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Indian Economy: Ready for High Gear ?

Posted by Ramoo on January 22, 2007

[Analysis] Old ways of policymaking unsuited for 21st century development

Ranjit Goswami (ranjit)

Twenty-five farmer suicides in five days in the small region of Vidarbha — approximately 24,000 square km (9,266 square miles) — in Maharashtra, one of the fastest-growing and richest States in India, made no big headlines in the Indian news dailies. When a news story is repeated day after day, its drawing power subsides (as can be seen from the global press coverage of Iraqi civilian deaths). At best, it will get a cursory mention on the umpteenth page of some local daily.

Vidarbha reflects the dilemma and pain of the “India Story,” as the nation continues to experience double-digit growth rates after decades of a “Hindu” rate of growth, a term applied to the laggard performance of the economy from independence in 1947 to the late 1990s.

This story is nothing new for Vidarbha or elsewhere in India or the developing world, as, increasingly, the Key Result Areas (KRAs) of policymakers are defined in terms of growth rates for the more laggardly developing areas of nations. One can sense the frenetic rush among certain sections of policymakers and analysts in India, as the sense sinks in of losing the race to China because of our leaders’ inaction over the last decade. During the license raj one had to wait years for permission to set up an industrial plant, which represented the height of inertia until it was dismantled in the 1990s. The same policymakers can now acquire farmland that has provided a livelihood for generations of marginal farmers, and, within weeks or months can establish industrial plants thereon, as they try to replicate the Special Economic Zone (SEZ) model that China has excelled in.

The corporate world has been familiar with the KRA acronym for years, which as with any measure has its limitations and possibly conflicting objectives; a surge of accounting scandals, like that of Arthur Andersen, the auditors of Enron, bred increasing skepticism about the obsession of the corporate world with short-term profits. From George W. Bush in Washington, D.C. to Manmohan Singh in New Delhi, all the talk is about the KRA called GDP growth, regardless of how it is achieved or whether the measure is indeed an appropriate one.

Don’t get me wrong: I am not antigrowth, anti-rich, anti-industrialization or anti-government. Let me admit the obvious — how easy it is to criticize and how much more difficult it is to deliver. After India followed the wrongheaded path of Nehru’s centrally-planned economic development model, broad swathes of the population suffered as some industries gained ground despite being uncompetitive, taking consumers and citizens in general for a ride, and the damage now has to be undone.

Policymakers now are attempting to move into high gear over bumpy and potholed Indian roads that can hardly support lower gears, not to mention that many villages lack passable roads at all. The competitive advantage we lost thanks to over 50 years of sluggishness can’t be undone by moving into top gear suddenly; a reaction likely to cause more dislocations than a simple inflationary speed-up of the economy. People wearing their safety belts and thus secured deep inside their vehicle can enjoy this ride in high gear by making a fast buck, with astronomical returns for the few and violence-prone social unrest for the rest of us.

Alas, however, the broad mass of Indians struggle for a foothold on that fast-moving economic engine. It exemplifies the traditional trekker or overburdened vehicles that ply the roads of rural India (as well as commercialized powerhouses like Mumbai) and the equally overburdened railways, with a passenger capacity of eight but accommodating no less than 28 — an accident-prone situation. The farmer suicides are a consistent example of this overburdening, the price we pay for trying to move into high gear in an economy that’s not ready for it.

The anarchic rough-and-tumble of corporatization dictates painful transitions for the broad majority of the people, who are not ready for these upheavals. Looking at some of the externalized and non-monetized fundamentals for rural dwellers (70 percent of Indians are rural) — literacy rate, infant mortality rate, the rural utility hookup rate (1/15th of the urban hookup rate) — India simply is not ready to move into high gear.

Does this mean that we Indians are going to miss another bus this early in the 21st century, failing to attract the FDI so badly needed for all-around growth? Capital is not like water, seeking a level playing field, but rather scales and aggravates the asymmetries in the local economic landscape. This is the challenge our world faces today, albeit with differing degrees of hardship, from the powerhouses of absentee ownership, like Wall Street, to socialist China to newly-opened up Vietnam.

It’s beginning to dawn on us that answers to difficult problems like this don’t come easily, as we sober up after bingeing on temporary rapid growth rates and race-to-the-bottom “free” marketeering, the fruits of neo-liberal globalization. One increasingly understands that the problems are global in nature and that traditional local solutions don’t apply globally.

The strategy of hunting higher and higher growth rates supposedly justifies itself with the mantra “a rising tide lifts all boats.” After many years, however, the results now make one circumspect about the validity of that hypothesis. The poverty and growth blog of the World Bank states that “Poverty will be more responsive to growth, the greater the equality of income distribution,” whereas growth by itself tends to be wealth-distribution neutral.

What’s surprising in the case of India, is that repeated calls over the last three decades by the federal government to attend to mass needs have not yielded any significant results. This is especially so in education from the basic and primary levels through college in the rural and less-developed regions, despite endless sloganeering to the effect that every village will get drinking water, electricity and basic healthcare. An article in the 1990s by Clive Crook, then Deputy Director of The Economist, showed that many economies in Asia, especially South Korea and India, started out in the 1970s with similar levels of income and literacy rates. Those economies that then invested heavily in basic education experienced economic growth, but Indian policymakers merely paid lip service in their anti-poverty and equal growth programs.

An examination of the results of these repeated calls for equality and poverty elimination will not show many achievements for recent decades. A look at land grabbing, however, since the inception of the SEZs since 2000, will show a nearly immediate cause-and-effect relationship, to the dismay of many. In Maharashtra State alone, through November 2006, each of the proposed 41 SEZs involved an area of between 2,500 to 10,000 hectares (6,178 to 24,711 acres). Taking the mean leads to an area of more than 250 square km (96.5 square miles). Referring back to the beginning figure for farmer suicides, lands would have to be taken from approximately 200,000 peasant households. Statisticians with a knowledge of average farm-family landholdings in India know this to be a super-optimistic picture, due to millions of landless share-croppers and laborers who depend on agriculture.

That government takes from us in return for servicing mass needs may be more or less true, depending on its policies and the level of corruption. The question is how equitably has the government performed this function, taking into account the differences in consumption, affordability, income, and wealth that support it?

Looking at the record of Indian growth, one is forced to ask policymakers what have they done for the thousands of villages without primary schools, healthcare facilities, utilities and roads in the fifty years since independence? How much has been gained from self-governance? But today, when the state can demand the end of traditional land tenure (claiming the land nature has given us), whether of tribals living where land records may not even exist or of farmers in relatively better-off places like Singur, one inevitably gets the feeling that the wrong people are being forced to sacrifice for the country’s overall growth.

Dragging in Tata’s Singur project controversy would be unfair. They want land for industrialization, and it’s the government’s responsibility to get that land in the right place at the right price and with equitable resettlement offered to those affected. It would also be unfair to ask Tata for employment in exchange for land, which would gloss over the fact that local development would generate other employment opportunities.

And though not directly linked, economic dislocation could result from these SEZ creations if domestic purchasing power can’t keep pace. Many believe that rapid growth rates and especially domestic consumption may not be sustainable in the near future at the levels of the last decade. There’s already tremendous excess capacity in manufacturing, be it in China or elsewhere. So a slowdown in the near future would affect these older existing capacities and also those capacities coming on line more severely. Playing China’s game from 25 years ago in India today may therefore be a costly affair.

The world has changed a lot in the last three decades and could change at an even greater rate in the future. In India now, however, the cost of making up for having missed the growth bus in the last century is increasingly being borne by those who, driving bullock carts, have never ridden any modern motor vehicle and today are having to hang on for dear life to a rapidly-moving economic engine without a secure seat.

For example, many reforms targeting growth rates of 8-10 percent of GDP are 21st century legislation, whereas India’s land acquisition policy dates back to 1894 and Victorian colonialism. Without denying the fact that land, especially agricultural land, was, is and will be needed for growth, a semblance of this policy should be in force now. The British formulated that policy ostensibly for Indian needs but suited more to British interests, and government today follows the same path again for “Indian” needs but suited more for elite interests.

2 Responses to “Indian Economy: Ready for High Gear ?”

  1. Kindly dont get me wrong, but bad math & statistics doesnt lead us anwhere. The mean of 2500 to 10000 hectares is not 1 = 100 hectares. So, even in your logic, the maximum is less than But, only one SEZ has reached this limit, with most of the approvals really small of the order of 1 And not all of these are on farm-lands. A lot of these are barren and AFAIK there are no two-crop lands involved. Still, I agree there will be some relocation.

    Indian has over 75% in agriculture and no way this can be sustained. So, do you think if you freeze all industrial development, India will be happy & prosperous. India has overabundance of agricultural workers and this 75% has to be reduced to atleast 30-40% in the next decade to have any meaningful poverty reduction and agricultural revolution. So, we are talking about displacing over 30% (300 million) of population in a decade for poverty alleviation while agriculture with best of development can at best be developed to support 300 million people and lead them out of poverty.

    So, how to absorb this 300m+population? Surely, service sector can’t do that. The only way is industrial development. We dont have much of infrastrucutre and so we need more sops to attract industries. And without this industrial growth has no chance. This is the only chance. Grasp or Perish.

    Thus, a lot of farmers will be displaced. But, each of these SEZ will also offer job opportunities to millions. So, the country has to retrain a lot of the farmers and relocate some of them to other farms. Such massive things have to happen. So, you can argue for more training & education. But, to argue against SEZ & industrial development, you should have some idea of what you are talking about. Do you have any constructive idea of how we can support 750 million people who are in agriculture, without any kind of displacement?

    If you really care about farmers, try to get involved in rural projects and support education and development. Critize govt on its lack of rural industries and pathetic public schools. And, status quo is not an option

  2. Dear BV,

    Thanks for your valued comment.

    About statistics – yes I got it wrong by one decimal point. What I wanted to do is combined area for those 41 SEZs based on an average of 6250 acres (averages can be misleading, I agree); which should have been more than 2500 square km (965 square miles). So when I wrote 250 square km, it was not individual one, but collective one for 41 SEZs (only for Maharashtra) based on averages and still went wrong by a decimal place, on the lower side. My apologies…

    And rest, I believe we are on same page – my only concern is whether a law of 1894 on behalf of farmers can compete with a law of 2005/06 on behalf of industrialists. One student of SJMSOM (IIT Bombay) wrote in Times that when it comes to selling of Mumbai mill lands, Government don’t interfere; and the skyrocketing prices are determined by market forces. So why do Government determines these thousands of hectares of land prices based on historical (last six months of three years, remember real estate is not as liquid as stocks or other asset classes in India) prices. And also remember, as per the draft SEZ law in circulation or in practice (I am not a legal man, so don’t get me wrong here); the acquired land is all not for industrialization – up to 50 (or 25%) can be used for real estate. That’s in black and white, we won’t be sure how much that would be in grey.

    So if one wants to misuse that, one just needs to borrow money, buy as much land as possible and pay interest for five years and then even if one resells that 25% for real estate, one makes a killing.

    That partly explains the increasing rural-urban (or rich-poor) divide; how rich can pay less and get more.

    Otherwise, as I said and believe, we are talking same thing that India needs industrialization, not by grabbing land cheap, but by grabbing (or by co-operative as ET reported with one example, again from Maharashtra) land at their rightful prices.

    Without complicating further, one can strengthen the cause of farmers by stating that they are selling tangible real asset against ‘fiat’ currency asset; which is made up of human promise (RBI) which would be broken one day (as was the gold-window was closed) with increased money supply globally. So if one looks from that angle, farmers are selling land for paper. Now if one wants to reimburse farmers with tangible gold, gold prices would shoot up, and Government can’t do that.

    But that’s a different matter all together…I agree.

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