofNTDR for the month July and August are 11.6% and 23%respectively in year 1997-98. Again in the month of April, thevalue of NTDR is also greater, that is 8.3% compare withother months. Since in this month another important fairnamed “Gajan Mela” is executed. This similar phenomenonof NTDR figure is shown in other two years i.e., in 2001-02and 2004-05. Therefore, greater religious activities generategreater earnings as well as greater economic activities. TheNTDR values in the month of July and August are 16.6% and25.2% respectively in year 2001-02 and 12.4% and 20%respectively in 2004-05. Also in month of April of all years,the ratio is higher. This analysis represents that the non-taxearnings from the sources of non-secular or temple relatedactivities of the Municipal Authority is guided by the shrineof “Baba Taraknath”.Therefore, Tarakeswar is a pilgrim town, whose economy,particularly depends upon the deity of the temple of “LordShiva”. The entire service sectors under different authority ofTarakeswar are somehow associated with this sacred centre.Hence, the significance of the deity of “Lord Taraknath” andthe temple is by no means confined to the religious aspectsalone, but also can be marked into the social, economical andcultural aspects at Tarakeswar.ConclusionTarakeswar is a smallest town under Hooghly District in WestBengal. But this place to be lighted by the glory of ‘BabaTaraknath’ to all devotees, living in our country and also inabroad. The town, Tarakeswar without establishment oftemple of ‘Baba Taraknath’ leaves nearly nothing. Due toimprovement of transport system many people come to thisplace from various socio-economic backgrounds fromdifferent areas that generate greater economic activitieswhich assist the people from inside and outside of Tarakeswarto maintain their livelihood. Many people at Tarakeswar earna satisfactory level of income by providing different religiousand non-religious services to the pilgrims.References and Additional Thinking• Smith, P. Adam, 1776, An Inquiry into the Nature andCauses of the Wealth of Nations, W. Strahan and T.Cadell, London, U.K.• Arrow, 1982. ‘A Cautious Case for Socialism’. In I. Howe,ed. Beyond the Welfare State. New York: Schocken Books.• Sen, A. K. 1973. ‘Behaviour and the Concept of Preference’,Economica 40: 241-59• Engels Friedrich, Manifesto of the Communist Party, KarlMarx, February, 1848; Marx/Engels Selected Works, Vol.One, Progress Publishers, Moscow, 1969, pp. 98-137• Iannaccone L.R., 1988, “Introduction to the Economics ofReligion”, Journal of Economics Literature, Vol. xxxvi(September 1998), pp. 1465-1996• Chakrabarti Prafulla, 1984, “Social Profile of Tarakeswar”,Calcutta, Firma KLM Pvt. Ltd., Kolkata, 198• Basu Kaushik, November, 1983, On Why We Do Not Tryto Walk Off Without Paying After a Taxi Ride, Economicand Political Weekly, Vol. 18(The views expressed in the write-up are personal and do notreflect the official policy or position of the organization.)THE INDIA ECONOMY REVIEW189

W HAT NEXT?When NationaliIt is neither the market nor the state but the combination of thetwo driven by passionate nationalism that have always createdthe best nations of the world.Pathikrit PayneSenior Faculty Member, IIPM New DelhiOne of the most important contributions of theWorld War II was the polarisation of the world thatstarted in the post war era. Incidentally Cold Warwas not just an era of face-off between the US and USSR butwas also the one which further galvanised the world into twoeconomic blocks. While the US and its allies came to becommonly known as the First World nations, the USSR andthe countries under Warsaw pact were termed as SecondWorld nations with the former having deep faith in theinstitutions of democracy and market capitalism while thelatter was associated more with communist regimes and statecontrolled economies. By late 1980s, with the fall of theBerlin Wall and the eventual disintegration of Soviet Unionin 1991, the very concept of the tug of war between theCapitalist West and the Communist East lost its essence. Butwhat did not lose essence was the quintessential debatebetween the state and the market. Even in the era of globalisation,this debate continues with many countries of WesternEurope like France, Italy and the Scandinavian countriesironically tending to have more faith in socialism and in thetenets of protectionism even as many erstwhile socialisteconomies of the Second and the Third World have endeavouredto not only embrace market capitalism but have alsoemerged as stronger nations through it. Strangely enough,one of the biggest mysteries of the modern day that hasremained unsolved is whether the disintegration of SovietBlock has diluted the essence of state in economic affairs andmade market stronger or not. All through the era of the ColdWar, the Communist Block gave primacy to the state in alleconomic issues and made sure that it is imbued in the heart,nerve and sinew of every citizen of their respective countries— that the state and the unity of the working class mattersmore than anything or anyone else. Not just that, the paranoiaand hatred for market capitalism was spread with the wordsthat capitalism not only creates the perennial rich-poordivide, but would make multinational companies morepowerful than state and often, at the cost of the state. Further,an important aspect of the propaganda machinery was alsothat while the state would always endeavour to take care of allthe basic needs of the downtrodden of the society, themultinational giants driven market capitalism would onlymake elitist products for the rich and the mighty. The masswould be reduced literally to the level of slave and that theywould have no power, rights or ownership of assets.Thus, in retrospect, more than two decades after the fall ofthe Berlin Wall and the subsequent embracing of the tenets ofglobalisation and market capitalism by the yesteryears’ posterboys of socialism, i.e. Russia and China, it becomes imperativeto scrutinise as to whether globalisation has essentiallydone what the Communist blocks always feared the most. Hasglobalisation and market capitalism that has swept the world,in reality diluted the concept of the state? Has the statebecome subservient to the dictums of the multinationalgiants? Has the state, in this era of globalisation forgotten itsbasic responsibilities towards the common man? Do the stateand the market continue to be mutually exclusive and anti-190 THE IIPM THINK TANK

A LONG ROAD AHEADsm is SocialismTHE INDIA ECONOMY REVIEW191

W HAT NEXT?thesis of each other or that there is a profound symbioticrelationship between the two? Well, to answer these complexpropositions and to find a common ground of convergence,let’s start with the objective of trying to find the answers offew fundamental questions...Even as China and Russia hopped into the globalisationbandwagon, Cuba preferred to continue with its tryst withCommunist socialism and a completely authoritarian economy.There the state continues till date to be completelyresponsible for healthcare, education and employment. If onelooks at the Human Development Index (HDI) of the HumanDevelopment Report of UNDP, Cuba is ranked at 51.Incidentally HDI ranks countries on the basis of ‘Quality ofLife’ in those countries measured in terms of life expectancyat birth, adult literacy rate, combined gross enrollment ratioin education and GDP per capita. Barring the last factorwhich could presumably be higher incapitalist economies, the other threefactors are all those about which thecommunist nations have always claimedto be more concerned than capitalistnations. Yet a glance at the HDI revealsquite a different story. While Cuba isranked 51 and China 92, in that very listCuba’s bête noire USA has been ranked13, Japan 10, Germany 22, Canada 4and France is ranked 8. In fact, barringRussia, every other G-8 country ranksamong the top 25 in the chart. This vindicates the fact thatnot only the market oriented economies are better-offeconomically, (best measured in terms of nominal GDP andGDP per capita), in terms of social indicators too, they aregenerations ahead of their erstwhile and present communistor say ideological adversaries. In fact the kind of socialsecurity system that the US has in place, a prominent Chinesethink tank has predicted that it would not be before 2020 thatChina could have such a system in place. Strange isn’t it? Andmore strange is the fact that China can only do so by piggybackingon market capitalism and not by going back to thetenets of Mao’s version of Communism. Now the primequestion here is why Cuba ranks 51 and China 92 instead ofUSA’s 13? Should the blame go to the US for the tradeembargo that it has imposed on Cuba? And if that's thereason then, should we accept the fact that Cuba’s well beingWhile Chinaand Russia joinedglobalisationCuba continuedits tryst withcommunistsocialismdepends completely on the dictums of the US which would inany case dent the credibility of a state controlled economicsystem? Or say, why is it that even today hordes of Cubansprefer to undertake the risky journey across the sea on smallboats to somehow reach the shores of the US? Why can’t theyjust trust the Cuban government for all its tall claims for thelast fifty years, and stay back?The second issue that needs to be addressed is why theUSSR collapsed under the burden of socialism while Chinasurvived? Why all of a sudden all Soviet republics were sovery willing to come out of Soviet Union and become independent?Does it vindicate the theory that Soviet Union wassynonymous with Russia and that the Russians consideredtheir race superior to all others in the Union and there weretremendous levels of discriminations? Does it also vindicatethe fact that all that the garb of socialism did was to hide theincredible levels of inefficiencies in theeconomic system and also that, for allthe semblance of a classless society, allthat it bred was an elitist one whereinonly the members of politburo and highranking state officials had the right toall privileges while the mass was left indestitution? Strangely enough, most ofthe countries of the Warsaw Pact andUSSR who clamoured for independenceare now again clamouring to becomepart of another union, i.e. the EuropeanUnion. And almost all of them are far better-off economicallynow than what they used to be two decades back.The third and perhaps the most intriguing issue is that ofChina. More than three decades back the Communist Partyof China under the aegis of Deng Xiao Ping, after the demiseof Mao Tse Dong, realised that three decades of 'Soviet-Styledraconian state ownership' and state control of the economyhad not resulted in any dramatic transformation of theChinese economy as well as in the well being of the commonman. Also, because of complete isolation from global trade,not only China was falling behind but in essence the WesternCapitalist block was racing ahead at a much faster pace.Deng’s decision to go for calibrated liberalisation of theChinese economy through the Bottom-Up Theory by takingthe villages as the building blocks of reforms, gradual liberalisationof prices, restructuring of the public sector enterprises192 THE IIPM THINK TANK

A LONG ROAD AHEADand eventually creating world class infrastructure in the fivecoastal Special Economic Zones not (SEZs) only metamorphosedthe Chinese economy into a potent force to reckonwith but also brought it within the striking range of overtakingthe US economically in the future. Mao’s dream is thusbeing fulfilled not essentially through pure communism but anew genre of economic model endeavoured by Chinesenamely market socialism. In other words, Mao’s Chinaemerged stronger against their ideological adversaries not bybeing dogmatic with their own ideology but with time, takingthe best of the attributes from the market economy to refinetheir own concepts — thereby making it a more potent force.China’s success lies in not undermining the key responsibilitiesof the state with respect to education and healthcare evenwhile not letting the veil of socialism be the perfect camouflagefor all kinds of inefficiencies blossoming in the economy.Business should be done in the waybusiness is supposed to be done. Thisessentially became the mantra of theChinese government which made surethat the kind the infrastructure itcreated in the Chinese Special EconomicZones (SEZs) would put even thebest industrial infrastructures of theFirst World to shame. It made sure thatthe very Western MNCs that thecommunists hated would eventuallyflock into the Chinese SEZs andbecome the ultimate catalysts for China’s economic metamorphosis.Deng’s success lies in successfully transforming therole of the state from a monopoly player to that of an enablerwhose task is to create an enabling environment wherebusiness can thrive and execute far better than what in theFirst World they could do. The resonance of the same couldbe found echoing in the words of the Indian Finance Ministerwhile presenting the Union Budget for 2010-11. He stated inno uncertain terms, ‘The third challenge relates to the weaknessesin government systems, structures and institutions atdifferent levels of governance. Indeed, in the coming years, ifthere is one factor that can hold us back in realizing our potentialas a modern nation, it is the bottleneck of our public deliverymechanisms.’ He further stated, ‘With development andeconomic reforms, the focus of economic activity has shiftedtowards the non-governmental actors, bringing into sharperThe turnaroundof the BRICeconomies isbecause oftheir creationof enablingenvironmentfocus the role of government as an enabler. An enabling governmentdoes not try to deliver directly to the citizens everything thatthey need. Instead it creates an enabling ethos so that individualenterprise and creativity can flourish. Government concentrateson supporting and delivering services to the disadvantagedsections of the society.’In essence, the key reason for the turnaround of theeconomies of Russia, India and China especially in the lastone decade is that they have realised the importance ofcreating this very enabling environment where business andnewer ideas can be nourished and thrived. This in turnvindicates the fact that the essence of the nation has not beendiluted even in this era of intense globalisation. In otherwords market economy would simply not be able to survive,leave alone thrive in a failed state or in a chaotic state. Everwondered why don’t great companies emanate from countrieslike Afghanistan, Somalia, Sudan,Ethiopia or Congo? Well, no prize forguessing because the answer is obvious.In fact the answer is so obvious that weoften ignore the inner essence beneaththe veil of simplicity in it. Thus, it goeswithout saying that there is a profoundsymbiotic relationship between the wellbeing of a country and the companiesoperating in that country. A healthycompany at the end of the day is thusthe manifestation of how good thesociety is. The reason being that for the sound functioning ofa company, it needs an environment where societal institutionssuch as banking, judicial system, law & order, theexecutive, legislative, regulatory environment as well as thehealthcare and educational infrastructure perform reasonablywell. Reason? Well, every healthy and educated personin a society is supposed to be employable and every employedperson (be it self-employed or otherwise) is always neverthelessa customer who would work and use his hard earnedmoney for a better living in a society where he presumes thathis hard earned money and assets are safe enough just asmuch as a business entity would want security and safety of itsbusiness assets. And therefore just as it is important for thebusiness to have its factors in right combination with the rightkind of market acumen, an ability to think ahead of time,anticipate future competition, never undermine the essenceTHE INDIA ECONOMY REVIEW193

W HAT NEXT?of clients and above all, never let the feeling of ‘cloud numbernine’ make the feet go off the ground, the same laws probablyapply for a nation as an entity too while marketing the nationas an investment destination and thus creating the sustainableenvironment for business to survive and thrive which in turncreates utility products, generates employment, creates ahealthy environment of competition, pays taxes to thegovernment and forces the government to bring structuralchanges in the society. It also forces the government todevelop the underdeveloped regions of the country in termsof physical, social and financial infrastructure without whichthe mechanism of invisible hand of the market economywould not work. In western developed countries, the key totheir high ranking in the Human Development Index can beattributed their efficient public deliverymechanism (in spite of being marketbased economies) which made sure thatthe revenues generated by the governmentthrough taxes is put to aneffective use through the developmentof high quality education,healthcare and physical infrastructurein the society. This in turnchurns out the army of skilledemployees and potentialcustomers that the marketeconomy thrives on. Thus, itis a win-win situation forboth the market and thestate. Well, these are simplerules of the game but then inthat very game with same simplerules, some win while most lose.In retrospect, the difference between the US and Cuba orsay between a reformed China and the erstwhile China hasnothing to do with the kind of ideology they followed orprofessed. Rather, it has everything to do with how successfuleach one of them has been in creating an enabling environment.China’s transition from state controlled economy to amore pragmatic market oriented one and getting integratedwith the global economy has not necessarily made it keepaside her own perspectives and become subservient to theUS. It has only created an effective environment whereproductivity, business acumen and enterprising attitude havea higher chance of success than what it was in pre-1978 China.Cuba unfortunately never learnt that and thus continues topay for it even when its one time mentor, i.e. USSR, in its newavatar Russia like China, has been extremely successful inmaking the quick transition to market oriented economy(albeit with several upheavals) and leverage it to the hilt bybecoming a major player in the global defence, minerals andoil & gas industry. Russia’s transition towards market economyhas similarly not made it subservient to the US or theWestern block. Rather it has strengthened Russia to theextent that it has again started aspiring for a multi-polar worldwith Russia as the only viable counterpart to China and US.Today the popularity of Vladimir Putin is no less than that ofthe incumbent US President. Today in thechanged geopolitical paradigm, Russia isgiven much more importance by the USthan it ever got during the whole era ofthe Cold War. Today US rather givesmore importance to Russia and Chinathan to countries like France, UK orJapan. Yet like China; Russia too hasnot given-up on its independentforeign policy and both more oftenthan not are on the opposite sideof US when it comes crucialissues of geopolitics like Iran.This is exactly where the likesof Fidel Castro failed theirrespective nations by equatingeconomic reforms andinstitutionalising of the systemwith capitulating to the Westerndeveloped nations. For those who are still intoxicated by theMarxian theories, the debate has always been about stateversus the market and never about the state plus the market.The likes of Deng Xiao Ping and Vladimir Putin realised thatthe key to the success of the US economy has been its abilityto keep aside this conflict and combine a cocktail of two tomake it an incredibly potent force. If today, the US is thelargest and the most powerful economy or say a nation of theworld and continues to be so, in spite of a crippling recession,it is primarily because of the incredible feats, innovations andmarket dominance that the giant corporations of US havecreated. The 140-odd US based companies in the Fortune194 THE IIPM THINK TANK

A LONG ROAD AHEADGlobal 500 list is essentially the backbone of the US economy.It is the clout of American Inc. which when combined withshrewd policies of the US government that created theindisputable clout of the biggest brand of the world i.e. dollar.What would happen in the future and whether the supremacyof the dollar would continue is a matter of debate. But at leastfor the time being, it doesn’t seem that there is any realcompetitor. That issue will be discussed later in the article butan important thing that needs elaboration again is that evenwhen many of the American corporations have becomegigantic, with many of them having annual sales turnoverbigger than the annual GDP of some middle rung countries ofthe world, it has not essentially made them bigger than thenation they originated from. Even though it goes withoutsaying that lobbying by giant corporations with governmentsis a common affair, still the corporations have not been ableto give-up their national allegiance and or replace thenational identities of people with corporate citizenship.Everything said and done, GE or GM or the likes of Microsoft,IBM, Oracle or Wal Mart would always remain Americancompanies. That identity can neverbe diluted even if majority of theirpresent day employees, customers orworkshops are located in other countries.In fact the most incredibleexample of this national allegiance aswell as the symbiotic relationshipbetween the state and the market can befound in the US defence industry. WhilePentagon remains the big daddy or saythe nucleus of the entire system, almostthe entire defence manufacturing andresearch work in the US is done in the realm of the America'sprivate sector. So if one considers the gigantic defensecontractors like Boeing Company, Lockheed Martin, Raytheon,Northrop Grumman, General Dynamics, L-3 CommunicationsHoldings, General Electric or United Technologies, itis these corporations and several others like them which formthe very backbone of American edge in defence technologies.Yet at the same time these organisations are so-called privatecorporations with their own board of directors and accountabilityto shareholders. But does that make their shareholdersor board of directors or say the profit margin of the companiesmore important than the nation they emerged from?Would Americandefencecompanies eversell weaponssystems toenemies of US forthe sake of profit?Would it ever happen that Boeing Company for the sake ofincreasing its sales turnover, endeavour to sell its cutting edgeF-18 Hornet combat aircraft to countries like China or Iranmuch against the wishes and the policies of the US Government?Would ever Lockheed Martin sell F-16s to Syria orwould ever General Dynamics sell the cutting edge M-1Abrams or Stryker Armored Combat Vehicles to NorthKorea just for the sake of increasing their profits and sales?This is where the miracle of globalisation lies. Everything saidand done, globalisation might have spawned a plethora ofgiant corporations but it has not necessarily diluted theconcept of nation or nationalism. Big talks of this world beingturned into one global village notwithstanding, the veryessence of today’s globalisation is not about diluting theparadigm of nation-state but to eventually make the statesstronger. The concept of symbiotic relationship in this casecan be proved further by the extent of toil the US administrationtakes to make sure that American companies get globalcontracts. The very issue of America’s sale of F-16s to Pakistanor pitching the same to India for the proposed near $10billion Medium Multi Role CombatAircraft (MMRCA) deal of Indian AirForce, has nothing to do with rewardingPakistan for its role in the 'War OnTerror' in Afghanistan or the crusadeagainst Taliban or about making India acloser ally. Rather, it has everything todo with keeping the assembly lines ofthe American defence industry rolling.To vindicate this point, I would takerecourse to one of the most happeningissues in the global defence industry atthis point of time. The MMRCA (Medium Multi RoleCombat Aircraft) deal of the Indian Air Force (IAF) which isvalued at $10 billion, on a conservative estimate, has enteredthe second round with some of the finest fighter aircraftmanufacturers of the world pitching in with their products forthe trials. One of the key contenders of the same is Eurofighter Typhoon from the European consortium of EADS. Inthe recent past, the chief of the Eurofighter Typhoon campaignin India, Dr. Matthias Schmidlin, gave an interview tothe defence journal StratPost in which he stated that the finaldecision of selecting the vendor would be a political one. Andhe couldn’t have been more correct than that. The reasonTHE INDIA ECONOMY REVIEW195

W HAT NEXT?being that each of the vendor be it the MiG of Russia,Lockheed Martin or Boeing of the US or Dassault of Franceor SAAB of Sweden is backed by their respective governmentsbecause this deal would not only help in creatingthousands of jobs in their respective countries but would alsogive assured business in terms of maintenance and upgradation,for decades to come, in addition to follow-on orders.Now consider this, the Fort Worth factory of LockheedMartin in Texas is home to the assembly line of the F-16combat aircraft. This fighter plane has been one of the finestand time-tested hardware for decades now, but it has almostreached the end of its life cycle. With the US Air Forcegradually shifting its priority towards the fifth generationfighter aircraft namely the Joint Strike Fighter or F-35, theorders at the Forth Worth factory have almost dried up with apotential of job-loss for thousands of people. Now it wasunder this consideration that George Bush had pushed sohard during his tenure to push the deal of selling F-16s toPakistan under the garb of furtheringthe war on terror even when every oneknew that F-16 is probably the lastpossible option to consider when theobjective is to fish out rag tag Talibanjihadis from densely populated regionsof tribal areas of Pakistan. The realobjective no wonder was to save jobsback home. Likewise the currentObama Administration has beenleaving no stone unturned to pushthrough the latest or perhaps the Indiaspecific version of F-16 namely F-16 IN which the US states toeven better than the one currently being used by the US AirForce. In the same league, by clearing the path of India’sentry into the elite nuclear club and letting it buy nuclear fuelfor civilian power production, even when India has not been asignatory of the Non Proliferation Treaty (NPT), the USplayed a master stroke in making India feel obliged by the USfavour to the extent that every now and then defense ordersare simply going to American companies than to others. Sowhile the MMRCA deal still hangs in balance, with Boeingand Lockheed Martin both having fair chance to see throughit, US also succeeded in getting orders for six C-130 transportaircraft (from Lockheed Martin stable for almost a billiondollar), eight P-8I Poseidon Maritime Surveillance aircraftsThe Americansale of defencesystems is mostlydriven by domesticcompulsions ofkeeping peopleemployedfor Indian Navy (from the Boeing stable for almost $2 billion).Moreover US has also been able to make India get interestedin the C-17 Globemaster heavy transport aircraft for theIndian Air Force (also from the Boeing stable) by almostmaking it desert its time tested IL-76s. In fact the desperationof Obama administration in pushing through this deal toocan be gauged by recent reports which stated that Boeing isalmost on the verge of closing its C-17 assembly line if freshorders from abroad don’t materialise. Thus the whole essenceof symbiotic relationship has been proved once more. The USGovernment often pulls all the strings possible to secureforeign contracts for its industry to keep their assembly linesrunning and thus keeping people employed at home whichproves again that globalisation is all about making nationsmore important than integrating the world into one.Well, the Doubting Thomas can still argue that there’snothing great about globalisation helping the US to become astronger economy as it is as common as saying that withoutoxygen, life would not have been possibleon earth. But the point of contentionhere is that it is not just the WesternCapitalist block or countries like Chinawith sheer passion to go ahead and beamong the top league of economies butalso some of the former Communistcountries and the erstwhile torchbearersof Communism as well as the fiercestcrusader against Capitalism i.e. USSR inits new avatar as Russia have beenundoubtedly some of the biggest beneficiariesof globalisation. Moreover as stated earlier Russia alsoused it as a potent force to revive the nationalist pride inRussia which was almost gone after the destitution and chaosthat swarmed in Russia after the disintegration of USSR. Butbefore that it is important to look at one of the key issues, i.e.the reason for the disintegration of the Soviet economy. Theconcept of planning of an economy and allocation of resourcesis not essentially a wrong or faulty concept as even theeconomies of Western Capitalist blocks too had and still havecertain elements of planning. For example, the US has one ofthe highest spending in the world when it comes to socialsecurity (as stated earlier) which is a planned expenditure bythe US government. But the fault with the Soviet economicplanning was its rigid structure of command wherein bottom-196 THE IIPM THINK TANK

A LONG ROAD AHEADup criticism for any kind of top-down order or plan wasconsidered dissension. Thus the planners, imbued with adistorted picture of what the reality is and overwhelmed byintoxication of a prefixed ideology, never really understoodthe ground realities. Their immediate subordinates in orderto save their own skins, lives and jobs continued to feed themwith as much a rosy picture as possible. When the whole worldwas going through a transitional phase of making a paradigmshift to low-cost and energy effective technologies, the SovietUnion continued to have faith in gigantic icons of theirindustrialisation. Gradually, not only they became out offavour when it came to international markets, the gap betweenthe estimates of the planners and ground level demandof products started creating a huge scarcity of basic productsin the economy even while SovietUnion, for the sake of keeping theWarsaw Pact countries under itsfold continued to feed them withsubsidised food. Where everythingelse failed they resorted toeither printing more currency totide over the deficits (thusgradually destroying the value ofthe currency), or attempted tobrowbeat the reality with thepropaganda machinery whichblamed everything to westernconspiracy. Thus, Soviet Union,in spite of having far betterengineering skills and capabilitiesthan many had in west, floundered.Just for the sake ofkeeping pace with the defenceexpenditure of US, it continued to commit almost 25% of itsGDP to defence production without realising that USA’sincrease in defence expenditure always went hand in handwith increase in its overall GDP which made sure that theoverall expenditure in defence was always in single digit aspercentage of GDP. But Soviet Union fell into the trap andthe decline continued. This was aggravated even morebecause of the absence of any kind of independent institutionalmechanism which could have exposed the big flaws inthe system. By late eighties, it was beyond repair and therewas much dissent among the mass because of the nearirrelevance of the currency and the sheer disparity betweenthe lavish and often western type lifestyle of the politburomembers and other senior party members vis-a-vis thedestitution all around. In the aftermath of the disintegrationof the Soviet Union, it was no less than utter chaos which wascompounded further by an IMF prescribed panacea whichsimply was destined to fail. Corruption reached to greaterheights. There was a systemic and a well planned liquidationof state assets in the name of divestment, most of which wentin the hands of powerful oligarchs who kept no stone unturnedto shift all their ill-gotten wealth out of the country.The same was happening with the money coming from IMFwhich was quickly going out of the country instead of beingput to good use for restoration of the beleaguered economy.While many do rightly blame thenear crippling of the Russianeconomy in the post Sovietdisintegration period to the IMFprescribed Structural AdjustmentProgram which forced Russia tosell its state owned enterprises, cutdown of state expenditure (oftenat the cost of social welfare) andallow unabashed entry of foreignplayers in the market, what isnever mentioned is that part of theblame should also be put on theSoviet form of governance fordecades which failed to create anykind of institutional mechanism towithstand shocks and yet survive.Soviet Union was run by a partyand not by institutions. So, when theparty collapsed there was nothing left which could havesalvaged Russia. The state run institutions never knew whatefficiency was all about and always took the subsidy and easyfinancing by the state or bailouts for granted. Had thoseinstitutions been in place, Russia’s transformation would nothave been so bloodied. Another important aspect withrespect to this which needs consideration is that IMF neednot be a symbol of globalisation. All those countries whichwent for the IMF prescribed doses of economic liberalisationeventually suffered systemic problems. In contrast, eventhough India did face a severe foreign exchange crisis in 1991,THE INDIA ECONOMY REVIEW197

W HAT NEXT?and was forced to open up the economy for good, it did notblindly follow the dictums of IMF because of which it hassince then never faced any severe economic crisis in spite ofrecording spectacular economic growth year after year. Thereason for this is simply because for India, globalisation hasbeen a calibrated one instead of a shock therapy. It neveraccepted the IMF version of globalisation. Globalisation forIndia, in addition to opening up the economy as well asinviting FDI, also included the very concept of making Indiancompanies strong enough in not just being able to competeand survive in the Indian market against foreign competitionbut also make sure that they become strong enough toeventually become strong global players. Globalisation forIndia also meant making optimal utilisation of its large poolof english speaking and technically qualified manpower toeither cater to offshoring of business from the US or migrateto be part of the workforce, thereby creating a steady pool ofexpatriates who are not only a leveragefor India in terms of their clout but alsoremit nearly $50 billion annually.Coming back to the issue of Russia,the thing that Russia learned, especiallyfrom the era of Vladimir Putin is how tomarket well made products, somethingthat was considered redundant in theSoviet era. In an era when OPECstarted to use its clout too much toincrease oil price randomly which oftenput the global economy in muchturmoil, Russia realised the incredible leverage that it hasbecause of its huge abundance of oil and gas reserve. It notonly went in for being a counter to OPEC in oil market buteventually started gaining trust of many countries which weregetting sick and tired of the tantrums of OPEC. By makingcountries like India partner in its oil explorations and defenceresearch projects, Russia from the late nineties startedplaying the game which US has been so adept in. The leadershipaspect of Putin is something that I would discuss later onbut with reining in of the powerful oligarchs and making theRussian expertise in defence engineering the USP to sell it inthe global market, Putin’s Russia was a new avatar altogetherin the market which was no more inhibited by the prejudicesof yesteryears but was more than willing to collaborate withthe West on crucial issues even while not always bowing toThe conceptof nation andthe governmentof thenation neednot besynonymoustheir dictums. Russia’s superpower ambitions were back inthe reckoning but it didn’t forget the reality of the day andthus, didn’t get into the arms race with the US any more. Itwas more than willing to accept the second fiddle roleprovided US gave it its due respect. Its brutal retribution ofthe Chechen rebellion and later on the thrashing of Georgiawas more of a signal to the West that Russia was not to bemeddled with. It renegotiated the gas price with many formerSoviet nations like Ukraine, Belarus, Georgia and literallyused the leverage of gas to bring many of the Europeannations to their knees. Russia was coming of age and all thatmattered to it was Russia and nothing else. It made very clearto the former Soviet nations that they cannot continue towarm-up to US and yet continue to have the luxury of gassupply at Soviet era rates. While Russian giants of the Sovietera like Gazprom or Sukhoi Corporation became much moreagile and adaptive to market changes, the Russian market toobecame a lucrative one for the westerncompanies. Today Russia is not onlyback in the reckoning but according tothe report of Goldman Sachs, it is oneof the four BRIC countries to watch outfor in the future.One thing in this respect that needs aspecial mention is that the very conceptof state is often confused with stateownership of companies and factors ofproduction. Likewise the nation andgovernment of the nation need not bethe same thing. It is even more strange that it is alwayspresumed that socialism is more nationalistic than globalisationor liberalisation. Thus, one can be extremely criticalabout the government of a country and yet be very committedto the cause of the nation. This is something that was neverappreciated in communist nations which often led to theirdownfall. There’s nothing wrong with state ownership offactors but if one looks at most of the African impoverishedyet resource rich countries, there’s predominantly stateownership of assets there but one knows pretty well as to whatstate ownership there means. For, in most of those dictatorled nations with no institutional mechanism in place, ruthlessdictators and their coteries make billions and siphon it off tosafe havens abroad while the mass continue to remain in utterdestitution and even starvation. Thus it is not necessary that198 THE IIPM THINK TANK

A LONG ROAD AHEADwelfare happens the best if the state has complete ownershipof everything in the nation. India in this regard would be awonderful example to vindicate it. In the late forties of theprevious century when it got independence from more thantwo hundred years of British colonialism, it was in utterturmoil as the independence came at the cost of a painfulpartition. As a result of formation of Pakistan and India,millions on religious ground migrated either from the presentday India to Pakistan (including Bangladesh which was thenknown as East Pakistan) or vice-versa. Thus, there was a hugepopulation of refugees to take care of along with a severefamine that immediately followed soon after. In those daysIndia did not have any industrial base worth talking about asthe British, for all the infrastructure they created in this country,never essentially wanted India to emerge as an industrialhub as the prime motive was always to make this resource richstate a prime supplier of raw material and semi-finishedproducts for the industrial zone ofManchester. Thus, when India gotindependence, it almost didn’t evenhave the capacity to produce a singleneedle on its own. Further, everythingsaid and done, the partition from theBritish point of view was a master strokeas it literally crippled whatever economicpotential the Indian subcontinenthad. While Mumbai was the textile hub,the cotton fields existed mostly in thepresent day Pakistan. While most ofprominent jute mills were in Kolkata, the fertile soils suitablefor jute cultivation were in East Pakistan or the present dayBangladesh. Thus partition meant breaking of the criticalsupply chain for the economy of South Asia. Essentially weare talking about an era when there were no RelianceIndustries or IT industries or a thriving service industrieswhere one could have gone and sought a job. We are essentiallytalking about an era when there were no industries andall that one could have done to earn a living was to start somekind of an economic transaction through business to sustain afamily. It was then that they realised that it was far moredifficult to conduct business in independent India than it wasperhaps during the British rule. The new regime and firstgovernment of independent India had some other plans.Their fascination for the Soviet style of socialism was notPartition of Indiawas a masterstrokeby theBritish to cut thesupply chain ofthe South Asianeconomyentirely wrong given the mayhem of Great Depression of 1929that had left its scar on the world less than two decades back.But what was appalling was the Indian polity’s sheer antipathytowards private entrepreneurship and businesses. Theconcept of Heavy Industry Oriented Economic DevelopmentStrategy was not wrong given the sheer need of basic industrythose days for creating the foundation of India. But what wasunacceptable was the way Indian government was more thanwilling to literally beg for money and technology from theBritish or the Germans or Russians even while restrictingsimilar ambitions of TATA and others for long. In any caseIndia was perhaps one of the more fortunate nations to takebirth with an intact infrastructure created by the British andnot reduced to rubble by the mayhem of the Second WorldWar. This when compared to the devastation that Japan,Germany, UK, France and other European countries wereleft with after the end of the war, was incredible. Irrespectiveof whether one was part of the Allied orthe Axis powers, all were reduced torubble and had to start all over again.But not India. The cities of Delhi,Mumbai, Chennai or Kolkata were nothit by the mayhem of the Second WorldWar unlike Paris, London, Tokyo orBerlin. But even then, can we comparetoday's Delhi or Mumbai with today'sLondon or Paris? That's the answer weneed to seek...The creation of the legacy of licensingpolicy for keeping private industry under leash and to preventthe over production of so-called luxury items by the same,eventually laid the foundation of India’s industrial decay.With the bureaucracy having been given the discretionarypowers to allocate licenses to new enterprises, it was only therich and the mighty with right kinds of contacts and bag fullof money who got the licenses to start business. The likes ofDhirubhai Ambanis were considered outsiders and castawayssince they were from rustic India and didn’t know English, orhorse-riding or golf which in those days of 'elitist India' wereso very important to start a business. Thus, the concept ofrural-urban divide and corruption started in India from thevery time India got independence. One would not be surprisedif the likes of G.D. Birla, B M Munjal or Jamna LalBajaj had to face similar harassment just for the sake ofTHE INDIA ECONOMY REVIEW199

W HAT NEXT?getting a license. Not just this, even when one got a license tostart a business, it was the government babus and not the businessmanor the market who could decide on the level ofproduction. Production control was a key pillar of the licensingsystem but the real flaw lay in the fact that there wasalways sheer disconnect between the level of demand ofsomething in the market and the estimation of the government.So suppose someone had this traditional knowledge ofmaking bicycles and eventually got a license to make bicycles.And suppose that this company was allowed in the 1950s tomake 10000 bicycles in a year and in those days this ubiquitousbicycle used to be the only source of mobility for thepoor mass. And so if one supposes that the demand in themarket was around a hypothetical figure of one lakh, (for apopulation of more than 40 crore those days, the demand wasinvariably more than one lakh) then the sheer disparitybetween demand and supply was good enough to raise theprice. Realising this, the government also made sure thatalong with production control, it would control prices also.Now from the producer’s point of view,within the installed capacity that hehad, to produce the commodity, herealised that he could produce probablythree times of the sanctioned productionand sell it in the black market evenwhile showing on documents that onlythe stipulated amount of units havebeen produced. Thus, say for every10,000 units of a product, the producerwas actually producing30000 and selling in the market even while showing on paperthat only 10,000 are being produced. This means that taxeswere being given for 10,000 units only while the rest of 20,000were part of the black economy as they were not paying taxes.And when the excise or the labour inspector comes forinspection of documents, the easiest thing to do was to greasetheir palms with enough currency that the whole hierarchyfrom the excise inspector to minister could be kept contentand silent. No wonder then that when the license raj wasabout to go, the political class was vehemently against it asdoing away with restrictions to production would also meanno easy money forthcoming. Thus the seeds of black economywere sown in independent India in the so called socialist era.The government control on most of the prices made surethat everything in this country was prohibitively expensiveand almost everything was considered a luxury. Limitedproduction meant long waiting period to get products or get itin the black market. Now imagine today if the governmentdecides to go for production control and declare that notmore than 10,000 laptops or say onelakh cellphones would be allowed to bemanufactured in a year, what wouldhappen then? Wouldn’t it create anenormous scarcity in the market?Wouldn’t the prices just shoot up?Wouldn’t people just revolt? Yes, all ofit is right but the biggest casualty wouldbe with employment generation. Takingthe instance of just the cell phonemarket only, the five hundred millionstrong customer base and the exponentialgrowth rate has created a plethoraof jobs in the production of cellphones, marketing of cell phones,sales of connections, after salesservice, network and tower managementas well as promotions andadvertising. A complete restrictionof the market would just dryup all the jobs. Now thenmultiply the same effect withsay, similar restrictions in each ofthe sectors and one can easily decipher the reasonfor India’s stagnation for so many decades. Likewise,The seeds of theblack economywere sownin independentIndia in theso-called Socialistera200 THE IIPM THINK TANK

A LONG ROAD AHEADwould the cell phone rates or the prices of consumer durablesor FMCG products have come down so much in the last onedecade if the government were to fix the prices? It's the sametelephone market where call rates were prohibitive for ages tothe extent that there are jokes in the bureaucratic corridorsthat the prime minister of one South East Asian country oncevisited India and while making a call back to his home state,tried to find out the call rates and eventually stated that withthe money he had to notionally spend for making the call, hecould have flown back to his state, inform his wife that he hasreached India safely and then could have flown back to Indiato continue with his rest of the tour. Now the question thatarises here is that what kind of planning was this and how didit benefit India? Compare that with today's call rates and howit has empowered the poorest of India through the ability ofaffording a cell phone.So while production and price control restricted consumerismand thus stifled the economy to a great extent, the twoother pillars of licensing system were even more dangerous.One of them was invariably the conceptof import substitution wherein thewhole objective was to create a viableand a self reliant industry in the countryfor reducing dependence on imports.Theoretically, it was not a bad conceptbut practically it is difficult for anynation to produce everything on its ownand when someone tries to do that, it isnothing more than a self defeatingendeavour. Being self reliant doesn’tmean shutting the doors to foreigninventions which are path breaking. Imagine if today Indiangovernment states that it would not allow let’s say, Microsoftor Oracle products to be used in India or say it would notpermit the use of Boeing or Airbus airplanes in India simplybecause they are foreign made and instead India wouldendeavour to build the same from scratches over here. Whowould then dare to travel in a plane made by any governmentalagency on an experimental basis? Or what would happento India’s prowess in software industry if they are asked towork without the products of Microsoft, Oracle, IBM, Ciscoand many more? Today any decision like that would be like adeath knell for the incumbent government as not even themost left leaning party can essentially think of doing that. ButThe four pillars oflicensing policyalmost destroyedthe culture ofentrepreneurshipin independentIndiaIndia, unfortunately did exactly the same for almost fortyyears when imports were restricted and companies likeInfosys had to plead with the government for buying computersfrom abroad which was considered unnecessary by thegovernments of those days. It was also for the same reasonthat many industrialists like Dhirubhai Ambani were prosecutedor even persecuted for importing machines forimproving productivity. Unfortunately India’s social plannersfor the first forty years were living in a utopian world withrespect to what growth in essence is. Imports were made soprohibitively expensive that it was mostly counter-productiveto buy. So Indians had to depend on the products made inIndia by some shoddy producers who were guaranteedimmunity from competition, from within and abroad, andwere almost given the free run to exploit the customers.People had to book and then wait for decades to get a car orwait for a minimum of five years to get a telephone connectionthanks to production control. And even the car they usedto get was not any way up to the mark. Before the advent ofMaruti Udyog Limted in 1980s, thechoice was invariably between theubiquitous Ambassador from theHindusthan Motors stable and thePremier Padmini from the PremierAutomobiles Limited. While choosingbetween the two it was never a questionof which was better but to find outwhich was less worse as if both theproducers in the absence of competitionhad put in major effort to make a badcar and now the issue was to find out asto who has failed to make a bad car and by default had made abetter car. The same was for every product. Indians remainedintoxicated with black & white television sets even when therest of the world was enjoying the marvels of colour televisionwith remote control.The fourth and the most dangerous of all the pillars oflicensing system was the concept of small scale industry. Thegeneral presumption was that Small Scale Industry, since itwould generally use labour intensive techniques, instead ofcapital intensive ones, would create much more employmentand thus would solve the problems of unemployment to agreat extent. The fact that this fallacy has been proved wrongis no more a breaking news but two important things needTHE INDIA ECONOMY REVIEW201

W HAT NEXT?mention. They need mention because even today in many ofthe educational curriculum of India, students are taught thatSmall Scale Industry is better. The first important propositionis that if capital intensive industry is so very anti-employment,then how come the IT industry which is extremely capitalintensive, continues to be one of the highest generator ofemployment in India? There was a similar fear about labourbecoming redundant with the introduction of InformationTechnology and yet along with India’s IT industry, thebanking industry continues to be one of biggest recruiters ofyoung people in India with recent reports stating that Indianbanking system would hire around 200,000 banking professionalin the next few years even when application of informationtechnology is reaching new heights in banking with eachpassing day. This vindicates the decades of lost opportunitiesfor India when restrictions of investments and technologystifled India’s growth. Shouldn’t we callit faulty planning? While planning isextremely crucial for the growth and thefuture of an economy, planning cannotbe done by bureaucrats sitting in airconditioned offices with secure futuresand assured salaries. And when plannedby such people, every nation is doomedto collapse. The end result is whathappened to India during the days ofstate-managed-socialism. India becauseof its idiosyncrasies lost opportunitieseven while China evolved its own version of socialism. Itrealised the incredible intrinsic value in the very essence ofeconomy of large scale production and literally captured theimagination of the whole world. One doesn’t require to be arocket scientist to deduce the fact that when anything isproduced in large scale then the per capita cost of productioneventually comes down and thus the price, while in case ofproducing the same thing in small quantity, the cost goes upwhich in turn raises the price. In 1960’s the definition of SmallScale Industry in India entailed any industrial unit with notmore than Rs 5 lakhs of investments. Shockingly even todaythe definition of SSI veers around the investment tag ofaround Rs 1 crore and if it goes beyond that, then it loses thatstatus of Small Scale Industry. Now consider a company likeTata Consultancy Services. This company, with revenues of$6 billion and assets of around $4.36 billion, today employsIndia, because ofits idiosyncrasieslost opportunitieswhile Chinaevolved itsown version ofsocialism149,564 people. For decades this company was stifled by theagonies of license raj. Now, if it were to be restricted till dateunder the clauses of SSI, could it have created employmentfor nearly a hundred and fifty thousand people? Could it haveinspired a $60 billion plus IT industry which is growing atmore than thirty percent per year? For the first forty years, itwas this kind of self defeating propositions that destroyedIndia’s potential of creating jobs for its people. Can we callthat era which stifled India's growth or made India loseopportunities a truly socialist era? Even today there areseveral items which are reserved for the small scale sectorwhile if one looks just beyond India’s boundaries, in China,those very products like say soft toys are produced in suchenormous economy of scale that no other nation in the rest ofthe world can compete with them. Eventually what hashappened is that India’s romantic illusions of socialism andupliftment of poor crash landed whileChina has been extremely successful inbringing out a substantial proportion ofits population out of poverty. In thePolicy Brief No 11 of ADB by SebastianMorris, Rakesh Basant and R Nagaraj,namely Small Scale Industries In The Ageof Liberalization, it is stated, ‘Theunstated but manifest assumption inpolicy has been that small firms needessentially to be protected.. In the past thisapproach sought to develop small firmsas an integral part of the Mahalanobis strategy. It was thenbelieved quite wrongly, as subsequent developments and thehistorical experience of Japan and elsewhere in the late industrializationcontext reveal,that the traditional, typicaly handicraftbased,industries producing a wide variety of consumerproducts could gradually and through continuous investmentsand upgradation of technology evolve into modern medium andsmall enterprises (SMEs). This assumption could at best havebeen right for a minuscule fraction of the small firms which werelargely household-based. Protection from large firms wasintegral to the Mahalanobis strategy. Protection was sought to bebuilt, inter alia, by the ban on capacity addition in industrieslike textiles in the mill sector. Such bans continued until 1984, tothe great detriment of the Indian economy. This measure andovervaluation of currency negated completely the industry’spotential to ride the postwar penetration of manufactured goods202 THE IIPM THINK TANK

A LONG ROAD AHEADmarkets of the advanced capitalist countries.’ It further statesthat, ‘Ever since the Mahalanobis Plan regional developmentwas seen as integral to the development of small firms. Smallfirms were seen as locatable virtually anywhere as long as thebasic physical infrastructure, water, electricity, roads, etc couldbe provided. Simplistic statements, such as steel plus electricity,with a policy of regional dispersal equals regional developmentalmost became dogma. The neglected truth was that small firmsare greatly dependent upon agglomeration economies andaccess to city serving functions. The result was disastrous.Industrial estates that lacked access to reasonably sized centralplaces failed. The survivors had to overcome and bear thehigh cost of inappropriate location. Many SMEs were pushedinto inappropriate locations through fiscal and other concessionsand administrative measures. Not given enough time toovercome location-related infirmities, as these push measureswere retracted, they became unviable andclosed down.’ From this perspective theChinese planning with respect tonational development has been far morepragmatic as they were not reluctant toevolve and take cue from some of thebetter concepts of the First Worldcountries. With respect to so called SSI,they not only never tried to immunethem from competition, big investmentsor agglomeration, on the contrary,instead of pushing them to farawayplaces in the name of balanced development, China createdthe Special Economic Zones for creation of better facilitiesfor them and for access to international market and worldclass infrastructure. The net result today is that most of theSSIs in India fail to compete with Chinese products which arenot made by big entities but by unknown, ubiquitous Chinesecompanies in very large scale. And this is exactly the pointwhere the likes of Dhirubhai Ambani differed from thegovernment. For them the concept was simple that if theincrease in the scalability of production eventually reducestheir cost which in turn would help the companies to sell it ata lower price which would benefit the consumer also, thenwhy that policy shouldn’t be pursued? Yet the Indian government’sfixation with licensing system was so high that whoeverwas thinking big was considered a criminal. Ironicallywhatever Dhirubhai Ambani talked about almost threeChina never triedto immune itscottage industryfrom competitionthrough myopicpolicies like SSIreservationdecades back, today those very policies are implemented byevery industry be it telecom, insurance, banking, or themanufacturing industry. But the problem with Indian policyplanners was that they considered planning for the nation astheir exclusive fiefdom and no one beyond the politico-bureaucraticclass had any right to infringe into that. Should thisversion of socialism be called more nationalistic than theAmerican version of liberal capitalism or the Chinese versionof market socialism?Thus, because of all these, the alienation of the youngeducated mass started in India from the very time Indiastarted with the concept of state planning. The sixties andseventies had witnessed a whole new generation of youngIndians who were politically very active and were passionateabout the cause of a new India. Many of those who weregraduates and post graduates from India’s elite universitiesand colleges wanted an economicrevolution through entrepreneurshipbut were devastated by the kind ofsuffocating environment that wascreated in the country. Business inessence was looked down and businessmenwere always tagged as sinners tothe extent that in most of the Bollywoodfilms till the early 1990’s, the stereotypeimage of a villain in evert film used tobe that of a crooked businessmaninvolved in smuggling, trading ofcounterfeit products, drugs and heist while the protagonistwas a typical angry young man, forever unemployed andunrecognized. He would simply not get the job because giventhe restriction on companies to grow beyond a point, therewas a limit on how many people they could have employed atany point of time. So, a new candidate could only be employedwhen an old one dies, or when he has influentialcontacts or was in a position to pay bribes. Today does anyoneneed to pay a bribe to get into any private sector company?Not really, for the simple reason that as the economy has beengradually released from the clutches of license raj, theexpansion of the economy and consumerism meant morepeople were needed to produce, sell, market, promote andservice the expanding customer base. India’s 500 millionsubscriber plus telecom market means an incredible numberof jobs created both directly and indirectly in the manufactur-THE INDIA ECONOMY REVIEW203

W HAT NEXT?ing of cell phones, selling of cell phones and connections,branding, maintenance of networks and in after sales service.Had there been a restriction on the number of cell phone thatcould be manufactured in a year or had it been reserved forthe SSI, could it have created the kind of economic revolutionand empowerment of the common man that happened in thelast one decade?It was essentially because of this kind of myopic and selfserving policies that the educated class of India got alienatedfrom the very cause of India. The best of the lot preferred toexit the country than to get suffocated by the bureaucracywhich would simply not let talent to thrive. The exodus thatstarted because of disgruntlement is continuing till date andthose who were considered worthless or never given their realworth in their own country, went abroad and created a brandout of the abbreviation NRI which stands for Non ResidentIndians and which continues to be oneof the most powerful diaspora communitiesin the world with an estimated networth of more than $1 trillion. Comparethis with the GDP of India which is ashade above $1 trillion now and onewould realise how faulty our planninghas been. While 20 million NRIs havenet worth of $1 trillion, around 1.15billion resident Indians produce goodsand services worth $1 trillion in a yearout of which 400 million live below thepoverty line and 60% remain disguisedly unemployed inagriculture which continues to be unviable because of faultystate policies and control. Imagine had they been given theright kind of environment and nourishment here, India's GDPwould have been almost twice of its present one. Add to it the$1.5 trillion of black money stashed in Swiss Banks, India'sGDP would have been nearly at par with China's Now if it isnot so, who's to be blamed for that?When the exodus started, many of the so called socialistsstarted terming it ‘brain drain’ and often accused the NRIs asbeing selfish and unpatriotic. But Dr. Abid Hussain hadperhaps said it right that brain drain better than brain in thedrain. Consider the case of Pranav Mistry, presently a PhDstudent at the MIT. His invention of the concept of SixthSense is about to revolutionise the world of informationtechnology and user interface. But imagine if Pranav hadDr Abid Hussainhad said thatbrain drainis betterany day thanbrain inthe drainstayed back and been in some universities of India say inKanpur or Lucknow or any other city. Would his inventionhave got the kind of attention or acknowledgement that he isgetting now? Would it have even been considered worth?That’s the real question. That is the kind of mockery of newconcepts and ideas that had forces millions of talented peopleto leave the country. Can a system which forces its bestpeople to leave for greener pastures be called socialsim? Onesimply has to look at the condition of the Indian universitiestoday and the kind of perpetual decay they have gonethrough. Where does JNU or Univesity of Delhi stand today?Why are'nt they anywhere near to the likes of Cambridge orOxford? While the exodus of the quality people continued,policy planners carried on with their undeterred experimentationwith a faulty concept of development. The drying up ofemployment opportunities because of the stifling policies ofthe government was the first step whilethe creation of a whole new generationof unemployable youth was the second.Throughout the whole forty years ofsocialism in India, its developmentironically remained city centric. Goodschools, good roads, good colleges,good universities, good amenities, goodbanking, good infrastructure were allconcentrated in the cities much akin tothe way it was during the British era.Life or lives beyond the cities nevermattered. It was and still it is in the cities that the elite and themiddle class live and everything is always meant for themstarting from the subsidy on education, to subsidy on fuel tosubsidy on LPG — albeit in the name of common man. Onejust has to simply visit any of the government colleges in NewDelhi and witness the kind of expensive cars parked outsidethe campus. Those are the cars in which students come tostudy in the colleges where they pay a pittance of a fee in thename of socialism. The amount they pay is perhaps less thanthey spend during their one time recharge of cell phone. Andit is more ironical that even today the families of the richestIndians get a subsidy of around Rs 300 on every cylinder ofcooking gas they buy while 400 million poor Indians whodon’t even get two square meals a day don’t even know that ascheme like this perhaps exists. With respect to educationthere was and there still continues to be a paradigm differ-204 THE IIPM THINK TANK

A LONG ROAD AHEADence between the kind of education being imparted in thecities vis-à-vis the villages of India. So while one can easilyfind quality English medium schools both in private andgovernment arena in cities, in case of villages, not only theschools were of bad quality, there was a concerted effort tokeep the pedagogy in vernacular languages devoid of any kindof English education which eventually made them completelyuncompetitive in the long run even while the politico-bureaucraticclass continued to send their progenies to privateconvent schools and then abroad for higher education whilegiving battle cry against English medium schools in India andprivatization of higher education. Unfortunately it was India’sera of planned period and its faulty planning that eventuallyled to the rural-urban divide that is plaguing the countrytoday. The very definition of rural India would make thingsclear. Even today in India, rural means a place devoid ofsanitation, healthcare, electricity, roads,quality education system or awareness.Is this the way to empower people? Andcan we call that socialism? If todayIndia's has a pathetic ranking of 134 inthe Human Development Index ofUNDP Human Development Report, itis primarily because of this city centricdevelopment that continued in Indiasince independence. And yet that citycentric planning too hasn't made Indiancities anywhere near the global benchmarksbe it on the parameter of road, healthcare, efficiency ofthe municipal corporations or law & order. Not that theessence of planning is at fault as has been vindicated by theplanned liberalisation of the Chinese economy but what hasbeen at fault in case of India has been its bureaucraticplanning which completely kept itself immune from new ideasand changes happening all around the world.To take it further, let’s take the example of the act calledMonopolistic and Restrictive Trade Practices Act or theMRTP which was created to contain the concentration ofresources in the hands of a limited number of companies andentailed that no company should have more than 25% marketshare. We will come to that issue later but let’s first understandthe nuances of MRTP and how it was detrimental toIndia. In the Indian market of operating systems, Microsoftalmost has a 92% market share and yet most of us don’tMRTP destroyedcompetitivenessof Indian industrybut failed to limitconcentrationof power in thehands of fewgenerally buy original software for personal use. Now goingby the era of the socialist India, Microsoft would have beencensured by the Indian government for breaching the 25%market share. Imagine if that law had still existed in India, theextent of havoc it could have created in terms of computerpenetration and empowerment of the common man. MRTPfailed to restrict the concentration of wealth in the hands offew because the ones with the right kind of contacts continuedto get licenses but what it eventually did was completelydestroying the competitiveness of the Indian industry. Whenthe economy got liberalised, the cracks got revealed as manyof the conglomerates whose businesses had flourishedthrough political contacts eventually withered away whileonly the genuine ones who had envisioned the future andwere truly competitive survived. In fact a larger economy ofscale and volume game eventually increases efficiency andreduces the price of the product.Moreover, in spite of MRTP, there wasno control on the monopolies of thegovernment which continued to wreakhavoc. Take for example, the IndianRailways which is still a monopoly andin the name of India’s mascot of socialengineering, has been reduced to amilking cow by politicians for their selfserving agendas. While every yearnewer trains are announced, no onebothers about the broken tracks,unrepaired bridges, safety norms or hygiene. Is there a countof the number of accidents that happen in railways every yearand how many die in that? Is there a count of the number ofrobberies, molestation, kidnapping happen every year on therail passengers? Why is it that most of the passengers till datehave to travel in the most inhuman conditions in railways?Why is it that today it is easier to get a plane ticket in case ofan emergency but is next to impossible to get a train ticket?Does a company require fourteen lakh employees to run acompany? Why is it that in spite of having 1.4 million employeesit finds difficult to provide security guards and a compulsorydoctor in every train? Why can’t Indian trains be run theway trains in Europe or Japan or even in China runs? Whyhave we allowed the railways to become some sort of personalfiefdom of the ruling parties? Why can’t it be run professionallythe way Delhi Metro is run? At times given the kind ofTHE INDIA ECONOMY REVIEW205

W HAT NEXT?free passes and freebies are given to employees, it seems thatIndian Railways exist only for its employees and not for thepeople. In fact the Indian Railways is an ideal example of thelegacy of the socialist era and how organisations were runthen without any kind of accountability. The same was therein the era when there were no private banks or private courieror insurance companies or to be more precise, an era whenthere was no direct competition to the government monopolies.One doesn’t need to be a rocket scientist to gauge howIndia was then. One conversation to any elderly or middleaged person would reveal the kind of harassment one had togo through while visiting a government bank or the neighbourhoodpost office. In fact up till the late nineties, whencompetition from the private sector was still not prominent,customers of public sector banks had to literally be at themercy of the bank employees whilegoing to fetch money from their deposits.This doesn’t mean that the nationalisationof banks was wrong but what itmeans that job security and lack ofcompetition that came along withnationalization ensured that thecustomer was relegated to the backburnerand was considered more of aburden than anything else. Indianorganizations were simply not customercentric. There were jokes that a letterwas posted by a man though government postal service to hisparents in native home and a month later he had arrived therebut the letter was yet to arrive. When people went to banks tofetch their own money out, the disdain, apathy and misbehaviourof staff used to come as free of cost compliments. Andthe least said about inflated telephone and electricity bills, thebetter. The ubiquitous Indian telephone run by the Departmentof Telecommunication, Government, before the adventof telecom revolution from the late nineties, didn’t use towork on two days, on the day it rained and on the day it didn’train. It would not run till the time the palms of many in thehierarchy get greased. The conditions of the governmenthospitals were even worse. Can anyone explain as to whythere’s only one AIIIMS for a country with such a vastpopulation? And then why is it that very hospital is half thetime reserved for the treatment of the VVIPs while thepatients who have come from the far flung areas of ruralThe amount ofIndian blackmoney stashedin Swiss Banksaccounts is astaggering $1.5trillionhinterland continue to languish in the corridors? Why thesocialist planners did never envisage the need of having anAIIMS like hospital in every subdivision of every district ofIndia? Why was every good amenity kept as exclusivity of theelite? Was it this kind of socialism that was supposed to createnational fervor and make the nation stronger? Was it this kindof socialism that was supposed to empower the commonman? Forget everything else, municipal corporations till datecannot even produce water worth drinking. Thus, in every cityand town worth talking about, packaged drinking water is anorm than an exception. None trusts the municipal waterunless there is an undying urge to become a victim of Hepatitisor Cholera. Water-borne diseases continue to be one of thebiggest killers in rural India.While entrepreneurship was never considered as a viableoption to empower the nation, theplanners always considered that privatecompanies would be unable to make biginvestments. Thus the government tookit on its own the responsibility to makegiant investments in basic industries.While many of them were actuallysuccessful, the need to keep the balancesheet on track was never given its dueimportance. Thus, throughout thesocialist era, the government borrowedheavily from the international developmentagencies but failed to convert that in the creation of realtime assets resulting in massive external debt for the country.Projects which could have been finished in five years timetook twenty five years to complete being caught in controversiesresulting in cost and time overrun to the extent that theprojects eventually became financially un-viable. The SardarSarovar Dam on river Narmada is an ideal case in point.Moreover lack of accountability made sure that no one reallykept a tag on where the borrowed money and the black moneywere going. Incidentally recent reports state that the extent ofIndian black money kept Swiss bank accounts stand at $1.5trillion which is just a shade higher than India’s GDP. Thismoney is primarily one made by the politico-bureaucraticclass as well as the torchbearers of India’s crony capitalismthat milked India for forty long years. The common man wasas helpless as he was during the British era or probably he wasbetter off during the British era in certain respect. Police had206 THE IIPM THINK TANK

A LONG ROAD AHEADbecome completely subservient to the political class and goingto courts meant becoming a pauper given the cost and timeimplications. Media was censored and there was nothingcalled television media the way it is now. Doordarshan thatcame into existence later on was autonomous only on paper aseverything was scripted to suit the government. It was nothingmore than a stooge.The late sixties saw the chest thumping by the Indiangovernment over a much publicised Green Revolution which,it was time and again stated, was about to make India selfsufficient in food production. While the Green revolutionindeed increased the productivity of Indian agriculturethrough the introduction of high yielding seeds and extensiveuse of chemical fertilizers, could our social planners guaranteethat no Indian would go to bed half fed or malnourished?Unfortunately while the strangulatinghold of the government on the agriculturalmarketing and procurement offood grains have ensured that India’sstate owned godowns are brimmingwith food grains bought from richfarmers of Western Uttar Pradesh,Haryana and Punjab at hefty prices,even today 400 million Indians go tobed malnourished every night. Unfortunatelythe faulty system of procurementmakes sure that food grains continue torot in the mandis and the government prefers this than toactually transport that food grain and distribute it throughthe public distribution system among the destitute. It’s anirony that today when the price of cell phones and consumerdurable products are coming down thanks to market competition,the archaic laws that still govern the agriculture sectormake sure that the prices continue to soar. While the cynicsand flag bearers of the Malthusian theory might say that it isthe increasing population whose pressure is to be blamed,then how come the increasing demand of cell phones havebeen able to crash the prices in the telecom market which haseventually empowered the common man?For the Doubting Thomases again, even if one considersthese justifications as lopsided then I just have one question.How come an amazingly well planned economy with some ofthe best leaders of the time, for all the big talks of laying thefoundation of the Indian economy, eventually ended upWhy did India wason the verge ofeconomic collpasein 1991 if italways had greatleadership to steerit through?putting the economy on the brink of bankruptcy in 1991? Andhow come in just seventeen years time, that very economywhich was on the verge of bankruptcy emerged as a darkhorse for the future and became a trillion dollar economy?This, not to say that planning or socialism is not good but tovindicate that market economy eventually helps in reachingthe goals of socialism if socialism is all about empowering thecommon man. In today’s environment the common man hasbeen empowered by the media much of which can be witnessedby how it played a critical role in making the rich andthe mighty pay for their sins. It’s not that cases like that of JessicaLall, Priyadarshini Mattoo or the Nitish Katara neverhappened before but those days in the era of monopoly ofDoordarshan, no one would have dared to raise voice againstthe politico bureaucratic class. The contrast is even moreprominent between the way wars werecovered by the media during 1962 andthat of the Kargil War in 1999. The wayprivate media championed the cause ofthe hapless foot soldiers who havealways been used as pawn by the babussitting in Delhi, during the Kargil Warcreated massive awareness and patriotismamong people. Today in the era ofmarket economy, the educated youth donot sit idle and can somehow get a jobwithout having to pay bribe to anyone.In seventeen years' time the contours of the Indian economyhas changed much with awareness spreading all around, theefficacy of education being realised by the common man,plethora of job avenues opening up and a whole new generationof young Indians jumping into the bandwagon of entrepreneurshipby giving up their cozy jobs while the marketeconomy, call it for its own selfish reasons or whatever, hasbeen successful in forcing the government to improve infrastructureand bridge the rural urban divide. Even today ifthere still exist a deep divide between the urban and ruralIndia, then it is not because of market capitalism but for thelack of it. The sixty percent of the population who depend onagriculture still get a pittance for their produce while themiddlemen with their stranglehold of the agri-market continueto rule the roost forcing the end customer to pay a heftyprice. Bringing organised competition in the agri-economywould not harm the farmers as is being propagated by theTHE INDIA ECONOMY REVIEW207

W HAT NEXT?vested interests. Instead, it would make the market transparentand increase purchasing power of the rural lot and restrictmigration to cities through the creation of necessary physicaland social infrastructure in that place. Gurgaon is a case inpoint as to how private investments can transform a place. Infact the entire stretch along the Jaipur Highway is gettingdeveloped one after another from Gurgaon to Manesar toBhiwadi thereby reducing pressure on the exiting cities.Likewise a whole new generation of Indian private companieswith ability to compete globally has proved our socialistleaders wrong. Today Infosys, TATA, or the Reliance are asmuch pride and prowess of India as the good PSUs likeBHEL, IOCL or NTPC is. Together they have made a farmore stronger India today than what it was two decades back.A trillion dollar economy, a near $ 300 billion forex reserve, astrong Diaspora with a trillion dollar of assets under theircontrol, one of the fastest growing economies of the world, afast emerging consumer market have all helped in makingIndia a nation worth taking pride in. Inthis respect China is even a betterexample as to how planning of theeconomy has made China one of thebiggest giants in the world. Films likeRang De Basanti or Chak De havecreated a new genre of patriotismamong the youth of this nationNationalism in this case is not justabout the citizenship but the nation towhich one actually has his roots.Otherwise how would one explain thephenomenon so often evident during cricket matches betweenEngland and India when played in England wherein onewould find a disproportionately high number of Indian flagsbeing waved in Oval or Lord’s and the gallery blued by aswarm of sky-blue jerseys to the extent that one would oftenmisconstrue it as a match being played in India. Thus thequestion is why do people of Indian origin who have migratedto England several decades back still feel more allegiance toIndia than UK even when they hold a British passport? Whydoes an Indian on a trip to UK feel the effervescent warmthof a person of Indian origin as if someone from his ownfamily has come, when he steps in an Indian owned restaurantin downtown London? Or say, what makes Indians takenationalistic pride and even consider it as a sort of reverseThe Diasporaof anycountry is noway lessnationalisticthan the residentcitizenscolonialism when the TATA Group acquires British companieslike Corus or JLR? After all it’s just a giant conglomeratewith huge cash reserves acquiring another giant. Isn’t it? Or isit much more than that? Similarly why do Indians consider itas an insult and a blow to their pride when the Taj HeritageHotel was literally decimated by the Pakistani terrorists? IsTaj just another hotel of a business house or it has transcendedthe boundaries of private ownership and has become thevery symbol of India’s resurgence? Or why is it that RatanTata takes it as a personal challenge to resurrect the bruisedhotel after the 26/11 siege and vowed to make it run againwithin twenty one days? Why did, one of the first things hedid after the siege was over was to hoist an Indian flag andthrough it sent a message to the perpetrators across theborder that India cannot be cowed down by such heinousacts? Why is it that Indians all across the world were on fireand felt so much for the victims that they were all willing to gofor an all out war against Pakistan? Or say why couldn’tIndians residing in US or UK just shrugit off as just ‘another incident’ and carryon with their normal life? Why did theyfeel the same passion as was felt byevery resident Indian or the people ofMumbai on that dreaded day? Whycouldn’t they feel more allegiance to thecompany they work for than to the onesin a distant nation which was once theirplace of birth? Thus one may concludethat it is just a fallacy that globalisationis all about permeating the boundariesof nations. On the contrary globalization is nothing but amere medium to make the nations stronger. For, the enormouslypowerful twenty million strong Indian expatriatecommunity with more than a trillion dollar of asset undertheir fold, essentially works as an extension of India’s increasingclout, be it through forcing the American government tochange policies in favor of India or sending back remittanceto motherland, the annual amount of which touched themagic figure of $50 billion in 2008. Incidentally when Indiawent for the nuclear tests in 1998 and faced the Americanwrath through Economic sanctions, it was the NRI communitywhich came to India’s rescue by participating in theResurgent India Bond through which India mopped up$5billion to tide over any foreign exchange crisis. Thus the208 THE IIPM THINK TANK

A LONG ROAD AHEADessence of a strong expatriate community and the efficacy ofits die hard nationalism towards the country of origin wasvindicated beyond doubt. The same can be stated for the Jewsacross the world and their passion for Israel. For China, thewhole essence of its introspection, metamorphosis andeventually becoming the game maker in global business, hasnothing to do with its communist or say socialist ideology tobecome the global hub for manufacturing for delivering lowcost products for the poor and the downtrodden. Rather, forChina the whole essence of globalisation i has been nothingbut a medium to reach that very zenith of political, ideologicaland military success which Mao had perhaps envisioned longtime back. This medium, for China, is perhaps more effectivethan the purest version of communism which they felt wasrather self-defeating. It has been vindicated by the fact that inthe last three decades, China’s meteoric growth has not onlybeen a spectacular exemplification of how globalisation canhelp in mitigating poverty but has also shown how it is a greatleveller. In fact such is the reach andomnipresence of Chinese goodsnowadays that its almost next toimpossible to find any product inEurope or even in US which is not madein China. Likewise the outsourcing ofbusiness processes by US based companiesto India has created such paranoiaof job losses in US that the quintessentialtorchbearer of globalization andopen economy has started advocatingprotectionism and tax incentives tocompanies who decide to stop the outsourcing. Similarly, suchis the extent of the Chinese impact that European companieshave no option but to outsource manufacturing to China inorder to remain competitive, thereby creating massiveunemployment in the whole of Europe. Today Europe is notjust clamouring for protection, but even in the very formationof European Union, individual countries are wary of eachother. Today the West European nations are concerned aboutthe massive migration of low cost workers from East Europeto West Europe as the integration process East Europeanstates in European Union starts. The Icing on the cake is thefact very fact that UK is still very paranoid about surrenderingits currency of Pound Sterling for Euro presuming thatsurrendering Pound Sterling would tantamount to almostBoth politicaland businessleadership areequally neededto steer a nationtowards truewelfaregiving up the essence of its sovereignty. Even today there is astrong under current of nationalism among the otherwisedeveloped nations of Western Europe. If one goes by thedisplay of passion during the soccer matches in the FIFAWorld Cup or Euro Cup, it still seems that most of them arestill driven by the legacy of their colonial and empirical warsof the past. In essence, the more the storm of Chinese andIndian onslaught is increasing, the more protectionism in thegarb of nationalism is spreading across Europe.Yet the whole essence of growth and resurgence of greatcounties is as much because of good leadership as it isbecause of planning, patriotism and unity. It is the leadershipof Putin that resurrected Russia after its near collapse in thenineties. It is similarly the leadership and vision of Deng XioPing and his calibrated reforms of the Chinese economy from1978 onwards through the Bottom-Up approach and embracingof market socialism that created the wonder called Chinatoday which can literally dictate terms to US. Yet leadershipis not just about political leadershiponly but includes business leadership aswell. So while USA’ s prowess is as muchbecause of legends like Bill Gates, SteveJobs, Larry Ellison, Jack Welch,Michael Dell or Henry Ford, it is also asmuch because of the successive presidentsof the United States of Americawho foresaw the importance of having afunctional, equitable and an institutionbased democratic society where ‘aheadof time’ ideas can be incubated, nourishedand blossomed in the right way. Sadly in India oureducation system has been able to cerate mature and visionarypolitical leadership. Politics here have been reduced tofamily business. In essence, an entrepreneur as a visionarycan only do as much as the society in which he is aspiring tounleash his ideas for the future, allows him to do which inturn depends on the visionary policies. Let’s imagine for achange that a college dropout named Bill Gates walks up to abanker in India and in the era when the Mainframe machineswere a norm than an exception, he proposes a revolutionaryidea of making an operating system to operate which, oneneed not be a hardware engineer and that he would need aloan from the bank to start a business of commerciallymaking such operating systems. Now would that IndianTHE INDIA ECONOMY REVIEW209

W HAT NEXT?banker give money? Well chances are high that he wouldactually think it as a crazy idea to innovate or invent somethingfor business purpose as for him and his society, the workof invention is that of the scientist and not of a businessman.Sadly, his society or its political leadership have neverunderstood the magic of making a business out of invention,innovation or improvisation. So Bill Gates’ proposal wouldsurely have been rejected. But even if the banker had been alittle more enterprising than what he is permitted to be andeven if he had agreed to lend money, he would surely thenhave asked for a collateral as a security for the loan he isgiving. Well, if budding entrepreneurs had enough propertyto give as collateral, they would have never gone to bankers.But then in countries like India, the very thought of giving aloan to a budding entrepreneur without asking any collateralin return would be termed blasphemous,and if the banker actually does so andthe business fails, he would surely bebehind bars for gross violation of rules.Thus, in this country, banks givebusiness loans only to those who alreadyhave money and therefore it is so verydifficult to find too many young menholding on to their convictions againstall odds and make the next big thinghappen. It’s not for nothing that thelikes of Dhirubhai Ambani or NarayanMoorthy are exceptions in this country. What Indian Inc.does today, Dhirubhai started doing it nearly thirty years backin an era when business was looked down and the licensingsystem was throttling the remaining few. The price that hehad to pay for being a visionary and crusader against the selfdefeating licensing system was that he became half paralyzed,thanks to all the trauma, censure and agony he had to gothrough for being a thinker. It never probably happens thisway in US. And thus it is easier to locate a successful entrepreneurover there than here while those in business prefer togo with the tide and cash in on it instead of thinking about thenext big thing. Thus the West makes the products and we inIndia service it. It’s still not the other way round. Socialism inreal terms was never meant to discourage the youth andfollow the rules laid down by dead theorists. Sadly in India ithappened like that.More than five decades back John F Kennedy had onceIndia hasconsistently failedto create andnurture bothvisionary politicaland businessleadershipstated, ‘Roads in America are not good because America is rich.America is rich because her roads are good.’ This only exemplifiesthat the phenomenal growth of the US and the rise of USglobal corporations was not incidental but an outcome ofpolitical leadership and its nationalistic fervour to see the riseof the nation through entrepreneurship and economicdominance. The rise of hundreds of Japanese Fortune 500companies which catapulted Japan to become the secondlargest economy of the world, barely a few decades after itshumiliating defeat in the Second World War was also anoutcome of political leadership’s vision to erase the infamy offascism tagged to Japan and transform Japan’s image in theworld as a pioneer of technology and innovation. Thus marketeconomy for japan, like US was a route to further the cause ofnationalism. Israel's incredible feat in terms of not just beingable to survive in one of the mostdifficult neighbourhood amongstenemies all across and thrive as one ofthe most efficient and technology drivencompany can only be attributed to theirconviction of never allowing the darkdays of holocaust return ever again.Being a nation of mandatory militaryservice and also as home to one of thehighest incidence of entrepreneurshipin the world Israel has been transformedby the zeal of young Jews todefend and prosper their holy land.It is unfortunate that in India the whole concept of leadershipdevelopment has only remained restricted in businessschools and that too has remained restricted with respect torunning companies efficiently. However, there’s a limit as tohow much business leadership can achieve till the timepolitical leadership of a nation creates the right kind ofbusiness environment. In the American Presidential system ofgovernance the president elect makes his own cabinet whichcomprises of eminent people from the industry and theintelligentsia. And they need not be the members of USCongress or Senate. Therefore policy making is more attunedto what would be beneficial to US companies and thereby toUS economy unlike in countries like India where for decadessuccessive government took pride is crucifying businesshouses, not realising that there cannot be employees withoutemployers and there cannot be welfare without fruitful210 THE IIPM THINK TANK

A LONG ROAD AHEADemployment. This vindicates again as to how for successfulnations state planning and private entrepreneurship workednot against each other but with each other. Wherever eachworked against the other, it led to collapse. Thus, it’s not thefault of the Indian bankers. In the US, being a college orschool dropout doesn’t carry any stigma. Moreover, innovationand original thinking is always appreciated. Over herepeople always scoff at every idea that originated here andgiven importance to it only when the West or say the FirstWorld endorse it. Be it spirituality, Yoga, or Indian culture orcreativity… the list seems endless.The biggest company of US is nothing else but US Inc. Solong it survives and remains the most powerful; every othercompany of US would survive. Thus there cannot be any greatcompany in a badly managed nation. That’s why politicalleadership is so very important. And if leadership is all aboutvision and then working towards materialising it, then thatvision is as much required in running a nation as it is requiredfor running a company. Sadly in India, for all the big talks ofleadership, not many from the industry seem to be interestedor involved in real time policy making. Contrast this withIsrael or US where majority of the heads of states had stints inthe armed forces of their respective nations. In Singapore, thelegislative members are some of the highest paid executives ofthat country. And the rest is history.In essence change would only come when things changeinside the parliament. Therefore, without entering that place,merely shouting from the periphery would not change India’sdestiny. India can only be a truly welfare state when theinherent inefficiencies of the state and the support systemare taken care of and entrepreneurship is allowed to flourishin every nook and corner of the nation since it's only thenthat jobs would be created through the unleashing of India'sintrinsic potential. Jobs invariably would mean more purchasingpower and welfare. If that happens then it can onlyhappen when India reaches anywhere near the predictions ofGoldman Sachs on BRIC economies. And if India has to goanywhere near the predictions of Goldman Sachs on theBRIC countries, where it has been stated that by 2050 Indiawould be the third largest economy of the world (with a GDPof $38 trillion plus), it cannot reach that place (from thepresent GDP of $1.2 trillion) merely by depending onoutsourcing of work from US or by flocking to US in largenumber and neither by remaining glorified workers of USMNCs. For that dream to come true, it is not only importantto have the right kind of political leadership and passionateseasoned technocrats who would take care of institutionalframeworks but India would also require a thousand moreDhirubhais, NarayanMoorthys and Ratan Tatas. Sadly, onewonders as to how many of the B-school graduates have thatin them to sacrifice twenty years of their prime life for onesingle dedicated cause which would not only a create worldclass company or institution but would also inspire others tofollow the footsteps? Can they come out of their comfortzones, give up their lifestyles, passion for brands and have‘guy next door’ simplicity like Bill Gates in their demeanor?Can they hold on to a company for ten long years even whenit’s not generating money and wait for that perfect moment,the way the promoters of Infosys held on to the dream ofInfosys for ten long years till liberalisation was ushered andopened a new vista for the entrepreneurial Indians? In spiteof all the big talks of leadership, isn’t this country actuallyending up creating followers only? Or why is it that thosewho were college or school dropouts worked better with theirgut feeling and instincts and created world class organizationswhile most educated people merely end up managingthe companies set up by them? Is state controlled educationkilling the natural instincts of risk taking, passion andthough process among our youth, be it in political or businessleadership? Are today’s practitioners becoming prisoners ofdead theorists? And is it because those who never venturedin higher education and thus remained free birds with freeminds ended up being the best creators and leaders of theworld? Well… it’s only then when young Indians would jointhe political and business mainstream that would create apowerful nation the Israel has been where socialism,capitalism or globalisation would all be tools for bettermentof the -ism called Nationalism. It's only then that a truewelfare state would be created where all are for one and oneis for all the way it has been in Israel where they went for awar with the Hezbollah, in 2006, just because one Israelisoldier was taken prisoner by them. Need any better exampleof socialism?(The views expressed in the write-up are personal and do notreflect the official policy or position of the organization. A verysmall portion of this write-up by the same author was publishedin the magazine The Human Factor of Planman Media)THE INDIA ECONOMY REVIEW211

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