THE

INDIA ECONOMY REVIEW

2010
Volume VII | Quarterly Issue: 31st March 2010
www.iipmthinktank.com
www.gidf.org

INDIA: GROWTH RETHINK

EDIFY
DELINEATE
SANS DEVELOPMENT

INSIDE THIS ISSUE

Lessons Not Learnt
Slipper y Slopes
N e e d To K n o w
Renascent India

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

“A Society where man is at the centre of all activities,

a society where exploitation of man by man has been
abolished, where he is cared for as an in a family, where
“to each according to his need’ is practised, a society where
non bureaucratic National Economic Planning is given due
importance for sustainable optimum growth, where adequate
social safety net is a reality and yet market’s advantages are
fully taken care of for creativity and entrepreneurship, such
a society can be truly described as humane society and the
vision as “Humanism”.
Dr. M K Chaudhuri
The Great Indian Dream, 2003, Macmillan
India,New Delhi

“Let us together dream of a country where poor are not

just merely reduced to statistics but where there are no poor.
Let there be a day when small children are taken to a poverty
museum like science museum where they shiver at the plight
of the way people used to live in the last millennium. Let this
dream take the form of a revolution and as long as our dreams
keep outweighing our memories, India would remain a young
and dynamic nation on this path to global equality. And for
this let the wait not be for eternity. Let us together achieve this
in the next 25 years.”
Prof. Arindam Chaudhuri
The Great Indian Dream, 2003, Macmillan
India,New Delhi
 IIPM: THE FUTURE IS HERE
Since its incorporation (1973), IIPM has been an institution with privileged traditions, in the diversity of its fraternity, its global outlook, its
world class research and its commitment to alternative national economic planning process.

It can be said, without much oversimplification that there are no ‘underdeveloped economies’. There are only ‘under managed’ countries.
Japan 140 years was ago was an underdeveloped country by every material measurement. But it very quickly produced management of great
competence, indeed of excellence. The policy inference is that ‘management’ is the prime mover and ‘development’ is the consequence. At
IIPM, every one considers that development is a matter of human energies rather than economic wealth. And the generation and direction
of these human energies is the task of ‘management’. Accordingly, we formed The Great Indian Dream. Unlike any other dream, this is
one dream which each one of us are determined to realise and that too in our own lifetimes. Each bit of cynicism and condemnation from
pessimists makes us evolve even stronger and determined.

All our endeavours and initiative is towards realisation of this dream, where in we produce committed ‘bare foot’ managers and
entrepreneurs who are needed by nation, on an insistent basis. As an educational institute, we aim at initializing a three dimensional
personality in IIPMites, viz.
 Pursuit of knowledge in economics and management
 Commitment to economic, social, political and technological upliftment of masses and
 Cultivation of taste for literature, fine arts and etc.
Economists often have limited access to the practical problems facing senior managers, while senior managers often lack the time and
motivation to look beyond their own industry to the larger issues of the global economy. It has set before it the twin tasks: to reorient education
and research towards the needs of both the private and public sectors and to establish the link between the National Economic Planning
and the development of private enterprises in Indian economy. IIPM dares to look beyond, and understands that what we teach today, other
adopt tomorrow. IIPM’s service output (education, research and consulting,) is a unique combination of two distinct disciplines: economics
and management. Through this integration, IIPM helps guide business and policy leaders in shaping the Indian and global economy, bringing
together the practical insights of industry with broader national and global perspectives.
A hall mark of IIPM is that it is armed with the comparative advantage of engaging the committed, passionate and brightest management
post graduates and undergraduates, who pursued the education at IIPM and subsequently joined it, to realise the dream. IIPM alumni, spread
across the globe, holding crucial decision-making positions in the corporate sector, are bonded by the one ideology of making a positive
difference, turning that ideology into a movement itself.
The India Economy Review is another humble initiative towards the realisation of the same and more distinctly, engaging the broader
publics and pertinent stakeholders.

SEARCH, SIEVE, SCHEME...

In economics, like in everyday existence, it is imperative to hear, perceive and consider what others have to say. Each issue of The IER
brings together a selection of important contributions on a particular theme, authored by some of the brightest minds in different areas
of Indian economics. The provocation for publishing these issues arises from the fact that over the years economic journals have become
copious, exclusive and expensive. Most of the journals and a good many of the books have gone beyond the cerebral and financial reach of
general students and other scholars. It is for them that these issues are primarily being raised and debated here.
Much about India is transparent enough. One does not require detailed criteria, cunning calibration or probing analysis to pinpoint
India’s problems and recognise its antecedents. There is in fact much that is perceptible about India. But not everything about India is even if
simplistic is so simple. The learned reader would appreciate the fact that India is like an elephant that looms too large to be grasped within
a distinct structure and paradigm the constituent parts of which would fail to reveal the entirety. Obviously and observably, no suggested
solution to any protracted and complex socio-economic problem will satisfy all sides and stake-holders evenly. Consequently, there exists an
enormous diversity in economic thinking and perspectives, as is also reflected in the viewpoints of different expert contributors in this issue.
The intended outcome of this exercise is to facilitate the invention, improvement, deliberation and dissemination of innovation in economic
thinking and national economic planning, insisting merely on well-grounded, open and unbiased debates, without predetermined outcomes.
It is impossible to do justice to the entire field of Indian economics in a single issue. The topics selected for this issue are those which are of
critical and immediate importance to India. Majority of them were freshly and exclusively written. Encapsulated, it is a constructive attempt
aimed at helping India actualise its promises and potential. The editors hope that this issue of IER proffer the reader a flavour of dynamism
and excitement and persuade her/him to participate in the journey towards realising ‘The Great Indian Dream’. At the same time, it illuminates
the terrible, practical problems of India and Bharat.

ACKNOWLEDGEMENTS
The IIPM Think Tank likes to thank all the internal faculty who have been instrumental in coordinating
with many authors all across India and according their unstinted support. The assistance of Prof. R.Krishnan
(IIPM Chennai), Prof. Amlan Ray (IIPM Lucknow) and Mr. Robin Thomas (IIPM Ahmedabad) has been more
valuable than, perhaps, they realise.
 CREDITS The First Words And The Last Word
Founder
Dr. M. K. Chaudhuri
Editor-in-Chief Aspiring Change: Will Past Be A Prologue Of The Future?
Arindam Chaudhuri
Managing Editor
Prasoon.S. Majumdar
Deputy Editor
M.N.V.V.K. Chaitanya
Consulting Editor
Prashanto Banerji Dear Reader,
Research Fellows
Pathikrit Payne India has come a long way in terms of eco-
Sray Agarwal
Akram Hoque nomic growth. Softer indicators – aspira-
Mrinmoy Dey
H.Divya Sharma tions, health, and literacy – are all register-
Mufaddal Poonawala
Group Design Director
ing discernible improvements. We live in a
Satyajit Datta
Senior Designer
generation of relative abundance now.
Prasoon.S Majumdar M.N.V.V.K.Chaitanya
Dinesh Chandelkar
Designer
While for the Western world it is going to Managing Editor Deputy Editor
Saurabh Mishra,
Parvesh Kumar Swami,
be a demographic winter, we in India with
Sujit Singh
tural inequalities in India are not only
Senior Illustrator
some effort should be reaping a demo-
Shantanu Mitra
deep and persistent, they are also inti-
Production Manager
graphic dividend. It is an India full of good-
Gurudas Mallik Thakur
mately linked with institutional struc-
Production Supervisors
ies –better consumption and lifestyle are in
Digember Singh Chauhan
tures in the political, social, and eco-
Soumyajeet Gupta
attendance all around. Spending power, op-
nomic domains – and they are likely to
Satbir Chauhan portunities, and the splurging propensity
Chief Marketing Advisor impede the transformations necessary
Amit Saxena have been shooting up. So free markets
Marketing & Sales for long term growth too. One can iden-
Shweta Shukla working for profits have delivered? Well,
IER Online tify structural inequalities as witnessed
Neel Verma, Anil Kumar Sheoran, poverty ratios have gone down, the per
Christopher Mani in oligarchic capitalism, group based in-
Principal Offices capita income is growing, the economy is
Satbari, Chandan Haula, Chattarpur,
Bhatimines Road, New Delhi - 110074
equalities, spatial differences, interstate
IIPM Tower, Junction of , 32nd Road & S.V. expanding at a fast pace. So where is the
Road, Bandra (W), Mumbai - 400 050 disparities, and education and skill based
IIPM Tower, 419 100ft. Road, Koramangala, problem? Well, poverty ratios have gone
Bangalore - 560 034 differences. And what could be the pos-
IIPM Tower, 893/4, Bhandarkar Road, down, not the number of poors. Poors still
Deccan Gymkhana, Pune - 411 004 sible remedial actions? These incidently
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remain vulnerable, largely unprotected –
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are the sub themes we pursued in this
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socially, economically, or legally. And, most
IIPM Tower, 6-3-252/2, Erramanzil, Banjara Hills, issue– can turn future sustained high
Hyderabad - 500 082 significantly, India has defi nitely performed
We are keen to hear from anyone, who would like to growth into a unique opportunity to
know more about IIPM Publications. You can e-mail on dismally as far as inclusive growth is con-
shweta.shukla@iipm.edu or alternatively call Ms.Shweta build a more equitable and cohesive so-
at 9811895267 cerned. The shift to inclusive growth as a
Additional Thinking
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www.iipm.edu
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the discussion. Happy Reading.
www.arindamchaudhuri.com tage. This shift marks a broadening of con-
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PROBLEMS & PERSPECTIVES:
The Beautiful Tree
Private Sector and Quality Concerns
Amit Kaushik
PROBLEMS & PERSPECTIVES:
Demographic Dilemmas
India’s Demographic Transition:
Dividend or a Disaster?
Anand Teltumbde
PROBLEMS & PERSPECTIVES:
Emerging India
Global Financial Crisis and
Indian Economy
G. Thimmaiah
PROBLEMS & PERSPECTIVES:
Indigenous India
Trade, Corporate Market and
Indigenous People
Goldy M. George
PROBLEMS & PERSPECTIVES:
Indian Indigence
Impact of Environment
on Poverty in India
T. Koti Reddy
(F)ACT SHEET
PROBLEMS & PERSPECTIVES: Debesh C Patra 110
Inclusive India ENVIRONMENTAL ECONOMICS:
Financial Inclusion: Enabling Gandhian Good
Inclusive Growth Gandhian Model for Sustainable
Swati Raju 42 Forest Management
PROBLEMS & PERSPECTIVES: G Bhalachandran 116
Whither India? HEALTH ECONOMICS:
Growth Sans Development ? An Economic Diagnosis
B.K. Thapliyal 50 Problems and Solutions of Shortage
PROBLEMS & PERSPECTIVES: of Physicians in the USA and its
Growth Goals Impact on Developing Countries
Income and Inequality in India Shamim Mohammad 128
Joydeep Goswami and INTERNATIONAL ECONOMICS:
Subrata Bandyopadhyay 56 Change For Good
PROBLEMS & PERSPECTIVES: Global Economic Uncertainties:
A Long Road Ahead Essential Coordinated Governance
India: Economic Growth Sans K. U. Mada 134
Development POLITICAL ECONOMY:
T S Mohanchandralal 66 MicroMacro
PROBLEMS & PERSPECTIVES: Politics, Governance, Political
An Actionable Agenda Economy of Development or
India : Growth Sans Development Stagnation: West Bengal 2009
Tushar Kanti Das 72 Amiya K. Chaudhuri 144
PROBLEMS & PERSPECTIVES: WELFARE ECONOMICS:
Profound Priorities MicroMacro
Is there any Relationship between Creating Jobs for Rural Youth in
Economic Growth and Human Andhra Pradesh, India
08 Development? Evidence from Meera Shenoy, Smriti Lakhey and
Indian States Parmesh Shah 160
Sacchidananda Mukherjee and MANAGERIAL ECONOMICS:
Debashis Chakraborty 80 MicroMacro
PROBLEMS & PERSPECTIVES: Retailers’ Preferences for Coca Cola:
12 Crucial Convergence A Case Study With Special Reference
India and the Crisis of Civilization: to the Kolkata Region
Potential Impacts of Converging Ruma Kundu, Indraneel Mandal and
Ecological, Economic and Energy Mithun Chakraborty 168
Catastrophes MONETARY ECONOMICS:
20 Nafeez Mosaddeq Ahmed 90 Price Puzzles
PROBLEMS & PERSPECTIVES: Inflation and Its Cures
Food First Madhusudan Raj 174
Food Security in North-East CARE ECONOMICS:
India in the Post Globalisation Era Pilgrims & Progress
28 Utpal Kumar De 98 Religion and Economics:
ENERGY ECONOMICS: An Empirical Analysis
Fuelling Growth Atanu Sengupta and Krishanu Nath 182
Is LPG a Sustainable Cooking Fuel WHAT NEXT: A Long Road Ahead
for India? A Study in Managerial When Nationalism is Socialism
32 Economics Pathikrit Payne 190
P R O B L E M S & P E R S P E C T I V E S
PRIVATE SECTOR AND
QUALITY CONCERNS
T
he last two or three years have witnessed a fairly
vigorous debate in the education space over the role
of the private sector in education, particularly at the
elementary level, and its merits and/or otherwise. The
somewhat contentious provisions of the then Draft Right to
Education Bill, 2005, recently passed as The Right of
Children to Free and Compulsory Education Act, 2009, also
contributed to this debate. Among other things, the Act
stipulates that even unaided schools under private manage-
ment would be responsible for providing free education to
8 THE IIPM THINK TANK
disadvantaged children between the ages of six and fourteen
years from their immediate neighborhood, at least to the
extent 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 schools
up in arms. Joining them, albeit for very different reasons,
are the proprietors of the unrecognized private schools, who
risk monetary fi nes and jail terms if they continue to operate
their schools without seeking recognition as prescribed under
the Act. Ironically therefore, an Act that seeks to universal-

Amit Kaushik
Chief Operating Officer, Pratham Education Foundation, Delhi Area, India
ize elementary education for children in India has succeeded
in alienating a significant proportion of those who are
engaged in contributing to that very objective.
While the numbers offered by different sources vary
slightly, it does appear to be more or less agreed that private
(recognized) schools in India account for anything between
15-25 percent of available schools. The District Information
System for Education (DISE) data for 2007-08, released in
November 2009, places the number of schools under private,
unaided management at 173,282 out of
a total of 1,250,775 schools in India1, or
about 14 percent. If one adds the Liberalizing the
number of aided schools under private school sector
management, we arrive at a figure of would result in
nearly 20 percent. According to
the emergence
NCERT’s 7th All-India Educational
Survey based on figures for 2002,
of educational
enrolment in such private schools was entreprenuers and
15 percent and 19 percent at the a new market
primary and upper primary stages
respectively. While NUEPA and
NCERT data capture the picture as related to recognized
schools, ASER only notes the fact of private school enrol-
ment without distinguishing between recognized or other-
wise, thus providing the slightly higher figure of 21.8 percent
children enrolled in private schools in 2009.
While there are minor variations in the private school
enrolment indicated by ASER between 2007-2009, it would
seem to be fairly clear that roughly one-fi fth of elementary
schools in India are under private management. If one adds
the number of unrecognized private schools, about which
little data is available, the percentage of children enrolled in
what may be called non-government schools may be conserv-
atively assumed to be between 25-30 percent, if not more. A
study in 2006 showed that even in rural areas, almost 28
percent of the population had access to fee-charging private
schools2 . In 2009, ASER data indicates that nearly 44
percent villages have access to private schools, and it would
seem safe therefore to assume that this is a sector that is now
TH E B E A U T I F U L TR E E
well established.
At the same time, it may not be correct to presume that
private schools are coming up in the absence of government
schools; in many cases, they come up in areas with poor
government school performance3. Various studies have
shown that while the private school sector has grown in
recent years, leading to a decline in the relative enrolment in
government schools, the former do not necessarily compete
with the latter in terms of addressing unmet demand.
Rather, in establishing themselves in
areas where government schools
already exist, these private schools
meet differentiated or quality demand,
attracting children from higher-income
groups or from advantaged social
groups4 .
Many years ago, when Milton
Friedman fi rst postulated his concept
of vouchers in schools, he was con-
vinced that liberalizing the school
sector would result in the emergence of
a market where none existed, with educational “entrepre-
neurs” entering the market to take advantage of opportuni-
ties offered and in turn, to offer quality school services 5.
While the effectiveness of voucher programmes remains a
matter of some debate, it does seem true that the desire of
parents to fi nd an alternative to poorly performing govern-
ment schools may have led in recent years to a growth in the
number of available private schools, under both recognized
and unrecognized management. In his book, The Beautiful
Tree6, James Tooley argues quite convincingly that notwith-
standing the costs involved, poor parents in urban areas are
choosing to vote with their feet and move their children from
free government schools into private (and in many cases,
unrecognized) schools, thus setting off an increase in the
number of such schools.
It is certainly true that there is greater interest in estab-
lishing private schools today than there was earlier; no
longer viewed as a purely philanthropic activity, the setting
THE INDIA ECONOMY REVIEW 9
P R O B L E M S & P E R S P E C T I V E S
up of private schools is now attracting more and more
corporate fi rms who see this as a potential business. In the
case of some real estate developers, it is even being seen as
another form of forward integration, making the purchase of
apartments in their developments more attractive by virtue
of guaranteeing a “good” school in the neighborhood; a case
in point is the recent announcement by a well-known real
estate group, of a chain of 150 CBSE schools to be set up all
over India. Similarly, the provisions of The Right of Children
to Free and Compulsory Education Act, 2009, requiring the
earmarking of 25 percent seats for children from disadvan-
taged families, are being viewed by many in the private
sector as an opportunity to invest in setting up schools, in
order to take advantage of the “guaranteed” reimbursement
of costs by government.
The government’s proposal to establish 2500 “model”
schools in various districts through the
Public Private Partnership (PPP) mode
has also generated significant interest
Unlike the
in the private sector, with several government
corporate houses exploring options of schools, all private
investing in the sector. Thus, the schools ensure
creation of educational “entrepreneurs”
accountability
does appear to be taking place to some
degree, even though the numbers
amongst the
remain comparatively small. teaching staff
But what of quality in these private
schools? As ASER 2008 showed, when various variables
such as family background, income and others are controlled
for, the difference in learning levels between government
and private schools becomes marginal7. Similarly, Education
Initiatives (EI), India’s largest private sector testing organi-
zation, found that “any lead that private schools show in their
learning outcomes over government schools can be com-
pletely explained away by... (1) Students’ socio-economic
background, (2) students’ initial levels, (3) rote/procedural
nature of learning tested. In other words, if you control for
factor 1, look for improvements between say, Grade 3 and
Grade 7 (to nullify any initial advantage), and the test is not
rote/testing procedural knowledge only, private schools (do
not) show any advantage over government schools”8. In part
of course, the trouble arises on account of the usual assump-
tion in reference to private schools—they are generally seen
to be high-end private schools of the likes of say, a Delhi
10 THE IIPM THINK TANK
Public School in New Delhi or a Cathedral in Mumbai. The
reality however, is that a majority of private schools are only
marginally different from their counterparts in government;
the major difference lies in their ability to ensure account-
ability amongst the teaching staff.
In fairness, it must be said that this is an area that remains
open to debate and further research. Tooley for instance,
records a difference of 16-17 percentage points in the
learning levels of children in private schools in urban areas,
as compared to their counterparts in government schools9,
but it is not clear whether this is after controlling for factors
of the nature mentioned in the preceding paragraph. His
fi ndings are clearly in contradiction to fi ndings elsewhere, so
there is certainly a case for deeper examination of the
underlying causes.
Given that ASER 2009 data reconfi rms what has been
observed in earlier years in respect of
enrolment, fi nding only about four
percent children in the 6-14 year age
group still out of school, the question
of what happens to the 96 percent
children in school acquires great
significance. Since this year’s data has
been discussed in some detail else-
where in this report, let us take just one
example, that of reading ability; on an
overall basis, ASER 2009 fi nds that
nearly 47 percent children in Class 5 are unable to read a
Class 2 text. More worryingly, at the national level, the
percentage of children in Class 5 unable to read a Class 2
text actually shows an increase between 2008 and 2009, from
44 percent to 47 percent. Regardless of how the difference
between government and private schools is explained, the
fact remains that these are unacceptably high numbers.
Going forward, two conclusions would appear to be
inescapable; fi rst, private management participation in the
school sector is only likely to increase over time, and it may
be wise to develop policies that address this situation. It may
even be time to move away from our traditionally hypocriti-
cal approach to private investment, which insists that such
investment should be on a not-for-profit basis, thus compel-
ling school operators to fi nd alternatives by which they can
make a return on their capital, to a regime that actively
encourages private investment within a regulated environ-
 TH E B E A U T I F U L TR E E

ment. Second, action is urgently required to improve quality
in our classrooms, whether these are in government or
private schools. A failure to address this need will lead to
increasing numbers of children going through the school
system without learning very much, something that no nation
can afford.
The most significant thing that ASER has done over the
last five years has been to focus attention on the need to
improve learning outcomes. Greater public awareness and
parental demand, improved infrastructure and more re-
sources have brought us to a point where enrolment is
reasonably satisfactory. But we would be failing future
generations if we do not take this to the next logical step,
improving what children do once they’re in the classroom. It
is to that—regardless of whether the child is in a government
or private school—that we must now turn our attention.
Public Interest, Robert A Solo (Ed), New Brunswick, NJ:
Rutgers University Press.
6
Tooley, James (2009), The Beautiful Tree, New Delhi:
Penguin Books India.
7
Wadhwa, Wilima (2009), “Private Schools: Do They
Provide Higher Quality Education?”, in Annual Status of
Education Report (Rural) 2008, Mumbai: Pratham
Resource Centre.
8
Sarangpani, Padma (2009), “Quality, Feasibility and
Desirability of Low Cost Private Schooling”, in Economic
& Political Weekly, Vol. 44 No. 43, October 24th - October
30 th, 2009, New Delhi
9
Tooley, James (2009), op cit.
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organization.)

Endnotes and
Additional Thinking
nking
1
Mehta, Arun C (2009), Elemen-
tary Education in India,
Where Do We Stand? State
Report Cards 2007-08, New
Delhi: Nationall University for
Educational Planning
anning and
Administrationn
2
Muralidharan, Karthik
and Kremer, Michael
(2006), “Publicc and Private
a”, Harvard Univer-
Schools in India”,
sity, Boston.
3
bid.
4
Tilak, Jandhyala
la B.G. and Ratna M.
Sudarshan (2001),
01), Private School-
dia, NCAER
ing in Rural India,
Working Paper No. 76, New
Delhi: Nationall Council for
Applied Economicmic Re-
search.
5
Friedman, Milton
ton
(1955), “The Role
ole of
Government in
Education”, in
Economics and d the

THE INDIA ECONOMY REVIEW 11

P R O B L E M S & P E R S P E C T I V E S

INDIA’S
DEMOGRAPHIC
TRANSITION:
DIVIDEND
OR A
DISASTER?
Anand Teltumbde
Managing Director, Petronet India Limited, Mumbai

A
section of the intellectual class which has chosen
to sing paeans to the ruling class policies has been
striving to cover up the ugly reality of India with a
thick coat of nationalistic fervor that India will emerge as a
superpower in this century. It tried showing India’s neolib-
eral reforms in brighter light chanting the success story of
GDP growth while they were devastating the countryside
and were creating a crisis of livelihood for majority of
people. Under the load of negative evidence, they lowered
their pitch and began painting bright future for India along
the superpower theme. The demographic transition, which
may be viewed as a cyclical phenomenon created by asyn-
chronous trends of fertility and mortality experienced by
every country in the developmental context, some time or
other is being noted as India’s ‘demographic dividend’,
which will give it a unique competitive edge over many
countries and realize her superpower ambition.

12 THE IIPM THINK TANK

 D E M O G R A P H I C D I L E M M A S

India’s Demographic Transition

Demographic transition is the change societies undergo from a
premodern regime of high fertility and high mortality to a
postmodern regime of low fertility and low mortality as observed
in the case of European and American population history during
1930s. This shift is typically seen from short lives and large
families to where people tend to live longer lives and raise
smaller families. Observed trends suggest that both size and age
structure of the population in all countries tend to change over
time because of this transition. About one-third of the world’s
countries have completed this transition and another third of all
countries are in the transition’s early or middle phases. Most are
in sub-Saharan Africa and the Middle East, while others are
scattered across southern Asia and Latin America.
American demographer Warren Thompson presented
demographic transition in three stages. The first stage depicted
rise in proportion of young people in the population. The second
stages marked significant increase in the working age population
while the proportion of young people declined and that of the

Table 1: India’s Demographic Advantage

Period Total Population Crude Crude Life Expectancy

Fertility growth Bith Death at Birth
Rate Rate Rate (Both Sexes)
1950- 5.91 1.79 43.4 25.5 37.9
1955
1960- 5.82 2.06 40.5 19.9 44.0
1965
1970- 5.26 2.21 37.3 15.2 50.4
1975
1980- 4.50 2.24 34.4 12.0 56.0
1985
1990- 3.86 2.01 30.7 10.4 58.8
1995
2000- 3.11 1.62 25.4 8.9 62.0
2005
2010- 2.52 1.27 21.0 8.1 65.2
2015
2020- 2.12 0.92 17.2 7.9 68.1
2025
2030- 1.86 0.58 14.2 8.3 70.5
2035
2040- 1.85 0.37 13.0 9.2 72.4
2045
2045- 1.85 0.25 12.4 9.7 71.4
2050

Source: Population Division of the Department of Economic and Social Affairs of the United Nations
Secretariat, World Population
Prospects: The 2008 Revision, http://esa.un.org/unpp, Tuesday, March 02, 2010; 1:10:56 PM.

THE INDIA ECONOMY REVIEW 13

P R O B L E M S & P E R S P E C T I V E S

Table 2: Working Age Population and rate, life expectancy provided in the table are consistent with this
Dependency Ratios positive demographic transition.

Population aged 15-59 Dependency ratio

Economic Pay-Off of ‘Demographic Transition’
Year (Thousand) (percentage) Total Child Old-age
Economic advantage of demographic transition to the countries
1950 212 418 57.1 68 63 5
materializes through a number of mechanisms. The most
1955 227 258 55.9 73 68 5
important are labour supply1, savings, and human capital.
1960 242 336 54.1 78 72 5
Labour supply is increased in two ways: maturation of baby
1965 263 130 53.0 82 76 6
boom populations to the working age of 15 to 59 and induction
1970 296 395 53.6 79 73 6
1975 335 649 54.4 77 71 6
of women into the workforce as family size declines.2 The
1980 380 171 54.9 75 69 6 demographic transition leads to the growth of savings in two
1985 429 113 55.4 73 67 6 ways. One, through the reduction of dependency ratio, which is
1990 482 844 56.0 71 65 7 the ratio of non-working age population (all the children until
1995 542 673 56.9 69 62 7 they reach the working age and all the old people who are past
2000 607 532 58.3 65 58 7 the working age) to the population actually in the workforce.
2005 677 099 59.9 60 53 7 Two, the behavioural effect insofar as the working people
2010 748 653 61.6 56 48 8 relatively consume far lesser than the non-working ones, i.e.,
2015 810 563 62.6 52 44 8 their propensity to save is more than that of the non-working
2020 868 259 63.5 49 40 9 people.3 The third mechanism is increase in human capital,
2025 918 679 64.2 47 36 11 which may be the least tangible, but most consequential in
2030 961 653 64.8 45 33 12 contributing to economy. The population that lives longer and
2035 993 795 65.0 44 30 14
stays healthier through demographic transition entails better
2040 1 011 317 64.6 44 28 15
education, and experiences deep-rooted changes in its culture
2045 1 014 055 63.6 45 27 18
which brings in great productivity benefits. Both the quantitative
2050 1 004 176 62.2 47 27 20
as well as qualitative increase in productivity ultimately spirals
Source: Population Division of the Department of Economic and Social Affairs of the United Nations
Secretariat, World Population Prospects: The 2008 Revision, http://esa.un.org/unpp, Tuesday, March up savings in economy thereby investment and thence economic
2, 2010
growth in a mutually-reinforcing manner.
old increased modestly. The third stage represented a decline in It is estimated that during the 30-year period beginning with
the proportion of working-age along with the rise of old people. the mid-1960s, policies designed to take advantage of the
Japan and parts of Western Europe are already past the second favourable demographic phase contributed nearly two-fifths to
stage while most of East and South-East Asia, having enjoyed one-third4 of the total economic growth in the successful South
the second stage for more than four decades is soon following East Asian countries.5 The Celtic Tiger, the present-day Ireland,
suit. India, in contrast, is just entering the second stage and its which also attained rapid economic growth, appears to be
share of the working age population is expected to increase until another powerful illustration of the same phenomenon. The
2035 and beyond. working-age population in East Asia grew nearly four times
Table 1 provides the demographic trend from 1950-2050, faster (an average of 2.4percentage a year) than its dependent
which illustrates that India’s fertility has been consistently falling population between 1965 and 1990. A virtuous spiral was thus
from the peak 5.91 percent in the first decade after independ- created: population decline pushing up income and increased
ence to 2.76 percent today and expected to fall further to 1.85 income further pushing down population growth. This is a major
percent. Even the death rate (per 1000) also likewise shows explanation, among others, of the phenomenal increases in
consistent decline from its peak of 25.5 in 1950-55 to 8.5 today national saving rates in East Asia in the last three decades to 30
and to the lowest of 7.9 in 2020-2025, which then looks up and percent or more.
goes on rising to a moderate value of 9.7 in 2050. Even the data The demographic transition on its own does not spell a
on other parameters like population growth rate, crude birth dividend; it needs congenial policy intervention to become one.

14 THE IIPM THINK TANK


In absence of such a policy intervention it could well turn out to
be a threat. For instance, Latin America’s demography reflects
close similarity with East Asia’s. In 1965 Latin America and East
Asia both had life expectancy in the upper 50s. Both followed
similar improvements in public health to raise it to above 70
years today. There has been similar reduction in infant mortality
in both the cases: Latin America’s 32 deaths per 1,000 live births
as against East Asia’s 34 in 2000. The fertility rate has also fallen
to the present level of 2.5, for many countries such as Brazil,
Chile, and Uruguay, it being just above replacement levels (2.1
children per woman). Despite these similarities in favourable
demographic changes with East Asia, Latin America could not
see the economic growth of the former. While East Asia had a
per capita annual growth rate between 1975 and 1995 of 6.8
percent, the growth rate for Latin America over the same period
was one-eighth of that, at 0.7 percent. It clearly illustrated the
importance of policy in capitalizing the opportunity through
demographic transition.6 Military juntas
and dictators ruling much of Latin
America for most of the 20th century, until India has a
the late 1970s, could not provide the whopping 61
policy framework that the democratic million stunted
regimes of East Asia could.
children. Three
India’s Demographic Dividend out of ten world’s
Table 2 provides the working age popula- stunted children
tion (15-59 years) from 1950-2050 along are in India
with dependency ratios, for both pre and
post working age. The data clearly reveals
that the working age population had begun to rise from its
lowest level of 53 percent in 1965 to the current 61.6 percent and
would reach its peak in 2035 at 65.0 percent before declining
thereafter. In 2050, it is estimated to be at 62.2 percent. This is
perfectly 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 dependency
consistently declines from its peak of 76 percent in 1965 to 27
percent in 2050, the old-age dependency rises right from its
lowest value of five percent in 1950 to its alarming level of 20
percent in 2050. Although this dependency pattern poses a
serious challenge to our policy makers, India enjoys its prepon-
derance of young age population for almost four decades.
Indeed, India would be one of the youngest nations, with its
median age lying between 25 and 30 over the next 15 years (2010
D E M O G R A P H I C D I L E M M A S
to 2025).7
The UN Population Division estimates that, over the next 10
years, India’s working age population is set to grow by a cumula-
tive 120 million, significantly greater than the expected increase
of 33 million in China or 12 million in the US and rather decline
of eight million in Japan and 18 million in Europe. By 2020, it
appears that the US will be short of 17 million people of working
age, China by 10 million, Japan nine million and Russia six
million. India in contrast will have a surplus of around 47
million. In face of it, this demographic scenario provides a
window of great opportunity for the country. As explained
before, this opportunity is just one-shot and could pass us by if
we are not prepared to grab it. Since, we are already in the zone
of demographic transition; it would be pertinent to see our state
of preparedness to exploit this opportunity.
India’s State of Preparedness
The basic premise behind the discourse of
demographic dividend is that the ‘bulge’
in our population pyramid is absorbed in
our workforce and it comprises people
with good health, education and skills to
be productive over their working age. It
implies that the current children who
mature into our workforce are healthy,
educated and skilled and our economy
will provide them suitable employment.
Viewed in this perspective, we are bound
to get shiver down the spine looking at
the pathetic state we still are in.
Child Health
Indian children are still in dismal state of health and nutrition.
According to the NFHS 3, 78.9 percent of Indian children of six
to 35 months suffer from anaemia. In fact, most children are
born anaemic as their mothers suffer from anaemia - 56.2
percent married and 57.9 percent pregnant women between 15
to 49 years suffer from anaemia. According to a Unicef report,
‘Tracking progress on child and maternal nutrition’8 , the country
has a whopping 61 million stunted children, the largest in any
country-- three out of 10 world’s stunted children are in India.
Stunting is associated with developmental problems and is often
impossible to correct. A child who is stunted is likely to experi-
ence a lifetime of poor health and underachievement. The same
THE INDIA ECONOMY REVIEW 15
P R O B L E M S & P E R S P E C T I V E S
report further tells us that there were 54 million underweight, 25
million wasted and over eight million severely wasted children in
India. The large incidence of poverty in the country, some 77
percent people living off Rs. 20 per day income, is the root cause
of the widespread nutritional deprivation in children. There is
plethora of data that clearly establishes that a vast majority of
our children with serious health deficiency will constitute our
working age population.
Education
In recent years considerable progress is made in terms of
enrolment at all levels of education though it still falls short of
the needs of demographic transition. The gross and net enrol-
ment ratios at the primary education were at 108 and 86 percent
in 2007, thanks to Sarva Shiksha Abhiyan and the mid-day meal
scheme. The same at the pre-primary level was however at just 47
percent, reflecting a lack of attention of the government to the
preparatory phase of children, considered
crucial in their capacity building. The
secondary and tertiary level enrolments 90% of colleges
drastically drop to 53 and 12 percent and 68% of
respectively, way behind the comparable universities across
case of China which has it at 75 and 24
percent. And this is just the quantitative
India were of
aspect; in terms of quality, the education
middling or poor
situation is far more disturbing. From quality, on almost
1980s, with increasing commercialization all indicators
of education, the overall standard has
consistently fallen to appalling levels. It is
taken for granted that quality education needs to be paid for
extra and hence has been the monopoly of the upper classes. The
majority being poor should live with poor quality.
Annual Status of Education Report 2005 based on the
nationwide survey conducted by Pratham had revealed disturb-
ing picture of our elementary education against the claims of
quantitative improvements. 34.9 percent of all school going
children in 7-14 year age group could not read even a short, easy
paragraph (class 1 level) and 51.9 percent could not read a
simple story (class 2 level). The current Annual Economic
Survey (February 2010) states that over 47 percent children
studying in class 5 cannot even read Class 2 textbooks. While this
percent shows a decline from 56.2 percent in 2008 to 52.8
percent in 2009, the report expresses concern about the worsen-
ing standards of education. With much of emphasis on elemen-
16 THE IIPM THINK TANK
tary education to expand markets in recent years, the secondary
education has been grossly neglected as revealed by a World
Bank study –‘Secondary Education in India: Universalizing
Opportunity’9. While it caters to fewer students, qualitatively it
is not any better than the elementary level. As per the first-ever
official assessment of the higher education system (123 universi-
ties and 2,956 colleges across India, estimated 60 percent of
them being private), conducted by UGC’s Bangalore-based
National Assessment and Accreditation Council (NAAC), 90
percent of colleges and 68 percent of universities across the
country 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 ASSOCHAM
Eco Pulse Study based on twenty quality parameters relating to
primary, secondary, tertiary and higher education system, India
came out last but one (just above Indonesia- score 2.68) among
the seven countries with a score of 3.3 out of 10. Russia was at
the top with score of 7.28 followed by
China with 6.77, Brazil with 5.57, Mexico
with 5.42 and South Africa with 3.29.11
Our education system represents huge
inequity. While a tip of it may compare
with the best in the world, the rest is just
nowhere. The recent Right to Education
Bill with lofty proclamations on paper
formalizes the existing iniquitous basis of
education and is callous about the overall
quality of education. In utter ignorance of
the Kothari Commission (1966) recom-
mendations to have equitous universal and state funded
education in line with what was envisaged by the Constitution, it
sought to promote neoliberal principle of public-private partner-
ship in the education market which could only be detrimental to
the interests of the bulging mass of youth.
Employment
The state of health and education has a serious implication to
the quality of workforce, which essentially determines whether
the demographic transition will prove boon or bane to us. The
nutrition deficiency extensively prevalent among children does
impair their physical as well as cerebral capacities. The deficien-
cy of our education system is reflected in the low skill level of
our young people. The overwhelming majority of the work force
not only in rural areas but also in urban areas, does not possess
 D E M O G R A P H I C D I L E M M A S

any identifiable marketable skill. Only 19.6 percentage of male turing and Services is 17, 20 and 63 percent respectively, with
and 11.2 percentage of female workers in urban areas and 10 approx 56, 21 and 23 percent workforce engaged in them. Most of
percentage of male and 6.3 percentage of female workers in this workforce (94 percent) is in unorganized sector, without any
rural areas possessed marketable skills. The percentage of security of tenure whatsoever. Its growth in recent years implies
younger members of the workforce (age group 20-24) having that the quality of employment is deteriorating fast. Given India’s
vocational skills is just five percent in India whereas in industrial baby boomers joining the workforce by millions each year, the
countries it varies between 60 percentage and 80 percentage, country’s economy needs to create 10-20 million new jobs each
except for Italy, which is 44 percentage. The percentage for year. Our performance however has been dismal on this front
Korea, which has recently been categorized as an industrialized which is evidenced by the rising percentage of self-employed
country, is at whooping 96 percentage. Even the developing people. The government’s employment guarantee schemes like
countries have better score than India: Mexico at 28 percentage NREGA notwithstanding, the official rate of unemployment has
and Peru at 17 percentage.12 been rising in recent years as shown in the Table 3.13
In recent years the Indian economy has been undergoing We are already in the midst of the demographic transition and
drastic structural change in favour of Services at the cost of hence the necessary institutional and policy framework to reap
Agriculture. The current contribution of Agriculture, Manufac- its benefits should have been already in place demonstrating its
efficacy. But unfortunately that is still not visible. The time is
Table 3: Unemployment Rates among Young Peo- passing us by and with it our problems are only leaping skywards.
ple and Overall Population It is certain that we will not be able to absorb the burgeoning
working age population, least provide them worthwhile jobs
Rural India Urban India
over the next two decades. As such, with falling employment
15-19 20-24 All 15+ 15-19 20-24 All 15+
elasticity world over, this is the larger challenge to the mankind
Males
and India cannot be an exception. Surely, those from the upper
1993- 3.3 4.9 2.0 11.9 12.6 5.4
94 classes endowed with market oriented educations and skills
Usual
1999- 5.5 5.2 2.1 14.2 12.8 4.8 would be in short supply given the global demand, but most of
Status
00
the rest would face acute crisis of living. This is bound to pose
2004- 7.9 6.2 2.1 14.0 12.5 4.4
05
serious civic and political challenge which could jeopardize or
1993- 9.0 10.3 5.6 16.2 17.0 6.7
even reverse the economic dynamic towards utter uncertainty.
94
Current
Daily
1999- 13.1 11.7 7.2 19.0 17.1 7.3 Some Qualifying Concerns
00
Status Notwithstanding the above analysis, what is claimed as India’s
2004- 15.0 12.9 8.0 18.4 15.8 7.3
05 demographic dividend may not look the same if one takes a
Females micro look at the composition of demographic transition. Table
1993- 19.0 2.8 1.3 12.8 21.7 8.3 4 and 5 provide population projections for the North and South
94
India. These two tables clearly shows that South India had
Usual
1999- 3.2 4.9 15.0 13.2 19.4 7.1
Status entered the favourable demographic phase in the 1990 and is
00
2004- 6.7 9.3 3.1 15.6 25.8 9.1
rather expected to exit it in the next 15 years time. On the other
05 hand the North will enter this phase in the next 10 years and
1993- 8.3 8.2 5.6 18.6 28.5 10.4 remain in this phase until 2025. By the year 2025 the population
94
Current of South India would have begun to grey. The median age of the
1999- 12.8 12.1 7.0 18.0 25.9 9.4
Daily population would have gone up from 26 years in 2000 to 34 years
00
Status
2004- 12.6 14.9 8.7 16.4 27.3 11.6 in 2025, and nine percent of the population would be of age 65
05 years and over. On the other hand, the North India would have a
Source: Jayati Ghosh and C.P. Chandrasekhar, Economic Growth and Employment Generation in India: relatively young population with a median age of 26 and only
Old Problems and New Perspectives.
http://www.networkideas.org/feathm/mar2007/fa10_Jayati_Ghosh.htm four percent of the population aged 65 and over. What we see as

THE INDIA ECONOMY REVIEW 17

P R O B L E M S & P E R S P E C T I V E S

Table 4: Key Results of Population Projection for the lowest in the world; China being at 38, Brazil and Mexico at
North India, 2000-2025 36. However, just this ratio does not make a good measure of
actual dependency, which rather arises from the combined
Demographic Indicators 2000 2005 2010 2015 2020 2025
influence of physiology, culture, institutions, and economic
Total Population (millions) 450 498 547 597 649 699
choice, in ways that we take as given.14 In India, 50.78 percent
Population Density (per 319 353 388 424 461 496
sq. km) rural and 57.35 percent urban old-age people are totally
Share of All-India 45 46 47 48 49 50 dependent and 15.20 percent rural and 13.71 percent urban
population (%) old-age people are partially dependent on others. The incidence
Females per 1000 males 924 920 918 917 918 919 as well as intensity of old-age dependency in India is thus far
Growth rate for preceding higher than anywhere in the world. It could have serious
5-years (%)
dampening effect on savings and thereby economy unless mitiga-
Total population 2.17 2.02 1.88 1.78 1.66 1.47
tive institutional and policy measures are taken in time.
Population age 15-64 2.23 2.45 2.39 2.24 2.04 1.82
years
Percent 0-14 years 38.1 36.6 34.9 33.3 31.8 30.2 Table 5: Key Results of Population Projection for
Percent 15-64 years 57.6 58.9 60.4 61.8 63 64.1 South India, 2000-2025
Percent 65+ years 4.3 4.5 4.7 4.9 5.2 5.7
Median age 21 22 23 24 25 26 Demographic Indicators 2000 2005 2010 2015 2020 2025

Dependency ratio Total Population (millions) 220 232 242 251 258 265
(percent): Population Density 346 365 381 394 406 417
Child (0-14) 66 62 58 54 50 47 (per sq. km)

Elderly (65+) 8 8 8 8 8 9 Share of All-India 22 21 21 20 19 19

population (%)
Total 74 70 66 62 59 56
Females per 1000 males 988 987 987 988 989 991
Population 6-14 years 97 105 111 115 120 125
(millions) Growth rate for preceding
5-years (%)
Crude Birth Rate 32.4 29.9 27.8 26.4 24.4 21.9
(per 1000) Total population 1.26 1.05 0.86 0.7 0.61 0.53

Crude Death Rate 11.3 10.5 9.7 9.2 8.6 8.1 Population age 15-64 1.79 1.67 1.39 1.15 0.83 0.55
(per 1000) years

Crude Growth Rate 21.1 19.4 18.1 17.2 15.8 13.8 Percent 0-14 years 30 27.5 25.3 23.2 21.7 20.5
(per 1000) Percent 15-64 years 64.4 66.4 68.2 69.8 70.5 70.6
Net Reproduction Rate 1.68 1.57 1.45 1.35 1.26 1.15 Percent 65+ years 5.6 6 6.5 7 7.8 8.9
Source: P.N. Mari Bhat, Indian Demographic Scenario, 2025. Population Research Centre Median age 26 27 29 31 32 34
Institute of Economic Growth, Delhi. June 2001
Dependency ratio
(percent):
the potential demographic advantage of India is rather the
Child (0-14) 47 41 37 33 31 29
resultant of these two profiles, mostly pertaining to the relatively
Elderly (65+) 9 9 9 10 11 13
undeveloped North. Having nearly squandered the advantage Total 55 51 47 43 42 42
associated with South, we would rather face more challenging Population 6-14 years 40 39 38 36 34 33
situation emerging in North created by expanding population of (millions)

young people with relatively low endowment. Crude Birth Rate (per 20.7 18.3 16.4 15.1 14.5 13.7
1000)
Finally, the bulge enters the old age bracket, as is happening
Crude Death Rate (per 8.6 8.6 8.6 8.7 8.7 8.8
in the developed countries, epitomized by Japan currently. The 1000)
high savings, high investment and high growth associated with Crude Growth Rate (per 12.1 9.7 7.8 6.4 5.8 4.9
the positive democratic transition have to reverse as the depend- 1000)
Net Reproduction Rate 1.03 0.95 0.87 0.83 0.84 0.85
ency rises, particularly old-age dependency, unless productivity
increases neutralize the demographic deficit. Table 2 indicates
Source: P.N. Mari Bhat, Indian Demographic Scenario, 2025. Population Research Centre
that India’s old age dependency in 2050 is at 20, certainly one of Institute of Economic Growth, Delhi. June 2001.

18 THE IIPM THINK TANK


Conclusion
India has tremendous potential advantage in its demographic
transition although its temporal mismatch in its developed
(South) and undeveloped (North) parts might substantially
reduce it. Such demographic advantage however is the one time
gift to the countries which needs to be capitalized with the
backing of appropriate economic, social and political institutions
and policies. Otherwise, it could easily lead to higher levels of
unemployment and give rise to social unrest. Moreover, if it is
allowed to slip off without capitalization, it soon turns into rising
liability on account of rising old-age population. India’s appar-
ent low ratios of dependency mislead one into ignoring this
mounting burden. They may be escalated substantially to be
truly 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 catch
up with it before it lapses. On the contrary, this advantage is
manifesting into a grave unemployment crisis. Its run after the
neoliberal mirage of economic growth at the cost of distribu-
tive justice has already done significant damage to the econo-
my. Much of its advantage is currently being monopolized by
the increasingly smaller numbers of the elite to make it the
fastest producer of Dollar billionaires in the world while the
majority is faced with crisis of survival. This growing inequality
is bound to feed the fury of the majority of youth which is
getting pushed into nowhere in absence of jobs. If our policy
makers realize the incipient danger through this demographic
transition, which is fast passing us by, and shun their elitist
policy myopia, it would prove to be the greatest dividend to us
through this demographic learning.
Endnotes and Additional Thinking
1
Bloom, Canning, and Sevilla (2000), Labor Force Dynamics
and Economic Growth, paper presented at the August 2000
Summer Institute of the National Bureau of Economic
Research, Labor Studies Program.
2
See http://www.ilo.org/public/english/bureau/stat/newsletr/nine.
htm. [Last Accessed: 4th March 2000]
3
C.H. Paxson (1996), “Savings and Growth: Evidence from
Micro 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 on
National Savings and Inequality”, Demography, Vol. 34, pp.
97-114.
D E M O G R A P H I C D I L E M M A S
4
D. E. Bloom and J. G. Williamson (1998), World Bank
Economic Review, 12 (3), 419. D. E. Bloom, D. Canning, P. N.
Malaney (2000), Population Development Review, 2000,
Supplement to Vol. 26, pp. 257-290.
5
Bloom, D. and Williamson, J. (1998), Demographic Transi-
tions and Economic Miracles in Emerging Asia. World Bank
Economic Review 12, 419-56; Bloom, D., Canning, D., and
Malaney, P. (2000), Demographic Change and Economic
Growth in Asia, Population and Development Review. Vol.
26, supp., pp 257-290.
6
Inter-American Development Bank (2000), Development
Beyond Economics, IDB 2000 report, Washington DC.
7
During 2010 to 2025 China’s median age will rise from 34 to
39. In the US, Western Europe and Japan it will rise from 37,
42 and 45 to 39, 46 and 51, respectively.
8
United Nations Children’s Fund (UNICEF) (2000), ‘Tracking
progress on child and maternal nutrition: A survival and
development priority’, November 2009.
http://www.unicef.de/fileadmin/content_media/mediathek/
AR_046_Tracking_Progress_Nutrition_2009.pdf.
[Last Accessed: 4th March 2000]
9
http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXT
EDUCATION/0,,contentMDK:22339000~menuPK:282424~p
agePK:64020865~piPK:149114~theSitePK:282386,00.html.
[Last Accessed: 4th March 2000]
10
Shubhajit Roy (2007), Higher education, lowest standards,
Indian Express, Jun 10th, 2007.
11
Assocham Eco Pulse Study (2008), “Comparative Study of
Emerging Economies on Quality of Education”, November
2008. www.assocham.org/arb/aep/quality-of-education_
nov_2008.pdf. [Last Accessed: 4th March 2000]
12
Shailendra Sharma, Employment (vision 2025), Planning
Commission: http://planningcommission.nic.in/reports/sereport/
ser/vision2025/emp2025.PDF.[ [Last Accessed: 4th March
2000]
13
The rate of unemployment has risen from 7.3 percent in
1999-2000 to 8.35 percent in 2004-05, as the Labour and
Employment Minister Oscar Fernandes informed the Rajya
Sabh on 18.03.2008.
14
Martin, L.G., and Preston, S.H. (1994). Demography of
Aging, National Academy Press, Washington.
(The views expressed in the write-up are personal and do not reflect
the official policy or position of the organization.)
THE INDIA ECONOMY REVIEW 19
P R O B L E M S & P E R S P E C T I V E S
GLOBAL FINANCIAL CRISIS A
G. Thimmaiah
Honorary Visiting Professor,
Institute for Social and Economic Change, Bangalore
G
lobal financial crisis is an important economic event
which engulfed the entire world towards the end of
2008. It resulted in the economic meltdown of USA
and Europe It proved the Marxian prediction of the inevitable
collapse of capitalism. It also revived the interest in the long
forgotten Keynesian solution of government intervention in
economic activity to save the western capitalist economies.
How is India affected by this global financial crisis? How has
the government managed the impact of the global financial
20 THE IIPM THINK TANK
crisis on the Indian economy?
Genesis of Global Financial Crisis
It is generally believed that the US housing bubble was the
main cause for the US financial crisis of 2007. That financial
crisis spread to other parts of the world through the intercon-
nected globalized financial markets. How did the US housing
bubble emerge? Easy availability of mortgage loans for house
buyers in general resulted in profligate lending by mortgage
banks to people who were previously refused housing loans on
the basis of their low credit rating, (‘sub-prime’ borrowers, as
they were not having regular income). But when there was
easy availability of refinance at low rates of interest from
commercial banks and investment banks, mortgage banks

AND INDIAN ECONOMY
overstretched their lending to prime borrowers and later to
even ‘sub-prime’ borrowers. In order to replenish their funds,
the house mortgage banks started securitizing their house
mortgage loans and selling the securitized mortgage loans at a
discount to investment banks, hedge funds and insurance
firms. These securitized mortgage loans were rated for their
credit quality by US credit rating companies like Standard and
Poor, Moody and Fitch. Such credit rating encouraged the
commercial and investment banks to take risk mainly guided
by sheer greed of making profit. They in turn packaged those
securitized house mortgage loans which they had purchased
from the mortgage banks and sold them to insurance firms and
foreign banks through globalised capital markets. The total
housing mortgage loans so packaged and sold amounted to a
E M E R G I N G I N D I A
woofing $10.5 trillion by mid-2007. The US Wall Street played
a major role in transacting these securitized financial instru-
ments which were issued on the basis of house mortgage loans.
When the foreign financial institutions started purchasing
packaged mortgage loans, mortgage banks started lending
more to housing companies who in turn used that money for
construction of more and more houses and selling them to
financially unviable buyers. However, the house mortgage
banks, the original sinners, started facing delinquency in loan
repayment from the ‘sub-prime’ borrowers and were forced to
declare foreclosures, (public auction of houses), as they could
not absorb the massive defaults of loans. When the mortgage
banks and other financial institutions failed to sell these
securitized houses to other buyers, they became toxic assets on
THE INDIA ECONOMY REVIEW 21
P R O B L E M S & P E R S P E C T I V E S

their balance sheets. Such bad loans entered into the balance ance companies like AIG and even federally owned refinanc-
sheets of almost all financial institutions which had partici- ing institutions like Fannie Mae and Freddie Mac faced huge
pated in the sophisticated process of mortgage financing. losses and started laying off their employees. This led to fall in
There was another factor which led to this kind of reckless consumer demand through multiplier effect. All this led to the
lending resulting in housing loan defaults by the ‘sub-prime’ collapse of both investment and consumer confidence in the
borrowers. After the great depression of 1930’s several American economy by mid-2007. What was worse, such bank
banking regulations were introduced in USA. But those were losses were transmitted to other countries through the
ignored during and after the Second globalized financial markets and led to
World War. But after the savings and chain reaction all over Europe and
loans banks failure in the USA in the What was worse, England where Royal Bank of Scotland
1980’s, more regulations were imposed the bank losses and Barclays bank faced severe losses
on the operation of all types of financial were transmitted which forced them to cut their labour
institutions like banks, mutual funds,
hedge funds, mortgage banks, insurance
to other countries force. This process spread to Middle
East, Asia and even to Australia.
firms and stock markets. They stabilized
through the Thus, excessive lending by house
the America financial system and USA globalized mortgage banks to ‘sub-prime’ borrow-
experienced one of the longest growth financial markets ers hoping to make more profit from
trend during 1990’s. However, when house sales created housing bubble.
there was world wide revival of the Failure of house buyers to repay their
ideology of free market capitalism, Reagan administration loans to mortgage banks because of absence of regular income
scrapped most of the regulations of the USA financial system. forced the banks to resort to public auction of houses. Failure
This encouraged American financial intermediaries like to realize the invested amount from the securitized mortgage
commercial banks, investment banks, mortgage banks, mutual loans led to enormous losses to the financial institutions which
funds, hedge funds, stock markets, broking firms to innovate had invested in securitized loans. In order to minimize their
new instruments of trading in financial assets like shares, losses, they laid off thousands of workers. This created sudden
debentures, and commodities like oil, food grains, metals and fall in domestic demand for not only domestic products but
other raw materials. They devised new forms of derivatives, also for the products imported from many European, Asian
financial futures, credit default swaps and used them in and Middle East countries. Many Asian countries like Singa-
sophisticated futures trading. When the USA economy was pore, Malaysia, and Taiwan who were dependent on their
booming in the early 2000’s, these financial institutions exports to USA suddenly faced sharp decline in their export
encouraged the commercial banks, investment banks, insur- earnings. This is evident from the following Table 1:
ance firms and hedge funds to trade the securitized housing
loans through these newly created financial instruments. What Table 1: Growth Rates of World Exports and Im-
is more, such repackaged mortgage loans were sold to com- ports During Recession Years
mercial banks, mutual funds and insurance companies outside
USA. Many European, British, Canadian, Australian, Japa- (Goods and Services) % Change
nese and South Korean banks purchased them hoping to make 2008 2009 2010 (Projected)
profit through capital appreciation. I. Exports From :
Once the commercial banks, investment banks and insur- 1. Advanced Economies 1.8 -12.1 5.9

ance firms which had purchased securitized repackaged 2. Emerging Economies 4.4 -11.7 5.4

mortgage loans found these as good as useless, they started II. Imports Into:

facing huge losses on their balance sheets. Once this negative 1. Advanced Economies 0.5 -12.2 5.5
2. Emerging Economies 8.9 -13. 5 6.5
financial impact started, many big financial firms like Bear
Streans, investment banks like Lehman Brothers and Insur- Source: Economic Survey, 2009-10, GOI

22 THE IIPM THINK TANK


Such decline in the demand for exports did not spare even
emerging economies like China and India. This resulted in
reduction of work force employed in export units. That in turn
reduced domestic demand in their economies which resulted
in fall in the growth rates of their GDP.
Even the financial sector was not free from such globalised
impact. As soon as the stock markets collapsed in USA and
Europe, there was panic in the Indian stock markets. The
foreign institutional investors who had invested in Mumbai
stock market suddenly withdrew their investment. This
naturally dipped the BSE sensex. The value of sensex which
reached 17,578 on February 2008 declined to 16,371 on March
28th, 2008. It further declined to 14,043 on July 6th, 2009
because of the net selling by the foreign institutional investors
(FIIs). Such decline was noticed in many other Asian stock
markets also. Table 2 shows the change in the equity index
value of share indices of major Asian countries in major Asian
Stock Markets after the US financial crisis. It may be observed
that the downward pressure on the share values was severe in
2008. However, in 2009 share values recovered in some Indian
and Chinese stock markets because of economic stimulus
measures announced by their governments.
It may be observed from Table 3 that the Foreign Institu-
tional Investors sold more than they purchased in their
portfolio investment in India in 2008 resulting in net disinvest-
ment in Indian equity and debt in 2008 when the financial
crisis was deep. This obviously resulted in loss of share value
for the Indian companies whose shares were purchased by the
FIIs. This was the only impact of the US financial crisis on the
Indian financial system. There were no bank failures in India
as it happened in USA and Europe. It has been estimated that
the 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 Over
2003 Level in Asian Stock Markets (Points)
Equity Index 2007 2008 2009
BSE Sensex (India) 247.4 65.2 199.1
Hang Seng Index (Hong Kong) 121.2 1.1 74.2
Nikkei 225 (Japan) 43.4 -22.9 -5.3
TSEC Weighted Index (Taiwan) 44.4 -25.2 32.3
SSE Composite Index (China) 251.5 43.7 116.9
Source: Economic Survey, 2009-10, GOI
E M E R G I N G I N D I A
Table 3: FII Investment in Equity and Debt In-
struments of Indian Companies. (Rs. in Crores)
FII Investment 2007 2008 2009
Gross Buying(B) 846295 769625 736010
Gross Selling (S) 765380 810841 648023
Net Investment (B-S) 80915 -41216 87987
Source: Economic Survey, 2009-10, GOI
which was $13.8 trillion.
The financial crisis created by US house mortgage banks
was transmitted to the real economy through the mechanism
of financial losses forcing large scale lay off of their workers
which in turn reduced consumer demand both for domestic
and foreign products. This ultimately shrank the GDP of the
countries which were connected through financial globaliza-
tion as well as international trade. The real economy of USA
started melting down which was in turn transmitted to Euro-
pean and Asian economies in the form of falling exports,
falling domestic and foreign demand and ultimately fall in the
growth rates of their GDP. The globalized interdependent
economies started facing fall in their growth rates of GDP.
This was the economic meltdown which originated from the
US housing financial crisis. It was estimated that the world
output would grow by three percent in 2008 but likely to
decline to a mere 0.8 growth rate in 2009. It was also estimated
the advanced economies will grow only by 0.5 per cent as
compared to negative growth in 2007 and their growth may
improve only in 2009.
Impact of Global Financial Crisis on Indian Economy
Though the fi nancial crisis started in USA in August 2007,
its impact on the real economy started manifesting only by
September 2008 all over the world. When the process of
fi nancial crisis was evolving in USA and Europe, Indian
policy makers argued that since Indian fi nancial system was
well regulated and not closely integrated with the global
fi nancial system,(in the absence of full capital account
convertibility of Indian rupee), its impact would be very
minimal. However, Indian fi nancial system could not escape
completely from the impact of the US fi nancial crisis. Some
Indian banks were exposed to the toxic assets of the mort-
gage banks of USA. One big private bank namely, ICICI
bank, was exposed to the American toxic assets substantially.
THE INDIA ECONOMY REVIEW 23
P R O B L E M S & P E R S P E C T I V E S

It is true that the Reserve Bank of India had supervised the economy of USA and Europe impacted the real economy of
Indian banking system effectively and ensured adequate India. This is evident from Table 4:
capital base for the banks. Their loan policies were also It may be observed from the data presented in Table 2,
carefully watched which prevented any substantive impact on that of all sectors of the Indian real economy, only mining
the Indian fi nancial system. As a result, Indian fi nancial and manufacturing sectors and to some extent trade were
system did not adversely impact the real economy of India. affected from 2007-08 by the economic meltdown of the
The macroeconomic fundamentals were reasonably in western economies. This was obvious because of the fall in
balance and hence the real economy was saved from any the demand for India’s iron ore and also due to the decline in
possible adverse impact from the well insulated fi nancial exports particularly garment exports. Even then the Indian
system. economy sustained an impressive growth rate of 9.2 percent
Notwithstanding such prudent management of the Indian in 2007-08. This was the second highest growth rate next
fi nancial system, the Indian economy could not escape from only to China in the whole world. And this is in contrast to
the adverse impact of the meltdown of the real economy in the shrinking of the real economies of many western econo-
the west. After the introduction of structural reforms, Indian mies.
economy got integrated into the global economy. Globaliza- However, the Indian economy could not withstand the
tion process integrated the Indian economy with the econo- impact of the global meltdown beyond 2007-08. In 2008-09
mies of the west, which enabled India to move on to a higher there was an all round decline in the growth rates of GDP
growth path and reduce poverty. But that global economic from almost all sectors except from community, personal
integration itself exposed the Indian economy to adverse and social services. Consequently, the GDP of the country
impact of the economic meltdown of the western countries. could grow only at 6.7 per cent in 2008-09, a decline of 2.5
In other words, though the fi nancial crisis of USA did not percent over the previous year. What became alarming was
spread to Indian fi nancial system, the meltdown of the real the sudden decline of the growth of exports from 29 percent
in 2007-08 to 13.6 per cent in 2008-09, a negative growth of
Table 4:Sectoral Growth Rates of GDP in India in 20.3 per cent in 2009-10. All these declining economic activi-
Pre-Melt Down and Meltdown Years. (At 2004-05
Prices) Percent ties resulted in lay off of workers. It was estimated by Bibek
Debroy (2009), that Indian export sector had created about
Pre-Meltdown Years Meltdown Years six million direct jobs and another nine million indirect jobs.
Sector 2006-07 2007-08 2008-09 2009-10 Of these, two million jobs were lost owing to the decline in
1.Agriculture, Forestry 3.7 4.7 1.6 -0.2 exports. In the manufacturing sector about 25 percent of the
& Fishing
workers were laid off. In the construction sector of Gulf
2. Mining & Quarrying 8.7 3.9 1.6 8.7
countries about 20,000 workers, mostly from Kerala, lost
3. Manufacturing 14.9 10.3 3.2 8.9
their jobs. About 40,000 workers in engineering industry
4. Electricity, Gas &
8.5 10.0 3.9 8.2
Water Supply (cycle and hand tools), lost jobs though from all over India
5. Trade, Hotels & Res- 11.2 9.5 5.3 8.3 but mainly from Punjab and Tamil Nadu. In Gujarat about
taurants
one lakh gems and jewellery workers were laid off. The
6. Construction 10.6 10.0 5.9 6.5
garment industry laid off about five lakh workers mainly in
7. Transport, Storage & 12.6 13.0 11.6 Note Punjab (Ludhiana), and Tamil Nadu (Tirusur). Job losses
Communication
8. Finance,Insurance, spread even to sun rise sectors like IT and BPO services. It is
Real Estate & Business 14.5 13.2 10.1 9.9 necessary to remember that whereas in western countries
Services
laid off workers get social security benefit for almost six
9. Community,Personal 2.6 6.7 13.9 8.2
& Social Services months until they get new jobs, in India out of 50 crore
Total GDP of India 9.7 9.2 6.7 7.2
workers only about four crores are in organized sector where
from all sectors
social security benefit is provided. The rest the workers who
Note: Included under item 8.
Source: CSO /Economic Survey,2009-10, GOI are mainly in the unorganized sector have to fend for

24 THE IIPM THINK TANK


themselves. The only social security for them is MNREGS
which has come into effect only for the last five years. Mr.
Pranab Mukherji has made a beginning to provide them pen-
sion and insurance benefits in his budget for 2010-11.
The efforts of the successive governments after the
introduction of economic reforms to reduce poverty by
achieving higher growth rates of GDP were made ineffective
by the decline in the growth rate of GDP and large scale job
losses on account of the meltdown of the real economy of
India.
Policy Response to
Economic Meltdown and Its Impact
The above narrated economic melt down alarmed the UPA
government in 2008 itself though the Union Finance Minis-
ter asserted that it will not have much impact on Indian
economy as it was well insulated from
global economic events. However, the
country was expected to face Parlia- The Indian export
mentary elections in middle of 2009 sector had created
which added political weight to the about six million
plight of the unemployed. Alarmed by
these ground realities, the policy
direct jobs and
makers swung into action. So on
another nine
December 6th, 2008 the Prime Minister million indirect
Dr. Manmohan Singh, who was tempo- jobs in 2009
rarily holding the fi nance portfolio,
(after the exit of Shivraj Patil as Home
Minister which resulted in shifting of P. Chidambaram as
Home Minister), announced a very bold 14-point stimulus
package to revive the Indian economy. These 14- points were
fourteen stimulus measures. They were:
1. Additional plan expenditure was increased by Rs. 20,000
crores for infrastructure development during next four
months from December 2008 to March 2009.
2. Authorised Infrastructure Investment Finance corpora-
tion to raise an additional amount of Rs. 10,000 crores by
issuing tax-free bonds for spending on infrastructure
development.
3. Excise duty reduced across the board by four percent.
4. Public sector banks were asked to lend housing loans up
to Rs. 20 lakhs at seven to eight percent interest.
5. Rs. 350 crores were allocated for providing export
incentives to revive exports.
E M E R G I N G I N D I A
6. Backup guarantee was announced for ECGC for up to
Rs. 350 crores.
7. Two percent interest subvention was announced for
labour intensive exports.
8. Rs. 1,100 crores were announced to ensure full refund of
excise duty.
9. Additional Rs. 1,400 crores of assistance was announced
for textile sector under TUF ( Technology Upgradation
Fund) scheme.
10. The guarantee cover for loans to SMEs was doubled to
one crore rupee.
11. The lock-in period for such collateral-free loans was
reduced.
12. Government departments were allowed to take up
replacement of vehicles.
13. Export duty on iron fi nes was eliminated.
14. Import duty on naptha for use in
power sector was eliminated.
In addition to these fiscal stimulus
measures, the Reserve bank of India
also announced monetary measures to
increase the liquidity available in the
economy particularly for export sector,
housing sector, auto sector and
construction sector. The RBI reduced
the Repo rate from 7.5 to 6.5 and
Reverse Repo rate from six to five
percent. The RBI also enhanced the
refi nance capacity of SIDBI to Rs. 7,000 crores and of NHB
to Rs. 4,000 crores.
Thus the stimulus measures targeted power sector,
exports, housing, automobile, SME and infrastructure
sectors to revive the economy from recession. These stimu-
lus measures coupled with anti-cyclical fiscal deficit measure
announced in the Union budget for 2008-9 created positive
impact on the economy. Growth rate of exports which
suffered sharp fall in 2008-09 started recovering from the
third quarter of 2009-10 as may be seen in Table 5.
When the Union Finance Minister Mr. Pranab Mukherji
presented only the interim budget for 2009-10 in February,
because of the ensuing Parliamentary elections, he did not
want to announce major policy decisions on the ground that
the government did not have the mandate to do so as the
Parliamentary elections were due in the middle of 2009.
THE INDIA ECONOMY REVIEW 25
P R O B L E M S & P E R S P E C T I V E S
After the return of the UPA government to power following
the Parliamentary elections, Mr. Pranab Mukherji presented
the full budget in July 2009 in which he increased the plan
expenditure by 14.9 percent, non-plan expenditure by as
much as 17 percent and overall government expenditure by
13.3 percent. The non-plan expenditure included the sixth
pay commission recommendations on the pay scales of
government employees. He also extended the exemption of
export earnings of IT companies under STPI by one more
year. He increased the exemption limits of income tax. All
these measures increased the fiscal deficit of the government
beyond the limit prescribed under Fiscal Reform and
Budgetary Management Act. Such increased fiscal deficit
was justified as a counter-cyclical fiscal measure which was
needed to stimulate the recession stricken economy exports.
In addition to these fiscal stimulus measures, the Reserve
bank of India also announced monetary measures to in-
crease the liquidity available in the economy particularly for
export sector, housing sector, auto sector and construction
sector. The RBI reduced the Repo rate from 7.5 to 6.5 and
Reverse Repo rate from six to five percent. The RBI also
enhanced the refi nance capacity of SIDBI to Rs.7000 crores
and of NHB to Rs. 4000 crores.
Thus the stimulus measures targeted power sector,
exports, housing, automobile, SME and infrastructure
sectors to revive the economy from recession. These stimu-
lus measures coupled with anti-cyclical fiscal deficit measure
announced in December, 2008 created positive impact on
the economy. Growth rate of exports which suffered sharp
fall in 2008-09 started recovering from the third quarter of
2009-10 as may be seen in Table 5.
It becomes clear from the foregoing data that growth rates
of both exports and imports went on declining until the
middle of 2009-10. By that time most of the export specific
stimulus measures started stimulating the exports and as a
Table 5: Quarterly Growth Rates of Exports and
Imports (Percent)
2008-09
Q1 Q2 Q3 Q4 Q1
Exports 57.0 39.5 -4.0 -20.3 -38.6
Imports 38.7 73.8 7.4 -24.0 -35.0
Source: Economic Survey, 2009-10, GOI
26 THE IIPM THINK TANK
result the growth rate of exports turned positive at six
percent in the third quarter. It may be mentioned here that
the Union Finance Minister Mr. Pranab Mukherji has
continued most of the stimulus measures specifically pro-
vided to export sector. This continuation will further push
up the growth rate of exports in the next quarter and there-
after.
As far as the recovery of other sectors is concerned, data
presented in Table 4 indicate that they have started recover-
ing from 2009-10. In view of this recovery of sectoral growth
rates of GDP, the Union Finance Minister Mr. Pranab
Mukherji has rolled back partially some of the fiscal stimulus
measures to reduce the fiscal deficit from 6.9 percent to 5.5
percent in his recent budget for 2010-11. This is intended to
moderate the inflationary pressure in the economy which has
started showing up in food grains prices. He has increased
the excise duty on non-petroleum products by two percent.
He has also restored the basic custom duty on petroleum
products. But he has increased plan expenditure on infra-
structure and rural development to ensure adequate domes-
tic demand for the economy..
Thus the Indian economy started recovering from the
slowdown towards the end of the fiscal year 2009-10. This is
evident from the 7.2 percent growth rate of GDP. Except
agriculture which suffered a negative growth rate of 0.2
percent and transport, real estate, fi nance and community
and social services, all other sectors have shown recovery.
Notably, mining, manufacturing, construction and electricity
generation have shown remarkable recovery. Thus the Indian
economy which was negatively impacted by the meltdown of
the western economies for one year has started recovering.
The Union Finance Minister has projected a growth rate of
GDP of 8.5 percent for the coming fiscal year 2010-11.This
would mean that the Indian economy will return back to
nine percent growth path by 2011-12. Let us hope that this
expectation will be realized in the coming years.
References and Additional Thinking
• Debroy, Bibek, “Global Downturn and Its Impact”, in
2009-10 Global Financial Crisis: It’s Impact On India’s Poor,
Q2 Q3 (2009), UNDP, India
-21.0 6.0
-33.6 1.2 (The views expressed in the write-up are personal and do not
reflect the official policy or position of the organization.)
P R O B L E M S & P E R S P E C T I V E S

Trade,
Corporate Market
and Indigenous People

28 THE IIPM THINK TANK


Goldy M. George
PhD Research Scholar,
School of Social Sciences,
Tata Institute of Social Sciences, Mumbai
T
he Copenhagen drama is over. Nothing came out of
it. It was predicted the same by many expert and
many intellectuals, activists, professional experts
kept a distance from this proscenium. But what is that
concerns the ordinary people of this nation? How does market
and market values related with people at large and particu-
larly the Dalits, Adivasis and the exploited sections of Indian
society? What is the correlation between trade, corporates,
market and indigenous communities of this land who still have
the noble quality of surviving on a minimum basis?
A Competition of Unequals
In March 2009, European Parliament What is the
came up with a resolution on EU-India correlation
Free Trade Agreement, where one of the between trade,
major concerns raised was the inability
corporates, market
of India to contain with the problems of
Dalits and Adivasis. The reason identi-
and indigenous
fied was the lack of administrative and communities
political will of the government, which of this land?
underlines the existence of an unjust
socio-political divide. Apparently this
stratifies the inability of Dalits and Adivasis to coup up with
the situation under free trade formula particularly in the
context of unjust caste system.
In October 2008, the Director General of WTO, Pascal
Lamy said, “All of the models suggest that the gains to
developing countries will be larger the more they open their
markets to trade.” Citing specific cases, he said, “since
opening their economies, Asian giants like China and India
have together lifted more than 440 million people out of
poverty, an economic success.” While trade has been an
engine of aggregate economic growth, Lamy did not consider
the unmitigated displacement of traditional sectors and the
uneven development that has led to an alarming rise in
income inequality both socially and geographically within
each country.
Industrialization has today proved to be the worst form of
I N D I G E N O U S I N D I A
development with unchecked exploitation, particularly with
WTO taking the centre stage of all sorts of trade related
agreements and transactions. Trade is no longer buying and
selling of goods and services but it encompasses issues like
Intellectual Property Rights, exploitation of resources,
maintenance of supremacy, mobilizing capital, controlling
share market etc. Prophets of free trade argue that it maxi-
mizes economic output but what has been witnessed is a
competition of unequals – diametrically opposite to these
claims.
Corporates Trading Indigenity
The symbiotic relationship between the forest-based commu-
nities and the forest Eco-system is an eternal truth. Their life
cannot be segregated into watertight compartments such as
social, economic, political, religious, cultural, administrative,
intellectual, spiritual, etc. Undoubtedly
Adivasis, live in close relationship with
the forest and have the greater depend-
ency on it. There are many Dalit artisan
and craftsman communities like Kurava
in Kerala, Mala communities in Andhra
Pradesh, Basod in Madhya Pradesh
dependent on the forests. However their
customary rights were either curtailed
or ignored by every ruler – both Colo-
nial and National.
Undeniably the past policies led to
unchecked forest destruction, affecting people’s lifestyle and
stuck at the very survival. People’s control over Natural
Resources was further reduced with the direct intervention of
World Bank in funding forest projects. Biodiversity, bionet-
work genealogy, natural knowledge, medicinal herbs etc. are
treasure of wealth in forests. With land, forest and water in the
open market, life and culture turns corporatized, slowly
legitimizing an unquestionable political and social control
over people.
State has turned out to be an implementation tool of the
corporatehood. For instance private participation in mining
sector is widely open in Chhattisgarh. The State’s Mineral
Policy has created conducive business environment to attract
private investment with simplified procedures. The state is
interested to provide resources and manpower such as
tailor-made programs in geology, geophysics, geochemistry,
THE INDIA ECONOMY REVIEW 29
P R O B L E M S & P E R S P E C T I V E S
mineral beneficiation, mining engineering, land procurement,
financial support, recommend for mining operations in forests
area, etc. For the people, their dependency on land and forest
is not just as a productive asset but as a symbol of their
self-determination, co-existence, community feeling and
dignity.
Displaced & Dislocated
Mining projects, power plants, dams, defense projects,
wildlife management, botanical gardens, bio-experiments,
eco-tourism, etc has displaced large population across the
country. For example in Chhattisgarh alone almost 17 lakh
acres demarcated for wildlife conservation consisting of 250
villages with an approximate population of 50,000 had already
been cleared off. Ten major dams acquired 2,57,032.585 acres
of land affecting 238 villages and their rehabilitation has not
yet been done. Thirty medium projects impacted 123 villages
with an acquisition of 32,745.13 acres. These statistics are of
2000, which has gone several multiple by now.
Sarguja, Raigarh and Bilaspur districts are the coal zones. It
is estimated that more than 72,000 acres was leased to SECL
for coal mining, dislocating hundreds of villages. Nearly
20,000 acres have been occupied for mining steel in Bailadee-
la and Dalli Rajhara area of Bastar and Durg districts with
some of the rare quality of steel. In Raipur, Durg and Bilas-
pur, there are 10 big cement plants and its auxiliary units.
Huge diamond deposits in Devbhog (Raipur) and Bastar are
also in the eyes of the MNCs. In all for cement industry 2,990
acres, 14,530 acres for rice mills, 7,665 acres for steel industry,
for ferry alloys 940 acres and 285 acres for re-rolling mills
were already acquired till 1998. Apart from these 18,652.377
acres of land has been given for mining.
Within the last two years, Chhattisgarh has signed 61 MoUs
with Independent Power Producer (IPP) to generate 50,000
MW of electricity with an investment of nearly Rs. 2,50,000
crores. National Thermal Power Corporation signed an
agreement last July to set up a 4,000 MW plant needing
30,000 hectares. 16 power projects are to be established in
Janjgir-Champa district alone with an approximate estimation
of 80,000 acres of land for unit establishment, ancillary
divisions and blocks, overburden dumping, fly-ash, staff
quarter, road, and other infrastructure.
Between 2005 and 2007 Jindal alone had applied for the
prospecting licence (PL) and mining licence (ML) for 6,110.95
30 THE IIPM THINK TANK
sq km and another 1,559.172 hectare (3,852.66 acres) in
Dantewada, Bijapur, Narayanpur, Rajnandgoan, Bilaspur,
Janjgir-Champa, Raigarh, Jashpur and Surguja districts. This
gives a glimpse of displacement or possible dislocation. A
survey by a Delhi based NGO revealed that over 1.5
Jharkhandi Adivasi girls/women are domestic workers in
Delhi. Over half of them are found to be from displaced
group. Non-recognition of land rights implies land alienation
which further leads to depeasantisation.
Seeking Market or Alternatives?
Under the impact of corporate market the lifestyle, culture
and ethos of indigenous people change forcefully. Land is
turned into a commodity with concentration on corporate
capital. People’s rights are systematically and strategically
bypassed, excluded or isolated, while a new army of easily
disposable domestic refugees emerge. The historic omission
and betrayal continues multifold. It is a conflict between
surplus and survival, subsistent economy and market econo-
my, between community life and competition.
Devastating development based on industrialism and
wasteful growth is the root cause of this. Developing countries
must be allowed the policy flexibility and political space to
create national development strategies to increase incomes
and secure livelihoods. Policies should create employment
and raise productivity, especially in the agricultural and
informal sector along with progressive taxation system, land
reform and equitable access to education, health, credit and
technology.
Hence a reorienting of economies from production for
export to production for the local market is required. De-
emphasize growth and maximize equity in order to radically
reduce environmental disequilibrium. Global policymakers
need to understand not only the economics of aggregate
growth, but the socio-economic impact of globalized flows on
the distribution of income aligning welfare of human beings.
One needs to come out of the socio-political inferiority and
impotence, which prevents them from identifying the de-
humanizing situations, and restricts them to magical explana-
tions and limits the activities to passive acceptance and
resignation.
(The views expressed in the article are personal and do not reflect
the official policy or position of the organisation.)
P R O B L E M S & P E R S P E C T I V E S

IMPACT OF ENVIRONMENT
ON POVERTY IN INDIA
T. Koti Reddy
Faculty in Economics, ICFAI Business School, Hyderabad

32 THE IIPM THINK TANK


Introduction
Economic growth is a prerequisite for poverty reduction, but
that a sustainable development strategy will also need to take
into account the impacts of growth on the environment. Rapid
economic growth over the past two decades has created
unprecedented opportunities for poverty reduction in India.
Sustained growth, allied to policies that tackle deep social
disparities, is a basic requirement for overcoming the coun-
try’s large human development deficit (UNDP 2007-08). The
challenge of reducing widespread poverty in India remains at
the centre of the development paradigm for the country. The
process of development inevitably involves the use of natural
resources in economic activities, it has become increasingly
clear in recent years that for any poverty reducing growth
strategy to be sustainable, it must address environmental
concerns and sustainable utilization of
generally limited natural resources
(Charles Leyeka Lufumpa 2005). This is Low productivity
particularly the case for India where the per hectare and
majority of poor live in rural areas and low productivity
their livelihoods are critically dependent
per worker are
on the exploitation of natural resources.
Improvements in the economic well-
largely a result
being of the population can only be of technological
sustained in the long run if the natural backwardness
resources are utilized in a sustainable
manner.
The average growth rate of the Indian economy over a
period of 25 years since 1980-81 has been about six percent - a
significant improvement over the annual growth rate of 3.5
percent over the previous three decades from 1950-51 to
1979-80. In the more recent period, the Indian economy has
entered a high-growth phase with the growth rate averaging
8.6 percent in the last four years and over nine percent per
annum during the last two years. The Reserve Bank of India
has projected the Indian economy to expand by 7-8 percent
during the current fiscal year ending March 31st, 2009. The
main reason for the fall in the overall expansion during the
period under review (July-September 2008) was a low five
percent growth in the manufacturing sector as opposed to 9.2
percent in the like period of last fiscal. Similarly agriculture
also logged a significantly lower growth of 2.7 percent as
opposed to 4.7 percent, while Hospitality, transport and
communications expanded the best 10.8 percent as against 11
I N D I A N I N D I G E N C E
percent during the second quarter of fiscal 2007-08. Financial
services, realty and business services also registered a notable
growth of 9.2 percent against 12.4 percent, given the circum-
stances where real estate companies have been complaining
about a major slow down (CSO 2008).
Issues like global warming and the resultant climate change
have gained importance in international discussions. Globally,
carbon trading has grown rapidly in recent years. There is a
need to balance the harmful effects of human activity on
global warming against the need for poverty reduction and
economic growth in developing countries like India. The issue
of global social justice cannot be delinked from the issue of
global public goods like the atmosphere.
Climate change may affect people’s health both directly and
indirectly. For example, heat stress and other heat related
health problems are caused directly by
very warm temperatures and high
humidity. Indirectly, ecological distur-
bances, air pollution, changes in food
and water supplies, and coastal flooding
are all examples of possible impacts that
might affect human health. How people
and nature adapt to climate change will
substantiate how seriously it impacts
human health. Generally, poor people
and poor countries are likely to suffer
the most.
There are at least three key reasons why poverty and the
environment should be addressed as a twin problem in India.
First, the main problem in India is the high level of birth rates
coupled with a falling level of death rates. The fast rate of
growth of population necessitates a higher rate of economic
growth in order to maintain the same standard of living of the
population. Second, the majority of the population depends
on low-productivity, rain fed agriculture for their livelihood.
The low productivity per hectare in Indian agriculture and the
low level of productivity per worker in agriculture and
industry are largely a consequence of technological backward-
ness. Third, inadequate economic policies increase the risks
related to farming, thereby inhibiting the use of enhanced and
more efficient agricultural technologies.
2.Poverty in India
The combined poverty ratio is declined from 54.9 percent in
THE INDIA ECONOMY REVIEW 33
P R O B L E M S & P E R S P E C T I V E S

Table 2.1 International Poverty Lines and GDP per Capita 2009, inspite of the absolute value of the
for Selected Countries human development index (HDI) for India
Population Population improving from 0.577 in 2000 to 0.611 in 2004
GDP HDI
Survey Below$1.25a Below$2 a and further to 0.612in 2007, the relative
Country Per capita Rank
Year Day % Day %
(PPP US$) (2007) ranking of India has not changed much.
(2000-07) (2000-07)

India 2007 41.6 75.6 2753 134

Kenya 2007 19.7 39.9
Nigeria 2007 64.4 83.9
Eritrea 2007 --- -----
Ethiopia 2007 39.0 77.5
Sierra Leone 2007 53.4 76.1
Niger 2007 65.9 85.6
Source: Human Development Report 2009
1973-74 to 36 percent in 1993-94. The poverty ratio declined
by nearly 10 percentage points in the five year period between
1993-94 to reach 26.1 percent in 1999-2000. While the
proportion of poor in the rural areas declined from 56.4
percent in 1973-74 to 27.1 percent in 1999-2000, the decline in larger in underdeveloped countries. If we compare the share
the rural areas has been from 49 percent to 23.6 percent
during the same period. In absolute terms, the number of
poor declined to 260 million in 1999-2000, with about 75
percent of these being in the rural areas.
Incidence of poverty is estimated by the Planning Commis-
sion on the basis of quinquennial large sample surveys on
household consumer expenditure conducted by the National
Sample Survey Organization (NSSO). The Uniform Recall
st
Period(URP) consumption distribution data of NSS 61
Round yields a poverty ratio of 28.3 percent in rural areas,
25.7 percent in urban areas and 27.5 percent for the country as terms of the incidence of poverty (measured as having less
a whole in 2004-05. The corresponding poverty ratios from
the Mixed Recall Period (MRP) consumption distribution
data are 21.8 percent for rural areas, 21.7 percent for urban
areas and 21.8 percent for country as a whole. The URP uses
30 day recall/reference period for all items of consumption,
the MRP uses 365 day recall/reference period for five infre-
quently purchased non-food items, namely, clothing, footwear, best wages to its workers with its productivity to wage growth
durable goods, education and institutional medical expenses
and 30 day recall/reference period for remaining items. The
average per capita consumption expenditure for rural and
urban population as per 61st Round (2004-05) is Rs. 558.78
and Rs.1, 052.36 respectively (Economic Survey 2007-08).
As per the UNDP’s Human Development Report (HDR)
The strength of the relationship between
growth and poverty is usually measured by the
1542 147
poverty elasticity with respect to per capita
1969 158
GDP. Our estimate of poverty elasticity is in
626 165
the range of -0.86 to -0.77.There has been no
779 171
significant acceleration in the process of
679 180 poverty reduction during 1980-2005 despite
627 182 an acceleration in the growth of per capita
GDP. There is now a growing consensus that
the poverty reduction strategy must also rely
on direct measures since the present high growth, given its
sectoral composition and degree of inclusiveness, may not
eradicate poverty completely even by 2015.
It is clear from the Table 2.1 that the income inequalities are
of national income accruing to the poorest 60 percent of a
country’s population with that of the richest 20 percent as a
rough measure of income inequalities, we could see that
underdeveloped countries have considerable degree of income
inequality. The proportion of people living below $1.25 and
$2 a day in a number of developing countries, demonstrates
Ethiopia’s achievements with regard to individual poverty:
while ranking definitively fourth in terms of GDP Per capita
(PPP US$) it is second(out of seven) in terms of incidence of
poverty(measured as having less than $1.25 a day) and third in
than $2 a day).
India witnessed a mere one percent hike in wages against a
five percent growth in productivity during the last two decades
to employees (ILO 2008). India has ranked ninth in the list of
countries offering highest disparity in wage and productivity
growth between 1990 and 2007. China has offered among the
ratio standing at 9:10. While Brazil was the worst, with its
productivity to wage growth ratio standing at a dismal 3.5: - 3.5.
Inequality in India owing to high food prices which have
risen by nine percent compared with 6.3 percent for non-food
prices. This is predicted to have a negative effect on the
purchasing power of all urban households. A decline in

34 THE IIPM THINK TANK


purchasing power of urban Indian households varies from 5.1
percent to 3.5 percent owing to rise in food prices which are a
major area of spending for lower and middle income groups.
The poorest households in urban India experienced an
estimated drop in purchasing power of over five percent, while
the richest in urban areas in 2007 experienced only a drop of
2.2 percent.
Another reason attributed for the income inequality has
been pointed to a rise in temporary jobs rather than perma-
nent jobs and India’s status was noted to be bleaker than Latin
American countries.”Temporary jobs pay, on average 20
percent less than permanent jobs. In Latin America, workers
with informal jobs earn, on average 43 percent less than
workers with formal jobs, while in India, casual workers (who
form the bulk of informal employment) earn 45 percent less
than regular employees(The Financial
Express 2008).
Casual workers,
3. Deforestation and Land Degra- who form the
dation bulk of informal
Deforestation is driven by many forces.
employment in
In some cases, poverty is the driver, with
agricultural populations collecting fuel
India earn 45
wood or expanding the frontier for percent less than
subsistence agriculture. In others, regular employees
opportunities for wealth generation are
the main engine of destruction. The
expansion of national and international markets for products
such as beef, soybeans, palm oil and cocoa can create strong
incentives for deforestation. Commercial pressure on rainfor-
ests is unlikely to dissipate in the near future. Croplands,
pastures, plantations and logging are expanding into natural
forests across the world. Population growth, rising incomes and
opportunities for trade create incentives for deforestation-as
does market failure on a global scale (UNDP 2007-08). Forests
are ecological resources that generate wide-ranging public and
private benefits. They are the home and basis of livelihoods for
many poor people and a source of potential profit for large
commercial interests. One of the challenges in forest govern-
ance is to balance the demands of competing interests with
very difficult levels of power. International cooperation on
climate change alone can not resolve the wider problems
driving deforestation. Respects from the human rights of
indigenous people, the protection of biodiversity and conserva-
I N D I A N I N D I G E N C E
tion are issues for national political debate. There is significant
potential for creating triple benefits from climate change
mitigation, to adaptation and sustainable development.
Out of the total 329 million hectares of geographical area
174 million hectares or 53 percent of the total land area in
India is suffering from serious degradation. Of this, area
subject to water and wind erosion amounts to 144 million
hectares and area degraded through special problems like
ravines, salinity, water logging etc., accounted for another 30
million hectares. Area degrade through special problems
includes Waterlogged area (eight million hectares), alkaline
soil(four million hectares) and saline soil (5.5 million hec-
tares) etc. It is estimated that the total flood prone area is 40
million hectares but the annual average area affected by
floods is eight million hectares and the annual average
cropped area affected by floods is four
million hectares. One-third of our land
under forests, nearly two-thirds of land
under agriculture and nearly all cultur-
able waste lands, permanent pastures
and grazing lands are in urgent need of
conservation measures (K.G.Tejwani
1982). The effects of haphazard grazing
on the environment are alarming. Land
degradation due to overgrazing has led
to desert like conditions in many parts
of the country. Besides, depletion of
vegetative cover, overgrazing is hardening the soil, preventing
forest regeneration and causing soil erosion in many parts of
the country. In addition to ecological destruction, there is
growing hostility from farmers against the graziers who are
generally nomads. Infact, many nomadic groups have given up
nomadism and have become landless labourers. The Indian
planners are completely ignorant about afforesting public
lands with fodder species and regenerating grasslands and are
not even aware of the fact that there is immense potential for
grazing lands in India. In Rajasthan alone, cultivable waste-
lands are estimated at 9.5 million hectares which even if
moderately developed can support a large livestock popula-
tion. This is an addition to permanent pastures estimated at
4.5 million hectares.
There is probably no other area of India’s environment that
has been viciously attacked and destroyed since independence
than the country’s forests. India was supposed to have lost 3.4
THE INDIA ECONOMY REVIEW 35
P R O B L E M S & P E R S P E C T I V E S
million hectares of forest land between 1951 and 1972 alone;
over 72 percent of forest area was lost to agriculture(2.4
million hectares) another 17 percent was lost to river valley
projects, industries and roads and communications(0.6
million hectares); and another 11 percent(0.4 million hec-
tares) was lost to miscellaneous purposes. The process of
deforestation has continued till today at the current annual
rate of 1.3 to 1.5 million hectares. India has lost nearly 2.5
million hectares of mangrove forests in this century alone.
These remarkable forests can grow on marginal lands, and
survive soil infertility, water logging and salinity and high
winds (International Union for the Conservation of Nature and
Natural Resources).
In India, one of the basic reasons for the degradation of
forests has been over use of its resources. Poverty and pres-
sure of population has made the rural
population increasingly dependent on
forests. Over harvesting of industrial The process of
wood has also caused tremendous deforestation
damage to forests. Cattle’s grazing is has continued
another important stress factor for
till today at the
forests. The industrial pollution of
sulphuric oxides and nitric oxides
current annual
emission are also a source of great risk rate of 1.3 to 1.5
for forests. These pollutants often affect million hectares
forests located at a long distance from
the source of pollution.
4. Water Stress and Scarcity
Changing climate patterns will have important implications
for water availability. Large areas of the developing world face
the imminent prospect of increased water stress. Flows of
water for human settlements and agriculture are likely to
decrease, adding to already acute pressures in water-stressed
areas. Water is vital to the health and well-being of households
and an essential input into agriculture and other productive
activities. Rapid population growth, industrialization,
urbanization and the need for irrigation water to feed a
growing population are already placing immense pressure on
water resources.
Water availability is uneven across regions in India. 71
districts in different states are drought prone. At present
agriculture and livestock account for 93 percent of fresh
water use in this country and out of the remaining seven
36 THE IIPM THINK TANK
percent the domestic consumption accounts for three percent
and industrial use and powers generation four percent. The
supply of fresh water for human activity comes partly from
surface water and partly from ground water sources. India
has now reached a stage of development where 32 percent of
its replenishable ground water is available for use. However,
the ground water resource has been over used in certain
regions. The overuse of ground water over the years has made
agricultural operations particularly in the green revolution
belt unsustainable. Another major cause of water deficiency
has been water pollution. Most of the water pollution in India
is domestic sewage, industrial effluents and agricultural
chemical inputs like pesticides and fertilizers. In India,
almost 90 percent of all wastes is discharged without treat-
ment in rivers.
5. Biodiversity
In respect of biodiversity India has rich
heritage of species and genetic form. It
has a share of six percent of the world
species. However, rapid growth of
population, urbanization and industri-
alization have seriously impaired the
ecological balance of flora, fauna and
forest. At the same time it is rather
difficult to quantify the biodiversity loss
for the simple reason that reliable
information is not available about the species that are found at
any given time. The extinction of species and organisms affect
human society through the destruction of ecosystem services.
All plants, animals and micro-organisms exchange gases with
atmosphere and the biotic composition thus contributes to the
maintenance of mix of gases in the atmosphere. Destruction
of biodiversity may result in such change in the gas mix in the
long run which may end up with rapid climatic change and
agricultural crop failure (Ramprasad Sen Gupta 2001).
If loss of diversity is considered inconsequential for future
development, then consumeristic life style which is destructive
from the ecological point of view will persist without any
restraint. It is important to conserve plants and animal species
and they should not be threatened of extinction due to
overuse. Economic rationality demands that biodiversity
should be protected all the time failing which sustainability of
development and human well being will be seriously impaired.

Changes in ecosystem biological diversity, evolution of
parasites and invasion by exotic species all frequently result in
disease outbreaks such as cholera which emerged in 1992 in
India. The frequency of AIDS/HIV is increasing. In 1996
about 46,000 Indians out of 2.8 million (1.6 percent of the
population) tested were found to be infected with HIV (Burns
JF 1996).
The Tenth Plan as asserted clearly that “the sustainable use
of biodiversity is fundamental to ecologically sustainable
development”. India is identified as one of the 12 major
biodiversity countries of the world. However, since 1951
industrialization has put severe strain on the ecosystem
altering and even destroying it. The loss of biodiversity arises
from the destruction of the habitat, extension of agriculture,
filling up of wetlands, conversion of rich bio-diversity areas for
human settlement and industrial
development, destruction of coastal
areas and uncontrolled and unregulated The share of agri-
commercial exploitation. A series of sector’s capital
steps have been in recent years to formation in GDP
protect and conserve biodiversity. These
declined from
include (Datt and Sundharam K.P.M
2004 P.114):
1.92% in early
* Establishment of 88 national parks 1990s to 1.28% in
and 490 wildlife sanctuaries; early 2000s
* The setting up Indian coral reef
monitoring work for the conservation
and management of mangroves and coral reefs;
* Deceleration of five sites as world heritage sites;
* Project tiger reserves and project elephants have been set
up to ensure long time survival of tigers and elephants in
their natural habitats; etc.
6. Low Productivity in Indian Agriculture
Productivity of crops in India is not only low relative to other
countries, there are considerable inter-state variations. The
Eleventh Five Year Plan observed that not only the yields
differed across the States, there was a significant gap between
the performance and potential as revealed by actual yield and
yield with improved practices adopted by farmers. Agriculture
in India has continued to be a gamble in the monsoons: failure
of rainfall in some parts of the country and excessive rains and
consequent floods in certain other areas of the country. Since
1961 the emphasis shifted to the use of seed-fertilizer-water
I N D I A N I N D I G E N C E
technology known as the new agricultural strategy. But the
new strategy succeeded only in wheat and to a small extent in
rice; other food and non-food crops did not show perceptible
improvement in production. Dry land cultivation was not
touched at all by the new agricultural strategy. Public invest-
ment on agriculture has been declined. The worrying aspect is
that private investment in agriculture is almost completely
concentrated in the northern regions particularly Punjab,
Haryana and Western Uttar Pradesh and almost completely
absent in other parts of the country. The share of agricultural
sector’s capital formation in GDP declined from 1.92 percent
in the early 1990s to 1.28 percent in the early 2000s due to
decline or stagnation in public investment in agriculture since
the middle 1990s. Due to decline in public investment the
growth of irrigation has slowed down. The situation with
respect to minor irrigation has been
relatively better but there is overexploi-
tation of ground water by rich farmers.
Public expenditure on agricultural
research and extension was low at 0.49
percent of GDP(on average developing
countries spend 0.7 percent and devel-
oped countries two to three percent). It
is important to recognize that the
research requirements are high in view
of substantial variations in agro-climatic
conditions that warrant region-specific
and crop-specific technologies, compatible with the endow-
ments of the farm community (S.Radhakrishna and S.Chan-
drasekhar 2008).
Many regions in India had continued to be poor and
backward indicating the necessity for a balanced growth of
agriculture as between different regions. Indian agriculture
displayed another type of imbalance in the form of disparities
in growth between foodgrains and non-foodgrains and
between different foodgrains. The agricultural production
with growing farmer’s suicides all over the country has created
a sense of panic in the country. Unprecedented hoarding of
cereals and pulses by traders and huge rise in the prices of
articles of daily consumption has forced the Government of
India to resort to import of wheat for the first time in nearly
three decades.
The Report of the Expert Group on Agricultural Indebted-
ness (GOI 2007) has highlighted the twin dimensions of the
THE INDIA ECONOMY REVIEW 37
P R O B L E M S & P E R S P E C T I V E S

current widespread agricultural crisis- an agricultural devel-
opment crisis and an agrarian crisis. The root cause of the
agricultural development crisis is the neglect of agriculture in
designing development programmes and ineffective imple-
mentation of agricultural programmes at the micro level. On
the other hand, the agrarian crisis is characterized by the high
dependence of rural population on farm incomes which are
too meager to withstand weather and price shocks and are
also vulnerable to technological risks. In addition to low
growth and declining productivity, the failure of growth in
creating adequate productive employment outside agriculture
underlines the agrarian crisis.
A major area of concern is the sluggish growth of institu-
tional credit. Agriculture’s share of about 10-11 percent in
the institutional credit was way below the stipulated target
of 18 percent. Half of the farmers had no access to institu-
tional finance in 2003; institutional agencies accounted for
57.7 percent of the outstanding loan amount of farmers,
followed by money lenders (25.7 percent) and traders(5.2
percent). It suggests heavy dependence of farmers on
informal sources of finance. Inadequacy of formal credit,
enormous delays in obtaining credit from scheduled
commercial banks, and cumbersome documentation have
compelled farmers to avail of high-cost credit from infor-
mal sources (Shettey).
A comparison of productivity levels in Indian agriculture
with the levels in other countries shows how low the produc-
tivity in Indian agriculture is. Table 6.1 compares the produc-
tivity of some crops in India with their productivity in some
other countries. As is clear from this table, productivity of
Rice in India is about 29.59 percent of the productivity in
Egypt. It is 37.17 percent of the productivity in comparison to
USA. As far as wheat is concerned productivity in India is
64.52 percent of the Productivity in China and 35.06 percent
of the Productivity in UK. As far as maize is concerned
productivity in India is 12.08 percent of the productivity in
USA and 22.44 percent of the productivity in China. Produc-
tivity of cotton in India is about 41.44 percent of the produc-
tivity in China and 60.52 percent of the productivity in
Pakistan. As far as major oil seeds is concerned, productivity
in India is 40 percent of the productivity in China and 80.0
percent of the Productivity in Nigeria. Information on India’s
global rank in major agricultural crops is still more revealing.
India happens to be one of the Larger growers and producers
of most of the agricultural crops but ranks very low in terms
of yield.
Productivity of crops is not only low relative to other
countries, there are considerable inter-state variations. The
productivity of wheat in 2005-06 varied from a low level of
1,393 kg per ha in Maharashtra to a high of 4,179 kg in Punjab.
The steering Committee on Agriculture for the Eleventh Five
Year Plan has observed that not only the yields differed across
the States, there was a significant gap between the perform-
ance and potential as revealed by actual yield and yield with
improved practices adopted by farmers (Economic Survey
2007-08).

Table : 6.1 - International Comparisons of Yield of Selected Commodities – 2004-05(In Metric tonnes/
Hectare)

Rice / paddy Wheat Maize Cotton Major oilseeds

Egypt 9.8 China 4.25 U.S.A 9.15 China 11.10 Argentina 2.51

India 2.9 France 7.58 France 7.56 U.S.A 9.58 Brazil 2.48

Japan 6.42 India 2.71 India 1.18 Uzbekistan 7.98 China 2.05

Myanmar 2.43 Iran 2.06 Germany 6.69 India 4.64 India 0.86

Korea 6.73 Pakistan 2.37 Philippines 2.1 Brazil 10.96 Germany 4.07

Thailand 2.63 U.K 7.77 China 4.9 Pakistan 7.60 U.S.A 2.61

U.S.A 7.83 Australia 1.64 -- -- Nigeria 1.04

World 3.96 World 2.87 World 3.38 World 7.33 World 1.86

Source : Ministry of Agriculture and Co-operation

38 THE IIPM THINK TANK


6.2 Agricultural Credit
A major area of concern is the sluggish growth of institutional
credit. Agriculture’s share of about 10-11 percent in the
institutional credit was way below the stipulated target of 18
percent. Half of the farmers had no access to institutional
finance in 2003; institutional agencies accounted for 57.7
percent of the outstanding loan amount of farmers, followed
by money lenders (25.7 percent) and traders (5.2 percent). It
suggests heavy dependence of farmers on informal sources of
finance. Inadequacy of formal credit, enormous delays in
obtaining credit from scheduled commercial banks, and
cumbersome documentation have compelled farmers to avail
of high-cost credit from informal sources (Shettey). The
interest rate is undoubtedly important, but more important is
the efficiency and speed of lending that is totally absent in
governmental lending agencies, that is at
the root of much farmers distress.
Rural Indebtedness in India is a result Indian farmers
of the social system or the relations of obtained only
production prevailing in Agriculture. about 53 percent
The problem of indebtedness of the
of the price of
farmers continues in the post- independ-
ence period. The proportion of indebted
rice, 31 percent
farmers were 22.3 percent in 1981 and it being the share
rose to 25.9 percent in 1991 and it has of middlemen
increased now sharply to 57.2 percent.
The situation with respect to minor
irrigation has been relatively better but there is overexploita-
tion of ground water by rich farmers.
6.3 Agricultural Marketing in India
There was a large chain of middlemen in the agricultural
marketing system like village traders, kutcha arhatiyas, pucca
arhatiyas, brokers, wholesalers, retailers, money-lenders etc.
As a result, the share of farmers in the price of agricultural
produce was reduced substantially. Farmers obtained only
about 53 percent of the price of rice, 31 percent being the
share of middlemen (the remaining 16 percent being the
market cost). In the case of vegetables and fruits, the share of
farmers was even less – 39 percent in the former case and 34
percent in the latter. The share of middlemen in the case of
vegetables was 29.5 percent and in the case of fruits was 46.5
percent (A.S.Kahlon and M.V.George 1985).
In addition to presence of a large number of middlemen and
I N D I A N I N D I G E N C E
widespread prevalence of malpractices in the mandies- there
were a number of other problems as well. For instance, there
was absence of proper warehousing facilities in the villages.
As a consequence, the farmer was compelled to store his
produce in pits, mud-vessels, kutcha storehouses etc. These
unscientific methods of storing led to considerable wastage.
Transportation facilities were also highly inadequate and only
a small number of villages were joined by railways and pucca
roads to mandies. Most of the roads were kutcha roads not fit
for motor vehicles and the produce was carried on slow
moving transport vehicles like bullock-carts.
The weakest link in India’s agricultural efforts is its totally
inefficient extension services. Only 0.9 percent of the farmers
make use of the hundreds of Krishi Vigyan Kendras (KVKs)
spread across the length and breadth of the country. Close to
half-a-lakh of village and block-level
extension workers with no knowledge of
the advances in technology are but a
financial burden on the exchequer (K.V.
Prabhakaran Nair).
7. Policy Recommendations
In India, besides industrial activity
causing damage to natural environment
land use, water use, deforestation and
forest degradation, loss of biodiversity,
energy production, and exploitation of
non-energy materials have resulted in environmental damage
and all these in turn have adversely sustainability of develop-
ment. Policy makers need to have better knowledge of the
exogenous factors influencing various economic activities such
as farming, forestry, grazing or fishing and how to manage
them and ensure efficient use of resources. There is a scope
for faster farm growth, based on the gap that exists between
the yields that the farmers actually get and the yields that the
farmers actually get and the yields that are shown to be
obtained using better practices, not in laboratory conditions
but actually on the field. The state governments have to be
encouraged to undertake additional expenditure on agricul-
ture over a baseline level and the centre has to share that
additional expenditure. Recognizing growing disparities
between the agricultural and non-agricultural sectors and
deterioration of the quality of the public services in rural
India calls for a radically different approach to make the farm
THE INDIA ECONOMY REVIEW 39
P R O B L E M S & P E R S P E C T I V E S
sector improve its growth performance (Vaidyanathan).There
is a need to raise farm productivity especially in the vast rain
fed areas. If India’s Gross Domestic Product is to rise by nine
percent a year, agriculture must grow by at least four percent.
Improved seeds can play an important role in increasing
productivity. Use of improved seeds and fertilizers requires
proper irrigation facilities. Farmers should be educated in the
methods of sowing, manuring, and irrigating the new high
yielding varieties of seeds.
The socio-economic development consideration needs a
rational and efficient management of water resources. For
sustainable development water problem is to be tackled by
giving overriding priority to augmenting water supply and
treating effluent waste to control pollution. From sustainabil-
ity point of view hydel power should receive far greater
attention than what it has been accorded
so far. Recycling of used products often
helps in conserving raw material Biotech crops
reserves. However, if the scope for were planted on
recycling of raw material wastes is over 100 million
limited, their sustainability would
hectares last year
require lengthening the life time of the
product. This implies that obsolescence
by ten million
rate of the product is to be lowered by farmers in twenty
discouraging too frequent changes in two countries
fashion. Products are to be made more
durable and repair services are to be
organized to handle damage.
Food security remains a global challenge today and famines
still threatens several parts of the globe. Many scientists believe
that new plants developed using modern biotechnology will
play an important role in increasing our ability to produce
enough food. Often called the Gene Revolution, advances in
biotechnology are having dramatic impacts on global agricul-
tural production. Biotech crops were planted on over 100
million hectares last year by 10 million farmers in 22 countries
and the results have been well documented. In all countries
where farmers have access to biotech crops, yields are higher
and production costs are lower, making farmers more efficient
than ever before. Since 2003, when biotech Bt cotton was
introduced, India’s cotton output has almost doubled to 27
million bales weighing 170 kilograms each, and average yields
are up around two-thirds, largely because of lower rates of pest
infestation in the hardier Bt cotton varieties.
40 THE IIPM THINK TANK
Government has to take steps for modernizing irrigation
systems in a phased manner like that of efficient water
management, adequate maintenance of canals and distribu-
tion systems, surveys and investigations for preparation of
new projects, developing a National Grid system to ensure
water supply from water surplus areas to water deficit areas
and etc. For increasing the agricultural growth community
farming (i.e. a place where farmers in an area coming together
to cultivate a common crop) should be encouraged. Proper
use of fertilizers and pesticides should be pressed upon,
especially encouraging use of organic manure like vermin
compost and bio fertilizers to minimize input cost and
increase yield.
Besides crop farminga, equal amount of stress need to be
laid on promoting livestock farming, horticulture, and fodder
plantation and grassland development.
A multi-layered approach would be
adopted with proper financial and
technical support so that the farmers
are protected from the vagaries of
nature and employment generated in
rural areas. The situation of women
needs special emphasis in rural areas.
Women are by far the biggest contribu-
tors to production in the countryside
and also the main gathers of food, fuel
and water. Expansion of electrification
programmes in rural areas, via simple environmentally
friendly technologies, could also reduce the rate of exploita-
tion of the natural resource base, particularly forests (Charles
Leyeka Lufumpa).
To remove the defects of rural marketing the markets
should be very near to the villages with adequate facilities for
grading, weighing and storage of all commodities. The
regulated markets should be strengthened in terms of ad-
equate market yard, market functionaries, ware housing and
storage facilities etc., Extension education in marketing
should be improved through regulated markets, primary co
– operative marketing societies and farmer’s servicing socie-
ties. An efficient marketing system helps to increase the
disposable incomes of rural people and this in turn generate
market for manufactured products.
To make agricultural credit services more effective there is a
need of co-ordination between various financial institutions in

order to avoid multiple financing. The banks should educate the
farmers and get them into the habit of regular repayment.
Large investment in agriculture is required for the growth of
infrastructural 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 across
regions and communities. The pattern of funding also should
have the objective of making States more self-reliant. Proper
monitoring and evaluation against the laid down benchmarks
along with the use of modern technology like e-governance can
help in ensuring the higher outlays result in better outcomes and
more inclusive growth. Policy makers should be able to compare
how various growth strategies impact on poverty and the
environment. Sustainable poverty reduction is attainable only in
conditions where the development strategy generates an
effective demand for environmental quality and for the sustain-
able use of natural resources. Along with higher economic
growth and poverty reduction there should be an improvement
in many important social indicators like life expectancy, infant
mortality rate and gross enrolment ratios at primary level of
education. However, disparities continue at the State and
regional level. Better governance and improved service delivery
are essential to ensure that leakages are plugged and the funds
under the welfare schemes reach the intended beneficiaries to
the maximum extent. Local governments, Panchayat Raj
Institutions and Non Government Organizations can play an
important role in this area. It is essential that these higher
outlays result in better outcomes.
References and Additional Thinking
• Ashok Gulati and Seema Batula, 2002, Capital Formation
in Indian agriculture, Trends composition and implications
for growth, NABARD, Occasional Paper-24
• Ashok Gulati, Kelly, Tein 1999, ‘Trade liberalization and
Indian Agriculture’, Oxford University Press, New Delhi.
• Burns JF. 1996. Denial and taboo blind India to the horror
of its AIDS scourge. New York Times, 22nd September.
• Charles Leyeka Lufumpa 2005: “The Poverty-Environment
Nexus in Africa”, African Development Review,Vol.17,No.3
December 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.
I N D I A N I N D I G E N C E
• Government of India 2006: “An approach to the 11th five
year plan”, Planning Commission, Page No. 18 & 19
• Government of India 2008: “Agriculture and food manage-
ment”, Economic Survey 2007-08, Ministry of Finance,
Oxford University Press, P.161.
• Kahlon A.S. and George M.V.1985: “Agricultural and Price
Policies”, New Delhi 1985,Table 4.1. p.39.
• Ministry of External Affairs, 2007 (GOI) ‘India in Busi-
ness’ FICCI-BISNET
• Misra S.K.& V.K. Puri 2004 ‘Indian Economy’, Himalaya
Publishing House, New Delhi.
• Prabhakaran Nair 2007: “Indian Agriculture at Cross-
roads”, The Hindu, August 15th
• Ramprasad Sen Gupta 2001: “Ecology and Economics-An
approach 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 Credit
and Indebtedness in India : Some Issues’ Indian Journal of
Agricultural Economics’ Vol. 61 No. 1 January - March
2006, Page No. 25
• Mohua Roy 2006: A review of Bank lending to Priority and
Retail Sector’s, Economic and Political weekly 18th Mar
2006 Page No. 1036
• Misra S.K.& V.K. Puri 2004 ‘Indian Economy’, Himalaya
Publishing House, New Delhi.
• Gulati, Ashok, Kelly, Tein 1999, ‘Trade liberalization and
Indian 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 Sector
Liberalization”, in Macroeconomics of poverty Reduction:
India Case Study, Report submitted to UNDP, IGIDR,
Mumbai, April 2006.
• Vaidyanathan 2005 “Farmer’s Suicides and the Agrarian
Crisis”, Economic and Political Weekly, Vol.XLI, No.38,23
Sep,PP.4009-13.
(The views expressed in the article are personal and do not
reflect the official policy or position of the organisation.)
THE INDIA ECONOMY REVIEW 41
P R O B L E M S & P E R S P E C T I V E S

Financial Inclusion: Enabling Inclusive

GROW TH
Introduction
Inclusive growth and financial inclusion have emerged as buzz
words in most discussions on economic growth in recent
times. India has witnessed a GDP growth rate of over nine
percent since 2005-06 with a significant slowdown to 6.7
percent in 2008-09 on the back of a global recession. Much of
the benefits of this high growth, however, have not been
equitably shared. Data reveals that while the economy
witnessed unprecedented high growth, according to the
estimates of the Tendulkar Report aggregate poverty was at
37.2 percent while 41.8 percent of rural population and 25.7
percent of urban population was below the poverty line (BPL).
The Planning Commission estimates vary and give a slightly
lower figure of aggregate poverty of 27.5 percent and peg rural
and urban poverty and 28.3 percent and 25.7 percent
respectively (by 61st round of NSS data for 2004-05).
Irrespective of the estimate it’s worthwhile to note
that more than a quarter of our population lives
below the poverty line. It is imperative therefore, that
growth must be inclusive and must be viewed as a tool to
alleviate poverty. Growth is inclusive when it creates
economic opportunities along with an equal access to
those opportunities. The Planning Commission defines
Inclusion as ‘a process of including the excluded, as
agents whose participation is essential in the very design of
the development process and not simply as welfare targets
of development programmes’ (Government of India, 2007).
The Economic Survey 2009-10 (p.22) rightly notes that
‘policies promoting growth need to be complemented with
policies that ensure that there are mechanisms in place to
re-distribute some of the gains to those who are unable to
partake in the market process and hence get left behind’. This Swati Raju
would require a new thinking as regards the role of the Lecturer, Department of Economics,
government, from being a provider to being an enabling University of Mumbai

42 THE IIPM THINK TANK


government where in the government does not directly partici-
pate in the provision of goods but creates an enabling environ-
ment where markets operate within well-defined incentive
compatible rules and also intervenes directly when it needs to
ensure its functions as a welfare state (Economic Survey
2009-10). The Eleventh Five Year Plan (2007-12) formally
integrated the concept of inclusive growth with overall
economic growth so as to make the growth process broad
based and reduce fragmentation in society. The plan docu-
ment states, ‘the development of rural India is an imperative
for inclusive and equitable growth and to unlock the potential
of the population that is presently trapped in poverty with its
associated deprivations’. The plan document envisaged a two
pronged approach through huge investments in social and
physical infrastructure which in turn would generate income
and employment and also finance social programmes that
would enable inclusive growth.
Achieving inclusive growth, however,
faces several challenges, viz., increasing Sustained high
growth in agriculture and allied sectors economic growth
which would in turn create a market for would create an
goods and services provided by manu-
increased demand
facturing and services sector; the huge
rural-urban migration which has put a
for diverse and
substantial pressure on urban infra- several financial
structure; large investment would be instruments
required to adequately train and skill
the young population and enable us to
exploit the demographic dividend since growth has been
driven by the knowledge and services sector. Thus, sustained
high growth would require huge investments in social and
physical infrastructure and in turn would create an increased
demand for diverse financial instruments. The role of the
financial sector in achieving inclusive growth would be pivotal
as apart from institutional investment there would be a need
at an individual level to have easy access to credit from formal
sources accompanied by effective and efficient credit-delivery
taking us to a related and an important facet of inclusive
growth, namely, financial inclusion. Financial inclusion
therefore emerges as the crucial link towards achieving
inclusive growth
Financial Inclusion: Definition
Financial inclusion, simply put, refers to taking banking
I N C L U S I V E I N D I A
services to the common man or in other words, the transfer-
ence from elitist/class banking to mass banking. More
importantly, financial inclusion is not just restricted to credit
but involves extending a wide array of financial products and
services like saving accounts, insurance, remittance and other
facilities to the under-privileged and the poor in rural,
semi-urban and urban areas. It is important to note that the
definitional emphasis of financial inclusion varies across
countries and depends on the level of socio-economic and
financial development of the concerned country. The defini-
tions hence vary with regard to dimensions such as ‘breadth’,
‘focus’ and degree of inclusion/exclusion. The Reserve Bank
of India in its Report on Currency and Finance (2003-08,
volume V) provides a compendium of definitions. To note a
few major definitions, Leyshon and Thrift (1993) focused
largely on social exclusion and the geographical access to
financial services, in particular banking
outlets while Ford and Rowlingson
(1996) and Kempson and Whyley (1998)
point out that the debate is no longer
restricted to just geographical access
but has widened to include all types of
people who make little or no use of
financial services. The Asian Develop-
ment Bank (2000) defines inclusion ‘as
the provision of a broad range of
financial services such as deposits,
loans, payment services, money trans-
fers and insurance to the poor and low income households
and their micro-enterprises’. The Treasury Committee, House
of Commons, UK (2004) defines financial inclusion as ‘ability
of individuals to access appropriate financial products and
services’. The World Bank (2008) expresses financial inclusion
as the broad access to financial services implies an absence of
price and non-price barriers in the use of fi nancial services; it
is difficult to define and measure access because access has
many dimensions. The United Nations (2006) notes, ‘a
financial sector that provides ’access’ to credit for all ‘bank-
able’ people and firms, to insurance for all insurable people
and firms and to savings and payments services for everyone.
Inclusive finance does not require that everyone who is
eligible use each of the services, but they should be able to
choose to use them if desired’. The Committee on Financial
Inclusion in India (2008) indicates that financial inclusion
THE INDIA ECONOMY REVIEW 43
P R O B L E M S & P E R S P E C T I V E S
implies ‘the process of ensuring access to financial services
and timely and adequate credit where needed by vulnerable
groups such as weaker sections and low income groups at an
affordable cost’. To summarize, the two focal points that
emerge from the different definitions are the access to
financial services and affordability (Reserve Bank of India,
2008).
Factors Affecting Financial Inclusion in India
Financial exclusion is the inverse image of financial inclusion
and is multi-dimensional. Financial exclusion on the demand
side arises because of (i) low income and asset holdings (ii)
the high information barriers and low awareness regarding
financial services in rural areas and also among women and
on the supply side (iii) the lack of access to financial services
which arises because of an absence of formal financial
institutions such as banks (which could
not extend outreach on account of high
cost of operations, or unviable due to
the small ticket size of the transactions
so there are fewer branches) (iv) unsuit-
able financial products (v) cumbersome
documentation and procedures (vi) in
the case of primary agricultural co-
operative societies where participation
is restricted those who have land
ownership (such societies do not provide
saving and insurance facilities to their
members). (vi) the failure of financial co-operatives in several
States has had an impact on the outreach of fi nancial services
in rural areas. (vii) the lack of financial education and coun-
selling. Finally, financial exclusion is often related to the issue
of social exclusion which gives access to financial services and
financial literacy a complex socio-economic dimension.
Consequently, the financially excluded comprise of marginal
farmers, landless labourers, share croppers or oral lessees, self
employed and unorganized sector enterprises, slum dwellers,
migrants, socially disadvantaged groups and women. These
factors accompanied by the easy availability of credit from
informal sources such as money lenders (where there is no
cumbersome documentation) makes borrowing from informal
sources though costly but popular.
Widening financial inclusion or in other words, overcoming
the problem of fi nancial exclusion would require a holistic
44 THE IIPM THINK TANK
approach wherein awareness about financial products and
services, financial counselling including debt counselling and
affordable credit is made available to those excluded. Banks
thus, emerge as the key players on the supply side and can
enable the poor and the socially disadvantaged as well as the
small and medium enterprise sector to gain access to formal
sources of credit (Thorat, 2007).
Financial Inclusion: Initiatives and Measurement
Though the Reserve Bank of India used the term Financial
Inclusion explicitly for the first time in its Annual Policy
Statement of 2005-06, the objective of banking/financial
policy has always been inclusive. The process of financial
inclusion began in 1969 with the nationalization of banks and
can be broadly classified into three broad phases. Phase I
(1969-1990) which was characterized by State control over the
banking system, a directed lending
programme with a system of adminis-
tered interest rates. This phase of bank
expansion was propelled by socialist
thrust /intentions and saw massive
expansion of bank branches in rural and
semi urban areas and priority sector
lending. Consequently, scheduled
commercial branches increased from
8,262 in June 1969 to 64,608 branches as
of end-March 2009. The average
population serviced per branch also
decreased from 64,000 to 15,000 and the share of rural
branches increased from 22.2 percent to 31.04 percent over
the same period. Priority sector lending was enhanced to a
compulsory 40 percent of total lending. Regional Rural Banks
(RRBs) were set up in 1975 in backward and tribal areas to
cater to the needs of the weaker sections. National Bank for
Agriculture and Rural Development (NABARD) was
established as an apex body for the agriculture sector and
provided concessional refinance for lending done by the rural
co-operative sector. Industrial Development Bank of India
(IDBI) was similarly set up for the industrial sector. The
credit outstanding against small borrowal accounts of Sched-
uled Commercial Banks (SCBs)which cover agriculture,
industry, trade, personal loans and professionals and other
services showed an increase of about 18.69 percent in 2008
while the rural sector also saw an equal increase of 18.26
 I N C L U S I V E I N D I A

percent over the same period. Of the total credit outstanding Table 1: Credit Outstanding against Small Bor-
against small borrowal accounts at the All-India level nearly rowal Accounts and Deposits (Scheduled Commer-
82.1 percent of the accounts are held by males (rural areas cial Banks) (Rs. in Crore)
males - 80 percent) while 14.4 percent (rural areas females
Credit Outstanding Deposits
hold 17.6 percent) of the accounts are held by females as of
March March March March
end March 2008. Deposits held in SCBs as of end March 2007 2008 2007 2008
2008, just about 15-16 percent of the deposits are from rural Rural 87675 103690 224047 261654
areas. However, irrespective of the geographical location Semi-Urban 75466 87443 272633 335978
almost 70 percent of all deposit accounts are held by males Urban 115753 139889 862330 1090730
and about 20 percent by females bringing out the gender All- India 278894 331022 1359020 1688362
disparity dimension of financial inclusion with regard to both Source: Basic Statistical Returns of Scheduled Commercial Banks, March 2008
credit and the deposit side.
Table 2: SHGs - Savings with Banks and Bank
Phase II (1990-2005) coincided with the period of financial Loans Disbursed (Rs. in Crore) (As of March end)
sector reform, higher allocation of credit to the private sector,
dismantling of the administered interest structure, strength- Savings Loans Disbursed
ening of the banking sector through the stringent monitoring 2007-08 2008-09 2007-08 2008-09
and the introduction of regulatory and supervisory norms for
Commercial Banks 2078 2773 5404 8061
capital adequacy, tier I capital. This phase also saw increased
RRBs 1166 1990 2652 3193
competitiveness with the entry of new private sector banks
Cooperative Banks 541 783 794 999
and listing of public sector banks on stock exchanges along
with a consolidation of the banking system and the scope of Total 3785 5546 8849 12254

priority sector lending was widened. The developments of this

Source: Report on Trends and Progress of Banking in India 2008-09
phase emphasized that fi nancial strengthening and inclusive
banking need to go together. Financial inclusion in this phase
Table 3: Number of Kisan Credit Cards Issued (in
saw the introduction of Self-Help Group (SHG) – Bank millions) (As of end of March)
linkage programme (SBLP) launched by NABARD in 1992.
A SHG is a small homogenous group of about 15-20 people Year Coopera- RRBs Commer- Total
(usually women) who join together to address common issues. tive Banks cial Banks
1 2 3 4 5
Pooled savings are used to make interest bearing loans to
1998-99 0.16 0.01 0.62 0.78
group members. SHGs aid in financial intermediation apart
1999-00 3.59 0.17 1.37 5.13
from inculcating the quality of thrift amongst members.
2000-01 5.61 0.65 2.39 8.65
Besides the transaction costs are low and SHGs can reach out
2001-02 5.44 0.83 3.07 9.34
to both the smallest unit in villages. The Reserve Bank of
2002-03 4.58 0.96 2.70 8.24
India allowed banks to open savings account for SHGs
2003-04 4.88 1.27 3.09 9.25
(despite the fact that they have no legal form) once the group
2004-05 3.56 1.73 4.40 9.68
had stabilized and thus gain access to credit and financial 8.01
2005-06 2.60 1.25 4.16
services from the formal sector 2006-07 2.30 1.41 4.81 8.51
Table 2 presents the results of the SBLP programme and 2007-08 2.09 1.77 4.60 8.46
shows the savings of SHGs with banks and the amount of bank 2008-09 1.34 1.41 5.83 8.58
loans disbursed to SHGs. It can be observed that commercial Total 36.2 11.5 37.0 84.6
banks lead in both savings held by SHGs as well as in loan Percentage 42.7 13.5 43.8 100.0
disbursement and are followed by RRBs. Another important share in Total

step during this Phase which aided inclusion was the introduc- Source: National Bank for Agriculture and Rural Development

THE INDIA ECONOMY REVIEW 45

P R O B L E M S & P E R S P E C T I V E S

Table 4: Credit Outstanding to MSE Sector Consequently, banks were advised by the Reserve Bank of
(Rs. in Crore) (As of end of March) India in November 2005 to introduce ‘no-frills’ accounts. Such
accounts would have very low or nil minimum balance, 5-10
Bank Group 2007 2008 2009(P) free transactions per month and an ATM facility. Besides all
Public Sector Banks 1,025 1,511 1,913 material used by such customers would be printed in the
(24.40) (47.38) (26.58)
regional language. Further to enable inclusion, Know Your
Private Banks 131 469 479
(26.05) (257.12) (2.14) Customer (KYC) norms were simplified for accounts with
Foreign Banks 116 155 181 balances not exceeding Rs.50,000/- and credit limits not
(38.04) (33.10) (17.10)
exceeding one lakh rupees in a year so that people belonging
P – Provisional. Figures in parentheses indicate growth rate over the previous year to the low income groups both in urban and rural areas do not
Source: Report on Trends and Progress of Banking in India, 2008-09.
have to face cumbersome procedures whilst opening accounts.
It can be observed that there has been a massive increase of
tion of Kisan Credit Cards (KCCs) for providing credit to about 7.28 times in the number of no-frills accounts opened
farmers. There has been a multifold increase (Table 3) in the by SCBs over the period of three years - March 2007 to March
number of KCCs issued since its inception in the late 1990s 2009, and the maximum number of accounts have been
and the percentage share of both co-operative banks and com- opened with Public Sector Banks given the comparative
mercial banks in the issuance of KCCs is above forty percent advantage they enjoy with their vast branch network in rural
respectively with RRBs having a share of just about 13.5 and semi-urban areas. Besides, banks, increasingly, have
percent. started looking the basic ‘no-frills’ accounts as a huge business
Apart from the different measures aimed at expanding opportunity that can emerge as a viable business model over
financial inclusion, it was recognized that inclusive growth time.
would need huge investments in rural infrastructure and in Further, the Raghuram Rajan Committee on Financial
the small scale industries sector (Micro, Small and Medium Sector Reform suggested that the opening of basic or ‘no-
Enterprises) which assumes importance because of its frills’ accounts be encouraged so as to provide 90 percent
employment generation potential and wide regional spread.
Consequently the Rural Infrastructure Development Fund Table 5: Disbursements under RIDF (Rs. in
Crore) (As of end of March 2009)
(RIDF) was launched under NABARD in 1995-96 with an
initial corpus of Rs.2000 crores with the motive of creating
All - India
adequate infrastructure in agriculture and later extended to
RIDF I 1761
develop rural infrastructure such as roads and bridges.
RIDF II 2398
Likewise a similar fund was created for the industrial sector RIDF III 2454
– Small Industries Development Fund (SIDBI). There are RIDF IV 2482
about 1.3 crore MSEs and they employ about three crore RIDF V 3055
people and the main source of credit to this sector are the RIDF VI 4071
public sector banks followed by the private sector banks and RIDF VII 4052
foreign banks. Table 4 presents the credit outstanding to the RIDF VIII 5141
MSE sector by various bank groups while Table 5 gives the RIDF IX 4871
disbursements under various tranches of RIDF which as of RIDF X 6200
end of March 2009 stood at Rs.56,052 crore. RIDF XI 5725
RIDF XII 5775

Phase III (2005 onwards) saw financial inclusion introduced RIDF XIII 5057

explicitly as policy objective and several initiatives were RIDF XIV 3013
Total 56052
undertaken to extend bank penetration and outreach with a
focus on the credit needs of agriculture and small enterprises. Source: Report on Trends and Progress of Banking in India, 2008-09.

46 THE IIPM THINK TANK


Table 6: Number of No-Frills Accounts Opened
by SCBs (As of March 31st)
Bank Group 2007
Public Sector 5865419 13909935
Private Sector 860997
Foreign 5919
Total 6732335 15788919
Source: Report on Trends and Progress of Banking in India, 2008-09.
Indians access to the formal financial system and that these
accounts may be used for the payments made under NREGS
and other government programmes. Besides, banks have also
been advised by the Reserve Bank of India to introduce a
General Credit Card (GCC) apart from KCCs with a credit
facility of up to Rs.25, 000/- at their rural and semi-urban
branches. This facility would provide
revolving credit and allow the holder to
withdraw up to the sanctioned limit
which in turn is determined after an
assessment of the household’s cash flow.
Interest rate on this facility is complete-
ly de-regulated and 50 percent of GCC
loans can be denominated as priority
sector lending which acts as an incentive
for the bank. This phase also saw an
expansion of the priority sector to
include high employment sectors such
as agriculture, small enterprises, retail trade, educational
loans, microfinance, low cost housing and venture capital.
A major contribution to inclusive banking in recent times
has been the role of microfinance institutions (MFIs) who
have emerged as major node in the expansion of outreach of
the formal financial sector. In January 2006, the Reserve
Table 7: Bank Loans Disbursed to MFIs
(Rs. in Crore) (As of end of March)
Bank Group 2007-08
Commercial Banks 1969 (497)
Regional Rural Banks 2 (8)
Cooperative Banks 0.04 (13)
Total 1970 (518)
- indicates nil/negligible. Figures in parentheses indicates number of MFIs.
Source: Report on Trend and Progress of Banking in India,2008-09, RBI
I N C L U S I V E I N D I A
Bank of India permitted banks to utilize the services of MFIs/
NGOs/ SHGs for expanding the coverage of fi nancial and
banking services through the Business Facilitator (BF) and
2008 2009 Business Correspondent (BC) models and it can be observed
29859178 from Table 7 that commercial banks have again emerged as
1845869 3124101 the largest lenders to the MFI sector.
33115 41482 In April 2008, the list of BCs was extended to include
33024761
retired bank employees, ex-servicemen and government
employees so as to provide banking facility to rural popula-
tion at an accessible location or put differently, taking
banking to the doorstep. The Raghuram Rajan Committee
on Financial Sector Reform also suggested the expansion of
the BC model. The Working Group set up to review the BC
model has submitted its Report in August 2009 and has
recommended the expansion in the list of BCs in rural and
semi-urban areas to include retired teachers, kirana/medical/
fair price shop owners, and authorized
functionaries of SHGs among many
Financial other such representatives. The Report
education and also suggests that banks be permitted to
credit counseling collect a reasonable service charge from
are important the customer in a transparent manner
depending upon the profi le of the
tools to enable customer along with providing ad-
people overcome equate risk-mitigation measures. Apart
indebtedness from such standardized approaches in
the formal sector, there are a large
number of innovative experiments done
by MFI and SHGs that serve local requirements and indicate
that there exists a market at the bottom of the pyramid.
Although, fi nancial exclusion is a major problem in rural
and semi-urban areas it is important to acknowledge the
prevalence of exclusion in urban areas as well particularly in
the case of informal sector workers such as artisans, labour-
ers, small businessmen, migrants, slum dwellers etc. who do
not have bank accounts and whose knowledge of banking
services is limited. Efforts along lines to overcome fi nancial
exclusion in rural areas will have to be undertaken by both
2008-09
SCBs and Urban Co-operative Banks (UCBs) to expand
3719 (522)
fi nancial inclusion in urban areas. For instance, Indian Bank
13 (59)
- (0)
opened a core banking branch (using smart card based
3732 (581) banking) along with ATM facility in Dharavi, Asia’s largest
slum, in Mumbai and extended doorstep banking to residents
of this slum. A similar model has now been extended for the
THE INDIA ECONOMY REVIEW 47
P R O B L E M S & P E R S P E C T I V E S
urban poor by Indian Bank in Guntur, Andhra Pradesh and
Tharamani, Chennai.
Besides, several others initiatives have been undertaken to
make access to the fi nancial sector inclusive, namely, adopt-
ing a decentralized strategy wherein the State Level Bankers’
Committee (SLBC) identifies one district in each State for
100 percent fi nancial inclusion (whereby all those who
wanted to open a bank account were provided with one by
allocating villages to different banks), conditional approval
for opening of new bank branches wherein at least half of
such new branches are opened in under banked areas as
notified by the RBI, strengthening and reviving Regional
Rural Banks and Co-operative banks which being local
institutions are best adapted to achieve fi nancial inclusion,
improvements in the payments system, exploiting the vast
network of post offices and the trust reposed by the local
population in the postman - banks are using post offices as
agents for branchless banking under BC models, strengthen-
ing primary agricultural credit societies, reviving the Lead
Bank Scheme (Reserve Bank of India, 2008; Thorat, 2008;
Chakrabarty, 2009).
On the recommendations of the Committee on Financial
Inclusion, the Government constituted two Funds with
NABARD – the Financial Inclusion Promotion and Devel-
opment Fund (FIPF) and the Financial Inclusion Technology
Fund (FITF) with an initial corpus of Rs.500 crore each. The
FIPF would focus on capacity building and promote rural
entrepreneurship, farmers service centres while the FITF
48 THE IIPM THINK TANK
would focus on funding low cost technology solutions
(Government of India, 2008).
Financial Literacy and Credit Counselling
Efforts at fi nancial inclusion will meet with success when
accompanied by an awareness of the available fi nancial
products and services, especially of the risks and rewards so
that an individual can make an informed choice. Financial
education and credit counseling are seen as important tools
to enable people overcome indebtedness. In India the need
for fi nancial education is well borne out given the low levels
of overall literacy and that a large section of population
continues to be out of the purview of the banking and
fi nancial sector. Credit/Debt Counselling can be defi ned as
‘counselling that explores the possibility of repaying debts
outside bankruptcy and educates the debtor about credit
budgeting and fi nancial management’. In other words, it
examines ways to solve current fi nancial problems, explains
the costs of misusing a credit and encourages distressed
people to access the formal fi nancial system. Counselling
can be preventive wherein people are made aware of the
pitfalls of misuse of credit, making borrowers aware of
their repayment capacity while it can be curative and help
distressed people in generating effective debt management
plans (Chakrabarty, 2009b). A model scheme on fi nancial
literacy and credit counseling centres was formulated and
circulated by the Reserve Bank of India to all Scheduled
Commercial Banks and Regional Rural Banks in February
2009 with the advisory that such centres be set up as
separate entities at arms length from the bank so that such
facilities can be availed by customers of different banks
(Reserve Bank of India, 2009).
Other measures undertaken by the Reserve Bank of India
is the creation of a multi-lingual link on its website in 13
Indian languages on all matters concerning banking in June
2007, taking fi nancial education to children by adopting the
comic books format that explain the basics of banking,
fi nance and central banking to children, promote financial
awareness through essay competitions for school children.
Further, the RBI has undertaken a project entitled ‘Project
Financial Literacy’ with the objective of creating awareness
on general banking concepts and the central bank to differ-
ent target groups and to be operated through the mass media,
banks, local government machinery and NGOs. Financial

literacy programmes are being launched in each State with
the active involvement of the government and SLBC (Reserve
Bank of India, 2008a).
Roadmap for the Future
The principle of fi nancial inclusion indicates that banking
and fi nancial services are to be viewed as public goods and
hence have to be equally enjoyed by all. All efforts at fi nan-
cial inclusion validate the issue of access and support the
argument of taking banking services to the last mile. A
direction for the future would be the increasing use of IT
enabled solutions which would reduce costs of fi nancial trans-
actions, improve the allocation of fi nancial resources,
increase competitiveness and take fi nancial products and
services to the general masses in under banked rural and
semi-urban areas. The use of smart cards, mobile ATMs with
instructions and commands in regional languages (like the
e-Choupal project) and the coverage of post offices under
electronic payments network could facilitate fi nancial
inclusion. Another tool could be the use of mobile telephony
whose use is widespread across all strata of society. The
mobile 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 smart
cards for opening bank accounts with bio-metric identifica-
tion and the link to a mobile or a hand held connecting
device ensures that the transactions are recorded in bank
books on a real time basis (Chakrabarty, 2009a; Thorat,2007).
As suggested by the Raghuram Rajan Committee on Finan-
cial Sector Reform that a nationwide electronic fi nancial
inclusion system (NEFIS) be created by linking the ‘no-frills’
accounts to facilitate electronic transfer of funds into these
accounts from various government social security pro-
grammes.
In conclusion, the approach to fi nancial inclusion needs to
be comprehensive and holistic as opening of a no-frills
account which would ensure the safety of savings and access
to affordable credit would encourage the individual to
embark on a continuous process of access to different
fi nancial products and services which lead to wealth creation
as also to seek insurance. The success of fi nancial inclusion
would ultimately depend on a collaborative strategy wherein
there is an adequate supply of correctly priced and appropri-
ate fi nancial products and services accompanied by an
I N C L U S I V E I N D I A
efficient delivery mechanism along with fi nancial awareness
and a co-operation between fi nancial institutions, govern-
ment and civil society organizations.
References and Additional Thinking
• Chakrabarty, K.C. (2009): Banking: Key Driver for
Inclusive Growth, Reserve Bank of India Bulletin,
September.
• Chakrabarty, K.C. (2009a): Technology, Financial Inclu-
sion and Role of Urban Cooperative Banks, Reserve Bank
of India Bulletin, September.
• Chakrabarty, K.C. (2009b): Furthering Financial Inclu-
sion through Financial Literacy and Credit Counselling,
Reserve Bank of India Bulletin, December.
• Government of India (2007): Towards Inclusive Growth:
The Gender Dimension, Planning Commission, November
15th 2007.
• Government of India (2008): Eleventh Five Year Plan
– 2007-2012, Planning Commission, Oxford University
Press, New Delhi.
• Government of India (2008a): Report of the Committee
on Financial Inclusion.
• Government of India (2008b): Report of the Committee
on Financial Sector Reforms.
• Government of India (2010): Economic Survey 2009-10.
• Ramesh, S. and P. Sahai (2007): Universal Financial
Inclusion in India: The Way Forward, CAB Calling, July -
September 2007.
• Reserve Bank of India (2008): Report on Currency and
Finance 2003-08, Volume V.
• Reserve Bank of India (2008a): Concept Paper on Finan-
cial Literacy and Counselling Centres.
• Reserve Bank of India (2009): Report on Trends and
Progress of Banking in India, 2008-09.
• Reserve Bank of India: Basic Statistical Returns of
Scheduled Commercial Banks, various issues.
• Thorat, U. (2007): Financial Inclusion – The Indian
Experience, Reserve Bank of India Bulletin, July.
• Thorat, U. (2008): Inclusive Growth: The Role of Banks in
Emerging Economies, Reserve Bank of India Bulletin,
March.
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organization.)
THE INDIA ECONOMY REVIEW 49
P R O B L E M S & P E R S P E C T I V E S

GROWTH SANS
DEVELOPMENT ?
B.K. Thapliyal
Former Professor and Head at National Institute of
Rural Development (NIRD), Hyderabad

50 THE IIPM THINK TANK


Economic Growth and Development
Economic growth and economic development are often used
synonymously. When progress takes place gradually and
reflected in quantitative changes, it should be considered as
economic growth. Growth leads to more output, saving and
investment. Development involves not only quantitative
increase in the economy but also qualitative changes. Eco-
nomic growth implies a gradual change in the economy.
Economic development may not be steady, and some times it
may be abrupt and uneven changes. From this point of view
development is more dynamic than growth. It has a broader
perspective. It not only stands for “more output” but also
“changes in the technical and institutional arrangements by
which it is produced”. Such changes are not automatic.
Further, it implies change in technological and institutional
organization of production as well as in distributive pattern of
income. Hence, compared to the objective of development,
economic growth is easy to realize by a
larger mobilization of resources and
raising their productivity and output Economic
levels. The process of development is far development
more extensive. Apart from a rise in is not possible
output, it involves changes in composi-
tion of output, shift in the allocation of
without growth.
productive resources, and elimination
But growth is
or reduction of poverty, inequalities and possible without
unemployment. Lastly, economic development
development is not possible without
growth but growth is possible without
development.
An economy grows because it accumulates factors of
production, like physical and human capital, because its
labour effort grows, or because it improves the efficiency with
which it uses the factors of production. The variables that
appear most frequently in economic growth include: savings,
investment, technological change, structure of capital,
consumption, etc. The conventional “neoclassical” theory of
growth had held that economic growth was a result of the
accumulation of physical capital and an expansion of the
labour force – combined with an “exogenous” factor, techno-
logical progress that makes capital and labour more produc-
tive. In addition to an expanded view of the relationship
between economic growth and human capital, there now is a
deeper understanding of the relationship between growth and
W H I T H E R I N D I A ?
equity. Human capital has more impact on growth, for
example, if it is equitably distributed.
It may be pointed out that economic development is not the
same as economic growth. Economic development involves
something more than economic growth. While economic
growth involves expansion of an economy through a simple
widening process, economic development incorporates
growth as well as essential qualitative dimensions appearing
in the form of improved performance of the factors of
production and improved techniques of production. Another
qualitative change may appear in the form of development of
institutions and changes in values and attitudes. Thus, while
economic growth refers to sustained increase in per capita
product, economic development refers to growth plus
progressive changes in the socio-economic structure of a
nation.
National income is one of the most commonly used
economic phrases and from that
viewpoint it appears to have a fairly
simple meaning, viz., it represents the
aggregate income of a nation as against
the income of an individual. A number
of specific problems or issues arise
when we try to defi ne and measure the
national income of any country.
However, to begin with, we may defi ne
national income as the aggregate money
value of the annual flow of fi nal goods
and services in the national economy.
Some aspects of this defi nition deserve special mention. For
instance, it may be noted that national income is an aggrega-
tive value concept. It makes use of the value determined by
the measuring rod of money as the common denominator for
the purpose of aggregating the diverse outputs resulting from
different types of economic activities.
Another aspect of this defi nition that should be noted is
that national income represents the aggregates value of fi nal
products rather than the total value of all kinds of products
produced in the economy. The distinction arises because
there are a number of products, which in turn are used in the
production of several other products. The output of the latter
will, therefore, include as its components the entire output of
the former. For instance, since flour is used in making bread,
the total value of bread includes the value of flour also. Hence
THE INDIA ECONOMY REVIEW 51
P R O B L E M S & P E R S P E C T I V E S

if we add the value of the former to that of the latter while
measuring national income, we will be indulging in what is
known as "double counting". Obviously the measure of
national income should be free form double counting. To
emphasize this aspect, the word ‘fi nal" has been used in the
above defi nition to specify the type of goods and services, the
values of which are to be aggregated to derive national
income. It indicates that national income is an unduplicated
total that does not involve any double counting.
Philosophically speaking, there are
two opposing views of development.
One is a consumerist view, which Growth must be
regards the human being primarily as a judged not by
consumer of goods and services. the abundance
Basically, ‘development’ is seen in this
view as an expansion of the flow of
of commodities it
consumption. For a time, development
produces, but by
was identified with aggregate economic how it enriches
growth to bring about a progressively people’s lives
higher flow of aggregate of consump-
tion irrespective of its distribution (the
‘reactionary‘ view). Gradually, the interpersonal distribution
question was raised, in terms of who benefits from such
development as consumers (the ‘liberal’ view)
(Rahman,1992:172).
In 1955 Lewis defined the purpose of development as
widening the “range of human choice”. However, Lewis
tended to equate wider choice merely with greater income -
and had more faith that economic growth would inevitably
lead to human development. Proponents of economic growth,
argue that without such growth, ‘development’ in the broader
sense 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 achieving
economic growth is the fi rst priority (Kabeer 1994:74).
Economic development is not concerned only with eco-
nomic growth but also with progress in human societies.
justice to those in need, and that any pattern of economic
growth is unjust that fails to improve the standard of living of
major segments of the population. Anything contributing to
extreme inequality in standards of living is morally unaccept-
able’. A similar point is raised in the HDR, 1996, “Is econom-
ic growth a meaningful goal? Or is human development the
real objective? If it is human development, growth should be
judged not by the abundance of commodities it produces, but
by how it enriches people’s lives”(UNDP: 1996:43).
Economic Growth and Develop-
ment in India
The economic growth and development
pattern in India has been very interest-
ing. From the beginning of First Five
Year Plan (1952-53) till Eighth Five
Year Plan (1991-92) India followed
socialistic pattern of development with
dominance of public sector in all
spheres of economic and social develop-
ment. The government had control over
most of the factors of economic growth and development. It
was mainly a closed economy and markets had very limited
role. During 1950 to 1980, the GDP grew between three and
four percent. Prof. K N Raj, an eminent economist named it
as “Hindu Rate of Growth”. During the decade of eighties,
there was some opening of the economy, which helped in
breaking the barrier of Hindu Growth Rate and the GDP
grew between 5-6 percent.
It was during 1991-92 when the government realized that
Table 1 : Sector Wise Growth Pattern in India
Period Agriculture Industry Services All
1950-60 3.0 6.2 4.3 3.9
1960-70 2.3 5.5 4.8 3.7
1970-80 1.5 4.0 4.4 3.1

Development is a process of economic, social, and techno- 1980-90 3.4 7.1 6.7 5.6

logical change by which human welfare is improved. Anything 1990-2000 2.5 5.6 7.6 5.6

that raises the level of human welfare contributes to develop- 2000-2006 2.8 7.7 8.9 7.3

ment; anything that reduces the welfare is anti-developmen- 1950-80 2.3 5.2 4.5 3.6

tal, a subtraction from development (Higgins,1992:27). A 1980-2006 2.9 6.4 7.7 6.0

major goal of development policy and planning, say Adelman 1950-2006 2.6 5.8 6.0 4.7

and Morris(1973:192-93), ‘should be to guarantee social Source : World Bank Central Database, May 2007.

52 THE IIPM THINK TANK

 W H I T H E R I N D I A ?

restructuring and liberating from the control of the govern-
ment is essential to achieve higher growth in the economy Thus
Ninth Five Year Plan onwards, the government allowed private
sector and the markets to play their role and started minimiz-
ing state control on the factors of production and business.
This upturn in the growth rate can defi nitely be attributed
to the economic reforms. After 2001, the growth rate further
jumped to cross seven percent and during 2007-08 it moved
above nine percent. Table 1 provides compounded growth
rate decade wise from 1950 to 2006.
There are two aspects of develop-
ment. One is increase in income of the
people by the expansion of gainful
employment leading to increase in their
consumption and also help in the
reduction of poverty. Another is
expansion of roads, power supply, more
hospitals, school and colleges, safe
drinking water and sanitation, etc.,
which reflects in the increase of literacy
and quality education, reduction in
Infant Mortality Rate (IMR) and Maternal Mortality Rate
(MMR), increase in expectancy of life and so on. In other
words, development can be measured in terms of improve-
ment in all aspects of human development. In fact the
ultimate objective of development is to improve the quality of
life of the people in the country.
Economic Growth and Employment
Let us fi rst compare the growth trends with the employment.
Table 2 given below provides data on the growth rate of
employment from 1983 to 2005. It can be seen from the table
that during 1983-84 and 1993-94 annual compounded growth
rate of employment was 2.1 while in the corresponding period
economic growth rate was 5.6. Between 1993-94 and 1999-
2000, while the growth rate was improving over the previous
decade, the employment rate declined to 1.0 percent. How-
ever the employment rate increased to 2.8 during 1999-2000
to 2004-05 but the economic growth rate was above seven
percent during the corresponding
period. This clearly indicates that high
The trickle down economic growth has not been helpful
effect of growth in expanding employment.
and inclusive
Economic Growth and Poverty
development will Reduction
be possible when One of the important indicator of
employment development is reduction in poverty. It
expands massively is the basic presumption that when
economy grows, every one gets the
benefit, but in proportion to his/her
capacity and capability. Thus those with high capacity and
capability would get higher share of growth while those with
poor capacity and capability get poor share. In other words
the rich become richer while the poor remain poor. This
situation will continue unless a mechanism is devised which
enables the poor to derive “little more than proportionate
benefit” from the economic growth.
Poverty reduction in India has been one of the dominant
development policies. A number of rural development

Table 2 : Employment Growth Rates by Sectors (Annual Compound Growth Rates)

Sectors 1993-94 over 1999-2000 over 2004-05 over 2004-05 over

1983-84 1993-94 1999-2000 1993-94
1. Agriculture 1.4 0.1 1.5 0.7
2. Mining & Quarrying 3.7 -2.8 2.4 -0.4
3. Manufacturing 2 1.6 5 3.1
4. Electricity, gas, water, etc. 4.8 -4.8 3.1 -1.2
5. Construction 5.7 6.4 8.2 7.2
6. Trade, hotel & restaurant 3.8 6.3 3.9 5.2
7. Transport, Storage and Communication 3.4 5.3 4.9 5.1
8. Other services – Financial, Insurance, Public and Personal services, etc. 3.9 -0.7 3.6 1.2
9. All sectors 2.1 1 2.8 1.9

Source : NSS Employment and Unemployment Surveys adjusted for population Census. Employment is measured by number of workers by UPSS status.

THE INDIA ECONOMY REVIEW 53

P R O B L E M S & P E R S P E C T I V E S
Table 3 : Population Below Poverty Line
(as per expert group)
Region 1973-74 1983-84 1993-94
1.Rural 56.4 45.7 37.3
2.Urban 49 40.8 32.4
3.Total 54.9 44.5 36
Source : Planning Commission, Press Release, March 21, 2007.
programmes with substantial budgetary allocation were
introduced from the First Five Year Plan . From Ninth Plan
onwards, the budgetary allocation has been increased by
many times. In addition during these periods India has been
on high trajectory of growth, but it has little or no effect on
the rate of poverty reduction as can be seen from Table 3.
Between 1973-74 and 1983-84, when the growth rate was
below four percent, the percentage of population ‘below
poverty line (BPL)’ declined from 54.9 to 44.5, averaging
about one percent per year. The decade between 1983-84 and
1993-94 when the growth rate broke the barrier of Hindu
Growth Rate and crossed five percent, the BPL population
was reduced to 36.0 percent from 44.5
percent, registering less than one
percent annual decline in poverty. From
1993-94 to 1999-2000 when the growth
rate was above six percent, poverty
declined by annual average of one
percent. However, this was the period
when there was a quantum jump in the
allocation for poverty alleviation
programmes. Unfortunately, the
greatest tragedy is that between
1999-2000 and 2004-05, poverty has
rather increased over the previous period in spite of the fact
that economic growth was above seven percent and invest-
ment on rural development programmes were increasing
phenomenally.
Economic Growth and Human Development
The overall indicator of development has to be reflected in
terms of the human development. The United Nations
Development Programme (UNDP) organisation in 1990
started bringing out human development report on all nations
of the globe. Based on the various indicators of human
54 THE IIPM THINK TANK
development a composite index was developed which is called
Human Development Index or HDI and based on it all the
nations are ranked. It is interesting to note that according to
1999-2000 2004-05
Human development Report 1990, India was placed at 123 in
27.1 28.3 HDI rank. In 1992 it climbed two steps up at 121. However
23.6 25.7 from 1993 it sided down to 134 and reached its lowest at 139
26.1 27.5 during 1998. It was this period when the economic growth in
the country was rising above six percent. During 2004 and
2005 India improved in HDI rank and stood at 127. There
was again a surprise that India dived to 139 HDI rank in
2009. These figures clearly indicate that the high economic
growth rate did have least effect on the HDI Rank of India.
Then can we conclude that there was growth but no develop-
ment?
Conclusion
The facts provided above in respect of the economic growth
pattern and some vital factors like employment, poverty
reduction and human development (which are important indi-
cators of development) have helped the government to
mobilise more resources and accordingly the government
development, clearly explain that
economic growth not necessarily lead
During 2004 to development. Economic growth has
and 2005 India increased investment on social develop-
improved in HDI ment and poverty alleviation by many
rank and stood at folds, unfortunately, these have not yet
shown encouraging results. There are
127. Then again it many causes for this situation, however
dived to 139 HDI there are three main causes which
rank in 2009 neutralise the efforts being made for
development. These are : (1) High rate
of population growth; (2) Inability to
transfer labour from agriculture to non-agriculture sectors on
a larger scale; and (3) High level of corruption.
If we want that high growth rate is translated to develop-
ment, there is a need to promote inclusive development. The
trickle down effect of the economic growth and inclusive
development will be possible when there is mass expansion of
employment in industrial and service sectors. In all the
developed countries, the percentage of workers in agriculture
sector and its share in GDP is much less than 10 percent while
in India more than 60 percent of the workers are in agricul-
ture sector though its share in GDP is around eighteen

percent.
In the ultimate analysis it can be concluded that economic
growth is necessary so that more resources can be mobilised,
but it can be translated into development only when all the
concerned, government as well as corporate sector make
sincere efforts to improve the factors contributing to human
development both in quantity and quality.
References and Additional Thinking
• Adelman, I. And Morris, C.T.(1973) ‘ Economic Growth
and Social Equality in Developing Countries’.
(California:Stanford University Press), pp.192-93
• (1992) ‘What is the Evidence on Income Inequality and
Development?', 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 Develop-
ment’. Journal of Development Economics, 6:307-42
• Bardhan, Pranab. (1995) ‘Research on Poverty and
Development twenty Years after Redistribution with
Growth',. in Michael Bruno and Boris Pleskovic (eds.)
‘Annual World Bank Conference of Development Eco-
W H I T H E R I N D I A ?
nomics, 1995,( Washington D.C.: the
World Bank
• Chenery, Hollis, Montek S. Ahluwalia,
clive Bell, Hohn H. Duloy, and richard
Jolly. (1974). ‘Redistribution with
Growth’. (New York: Oxford University
Press)
• Colman, D and Nixson, F. (1994).
‘Economics of Change in Less Devel-
oped Countries’. (New York: Harvester
Wheatsheaf), p. 100
• Fields, G.S. and G.H. Jackbuson. (1993).
‘ New Evidence on the Kuznets Curve’.
Yale Economic Growth Centre, New
Haven, Conn.
• Fishlow, A. (1995) ‘Inequality, Poverty,
and Growth : where Do We Stand?', in
Michael Bruno and Boris Pleskovic (eds.)
‘Annual World Bank Conference of
Development Economics, 1995', (Wash-
ington D.C.: The World Bank
• Higgins, B. (1992) ‘Equity and Efficiency in Development:
Basic Concepts’, in Donald J. Savoie and Irving Brecher
ed. Book ‘Equity And Efficiency in Economic Develop-
ment' (London: Intermediate Technology Publications), p.
37-8.
• Lewis, W.A. (1976) ‘Development and Distribution’, in A.
Cairncross and M.Puri (eds.) Employment, Income
Distributed and Development Strategy, Macmillan.
• Rahman,A. (1992) ‘People’s self-development’ , in Paul
Ekins and Manfred Max- in Paul Ekins and Manfred
Max-Neef (ed). Real-Life Economics: Understanding
wealth Creation (London: Routledge) p,172
• Todaro, M.P. 1997. ‘Economic Development’ (London:
Longman) p. i70UNDP (1996) Human Development
Report (New York: OUP)
• Watkins, Kevin. (1998). ‘Economic Growth with Equity:
Lessons from East Asia’,. (Oxford: Oxfam).
• World Bank. (1993) ‘The East Asian Miracle: Economic
Growth and Public Policy- A World Bank Policy Research
Report.’ (New York:OUP)
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organization.)
THE INDIA ECONOMY REVIEW 55
P R O B L E M S & P E R S P E C T I V E S

INCOME
AND
INEQUALITY
IN INDIA

56 THE IIPM THINK TANK

 G R O W T H G O A L S

Joydeep Goswami world by market exchange rates and the fourth largest by pur-
chasing power parity (PPP) basis. The economy was charac-
Consultant, National Council of Applied Economic
Research, New Delhi terized by extensive regulation, protectionism, and public
ownership, leading to pervasive corruption and slow growth

Subrata Bandyopadhyay
Senior Research Manager, ICMR, New Delhi
1. Introduction
India being the home to 1.1 billion people with a median age
of 25 years has the phenomenal potential for growth. With
real per capita income growing in excess of seven percent per
annum, together with an increased willingness to cooperate
as well as compete with the rest of the world, the country is
emerging as a major player in the global economy. Sixty years
have passed since India gained independence, and it is a
fascinating time to review the country's economic perform-
ance over these last few decades, and to assess future
prospects and potential.
The economy of India is the twelfth largest economy in the
till the last part of eighties. Since 1991, continuing economic
liberalization has moved the economy towards a market-
based system. Indian economy has moved from the tradi-
tional economy depending primarily on agriculture to
industrialized economy and is on the threshold of emerging a
big player in the world economy. India has been one of the
best performers in the world economy in recent years, but
rapidly rising inflation coupled with ever increasing inequal-
ity in income is posing a serious threat to the growth path.
This is a matter of debate whether inequality is greater in a
country when the vast majorities are poor and a few people
are very wealthy with a small middle class or when there is a
considerably larger middle class with the number of rich
persons, few of them sumptuously wealthy, increased by
several multiples. The latter situation has a lower inequality
but makes more visible to the poor.
The main objective of this paper is to examine the income

Table 1: Growth Rates in GNP, NNP and Per-Capita NNP in Different Plan Period (in percent)

Gross National Product at Net National Product at

Plan Period Per Capita NNP
Factor Cost Factor Cost

At 1999-00 At Current At 1999-00 At Current At 1999-00

At Current Prices
Prices Prices Prices Prices Prices

First plan period (I951-56) 1.8 3.7 2.0 4.4 0.2 2.6

Second Plan period (1956-61) 8.8 4.0 8.7 3.8 6.5 1.7

Third Plan Period (1961-66) 9.6 2.8 9.6 2.6 7.2 0.4

Annual Plan (1966-69) 12.3 3.9 12.3 3.9 9.9 1.6

Fourth Plan (1969-74) 11.1 3.4 10.8 3.1 8.3 0.8

Fifth Plan (1974-79) 10.7 5.0 10.3 4.9 7.9 2.6

Annual Plan (1979-80) 9.4 -5.0 8.3 -6.0 5.7 -8.2

Sixth Plan (1980-85) 15.4 5.4 15.2 5.4 12.8 3.1

Seventh Plan (1985-90) 14.1 5.5 13.8 5.5 11.4 3.3

Two Annual Plans (1990-92) 15.7 3.2 15.6 3.1 13.3 1.0

Eighth Plan (1992-97) 16.4 6.6 16.5 6.7 14.2 4.5

Ninth Plan (1997-2002) 10.8 5.5 10.6 5.3 8.5 3.3

Tenth Plan (2002-07) 12.6 7.8 12.5 7.8 10.8 6.1

Note: Growth rates from 2000-01 based on New Series with base year 1999-2000
Source: Economic Survey 2007-08, Ministry of Finance, Government of India, 2008

THE INDIA ECONOMY REVIEW 57

P R O B L E M S & P E R S P E C T I V E S

and inequality in India across states and regions and various IHDS survey carried out by NCAER for the year 2004-05.
regional groupings. Our main focus here is to measure The surveys was carried out for the households located in all
income inequality among the rural and urban households in States/Union Territories of India in both rural and urban
India by states and various groupings. The levels of inequal- areas and information about their sources of income, income
ity have been measured using Gini Coefficient. Another earned by each one of earners in the household along with
important aspect of income dynamics for a country like other demographic characteristics. Income survey was
India is large spatial variation. In this paper we have cap- designed around a three stage stratified sampling design
tured spatial variation in household income by states and which is similar to that used by the NSSO in its Household
various regional groupings. We have also looked at relative Budget Surveys (HBS).1 Sampling was done independently
income inequality across various income groups, sources of within each state/UT with objective of generating estimates
household income, religion as well as levels of education. at state/UT level.
The rest of the paper is organized in the following fashion.
In the next section we have mentioned the sources of data on 3. Indian Economy at Broader Perspective
which the analysis has been carried out. Section 3 mentions The structural transformation that has been adopted by the
the broad outline of the Indian economy and growth while national government in recent times has reduced growth
Household and per capita income and inequality by various constraints and contributed greatly to the overall growth and
stakeholders is taken up in Section 4. Section 5 makes the prosperity of the country. Indian economic policy after
concluding remarks of the results and fi ndings. independence was influenced by the colonial experience and
has strongly led to the exposure to Fabian socialism. Policy
2. Data and Methodology tended towards protectionism, with a strong emphasis on
For the analysis of income and inequality we have used import substitution, industrialization, state intervention in
labor and fi nancial markets, a large public sector, business
Table 2: India’s Growth Performance per Year regulation and central planning paradigm.
An adoption of the development strategy
Total Sectoral Growth of GDP (%)
Period GDP
helped the country to escape from the massive
Growth Agriculture Industry Services illiteracy, recurrent famines, fertility rates of
1970-72 to 1980-81 (average) 3.2 2.0 4.0 7.2 about seven children per woman, and secular
1981-82 to 1990-91 (average) 5.7 3.8 7.0 6.7 stagnation prevailing before Independence.
The adverse economic situation during the
1991-92 1.4 -1.5 -0.1 3.5
later part of 1980s and the fi rst part of 1990s
1995-96 7.3 -0.2 12.2 9.4
made the Government of India review the
1996-97 8.0 9.1 7.3 7.2
polices followed in the preceding four decades,
1992-93 to 1996-97 (average) 6.7 4.6 8.0 7.6
take a "U" turn and try to pull the economy
1997-98 4.3 -1.6 4.3 7.9 from the brink of disaster and the verge of
1999-2000 6.4 2.7 4.7 9.3 bankruptcy. The terms Liberalization, Privati-
2001-02 5.8 5.9 2.8 6.4 zation and Globalization (the new LPG) amply
1997-98 to 2001-02 (average) 5.4 2.3 4.5 7.8 summaries the crucial aspects of the reforms
2004-05 7.5 0.7 10.5 8.7 started in 1991. The stabilization policies
2005-06 7.9 14.0 9.6 11.1
initiated in 1991 were highly contractionary
and were designed to reduce inflation from the
2006-07 8.2 15.2 9.8 12.5
level of 16 percent, improve precarious balance
2007-08 7.6 14.6 9.3 12.1
of payment situation, reduce fiscal deficit and
2008-09 6.7 NA NA NA
help pick up drooping industrial growth.
Note: Growth rates from 2000-01 based on New Series with base year 1999-2000
Source: Economic Survey 2008-09, Ministry of Finance, Government of India, 2009 The liberalization of the Indian economy

58 THE IIPM THINK TANK

 G R O W T H G O A L S

during the early nineties provides increasing hopes to the Table 3: Basic Characteristics of Indian Economy
agricultural sector. But what is different is that there has by Location
taken place a notable deceleration in the growth rate of gross Variables Rural Urban All India
product from agricultural during the nineties, which deceler-
Estimated Population (Million) 741.5 260.9 1002.5
ated for 3.94 percent per annum during 1980-81 to 1990-91
Estimated Household (Million) 138.2 53.7 191.9
to only 1.9 percent per annum during 1990-91 to 1998-99.
Household Size 5.4 4.9 5.2
The fruits of liberalization reached their peak in 2007,
Estimated Household Income (Rs.) 45135 77410 54160
with India recording its highest GDP growth rate of nine
percent. With this, India became the second fastest growing Estimated Per-Capita Income (Rs.) 8413 15915 10366

major economy in the world, next only to China. An Organi- Estimated Poor Household (%) 24.0 22.0 23.5

zation for Economic Co-operation and Development Gini (Inequality) 0.48 0.48 0.51
(OECD) report states that the average growth rates 7.5 Source: Calculated by the author from IHDS data

percent will double the average income in a decade and more

reforms would speed up the pace. Indian government
coalitions have been advised to continue liberalization. India
grows at slower pace than China. McKinsey states that
removing main obstacles "would free India’s economy to
grow as fast as China’s, at 10 percent a year". The GDP
growth 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 to
the nation’s development.
4. Household and Per-Capita Income
The share of household income to the GDP is an indicator
based on consumption levels, is often used, but other indica-
tors are needed to capture other dimensions of poverty. The
level of household income is an important indicator deter-
mining the level of inequality. This section explains the levels
of household income and per capita income by various
regional groupings. In the beginning we present the estimat-
ed characteristics of Indian economy such as population,
household size, household income and the proportion of
poor household by the place of location to fi nd out the level
of inequalities at the broader aspects.
The household income estimated from the surveys data
shows that the mean household income in among the rural

Figure 1: Average Annual Per-Capita Income by Income Groups

32816

35000
29557
Average Annual Per Capita Income (Rs.)

30000

25000

20000 Rural

Urban
11670
11327

15000
6981
6816

10000
4455
4371
2284
2291

5000

0
Q1 Q2 Q3 Q4 Q5
Household Income Groups

THE INDIA ECONOMY REVIEW 59

P R O B L E M S & P E R S P E C T I V E S

and urban area is significantly different (Table 3). However, Table 4: Household and Per-Capita Income by
the rural-urban differences are far less pronounced when we Quintiles
compare the per capita incomes. The significant point to be
highlighted is that the rural-urban difference in household Quintiles (Rs.)
Income
All
income and per-capita income is striking. The survey reveals Q1 Q2 Q3 Q4 Q5
India
that rural household in India is earning 42 percent less than HHY 13568 24080 35699 57300 140166 54160
urban household. The CSO estimates suggest that the per PCY 2290 4385 6856 11449 31172 10366
capita net domestic product at current prices for 2004-05 0.51
Gini 0.19 .08 .08 .09 0.31
vary about five times between the rich and the poorer states.
Shukla (2007) reports that 48 percent of the Indian live in Source: Calculated by the author from IHDS data

the low income states while about 31 percent come from the
middle income states.
A significant way of looking at the inequalities is by
dividing the households ranked by their incomes. We have
divided the households on the basis of their incomes into five
groups called quintile where Q1 correspond to the house-
holds at the bottom of income range and Q5 representing the
households at the top. Differences across quintiles are
striking. This shows that the share of income of the house-
hold for Q1 is just 10 percent of the household income of Q5.
This disparity is independent irrespective of rural and urban
areas but marginally better in rural areas.
The per capita income by quintiles shows a more conspicu-
ous fact as the per capita income for the household belonging
to Q5 is about 13.6 times more than the per capita income of
household belonging to Q1. The difference by place of
residence is again prominent. In rural areas, the Q5-Q1 ratio
is 12.9 while in the urban sector the ratio difference is about
14.4. These differences arise due the fact that the households
in lower income groups tend to have larger household size.
Again capturing the spatial variations in income the
household income and per capita income is determined by
regions.2 The northern regions experienced a more balanced
development in terms of Industry and agriculture. Moreover,
urbanization has flourished at a fast rate in the northern
region compared to the other regions of the country. The
western regions are blessed by various industries due to easy
availability of the raw materials.
The Northern region is having highest mean household
income followed by the states in the hill areas (Mountain).
The households in four out of seven regions on an average
earn less than the all India average (Figure 2). The lowest
mean household income is in the region comprising of states
of Eastern and North Eastern States. The mean household
income in Northern region is more than two times to that of

Table 5: Household and Per-Capita Income by Quintiles

Rural Urban All
Regions
HHY PCY Gini HHY PCY Gini HHY PCY Gini

Mountain 75834 12958 0.43 101065 19312 0.45 80658 14067 0.44

North 93185 15603 0.48 88383 18302 0.44 90846 16775 0.47

UP-UT-Bihar-Jharkhand 39283 6387 0.43 75611 13232 0.51 45530 7495 0.47

Rajasthan-MP-Chhattisgarh 44849 7767 0.46 66562 12399 0.49 49983 8803 0.48

East & NE 38274 7675 0.47 81803 18724 0.46 47994 9898 0.51

West 53150 10264 0.49 85534 17324 0.44 66491 13091 0.49

South 42917 9639 0.49 69666 15835 0.48 51499 11611 0.51

All India 45135 8413 0.48 77410 15915 0.48 54160 10366 0.48

Source: Calculated by the author from IHDS data

60 THE IIPM THINK TANK

 G R O W T H G O A L S

Figure 2: Average Per-Capita Income by Regions

19312
18724
18302
17324
20000

15835

15603
13232

12958
Per Capita Income (Rs.)

12399
15000

10264
Rural

9639
Urban
7767

7675
10000

6387

5000

0
Rajasthan-MP- UP-Uttara- South West North East & Mountain
Chhattisgarh khand Bihar- North East
Jharkhand

mean household income in the East and North Eastern has been much lower in the Hill (Mountain) states (Table 5).
States. The disparities in the household earnings become sig- In the urban areas of the plain region of Uttar Pradesh,
nificant when we look at the income by place of residence. Uttarakhand, Bihar and Jharkhand the inequality has been
The difference is quite significant in the East and North higher though inequality in income in rural areas has been
Eastern States as rural household in these states earns more much lower in these states.
than two times less than their urban households. In Northern It is believed that about 68 percent of the people in India
region the household in rural areas earn five percent more still depend on agriculture while in recent time there has
than the households in the urban areas though the per-capita been exemplary shift of occupational pattern in the country
income of the household in urban areas is about 14 percent due to rapid industrialization on one hand and fast increase
more than the household in the rural areas. However, it may in the service sector. It is expected that there has been shift
here be mentioned that income inequality as indicated by of income from the traditional agriculture to the service
Gini coefficient has been higher in the East and North-East sector in the form of regular salary and wages.
region along with Southern Indian States though inequality The survey fi ndings suggest that the regular salary and

Table 6: Household and Per-Capita Income by Principal Source of Household Income

Rural Urban All

Occupations
HHY PCY Gini HHY PCY Gini HHY PCY Gini

Regular Salary/Wages 73486 13606 0.44 100534 21259 0.41 89677 17940 0.44
Self employment in
46700 8714 0.45 79030 15342 0.49 62152 11817 0.49
Non-Agriculture
Labour 25536 5096 0.36 35255 7111 0.34 27369 5473 0.36

Self-employment in Agriculture 57113 9680 0.51 94713 16026 0.55 57944 9821 0.51

Others 45573 10903 0.48 72044 17481 0.49 56316 13550 0.50

All India 45135 8413 0.48 77410 15915 0.48 54160 10366 0.51

Source: Calculated by the author from IHDS data

THE INDIA ECONOMY REVIEW 61

P R O B L E M S & P E R S P E C T I V E S

wages households in India earn on an average of Rs. 89,677 have lower inequalities while inequalities has been very high
per annum while the household engaged as self-employed in among the household income whose main occupation is
non-agriculture earns Rs. 62,152 per annum. The household self-employment in non-agriculture. This is equally true by
belonging to manual labour on an average earns about 3.2 the place of location though the household in urban areas
times less than the household engaged in regular salary and whose main occupation is salary and wages has lower
wage. The disparity between the rural and urban areas for inequality compared to rural areas.
the household engaged as self employment in non agricul- The Indian population is characterized by a distinctive
ture has been quite significant as it is texture with socio-cultural and reli-
understood that the household engaged gious structure. Institutionally there is
in non-agriculture have wider scope of Indian no reason why income will have any
earning in an urban areas than in rural population is correlation among the caste and
areas. characterised religion of a household. However, it is
The per capita income closely follows
the similar pattern like household
by distinct known that Indian case is exclusive in
its traditional organization where caste
income among the various occupational
texture with and/or religion play an important part
distributions. However, the noticeable socio-cultural and in determining the scope of occupa-
differences emerge in case of urban religious structure tion. Despite greater access to educa-
areas where the per capita income of tion and positive action on the part of
the other occupation is higher than the Indian Government, there are studies
per capita income of the household engaged as self employ- that show that the caste groups who were traditionally at the
ment in agriculture. This is understood that in urban areas lower ranking were also economically worse off.
the scope of agriculture as occupation is very much limited. Over the years, social scientists have investigated the
Talking about inequalities in income distribution by relationship between religion and social inequality. Re-
occupation pattern of the household, the household whose searchers have focused on issues such as the impact of
main occupation is labour (agriculture and non-agriculture) inequality on religion, the effect of religion on inequality,

Figure 3: Average Per-Capita Income By Socio-Religious Groups

24121
22636

21953

25000

20000
16206
Per Capita Income (Rs.)

14319
12269

15000 Rural
11793

Urban
9793
8111

10000
7368
6313

6205

5000

0
High Caste OBC Dalit Adivasi Muslim Others
Hindus

Socio-Religious Groups

62 THE IIPM THINK TANK

 G R O W T H G O A L S

Table 7: Household and Per-Capita Income by Socio-Religious Groups

Rural Urban All
Religious Groups
HHY PCY Gini HHY PCY Gini HHY PCY Gini

High Caste Hindu 66339 12269 0.47 102581 22636 0.46 81382 16135 0.49

OBC 43754 8111 0.46 68100 14319 0.45 49732 9495 0.48

Dalit 32655 6313 0.42 59046 11793 0.42 38309 7457 0.44

Adivasi 31338 6205 0.48 79189 16206 0.47 36141 7180 0.51

Muslim 43796 7368 0.46 56124 9793 0.44 47945 8165 0.46

Other Religion 107607 21953 0.55 107911 24121 0.47 107740 22855 0.52

Total 45135 8413 0.48 77410 15915 0.48 54160 10366 0.50

Source: Calculated by the author from IHDS data

and the relationship between religion and socio-economic
status. In order to justify the income inequality by religious
groups, we have estimated the household and per capita
income by various socio-religious groups.
Among the various religious groups, the survey result
reveals that on an average, household from other religious
groups in India earns Rs. 1,07,740 per annum followed by the
household belonging to High Caste Hindus earns on an
average Rs. 81,382 (Table 7). This may be due to the fact that
agriculture has flourished in North
Eastern Region. It may also be men-
tioned here that a household on an
average earns Rs. 91,557 in Punjab
which is considered as among the rich
state in India. Strikingly, the household
the adivasis though
income of Muslims is lower than the
national average while that of the
household income of the Adivasis is the
lowest and worse off among other
socio-religious groups.
There is not much difference in the
trend in household income by the place of residence. In
urban areas, the Hindus households are better off than their
Christians counterpart. The per capita income of the
household belonging to other socio-religious groups has
been highest followed by high caste Hindus. This is under-
stood that Sikhs are more prone to Punjab and are much
better off. Interestingly in urban areas, Adivasis are better
off than Muslims, Dalit and OBCs while in rural areas
Muslims are better off than these groups.
The Gini coefficients by various socio-religious groups
suggest that inequality has been higher among the other
religious groups followed by higher inequality among the
Adivasis. However, inequality has been lowest among the
Dalits. The same scenario persists by the place of residence.
With the changing economic structure brought about by
industrialization and large scale development in social
structure, education sector has done quite well in providing
basic education to the Indian masses. It is believed that
education makes a big difference to
earning level for the Indian house-
Inequality of holds. About 17 percent of the house-
Income is said to hold in India do not have a single
be higher among literate. This is about nine percent in
urban areas and about 24 percent in
rural areas. On the other hand, we fi nd
mean household that about 20 percent of the head of the
income of this households are graduates or have
group is lowest higher degree. The proportion is about
30 percent in urban areas and about 10
percent in rural areas.
As expected the mean household income increases with
the increase in education level. On an average, a household
of illiterates in India earns almost 5.7 times less than the
Graduate household. However, urban households are quite
better off in earning by all level of education. On the other
hand, an illiterate Indian on an average earns about 3.8
times less than a graduate but this inequality has been
slightly less in rural areas compared to that of urban areas in
the country.

THE INDIA ECONOMY REVIEW 63

P R O B L E M S & P E R S P E C T I V E S

5. Conclusion with rising inequality.

Various studies have shown that the marginal productivity in The household size is an important determinant in the
agriculture is zero if not negative. Indian agriculture is over determination of per capita income in the country. It is
burdened and this is suggested from the fact that the growth expected that the larger the household size lower is the
rate in the agricultural sector has been very slow. Since per-capita income. However, the survey results shows that
agriculture is concentrated to the rural areas, there seems to northern region with higher household size tops the list
be large inequality in the distribution of income between among the other regions in terms of per capita income. On
rural and urban areas. Our results the other hand, though the western
suggest that on an average a household India regions have higher household
in the rural areas earns about 60 Urbanization is income compared to the southern India
percent less than the household in the leading to shift region, but with higher household size,
urban areas. This disparity is much in occupational the per capita income for the west is
lesser in the south Indian states.
While standard political economy
structure and lower than south.
Inequality also persists among the
theories suggest a moderating effect of
leading to a rise states and regions in India. The
development and growth on income in inequality in development process has not been
inequality, empirical literature has income uniform across states and regions. Our
failed to uncover any such robust results suggest that the northern
relationship. After about six decades of regions are quite better off in terms of
planning with various incentives of growth, inequality household income though inequality in income is higher
remains the most shameful scar on the face of Indian society. among the household in these states. The central Indian
The rising income accompanied by rapid growth of popula- states is yet to catch up with the development effort showing
tion, per capita income has been increasing at a slow pace. low level of household income and higher poverty ratios
The growth of urbanization and rapid industrialization in the compared to the other regions. However, these states show
country is leading to a shift in occupation structure coupled lower level of inequality in income among the households.

Figure 4: Average Per Capita Income by Education Level of Head of Household

25000
21957

20000
Per Capita Income (Rs.)

15000 13334

10542
10000
7836
5943 6338
5006
5000

0
Illiterates Lower Primary Middle Matric Higher Graduation
Primary Secondary & Above

64 THE IIPM THINK TANK


Another sign of income inequality is observed between the
higher and lower income groups. This inequality is observed
irrespective of the place of residence though marginally
better in rural areas. Inequality in income also persists by
various religious groups in India. It was observed that
households which belong to other religious groups are quite
better off though income inequality among these household
is quite high.
To conclude, we observed that with higher income there
has been higher income inequality though the poverty ratio
has been lower. The household size is lower for the house-
hold with higher income though there is no direct relation-
ship between level of income inequality and poverty ratio.
There seems to be inequality in the distribution of income by
regions and by place of residence. The northern regions are
quite better off though these regions are characterized by
higher income inequality. The disparity in income distribu-
tion has been more severe in eastern and north eastern India
by rural and urban areas though this region is not worse off
compared to central plains of India.
Endnotes
1
See GOI (2004) for detailed on sampling design and other
related issues in NSSO surveys during 2004-05.
2
The regions are group of states classified based on
geographical location and physical proximity.
References and Additional Thinking
• Bhalla, Surjit S (2003): ‘Recounting the Poor: Poverty in
India, 1983-99’, Economic and Political Weekly, January
25-31.
• Bhagwati, Jagdish (2001): ‘Growth, Poverty and Reforms’,
Economic and Political Weekly, March 10 th.
• Bhaumik, S.K. and Chakraborty Manisha (2006): Earn-
ings Inequality in India: Has the Rise of Caste and
Religion Based Politics in India Had an Impact?, IZA
Discussion Paper No. 2008, Bonn, Germany.
• Chadha, G K and Alakh N Sharma (1997): Growth,
Employment and Poverty: Change and Continuity in
Rural India, Vikas, Delhi.
• Deaton, Angus and Jean Dreze (2002): ‘Poverty and
Inequality in India: A Re-examination’, Economic and
Political Weekly, September 7th.
• Deaton, Angus (2003): ‘Prices and Poverty in India,
G R O W T H G O A L S
1987-2000’, Economic and Political Weekly, January
25-31.
• Dubey, A. and Gangopadhay, S. (2000): Counting the
Poor, Indian Statistical Institute, New Delhi
• Kaplinsky Raphael (2005): “Globalization, Poverty and
Inequality: Between a Rock and a Hard Place” Polity
Press, Cambridge, UK.
• Narayan, D., with R. Patel, K. Schafft, A. Rademacher,
and S. Koch-Schulte. 2000. Voices of the Poor: Can
Anyone Hear Us? New York: Oxford University Press.
• GOI, (2007): Poverty Estimates for 2004-05, Press
Information Bureau, New Delhi.
• GOI (2008): Employment and Unemployment Situation in
India – 2005-06, NSSO 62nd Round, Ministry of Statistics
and Programme Implementation.
• Sen, Abhijit (1996): ‘Economic Reforms, Employment and
Poverty: Trends and Options’, Economic and Political
Weekly, Special Number, September.
• Sen Amartya (2006): Inequality Re-examined, Oxford
University Press, New Delhi
• Shukla, R.K. (2007): How India Earns, Spends and Saves,
NCAER, New Delhi.
• Sundaram, K (2001): ‘Employment and Poverty in the
1990s: Further Results from NSS 55th Round Employ-
ment-Unemployment Survey 1999-2000’, Economic and
Political Weekly, August 11-17.
• Sundaram, K and Suresh D Tendulkar (2003): ‘Poverty
Has Declined in the 1990s: A Resolution of Comparability
Problems in NSS Consumer Expenditure Data’, Economic
and Political Weekly, January 25-31
• Sundaram, K and Suresh D Tendulkar (2003): ‘Poverty in
India in the 1990s: Revised Results for All-India and 15
Major 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 Asian
Woman Trade Unionists Conference Organized by
GEFONT-3F Partnership, Kathmandu.
• World Bank (2000): World Development Report 2000-
2001: Attacking Poverty. New York: Oxford University
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(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organization.)
THE INDIA ECONOMY REVIEW 65
P R O B L E M S & P E R S P E C T I V E S

INDIA: ECONOMIC GROWTH

SANS DEVELOPMENT
T S Mohanchandralal
Visiting Faculty, IIPM Chennai

Economic Growth Versus Economic Development
Economic growth is quantity centric. It indicates a rise in GDP
or GNP of a nation which focuses on the quantity of goods and
services produced without mentioning how they are produced,
and how they are distributed among the people across of the
country. Positive economic growth implies expansion of eco-
nomic activities in terms of increased production etc, while
negative growth suggests it’s down turn; recession culminating
into depression. Income per capita of various countries is
compared through purchasing power parity which compensates
for changes in the value of money. Hence GDP and GNP are
also given in inflation adjusted terms along with their nominal or
current figures.
Economic development is quality centric too. In a more
comprehensive way it describes a rise or fall in the share of
agriculture in GNP and a steady rise or decline in the shares of
industries, trade, banking, construction and other services. It is
inclusive of the changes in technological and institutional
arrangements of production and their distributive pattern among
the people. It is not very difficult to achieve economic growth
through mobilization of resources, raising their productivity, and
output level. But the process of development is quite challeng-

66 THE IIPM THINK TANK


ing. It involves not only a rise in output but also changes in their
composition, shifts in the allocation of productive resources
among the various sectors of the economy, and elimination or
reduction of poverty, inequalities and unemployment. In the
words of AmartyaSen development requires the removal of the
major sources of poverty, filth, squalor, poor economic opportu-
nities, and denial of basic facilities to the people as well as
intolerance of the repressive activities of the states.
India’s economic growth is amazing but her development is
appalling and hence the over all performance is not appealing.
India has achieved economic growth in substantial measures in
almost all the sectors of the economy. Production in the primary
sector has gone up. The secondary sector has diversified well
with increasing output. The tertiary sector is becoming promi-
nent in India’s GDP. But in the process of achieving economic
growth, India is facing many challenges in the form of rural-
urban divide, growing income inequali-
ties, price inflation, shrinking employ-
ment opportunities in the rural side, The food sector
sectoral and regional imbalances, stock that is valued at
market scams etc. All these issues that are US$ 200 billion
associated with economic development
at present is
have to be tackled effectively to see that
the benefits of economic growth reach all
expected to grow
the sections of the society. at $310 billion by
the year 2015
Indian Economy:
Growth Dimensions
Indian economy has grown at the rate of 8.8% for the past four
years save 2005. It reached 9.6% in 2006, the highest rate
attained in the last 18 years. Structural transformation fortified
by the policy of liberalization has contributed to the overall
growth the economy. During this period the performance of the
service sector grew at 11.2% and the industrial sector at the rate
of 10.6%.
An upcoming manufacturing sector has provided the environ-
ment for the country’s excellent growth momentum. Its growth
rate sprang up steadily from nine percent in 2005 to 12% in 2006.
The storage and communication sector also posted an impres-
sive growth rate of 16.6% in the same year. High savings rates
backed by sustained investment provided the right environment
for this dramatic transformation. Hence India’s GDP jumped
from 22.8% in 2001 to 35.9% in 2006. Further, the gross rate of
savings as a proportion to GDP registered a solid growth from
A L O N G R O A D A H E A D
23.5% 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 vibrant
industrial health of the economy. Six Indian corporations: IOC,
RIL, BPCL, HPCL, ONGC, and SBI have gone into the Fortune
Global 500 list for the year 2006. Construction growth rate rose
to 10.7%. Trade, hotels, transport and communication registered
a 12% growth rate. Financing, insurance, real estate, and
business services recorded a telling growth rate of 11% during
this 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 decent
growth rate of 7.6%. Agriculture forestry and fishing, and mining
and quarrying, grew at 3.8% and 3.2%, respectively during
2007-2008.
Exports grew by 18.1% and the imports shoot up by 34.3%
during 2007-2008. India's foreign ex-
change reserves sans gold and SDRs
stood at $219.8 billion at the end of 2007.
The food sector that is valued at US$ 200
billion at present is expected to grow at
$310 billion by 2015. Stocks of food-grains
grew by 13.1% to 17.7 million tonnes. The
annual inflation rate was 4.5% in 2007.
After a high dose of price rise in the past
couple of years, now it is on the moderate
side. India's balance of payments is
expected to remain comfortable, with
merchandise exports witnessing substantial growth. In recent
years due to global recession there may be setbacks in our
exports, but compared to countries such as China, the fall may
not phenomenal.
The productivity trends of different sectors of our economy
and its subsequent growth is estimated to be around eight
percent and above until 2020. At this rate, India will become the
second largest economy in the world after China. IMF ranks
India 4th in the world with only the USA, China and Japan ahead
of it in terms of purchasing power parity. World Bank estimates
for 2006, ranks India 12th in the world with a GDP of $906,268
million. It has also ranked India as one of the top economic
performers of the world.
Agriculture
Indian agriculture in terms of GDP is fast losing ground to the
THE INDIA ECONOMY REVIEW 67
P R O B L E M S & P E R S P E C T I V E S
services sector. In the second plan period our agriculture with
60% of our labour force contributed only 18.6% of the country's
GDP. In 2006 with less percentage of labour force it contributed
19.9% of our GDP. While the services sector accounted for
60.7% of our GDP, our industry’s share was 19.3% of GDP.
Thus agriculture is no longer the keystone of our economy, as it
was for about 30 years since the 1960. It reflects the structural
changes of an emerging economy. Today our primary agricul-
tural produce include milk, tea, ginger, cashew nuts, black
pepper, turmeric, wheat, rice, tobacco, oilseed, cotton, jute,
sugar, sugarcane, groundnut, inland fish and cattle. More
commercial crops have entered the list. Their outputs have
been on the steady rise, thanks to the green revolution and
white revolution.
Trade and Investment
India's exports have been steadily rising
since liberalization. Our foreign exchange
reserves rose in 2005-06 from an impres- India is the
sive $141 billion, to $200 billion in recent world's 6 largest
years. Thanks to this welcome develop- energy consumer
ment, our dependence on external
assistance and commercial borrowings
accounting for
have started moving southward since
about 3.5% of the
1991-92, and since 2002-03, we have world's annual
started paying back our external debts. energy usage
India's exports stood at $125 billion
during 2006-07, as against the $187.9
billion imports. Today our major trading partners are the USA,
China, the UAE, the UK, Singapore, Hong Kong and the EU. In
the past our trade was mostly confined to the UK and the US.
Besides skilled manpower, now our main exports constitute
engineering goods, gems and jewellery, textile products, chemi-
cals, and leather products. Our main imports include crude oil,
fertilizers, chemicals, machinery, and gemstones.
Outsourcing Hub
India's service sector is witnessing an unprecedented growth,
with great promises for the new - generation professionals who
are knowledge workers. This unenviable position has pushed
India to the status of a knowledge superpower. With less than
1/3rd of India's labour force; today it generates more than half of
India's output. With its huge supply of skilled and cheap man-
power, India has become the most sought after destination for
68 THE IIPM THINK TANK
'back office' operations of many prominent global conglomerates
in the world. All these have sparked an outsourcing boom in the
west, with its main base in India. In 1950 the service sector
contributed only 15% to our GDP, whereas in 2005, it contribu-
tion sprang 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 years
2003 and 2007. Our software and services industry with its strong
value chain, gives us formidable brand equity in the global
markets. Our Business Process Outsourcing sector has emerged
as a key driver of growth for our economy. India is the world's 6th
largest energy consumer accounting for about 3.5% of the
world's total annual energy consumption. It is the 8th largest
crude steel producing country in the world. Our cement industry
uses the latest technology and we are the second largest manu-
facturer of cement in the world. These outstanding perform-
ances have let loose a number of formida-
ble challenges to India which are
associated with economic development.
th
Agriculture and rural- urban divide
The sharp rise in rural-urban disparities
in India after decades of planned eco-
nomic development is appalling. Our
planning process instead of narrowing
down such disparities accelerated it.
Rural India with about 70% of the India's
population is characterized by low income
levels, poor quality of life and a weak base
for human development. Nearly 1/3rd of our national income
comes from villages, but there is a sharp rural-urban divide.
Agriculture supports about 50% of the workforce. But a lion's
share of our national resources is directed to the non-agricultur-
al sector. Our agriculture has been growing at less than half the
pace of the other sectors. During the 7th Plan agriculture and
allied sectors grew at the rate of 3.4% while the national
economy grew at six percent. In 1997-98 our agriculture experi-
enced a negative growth of two percent, as against a five percent
growth of the national economy.
This dismal performance agriculture has serious implications
for the rural-urban relationship. The GDP per agricultural
worker was Rs. 2443 in 1950-51, followed by Rs.3196 in 1970-71
and Rs. 3627 in 1995-96 whereas GDP per non-agricultural
worker rose sharply from Rs. 4470 in 1950-51 to Rs. 9179 in
1970-71 and to Rs. 16715 in 1995-96. This problem remains more

or less the same even after the Structural Adjustment Pro-
gramme of the central government. While the GDP per agricul-
tural worker moved up marginally from Rs. 3545 in 1990-91 to
Rs. 3627 in 1995-96, the GDP for per non-agricultural worker
rose from Rs. 14660 to Rs. 16715 during the same period. Our
liberalisation policy has hit hard the non-farm employment in
rural areas. In 1997-98, the annual increase in non-farm employ-
ment in rural areas was four percent. In 1983-84 it was 3.3%.
During 1999-2000 it came down to 2.1%. The consequence is a
very slow reduction in rural poverty. In 1993-94 it was 39.4%,
and in 1999-2000 it came down marginally to 36.4%.
NSSO on Rural poverty
The survey report of NSSO is revealing. Investment in agricul-
ture has been about 10% of the total investments of the country.
The neglect of agriculture and allied sectors is apparent from the
budgetary allocation. It has never been
more than 20%. In 1997-98 the Central
and State governments spent about Rs.12, The neglect of
000 crores on agriculture and allied agriculture is
activities. The average income of an urban apparent from
dweller is four times higher than that of a
rural dweller. The neglect of rural India is
the budgetary
clear if one examines the data on rural
allocation. It has
India's contribution to the GDP and what never been more
the rural areas get back from the nation. than 20 percent
With 27% of the GDP coming from rural
India, the return is just five percent. A
Human Development Report of India (1999) points out that the
rural per capita per month consumption expenditure was Rs. 486
in 1999-2000 while it was Rs. 855 for urban areas.
Data collected by the NSSO also show that the mean expendi-
ture gap between the urban and rural areas has widened by over
eight percent points between 1988 and 2001. This increase in the
disparity level will be great during drought periods. Another
NSSO data points out that while 75% of the country's population
in 2000-01 resided in rural areas, they accounted for less than
62% of the total consumption expenditure.
The disparities in the social development sector too are quite
disturbing. In 2001, the urban literacy rate was 80% while it was
59% for rural India. In percentage points the disparity is 20.9. A
study by the Planning Commission shows that illiterate people
aged 15 years and above but not beyond 60 years, in rural areas
constitute 56% and it is 25% for urban areas. Of the school-
A L O N G R O A D A H E A D
going children in the age group of 5-14 years, 82% live in urban
areas. The rural figure is 63%. Kerala has brought down this
disparity to a significant extent.
Rural India is Classically Backward in Basic Amenities
The NSS 5th round data show that 70% of the urban dwellers
have access to piped water, as against just 19% of the rural
population. Public health facilities are so poor in rural areas that
the death rate per 1,000 is 10% while it is six percent in urban
areas. In rural areas the infant mortality rate is 77 per 1,000 but
in urban areas it is 45 per 1000. Again 84% of rural households
are devoid of toilet facilities as against 23% in urban areas. In
1991, such facilities were made available to nine percent of rural
households as against 64% for urban households. A HDR 2002
report indicates that only 31% of rural households had electricity
as against 76% for urban areas. All these disparities are well
reflected in the Human Development
Index of the planning commission. The
index is 0.34 for rural India and it is 0.51
for urban India. The Human Poverty
Index for rural India is 42 and it is 44 for
urban India.
Gandhiji wanted that the engine of
India's development must roll down from
the villages. Time and again he empha-
sized that regeneration of rural economy
alone save India from classical backward-
ness. A strong rural India can lay the royal
road for urban progress and prosperity. But the planners felt that
urban India with a modern-mind set can provide the spark for
sustained economic development which will in due course
percolate into the rural India. This misplaced emphasis has been
responsible for the present day rural-urban divide.
The Need of the Hour
There is little doubt that our rural economy cannot grow
without a strong and well diversified agriculture. This calls for
bottom up approach to development. Reconstruction of the
rural economy poses one of the greatest challenges for India.
We have to start from scratch. Effective land reform is the need
of the hour. It must be backed by uninterrupted supply of farm
inputs and implements to the peasants at reasonable prices.
Here commercial banks can play a constructive role to bring
bought economic transformation in rural India. Financial
THE INDIA ECONOMY REVIEW 69
P R O B L E M S & P E R S P E C T I V E S
institutions and industries can give life again to village adop-
tion scheme. Their participation can result in an increase in
agricultural productivity, besides commercialisation of agricul-
ture and disagriculturalisation.
Apart from improving basic facilities such as health, sanitation
and education in the villages, the local bodies with the support of
the state and central Government must launch time bound cum
task-oriented programs for the development of rural infrastruc-
ture such as roads, rural housing and marketing facilities for
agro and agri-products. There is a great need for employment
generation, which can better the living style of the rural popula-
tion. We must put in place a long-term policy with multilevel
targets, keeping in mind the immediate requirements of the rural
and urban areas and the technologies available to fulfil their
need. The government must demonstrate that there will be no
ad-hocism in our developmental policy and planning exercises.
Such an approach will instill confidence
among the rural population.
At least 25% firms
Technology Can Reduce the Rural listed on the BSE
Urban Divide and 28% firms
Technology can be effective to contain
the growing rural-urban divide through
listed on the NSE
a) high connectivity, b) renewable energy
have manipulated
for Power, and c) multiple economic their financial
opportunities for income generation. a) statements
The Private Service providers can exploit
the vast unexplored market of rural India
for connectivity. Reliance has made a beginning and reached
the rural corridor. Others can follow suit. Tremendous effort is
needed to bring telecommunication facility to the remotest
area with internet technology and other related IT enabled
technologies. This will bridge the gap in information flow and
knowledge between the rural and urban India. E governance
can bring about transparency and prevent the exploitation of
the rural folks.
The rural sectors can be self sufficient in power supply by
banking on renewable energy in bio mass, solar and gas fired
digesters that can lessen the urban dependence. Since the rural
sector is rich in natural resources this can be made easily
adaptable on large scale.
Rural BPO with great employment opportunities has caught
up in Tamil Nadu with IIT Madras spinning several novel
successful ventures under the leadership of Prof Junjunwala.
70 THE IIPM THINK TANK
This can be imitated by the entire country. The quality education
through online education portal provided by Tutorvista can be
extended to the rural areas too. This will make the rural folks
more confident in their career profile. It promotes employability
and generates quality employment options. Apart from their
traditional occupation the rural population can also work
through the tale- networking projects by sitting at home. This
will increase their per capita income. Besides selling their
services, they can also sell produce and products online.
Technology development hubs once set up in rural areas can
promote technical skill among rural masses which can be
successfully employed for rural industrialisation. This can also
cry halt their migration to urban areas. For example, Titan
Watch factory at Hosur was responsible for the development of a
new generation of work force from the surrounding rural areas.
It has built up a talent pool there with precision delivery systems
particularly with the women population.
Bio-technology can be used to promote
contract farming which can give an
additional revenue base for the rural folks
besides their traditional income. Agri
business will generate great income if the
traditional organic methodology is used in
cultivation of crops and vegetables. A
Non-Government Organization named
Development Alternatives has been using
GIS spatial mapping for locating wet
areas and ground water levels for building
watershed management systems in rural arid areas. This has
changed there the method of cultivation on modern lines.
With numerous employment options and good income choice
available via technology applications there is no reason for the
rural mass to migrate to the urban centres in search of employ-
ment. This will bring about a holistic development between the
urban and rural areas by reducing the divide considerably.
Modern technologies can be of great help for the reconstruction
of rural India. Urban development in a country like India has to
dovetail with rural development.
Corporate Frauds: Appalling Disclosures
Now turning to the urban issues, a serious problem which needs
immediate attention is how to fight out the recurring stock
market scams engineered by greedy and self seeking profession-
als. This menace enervates the small investors from entering the

stock market with their tit bits of savings. A recent survey by the
India Forensic Consultancy Services brings to light many
shocking revelations on corporate frauds. The study points out
that at least 25% companies listed on the BSE and 28% compa-
nies listed on the NSE have manipulated their financial state-
ments to woo the gullible investors. They include almost all
industries belonging to manufacturing and service sectors. The
manufacturing sector, which contributes about 28% of India's
GDP, is fraught with fraudulent activities largely due to the
peculiar nature of their business and the underlying procedural
complexities of this sector. Real estate and Puss are in no way
inferior to the former in manipulations.
73% of 340 Chartered Accountants (CAs) who participated in
the survey, admits that they are forced to manipulate accounting
statements to exceed the expectations of stock market analysts.
Credit-greedy firms force the auditors to manipulate their
financial data in their applications to qualify for easy credit at
concessional rate of interest. Most of the investors apprehend
that financial fraud will be on the rise in the years to come. It is
most unfortunate that the personnel in the accounts depart-
ments of companies, auditors and directors of companies,
promoters and others benefit more from the financial frauds at
the expense of the ordinary investors. These fraudsters if go
unchecked in due course may make quick money through insider
trading too.
Checks and Balances
Despite multilevel inbuilt checks and balances in the form of
induction of independent directors, independent audit commit-
tees, and certifications on the genuineness of the financial
statements by chief executive officers and chief finance officers
of companies and finally the inspection of the Department of
Corporate Affairs of the Government of India, it is really
astounding to see that at least 20% of the listed companies have
successfully managed to come out unscathed with fraudulent
financial statements. There are some strategies worth trying to
contain this menace. The government must see to it that the
companies publish their balance sheets and profit and loss
accounts on quarterly basis instead of the present system of
annual publications so that the investors will get a better picture
of the companies before they flow their funds in the stock
market. The Institute of Chartered Accountants on India should
also take strong penal action against the fraudulent chartered
accountants concerned. Once a fraudulent cover up is un-
A L O N G R O A D A H E A D
earthed, SEBI should immediately start investigations in the
transactions of shares of the tainted companies to discover cases
of insider trading etc. Once the crime is proved SEBI must come
out with strong deterrent action. The stock market regulator
must also carefully evaluate the roles of the independent
directors in their depth and breadth and also their share in the
financial misappropriations for suitable deterrent action. To
prevent the future financial managers, auditors and other
professionals from falling prey to corporate frauds, institutions
offering professional courses must include corporate ethics as an
important program in their education.
Conclusion
If the fraudulent activities are not nipped in the bud it will
ultimately ruin the future of corporate world and that of the
stock market. Therefore the need of the hour is to send a strong
message to the fraudsters through strong penal action once their
fraudulent activities are exposed. If we want a strong India, a
healthy and vibrant economy, and a cheerful society, we must
strive for rural and urban integration to bring about a reasonable
balance between their income levels. We also crush corruption
and financial frauds in stock market with iron hand. It is really an
uphill task, but there is no escape.
The holy words of Bhagvad Gita rightly say: “yat tad agre
visam iva pariname amrtopamam tat sukham satvikam
proktam” Ch 18-36. The happiness which appears as poison in
the beginning and nectar in the end is said to be dominated by
clarity 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-urban-
divide/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 reflect
the official policy or position of the organization.)
THE INDIA ECONOMY REVIEW 71
P R O B L E M S & P E R S P E C T I V E S

INDIA :
Growth Sans
Development
Tushar Kanti Das
Lecturer, Department of Business Administration,
Sambalpur University

Introduction
For last several years the performance of Indian economic
growth is remarkable (praiseworthy). But when it comes to
social indicators such as health and education performance
of India is limited. Inequality is often blamed for the poor
links between economic growth and human development.
Gross Domestic Product (GDP) in US dollar for India is
1217.49 billion in 2008. The annual GDP growth rate was
4.0% in 2000. It increased to 9.4% on 2005 and 9.1% in
2007. In the year 2008 the annual GDP growth rate of India
was 7.1% as compared to US which had 1.1%. On the other
extreme, between 1980 and 2007 India’s Human Develop-
ment Index (HDI) rose by 1.33% annually from 0.427 to
0.612 today. During the same period US’s HDI rose by
0.25% annually from 0.894 to 0.956.
“India is a country with many poor people but is not a
poor country1”. It is a country of population just over one
billion (1139.96 million in 2008 approx) of which about 300
million live below the poverty line. It is the largest democ-
racy in the world and one of the most important countries in
terms of meeting global development goals. In the past
decade, India has accelerated economic growth, improved
most MDGs and maintained a vibrant democracy. It has
also emerged as a global power – the fourth largest economy
on purchasing power parity terms and a leading player in
information technology, telecommunications and business
processes outsourcing.

72 THE IIPM THINK TANK

 A N A C T I O N A B L E A G E N D A

THE INDIA ECONOMY REVIEW 73

P R O B L E M S & P E R S P E C T I V E S
With economic liberalization in 1991, India began to focus
on private sector investment led growth, engendering an
open and competitive economy. A massive introduction of
new services and manufacturing drove its global competi-
tiveness and growth. Software exports, telecommunications,
Information Technology, the outsourcing of business
processes, the financial sector, housing and retail services
all helped in the rise of the services sector.
The Eleventh Five Year Plan (2007-12) aims to achieve a
GDP growth rate of nine percent and double the per capita
GDP within 10 years. Achievement of this target and
continued growth of 10% in the 11th plan would lead to a
doubling of per capita income over the
next two plans (Planning Commission,
2006). The structure of growth should
also be such as to promote a wide spread
of benefits. Doubling agricultural GDP
growth to around four percent is particu-
larly important in this context. The
approach paper is also of the view that
doubling agricultural GDP growth to
around four percent is very important.
This must be combined with policies to
promote rapid growth in non-agricul-
An apposite
tural employment so as to create job definition of
opportunities. The approach paper has inclusive growth
also identified areas where new policy implies a direct
initiatives are needed to achieve the
nine percent growth target and its
link between the
desired sectoral composition.
macro and micro
The reform process that began in determinants
1991 was gradual. As a result reforms
have become relatively endogenous with much better
accountability for results. It is important to note the growing
role played by states with greater competition to perform
increasing accountability. In India’s deregulated and open
economy, those states in which governments have delivered
better governance and public services have attracted greater
and more private investment. Conversely those states where
political leaders have not done so have been punished by a
flight of both capital and people. The challenge is to improve
the prospects of the poorest and low income states.
Investment rates, backed by growing savings and led by
private investment have now increased close to 40% of GDP
74 THE IIPM THINK TANK
compared to about 24% a decade ago. Foreign Direct
Investment grew rapidly until the global fi nancial crisis in
2008. Fiscal deficits have remained high but prior to the
Indian Fiscal Year 2008 were on a declining track under the
fiscal responsibility acts at the center and the states. Poverty
has fallen to about 28 percent although the momentum of
decline may have slowed. Growth has helped considerably in
progressing towards the Millennium Development Goals
(MDGs) but delivery of public services to India’s 300 million
pose major challenges.
Investment as a growth engine for India was running out
of steam in 2008 when bottlenecks in the economy became
increasingly apparent. In addition, high
international commodity prices and
rising interest rates in response to
inflationary pressures lowered corporate
profitability. In the last quarter of 2008
large capital outflows put pressure on
reserves and the rupee. The government
reacted to the slowdown with swift easing
of monetary policy and a sizeable fiscal
stimulus.
Thus, on the one hand a rapid
development trajectory and on the
other the progress is much slower,
caught in a low level development trap.
Significant differences persist in
poverty levels and human development
indicators along gender, ethnic and
regional lines. In response the central
and state governments have stepped up
their attention to programs that help
the poor and disadvantaged. At the state level there are
growing initiatives to support spending on water, old age
and disability pensions and rural livelihoods and credit.
Economic Growth
Economic growth is the most powerful instrument for
reducing poverty and improving the quality of life in
developing countries. The goal of development is to
improve human well-being in a sustainable way, with
particular emphasis on less well off. Rapid and sustained
economic growth, though not sufficient for eliminating
poverty, is certainly a necessary condition for improving

living standards.
India’s economic growth has received potential attention in
recent years. It is also evident that the India’s growth has
accelerated over the past two decades. Sweeping economic
reforms that commenced in 1991 have included the de-licens-
ing of most industries, deregulation of industries earlier
monopolized by the public sector, liberalization of foreign
trade through a steady reduction in tariffs and freeing up of
the foreign investment limits in nearly all industries. These
measures have had far reaching consequences and today,
India has a strong, vibrant and fast-growing economy which is
rapidly integrating with the global economy (Ernst & Young,
2006). India is forecast to become the third largest economy
in the world, after China and the US, by the year 2050 over-
taking all other developed economies (Wilson and Purush-
othaman, 2003).
Now the policy challenge for India is
not to raise growth from 8-10 percent.
Rather the primary challenge is to The primary
sustain rapid growth while extending challenge is to
rapid growth and its benefits to more
regions, sectors and people. Questions
sustain rapid
have been raised about the distribution
growth, while
of the benefits of growth on income extending rapid
groups, especially the poor. A key growth benefits to
concern is the perception of two more regions
Indians, one shinning and the other
bleak, referring to the large gap in the
living standard of the rich and the poor (World Bank, 2006;
Kohli, 2006).
High growth rate of India can be sustained only if neces-
sary policies are adopted for removing binding constraints
like poor infrastructure, stagnant agriculture and lack of
fiscal space (Kumar, Palit & Singh, 2007). India’s post-inde-
pendence leadership had undertaken to abolish mass
poverty remains only partially fulfilled. Half the battle still
lies ahead. The challenge for policy makers today is to
balance the growth momentum with inclusionary policies
(Ahmed and Varshney, 2008). The eventual prospects for
making India’s growth process more inclusive are not
encouraging. If rapid growth continues, some of this will
necessarily ‘trickle down’ and help the poor. Beyond that the
scope for hastening this trickle via deliberate redistribution
is limited (Kohli, 2008).
A N A C T I O N A B L E A G E N D A
Evidence suggests that income inequality is rising and the
gap in average per capita income between the rich and poor
states is growing. In the agriculture based country like
India, agriculture is essential to growth, which in turn
necessary to reduce poverty and food insecurity. As the
largest sector of the economy agriculture has an important
role in providing resources for the development of the
overall economy.
Theory of Inclusive Growth
The strategy of ‘inclusive growth’ combines empowerment
with entitlement and investment. Education empowers,
improved health care empowers, employment guarantee
entitles, fulfi lling quota obligations entitles. Through a
combination of offering entitlement, ensuring empowerment
and stepping up public investment the growth process can
be made more inclusive. Inclusive
growth also means empowering the
disadvantaged. The strategy for
inclusive growth is to provide access to
basic facilities such as health, educa-
tion, clean drinking water, etc. to the
common people. In the short run these
essential services impact directly on
welfare, in the long run they determine
economic opportunities for the future.
Inclusion implies not only reduction
in absolute poverty but also in income
inequality across income groups and geographical regions.
A variety elements and dimensions are involved in deter-
mining whether growth is inclusive. The most important
dimension is the improvement of the livelihood of the poor.
The general consensus is that for growth to be inclusive it
must be pro–poor i.e. growth that is not pro-poor is defi-
nitely not inclusive.
Inclusive growth allows people to contribute and benefit
from economic growth. Rapid pace of growth is necessary
for substantial poverty reduction. For this growth to be
substantial in the long run it should be broad based across
sectors and inclusive of large part of the country’s labour
force. This definition of inclusive growth implies a direct
link between the macro and micro determinants of growth
(Ianchovichina and Lundstrom, 2009). The micro dimension
captures the importance of structural transformation for
THE INDIA ECONOMY REVIEW 75
P R O B L E M S & P E R S P E C T I V E S

economic diversification and competition. Inclusive growth require a sense of priorities. This has led to the development
refers both to the pace and pattern of growth which is framework for growth diagnostics (Hausmann, Rodrik and
considered interlinked and therefore they should be ad- Velasco, 2005), i.e., a strategy for figuring out the policy
dressed together. For achieving a sustainable growth record priorities.
as well as poverty reduction both the pace and pattern of Growth diagnostics require in depth knowledge of the
growth are critical. economy that is being analyzed (Leipziger and Zagha, 2006).
The Commission on Growth and Development in their The strategy is aimed at identifying the most binding
report Growth Report: Strategies for Sustained Growth and constraints on economic growth such as limitations in
Inclusive Development (2008) stated that ‘inclusiveness’ is mobilizing sufficient domestic or foreign finance, low levels
an essential ingredient of any successful growth strategy. of human capital and technological capabilities, weaknesses
Inclusiveness is a concept that includes equity, equality of in governance structures and the poor functioning of
opportunity and protection in market and employment institutions that regulate markets or provide public goods
transitions. The Commission considers and social services. The importance and
systematic inequality of opportunity will relevance of these constraints tend to
be toxic and it will derail the growth vary from country to country.
process through political channels or The implementation of the ‘growth
conflicts. diagnostics’ framework aims to give the
The extent to which growth reduces meta-steps that a persuasive growth
poverty depends in the degree to which diagnosis should have, and elaborates on
the poor participate in the growth the strategies and methods that may be
process and share in its proceeds. Thus, used (Hausmann, Klinger and Wagner,
both the pace and patterns of growth 2008). Rather than a step-by-step
matter for reducing poverty. India’s instruction manual or handbook it
most recent development plan has two
Higher real suggests how to think about the
main objectives: raising economic incomes lead problem of identifying a country’s
growth and making growth more to higher food constraints to growth. Analyzing
inclusive. consumption constraints does not necessarily make
‘growth diagnostics’ an advocate of
Growth Diagnostics
levels, implying economic growth. Countries should
Last 25 years has seen considerable
more pressure find the trade offs, if any, between
developments in thinking on develop- on demand growth and other goals through an
ment policies. The standard policy appropriate political process4.
reforms included in the Washington2 Consensus have the
potential to be growth promoting. Many countries have Actionable Policies
adopted the Washington consensus, i.e., the enforcement of Without higher agriculture growth, India's ten percent
property rights, maintenance of macroeconomic stability; economic growth target will be impossible to achieve. In
integration with the world economy and creation of a sound addition, higher real incomes lead to higher food consump-
business environment. However, experiences of last 15 years tion, implying more pressure on demand. Historically,
have shown that impact of these reforms is heavily depend- India's agriculture growth has fallen short of growth in the
ent on circumstances. Growth strategies are likely to differ overall economy. In fact, long-term average growth in
according to domestic opportunities and constraints. The agriculture has been close to two percent. India's population
disappointments with the Washington Consensus led to the has been growing at 1.4%. Consequently, it has just managed
Barcelona consensus3 of 2004. The key recommendation of to maintain its per capita growth in food and non-food crop
the Barcelona consensus is that the growth strategies production. Given such a precarious demand-supply

76 THE IIPM THINK TANK


position, one year of drought leads to food prices shooting
up. This is what we are seeing at this time of the year. With
growth in per capita incomes, the supply constraints will hit
India even harder in the future. If the growth story in India
is to be inclusive, farm productivity has to rise for income
levels to increase (Narang and Santnalika, 2010).
One vital policy decision the government should take
while choosing between two different sectors. Suppose there
is a multipurpose dam project. The farmers in the periphery
are producing two / three crops in a year using the water
from the canal of the dam. Many often the farmers complain
insufficient water is released through the canals which is not
sufficient for sustainable agriculture. This results in low
productivity of agricultural commodities. Water is also used
by the different heavy industries which are present in these
localities. The announcement by the heavy industries to
increase capacities to different de-
grees, e.g. double the capacity in some
cases, makes the situation complex. It is imperative
Thus these heavy industries are going to enable the
to suck more water from the reservoir.
Obviously the water share of agricul-
poorer states
ture is bound to reduce. Inclusive
to strengthen
policy demands with the existing infrastructure to
allocation of water between different harness their
vital sectors, the government should rich resources
not reduce the share of water to
agriculture, as agriculture is the key to
inclusive growth.
To make the growth process inclusive, it is necessary to
enable the poorer states to raise infrastructure levels to
harness their rich resources and compete with their devel-
oped peers (Rao, 2009). The shift in focus towards inclusive
growth in the Tenth Plan and increased emphasis on the
same in the Eleventh Plan are important to ensure that the
poor participate in the market activity and the growth
process in a meaningful manner. However, the strategy has
been mainly to provide this section with some measure of
consumption security through various employment pro-
grams and / or writing off farm loans. While these are
important in the short term, the inclusive growth strategy
requires linking the poor rural population to the market and
undertaking measures to increase their skill levels and
productivity. Considering the fact that the poor are concen-
A N A C T I O N A B L E A G E N D A
trated in less developed areas of the country, the growth
strategy, to be inclusive, should shift the focus to less
developed areas.
Providing infrastructure and connectivity in these areas
can go a long way not only in bringing these regions within
the fold of market activity, but also in breaking their institu-
tional impediments. A lasting solution to poverty and
backwardness in the country cannot avoid focusing on
poorer regions. These regions—comprising Bihar, Chattis-
garh, Madhya Pradesh, Orissa, Jharkhand, Rajasthan,
Uttarakhand and Uttar Pradesh —with 45 percent of the
total population account for just about 22 percent of income
generated in the country. Almost 60 percent of the poor
reside in these states. The human development ratio in these
states is substantially below the national average, and
infrastructure like road and transportation facilities,
agricultural marketing and cold
storage as well as power supply is
abysmal. Many of these states, Bihar
and Orissa in particular, suffer from
periodic floods, controlling of which is
beyond their capacity or realm.
Growth without development will
deepen inequality and have dangerous
socio-political consequences that could
undermine the very essence of free-
dom and democracy. If economic
growth is achieved without social
development at the grassroots level, it will not only widen
inequality but also give rise to socio economic paranoia,
socio-political unrest and instability. The biggest constraint
on rapid growth in the years ahead will be the lack of
physical infrastructure and its poorer quality. Both the
center and the states have responsibility in this area as
different types of infrastructure (roads, ports, railways,
airports, electric power system and various types of urban
infrastructure) fall under different jurisdiction. The strategy
for infrastructure development must therefore encourage
public private partnerships (PPP). The PPP strategy must be
based on principles which ensure that PPPs are seen to be in
the public interest in the sense of achieving additional
supply at reasonable cost. PPPs must serve to put private
resources into public projects and not the other way round.
Labour markets in India are characterised by underutili-
THE INDIA ECONOMY REVIEW 77
P R O B L E M S & P E R S P E C T I V E S
sation of labour which manifests itself in unemployment and
under employment. Improving labour market opportunities
for workers is the key to poverty reduction and improving
standard of living (Felipe and Hasan, 2006). The cause of
unemployment and under employment in developing
countries is lack of capital equipment and productive
capacity. Only sound policies geared toward full employ-
ment will create the foundation for inclusive growth.
Unemployment and underemployment as the fundamental
causes of lack of inclusiveness are unethical states of a
malfunctioning economy (Felipe, 2009). The objective of
achieving full employment has to be complemented with the
objective of creating productive employment and ensuring
decent employment. Full employment requires the govern-
ment’s commitment to attaining and maintaining it. The
private sector has neither the commitment nor the tool to
achieve it. Full employment requires close coordination
between private and public sectors.
The National Rural Employment Guarantee Act now
renamed Mahatma Gandhi National Rural Employment
Guarantee Scheme, guarantees 100 days of employment at
the state's minimum wage. The Mahatma Gandhi National
Rural Employment Guarantee Act (MGNREGA) enacted
in 2005 with the objective of enhancing the live hood
security of people in rural areas by guaranteeing hundred
days of wage-employment in a financial year to a rural
household whose adult members volunteer to do unskilled
manual work. Now the question arises how far the
MGNEGA is helpful in achieving full employment.
In the Right to Education Act 2009 under Sarva Shiksha
Abhiyan government allocated Rs 1.71 lakh crores. It is
expected that the government should do effective social
sector spending. Funds should be set aside in the budget for
support functions that improve the implementation of such
programs. Sarva Shiksha Abhiyan, that is educational
program which started in 2001, should improve the quality
of 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 between
the states and the center. Government has also initiated the
National Rural Livelihood Mission. Here the government is
inviting private players to work alongside the state machin-
ery. The government bears the cost of training on the
condition that private parties will provide jobs to the trained
78 THE IIPM THINK TANK
workers. It is expected that the government will identify
more such areas where private sectors participation can be
leveraged in development.
Social services institutions should not be concentrated in
some specified areas. The inclusive growth policy will be
more appropriately implemented if these institutions are
more diversified throughout the sub-national government
jurisdiction. The objective of the government should not
only to create more such social institutions but to maintain
efficiencies in the existing institutions.
The Long Road Ahead
Structural inequalities are deep and persistent. They are
also intimately linked with institutional structures in
political, social and economic domain. These are likely to
impede the transformation necessary for long term growth.
The appropriate Indian policy for growth with development
is inclusive growth and inclusive development, as appropri-
ately adopted by Eleventh Five Year Plan.
A necessary next step is to look at more specific policy
instruments and for each instrument calculate a ratio of the
additional growth potential associated with this instrument
with respect to the cost of implementing the corresponding
policy. This in turn would enable us to “rank” the reforms,
that is, to get a more precise view as to what should be
undertaken first, or as to which reforms should be imple-
mented jointly because of complementarities in their
growth impacts.
Endnotes
1
As stated by His Excellency Mr. M. Hamid Ansari, Vice
President of India.
2
The concept and name were first presented in 1989–1990
by John Williamson, an economist from the Institute for
International Economics, Washington DC. The Wash-
ington Consensus contained a set of 10 recommendations
that synthesized the policies considered necessary for the
recovery of Latin American economies from the financial
crises of the 1980s and cycles of high inflation and low
growth.
3
Sixteen leading economists, gathered in Barcelona in
September 2004 to discuss effects of economic reforms,
lessons for future policy making, and performance of
international economic systems, and issued a consensus

on growth and development.
4
To set up an appropriate growth diagnostic exercise
(which the authors named as differential diagnostics), it is
useful to follow the following five step process: i) De-
scribe the growth process and determine a relevant
question; ii) Go through a differential diagnosis; iii) Posit
a syndrome; iv) Test further implications, corroborate
evidence 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 Theory
to Policy Design’, Commission on Growth and Develop-
ment, Working Paper No. 57.
• Ahmed, S. and Varshney, A. (2008), ‘Battles Half Won:
The Political Economy of India’s Growth and Economic
Policy since Independence’. Working Paper No.: 15.
Commission on Growth and Development, Washington
DC
• Badoni, S. R. and Nadkarni, P. (2010), ‘Effective Social
Sector Spending Needed’, The Wall Street Journal,
February 25th.
• Commission on Growth and Development (2008),
Growth Report: Strategies for Sustained Growth and
Inclusive Development, the World Bank.
• Ernst & Young (2006), Doing Business in India, Ernst &
Young Private Limited, New Delhi
• Felipe, J. (2009), Inclusive Growth, Full employment and
Structural Change: Implications and Policies for Devel-
oping Asia, Anthem Press.
• Felipe, J. and Hasan, R. (2006), ‘The Challenge of Job
Creation in Asia’, ERD Policy Brief No. 44, Asian
Development Bank, Manila, Philippines, April
• Hausmann R., Klinger, B. and Wagner, R. (2008), ‘Doing
Growth Diagnostics in Practice: A ‘Mindbook’, Working
Paper 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 Gov-
ernment, Harvard University, Cambridge, MA, March.
• Ianchovichina, Elena and Lundstrom, Susanna (2009),
‘Inclusive Growth Analytics: Framework and Applica-
A N A C T I O N A B L E A G E N D A
tion’, World Bank Policy Research Working Paper 4851,
March.
• Kohli, Atul (2006), ‘Politics of Economic Growth in
India, 1980-2005, Part I: The 1980s’, Economic and
Political Weekly, April 1st, pp 1251-1259 and ‘Politics of
Economic Growth in India, 1980-2005, Part II: the 1990s
and Beyond’, Economic and Political Weekly, April 8th, pp
1361-1370.
• Kohli, Atul (2008), ‘State and Redistributive Develop-
ment in India’, Working Paper, Princeton University
• Kumar, R., Palit, A. and Singh, K. (2007), ‘Sustainability
of Economic Growth in India’, Working Paper No. 25,
Center for International Governance Innovation, On-
tario, May.
• Leipziger D. and Zagha R. (2006), ‘Getting Out of the
Rut’, Finance & Development, Vol. 43, No. 1, pp 16-18.
• Narang, S. and Santnalika, S. (2010), “Agriculture: The
Key to Inclusive Growth”, The Wall Street Journal,
February 24th.
• Planning Commission (2006), “Towards Faster and More
Inclusive Growth; an Approach to the 11th Five year Plan
(2007-2012)”, Government of India, Yojana Bhavan, New
Delhi, December p. 97.
• Rao, M.G. (2009), ‘Regional Development for Inclusive
Growth’, Business Standard, New Delhi, October 6th.
• UNDP (2009), Human Development Report 2009, New
York
• Wilson, D. and Purushothaman, R. (2003), Dreaming
with BRICs: The Path to 2050, Goldman Sachs Global
Economics, 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 Service
Delivery: Building on India’s Success, Development
Policy 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 IDA
Effectively in a Large Country, July.
• World Bank (2009), World Development Indicators
Database, Washington D.C., September
(The views expressed in the article are personal and do not
reflect the official policy or position of the organisation.)
THE INDIA ECONOMY REVIEW 79
P R O B L E M S & P E R S P E C T I V E S
IS THERE ANY RELATIONSHIP
BETWEEN ECONOMIC GROWTH
AND HUMAN DEVELOPMENT?
EVIDENCE FROM INDIAN STATES
Sacchidananda Mukherjee
Consultant, National Institute of Public Finance and
Policy, New Delhi
Debashis Chakraborty
Assistant Professor, Indian Institute of Foreign Trade,
New Delhi
1. Introduction
The economic reform process initiated since 1991 has played
a major role in determining India’s overall economic growth
path. Among the major changes undertaken during this
period, shift in emphasis on export-oriented economic
philosophy, encouragement to FDI inflow, unshackling of
industrial licensing system, ongoing tariff reforms (unilater-
ally as well as part of WTO obligation) need to be mentioned.
The collective influence of these measures has ensured a
steady growth path for the country over the last decade.
The enhanced economic growth (EG), thus generated, is
however likely to create important repercussion effects in the
economy, which would further propel the growth trajectory
in the long run. For instance, the rising income level would
be instrumental in expanding the capacity of the government
to raise the general level of human development (HD) in the
current period (through provision of health and educational
achievements), which in turn would influence the future EG
potential positively.
Over the last decade, India has initiated a number meas-
80 THE IIPM THINK TANK
ures for augmenting HD. For instance, the Sarva Shiksha
Abhiyan started for universalising elementary education
across the States has been a commendable initiative. Simi-
larly, the goals of National Rural Health Mission (2005-12)
includes: reduction in Infant Mortality Rate (IMR) and
Maternal Mortality Ratio (MMR), universal access to public
health services such as women’s health, child health, water,
sanitation & hygiene, immunization, and nutrition, preven-
tion and control of communicable and non-communicable
diseases, including locally endemic diseases etc. The intro-
duction of National Rural Employment Guarantee Schemes
in rural areas and introduction of Bills like Right to Educa-
tion Act and Food Security Act in the Parliament are in the
right directions to empower the people with right to employ-
ment, food and education. All these measures are expected
to enable India to move closer to fulfillment of the related
Millennium Development Goals by the stipulated deadline,
2015. On the economic front, the growing size of the healthy
and educated population in the working age group would
enable the country to reap the benefits of Demographic
Dividend more vigourously.
In this background, on the basis of a secondary data
analysis, the current paper attempts to analyze the relation-
ship between EG and HD for 28 major Indian States during
four time periods ranging over last two decades: 1983, 1993,
1999-00 and 2004-05. The objective of this exercise to
understand to what degree and extent the per capita income
(as an indicator of economic growth) has influenced the
human development achievements across Indian States. To
understand the rural – urban disparity in the realization of
 P R O F O U N D P R I O R I T I E S

THE INDIA ECONOMY REVIEW 81

P R O B L E M S & P E R S P E C T I V E S

human development, the Human Development Index is Figure 1: The Relationship between Per Capita GDP
constructed for rural and urban areas separately for each of and HDI Score: 2007
the States. While 1983 marks the pre-liberalization era, 1993
Per Capita GDP (PPP USD) 2007 vs HDI Score_2007:
captures the scenario shortly after initiation of the reform Cross-Country Analysis
exercises. Though the reform process was almost a decade 1.1
1.0
old during 1999-00, the EG in the preceding period was

HDI Score-2007
0.9
influenced by several external and internal events (e.g.
0.8
Southeast Asian Crisis during 1997-98, three successive
0.7
General Elections over 1996-99 etc.). On the other hand,
0.6
2004-05 marked a period of relative stability. 0.5
The paper is organised as follows. A brief literature survey 0.4
on the relationship between EG and HD is followed by a 0.3
discussion on the methodology adopted in this paper, the 0 10K 20K 30K 40K 50K 60K 70K 80K 90K
Per Capita (GDP) (PPP USD)
results and the policy observations respectively.
Source: Computed by Authors based on UNDP (2009) data

2. Economic Growth and Human Development

The existing literature suggests a of a non-linearity and suggests that with
two-way relationship between EG and decline in corruption, HD level rises, but
HD, implying that nations / States may From cross country declines marginally for a few countries
enter either into a virtuous cycle of high perspective, per characterized by a less corrupt regime
growth and large HD gains, or a vicious capita income is (Mukherjee and Chakraborty 2010).
cycle of low growth and low HD im-
necessarily an The UNDP annually publishes
provement (Ranis, 2004). Higher initial an extensive analysis of global HD
level of HD may also lead to positive
ingredient for situation in the Human Development
effects on institutional quality and achieving a higher Report (HDR) along with country
indirectly on EG (Costantini and Salva- level of well-being rankings. While India remained in the
tore, 2008). India displays a two-way low HD category throughout nineties,
causality between EG and HD, indicating possibilities of in 2002 it graduated to medium HD category. In 2005 it
vicious cycles (Ghosh, 2006). The relationship pattern secured a composite HDI score of 0.619, as compared to
between Per Capita GDP (in PPP USD) and HDI score the corresponding figure of 0.439 in 1990. India’s global
(UNDP 2009) is presented in Figure 1. The figure shows that, HDI rank has also improved from 132 in 1999 to 134 in
from cross-country perspective, as per capita income increas- 2007, while the number of countries covered also increased
es the HDI score increases upto a level and then it remains during this period. Recently in association with UNDP, the
constant. This non-linearity in the relationship between EG Government of India has started analysing the State-wise
and HD has been reported by Mukherjee and Chakraborty HD status. The National Human Development Report 2001
(2009). Therefore, from cross-country perspective per capita (Government of India, 2002), brought out by the Planning
income is necessarily an ingredient for achieving a higher Commission following the UNDP methodology, is worth
level of human wellbeing. From cross-country perspective, mentioning in this regard. While the report ranked Kerala,
Mukherjee and Chakraborty (2010) observed that HD is Punjab and Tamil Nadu as the toppers; Bihar, Madhya
positively related to both democracy and income level, Pradesh and Uttar Pradesh were at the other extreme in
indicating that the countries characterized by higher levels of HD scale. The alternate index developed by Guha and
income and better democratic set up are likely to witness Chakraborty (2003), in line with Nagar and Basu (2001),
higher HD achievements. The regression results on the however showed that inclusion of other socio-economic
relationship between HD and corruption confirms presence variables changes the State rankings to some extent.

82 THE IIPM THINK TANK


3 Methodology and Data
3.1 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 three
variables, namely - per capita consumption expenditure;
and composite indices of educational attainment and health
attainment respectively. With this formulation, following
the HDI method, the HDI score for the jth State is given by
the average of the normalised values of the three indicators,
namely - inflation and inequality
adjusted per capita consumption
expenditure ( ); composite indicator One important
on educational attainment policy response for
( ) and composite indicator on health the Government
attainment ( ). The normalisation is
done by dividing the difference between
would be to
any variable
ensure balanced
( ) within these categories and the growth process
minimum value of to the difference across the States
between the maximum and the
minimum value of .
Although UNDP considers Real GDP Per Capita in
PPP USD for generating the HDI, the NHDR 2001 has
preferred inflation and inequality adjusted average monthly
per capita consumption expenditure (MPCE) of a State
over that for the analysis. Here the monthly per capita
consumption expenditure data, obtained from National
Sample Survey Organisation (NSSO)’s quinquennial
surveys (38th Round: 1983, 50th Round: 1993-94, 55th Round:
1999-2000 and 61st Round: 2004-05), first adjusted for
inequality using State-wise Gini Ratios (also provided in
the quinquennial rounds), and further adjusted for inflation
to bring them to 1983 prices by using deflators derived from
State specific poverty line (Government of India, 2002). The
adjustment was done in the following manner. If (GR ij)is
the Gini Ratio for the jth State for the ith period and MPCEij
is the average monthly per capita consumption expenditure
for the jth State for the ith period, inequality adjusted
average monthly per capita expenditure for the jth State for
the ith period (IMPCEij) is expressed as (1-GR ij) XMPCEij ,
where .After adjustment for inequality for each
of the states, we carried out adjustment for inflation. If PLij
is the poverty line (in Rs. per capita per month) for the jth
P R O F O U N D P R I O R I T I E S
State for the ith period and PL1983j is the poverty line of the
jth State for 1983, then inflation and inequality adjusted
average monthly consumption expenditure for the jth State
for the ith period (IIMPCEij) is expressed as (PL1983j/PLij)
XIMPCEij .1 Hence inflation and inequality adjusted MPCE
of a State is considered as an indicator of consumption (
) to construct HDI. The analysis carried out for rural and
urban 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 seven
years and above (e1) and adjusted
intensity of formal education (e2). The
idea is that literacy rate being an overall
ratio alone may not indicate the actual
scenario, and the drop-out rate, needs
to be incorporated in the formula.
We consider the data on literacy rate
for three periods – 1981, 1991 and
2001 corresponding to the Population
Census. The adjusted Intensity of
Formal Education data is used for four periods – 1978
(4th All India Educational Survey, NCERT, 1982); 1993 (6th
All India Educational Survey: NCERT, 1999), 2002 (7th All
India Educational Survey: NCERT, 2002) and 2005-06. For
2005-06, we have taken the Intensity of Formal Education
(IFE) from NCERT (2002) and used the Total Enrolment
Figures as given in Government of India (undated).2 The
entire analysis is carried out for rural and urban separately.
Estimation of State-wise population between 6 to 18 age
group (rural and urban separately) has been taken from
the data released by the Registrar General of India and
Census Commissioner (RGI&CC 2006) for 2001. It is to
be mentioned here that RGI&CC (2006) data does not
provide population data for 6-18 age group for rural and
urban separately, so we used the rural and urban 6-18 age
group population ratio in 2001 and estimated the State-
wise projected rural and urban 6-18 age group population
for 2002 and 2005. The current analysis assigns weightage
of 0.35 to e1 and 0.65 to e2 to estimate , in line with the
NHDR 2001 methodology.
The Intensity of Formal Education (IFE) is estimated
as a ratio between Weighted Average of Enrollment
(WAE) of students from class I to class XII (where weights
THE INDIA ECONOMY REVIEW 83
P R O B L E M S & P E R S P E C T I V E S

Table 1: State-wise Human Development Index (HDI) Scores & Ranks

1983 1993 1999-00 2004-05
State Name
Rural Urban Urban Rural Urban Rural Urban
Andhra 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 Authors

being assigned 1 for Class I, 2 for Class II and so on) to
the Total Enrolment (TE) in Class I to Class XII. IFE
is multiplied with the proportion of Total Enrolment to
Population in the age group 6-18 (Pc) (Government of
India, 2002). According to the formula suppose Ei be the
number of children (rural and urban combined) enrolled in
ith standard in 2002, i = 1 for Class I to 12 for Class XII).
Then Weighted Average of the Enrolment (WAE) from
Class I to Class XII is calculated as the weighted average of
enrolment (Ei) in a particular Class where weights are i = 1
for Class I to 12 for Class XII.
Now, suppose Ei is the total enrolment of Children from
Class I to Class XII in 2002. Then the Intensity of Formal
Education (IFE) for children (rural and urban combined)
in 2002 becomes WAE expressed as a percentage of TE.
Suppose Pc represents the Population of Children (rural
and urban combined) in the age group 6-18 years in 2001.
Then we can determine the Adjusted Intensity of formal
education (AIFE) for children (for rural and urban
separately) in 2002, as the ratio of IFE multiplied by TE
and the Population of Children in the age group 6 to 18
years in 2001.

84 THE IIPM THINK TANK

 P R O F O U N D P R I O R I T I E S

Finally the Composite indicator on health attainment General (1999). The data on IMR (per thousand) for rural
( ) is arrived at by considering two variables, namely Life and urban is considered for four data points, namely – 1981
Expectancy (LE) at age one (h1) and the inverse of Infant (for 1983), 1991 for (1993-94), 1999 for (1999-00) and 2004
Mortality Rate (IMR) as the second variable (for 2004-05). The IMR data for 1981 and 1991 are taken
(h2). For h1, which measures the life expectancy at age one from Government of India (2002) and for other two data
(Person – rural and urban separately), the four data periods points we have taken data from SRS Bulletins (RGI 2001).
considered for our analysis are: 1981-85 (for 1983), 1991-95 The current analysis assigns weightage of 0.65 and 0.35 to
(for 1993-94), 2000-04 (for 1999-00) and 2001-06 (for 2001- h1 and h2 respectively to determine the composite indicator
05). For the first two periods we have taken data (rural and ( ), in line with the NHDR 2001 methodology. The entire
urban separately) from Government of India (2002) and analysis is carried out for rural and urban separately.
for other two periods we have taken data from Ministry of
Health & Family Welfare and the Office of the Registrar 3.2 Economic Growth (EG)
EG in the current analysis is
Table 2: Per Capita Gross State Domestic Product (at Constant 1999-00 measured by the Per Capita
Prices) (1999-2000 Series) (Rs.)
Gross State Domestic
State Name 1981-82 to 1983-84 1992-93 to 1994-95 1998-99 to 2000-01 2003-04 to 2005-06
Product (PCGSDP) at
Andhra Pradesh 9,439 (M) 13,252 (M) 17,358 (M) 22,247 (M)
constant (1999-00) prices
Arunachal Pradesh 7,836 (L) 13,935 (M) 15,246 (M) 20,119 (M)
(Comparable 1999-2000
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) Series), as reported by
Chattisgarh 8,275 (M) 12,600 (M) 13,168 (L) 16,225 (M) EPW Research Foundation
Goa 18,782 (H) 31,315 (H) 46,919 (H) 53,485 (H) database (EPWRF 2009). To
Gujarat 11,467 (H) 17,101 (H) 22,068 (H) 28,719 (H) understand the size of the
Haryana 14,501 (H) 20,662 (H) 25,182 (H) 33,728 (H)
economy and growth pattern
Himachal Pradesh 12,554 (H) 17,567 (H) 23,573 (H) 29,749 (H)
of each of the States, we
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)
have classified them in three
Karnataka 8,832 (M) 13,253 (M) 19,090 (M) 22,858 (M) categories with respect to
Kerala 11,336 (M) 16,520 (H) 21,592 (M) 28,447 (H) their PCGSDP at constant
Madhya Pradesh 8,275 (M) 10,572 (L) 12,911 (L) 13,777 (L) prices in the following
Maharashtra 12,368 (H) 20,050 (H) 25,278 (H) 31,011 (H) manner: high income States
Manipur 9,296 (M) 11,922 (L) 13,800 (M) 15,712 (L)
(PCGSDP: greater than 3rd
Meghalaya 9,787 (M) 12,634 (M) 15,963 (M) 19,679 (M)
Quartile), medium income
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) States (PCGSDP: 1st to 3rd
Orissa 8,164 (L) 10,042 (L) 11,629 (L) 14,924 (L) Quartile) and low income
Punjab 17,134 (H) 23,697 (H) 28,016 (H) 31,273 (H) States (PCGSDP: less than
Rajasthan 8,202 (M) 11,842 (L) 14,979 (M) 17,337 (M) 1st Quartile).
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)
4. Results and Policy
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)
Observation
Uttarakhand 7,543 (L) 14,786 (M) 15,877 (M) 21,738 (M) The overall HD scores
West Bengal 9,009 (M) 12,487 (M) 17,010 (M) 21,126 (M) for the States generated
Quartile 1 8,193 12,056 13,684 16,097 following the above
Quartile 3 11,448 16,277 21,640 26,778 methodology is presented
Note: (H) implies High Income State (PCGSDP is higher than third quartile); (M) implies Middle Income State (PCGSDP lies between first and second quartile); in Table 1. It is observed
and (L) implies Low Income State (PCGSDP lies below First Quartile).
Source: Authors’ own estimation based on EPWRF (2009) from the table that HD

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Table 3: Average Per Capita GSDP and Average HDI level is consistently high for States like Kerala, Goa,
Score across Income Groups Mizoram, Himachal Pradesh etc. On the other hand,
Low Middle High
Year Criteria F-stat Chhattisgarh, Uttar Pradesh, Uttarakhand, Bihar,
Income Income Income
1983 PCGDP (Rs.) 7,008 9,858 14,163 29.354 * Orissa etc. have always been among the bottom
Gini Ratio of Rural 0.272 0.279 0.266 0.180 liners. Some interesting movement across the States
MPCE (Rs.) Urban 0.307 0.299 0.284 0.292 is noticed over the period of analysis. For instance,
Rural 0.134 0.297 0.464 6.541 *
Punjab and Haryana started with an appreciable HD
HDI Score scenario in 1983, but their performance in the urban
Urban 0.178 0.380 0.477 6.017 *
areas decline considerably during the last observed
1993 PCGDP (Rs.) 10,017 13,694 20,988 26.731 *
period. A similar worsening effect is noticed for
Gini Ratio of Rural 0.238 0.241 0.279 2.150
Arunachal Pradesh at the bottom of the scale as well.
MPCE (Rs.) Urban 0.284 0.284 0.320 1.085
On the other hand, Jammu & Kashmir and West
Rural 0.163 0.254 0.488 8.434 *
HDI Score Bengal has managed to improve their HD level to
Urban 0.223 0.363 0.507 4.774 **
some extent over the period. Interestingly Jharkhand
1999-00 PCGDP (Rs.) 11,654 16,597 27,546 21.519 * has shown marked improvement in terms of HD
Gini Ratio of Rural 0.227 0.214 0.247 2.503 achievements after separation from Bihar.
MPCE (Rs.) Urban 0.313 0.273 0.311 3.122 *** The changing income scenario across the States
Rural 0.133 0.345 0.477 11.868 * is explained with the help of Table 2. The income
HDI Score
Urban 0.180 0.408 0.471 8.278 * quartiles during the years under observation are
2004-05 PCGDP (Rs.) 13,289 20,711 33,773 31.065 * defined and the States falling under different income
Gini Ratio of Rural 0.236 0.251 0.302 4.633 ** categories during a period are mentioned in the
MPCE (Rs.) Urban 0.329 0.315 0.365 1.435 parenthesis. It is observed from the table that while
Rural 0.206 0.364 0.583 13.633 *
Punjab, Haryana, Goa, Gujarat and Maharashtra
HDI Score remained in the high income category throughout the
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 level
period, Bihar, Orisa and Uttar Pradesh stayed on the
Source: Calculated by the Authors

Table 4: Regression Results on the Relationship between HDI and PCGSDP

Dependent Log (Human Development Index Score)
Variable:
1983 1993 1999-00 2004-05
Independent
Rural Urban Rural Urban Rural Urban Rural Urban
Variable
-19.724 -17.301 * -15.901 * -11.773 * -13.835 * -12.957 * -10.889 * -9.663 *
Constant
(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 *

Log (Per Capita
GSDP) (0.229) (0.560) (0.289) (0.429) (0.178) (0.399) (0.147) (0.182)
Number of
28 28 28 28 28 28 28 28
observations
Adjusted R2 0.607 0.212 0.331 0.117 0.634 0.311 0.571 0.522
Durbin-Watson
2.142 1.667 2.24 1.471 1.847 1.75 1.859 1.541
statistic

F-statistic 42.724 8.256 14.372 4.591 47.828 13.192 36.927 30.53

Prob(F-stat) 0.000 0.008 0.001 0.042 0.000 0.001 0.000 0.000

Note: 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 respectively

86 THE IIPM THINK TANK

 P R O F O U N D P R I O R I T I E S

Figure 2: Relationship between HDI and rural and the urban belt with the respective Gini ratios.
PCGSDP (1983) It is observed from the table that the rise in income level
HDI Score vs PCGDP : 1983
over the study period is associated with rise in inequality
in the high income States during 1983 to 1993 (both for
0.900
0.800 rural and urban). For high income States, the inequality
HDI Score-2007

0.700 marginally fall (both for rural and urban) during 1993 to
0.600 1999-00, but again gone up during 1999-00 to 2004-05.
0.500
0.400 Except for urban areas under low income States during
0.300 1993 to 1999-00, the inequality (both for rural and urban)
0.200 gradually declined during 1983 to 1999-00. However, urban
0.100
0.000 inequality is found to be gone up for low income States
0 5K 7K 9K 11K 13K 15K 17K 19K during 1993 to 1999-00. For all income States, both for
Per Capita (GDP) (RS.)
Rural Urban Log (Urban) Log (Rural)
rural and urban, the inequality has gone up during 1999-00
Source: Computed by Authors based on UNDP (2009) data to 2004-05. Understandably, the increase in the HDI score
for the low income States over 1983 to 2004-05 has been
other extreme. States witnessing a growth in the service moderate as compared to the corresponding figures for
sector of late, i.e., Andhra Pradesh, Karnataka, Tamil the high-income States. Average HDI score of the States
Nadu and West Bengal have remained in the mid-income is significantly different across income categories. The
category throughout the period of study. The position of existing literature suggests that the rising inequality has
Kerala kept fluctuating between high and middle-income affected the growth process and livelihood of the citizens of
category. A fluctuating trend between low and middle- different States differently, though HD level has improved
income category is noticed for some Northeastern States across all income groups. However, the improvement is
as well. It becomes clear that liberalization exercise has not smooth. For middle income States, both for rural and
affected the growth path of the States in different manner. urban categories, HDI score in 1993 is lower than the
Before exploring the relationship between HD and corresponding 1983 level. For lower income States, for
EG, a deeper analysis on the quality of income growth urban areas, HDI score in 1999-00 is lower than the 1993
across Indian States would not be irrelevant here. The level and for high income States, for rural and urban areas,
concern here is that the inequality in the growth process the HDI score in 1999-00 is lower than the corresponding
may adversely influence the pace of HD formation in a 1993 level.
State. Table 3 compares the HD level of the States in the In order to understand the relationship between EG
and HD, a regression analysis has been undertaken here,
Figure 3: Relationship between HDI and PCGSDP involving the logarithm of the HDI score as dependent
(1993) variable and the logarithm of the PCGSDP of the States
HDI Score vs PCGDP : 1993 as independent variable. The cross-section regressions are
0.900 separately estimated for the four periods under study and
0.800 for the rural and urban areas separately.
HDI Score

0.700
0.600 It is observed from the reported results in Table 4 that
0.500 the HDI formation process of the States is positively
0.400
influenced by the growing income levels, as reflected from
0.300
0.200 the positive value and significance level of the coefficients
0.100 of log (Per Capita GSDP). It is observed that, the value of
0.000
the coefficients of the log (Per Capita GSDP) (it measures
5K 10K 15K 20K 25K 30K
Per Capita (GDP) (RS.) the income elasticity of human development), both for rural
Rural Urban Log (Urban) Log (Rural)
and urban areas, is declining over the period. This implies

THE INDIA ECONOMY REVIEW 87

P R O B L E M S & P E R S P E C T I V E S

Figure 4: Relationship between HDI and PCGSDP reside in the rural areas.
(1999-00) Figures 2-5 pictorially depict the cross-State relationship
HDI Score vs PCGDP : 1999-2000 between HD and EG during the four periods under
0.900 observation across the States. The rural and urban income
0.800
levels and HD achievements are considered separately in
HDI Score

0.700
0.600 the diagrams. A couple of observations emerge from the
0.500 figures. First, the positive relationship between EG and
0.400
HD holds good for all four periods under consideration.
0.300
0.200 Second, the relationship between EG and HD is non-
0.100 linear in nature; rising level of income is associated with
0.000
5K 10K 15K 20K 25K 30K 35K 40K 45 lesser degree of increase in terms of HD achievements.
Per Capita (GDP) (RS.) Third, despite rising income inequality in the last period
Rural Urban Log (Urban) Log (Rural)
under consideration (2004-05), as reflected from the
Source: Computed by Authors based on UNDP (2009) data
divergence of the rural and urban curves, this non-linear
that per capita income (as an indicator of economic growth) structural relationship is not affected in any significant
is not translating into human well being more effectively manner. Except for a few States, the urban HDI score
in the recent period. This in another way may signify the is higher than rural HDI score for all the periods of our
rising influence of other variables in determination of the analysis. For Goa, a high income State, rural HDI score
HD achievements of a State. This indicates that there is is higher than urban HDI score for 1983, 1993 and 1999,
much scope for further investigation to understand the but it is opposite in 2004-05. For high income States
underlying factors (other than per capita income) which like Punjab and Haryana (1999-00, 2004-05), rural HDI
influence human development of a State. Moreover, we score is higher than urban HDI score. The same is true
observe from the table that except in 1999-2000, for all the for middle income States like Kerala, Jammu & Kashmir,
other years the income elasticity of human development Andhra Pradesh (1993, 1999-00) and low income States
is higher for rural areas as compared to urban areas. This Uttar Pradesh and Uttarakhand.
implies that an increase in per capita income results higher Over the last decade the contribution of the service
human development in rural areas as compared to their sector in India’s GDP has increased tremendously. Health
urban counterparts. This has a major policy implication and education is part to that growth in a two-way process,
given the fact that around 70 percent of the population still on one hand they form part of the service sector, and on
the other hand healthy and educated population stand
Figure 5: Relationship between HDI and PCGSDP to augment the GDP in a more productive manner not
(2004-05) only in the service sector but also within agriculture and
HDI Score vs PCGDP : 2004-2005 manufacturing segment. It is observed from the current
1.000 analysis that EG and HD levels in India are positively
0.900
related. While this is a comforting observation, indirectly
0.800
0.700 implying that the HD formation process resulting from the
0.600 rising income level in the current period would continue
0.500
to provide growth impetus in the subsequent period, the
0.400
0.300 rising inequality level and the weakening of the income
0.200 elasticity of HD in the recent period are among the major
0.100
areas of concern. One important policy response for the
0.000
5K 10K 15K 20K 25K 30K 35K 40K 45K 50K 55K Government would therefore be to ensure a balanced
Per Capita (GDP) (RS.)
Rural Urban Log (Urban) Log (Rural) growth process across the States on one hand, and to
Source: Computed by Authors based on UNDP (2009) data bridge the gap between the rural and urban areas within

88 THE IIPM THINK TANK


a State on the other. Only then the benefits of the EG and
HD augmentation process would cumulatively lead to
sustainable economic development path.
Endnotes
1
State-specific poverty lines for the three periods (1983,
1993-94 and 1999-00) have been taken from Government
of India (2002) and for 2004-05 we referred the estimates
provided by Himanshu (2009).
2
For 2005-06, we estimated the adjusted intensity of
formal education as on September 30th, 2005.
References and Additional Thinking
• Costantini, Valeria and Salvatore Monni (2008),
"Environment, human development and economic
growth", 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 human
development in Indian States”, Economic and Political
Weekly, Vol. 41, No. 30, pp.3321–3329.
• Government of India (undated), “Annual Report
- 2007-08”, Department of School Education and
Literacy, Department of Education, Ministry of Human
Resources Development, Government of India, New
Delhi.
• Government of India (2002), “National Human
Development Report 2001”, Planning Commission,
Government of India, New Delhi.
• Guha, A. and D. Chakraborty (2003), “Relative Positions
of 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 Review
the Methodology for Estimation of Poverty, Planning
Commission, December 2009.
• Mukherjee, S. and D. Chakraborty (2010), “Is there
any Relationship between Environment, Human
Development, Political and Governance Regimes?
Evidences from a Cross-Country Analysis", MPRA
Paper 19968, University Library of Munich, Germany.
• Mukherjee, S. and D. Chakraborty (2009),
P R O F O U N D P R I O R I T I E S
“Environment, Human Development and Economic
Growth: A Contemporary Analysis of Indian States”,
(Co-authored with S. Mukherji), International Journal of
Global 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 Latent
Variable Approach”, National Institute of Public Finance
and Policy, New Delhi.
• NSSO (1986), “Levels and Pattern of Consumer
Expenditure”, NSS 38th Round (January 1983 –
December 1983), NSSO, CSO, MoS&PI, GoI, New Delhi.
• NSSO (1996), “Levels and Pattern of Consumer
Expenditure”, NSS 50th Round (July 1993 - June 1994),
Report No. 402, NSSO, CSO, MoS&PI, GoI, New Delhi.
• NSSO (2002), “Levels and Pattern of Consumer
Expenditure”, NSS 55th Round (July 1999 - June 2000),
Report No. 457, NSSO, CSO, MoS&PI, GoI, New Delhi.
• NSSO (2007), “Levels and Pattern of Consumer
Expenditure”, NSS 61st Round (July 2004 - June 2005),
Report No. 508, NSSO, CSO, MoS&PI, GoI, New Delhi.
• Ranis, G. (2004), “Human development and economic
growth”, Center Discussion Paper No. 887, Economic
Growth 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 Population
Projections Constituted by the National Commission
on Population”, Registrar General of India & Census
Commissioner, Government of India, New Delhi.
• Registrar General of India (1999), “Compendium
of India’s Fertility and Mortality Indicators 1971 to
1997, based on Sample Registration System”, RGI,
Government of India, New Delhi.
• Registrar General of India (RGI) (2001), “Sample
Registration System (SRS) Bulletin”, Volume 35, No. 2,
October 2001, RGI, Government of India, New Delhi.
• United Nations Development Programme
(UNDP) (2009), “Human Development Report
2009 - Overcoming barriers: Human mobility and
development”, New York: Palgrave Macmillan.
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organization.)
THE INDIA ECONOMY REVIEW 89
P R O B L E M S & P E R S P E C T I V E S
India and the Crisis
of Civilization
Potential Impacts of Converging Ecological,
Economic and Energy Catastrophes
Nafeez Mosaddeq Ahmed
Executive Director, Institute for Policy
Research & Development, London
T
he first decade into the new millennium has seen
India rise dramatically onto the world stage as a
major economic and geopolitical force, both re-
gionally and globally. The trend has been long anticipated,
as articulated by the CIA in its 2005 report, Mapping the
Global Future. The report noted that by 2020 India’s GDP
would “have overtaken” or would be “about to overtake Eu-
ropean economies.” Rather than the
21st century constituting a new ‘Amer-
ican century’, the report observes, it Poverty has
“may be seen as the time when Asia, remained a
led by China and India, comes into its serious problem
own.” But the report also includes the
which, contrary
following crucial caveat: “Barring an
abrupt reversal of the process of glo-
to conventional
balization or any major upheavals in wisdom, has
these countries, the rise of these new actually worsened
powers (China and India) is a virtual
certainty.”1
Needless to say, the global financial crisis which has
plunged the world into a recession whose overall outcome
remains uncertain, was certainly one such “major upheav-
al” that was never anticipated by the US intelligence
community, nor even the financial community. Indeed, the
spate of banking collapses in 2008 took the vast majority of
neoliberal economists, including those working for national
governments, by complete surprise. The inability to foresee
90 THE IIPM THINK TANK
the financial crisis is only one factor suggesting that the
more optimistic conventional scenarios for Asia should be
approached with some caution. Other “major upheavals”
that both security and financial experts have largely missed
include issues like climate change, energy scarcity and food
production – all of which are likely to have significant,
converging impacts on India in particular.
That is not to say the future is nec-
essarily bleak. To the contrary, world-
class experts across India are cognizant
of all these issues, and working furious-
ly to address them. But the fact remains
that as these global crises intensify, In-
dia will face escalating challenges that
are likely to exacerbate her as yet unre-
solved internal and external problems
without sufficient mitigating, preven-
tive and transformative measures.
Social-Structural Inequalities:
Neoliberalism in Crisis?
The Indian economy has been frequently cited as a prime
example of the success of the model of development pro-
posed by institutional agents of neoliberal globalization such
as the IMF and the World Bank. But over the last decades,
poverty has remained a serious problem which, contrary
to conventional wisdom, has actually worsened under the
 C R U C I A L C O N V E R G E N C E

THE INDIA ECONOMY REVIEW 91

P R O B L E M S & P E R S P E C T I V E S
impact of neoliberal reforms. The landmark 2007 report of
the Indian government’s National Commission for Enter-
prises in the Unorganized Sector (NCEUS) clarifies this
beyond doubt, finding that 77 percent of the entire popula-
tion lives on less than half a dollar a day. The report put to
rest earlier government claims that India’s poverty rate had
stabilised at around 30 percent.2 The report further shows
that out of the 457 million people (nearly 42 percent of the
population) in employment, only 34 million were employed
in the organized sector (including industries directly linked
to India’s economic growth such as IT, textiles, heavy in-
dustry, and so on). The vast majority of new jobs created
have been in the organized urban sector, and even here,
most jobs have accrued to ‘informal workers’ who lack job
security and social security benefits.3 Moreover, 88 percent
of rural workers earn less than Rs. 66 per day – the Labour
Ministry’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 in 1-2% of India’s
the private organized sector is reaping population in the
much of the fruits of the recent rapid private organized
economic growth. Increased wealth
sector is reaping
and income remain mostly within this
small minority; the gap between them
much of the fruits
and the rest of the nation is widening of the recent rapid
by the day. Those who have accumu- economic growth
lated immense wealth are in a position
of power and influence to further en-
hance it, often without sharing much with anyone else. The
economic and social system seems to be inequitably struc-
tured and in the end, most Indians are unable to partake in
the benefits of the aggregate growth in the economy.”4
The World Bank, however, has repeatedly taken India’s
previous highly questionable official statistics at face value to
lend support to the claim that neoliberal policy reforms and
trade liberalization have contributed to poverty reduction.
In its 2006 World Development Report, for instance, the
Bank uncritically reproduced now thoroughly discredited
official Indian figures suggesting that poverty declined from
37.3 to 27.4 percent between 1993 and 2000. 5 Yet as noted
by Utsa Patnaik, Professor of Economics at the Center for
Economic Studies and Planning, Jawaharlal Nehru Univer-
sity in New Delhi:
92 THE IIPM THINK TANK
“... over exactly the same period a number of crucial and
inter-related indicators of rural well-being have worsened:
crop growth rates have halved in the 1990s compared to the
1980s, rural development expenditures have gone down as a
share of National Product and in real per head terms. Rural
employment growth has dropped sharply and open unem-
ployment has been growing fast. Bank credit to farmers has
declined and there is higher dependence on private usurious
credit. Price declines have been severe for many crops, and
food grains absorption per head has declined sharply to
reach levels prevalent fi fty years ago. Mounting un-repayable
farm debts have led to loss of land reflected in a sharp rise
in landlessness, and to the historically unprecedented situ-
ation of many thousands of farmer suicides in widely sepa-
rated areas in different states (Andhra Pradesh, Karnataka,
Vidarbha in Maharashtra, Punjab, and Kerala) and these
suicides are continuing. All these indicators of acute agrar-
ian distress are quite inconsistent with
the claims of decline or constancy of
poverty. These indicators suggest that
as a ground level reality rural poverty
is high and rising in many areas.”6
Other studies indicate that available
figures cannot easily prove that poverty
has drastically reduced or increased in
the last decade. However, Deaton and
Dreze argue that there has been “an
intensification of regional disparities”
between historically poorer and afflu-
ent states, with some poorer states such as Assam and Oris-
sia experiencing “virtually zero growth of average per capita
expenditure” between 1993-94 and 1999-2000. This is part
of “a broader pattern of increasing economic inequality in
the nineties”, evident for instance in “rising rural-urban dis-
parities in per capita expenditure” and “rising inequality of
per capita expenditure within urban areas in most states.” 7
Indeed, widening inequalities in India are also part of a
larger global pattern throughout the world, linked directly
to neoliberal macroeconomic policy prescriptions. A 2006
United Nations Department of Economic and Social Af-
fairs (UNDESA) report on the impact of IMF-World Bank
reforms in the South for the period 1980-2005 found that:
“The past quarter-century has seen a sharp decline in
the rate of growth for the vast majority of low and middle-

income countries. Accompanying this decline has been re-
duced progress for almost all the social indicators that are
available to measure health and educational outcomes... [A]
t least some of the policy changes that have been widely
implemented over the last 25 years have contributed to this
long-term growth and development failure.”8
The report points out that the isolated growth-gains in
India and China are more likely to be linked less to neo-
liberal reforms, than to specific government interventions
such as high levels of protection, currency controls, and so
on.9 While the neoliberal model therefore cannot be eas-
ily absolved from the entrenchment of social structural in-
equalities in India, it clearly must take responsibility for
the devastating impact of the 2008 financial crisis. NDESA
estimates that the number of India’s poor was 33.6 million
higher in 2009 due to declining growth rates in the after-
math of the crash.10
Climate Change: Probable Risks
Experts project further economic loss- Global warming
es due to the impact of global warm- would also lead to
ing over the coming decades. Although greater episodes
climate ‘sceptics’ have had a field day
of heat cramps
over the discrediting, due to a case of
sloppy referencing, of the claim in the
and heat stroke,
IPCC’s Fourth Assessment Report that largely affecting
the Himalayan glaciers are in danger poorer classes
of completely disappearing by 2035,
the peer-reviewed scientific literature
confirms that the glaciers are nevertheless melting rapidly.
A 2008 study in Geophysical Research Letters notes, for
instance, that:
“Naimona’nyi is the highest glacier (6050 masl) document-
ed to be losing mass annually suggesting the possibility of
similar mass loss on other high-elevation glaciers in low and
mid-latitudes under a warmer Earth scenario. If climatic
conditions dominating the mass balance of Naimona’nyi
extend to other glaciers in the region, the implications for
water resources could be serious as these glaciers feed the
headwaters of the Indus, Ganges, and Brahmaputra Rivers
that sustain one of the world’s most populous regions.”11
This is part of a wider global trend of “unbroken accelera-
tion” in melting of the majority of glaciers around the world
over the last 10 years according to the World Glacier Moni-
C R U C I A L C O N V E R G E N C E
toring Service – such that even on a “medium scenario” of
global warming, 70 percent of the Alps and a 100 percent of
mountain ranges like the Pyrenees would be ice free.12
Other impacts of global warming on India could be equal-
ly deleterious. Scientists project that sea level will rise at
the rate of 2.4 millimetres (mm) per year in India, reaching
38 centimetres (cm) by mid-century. This would “inundate
low-lying areas, drown coastal marshes and wetlands, erode
beaches, exacerbate flooding and increase the salinity of
rivers, bays and groundwater.” As a quarter of Mumbai com-
prises low-lying areas, those most detrimentally affected by
these impacts will be “low-income groups and poor residents
living in vulnerable locations (accounting for nearly 50% of
Mumbai’s population).”13
Flooding would be exacerbated by increased precipita-
tion. In 1989, Mumbai’s average rainfall was 2129 mm, in-
creasing by 50 percent by 2005-2006 to 3214 mm. Global
warming is likely to continue intensi-
fying “extreme precipitation” over the
western coast and west central India,
with the summer monsoon increasing
by as much as 20 percent by 2008 in
all states except Punjab, Rajasthan and
Tamil Nadu. Inadequate drainage and
sewage infrastructure, sanitation and
hygiene would in this context exacer-
bate danger of disease outbreaks.14
Global warming would also lead to
greater “episodes of heat cramps, heat
exhaustion and heat stroke” largely affecting poorer class-
es. Heat stress would weaken immune systems and further
amplify “susceptibility to diseases”, mainly for three major
illnesses – diarrhoea, malaria and leptospirosis. Increased
heat can also increase the range of vector-borne diseases
like malaria, thus facilitating the spread of pathogens.15
Flooding could also be as damaging as drought in terms
of agriculture, and in this regard has already detrimentally
affected 20 million people in India. In the 2007 monsoon
alone, for instance, nearly 8,000 square miles of agricul-
tural land had been inundated; more than 130,000 houses
destroyed; and 1,428 people killed.16
By 2009, however, the monsoon failed, most likely due to
the El Niño Southern Oscillation.17 Vandana Shiva reports
that the failure had “impacted two thirds of India, especially
THE INDIA ECONOMY REVIEW 93
P R O B L E M S & P E R S P E C T I V E S

the bread basket of India’s fertile gangetic plains. Bihar has paradigm which eschews Southern food self-sufficiency in
had a 43% rainfall deficit, Jharkhand - 47%, Uttar Pradesh production for export crops to Western markets. This has
- 64%, Haryana - 61%, Punjab - 26%, Himachal Pradesh - led to:
63%, Uttarakhand - 42%.”18 “... an intensification of the international division of la-
bor in agriculture, where tropical lands are increasingly
Food Insecurity: from Scarcity to Calamity? required to produce the relatively exotic requirements of
Overall, climate change is likely to increase the frequency of advanced country populations, keeping the supermarket
floods and droughts in India, along with Himalayan glacier- shelves in the North well-stocked with everything from win-
melt, which together will dramatically affect agricultural ter strawberries to edible oils and flowers. The resulting
productivity. Already in India, per capita food grain has food grain deficits of developing countries, as they divert
fallen from 177 kg in 1991 to 155 kg in 2001. Wheat pro- more land to export crops and specialized crops for internal
duction in India’s breadbasket is projected to drop by 50 consumption by the wealthy, are supposed to be met by ac-
percent in 2050, putting 200 million further people at risk cessing the global market for grains, which is dominated by
of hunger. Agriculture will be worst affected in the most the United States, Canada, and the European Union with
fertile coastal regions of Gujarat and Argentina and Australia as smaller
Maharashtra.19 players.”23
But the escalating food crisis is not Wheat production The problem is that the majority
simply a function of climate change, is projected to poor cannot afford to buy expensive
but part of a deeper systemic crisis in drop by 50% in food imports from the West, and that
the nature, structure and methods of
corporate-industrial food production
2050, putting 200 the system of global agribusiness is
systematically degrading its own con-
and distribution. As Patnaik argues,
million further ditions of production. Maps released
rising levels of hunger in India have people at risk in December 2005 by scientists at the
largely been not due to unavailabil- of hunger Center for Sustainability and the Glob-
ity of food, but due to increasing in- al Environment (SAGE) at the Univer-
equality: sity of Wisconsin-Madison show that
“... the average Indian family of five in 2005 was con- the Earth is “rapidly running out of fertile land” and that
suming a staggering 110 kg less grain per year compared “food production will soon be unable to keep up with global
to 1991, reflecting divergent trends: a sharp rise in intake population growth.”24 As US structural geologist Dave Al-
for the wealthy minority, outweighed by a large decline for len Pfeiffer argues, the principal problem is that modern
the majority. Not only has calorie intake per capita fallen, industrial agriculture in its current structure is simply un-
there is also a steep decline in protein intake for four-fifths sustainable. In the US alone, it takes 500 years to replace
of the rural population over the period 1993-94 to 2004- one inch of topsoil lost to industrial methods, and erosion
05 according to the National Sample Survey Reports on is reducing productivity by up to 65 percent each year. For-
Nutritional Intake (NSS).”20 mer prairie lands, which constitute the breadbasket of the
Yet she acknowledges that this does not obviate the fact United States, have lost one half of their topsoil after about
that growth rates for food grains have “slowed sharply in 100 years of farming. Overall, the soil is eroding 30 times
every developing country, including India and China, and in faster than the natural rate of reproduction.25
many countries, there has been an absolute decline in grain The over-dependence of industrial food production on
output.”21 Indeed, during seven of eight years prior to 2008, fossil fuels exacerbates this problem. Currently, the modern
world grain consumption exceeded production.22 food system consumes ten calories of fossil fuel energy for
She urges that this global food production crisis, and its every calorie of food energy produced.26 Yet a growing con-
link to the massive food price hikes of 2008, must be un- sensus among oil industry experts suggests that the world is
derstood in the context of the enforcement of the neoliberal either precariously close to exhausting half the world’s con-

94 THE IIPM THINK TANK


ventional oil reserves, or may already
have done so – a phenomenon known India is currently
as ‘peak oil’. the world’s fifth
Energy Depletion – Scaling the largest energy
Peak
India is currently the world’s fi fth larg-
consumer,
est energy consumer, importing about
importing about
70 percent of its crude oil requirements. 70% of its crude
This is likely to increase to around 85 oil requirements
percent by 2012 due to growing energy
demand and a lack of alternative do-
mestic energy sources coming online. Saudi Arabia is India’s
largest crude oil supporter, followed by Iran. New imports
will continue to arrive from these Middle East suppliers,
along with Abu Dhabi, Iraq and Kuwait.27
Yet world oil production may well have already peaked.
From 2005, world oil production stopped rising, remained
roughly flat for three years, and then began to decline in
2008, and now continues to decline.28 Although a studiously
optimistic estimate by Cambridge Energy Research Asso-
ciates, whose chair is close to Saudi elite circles, puts the
annual decline rate at about 4.5 percent,29 the International
Energy Agency noted that the “natural annual rate of de-
cline” as of 2008 has been 9.1 percent. This decline has only
been temporarily ameliorated due to the slow-down of world
demand in the context of global recession. Recent estimates
put the coming oil supply-crunch at around 2015. 30
Indeed, for India, the prospects are grim, given that its two
major Middle East oil suppliers, Saudi Arabia and Iran, have
C R U C I A L C O N V E R G E N C E
most likely already peaked.31 Saudi Arabia, for instance, is
struggling to maintain 2008 levels of production, with 2009
and 2010 production levels falling consecutively.32 Given that
India’s oil imports are projected to triple by 2020 from 2005
levels to meet rising demand, this potentially poses a serious
crisis since it is unlikely the oil will actually be there. 33
Beyond State Failure
The rising challenges India faces are by no means unique.
The convergence of global ecological, economic and en-
ergy crises will increasingly undermine the capacity of all
states to maintain territorial integrity, deliver goods and
services, and provide security. This, in turn, will intensify
the vulnerability of increasingly disenfranchised classes to
resort to violence; while also increasing
states’ willingness to attempt to exert
social control through military means.
It is no accident, in this context, that
Maoist revolts began to break-out in
eastern parts of India in late 2009. This
emerging conflict cannot be defused
with counterinsurgency initiatives – a
symptom-led approach – but through
addressing root structural causes.
The reality is that this and many other
violent conflicts are symptomatic of a
deeper 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 trends
with extreme pessimism, even though necessary pragma-
tism entails recognition that social dislocations and even
catastrophic short-falls may well be inevitable. Despite this,
the window of opportunity – albeit closing fast – still re-
mains for India to play a pioneering role in undertaking
the wide-ranging social, political, economic, and cultural
transformations essential to effectuate a successful transi-
tion to a social form which is truly sustainable and prosper-
ous in the long-term. Such a transition requires, ultimately,
a rejection of the failed neoliberal model, whose doctrine of
unlimited growth through deregulation and liberalization,
has proven to be intimately bound up with the destruction
of the environment, the exhaustion of the soil, the unsus-
tainable depletion of resources and raw materials, and the
unrestrained unbalancing of the Earth’s complexly inter-
THE INDIA ECONOMY REVIEW 95
P R O B L E M S & P E R S P E C T I V E S
dependent ecosystems. India has already proven that it has
the technological, cultural, spiritual and human resources
to successfully pursue this transition. In the words of British
environmentalist Martin Wright:
“India’s economic growth may have fuelled pollution, but
it is also producing a massive expansion in renewable ener-
gies... Across the country, I’ve seen some truly dramatic
grassroots innovations in agriculture, energy and water man-
agement. India’s long traditions of self-reliance and ‘right
living’, as expounded by Gandhi, and still embodied in the
determination and commitment of community leaders and
innovators across the country, could be a powerful source
of strength to meet the sustainability challenge. Everything
depends on the choices India’s leaders make in the coming
few years.”34
Indeed, India, as well as the world, is at a crossroads.
Without massive mitigating, preventive and transformative
measures, the convergence of global crises threatens the
continuity of civilization into the 21st century. Yet India is
uniquely positioned, both in terms of its meteoric ascension
as a major economic power as well as its abundant domestic
civilizational resources, to play a leading role in transition-
ing toward a form of social organization that is more equi-
table, just, sustainable and harmonious than hitherto even
conceivable.
End Notes and Additional Thinking
1
Jonathan S. Landay, “Report foresees gains by China,
India”, Knight Ridder Newspapers (14th January 2005)
<http://seattletimes.nwsource.com/html/
nationworld/2002150724_ forecast14.html>
2
NCEUS report, Conditions of Work and Promotion of
Livelihoods in the Unorganised Sector (New Delhi:
National Commission for Enterprises in the Unorgan-
ised Sector, 2008) pp. 1-13
3
Ibid.
4 14
Abraham George, “Is India’s Prosperity Trickling
Down?” Uncovering the Truth Behind Poverty (17th
August 2007) <http://www.abrahamgeorge.blogspot.
com/2007/08/is-indias-prosperity-trickling-down.html>
5
World Bank, World Development Report 2006 (New
York: Oxford University Press, 2006) p.278, Table A1
6 17
Utsa Patnaik, Poverty and Neo-liberalism in India (New
Delhi: Center for Economic Studies and Planning,
96 THE IIPM THINK TANK
Jawaharlal Nehru University, February 2006) p. 2
7
Angust Deaton and Jean Dreze, “Poverty and Inequal-
ity in India: A Re-Examination”, Economic and Politi-
cal Weekly (7th September 2002) p. 3745
8
Mark Weisbrot, Dean Baker and David Rosnick, The
Scorecard on Development: 25 Years of Diminished
Progress (New York: United Nations Department of
Economic and Social Affairs, September 2006) p. 17
<http://www.un.org/esa/desa/papers/2006/wp31_2006.pdf>
9
Also see Robert Wade, “Is Globalization Reducing
Poverty and Inequality”, World Development (2004,
Vol. 32, No. 4) pp. 577-589. Available at <http://www.lse.
ac.uk/collections/DESTIN/pdf/Isglobreducing.pdf>
10
Rukmini Shrinivasan, “No financial crisis impact?
India’s poor grew by 34 mn”, Times of India (10th
February 2010) <http://timesofindia.indiatimes.com/
india/No-financial-crisis-impact-Indias-poor-grew-by-34-
mn/articleshow/5553859.cms> Also see Rajiv Kumar et.
al, Global Financial Crisis: Impact on India’s Poor –
Some Initial Perspectives (New Delhi: United Nations
Development Programme India, 2009) <http://data.
undp.org.in/FinancialCrisis/FinalFCP.pdf>
11
Natalie. M. Kehrwald, et. al. “Mass loss on Himalayan
glacier endangers water resources,” Geophysical
Research Letters (November 2008, Vol. 35) L22503,
doi:10.1029/2008GL035556 <http://www.wrq.eawag.ch/
organisation/abteilungen/surf/publikationen/2008_kehr-
wald.pdf>
12
Juliette Jowit, “World’s glaciers continue to melt at
historic rates”, Guardian (25th January 2010) <http://
www.guardian.co.uk/environment/2010/jan/25/world-
glacier-monitoring-service-figures>
13
Rakesh Kumar, Parag Jawale and Shalini Tandon,
“Economic impact of climate change on Mumbai,
India”, Regional Health Forum (2008, Vol. 12, No. 1)
pp. 38-39
Ibid.
15
Ibid.
16
Somini Sengupta, “Climate change threatens food
production in India, UN expert warns”, New York
Times (8 August 2007) <http://www.nytimes.
com/2007/08/08/world/asia/08iht-india.1.7036864.html>
K. Krishnar Kumar, “Unravelling the Mystery of Indian
Monsoon Failure During El Niño”, Science (October

2006, Vol. 314, No. 5796) pp. 115-119. Also see Steve
Connor, “In India, the monsoon fails. In Europe, it
rains without mercy. Is this more than a coincidence?”
Independent (13th September 2002) <http://www.
independent.co.uk/news/science/in-india-the-monsoon-
fails-in-europe-it-rains-without-mercy-is-this-more-than-
a-coincidence-607269.html>
18
Vandana Shiva, “Climate Change, Drought and India’s
Looming Food and Water Crisis”, ZNet (15th August
2009) <http://www.zcommunications.org/climate-change-
drought-and-indias-looming-food-and-water-crisis-by-
vandana2-shiva>
19
Anita Chaudhary and P. K. Aggarwal, “Climate Change
and Food Security in India” National Workshop on
Climate Change and its Impact on Health (New Delhi:
World Health Organization India, 26th-27th November
2007) pp. 39-40 <http://www.whoindia.org/LinkFiles/
Health_&_ Environment_ Nat_Wrksp_Climate_Change_
Lonavala_ p09.pdf>
20
Utsa Patnaik, “Origins of the Food Crisis in India and
Developing Countries”, Monthly Review (July-August
2009)
21
Ibid.
22
Lester R. Brown, ‘World facing huge new challenge on
food front: Business-as-usual not a viable option’, Plan
B Update 72 (Washington DC: Earth Policy Institute,
16th April 2008) <http://www.earthpolicy.org/
Updates/2008/Update72.htm>
23
Patnaik “Origins of the Food Crisis”, op. cit.
24
SAGE Press Release, ‘New Map Reveals True Extent of
Human Footprint on Earth’ (San Francisco: Center for
Sustainability and the Global Environment, University
of Wisconsin-Madison, 5th December 2005) <http://
www.news.wisc.edu/releases/11907.html>; Kate Ravilous,
‘Food crisis feared as fertile land runs out’, Guardian
(6th December 2005) <http://www.guardian.co.uk/food/
Story/0,,1659112,00.html>
25
Dale Allen Pfeiffer, ‘Eating Fossil Fuels’, From The
Wilderness (3rd October 2003) <http://www.fromthewil-
derness.com/free/ww3/100303_eating_oil.html>
26
Richard Heinberg, ‘Threats of Peak to the Global Food
Supply’, Museletter (July 2005, No. 159) <http://www.
richardheinberg.com/museletter/159>
27
“India’s dependence on oil exports to grow 85% by 2012:
C R U C I A L C O N V E R G E N C E
report,” Financial Express (New Delhi: 17th August
2007); Piyush Pandey, “India expected to increase oil
imports from Mideast”, Emirates Business (Dubai: 11th
February 2010)
28
Oilwatch Monthly (Amsterdam: Association for the
Study of Peak Oil, December 2008) <http://www.
peakoil.nl/wp-content/uploads/2008/12/2008_december_
oilwatch_monthly.pdf>
29
Reuters, “World’s oil fields declining at 4.5 pct – CERA”
(17th January 2010)
30
“World oil output declining faster than thought”
Telegraph (29th October 2008) <http://www.telegraph.co.
uk/finance/newsbysector/energy/oilandgas/3276406/
World-oil-output-declining-faster-than-thought.html>;
Simon Roberts (ed.) The Oil Crunch: A wake-up call for
the UK economy (London: UK Industry Taskforce on
Peak Oil & Energy Security, February 2010) <http://
peakoiltaskforce.net/wp-content/uploads/2010/02/final-
report-uk-itpoes_report_the-oil-crunch_ feb20101.pdf>
31
Werner Zittel and Jorg Schindler, Crude Oil: The
Supply Outlook (Berlin: Energy Watch Group, October
2007, EWG-Series No. 3/2007) pp. 5–17 <http://www.
energywatchgroup.de/fileadmin/global/pdf/EWG_
Oilreport_10-2007.pdf> Also see summary of US
geologist Jeffrey J. Brown’s Export Land Model (ELM)
in David Galland, ‘What the Export Land Model Means
for Energy Prices’, Casey Energy Speculator (19th May
2008) <http://www.investorsinsight.com/blogs/john_maul-
dins_outside_the_box/archive/2008/05/19/what-the-ex-
port-land-model-means-for-energy-prices.aspx>
32
MENAFN, “Saudi oil production still below 2008
levels” (Amman: Middle East North Africa Financial
Network, 3rd March 2010) <http://www.menafn.com/
qn_news_story_s.asp?storyid=1093310493>
33
“China and India: A Rage for Oil”, Business Week (25th
August 2005) <http://www.businessweek.com/bwdaily/
dnflash/aug2005/nf20050825_4692_db016.
htm?chan=gb>
34
Forum for the Future, “India’s future – sustainability or
bust?” (31st January 2008) <http://www.forumforthefuture.
org.uk/press-release/indias-future-sustainability-or-bust>
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organization.)
THE INDIA ECONOMY REVIEW 97
P R O B L E M S & P E R S P E C T I V E S

FOOD SECURITY
IN NORTH-EAST
INDIA IN
THE POST
GLOBALISATION
ERA
Utpal Kumar De
Department of Economics,
North-Eastern Hill University, Shillong

Background
Food and nutrition security is directly related to the well-being
of human population as it directly affects the physical and
working ability of the people. The problem of food and nutri-
tion security has become more important in the trade liberaliza-
tion and globalisation regime and now even the staple food has
become the political good in the developing country like India.
It has become more important in the developing countries not
only because it is essential for the survival of the people who
live under poverty but also for its social and political conse-
quences. The problem is much more significant in North-East-
ern region of India that has been lagging far behind the other
states in respect of agricultural production especially of food
items, industries and the development of human capital.
Basically these states are food deficit states and for meeting the
requirements of the inhabitants these states depend on import-
ed food articles from other regions of the country to a great

98 THE IIPM THINK TANK

 F O O D F I R S T

THE INDIA ECONOMY REVIEW 99

P R O B L E M S & P E R S P E C T I V E S
extent. Whereas, assurance of food and nutrition security is also
important from the point of view of human capital growth and
also the productive capacity of human being in the region.
The decade of 1990s, observed rising concerns of the people
about the question of food security at the local, regional,
national as well as international level. People have become
more concerned about the problem of persistent food insecurity
especially the chronic insecurity that is observed during the
period of natural calamities like drought, flood etc. and war and
caused the loss of human lives, which is a common seen of many
countries in Asia and Sub-Saharan Africa. The international
community has been discussing the issue at different interna-
tional forum for preparing guidelines to make provisions for
adequate food for everyone in order to meet their nutritional
requirement so that they are able to lead a smooth healthy life.
The Agenda 21 of Rio Earth Summit in
1992, emphasis on Nutrition in Rome
conference 1992, Cairo conference on The assurance of
Population and Development, 1994 and food and nutrition
World food summit in Rome 1996 are a security is also
few to name. The primary concern of all
important from
those summits was the level of poverty
and food security and how to enable the
the point of
poor to acquire their purchasing power view of human
so that everybody can obtain the basic capital growth
food requirement to lead a healthy life in
a sustainable environment and no one die
of starvation. Technological improvement was also given the
priority for raising the production of food-grains and that has
yielded much during the last few years but added another
question of sustainability of land productivity.
At the same time, continuous efforts have been there to
integrate the world economy and deregulate the economies in
favour of free trade and to allow the market to work freely
without any interference. Here opinions are formed in neoclas-
sical line that if the markets are allowed to work freely then
efficient results would come and there will automatically a flow
of food items from the surplus to deficit regions. It will flourish
the world economy; economic activities and opportunities will
increase and free trade will benefit every country through the
best utilisation of their comparative advantages. Free market
operation was supposed to enable the system to tickle down the
benefits of technological advancement and development
towards the poorer section of population all over the world.
100 THE IIPM THINK TANK
However the globalisation programmes operate under the
GATT agreement in which there is the clause of patent right,
intellectual property right and sui-generis system to give a
special benefit to the inventors of different technologies and
varieties of crops i.e., to those having an advantage of develop-
ing newer improved varieties of food and other items of human
welfare. This system allows the already developed nations a
chance of harvesting extra benefits through their monopoly
practices in many cases and cause twist in balance of power of
exploitation in favour of developed nations. Also negotiations
are going on for the reduction in food and agricultural subsidy
(under WTO agreement) and the gradual removal of Public
Distribution System (PDS) in the developing countries (espe-
cially in Asia and Sub-Saharan Africa) that would cause further
food insecurity in the deficient production zone and having
substantial number of people under
poverty. Thus we observe severe conflict
between the lobby of less developed
nations who want to protect their right
and interest against the hitherto unequal
competition as well as avoid precarious
food security condition and the rich
nations who still provide heavy farm
subsidy, export subsidy etc in order to
protect their farmers’ profiteering
interest. Therefore, the Doha round
(2001), Cancun meet (2003) were
marked by strong disagreement and concluded without any
concrete resolution.
However, one cannot deny the welfare implication of PDS in
a developing country like India where still now more than 26
percent of population are poor. That is more chronic in
North-East India with about one-third of its population is under
poverty and thus is not entitled to acquire their basic needs.
Similarly, the poor farmers in many cases, because of imperfec-
tions in market structure, financial obligations and having no
control over market are compelled to follow distress sell of their
products at meagre prices and thus lose economic access to
necessaries in the lean seasons when consumer price index go
up and they turn out to be the essential buyer of the same
product. Therefore, a strong public policy is required to arrange
for procurement and proper distribution of essential items to
meet the necessaries of general public at their affordable price
and fulfil their nutritional requirements (De, 2000). In spite of

having a low level of per capita SDP and being a food deficit
state Kerala through its wide coverage of PDS to benefit the
under-privileged section of society has been able to reduce the
impact of poverty and achieve a notable growth in human devel-
opment (Dreze & Sen 1995; Govt of Kerala 1994). On the other
hand, at the same time despite being a relatively richer state;
Maharashtra (in terms of per capita SDP) has not been success-
ful in reducing rural poverty and a substantial part of its
population is still suffering from shortfall of calorie intake in
both rural and urban areas (Suryanarayana, 1999). Though
some developed countries followed the policy of import
restriction (price policies and quota) to encourage their own
farmers to grow more and attain self-sufficiency in food
production and support producers’ income; they also supply the
urban consumers cheap food at some stable prices and try to
provide the rural poor masses the staple
food items at some standard affordable
prices (Anderson 1994). India also Reduction in
adopted a targeted Public Distribution food subsidies
System since 1997 to tackle the problem and gradual
of the target groups (severely poor
withdrawal of PDS
people) who suffer from chronic food
insecurity in terms of their entitlement.
has increased
In North-East India, around 40 percent dependence on
of population (most of those live in rural open markets
areas) are directly or indirectly depend-
ent on nature, especially forest resources.
But due to degradation of forest in terms of quality and
quantity, productivity of forest and thus availability of forest
produces have been declining over the years. Also a large
number of farmers follow jhum cultivation with traditional tech-
nology for their subsistence that without technological progress
and due to rise in population or declining land per head
coupled with falling fallow period led to decline in crop produc-
tivity. Moreover, adverse changes in terms of trade of their
small or marginal farm produces make the situation worse for
those vulnerable sections.
Objective
An effort is made in this paper to examine the changes in food
security situation in the region in the post globalisation era
from both the supply as well as demand side.
Agricultural Liberalisation, Globalisation and Food
F O O D F I R S T
Security
Agricultural trade liberalisation has led to the rapid commer-
cialisation of agriculture in India and therefore diversification
of crop production has taken place more in favour of the high
valued cash crops or non-food crops from the production of
food crops. Reduction in food subsidies and gradual withdrawal
of PDS has increased peoples’ dependence on the open market
for their basic food requirements. During 1990s foodgrain
output growth in India has fallen short of population growth
rate. Foodgrain output growth has decelerated to 0.58 percent
annual compound rate, where as during the same period though
population growth rate has declined than earlier, annual
compound rate was still 1.95 percent. Therefore it is very likely
to reduce the per capita availability of foodgrains from the
indigenous production to 139.07 kg per year (estimated by the
author for the year 2001).
During the age of trade liberalisation
and globalisation the deficit of food item
can be met by importing food items from
abroad and thus the thrust on export of
agricultural produce has resulted in a
policy induced changes in the production
of oilseed, cotton and other horticultural
crops. But due to the adverse change in
the exchange rate and due to the absence
of strong tie among the developing
nations, the price of export item has
fallen. Where as the developed countries operate in a system of
cartel and thus the price of importing items have increased
compared to the exporting items that has therefore added to
the problem of food insecurity. The first time, the lobby of
developing countries tries to put pressure on their developed
counterpart in Cancun meet of WTO, Mexico in September
2003 for the maintenance of agricultural subsidy and public
distribution system and the effort continued till now.
Moreover during the period of 1990s there is a drastic fall in
acreage and production of coarse grains, especially of coarse
cereals and coarse pulses, which are the main food item of the
poorer section of population. An estimated 4.6 million hectares
decline in area under food-grains cultivation has been observed
in India during 1991 to 2000. Gross area under coarse grain fell
by nearly seven million hectares during that period. Area under
pulses fell by 2.4 million hectares. Though there is a rise in area
under rice by 1.9 million hectare (especially because of rise in
THE INDIA ECONOMY REVIEW 101
P R O B L E M S & P E R S P E C T I V E S
area under boro rice cultivation) and rise in area under wheat
cultivation by 4.4 million hectares has taken place, the net
food-grains production growth has been decelerated. That
phenomenon has added to the hardship of the people lying
below poverty line.
Scenario of Food Security in North-East India
Per capita income and disparities or inequality of income
distribution, price level, availability of food items are the major
indices of food security in a region. According to FAO (1980)
food security implies that “all people at all times have both
physical and economic access to the basic food they need”. The
World Bank (1986) extended the idea to “access by all people at
all times to enough food for an active, healthy life. Its essential
elements are the availability of food and the ability to acquire
it”. Similarly there are the concepts of chronic and transitory or
temporary food insecurity. The first one means continuous
failure to acquire adequate diet caused by the inability to buy
food or to produce by them. The transitory insecurity however
arises because of temporary failure to access enough food
either due to sudden price rise, crop failure and household
income, which is experienced time to time by different parts of
the country (George, 1999).
The process of agricultural liberalisation and globalisation
started in 1991 in a significant way. Therefore the growth of
food-grains production and other changes during nineteen
eighties are compared with that of post globalisation period.
The triennia average figures presented in table-1 show that
though production of total food-grains in India had increased at
an annual compound rate of 2.93 percent during 1980-82 to
1990-92, the rate declined significantly during 1990-92 to
2000-02. In North-East India also, the annual compound
growth rate declined from 2.68 percent in 1980s to 1.84 percent
in the following decade and the trend continued till now. But
the changes are associated with significant interstate variation
in the region.
Except Manipur and Meghalaya all other North-Eastern
states recorded the similar trend. Production of total cereals as
well as the staple food, rice also recorded a similar trend like
that of total food-grains across all the North-Eastern states
(Table-2 & Table-3). But during the previous period, growth of
paddy production was relatively higher than that of cereal or
food-grains, whereas during the latter period growth of staple
food i.e., paddy (which is the basic food grain of the people of
102 THE IIPM THINK TANK
eastern and North-Eastern India) declined at a faster rate than
that of cereal or total food-grains. It indicates slightly higher
rate of growth of other cereal items in comparison to paddy in
the region.
On the other hand, at all India level during the decade of
1980s growth rate of paddy production was relatively higher
than the total cereal, which was again significantly higher than
the total food-grains. In the following decade however the rate
of growth of production of total cereal was significantly higher
than that of paddy, in spite of the fact that the rate of growth of
all has declined. It is an indication of relatively faster growth of
other cereals and that indicates a faster deceleration in the
growth of staple food (rice) production. The deceleration in
North-Eastern region has however been associated with the
decline in inter-state variation in growth rate, which is observed
from the significant decline in coefficient of variation in growth
rate in the later period.
Unlike all India aggregate, rice is the primary food-grain of
the North-Eastern region. Allocation of land towards paddy is
significantly higher in all the North-Eastern states than that of
all India average. From Tables 4 to 6 it is evident that percent-
age of area allocated for the production of food-grains, cereals
as well as staple food item paddy has declined in all the North-
Eastern states since 1976, which shows the shift of attention of
the farmers towards the non-food crops. Whatever, rise in
production has been observed was therefore due to the rise in
yield but that was also insufficient owing to the fall in long run
rate of growth of yield of crops as a result of lack of investment.
Diagram-1 shows that except Manipur and Tripura all the
North-Eastern states lie below the all India average yield of
food-grain. Also growth of yield in the region followed deceler-
ated growth over the years and thus raised question of sustain-
able availability of food-grain from internal production.
However, one may argue that the decline in percentage of
area allocated for food-grains has been observed throughout
the period before and after the globalisation and economic as
well as agricultural reform in India and thus it is not the effect
of globalisation. But it should be remembered that gross area
under cultivation has increased over the years and hence
increasingly people allocated their enhanced area under
cultivation towards non-food crops as well as horticulture
activities. Area under horticulture fruit crops together has
increased from 56.831 thousand hectares in 1979 to 262.124
thousand hectares in 1990 and further jumped to about 21060
 F O O D F I R S T

Table-1: Production of Food-grains and its Growth in the North-Eastern Region during 1980-82 to 2000-02
Production in ’000 Tonnes Annual Compound Growth Rate (%)
State 1980-82 1990-92 2000-02 1980-82 to 1990-92 1990-92 to 2000-02
Arunachal 139.33 209.5 222 4.16 0.58
Assam 2632.70 3422.67 4028.33 2.66 1.64
Manipur 261.97 304.23 385.00 1.51 2.38
Meghalaya 154.40 151.03 215.87 -0.22 3.64
Mizoram 40.33 90.53 126.50 8.42 3.40
Nagaland 113.73 209.90 333.00 6.32 4.72
Tripura 393.57 485.53 559.33 2.12 1.43
NER 3739.37 4873.53 5850 2.68 1.84
All India 130815.8 174695.3 185052 2.93 0.58
Coefficient of Variance in Growth Rate 83.30 57.06
Source: 1. North Eastern Council, Basic Statistics of NER, Various Issues
2. Government of India, Economic survey, Various Issues.

Table-2: Production of Cereals and its Growth in the North-Eastern Region during 1980-82 to 2000-02
Production in ’000 Tonnes Annual Compound Growth Rate (%)
State 1980-82 1990-92 2000-02 1980-82 to 1990-92 1990-92 to 2000-02
Arunachal 139.33 206.23 216 4.00 0.46
Assam 2582.00 3371.70 3965.67 2.70 1.64
Manipur 260.27 304.23 383.50 1.57 2.34
Meghalaya 152.87 148.63 212.37 -0.28 3.63
Mizoram 40.07 85.03 122.00 7.82 3.68
Nagaland 111.97 198.77 312.50 5.91 4.63
Tripura 391.37 479.17 553.93 2.04 1.46
NER 3681.03 4793.90 5747 2.68 1.83
All India 119485.5 161730.83 174148 3.07 0.74
Coefficient of Variance in Growth Rate 80.98 58.15
Source: Same as table-1

Table-3: Production of Rice and its Growth in the North-Eastern Region during 1980-82 to 2000-02
Production in ’000 Tonnes Annual Compound Growth Rate (%)
State 1980-82 1990-92 2000-02 1980-82 to 1990-92 1990-92 to 2000-02
Arunachal 93.27 134.17 139.50 3.70 0.39
Assam 2447.23 3255.70 3863.67 2.90 1.73
Manipur 248.53 294.67 372.00 1.72 2.36
Meghalaya 126.90 118.30 179.00 -0.70 4.23
Mizoram 34.20 72.93 106.50 7.87 3.86
Nagaland 99.57 162.10 215.50 4.99 2.89
Tripura 383.23 471.30 547.80 2.09 1.52
NER 3436.27 4509.17 5404.00 2.75 1.83
All India 51331.73 74044.70 78762.00 3.73 0.62
Coefficient of Variance in Growth Rate 83.98 55.81
Source: Same as table-1

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Table-4: Changes in Percentage of Gross Cropped Table-5: Changes in Percentage of Gross Cropped
Area Allocated for Foodgrains Area Allocated for Cereals
State\Year 1976-77 1988-89 1995-96 2000-01 State\Year 1976-77 1988-89 1995-96 2000-01
Arunachal 81.77 76.03 75.04 69.96 Arunachal 81.77 76.13 72.54 67.68
Assam 74.59 69.97 69.24 67.77 Assam 71.77 66.64 66.52 64.87
Manipur 92.69 91.10 86.26 78.47 Manipur 89.95 91.10 86.26 78.47
Meghalaya 61.91 57.87 53.16 47.29 Meghalaya 61.18 56.61 51.82 45.49
Mizoram 92.67 83.97 71.65 64.89 Mizoram 92.29 83.09 67.52 62.77
Nagaland 89.74 77.17 84.39 67.20 Nagaland 85.74 74.09 79.60 61.78
Tripura 81.68 65.19 57.39 59.35 Tripura 80.23 63.33 55.42 57.01
NER 76.50 70.47 69.10 68.90 NER 73.11 67.69 66.49 66.21
All India 74.41 70.89 64.86 64.05 All India 66.66 58.03 52.92 53.34
Source: Same as table-1 Source: Same as table-1

thousand hectares in 2000 in the region. Also area under tea Table-6: Changes in Percentage of Gross Cropped
has increased from merely 194.5 thousand hectares in 1977-78 Area Allocated for Paddy
to 236.475 thousand hectares in 1989-90 to further 282.403 State\Year 1976-77 1988-89 1995-96 2000-01
thousand hectares in 2002-03. Similar is the case for other Arunachal 54.62 51.98 48.65 45.25
plantation crops. Even if area under food crop increased in Assam 69.03 62.98 63.57 62.41
some states in the 1990s the growth of absolute area under it Manipur 85.19 87.95 84.83 77.03
has declined (except Manipur) significantly compared to its Meghalaya 51.67 45.90 42.11 37.18
previous decade, which is clear from the Tables-7 and 8 respec- Mizoram 88.67 74.41 60.37 55.32
tively. Moreover, the small subsistence farmers who are Nagaland 58.70 62.63 61.40 46.50
substantial in number in the region compelled to grow some Tripura 79.04 62.56 54.34 56.31
staple food for their survival but that is insufficient to meet the NER 68.67 62.66 61.74 61.89
growing total requirement. All India 23.05 23.17 22.96 23.19
Table-10 and 11 reveals that except Manipur, Meghalaya and Source: Same as table-1

Mizoram all other North-Eastern states and the region as a

whole observes a fall in the per capita production of cereal as
well as total food-grain during 1990s though the growth was
positive during the previous decade in most of the states. It is
due to the rapid growth of population compared to the growth
of food-grain production like that of all India trend. Though per
capita production in Mizoram has increased marginally in the
1990s, growth rate declined at very faster rate. Table-10 also
shows that the estimated deficit of cereal per capita though
decreased during 1981 to 1991 it increased again after 1991 due
to rising gap between production and the requirement. There-
fore, there is a rising dependence on import of food-grains
especially coarse cereal from other region of the country. But
the country as a whole is becoming food deficit on an average
and thus the situation indicates rising food insecurity especially
for those who cannot afford the imported food articles. The
price of imported food from other regions becomes costlier in
the region due to heavy transportation cost. Also due to rise in
price of fertiliser, HYV seeds etc. when transported from the
main land, many of the small and marginal farmers cannot
afford to adopt such technologies and hence modernisation of
agriculture is very slow even after globalisation or market
integration and hence the growth of productivity is slow and
uncertain. Therefore, globalisation process fails to accelerate
the process of modernisation through the expansion of trade
and improve food security position in the region.
If we look at the index number of prices in India, food prices
are found to increase at a faster rate than the non-food and
manufacturing articles since 1981-82. However, growth of food
prices during 1990-91 to 2000-01 (i.e., in the post-globalisation
period) was much faster than that of previous decade i.e.,
1981-82 to 1990-91 (Table-12). Though rise in food prices is
comparatively lower during 2000-01 to 2004-05 than the

104 THE IIPM THINK TANK

 F O O D F I R S T

Diagram 1: Growth of Yield of Foodgrains in North-Eastern States on India

3.5

3
Arunachal
2.5 Assam
MT Per Hectare

Manipur
2
Meghalaya

Mizoram
1.5
Nagaland

1 Tripura

NER
0.5
India

0
1975-76

1977-78

1979-80

1981-82

1983-84

1985-86

1987-88

1989-90

1991-92

1993-94

1995-96

1997-98

1999-00

non-food and manufacturing articles, food prices have esca- 2001-02

of globalisation is more visible (Table-12). Therefore the
lated swiftly in recent past even when there is a recession world farmers in the region prefer to switch over to relatively more
over. The process of diverting corn output for the production of remunerative crop like potato and horticulture crops where
ethanol or bio-diesel in USA (that reached about 20 percent of profit depends not only on the price but also on the yield rate of
its current production and there is a target to increase to 30 the respective crops. The rise in price of food crops rather
percent by 2010) and EU (where the target is to divert 10 increases their cost of living, as there is deficiency of output.
percent of their crop output for the purpose and reduce the If we look at the per capita income, which shows the standard
dependence on fossil fuel) has added fuel to this fire. Recently, of capability of the people on an average, it is observed that
Indian Government has also taken decision to allow the annual compound rate of growth of per capita NSDP in all the
generation of ethanol and bio-fuel from corn in order to solve North-Eastern states has increased during 1990s compared to
the problem of petroleum and that is supposed to complicate its immediate previous decade except in Assam and Arunachal
the situation further unless food production rises to over-com- Pradesh (Table-13). But if one looks at the recent past rise in
pensate the loss. price level across all the commodities including food items, the
A simple question may arise that if food prices have increased purchasing power of the average people is bound to affect
at faster rate why the farmers switched over to other crops. It adversely. After the integration of world market the local
has been experienced that the farmers do not receive the exact financial markets respond to the changes in world market very
price at the time of harvest that is reflected through index fast, where as commodity prices (that those people sale) varies
because of market imperfection and local conditions and more depending upon the availability in the indigenous
especially in North-East India where markets are disintegrated. markets. Whatever rise in NSDP in North-Eastern region has
Also, a large number of farmers here practice Jhum cultivation been observed during 1990s was not mainly due to integration
for self-sustenance and hence marketed surplus is very low. with the world market as these economies are mostly based on
Moreover, there is fall in relative price of food with respect to the natural resources with little export orientation of manufac-
non-food or manufacturing items since 2000-01 when the effect tured articles. The growth here has been due to the exploitation

THE INDIA ECONOMY REVIEW 105

P R O B L E M S & P E R S P E C T I V E S

Table-7: Growth of Triennia Average Area under Foodgrains during 1981 to 2001
Area under Foodgrains in ‘000 Hectares Annual Compound Growth Rate (%)

State\Year 1981 1991 2001 81-91 91-01

Arunachal 133.17 184.90 190.00 3.34 0.27

Assam 2529.50 2734.10 2797.33 0.78 0.23

Manipur 182.43 159.60 167.00 -1.33 0.45

Meghalaya 130.97 132.77 133.17 0.14 0.03

Mizoram 43.97 65.73 65.00 4.10 -0.11

Nagaland 127.60 180.00 209.50 3.50 1.53

Tripura 302.00 273.97 255.47 -0.97 -0.70

NER 3449.63 3731.07 3857.00 0.79 0.33

All India 126966.50 124179.00 115638.60 -0.22 -0.71

Source: Same as table-1

Table-8: Growth of Triennia Average Area under Cereals during 1981 to 2001
Area under Cereals in ‘000 Hectares Annual Compound Growth Rate (%)

State\Year 1981 1991 2001 81-91 91-01

Arunachal 133.17 181.13 184 3.12 0.16

Assam 2410.9 2620.97 2683.67 0.84 0.24

Manipur 177.93 159.6 164 -1.08 0.27

Meghalaya 128.47 129.5 128.7 0.08 -0.06

Mizoram 43.43 62.87 61.5 3.77 -0.22

Nagaland 123.87 169.17 186 3.17 0.95

Tripura 296.67 262.77 246.67 -1.21 -0.63

NER 3314.07 3586 3695.5 0.79 0.30

All India 103922.1 101079.2 95600.5 -0.28 -0.56

Source: Same as table-1

Table-9: Growth of Triennia Average Production of Foodgrains per Capita in North-Eastern States during
1981 to 2001
Annual Production per Head in Kg Annual Compound Growth Rate (%)
State\Year 1981 1991 2001 81-91 91-01
Arunachal 220.46 242.20 202.37 0.94 -1.78
Assam 145.93 152.70 151.13 0.45 -0.10
Manipur 184.35 165.61 177.75 -1.07 0.71
Meghalaya 115.57 85.09 93.13 -3.02 0.91
Mizoram 81.65 131.21 142.45 4.86 0.83
Nagaland 146.75 173.47 167.34 1.69 -0.36
Tripura 191.70 176.11 174.85 -0.84 -0.07
NER 151.09 154.48 152.68 0.22 -0.12
All India 191.44 206.42 179.88 0.76 -1.37
Source: Same as table-1

106 THE IIPM THINK TANK

 F O O D F I R S T

of natural resources and its export and partly due to the growth
of service sector a fraction of which is the export of labour
services in the BPOs which has of course been confronting the
severe problem in the last few months due to the set back in
world financial market and bankruptcy of many foreign compa-
nies and instability in the fossil fuel market. Even there is degra-
dation of natural resource base and hence its productivity that
raise question about the sustainability of such rise in NSDP.
Moreover, even after globalisation, look-east policy of the
government of India we do not observe notable progress in

Table-10: Growth of Triennia Average Production of Cereals per capita in North-Eastern States during
1981 to 2001
Area under Foodgrains in ‘000 Hectares Annual Compound Growth Rate (%) Annual Deficit per Head in Kg

State\Year 1981 1991 2001 81-91 91-01 1981 1991 2001

Arunachal 220.46 238.42 196.90 0.79 -1.90 -91.88 -84.57 -86.22

Assam 143.12 150.43 148.78 0.50 -0.11 -51.84 -69.39 -57.95

Manipur 183.16 165.61 177.05 -1.00 0.67 -120.58 -151.26 -143.38

Meghalaya 114.42 83.74 91.62 -3.07 0.90 -153.89 -111.76 -97.61

Mizoram 81.11 123.24 137.39 4.27 1.09 -90.53 -70.73 -77.96

Nagaland 144.47 164.27 157.04 1.29 -0.45 -44.37 -61.20 -61.84

Tripura 190.63 173.80 173.16 -0.92 -0.04 -86.27 -83.04 -85.01

NER 148.73 151.96 149.99 0.21 -0.13 -60.14 -43.90 -65.72

All India 174.86 191.10 169.28 0.89 -1.21 -14.54 3.42 -38.10
Source: Same as table-1

Table-11: Growth of Triennia Average Production of Paddy per capita in North-Eastern States during
1981 to 2001
Production of Paddy in ‘000 Tonnes Annual Compound Growth Rate (%)

State\Year 1981 1991 2001 81-91 91-01

Arunachal 147.57 155.11 127.16 0.50 -1.97

Assam 135.65 145.25 144.95 0.69 -0.02

Manipur 174.90 160.41 171.75 -0.86 0.69

Meghalaya 94.99 66.65 77.22 -3.48 1.48

Mizoram 69.23 105.70 119.93 4.32 1.27

Nagaland 128.47 133.97 108.29 0.42 -2.11

Tripura 186.67 170.95 171.24 -0.88 0.02

NER 138.84 142.93 141.04 0.29 -0.13

All India 75.12 87.49 76.56 1.54 -1.33

Source: Same as table-1

Table-12: Variation in Index Number of Prices of Food, Non-food and Manufacturing Articles in India
since 1981-82
Year Growth during
1981-82 1990-91 2000-01 2004-05
Item 1981-2 to 1990-1 1990-1 to 2000-1 2000-1 to 2004-5

Food 100 200.6 484.9 529.8 100.6 141.7 9.25

Non-food 100 194.2 364.9 467.3 94.2 87.9 28.1

Manufacturing 100 182.8 344.6 404.4 82.8 88.5 17.4

Source: Same as table-1

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Table-13: Per Capita NSDP and Annual Compound Growth Rate during 1980s at 1980-81 prices
State 1980-81 1990-91 2000-01 Annual Compound Growth Rate (%)

Rs Rs Rs 1980-1 to 1990-1 1990-91 to 2000-1

Arunachal 1516 2443 3708 4.58 4.26

Assam 1200 1790 2541 4.08 3.57

Manipur 1429 1736 2527 1.97 3.82

Meghalaya 1361 2020 3474 4.03 5.57

Mizoram 1289 1985 4383 4.41 8.24

Nagaland 1448 2233 4179 4.42 6.46

Tripura 1323 1525 3616 1.43 9.02

C-V 7.82 15.85 20.81 36.37 36.98

Source: Economic Survey, various issues.

Table-14: Changes in Poverty in North-East India

Incidence in Percentage Changes in Percentage
1993-4 to 1999-
State\Year 1983 1993-4 1999-00 1983 to 1993-4 1983 to 1999-00
00
Arunachal 40.38 39.35 33.47 -2.55 -14.94 -17.11

Assam 40.47 40.86 36.09 0.96 -11.67 -10.82

Manipur 37.02 33.78 28.54 -8.75 -15.51 -22.91

Meghalaya 38.81 37.92 33.87 -2.29 -10.68 -12.73

Mizoram 36.00 25.66 19.47 -28.72 -24.12 -45.92

Nagaland 39.25 37.92 32.67 -3.39 -13.84 -16.76

Tripura 40.03 39.01 34.44 -2.55 -11.71 -13.96

Source: Planning Commission, Government of India

Table-15: Inflation and Inequality Adjusted Monthly decline in incidence of poverty but still now it is much higher
Per Capita Consumption Expenditure (Rs) than the national average (Table-14). About one-third of
State\Year 1983 1993-4 1999-00 population is still suffering from the lack of entitlement to
Arunachal -- 104.71 (14) 129.38 (12) acquire their basic necessities. Therefore, the growth of per
Assam 93.84 (11) 96 (17) 99.81 (21) capita NSDP is not showing the actual improvement of entitle-
Manipur 101.06 (8) 112.89 (9) 130.88 (10) ment rather there is the lack of economic entitlement and
Meghalaya -- 124.55 (5) 145.65 (7) inequality in income.
Mizoram 119.82 (3) 174.47 (1) 202.99 (2) Inflation and inequality adjusted monthly per capita con-
Nagaland -- 164.15 (2) 228.04 (1) sumption is another index of welfare and condition for human
Tripura -- 119.53 (8) 125.92 (14) development in any region. In this case of course all the
All India 86.59 97.53 111.28 North-Eastern states except Assam are much ahead of the
Source: Planning Commission, Government of India, National Human Development Report, 2001. Note: national average. The condition of Arunachal though better
Note: Figures in the parentheses represent ranking among all the Indian states.
than all India average it ranked 12 among all the states in
industrial activities in the region except the tertiary activities 1999-2000. Here it may be pointed out that though per capita
that cannot sustain growth process without improvement in consumption is adjusted with the general inflation level, at any
production activities. point of time, general price level in any North-Eastern state is
Moreover, the increase in NSDP is associated with the much higher compared to the national average (Basic Statistics

108 THE IIPM THINK TANK


of NER 2006, P. 416) and there is large scale variation in prices
within each North-Eastern state especially in Mizoram, Tripura,
Nagaland and Meghalaya due to poor infrastructure and if that
can be considered the actual conditions would not show much
better. Moreover, inequality in actual consumption in the rural
areas is observed to increase during 1990s (National Human
Development Report, 2001) in all the North-Eastern states
except Arunachal, Meghalaya and Tripura.
Concluding Remarks
In terms of availability of coarse food-grains, scarcity in the
North-Eastern region of India has increased after the globalisa-
tion of Indian economy and that has raised the dependence on
import. More market-oriented approach has led to the growth
of non-food crops at the cost of food crops.
Income of the people on an average has increased due to the
expansion of economic activities especially in the tertiary sector
and thus raised the capability to acquire food security. But that
has been associated with the large-scale uncertainty, which is
clear from the recent devastation of the world financial econo-
my. Also the growth in NSDP has not been able to reduce
poverty substantially and therefore a large section of population
is excluded from the growth process and still suffering from eco-
nomic as well as food insecurity due to lack of entitlement.
Moreover, globalisation and other economic reforms have
not yet contributed to the industrial progress of the region
(which is clearly visible from the sluggish industrialisation
figures in the region) so that the income and entitlement of the
people would increase. Rather opening up of market has
accelerated the import of consumer durables from outside and
thus in order to meet their aspirations for such goods exploita-
tion of natural resources like forest has taken place at faster
rate during 1990s that further caused decline in productivity of
soil and the problem of food insecurity deepened (De, 2003).
Therefore, from both supply as well as demand capability side
the globalisation movement has necessitated the institutional
arrangement like PDS more in order to balance the require-
ment of food and nutrition across different sections of the
society. Even though money income has increased on an
average the benefit has not yet reached to all the sections in the
society and that also involves uncertainty for the future of those
benefited temporarily unless production activities increase
sustainably.
Finally, it should be noted that here data were available up
F O O D F I R S T
to 2001-02 only. If the recent past information is considered; it
will definitely reflect a further grey picture of food security
position in the region. As of now, globalisation has not been
found to be a great path towards the achievement of better
food security in the absence of much focus on the industriali-
sation in the region.
References and Additional Thinking
• Anderson, K. (1994): “Food Price Policy in East Asia”, Asia
Pacific Economic Literature, Vol. 8, No. 2, Pp. 15-30.
• De U. K. (2000): “Food Security and PDS in Tripura: A
Policy Intervention” Paper presented at the National Level
Seminar on Food, Nutrition and Food Security – Public
Distribution System in North-East India organised by
NEICSSR from 27th to 28th, November, 2000.
• De, U. K. (2003): “Economic Incentive and Environmental
Management: 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 Develop-
ment and Social Opportunity, Oxford University Press,
Delhi.
• FAO (1980): Conference 24th Session, Evaluation of Food
Security Assistance Scheme, Rome, C 87/8-Sup 3.
• George, P. S. (1999): “Some Reflections on Food Security in
India”, Indian Journal of Agricultural Economics, Vol. 54,
No.4, Oct.-Dec., Pp. 465-489.
• Government of Kerala (1994): Eighth Five Year Plan
1992-97: Final Outlay, Approved by the Planning Commis-
sion (Summary Feature), State Planning Board, Thiruvanan-
thapuram.
• Planning Commission, GOI (2001): National Human
Development Report, 2001.
• Singh, R. P. (1999): “Strategies for Rural Prosperity: Some
Policy Interventions”, Yojana, June, Pp. 12-17.
• Suryanarayana (1999): “Poverty, Food Security and Levels of
Living: Maharashtra”, Journal of Indian School of Political
Economy, Vol. 11, No.1, January-March, pp.77-100.
• World Bank (1986): Poverty and Hunger: Issues and Options
for Security in Developing Countries, (Washington D.C.,
World Bank).
(The views expressed in the write-up are personal and do not reflect
the official policy or position of the organization.)
THE INDIA ECONOMY REVIEW 109
E N E R G Y E C O N O M I C S

IS LPG A
SUSTAINABLE
COOKING FUEL
FOR INDIA?
A STUDY IN
MANAGERIAL
ECONOMICS
Debesh C Patra
Ph. D. (Petroleum Economics)
Chief Manager (LPG),
Bharat Petroleum Corporation, Mumbai

Introduction natural gas sources. During 1990s, LPG consumption grew at

LPG is an item of cooking fuel for urban middle class Indian
families. Currently 55 percent of country’s household use LPG
in their kitchens. The UPA-II Government at the Centre is
committed to take this number up to 75 percent during next
five years. This would essentially mean penetration of LPG
into rural areas and high growth in demand. Currently LPG
for 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 demand
may be unsustainable at some point. This paper attempts to
examine this issue.
Demand for LPG
In 1965 the country consumed only 43 thousand metric ton
(TMT) of LPG; 10 years later in 1975 it was a meager 281
TMT against the level of 11,700 TMT in 2008-09. Consump-
tion of LPG literally boomed during 1980s at the rate of 19%
per annum, primarily being boosted by availability from
10% annual average rate, a spectacular growth, being boosted
by: a) availability from natural gas (40%); and b) imported
source (20%). From 2000 onwards, during last eight years,
consumption grew at annual average rate of seven percent;
supply source supported by refinery production (57%), from
natural gas condensation (24%) and balance (18%) from
import. Despite growth in domestic refining throughput (146
million in 2006-07) and high LPG yield from Crude (4.3%),
LPG supply is becoming import intensive as import compo-
nent is as high as 21% (average of last decade).
LPG is primarily used as a cooking fuel. Household sector
consumes about 86% of total LPG consumed in the country;
nine percent goes to commercial, industrial including manu-
facturing sector. By 1999-2000, 54 out of every 1,000 rural
households used LPG for cooking, which scaled up to 86
households by 2004-05 and to 93 by 2005-06. In urban area,
out of every 1,000 households, 571 used LPG as cooking fuel
by 2005-06, which was 442 by 1999-2000. This shows that 39

110 THE IIPM THINK TANK

 F U E L L I N G G R O W T H

households (per 1000) have adopted to LPG cooking during
last six years in rural area, where as in urban area, the adop-
tion rate is 129 per 1000. The incremental adoption is propor-
tionately higher in rural area (72%) than in urban area (29%).
Supply of LPG
LPG is always seen to be in short supply. LPG is preferred fuel
from health and environment points of view. 57% of urban
households pan India (2005-06) use LPG as cooking fuel. In
states like Punjab, Assam, Haryana, Madhya Pradesh and
Maharashtra, it is above 65%.
There is high degree of correlation between quantity of LPG
consumed and country’s national income (NNP at current
price). The correlation coefficient is 0.9945 for 34 years
(1974-2006). The coefficient was highest in 1990s (0.9959). It
was low (0.9878) during 1980s and further low (0.9673) during
2000s.
Average household consumes 112 kg LPG per year. After
2000, consumer base has been increasing at 11% per annum
and supply is lagging behind. That is getting reflected in
reduced consumption to 102kg per year during 2000s, from a
level of 114kg per year recorded during 1990s.
Private final consumption expenditure on LPG in the
country (Rs 18,625 crores in 2006-07) constitutes only 0.8% of
total private consumption expenditure. Its annual growth
slowed 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, under
the given conditions?
Demand for LPG: Long Term Projection
Currently 86% of demand for LPG emanates from household
sector. In the near term future, the same household sector will
continue to remain the principal consuming segment; how-
ever, there will be increasing penetration into rural area. In
the long term, demand will be generated from commercial
application like auto LPG, cooking and heating requirement
from 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. ‘Base
Case’ is a conservative projection, where a subset of existing
customers belonging to one (out of three) company is taken
for projection and its projected numbers are proportionately
applied for the whole Industry. The ‘Most Likely Case’ follows
projection done for the whole Industry. ‘Optimistic Case’
takes into account more of auto LPG application and high
economic growth scenario where more of commercial applica-
tion of LPG will pull the LPG demand up.
Methodology for Base Case
2007-08 and 2008-09 has been taken as base year. Demand
estimation for 2009-10 and 2010-11 has been done as per
following method:

Issues Chart 1: LPG Consumption (1980/81 - 2008/09)

In the light of demand and supply scenario
Thousand ton
as presented above, economic and manage-
rial issues that are to be studied are the Annual average growth 4% growth
14000
• during 1980s = 19% per annum
following: • during 1990s = 11%
12000 • during 1980s = 7%
• How much will be the estimated demand
for LPG by 2015, taking into account: a) 10000 Lowest Growth @ 2.1% (05-06)
the expansionary policy stance of UPA II
Government; b) substitution of LPG by 8000

CNG; and c) substitution of liquid fuel by Quantum jump @ 20% (1999-2000)

6000
LPG.
• How much of demand will be met by 4000

indigenous source and how much will be 55% of country's household is covered under
2000 LP Gas for cooking till now; By 2015, 75%
imported and whether the demand is planned to be covered
sustainable from the supply point of 0
81

83

85

87

89

91

93

95

97

99

01

03

05

07

09

view?

THE INDIA ECONOMY REVIEW 111

E N E R G Y E C O N O M I C S

Chart 2: Supply Sources Matching Most Likely Demand realistic assessment of:
1. (i) Customer base, (ii) new
20 connection as per ‘Vision 2015’ of
18 • Import is the balancing source Government of India, (iii) per
16
• Globally supply is available
capita consumption, (iv) rural
14
urban composition of customer
12
population, existing and conform-
10
8 ing to ‘Vision 2015’ stipulation
6 2. Rural and urban figure for each
4 state has been aggregated for the
2 total of state for domestic con-
0 sumption.
.07-08 .08-09 .09-10 .10-11 .11-12 .12-13 .13-14 .14-15 .15-16
3. Non domestic consumption has
Fractionators Refineries Import been considered to be 10% of
domestic.
Table 1: Demand Supply Balance (Figures in Million ton) 4. All states have been aggregated
07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 15-16 to arrive at all India figure.
Demand
Base Case 11.17 11.52 12.28 13.11 13.94 14.82 15.76 Projection till 2015-16
16.66 17.60
Most 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 been
Optimistic Case 12.29 12.67 13.51 14.42 15.33 16.30 17.34 18.32 19.36 done on the basis of CARG
Supply growth assumed for the following
Fractionators 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 2013-14
Import 2.47 2.53 2.10 1.51 2.20 2.30 3.21 4.18 5.21 2014-15 to 2015-16
Total Supply 11.16 12.08 12.80 13.57 14.38 15.25 16.16 17.13 18.16 Different growth assumptions
Source: Author's Own Calculation have been applied for the rural
and urban segment of each state
2009-10 for the first two periods. These assumptions captures the
Newly enrolled customers of 70 lakhs have been apportioned growth potential, market forces like ingress of alternative gas
across the states in proportion to their distribution in 2008-09. and policy directives flowing from ‘Vision 2015’ of Govern-
Consumption of a particular state has been split into rural and ment of India.
urban on the basis of rural urban ratio of respective state.
New enrolment for each state (rural and urban separately) Methodology for Most Likely Case
has been added to the customer base of previous year. Total This is based on Industry approach, where assumed growth is
customer of each state has been converted into consumption applied for the whole Industry for different years. The as-
number by applying the per capita consumption of that state, sumed growth rate for the year captures market potential and
rural and urban separately. government policy based on historical growth.

2010-11 Methodology for Optimistic Case

Same method has been followed for estimating consumption In the ‘Optimistic Case’, consumption is assumed to be higher
for each state (rural and urban separately) by taking the new by 10% on the volume of ‘Base Case’. This high growth will
enrolment at 80 lakhs. emanate from the following sources:
Thus estimation for 2009-10 and 2010-11 has been done with a) Higher per capital consumption in household segment than

112 THE IIPM THINK TANK

 F U E L L I N G G R O W T H

assumed in the ‘Base Case’. It is assumed that per capita
consumption of rural consumers will grow along with higher
income earned by average rural household in coming years.
b) Auto LPG will make a difference, as more hybrid vehicles
will be manufactured and more and more auto LPG
dispensing stations are provided by private marketers in
upcoming metropolis.
c) Optimistic Case primarily assumes a high commercial
consumption scenario based on high economic growth
(double digit growth for next 10 years), leading to high
commercial application of LPG in hotels and hospitals
along with the growth of real estate development and life
style consumption.
Demand for LPG under the three scenarios has been
projected in the Table ‘Demand Supply Balance’.
Supply Side
LPG is known for its multi source availability and multi modal
transportation. These features make LPG a more dependable
gas, vis-à-vis natural gas. LPG is produced as a stream of
refinery yield; it is also produced from natural gas fractiona-
tion and it can be imported by ocean tankers. This makes
availability of LPG more flexible. LPG transportation can be
optimized by a suitable combination of road, rail, pipeline and
ocean tanker.
Supply of LPG has been
estimated from the
production number of all Chart 3: Volatility in International Market - Integration
the refineries till 2015-16.
International Price Trend of LPG
Each refinery LPG produc-
tion has been put together 1000
level from 2012-13 onwards. Production of LPG from frac-
tionators has been assumed to remain same at the current
level of 2.1 million ton for the whole period. This assumption
is a limitation of the exercise; however, variation of supply
under this heading will be counterbalanced by variation in
import. Import has been taken as the balancing supply source.
The existing and planned import handling capacities till
2010-11 will support the projected import volume till 2014-15.
Beyond 2014-15, additional import facilities have to be built
up to match the demand. Supply has been balanced with the
‘Most Likely Case’ demand projection. Deficit demand is
assumed to be imported.
Global Availability of LPG
LPG production has been rising in every region of the world.
In 2007, global supply was about 229 million tons, up by 2.4%
from 2006 level. During 2000 to 2006, supply grew at average
two percent per year. LPG production and exports have
ramped up, associated with higher crude oil and LNG produc-
tion rates. Because LPG is a byproduct of oil and gas, LPG
production is unlikely to be reduced, despite a surge in supply
and probable reduction in LPG prices relative to crude.
Natural gas processing continues to be the largest supply
source of LPG, accounting for nearly 60% of worldwide
production during the last 10 years. A fundamental change in
with Indian Market

in line with their expansion 900

plan and new refinery 800
capacity also has been
700
factored in. Two new Price
600 formation in
refineries (Bhatinda in
international
North and Paradeep in 500 market is
East) production has been a complex
400
process
added from the year
300
2012-13 onwards. Known
200
expansion plan of other
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar
refineries has been taken
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 5 yrs avg
into account till 2011-12, - Data for 2009-10 is up to 31st Dec. 09
and maintained at that - LPG Price is Saudi Aram co CP based on 60:40 butane/propane ratio

THE INDIA ECONOMY REVIEW 113

E N E R G Y E C O N O M I C S
the market will occur during the next few years as LPG is
recovered from LNG. Most propane and butane available in
the raw gas streams for LNG production will be separated
from the LNG upon liquefaction. The growth in LNG facilities
around the world will increase LPG production accordingly.
LPG demand has also increased around the globe. About
half of LPG demand comes from the residential-commercial
market for heating and cooking. Within limits, base demand
that consists of residential-commercial demand and a signifi-
cant fraction of other LPG demand is relatively insensitive to
price. Consequently, any LPG supply that exceeds this base
demand will need to be consumed by the more elastic demand
coming mainly from petrochemical plants or possibly stored
for later consumption when the market adjusts.
The global LPG surplus is building even while crude oil and
petroleum product prices are strong. As a result, LPG price
relationships have been affected. Global LPG markets are
experiencing high absolute LPG price
levels, which are supported by high
crude oil and natural gas prices, but Currently LPG
recent LPG prices have also been for domestic
relatively weak compared to crude. consumption is
Markets for LPG substitutes such as
ethane, light naphtha and certain fuels
subsidized to the
are also affected by changes in LPG
extent of 25% and
supply and pricing. For example, in 55% of country’s
Japan, Fuel Oil has traditionally been a household use it
more economical industrial fuel than
LPG. In recent years, however, LPG has
been the more economical industrial fuel except during peak
seasonal LPG demand.
Pricing Issues
During last six years, LPG prices have exhibited such high
volatility as was not seen earlier, as depicted in the figure
below. Prices have oscillated between 300 USD per MT and
800 USD per MT.
Contrast to this volatility, domestic selling price of LPG has
remained more or less fixed, leading to un-recovered cost
being borne by the LPG marketing companies, which are
financed by upstream companies and by the Government. The
subsidy has made LPG business unattractive for private
players. Therefore, the business has largely remained in the
domain of public sector marketing companies. Subsidy
114 THE IIPM THINK TANK
financing is a larger issue, involving financial health of oil
marketing companies in particular and country’s budget in
general.
Subsidy Administration – A Managerial Challenge
LPG Market in India is characterized as:
• Plural market (customers of all income classes coexist in a
geographical unit); overlapping market segment; hard to
segregate geographical areas based on any parameter, be it
income, per-capita expenditure, family size, spending habits
etc.
• Subsidized LPG has number of stakeholders (vested
interests) across the distribution chain; it distorts the value
chain as a cylinder gets marketed to the end consumer;
• A LPG cylinder is an item of low price and high signifi-
cance; customer demands the item, does not pay for the
value of it.
• Market is largely concentrated in
urban area and rural market is largely
disconnected and unviable at most of the
places.
• Generally there is no substitute to
LPG as a domestic fuel in cities; but in
few cities, piped natural gas (PNG) is
emerging a substitute product.
• Consumption is supply driven; high
demand at current price; there is trade
off between volume and price; enough
volume is not available at current
artificially low price level.
Profile of an Indian LPG Consumer is:
• Customer is a subscriber; he is not free to buy his product
from 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 not
merely a commercial transaction; a connection in the
household has a legal status. It makes marketing a bit
difficult. (like a trade off between ‘hospitality’ and ‘security’)
• Customer is price sensitive; (both as an individual and in
political sense); it restricts the freedom of the marketing
company to recover the cost of marketing. It makes market-
ing a rationing job.
• Customer feels unsecured; he has underlying fear that in a
 F U E L L I N G G R O W T H

Chart 4: Un-recovered Cost • Hart Walt, Ken Otto, Ron Gist and S. Craig Whitley
(2007) ‘Global Markets Facing Adjustment to Surge in
Subsidy on Domestic LPG
300
LPG Supply’, Oil & Gas Journal, June 18th, 2007
Under recovenes to Oil companies
• Hart Walt, Ken Otto, Ron Gist and S. Craig Whitley
257.46

250
Subsidy from fi scal budget
236.63
(2008) ‘Global LPG Markets React to High Oil Prices’, Oil
Total susidy to consumer

• How is this
& Gas Journal, June 23rd, 2008
un-recov- • Lal, Deepika (2007) ‘LPG Supply Crunch’ Indian
Rs. Per cylinder

200
175.04 178.66 ered cost
financed?
Infrastructure, June, 2007, pp. 60 - 61
147.47
150 130.02 134.72 131.61
• Patra, D.C. (2004) ‘Oil Industry in India: Problems and
234.88 • What are
214.05
the macro
Prospects in Post APM Era’, Mittal Publications, New Delhi
100 62.27 152.89 156.08 economic • Patra, D.C. (2005) ‘How much Gas would India consume
89.54
124.89 impacts?
109.03 in 2050?’ Hydrocarbon Asia, March / April 2005, pp. 12-18
50 • Patra, D.C. (2005) ‘LPG Subsidy in India 2005’, Oil Asia,
67.75
45.18 International Edition, Vol. 25, No. 4, Jul-Aug. 2005. pp.
22.58 22.58 22.58 22.58 22.58 22.58
0 46-54
2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Apr-
Sept'09 • Patra, D.C. (2006) ‘Retail Marketing of LPG: An Entre-
(Prov.)
preneurial View, with Special Reference to Mumbai’, in
PATH, by Mathew Thomas (ed.) St. Francis Institute of
situation of scarcity, he may not get a cylinder. The scarcity Management and Research, Mumbai, pp. 203-213
syndrome has not got off the psych of Indian consumer. • Patra, D.C & Parag Diwan. (2008) ‘Where is Oil in
• Generally customers are not sensitive to safety; they do not National Reforms?’ Excel Books, New Delhi
appreciate that a cylinder is a pressurized vessel filled with • Patra, D.C. (2009) ‘Tariff on Petroleum Products: A Case
explosive gas. for Fiscal Consolidation in India’ in ‘Contemporary Issues
From a managerial perspective, marketing a product with dual in Energy Sector’, Anand Neeraj (ed), Technology
pricing under the above stated market condition and consum- Publications, Dehradun
er psyche, is a complex job of serving the customer on the one • Patra, D.C. (2009) ‘LPG Marketing in India: A Trade off
hand and regulating his consumption on the other. between Price & Volume – A Consumer’s Perspective’
Reprints of technical papers in CD ROM by PETRO-
Conclusion TECH 2009
Growing LPG market in India is constrained by supply. Supply • Petrofed (2005) ‘Fuelling India’s Growth: Past Trends and
in the country is balanced by import from international Scenarios 2011-2012’, Petroleum Federation of India, New
market, where LPG is available for trading. However cost of Delhi
imported product is not getting recovered by the domestic • Petrofed (2005) ‘Fuelling India’s Growth: Vision 2030’,
selling price, as domestic selling price is a regulated price. Due Petroleum Federation of India, New Delhi
to larger interests like price stability, environmental protection • Petrofed (2009) ‘Aspiring Change – Suggestions for 100
and social equity, selling price of LPG is subsidized. That has day Agenda for Government for the Oil & Gas Sector’,
robbed the market its equilibrating mechanism. Therefore the Petroleum Federation of India, New Delhi
high potential demand is not being supported by a flexible • Sreenivas, Ashok, Girish Sant and Daljit Singh (2007)
supply line. ‘Emerging Issues in the Indian Gas Sector: A Critical
Review’, Economic and Political Weekly, August 25th,
References and Additional Thinking 2007, pp. 3465 – 3474
• Chakraborty Atanu (2005) ‘Status of Gas in India’s Fuel
Basket’, Economic and Political Weekly, April 2nd, 2005, (The views expressed in the write-up are personal and do not
pp. 1424 – 1427 reflect the official policy or position of the organization.)

THE INDIA ECONOMY REVIEW 115

E N V I R O N M E N T A L E C O N O M I C S

Gandhian
Model For
Sustainable
Forest
Management
Introduction
Planet Earth was covered with diverse natural vegetation in an
estimated area of six billion hectares1 prior to the human
domestication of plant species and invention of agriculture. On
account of human habitation, urbanization and development
in agriculture, industry and tertiary sectors, this pristine gift of
nature, called forest, is just reduced to about thrity per cent of
the land surface of the Earth2. This resource is a heterogene-
ous collection and this plays a vital role in maintaining the
ecological balance, in preserving soil fertility and in taming
climates. These are the non-marketable services of forests.
But, forests do supply a lot many harvestable products which
have direct use value. In other words, they provide raw
materials for a range of industries which contribute to the
growth of a country. In addition, forests supply the essentials
for the rural poor and support them in several ways3. It hardly
requires any emphasis to say that the socio- cultural and
economic benefits derived from forests enhance the quality of
life and sustain it for long.
Destruction and degradation of forests is one of the major
environmental crises of the world today4. This has led to the
species extinction worldwide5. Moreover, its negative impact
can be seen in the form of heavy soil erosion, greenhouse
effect, silting of rivers and dams, flooding, landslides, denuded
upland, degraded watershed, and even destruction of corals

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116
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 G A N D H I A N G O O D

G. Bhalachandran
Department of Economics,
Sri Sathya Sai University,
Prasanthinilayam, Andhra Pradesh

along the coast.

If one surveys the Indian forest scenario, the picture is not
different and quite depressing too. India’s forest cover ac-
counts for 21.02 per cent of the geographical area of the
country6 in 2009 with a marginal increase of 0.03 per cent
during 2007-’09, which is, of course, far from the Govern-
ment’s recommended resolution of 33.3 per cent7. The inter-
state distribution of forests is also quite skewed8. The defor-
estation process, though started even before the British period
mainly to expand the agriculture, a large scale destruction of
forests was recorded during the Colonial Rule on account of
its commercial policy in general and the owner ship policy in
particular. This impact continued even after Independence.
Recently, the globalization and liberalization have worked
negatively on the forest development. Precisely, the polariza-
tion of development strategies in the reform- period, un-
planned urbanization, mad consumerism and depressing trend
in agricultural sector insensitively alienated the communities
living in the forests deprived them of their basic sources of
survival and made them refugees in their own land.
At this juncture, Sustainable Forest Management (SFM) is
recommended as the remedy for the maladies. At the Sixth
session of UNFF, four global objectives9 on forest manage-
ment were spelt out. They are relevant to India as well in all
respects. They happen to be:
(a) To reverse the loss of forest cover and increase the efforts
to prevent forest degradation;
(b) To enhance the multiple benefits derived from forests and
improve the livelihoods of forest-dependent people;
(c) To increase the protected and other areas under SFM and
the proportion of forest products from sustainably man-
aged forests and
(d) To reverse the decline of official development assistance
and mobilize new and additional financial resources for
SFM.
SFM concept has its origin in the World Commission on
Forests and Sustainable Development, which was set up follow-
ing the Earth Submit in Rio in 199210. The Commission came

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out with its sets of recommendations to improve the life of
people who depend on forests for their livelihood. In addition,
the Commission underscored the need to improve the ecologi-
cal balance by projecting the social importance of forests. For
this purpose, it emphasized SFM as a plausible approach with a
view to initiating bold political decisions and initiating new civil
society institutions to bring in transparency and accountability
in forest management. It takes into account some of the
important human issues like that of improvement in living
conditions, social equity, poverty reductions, power relations,
gender roles, etc. along with involving civil society and commu-
nities living in forests in the process of decision making. In
short, sustainability can be ensured in forest management only
if government and forest communities work in unison with a
sense of participation and commitment. This was reiterated in
the Millennium Summit of United Nations Conference on
Environment and Development (UNCED) in 200011 in addi-
tion to the fixing of quantitative and
time-bound targets coupled with
ensuring and securing forest communi- Research literature
ties’ rights and accessibility to forest points that the
resources. This gave proper direction to sustainable forest
many countries to work on strengthening
the process of forest governance and to
management
improve the living conditions of their
was ingrained in
forest communities12. the way of life of
In essence, SFM must ensure ecologi- ancient India
cal, economic and socio- cultural
well-being13. It is not out of context for
one to dwell upon the concept of sustainability as it has to be
properly linked with forest management. This concept is very
comprehensive and at the same time it encompasses many
spheres of activity related to human life with the support of
Nature. This implies a pattern of development which ensures
welfare to the present generation along with an assurance to
the future generation that their life would be as comfortable
as that of present generation14. When one thinks of Sustain-
able Forest Management, especially with reference to India,
the socio- economic, political, cultural, geographical and
climatic factors are to be considered in addition to the
historical developments that had influenced the people,
governance and practices in the country. These factors must
be considered when a theoretical frame work is designed for
this concept. In this study, an attempt is made to provide a
118 THE IIPM THINK TANK
simple, but an enduring theoretical structure drawn from
Mahatma Gandhi’s Model of Sustainable Development which
is idealistic and at the same time practical in several respects
in the present context.
Forest Management in Ancient India
A survey on Forest Management in Ancient India is useful in
this context not only to admire the ancients’ forethought and
wisdom on forestry but to pick up the thread from them to
initiate a sustainable and at the same time, long lasting and
practical approach in Forest Management in India. The
available literature on ancient Indians’ approach to Forest
Management reveals that sustainable forest management was
ingrained in the way of life of ancient India. The main reason
for this was that forests had played an influential role in
shaping their social, political, economic and cultural life15 and
hence they integrated them in their regular course of life.
Even during the Vedic period (4500-
1800 BC), productive and protective
aspects of forests were emphasized16. In
the latter Vedic period (1000- 500 BC),
Aranyakas (work on forests), Upanisads
(especially Brahadaranyaka Upanisad),
Smrities, etc. contain wealth of informa-
tion on the use and management of
forests. To be precise, each village then
was attached to a forest17. The concept
of Participatory Forest Management was
in vogue and village committees
managed and maintained forests. Moreover, agriculture
became a dominant economic activity during this period. As a
result, concept of cultural landscapes promoting sacred
forests and groves, sacred corridors, ethno- forestry practices,
etc. was developed18.
The Himalayas was the treasure house of medicinal plants
during the Vedic period. This practice was prevalent even
during Emperor Asoka’s time19 ( 273-232 BC). This led to
the practice of growing medicinal plants at residential
dwellings by assigning sanctity to them20. This practice is
continued even today in many parts of this country. In
essence, Religion in Ancient India was more to promote
sustainable practices by protecting environment and attuning
each one’s life to the Nature.
One can observe here that the environmental conscious-

ness in Ancient India was holistic in approach and it came
from the Upanishads’ Gospel, Vasudhaiva Kutumbakam,
which proclaims that all beings of the entire universe belong
to one family21.
Arthasastra (the end of the Fourth Century BC.)22, an
authentic treatise on the socio- economic, political, environ-
mental and cultural aspects of the Mauryan period, has an
elaborate discussion on forestry and its management. Its
approach in this regard, is the direct assimilation of the
wisdom and practices prevailed in ancient India and adopting
them for sustainable development23. Kautilya, the author of this
master- piece, pinned the responsibility of protecting, preserv-
ing and conserving forests with the State24 in a planned
manner25. In addition, he wanted this to go with well designed
dwellings in a scintillating environment26. He expected that
every citizen must have a sense of belonging27 and commitment
in society for realizing the goal of total welfare with the
support of the State. At the same time, he did not want to
spare the rod in the case of defaulters28. When he dwelt upon
the disaster of many kinds, he preferred prevention to cure29.
In essence, Kautilya wanted to instill the faith and awareness
in every individual that he/ she was a part of the Whole and he
wanted the activities of individuals/ society/ State to be
regulated in such a way that the development of economy is a
harmonious and integrated one with the support of the Nature.
If one looks at the problems of environment and more
specifically 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 a
better sense of understanding, commitment and coordinated
efforts. This cannot be achieved overnight. For this, a selfless
direction with avowed objectives through a planned mecha-
nism suitable to the people in the modern context is called for.
This study notes that the Ancients in India were successful
in bringing sustainability in forest management because it had
a strong theoretical background, of course unwritten, but
assimilated in practice and adopted as a way of life. This can
be termed Ancient Indian Model of Sustainable Develop-
ment30. The Ancients in India used the concept, Dharma,
31
which includes both the means and end in itself , to refer to
the concept of Sustainable Development (SD). This word, which
has been in vogue from time immemorial in India, has no
equivalent in any other tongue. But, it encompasses and
synthesizes all the healthy, lofty, profound practices that the
G A N D H I A N G O O D
concept of SD stands for. Moreover, this concept was used as a
touch-stone32 in thought, word and deed and hence, it was easy
for any one in Ancient India to weigh the pros and cons of
every one of his/ her actions and choose only those actions that
would produce welfare. For this, every individual requires a
constant training from cradle to tomb. Indian Culture, which
survives in its prop-roots and practiced sporadically today in
many parts of India and elsewhere, vouches for this. Many of
the 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 they
faced during the British Rule by translating the directives of
the Ancients of India into practice. One can find the silver
lining in dark clouds that the tool-box of ancient Indian
wisdom would never let us down when the country faces crisis
of any kind. Needless to say that the strategies of development
adopted in India and elsewhere in the modern time are
wanting in quality and application.
Critical Review of Forest Management in India:
Forestry in India is the second major land use productive
activity, after agriculture. It is estimated that India has 2.5 per
cent of the world’s geographic area and 1.8 per cent of the
world’s forests. Forestry contributes 1.7 per cent of India’s
National Income33. Moreover, one ha of forest plantation can
create 630 man-days of employment. According to the India
State of Forest Report- 200934, (Table 1) forest and tree cover of
the country happened to be 78.37 m.ha in 2007, which was
23.84 per cent of the geographical area. It includes 21.02 per
cent 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). The
increase in forest cover in hill and tribal districts stood at
66,300 ha and 69,000 ha respectively compared with the
previous assessment in 2005-‘06. The seven north- eastern
states of India had nearly one fourth of country’s forest cover.
This region gained 59,800 ha of forest cover in the two year’s
time. Almost, 97 per cent of forest cover is owned and main-
tained by the Government of India35. It is an established fact
that India, which is a rural biased economy, has over 1.7 lakh
villages with a total population of 200 million are located in
the vicinity of forests.
The forest cover assessed was classified into four canopy
density classes:
(a) Very dense forest (VDR) – more than 70 per cent.
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E N V I R O N M E N T A L E C O N O M I C S

(b) Moderately dense forest (MDF) – 40 to 70 per cent. It is to be noted that a majority of Indian population
(c) Open forest (OF) – 10 to 40 per cent. depends on forests directly for its fuel38, sustenance39, fodder
(d) Shrub, which is classified as degraded forest, had a canopy for its cattle40, timber for its construction, medicine for its
density less than 10 per cent. health41, etc. On account of the change in the consumption
One could see the inter-state variations in the increment pattern at home and in abroad, demand- supply gap of forest
process of the forest cover. While some states like Jharkhand, produce has emerged. The fuel- timber ratio remains at 7: 3. It
Manipur, Mizoram, Meghalaya, gained more than 0.5 per is to say that forests in India have to put up with five times
cent forest cover, states like Haryana, Tripura and Nagaland more pressure42 which is certainly abortive. This has led to an
had lost more than 0.5 per cent forest cover during the over exploitation of the forest resources and resulted in
assessment period. deforestation. With a view to containing this, the Government
This report succinctly points out that the Government’s of India initiated, a strategy, under the banner of the National
progressive national forestry legislations and policies in India Commission on Agriculture, to use forest lands for the
supported conservation and sustainable management of commercial production of timber and a massive drive on
forests in the last two decades and transformed India’s forests social forestry programme in unused fallow lands for the rural
into a significant net sink of CO2. It is estimated that the CO2 population to meet their timber, fuel and fodder require-
absorption by India’s forest and tree cover is right now enough ments. It was an old practice in new vigor to make the village
to neutralize the 11.25 per cent of India’s total green house gas administration and people to conserve and judiciously use the
(GHG) emissions. In other words, India’s forest and tree cover natural resources around. This scheme was put forth in the
is a main mode of carbon mitigation for India36. names of farm- forestry, community forestry, extension
The Thirteenth Finance Commission (TFC) was asked in its forestry and agro-forestry. This picked up well at an average
terms of reference37 by the President of India to consider the rise in the coverage of one million hectares per year. However,
need to manage ecology, environment and climate change this project had not yielded the desired results since the
consistent with SD while making its recommendations. It is to people continued to mount their pressure on forests and forest
be noted that environment was explicitly made an important degradation could not be mitigated as desired. In addition, the
area of study in the federal mechanism for the fi rst time conflicts between the forest communities and the forest
keeping in view the value of India’s forest and tree cover as a officials posed severe problems.
national asset. Knowing full well of the need to have a revamped forest
policy in tune with the major shift towards a more centralized
Table: 1: Forest and Tree Cover in 2007 and people oriented forestry in many parts of the world43, the
Government of India introduced Joint Forest Management
Class Area % of
(JFM) programme in 1988 with a view to giving emphasis to
(million ha) Geographic Area
conservation and meeting the demands of forest communities
Forest Cover
by keeping revenue generation as a secondary objective. It was
• VDF 8.35 2.54 realized that any programme on forest management would be
• MDF 31.90 9.71 successful only if the forest communities are the direct
• OF 28.84 8.77 beneficiaries. Under this programme, it is mandatory for the
Total Forest Cover 69.09 21.02 forest department and the forest communities to enter into an
1
Tree Cover 9.28 2.82 agreement to jointly protect and manage the forest lands in
Total Forest & Tree Cover 78.37 23.84 which these communities have accessibility and share benefits
Scrub 4.15 1.26 they accrue. The village community is expected to be repre-
Other Non-forest 246.21 74.90 sented by a committee44 (commonly known as Forest Protection
Total Geographical Area 328.73 100.00 Committee) nominated for this purpose. Moreover, each state
is privileged to have one’s own resolution to accommodate the
1
Tree cover is defined as tree patches less than 1 hectare with canopy density above10%
Source: India State of Forest Report- 2009, p.6. local needs. This initiative has led to a better accessibility and

120 THE IIPM THINK TANK


control on forest resources for the forest communities thus
making them more committed towards rehabilitation and
extension of forests. This is the first step towards SFM in India.
According to the JFM cell, Ministry of Environment and
Forests (MEF), this programme has been extended to 22 per
cent of country’s forest land, covering 17.33m ha of India’s
forest area45 through 84,642 JFM committees up until 200346.
The MEF has also initiated a project entitled, National Forest
Programme- India (NFP) under the aegis of National Forest
Policy and it has very well accepted the JFM programme as a
part and parcel of it and projected a target of 33 per cent of
forest- tree cover for India by 202047. It has to be noted that
there are many state- sponsored organizations and NGOs
including women- self- help groups, which have also been
involved in the participatory management of forests at present
along with the JFMP.
This programme is credited with many positive impacts.
They happen to be,
a) It has brought the forest officials and
forest communities closer to work for
The Forest
a common goal48. communities find
b) This coordinated effort has really it worth while to
improved the conditions of forests49. have a share in
c) Reduction in encroachment or NTFPS than even
withdrawal from encroached areas is
observed50.
in timber under
d) There is an increase in the income of JFM programme
forest communities since several
external assisted projects have offered employments51.
e) This has led to an increase in the involvement of many
NGOs in the forest- sector although there is significant
variation from state to state.
But, there are several issues related to this programme
which have to be critically looked into. They are:
a) Many intra- community conflicts have emanated in many
parts of the country on account of unequal distribution of
cost- benefits observed in several pockets under JFM52. This
was not foreseen when this programme was initiated. This is
quite depressing.
b) In a programme of this kind, where large amount of funds
are poured in through several projects, transparency at
every stage is expected. But, this was in stake in several
places that led to untoward incidences53.
c) From time immemorial, there have been several thousands
G A N D H I A N G O O D
of village communities who own and manage forests in
several parts of the country54 wherein JFM would be a fifth
wheel in the coach.
d) Normally, JFM is extended to degraded forests (crown
cover less than 25 per cent). Forest communities in high
crown cover area are not benefited.
e) Of late, JFM programme has become a project- driven one.
This has resulted in skewed development within a forest
area since a project could cover only a portion of a forest
jurisdiction. Moreover, after the completion of a project, it
is not sustained55.
f) Forest communities find it worth while to have a share in
NTFPS than even in timber under JFM programme. But a
clear policy measure has not come out of the state govern-
ments56.
g) The forest community is entitled to have only 20 per cent of
the revenue accrued annually57 which is believed to be on
the lower side. There is no viable model
for JFM, adaptable to the local
needs.
h) JFM programme is not properly
linked with market. As a result, the
supply of forest products is ill- or-
ganized and their demand is not
properly tuned58.
i) Corporate sector has not been drawn
into JFM programme. If due place
is given to them, they would be
supportive in production, processing and marketing.
j) There is no proper legal backing in this programme. It was
pushed through by issuing an administrative order in many
states. So it is not properly focused in the States’ plan.
k) Panchayats are not legally linked with this programme. This
will not only strengthen the activities of JFM programme
but also support the forest communities involved through
governments’ welfare measures59.
l) A macro outlook of this programme is lacking.
m) Several national and international agencies have been
drawn into this programme. But it lacks proper channeliza-
tion.
In short, one can find that the Forest Management Pro-
gramme in India lacks a sound theoretical base and a vision for
the future. If one examines the cause for this, It is due to the
fact that it is not properly linked to the country’s development
THE INDIA ECONOMY REVIEW 121
E N V I R O N M E N T A L E C O N O M I C S
strategy. But the pity is that the country is yet to choose a path
of development that is of her own and at the same time
sustainable and conducive to her people, their attitudes and
living conditions. China and East Asian countries feel proud
to declare that their development strategies owe their origin to
the Confucian Ethics60 and they are even patenting them. It
hardly requires any over emphasize that Mahatma Gandhi
happened to be the binding force in India’s past, present and
future through his stature, contribution, dedication and
exemplified life. He proved through his life that what he taught
could be practiced with no special effort. More over, he could
prophesize the ills that would befall on this country and had
designed a model of development for this country to emerge
great, grand and glorious for ever. This study attempts to
present his model of SD as the befitting theoretical back ground
for the sustainable forest management programme the country
proposes to have.
Gandhian Model of Sustainable
Development Blind use of
Mahatma Gandhi had his roots deeply machines and
soaked in the Ancient Indian Philoso- technological
phy61. Though he was not an economist
by profession, he had a total grip on the
development
socio- economic, political and cultural
would destroy
problems that India faced during the the value-system
pre- Independence days, on account of cherished in India
series of invasions she suffered over
centuries and the wrath of subjugation
from the British. The model of sustainable development that he
designed at that time was to grant Purna Swaraj62 or to ensure
a better quality of life to the people of his country. His model
that he outlined 1930s had interwoven several concepts needed
in his angle for the reconstruction of India.
First, one must be aware that this model presupposes the
spread of a certain set of attitudes to economic life and
economic action63 and these attitudes themselves will lead for
economic progress. It is a rare combination of idealism mixed
with practical approach. Above all, it was time- tested in the
sense that Gandhiji himself proved the success of his model in
his personal life. His model is verily an alternate to individual-
ism and socialism. In essence, his model promotes the concept
that an individual or a society can improve his/ her or its
quality of life only through collaboration and co-operation. It is
122 THE IIPM THINK TANK
the duty of society to inculcate these values through training
and practice64. He wanted the required institutional structure
and the instruments for economic reconstruction to be worked
out through a planned approach from below.
It is a wide spread belief even today that poverty in less- de-
veloped countries (LDCs) is due to the inadequate moderniza-
tion of their economic system. Gandhiji asserted that the
poverty in these economies was due to the direct result of the
excessive and indiscriminate preference for technical moderni-
zation in advanced countries65. This startling paradox is the key
to the analytical treatment of the Gandhian model. His
premise has life even at present when the concept of globaliza-
tion, which the advanced countries have pushed through in
LDCs with a selfish motive in its back-drop, is claimed to be a
failure, according to the Nobel laureate, J. E. Stiglitz, from the
point of view of development perspective66.
Indian economy which has adopted incrementalizm
bordering on stagnation as its dominant
development strategy67 has no doubt
produced impressive results in different
spheres during its plan- period. But, if
quality deflators are applied, its
achievements seem to be gloomy. In
other words, the managers of the
country are unable to sustain its
development process in totality.
Gandhiji’s fundamental question which
is considered as a bench- mark to
determine the viability of progress
happens to be, does moral progress increase in the same
proportion as material progress?68. The short point is that
Gandhiji linked SD with the improvement in the quality of
life, which is a buzz-word today.
When Gandhiji wrote his manifesto entitled, Hind Swaraj or
Indian Home Rule69, way back in 1908, India was under the grip
of the materialistic and the cultural influence of the west. At
the same time, the teachings of Swami Dayanand Saraswathi,
Swami Vivekananda, Bladavasky, etc. had sown the seeds of
the Indian Renaissance. The Indian National Congress, which
led the freedom movement in the country, had nurtured two
approaches to the future constitutional set-up for the country,
in the beginning of the 20th century. One was supported by
Gopalakrishna Gokhale and his followers, which believed in
the Parliamentary form of government practiced in England70.

The other was propounded by Bipin Chandra Pal and his
supporters which wanted a village to be the primary basic unit
of governing system for the country71. Gandhiji was convinced
of the latter’s view and converged the national opinion towards
the village Swaraj. His purpose then was to reestablish the lost
civilization by promoting mutual co-operation, simple living
and high thinking and the force of love72 to envelope the
thought, word and deed. The Mahatma was emphatic to say
that Indians were the inheritors of rural civilization73. In his
opinion, it could neither be uprooted nor substituted by an
urban civilization. He dreamt that by removing the ills in the
present village system and equipping the village communities
for self- governance with minimum external interference74,
village swaraj could become a reality. One has to pick up the
thread to argue that this concept should be the strong basis for
sustainable forest management in India.
Gandhiji analyzed the negative effect of the British industri-
alism on the development of the Indian Economy in the
long-run. He understood that it was based on three weak
premises: unabated wants- growing use of complicated
machines- wrong method of distribution. This resulted in the
material comfort of a few; unrest in the rest of the economy
and above all, total negation of moral progress. Gandhian
solution to this was born out of his own philosophy of life75. He
realized that the blind use of machines and technological
development would destroy the value- system cherished in the
country. He was in favor of production by masses in the place
of the modern craze for mass production. He understood that
the problem of Indian’s economic development is not merely
one of growth but also of rehabilitation and arresting of the
influence of shocks. Above all, his interest was more on a
decentralization of productive activities and an integration of
rural and urban economies to ensure orderly production
according to needs. This concept was much lauded by econo-
mists like G.D.H. Cole76.
The village Swaraj model is to antidote the wide spread
abject poverty prevalent in villages. The Mahatma was clear
that to the hungry millions, their God was bread77. From this
one can infer that his primary consideration was man and his
well being. More over, one could find in his writings that he
welcomed labor- saving and employment – generating ma-
chines. He believed that such a venture could drive away
India’s pauperism and idleness78 and pave the way for self- suf-
ficiency and self-reliance.
G A N D H I A N G O O D
In essence, the Gandhian Model of Sustainable Develop-
ment has potentialities for social reconstruction for perennial
social and human progress locally, nationally and globally79. In
other words, it is a non- materialistic, non- violent, harmonis-
tic, egalitarian and value- driven model.
The unlimited growth model of the western economists has
supported the maximization of utility and profit and thus
encouraged irresponsible and continuous exploitation of
natural resources and environment beyond the threshold of
resilience of the eco- system80. This has resulted in an unsus-
tainable development process. Gandhiji’s model is very
sensitive to this issue. It calls for an effective resource manage-
ment by having a check on the pace of development, rate of
consumption and restraint over insatiable demand for goods
and services81. This model is against the over exploitation of
resources, disruption of ecological balance and deterioration
of environment since these are considered as a form of
violence .It is convinced that the all pervasive greed that is
prevalent in every sphere of activity prompted by homo
oeconomicus82 approach of modern man is the basic cause of
all crises the humanity encounters today. Gandhiji wanted that
economics must have its roots in ethics83 and his philosophy of
Sarvodaya, the welfare for all, aimed at the overall develop-
ment of every individual, which he called, the micro unit of
development84.
In the past, the industrial development in India was a part
and parcel of her proud heritage. During the British time, it
received a death blow. It was a pathetic story of intrigues
exploitation and day light plunder. Physical brutalities were
also perpetuated by the British rulers on Indian weavers and
artisans of extra-ordinary dexterity, unheard in human history,
with the sole purpose of delinking them from their ancestral
training and support from local rulers. This pained Gandhiji a
lot and he ingrained rural industrialization as the axis of his
model. He wanted the village and cottage industries, main-
tained by the village communities, to co-exist with heavy
industries in urban areas85. It is more to ensure zero structural
unemployment. He visualized that the decentralization of
production would lead to decentralization of economic and
political power, paving the way for a classless, unexploited,
egalitarian society86.
In egalitarian society, ensuring economic equality is the
pre- condition. In the gamut of non- violent model, Gandhiji
prescribed trustee-ship as a plausible remedy to achieve this
THE INDIA ECONOMY REVIEW 123
E N V I R O N M E N T A L E C O N O M I C S
goal. By trustee- ship, he meant that people, who possess
wealth of any kind, may be material wealth or gift of God, must
hold it as its trustee for the welfare of mankind. By caring and
sharing, one’s human dignity gets elevated, he stressed.
Gandhiji was inspired by the dictum of Ishavasyopanishad and
he was convinced that wealth in the hands of a few was unjust.
In other words, this concept is based on the Law of Non- pos-
session87.
This study feels that this simple model has a universal
message. Gandhiji’s much cherished symbol, the Spinning
Wheel (Charkha), aptly represents his vision and sustainable
model of development. No doubt, this wheel is for the weal of
humanity, upholding the dignity of labour. The strong wooden
base of the Spinning Wheel denotes the well structured society
without which no development is possible. The giant wheel
represents life, full of dynamism. The pole- stands that hold
the wheel and facilitate its rotation are to connote two basic
human values, Sathya (Truth) and Santhi (Peace).The handle
that propels the wheel is the chosen activity, properly planned
and 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 wheel
indicate togetherness (collaboration and co-operation needed
for the promotion of high quality of life). The activating thread
connecting the wheel and the spindle represents the force of
love, revealed through the sense of belonging. The groove on
which the thread runs, symbolizes non- violence. The spindle in
Charkha exhibits simple living and high thinking. The yarn
produced is the out come of all the efforts undertaken i.e.,
welfare of society.
Gandhian Model of Susutainable Development and
Forest Management in India
Gandhiji felt that his mission was not merely securing freedom
for India, but more to ensure equal rights for every one88. He
considered himself as a humble servant of humanity89. His
concept of Swaraja was born out of him with the objective of
uplifting the downtrodden. His concern for the forest tribes was
special which fructified into the establishment of All India
Adim Jati Seva Sangh at the first instance and several organiza-
tions under the stewardship of Thakkar Bappa to work for the
benefit of forest communities90 with the support of thousands
of volunteers later. Many NGOs too were inspired and joined
in this venture. Later, Kadhi and Village Industries (KVI)
124 THE IIPM THINK TANK
took a leading part in establishing the link between tribal and
urban communities for a mutual support. When the Kadhi and
Village Industries Commission (KVIC) were established in
1961, many programmes were charted out for the uplift of
forest- dwellers. The National Forest Policy- 1988 initiated the
JFMP which is controlled and regulated by MEF.
How does the Gandhian Model work as a theoretical base
for the sustainable forest management?
• JFMP is a joint venture between the government and forest
communities. Trust and co-operation must guide them for
better results. The leader of the programme must be trained
to be selfless and committed to the welfare of the community.
• Government might be the owner of the forest wealth. But, it
must act as a facilitator in the case of the functioning of
JFMP.
• Each one in this programme must be trained in the Gan-
dhian principles and live harmoniously.
• Village reconstruction works must be undertaken by the
forest officials and each forest village must be self- con-
tained and self- sufficient.
• Village Swaraj concept must be made a reality and self
governance must give confidence and support to remove the
bottlenecks of any kind in the path of development of forest
community.
• If these communities are strong in their values, externalities
and shock variables dare not to enter and dissuade their
faith and misguide them.
• These communities can be trained in modern techniques
and modes of production; but, they should see that none is
unemployed.
• It is suggested that these communities could have their own
co-operatives for marketing so that the link with the
consumers be direct and the income earned would be
relatively larger.
• Any project accepted by the community must go with their
life- style and functioning of the community. The independ-
ence or the identity of these communities need not be
sacrificed at any cost.
• There must be a legal sanction of this model for JFMP to
gain value among the forest communities to come forward
and organize themselves for their benefit and growth.
• It will be highly desirable if the Centre could design this
programme, implement and monitor it for the sake of
uniformity.

• Any support from external agencies could be properly
9
weighed and canalized for effective results.
Conclusion 10
The attempt made in this paper is to show that new vistas can
be opened if one thinks of a remedy for the maladies of forest
11
management. There might have been some difficulties encoun-
tered when someone attempted this model in a community. It
12
is not due to the deficiencies in the model. It is certainly due to
the deficiencies in the understanding and implementation of
this model. One cannot ignore the success of the Operation
13
Flood 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 die
14
hard. If these communities are grooved in certain unhealthy
tradition and approach, it would take some time to get rid of
15
them and get convinced about this model and accept it for their
benefit. Above all, this model took birth in this soil and prac-
16
ticed. There is no way for this model to be unsuccessful and
misleading at any time. It is up to the stakeholders to see that
this is workable, contributive, beneficiary and elevating.
17
End-notes and Additional Thinking
1
Ramprasad Sengupta, (2002), Ecology and Economics: An
18
Approach to Sustainable Development, Oxford, New
Delhi, p. 157.
2
B.C. Field, (2001), Natural Resource Economics- An
19
Introduction, McGraw Hill, New York, p. 222.
3 20
It is estimated that approximately 60 million indigenous
people are almost wholly dependent on forests in the
world. See, CBD, (2010), Sustainable Forest Management:
21
Biodiversity and Livelihoods, IUCN, Montrea, p. 3.
4 22
Everyday at least 80,000 acres of forest vanish from Earth.
See, www.articleonramp.com, site visited on January 27th,
23
2010.
5
In 20th Century alone, nearly two million species became
24
extinct. See,en.wikipedia.org/wiki/Holocene_extinction, site
visited on January 27th, 2010. 25
6 st 26
See, timesofindia.indiatimes.com dated December 1 , 2009,
site visited on January 27th, 2010. 27
7 28
This happens to be the desirable norm of FAO too, quoted
29
in K.T.Acharya, (1985), Integrating Forestry with Human
30
Needs, Institute of Rural Management, Anand,p. 2.
8
FSI, (2003), State of Forest Report-2003, Forest Survey of
G A N D H I A N G O O D
India, p. 13.
Peter Csoka,(2008), International Symposium on Sustain-
able Forest Management, UNFF Secretariat, Beijing, p.2.
Subhabrata Palit,(2006), Sustainable Management of
Forest, in Chandreyee Das and Dipankar Ghosh, (ed.),
(2006), Eye on Development, Sampark, Kolkata, p. 144.
See, http://www.un.org/millennium/declaration/ares552e.htm
Site visited on February 9th, 2010.
See, Ahuja Chopra and Shivanji Sharma, (2008), Forest
Management in India, Legal Service India.com, Site visited
on February 9th, 2010.
See,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 25th, 2008.
Michael P. Todaro, (2000), Economic Development, 7ed.
Addision- Wesley, Delhi, p. 766.
Arjun Das, (1986), Economic Philosophy of Ancient India,
Agam Kala Prakashan, Delhi, p.30.
B. M. Kumar, (2008), Forestry in Ancient India: Some
Literary Evidences on Productive and Protective Aspects,
Asian Agri- History, Vol. 12, No. 4, p.299.
R. Prime, (2002), Vedic Ecology: Practical Wisdom For
Surviving the 21st Century, Mandala Publishing Group,
Novata, California, USA., p.157.
D.N. Pandey, (1998), Ethno-forestry: Local Knowledge for
Sustainable Forestry and Livelihood Security, Himansu/
AFN, New Delhi, p. 91.
See, http://www.cs.colostate.edu
This practice had its beginning even during the Indus- Val-
ley civilization (3000- 1700 BC).See, B. M.Kumar, (2008),
op.cit., p.304.
See, Mahaupanisad, Chapter 6, verse 72.
R.P. Kangle, (1986), The Kautiliya Arthasastra, Motilal
Banarsidass, Delhi, p.59.
See, M.B. Chande, (2004), Kautilyan Arthasastra, Atlan-
tic, New Delhi,p. 5.
Arthsastra, 2.2.5.
ibid., 2.1.39, 2.2.4, and 2.2.5.
ibid. 2.4.1.
Ibid., 2.36.15 and 4.3.8.
ibid., 4.10.4 and 5.
ibid., 4.3.6 and 7.
See, G.Bhalachandran, (2004), Ancient Indian Model of
Sustainable Development, Proceedings of the All India
THE INDIA ECONOMY REVIEW 125
E N V I R O N M E N T A L E C O N O M I C S
Economics Conference of Indian Economic Association,
Varanasi. (Unpublished)
31
See, R.P. Kangle, (1986), op.cit., p.69.
32
See, G.Bhalachandran, (2011), Kautilya’s Model of
Sustainable Development, Humanomics, Vol. 27: 2
(Accepted for publication)
33
R.M.Singhal , Sudhir Kumar and V Jheera, (2003), Foresta
and Forest Research in India, Tropical Ecology, 44(1): p.57.
34
See, Forest Survey of India and Ministry of Environment
and Forest, India State of Forest Report-2009, Govern-
ment of India,
35
Sushil Saigal, (2001), Joint Forest Management: A Decade
and Beyond, www.rupfor.org , Site visited on February 1st,
2010.
36
ibid., p.8.
37
See, fincomindia.nic.in site visited on February 13th, 2010.
38
In India, 70 per cent of rural and 50 per cent of urban
population use fire-wood as fuel. In other words, 40 per
cent of energy requirements in India are met ny forests. For
this purpose, 131 mmt of wood is cut from forests. See,
Sushil Saigal, (2001), p.2
39
(a) Many landless families and marginal farmers around
forests depend on forests for their sustenance. See, M.
Ahmed, (1997), In Depth Country Study –India. Asia – Pa-
cific Forestry Sector Outlook Study. Working paper No.
APFSOS/WP.26.Food and Agriculture Organization of
the United Nations (FAO). Rome/ Bangkok, October 1997.
(b) As per an estimate made in West Bengal, an average
income of Rs. 2270/- per ha in a year from NWFPs could
be earned. See, R.M.Singhal , Sudhir Kumar and V
Jheera, (2003), p. 57.
40
India has the world’s largest livestock population of 1.3 b,
according to the 18th Livestock Census- 2009, of which 25
per cent depend on forest for fodder and grazing. See,
en.wikipedia.org Site visited on February 13th, 2010.
41
The herbal medicines prepared and used in India are from
8200 species of medicinal plants from forests.See,
R.M.Singhal , Sudhir Kumar and V Jheera, (2003), p. 59.
42
R.M.Singhal , Sudhir Kumar and V Jheera, (2003), p.58.
43
In the Asia- Pacific region, community based forest
management programme is widely practiced. See,Ram
Prasad, Forest Management, Extension Digest, www.
manage.gov.in p.1 Site visited on January 28th, 2010.
44
These communities prefer to call themselves by specific
126 THE IIPM THINK TANK
names to create an identity for each one of them. See,
Sushil Saigal, (2001), op.cit.
45
The area covered under JFM can be compared with that of
under National Parks and Sanctuaries (15.60 mh). See,
Sushil Saigal, (2002), Regenerating India’s Forests, The
Deccan Herald, dated March 26th, 2002.
46
N.H. Ravindranath and P. Sudha (ed.), (2004), Joint Forest
Management in India: Spread, Performance and Impact,
University Press, quoted by Subhabrata Palit, (2006),
Sustainable Management of Forests, in Chandreyee Das
and Dipankar Ghosh, (ed.) (2006), Eye on Development,
Sampark, Kolkata, p. 144.
47
See, Ram Prasad, Forest Management, Extension Digest,
www.manage.gov.in p.3. Site visited on January 28th, 2010.
48
For instance, in Andhra Pradesh, 20987 training camps
were organized in two decades period. See, S.D. Mukher-
jee, (2001), Status of JFM in Andhra Pradesh. Draft paper
prepared for a book on Joint Forest Management by
Commonwealth Forestry Association (India Chapter) in
collaboration with Winrock International India and Ford
Foundation, New Delhi.
49
See,A. Ghose, (2001), ibid.
50
See, S.D. Mukherjee, (2001), ibid.
51
In Gujarat, the Nisana village has registered an increase in
milk production from 40000 litres to two lakhs litres. See,
P.Khanna, and J.Prasad, (2001), ibid.
52
See, Sushil Saigal, (2001), op.cit., p.6.
53
See, Samatha and CRYNet. (2001), Joint Forest Management
- A Critique Based on People's Perspectives, (Unpublished).
54
In the seven north-eastern states, only about 45 % of the
recorded forest area is under government control and rest
is 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 Manage-
ment by Commonwealth Forestry Association (India
Chapter) in collaboration with Winrock International India
and Ford Foundation, New Delhi.
55
See, Ecotech Services, (2000), Study on Management of
Community Funds and Local Institutions. New Delhi:
Ecotech Services (Mimeo.).
56
In Andhra Pradesh, the Government allowed 50 per cent
share NTFCs revenue since 1999 and it really enhanced
the revenue of the forest communities. See, S.D. Mukher-
jee, (2001), ibid.

57
See, Ahuja Chopra and Shivanji Sharma, (2008), op.cit.
58
See, S. Saigal, H.Arora, and S.S. Rizvi. (2001), Forestry
Beyond Bureaucracy: Role of Private Enterprise in the
Indian Forestry Sector, International Institute for Environ-
ment and Development and Ecotech Services, London.
59
See, S.D. Mukherjee,( 2001), op.cit.
60
See, V.V. Bhanoji Rao, (2001), East Asian Economies: The
Miracle, A Crisis and the Future, McGraw Hill, Singapore,
pp.131-135.
61
See, Rajni Bala Sharma, (1998), Gandhi’s World View and
Industrial civilization, Printwell, Jaipur, pp. 1-24.
62
See, Pyarelal, (1965), Mahatma Gandhi: The Last Phase,
Navajivan Publication House, Ahmedabad, Vol. I, Book-I,
p.182.
63
Amritananda Das, (1979), Foundations of Gandhian
Economics, Allied Publishers (P) ltd., New Delhi, p.48
64
M.K. Gandhi, The Harijan, Dated February 23rd, 1947
65
M.K. Gandhi, Young India, October 7th, 1926.
66
See, J. E. Stiglitz, (2002), Making Globalization Work,
Amazon.com
67
Hiten Bhaya, (2006), Sustainable Development and the
Indian Perspective, in Chandrayee Das and Dipanker
Ghosh, (ed.), op. cit., p.6.
68
A.J. Patel, (ed.), (1997), M.K. Gandhi’s Hind Swaraj and
other writings, Cambridge University Press, London, p. 157.
69
See, M.K. Gandhi,(1939), Hind Swaraj or Indian Home
Rule, Navajivan Publication House, Ahmedabad,
70
See, Gopalakrishna Gokhale, (1916), Speeches of
Gopalakrishna Gokhale, Natesan and co., Madras, p.1213.
71
Annie Besant, (1915), Self- Government in India, Theo-
sophical Society Publishing House, Madras, p. 7.
72
(a) Gandhiji asserts that the universe would disappear
without the existence of this force. See, M. K. Gandhi,
Hind Swaraj, op.cit., p. 77.
(b) Bhagawan Sri Sathya Sai Baba of Puttaparthi elabo-
rates the 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.
73
A. J. Patel, (ed.), (1997), op.cit., p.157.
74
S. K. Lal, (1981), Gandhiji and Village, Agricole Publish-
ing Academy, New Delhi, p. 49.
G A N D H I A N G O O D
75
See, Ramjee Singh, (1988), Gandhi and the Modern World,
Classical Publishing Co., p.155.
76
Quoted in G.M.Bhat and Shabir Ahmad Padder, (2007),
Economics of Mahatma Gandhi: Challenges and Develop-
ment, The Indian Economic Association- 90th Conference,
Vol. I, p. 220.
77
M. K. Gandhi, Young India, Dated October 15th, 1931.
78
M. K. Gandhi, Young India, Dated November 3rd, 1921.
79
T.K.N. Unnithan, quoted in Sachinandan Sau, (2007),
Gandhian View of Sustainable Development: Some Issues,
The Indian Economic Association- 90th Conference, Vol. I,
p. 172.
80
B. M. Sanyal, (2006), Sustainable Development: Certain
Critical Observation, in Chandreyee Das Dipankar Ghosh
(ed.), op. cit., p.89.
81
To draw a parallel, Bhagawan Sri Sathya Sai Baba of
Puttaparthi too advocates ceiling on desires as the remedy
for the ills of modern economic problems. See,
http://www.saibaba.ws/teachings/ceilingondesires.htm
Site visited on February 19th, 2010.
82
See, Homo Oeconomicus, www.wikipedia.org , Site visited
on February 19th, 2010.
83
B.G. Gokhale, (1961), Indian Thought Throughout the
Ages, Asia Publishing House, Bombay, p. 72.
84
Amritananda Das, (1979), p.49.
85
Gandhiji believed in harmony between small and big. See,
M. K Gandhi, The Harijan, Dated August 27th, 1930.
86
M. Maharajan, (1998), Economic thought of Mahatma
Gandhi, Discovery Publishing House, New Delhi, p. 62.
87
See, Y Kesavulu, Gandhian Trusteeship as an Instrument
of Human Dignity, http://www.mkgandhi- sarvodaya.org/
articles/trusteeship.htm Site visited on February 19th, 2010.
88
See, U. S. Mohan Rao, (1968), The Message of Mahatma
Ganghi, Publication Division, Ministry of Information and
Broadcasting, New Delhi, pp.125-127.
89
K.P. Saksena, (1981), Gandhi and International concern
with Human Rights, in K.P. Misra and S.C. Gangal, (ed.),
Gandhi and the Contemporary World: Studies Peace and
War, Chanakya Publications, Delhi, p. 153.
90
Y.A. Panditrao, (1992), Gandhian Approach to Economic
Development, Himalaya Publishing House, Delhi, p. 122.
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organization.)
THE INDIA ECONOMY REVIEW 127
Problems and Solutions
of Shortage of Physicians
in the USA and its Impact
on Developing Countries
Shamim Mohammad
(International Ford Fellow)
Member, Managing Committee,
Samajik Seva Vikas Sansatha
 A N E C O N O M I C D I A G N O S I S

Overview of the Problem:

Health workers are all people whose main activities are aimed
at enhancing health (WHO, 2006). They include the people
who are directly or indirectly involved in rendering health
services such as doctors, nurses, pharmacists, laboratory
technicians, management and support workers. According to
the World Health Report (2006) there are 59.8 million health
workers worldwide. About two-thirds of them (39.5 million)
provide health services; the other one-third (19.8 million) are
management and support workers. They are responsible for
prevention and treatment of diseases and advances in health
care globally. There are fi fty-seven countries, most of them in
Africa and Asia continents, which are facing a severe health
workforce crisis. The global profile presented below in the
Table I shows that there are more than 59 million health work-
ers in the world, distributed unequally between and within
countries. They are found predominantly in richer areas
where health needs are less severe. Their numbers remain
woefully insufficient to meet health needs, with the total
shortage being in the order of 4.3 million workers worldwide.
It is a challenging impediment in the way of achieving public
health priorities such as reducing child and maternal mortal-
ity, increasing vaccine coverage, and battling epidemics such
as HIV/AIDS. Bridget, M.K. (2007). The world is facing a
serious health workforce shortage and without prompt action,
the shortage will worsen.
Though, Table I demonstarte that the American region has
the highest concentration of health workers, which is 24.8 per
thousand residents whereas the rest of the world has only 9.3
per thousand residents. Despite this, USA is experiencing a
severe shortage of physicians in critical areas, which has been
widely documented and is expected to last through 2050

Table I : Global Health Workforce, by Density

WHO Region Number Density

(In Millions) (Per 1000 Population)
Africa 1.6 2.3
Eastern Mediterranean 2.1 4.0
South East Asia 7.0 4.3
Western Pacific 10.1 5.8
Europe 16.6 18.9
Americas 21.7 24.8
World 59.2 9.3
Source: World Health Report (2006)

THE INDIA ECONOMY REVIEW 129

H E A LT H E C O N O M I C S
(NRHA, 2003). Merritt, Hawkins & Associates (2004)
reported that there is a growing demand for health profes-
sionals in the United States in the face of stagnant supply. It is
estimated that the United States could be short of 808,000
nurses and 85,000 to 200,000 physicians by 2020.
Health Professional Shortage Areas (HPSAs):
Sensing the shortage of Physicians, USA had created the
Health Professional Shortage Areas (HPSAs) in 1978, with a
purpose to identify areas and populations that needed
physicians the most than other areas. It is used by a number of
Federal programs to make decisions about financial and
manpower support to the needy states.
It has an in-built rationing system in it.
This program is administered by the,
United States
Health Resources and Services Admin- could be short
istration (HRSA). Its role is to desig- of 808,000 nurses
nate HPSAs based on the ratio of and 85,000
population, to the number of primary- to 200,000
care physicians and other factors, such
as the area's infant mortality rate, the
physicians by the
percentage of the population below the year 2020
poverty level, or the area's birth rate.
HRSA then gives each HPSA a score based on specific
criteria that ranks shortage of primary-care providers or other
needs, relative to other HPSAs. Each HPSA is ranked from
0-25. A low score can disqualify an HPSA for certain Federal
aid programs.
A report on the status of officially designated Health
Professional Shortage Areas (2006) from the Government
Accountability Office provides some basic figures on the
shortage throughout the United States, of primary-care
physicians. Looking at the deficit for geographic areas and
population groups, 831 counties were designated as HPSAs,
while another 815 consisted of service areas within counties.
Table II: Doctors per Thousand Residents
Sl.No. Doctors per 1000 Residents Nos. of State
1 Below 2 8 gists at the same time, there will be a substantial increase in
2 2-3 35
3 3-4 6 to the aging of population, the epidemic of obesity and,
4 Above 4 1 diabetes.
Source: USA Today (2005)
130 THE IIPM THINK TANK
There is no state that does not have some HPSA designation.
The GAO estimates concluded that 6,941 additional full-time
primary-care physicians are needed to achieve ratios that
would eliminate HPSA designations; this is based on a ratio
of 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 physi-
cians by density in the USA, which is depicted in Table II,
shows that there are eight states having less than two doctors
per thousand residents whereas 35 states have 2-3, six states
have 3-4, and only one state has more than four doctors per
thousand residents. These findings indicate that physicians
tend to concentrate in urban areas and
there is problem for the rural American
in accessing health services. There is
shortage of physicians as well as mal-
distribution to provide needed health
services in rural areas. This problem is
especially serious in remote frontier
communities, many of which are located
in the Western region of the United
States of America (NRHA, 2003).
Shortage of Physicians in Critical Areas:
The recent workforce studies indicate that the United States of
America already faces current and future shortages in many
specialties. The studies cited below explore the extent and
critical 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 Albany
in 2000 concluded that within 10 years, there will be a
shortage of allergist/immunologists. The supply of new
physicians will not be able to keep pace with the current
retirement rate of practicing allergists and immunologists as
demand is rising very fast. The American College of Cardiol-
ogy in (2004), reported that the USA is facing a serious
shortage of cardiologists. It is estimated that by 2020, there
will be a 20% decrease in the age-adjusted supply of cardiolo-
the incidence and prevalence of cardiovascular diseases due
The Department of Health and Human Services (1990)

concluded that the nation should have over 30,000 child
psychiatrists but there are less than 7,000 currently practicing.
Further, a similar study published in 2003 revealed that the
actual growth and supply of child and adolescent psychiatrists
has been very slow. The Committee on Manpower for Pulmo-
nary and Critical Care Societies (2004) stated that there will
be increased demand for intensivists and pulmonologists due
to the aging of the population while the supply of these
specialists will remain near constant. This will result in a
shortfall of specialists by 35% by 2030. The CHEST (2004)
predicted that the shortage will become severe as early as
2007. This shortage is expected to worsen as hospitals move to
increase the use of intensivists as
recommended by the Leapfrog Group.
The Journal of the American Acad-
Empirical evidence
emy of Dermatology (2004) indicated indicates that
that there is an inadequate supply of there will be a
dermatologists to meet the current deficit of 90,000
demand. The Journal of Clinical to 200,000
Endocrinology & Metabolism (2003)
reported that the supply of newly
physicians by the
trained endocrinologists will not be year 2020
sufficient to offset retirements and
future increases in demand. As it stands, current demand
exceeds supply by 15% and the aging of the population
compounded with physician retirements will exacerbate the
situation. A report from the American Geriatrics Society
(2004) suggested a “severe and worsening shortage.” There
are only 7,000 practicing geriatricians with around 65%
unmet needs. The Alliance for Aging Research estimated
that another 14,000 geriatricians are needed to adequately
care for the existing elderly population.
The Banbury Summit Meeting on Training of Physicians in
Medical Genetics (2004) stated that “the medical genetics
workforce situation is critical.” The scope of practice for
geneticists has increased manifolds. They are not only
treating rare pediatric disorders but also common health
problems such as cancer and a number of neurological and
cardiovascular disorders. According to a study published in
the February 2005 in an issue of the Journal of Neurosurgery,
the nation is encountering a severe decline in the number of
active neurosurgeons. However, at the same time there has
been a significant increase in the demand for neurosurgeons.
The Department of Health and Human Services (2003)
A N E C O N O M I C D I A G N O S I S
reported the shortage of the pediatricians. It said that
children with special needs have problems in accessing to
appropriate subspecialty care. As a result, many children with
juvenile arthritis and other serious autoimmune conditions
are often forced to seek care from adult specialists because of
a lack of adequately trained pediatric providers. Further, a
study published in (2003) revealed that the current psychiatric
workforce supply trends indicate that the present supply of
Psychiatrists is not enough to keep up with the rate of growth
of demand. Furthermore, a workforce report published in
American Journal of Roentgenology in (2002) found out that
the demand for radiologists over the next three decades will
be difficult to meet.
International Physicians Alone
will not Solve the Problem:
There is overwhelming empirical
evidence which indicate that there will
be a shortage of 90,000 to 200,000
physicians by 2020. The average wait
times for medical specialties are likely
to increase dramatically beyond the
current range of two to five weeks.
Various factors, including the demise of managed care, the
aging of the population, changing practice patterns, increas-
ing regulation and paperwork are some of the reasons for the
impending shortage. Many American believes that the
present healthcare system is poorly distributed, offers little
protection to patients, to support long term health manage-
ment, and it is expensive to the point of inaccessibility for
many Americans. Moreover, at the moment it provides
inconsistent and fragmented care.
The sustainable solutions to this problem have to emerge
from within, but the U.S. is relying more and more on Inter-
national Medical Graduates as its generalist physician
providers, especially in designated underserved areas (L.
Table III: Who is Located Where?
Geographical Location IMG USMG
Large Rural 69.6% 62.4%
Small Rural 80% 70.6%
Isolated Small Rural 84% 73.4%
Source: Health Affairs (2007)
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Table IV: J-1 Visa Waiver Physicians Placed on exchange visas to remain in the United States during a
Through the Conrad Program, By Specialty period of obligated service employment; many subsequently
apply for permanent residency status. As of February 2002
Specialty Per- Country Per- Type of Facility Percent
forty-one states and the District of Columbia were participat-
cent of Origin cent
Internal 43% India 25% Private practice/ 45%
ing in this program. This program allows each jurisdiction to
medicine clinic recommend up to twenty physicians for J-1 visa waivers each
Family 13 Pakistán 19 FQHC/CHC 18 year. Hagopian A., (2006)
practice
According to a survey conducted under Conrad Program in
Psychiatry 11 Philip- 14 Rural hospital 10
pines 2002, mentioned above in Table IV shows that 43% Interna-
Pediatrics 10 Lebanon 5 State facility 6 tional Physicians were practicing Internal Medicine, 13%
Obstetrics 2 Syria 5 Local health 2 were involved in Family practice, and 11% Psychiatry, 10%
department Pediatrics, two percent Obstetrics, two percent Surgery, and
Surgery 2 Colombia 4 Other 13
19% were from other specialty. These findings reveal that
Other 19 Romania 4
shortage in critical areas such as Immunology, Pulmonology,
Source: Health Affairs (2008)
Cardiology, Dermatology, Endocrinology, Geriatrics, Genet-
ics, Neurology, and Neurosurgery will remain unmet as long a
Gary H.L., et al., 2001). After the terrorist attacks of Septem- sustainable solution is not found.
ber 2001, the visa and immigration rules were made more
stringent, and it has now become more difficult for many Proposed Solutions
foreigners to enter and work in the country. If the number of The situation warrants a multipronged and urgent response.
IMGs eligible to work in the U.S. in future years is reduced Several areas of the USA and several medical specialties are
because of these restrictions, access to primary care may be already reporting shortages. The number of elderly Ameri-
further limited for underserved populations of the country. cans is growing far more rapidly than supply of physicians and
However, in the present health care system IMGs are playing the large Baby Boom generation will begin to reach age 70 in
a great role in delivering health services in the underserved 2015. This will burden the health care system further. The
areas. Since World War II America's physician workforce has physician workforce is also aging: In 2003, 205,000 doctors,
been significantly infused with foreign-trained international 29% of all active US physicians were over 55 and Physician
medical graduates (IMGs) (Hagopian A.,2008). migration from poor countries to the USA has slowed down
Presently, approximately 180,000 IMGs are practicing in due to rigid visa policies. Moreover, migration trends of
the USA. Majority of IMGs working in the United States International Physicians suggest that the shortage in critical
come from seven countries: 32,822 (20.3 percent) from India, areas will remain unchanged. Furthermore, how ethically
17,357 (10.7 percent) from the Philippines, 10,049 (6.2 per- correct it is to poach physicians from poor countries as it
cent) from Mexico, 7,310 (4.5 percent) from Pakistan, 5,311 contributes to worldwide health workforce imbalances that
(3.3 percent) from China, and 4,300 (2.7 percent) from the may be detrimental to the health systems of source countries
Republic of Korea. India and Philippines have remained the (Hagopian A. et al., (2008)). In addition to that there is
largest contributors since 1981, but the rankings of other empirical evidence which suggest that younger physicians are
countries have changed (Gary, L.H., et al., 1981). choosing to work shorter hours than their predecessors.
Table III, shows that the most of the International Physi- There is a need to relook into policies which warrant
cians are placed in large, small, and isolated small rural areas reforms, how J-1 visa waiver and immigration policy reforms
whereas the US physicians are placed significantly less in may increase the numbers of International Physicians. How
numbers in remote and rural areas. Under the Conrad school enrollment can be increased in Medical Science
Program, IMGs are granted waivers of a visa rule, in return of Studies? In addition to that more funding to increase physi-
a commitment to practice at least three years in a HRAs. This cian residency positions and specialty mix, and the National
J-1 visa waiver allows foreign-born, nonimmigrant physicians Health Service Corps numbers can be considered. The other

132 THE IIPM THINK TANK


programs affecting physicians supply should also be relooked
into (Gary, H.L., 2001).
The Association of American Medical Colleges recently
recommended that US medical colleges increase their output
of new doctors by 15% over the next 10 years, and that
residency programs increase the number of training slots
available for new graduates. If medical colleges start imple-
menting this recommendation of AAMC, USA will be able to
produce about 2500 more MDs a year by 2015 than the 16,000
produced currently.
Are these numbers adequate? A lot will depend on what
happens to the American healthcare system in time to come.
If some forms of severe managed care restriction on use of
physician services are brought into effect, supply could
overshoot the mark. But, if fewer international physicians
enter the American health workforce, it may still need even
more of its own physicians to meet the country's needs. These
trends need to be monitored closely so that additional adjust-
ment can be made as per requirements (Jordan J. C., 2005).
The Critical Care Workforce Partnership (2006) proposed
solutions to alleviate the current and future burden imposed
by the critical care workforce shortage. It suggested that this
problem can be resolved through legislative and regulatory
changes. Among the solutions, the Partnership recommended
specific steps to increase the efficiency of the current critical
care workforce, increase the future supply of critical care
professionals, and address the patient demand for critical care
services. The challenge for meeting the future demand is to
clearly communicate with policymakers, educators, medical
students, and the medical community the importance of a
well-trained, adequately equipped, and equitably distributed
family physician workforce for America. AAFP, (2007).
References and Additional Readings
• American Academy of Family Physicians. (2007).
Match Summary and Analysis. Retrieved February 28th,
2008, from http://www.aafp.org/online/en/home/residents/
match/summary.html
• Center for Workforce Studies, Association of American
Medical Colleges. (2006). Recent Studies and Reports on
Physician Shortages in the US. Retrieved March 1st, 2008,
from http://www.aamc.org/workforce/rcntwrkfce.pdf
• Cohen, J. J. (2005). Help wanted: More doctors for the
United States. Retrieved February 15th, 2008, from
A N E C O N O M I C D I A G N O S I S
http://www.medscape.com/viewarticle/506845
• Cauchon, D. (2005). Medical miscalculation creates
doctor shortage. Retrieved February 15th, 2008, from
http://www.usatoday.com/news/health/2005-03-02-doctor-
shortage_ x.htm
• Hart, L. G., Skillman, S. M., Fordyce, M., & Thompson,
M. (2007). International Medical Graduate Physicians In
The United States: Changes Since 1981. HEALTH AF FA
I R S, 26(4), 1159-1168.
• Hagopian, A. D., Thompson, M. J., Fordyce, M., &
Johnson, K. E. (2004). The migration of physicians from
sub-Saharan Africa to the United States of America:
Measures of the African brain drain. Human Resources
for Health, 2(17).
• Hagopian, A., Thompson, M. J., & Kaltenbac, E. (2008).
Health Departments’ Use Of International Medical
Graduates In Physician Shortage Areas. Retrieved
February 20th, 2008, from http://content.healthaffairs.org/
cgi/reprint/22/5/241
• Hagopian , A., & Friedman, E. (2006). Ethical Restric-
tions on International Recruitment of Health Profession-
als to the U.S. Retrieved March 2nd, 2008, from
http://www.apha.org/programs/globalhealth/section/advo-
cacy/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). Recom-
mended Solutions to Critical Care Workforce Shortage:
Stemming a Crisis. Retrieved February 19th, 2008, from
http://www.chestnet.org/downloads/practice/gr/HRSABack-
grounder.pdf
• National Rural Health Association. (2003). Health Care
Workforce Distribution and Shortage Issues in Rural
America. Retrieved February 11th, 2008, from
http://www.nrharural.org/advocacy/sub/policybriefs/Work-
forceBrief.pdf
• World Health Organization. (2006). The World Health
Report 2006. Retrieved February 25th, 2008, from
http://www.who.int/globalatlas/default.asp
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organization. He is
reachable at this email id: sm270906@gmail.com)
THE INDIA ECONOMY REVIEW 133
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GLOBAL ECONOMIC
UNCERTAINTIES: ESSENTIAL
COORDINATED GOVERNANCE

134 THE IIPM THINK TANK


K. U. Mada
Economist & Management Specialist
and former Executive Director, I.D.B.I.
T
he recent global meltdown has brought into sharper
focus the embedded threats to the world economy.
The political, geopolitical, social, economic and
financial issues influence, and be influenced, by economic
and financial affairs. “There are a number of key unknowns,
but one of the most vexing is political uncertainty”, says
Smick.1 With risks ingrained in coalition governments in
power in nations like India, Pakistan, Germany and France,
the reconciliation of competing and conflicting views tends
to be more complex and tardy. Also, globalization generates
uncertainties. Themes of anti-globalisation have gained
support with rising discontents among people2. In globalised
economy, economic affairs often go beyond national
frontiers. As Robert Kagan underlines,
“the new geopolitics runs along an arc
from North-east Asia through the When faith in
South-east and into Central Asia, self-regulating
where the interests and ambitions of markets is shaken,
China, Japan, India, Russia, and the
government
United States all overlap
and collide.”3 All this
intervention for a
adds to greater temporary period
uncertainties. may be required
Hence, governments
and markets have, perforce, deter-
mined their own space in different economies.
Government and Market Participants
In capitalism, government is sovereign but the community
at large and non-governmental organizations are the
movers and shakers. They establish relationships
based on individual freedom and security, creating
opportunities for citizens to grow to their poten-
tial. Traditionally, market economies had three
ingredients viz. prices, private property, and
profits; firms which operate therein aim at achieving
least-cost combinations to maximize their profits. As
Paul Krugman says, “efficient markets have been very
hard to kill”.4 However, when faith in self-regulating
C H A N G E F O R G O O D
markets is shaken, government intervention for a temporary
period may be required. Adam Smith’s invisible hand
guiding the market to efficient outcome is guided by govern-
ment interventions to make the market participants better
off. Increased transparency is crucial to decide the timing
for government interventions. If operatives in the markets
are at fault, intervention by a balancing force is desirable
and also unavoidable if information is asymmetric. People
have their likes and dislikes, preferences, angularities and
profit motives. Government should, as political supremo,
reconcile conflicting views of the parties concerned. The
markets are at the centre of the economy and the govern-
ment’s role is limited. Depending on socio-economic needs,
it is necessary for “reinventing govern-
ment” and “markets” to make them
efficient. Detailed information and
transparency lead to enlightened
policies.
The role that trust and faith plays in
a democracy reflects in the community
organizations or non-governmental
organizations (NGOs) which search
for consensus on issues of deeper
concern. Their function is to have, as
Barack Obama says, “some influence
on the public debate”. 5 In public affairs, individuals by them-
selves cannot influence policies, except the few who are in
vantage points. In view of this, the Non-Governmental
Organizations (NGOs) become an integral part of the
community. The budgetary supports extended by govern-
ments in developing economies do not reach the target
beneficiaries. They are leaked in the delivery process. The
poor might be ignorant of their entitlement but could not
demand due to their weakness. The cost of delivery mecha-
nisms is large due to the structural deficiencies. NGOs could
understand what should work in a specific location and how
to improve the services by targeting the deserved ones. It
has been the experience that states like Kerala were success-
ful in setting up appropriate delivery mechanisms whereas
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I N T E R N A T I O N A L E C O N O M I C S

Uttar Pradesh could not. Research studies reveal that in Agreement on Tariffs and Trade (GATT) succeeded in
Kerala, with better infrastructure facilities, women live lowering tariffs. The World Trade Organisation (WTO)
longer, infant mortality was lower and births per woman provided a forum for trade negotiations. Capitalist econo-
were lower. Over 70 percent of primary school teachers were mies support free trade but if an exporting country wants to
women. And, there was better awareness of the government export a commodity, domestic “protectionist interests are
facilities. Compared with the position in Kerala, Uttar galvanized”. This mix of labour and business interests uses
Pradesh had relatively poor indicators and performance.6 “fair trade laws” to construct barbed-wire barriers to
NGOs could play an important role in correcting the imports and makes out a case of “dumping” i.e. selling
missing links. The strengthening of NGOs paves the way for below cost without substantive evidence and protects itself
efficient functioning of market economies. by levying “dumping duties”.9
The government should take action to build institutional The new round of trade negotiations agreed in November
framework at national, state and district levels. Also, the 2001 at Doha, Qatar, characterized as the “development
legal and regulatory framework should be built/strength- round” to open up markets further, to rectify imbalances
ened to enforce contracts, resolve commercial and social and to have more open discussion on “poverty”. Despite the
disputes, and settle matters arising from commercial high hopes, there was skepticism. The Americans and
dealings. To make them effective, Europeans protect agriculture and
trained and dedicated local leaders are specific industries. As the negotiations
to be involved in the NGOs. The The government would be about the maximum permit-
preventive supervision and regulation should take ted (“bound” tariff rates) by global
over the local institutions could reduce action to build trade rules, the Doha round cannot
the need for intervention by them to dramatically change the world’s
the irreducible minimum. At the same
institutional fortunes. What persists is the use of
time, the leadership of NGOs should
framework at non-tariff barriers, such as overnight
be effectively monitored for they could national, state and import taxes or surcharges or imposi-
misuse the privileges and start playing district levels tion of time-consuming, expensive and
partisan games. complex quality controls. With strong
integration of supply-chains, multilat-
International Trade Negotiations eral negotiations may not be popular. The symbolic signifi-
Thanks to the prosperous Dutch Republic and the spread of cance of the talks is important inasmuch as their failure
affluence in the 17th century, a new dynamic and capitalist bodes ill for future multilateral cooperation. Also, such
society emerged. It generated innovations in finance, failure could lead to more of regional and bilateral trade
technology, marketing and communications. This develop- deals. The Doha talks failed because emerging economies
ment over 400 years infused the culture of growing world like China and India desired to maintain the right to impose
trade and gaining power status.7 In 1776, Adam Smith said “safeguard” tariffs to protect their agriculture and food
in The Wealth of Nations that markets would create surplus- security. Food self-sufficiency is socially and politically
es. Accelerated technological advances have made suppliers important for India and China. The developed world makes
to produce an unprecedented array of products and services reference to trade restrictions on the grounds of control of
leading to supply exceeding demand which further accentu- carbon emissions. Arguments in favour of trade marks,
ated the trend towards globalization. economic security and key industries reign supreme. With
“As trade barriers between nations and regions disman- China and other Asian countries growing, it is argued, there
tled and as information on products and prices became could be a long-term trend of over-capacity in manufactur-
instantly and globally available, niche markets and havens ing and in services which could lead to greater shortage of
for monopoly continued to disappear”, say Chan Kim and natural resources (copper, iron ore, oil, zinc, etc.).
Mauborgne.8 As part of trade negotiations, the General There is a view that global integration may be causing

136 THE IIPM THINK TANK

 C H A N G E F O R G O O D

wage stagnation, widening inequality and greater insecurity.
Eminent economists like Alan Blinder and Larry Summers
doubt the benefits of globalization for the American middle
class. Trade restrictions and controls over carbon emissions
could be other setbacks. Global talks should concentrate on
fears over “security” of food, energy, environment, income
and oil production quotas.10 The Doha Talks failed on
account of irreconcilable differences in trade, patents,
subsidies, professional services and tariffs between the
developed and the emerging econo-
mies. The resultant inward-looking
attitude will be another embedded The resultant
threat to the world economy. inward-looking
attitude of failed
Reshaping International
Institutional Architecture
Doha Talks will
The thinking of shaping the interna-
be an embedded
tional institutions began with the Paris threat to the
Peace Conference in 1918, followed by world economy
the London Conference in 1933 to
reestablish fi xed parities for a wider
range of currencies, the Bretton Woods Conference in
1944, the decision to end of fi xed exchange rates
in 1971-73, oil-price shocks in 1973-74 and
subsequently by the call for a new
Bretton Woods in the 1980s and
onwards. The several discussions
that followed eventually resulted in
the adoption of Multilateral Debt
Relief Initiative and the IMF’s
Policy Support Instrument in 2005.
According to James M. Boughton,
IMF historian, on the basis of the
developments and crises over these years,
there were three lessons. They are:
some goals be set but they
cannot be fully achieved; if
revision of the rules
dominates the agenda
other issues would not get
full attention;
and major
participants in
financial markets could
devise rules for finance but they cannot devise rules for
trade in commodities, climate change or extreme poverty.11
As a sequel to the World War I, huge reparations pay-
ments had to be made by Germany to Great Britain and
other allied countries. With hindsight this looked unfair.
Taking this cue, the victorious nations after the World War
II decided to ensure the reconstruction of the war-devastat-
ed nations in the western Europe under the American-spon-
sored Marshall Plan. Europe, which had technology and
knowledge of management, rebuilt the
economy. The reconstruction of
developed countries, it was felt, should
be supplemented by development of
underdeveloped countries to ensure
peace, stability and prosperity. An
international conference, convened at
Bretton Woods, New Hampshire, San
Francisco, in July 1944, had partici-
pants from 44 countries. A major
outcome of their deliberations was the
setting up of the International
Monetary Fund and the Interna-
tional Bank for Reconstruction
and Development (IBRD) or The
World Bank. The conference
participants had at the back of
their mind the great depres-
sion of the 1930s. The IMF
was to identify coun-
tries with balance of
payments problems,
especially “fundamental
disequilibrium” so that
‘collective action at the global
level’ could be taken.12 The World Bank
was for assisting industrial, agricultural
and infrastructure projects and for
promoting development banking
network and development in
underdeveloped economies.13
The IMF, the World
Bank and also the
WTO, set up later
in 1991 for trade negotia-

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I N T E R N A T I O N A L E C O N O M I C S

tions, have come to occupy the centre stage in economic and brought into the mainstream of growing world.
financial affairs. The organizational structures of the IMF and the World
The World Bank is headed by a representative of the US Bank were designed by the post-World War II powers to
Government and the IMF, by convention, is by a representa- satisfy the needs and aspirations of the then victorious
tive from Europe. The professional staff has been drawn nations without giving much thought to possible future
from all over the world. It is felt that the IMF does not seem developments. An important post-World War II develop-
to fully appreciate the diversity in the socio-economic ment was the emergence of a number of independent nations
structures in developing countries. The IMF assistance has since the colonial rule to which they were subject came to an
rigorous conditionalities. This briefly means providing funds end. For instance, at the time of its independence, India had
only if assisted countries could strictly adhere to prescribed a not insignificant share of world trade. Compared to
policies like reduction in expenditures and deficits, raising France, Germany and the U.K., countries like Japan, India,
taxes and interest rates, devaluation of currencies, and China, South Korea, Eastern Europe and Brazil have grown
lowering inflation. These conditionalities came to be known relatively fast.
as “Washington consensus”. These prescriptions led to As a matter of immediate recognition of the changed
contraction of the economies of the assisted countries and situation, India and some others have been demanding a
limited their operational freedom not only in terms of revision of their SDR shares. There has been no in-built
utilizing the assistance provided but adjustment mechanism to effect
also in management of the economies structural changes after 1944. Thus, as
in general. The signing of now, there is an absence of accom-
This situation differed from what of SAFTA is a modative spirit and effective voice for
John Maynard Keynes had envisaged precursor to the the emerging economies. This is an
for adoption of expansionary measures
by depressed economies by larger
gradual process of obvious lacuna. The set pattern of the
“Washington consensus”, influenced
expenditures for increasing consump-
Asian integration and nurtured by Wall Street stalwarts-
tion and undertaking projects. Even towards a turned politicians, European leaders,
the broad-based structural adjustment common currency and persons without proper grounding
loans had rigorous built-in condition- in “inclusive”, welfare-based growth
alities.14 Apart from prima facie perspectives and ways of life, have
national diversities, such prescriptions require in-depth been ruling over the global affairs. These institutions have
understanding of the life of people in the assisted countries. become less and less relevant for the current world economy.
Exchanges of experiences were not strong points of interna- Now that the far-reaching changes have taken place world
tional institutions. Thus, the IMF and the World Bank have over, the entire international financial architecture need
had only a mixed success. undergo change to be of contemporary relevance. “The
It goes without saying that the world, in the six and half international architecture which is six and half decades old
decades, has had far-reaching changes. Several countries requires drastic reorganization”.15 Emerging economies like
like Japan, South Korea, and Taiwan have emerged as India and Brazil could contribute significantly to the
export-led economies. West Germany became a strong decision-making process in the fields of climate change,
industrialized country. China and India followed their global security, food security and economic and financial
growth paths. The rest of Asia pursued its own strategies to issues. In this evolving scenario, Brazil, India, and Russia
make quantum jumps in economic progress. Known as the look for occupying their rightful places. In equity and
Asian tigers, they did well because of business, technological fairness, therefore, there should be changes in quotas of
and financial collaborations and the flow of foreign direct member countries and representations on the boards of
investments. Oil-producing countries are another major directors with appropriately-designed and consensus-based
block in the world economy. Africa, however, remains to be organizational and policy changes. Incidentally, the signing

138 THE IIPM THINK TANK


of SAFTA is a precursor to the gradual process of Asian
integration towards a common currency on the lines of the
European Union.
The G-20 leaders who met in November 2008 and April
2009 agreed to impose stronger restraints on hedge funds,
credit rating companies, and executive remunerations. Also,
they agreed to establish a new Financial Stability Fund to
unite regulators and join the IMF in providing early warn-
ings of potential threats. The summit increased IMF rescue
funds to $ 750 billion from $ 250 billion. Japan, European
Union and China will provide the first $ 250 billion. As the
G-20 leaders encouraged the IMF and the World Bank, they
should reorganize these institutions to make them more
representative of the composition of the G-20 and the rest of
the nations. Such global coordinated actions should be set
on a long-term basis and on an even keel.
The diverse viewpoints for national
sovereignty and global capital markets
limit the room for an overhaul. No There is a need to
country is agreeable to cede sovereign- have something
ty to a global regulator. Dr. Dan like traditional
Rodrik (Harvard) is opposed to having
any international supervision while
bank regulation
Gordon Brown (U.K.) had a proposal
extended to any
to have a “college of supervisors” to financial product
oversee the biggest financial firms. to contain crisis
Despite the recent excesses in the
banking field, Dr. Rodrik is not
convinced of the need for international control.16 In a recent
interview, Paul Krugman says, we “need to have something
like traditional bank regulation extended to any financial
product if it is capable of generating a crisis”17.
Significance of U.S. Role
The USA being the dominant country could be a moderator
as well as a source of threats. As other economies grow there
would be dynamic changes. The USA, the western parts of the
European Union and to some extent Australia attract immi-
grants from the rest of the world. Immigration takes place
because of employment opportunities, educational facilities
and better ways of life in the prosperous regions. Viewed from
the immigrant-receiving nations, the immigrants should
contribute and make positive contributions to their economies
and cultural settings. The receiving countries should publicize
C H A N G E F O R G O O D
their expectations from the immigrants so that the latter could
prepare themselves to cope with them. If the receiving
countries refuse to accept immigrants, it would be a retro-
grade step for the processes of world integration and the
balancing of global economic resources. Similarly, the USA
might set up investment barriers to foreign ownership of U.S.
assets. This could provoke other countries to take retaliatory
measures with the result that transfer of technology and flow
of human resources and capital would be hampered to the
detriment of global welfare. Further, if the Doha Talks fail,
emerging markets might not respect patents or guaranteed
payments on anything considered “public good” (pharmaceu-
ticals, water treatment facilities, etc.) and the USA might
retaliate. This will result in trade melt down. Another possi-
bility could be that the developed world might restrict cross-
border movement of intellectual property and also ban
intellectuals, scientists, and students,
seeking best possible intellectual
environment to pursue their research
projects. This will restrict freedom of
thinking, innovative spirit, research
output and consequential world pros-
perity for want of cross-fertilisation of
ideas and research findings. The USA
might become less innovative.
So also any regulatory change the
USA might make on the U.S. Treasury
market might cause a decline in value
of T-bills and this could drive the U.S. bond markets into
chaos. The heavy investment in U.S. Treasury bills itself is
an embedded threat perception. In case the U.S. restricts or
prohibits, for any reason, investments in the Treasury bills,
there could be an anomalous situation. Concentration of
huge funds in one country and in one reserve currency,
however safe it is, could be a built-in weakness in the
international monetary system. Political or economic events
might lead to a situation in which the investors from the rest
of the world could feel unsafe. Another instance could be
that if the US and Europe join together and impose tax on
imported goods based on high carbon emissions, countries
like China might retaliate resulting in a major Wall Street
meltdown.18 Recently, a Chinese company preferred to go in
for initial public offering (IPO) to the Dubai financial
sources, ignoring the New York and London fi nancial
THE INDIA ECONOMY REVIEW 139
I N T E R N A T I O N A L E C O N O M I C S

centres. In this context, “America is at risk of losing its care and dote on them more effectively.
perceived uniqueness as a trusted repository for global Recently, Dr. Mikko Myrskyla and his colleagues write in
investment”, says David M. Smick.19 Implicitly, the centres of Nature that as development continues, the demographic
liquidity and financial services will change over time. transition goes into reverse. With relatively high standards
The US dollar as reserve currency has its built-in unique- of living, fertility rates are now approaching two children
ness. The US is the repository of savings of the rest of the per woman. The nadir of fertility is reported to be 1.3
world, especially in its Treasury bills. In turn, the funds take children requiring 1.5 immigrants to remain static. It is
the form of international flows of funds for investment and pointed out that the introduction of female-friendly employ-
financing. If this flow is restricted, global liquidity may dry ment policies in the most developed countries allow women
up and interest rates soar with consequential adverse results. to have best of both worlds. Abundance enhances the
Another development of significance is that at recent instinct to lavish care on offsprings without compromising
international fora, China and Russia have been talking of on continued care of those the parents already have.20
replacement of US dollar as reserve currency. The BRIC
countries also referred to the scope for having a “more Accounting Standards and IFRS
diversified” monetary system. There is also a view that the After the Enron and WorldCom debacles, there is a relook
Asian region could evolve a single Asian currency so that at corporate accounting standards. In a globalised world, all
the trade between Asian countries countries should adhere to the globally
could accelerate. Asia’s share of world’s accepted accounting standards. The
merchandise exports went up from Asian region could US Generally Accepted Accounting
10% in 1985 to 26% in 2003 and they evolve a single Practices (US-GAAP) is more quanti-
are on the rise; during this period, Asian currency tative whereas the International
intra-regional Asian trade grew at an
so that the standards are based on “fair value”
average of 14 %. A single Asian concept. The US companies “mix
currency unit, it is pointed out, can be
trade between mark-to-market values with the more
an incentive for integration of Asia. Asian countries traditional practice of carrying assets
The issue of reserve currency could be could accelerate at their cost and impairing them only
part of the agenda for reshaping the when managers and auditors think fit.
international financial architecture. There are also several different ways of
recognizing losses. The result is that the balance sheets of
Demographic Somersault or Uptick different banks are not always directly comparable”.21 The
The rich world has fewer children than the poor world. India discretion allowed scope for window-dressing. However,
and China have more people below the age of 35; Japan and when proposal for merger of the international and American
Europe have more beyond the age of 35 with shrinking practices under an independent body is mooted, the Ameri-
population. As economies grew, they experienced demograph- ca’s rule-maker, the Financial Accounting Standards Board
ic transition with fertility dropping from eight children borne (FASB) is not enthusiastic. Simply stated, mark-to-market
by a woman to one and a half. With this reproductive collapse makes the accounting process dance to the tune of market
combined with increased life expectancy, population in the fluctuations as on a given date in a year.
developed world has shrunk with an increase of older people. If International Financial Reporting Standards (IFRS)
Fertility goes down on account of family planning, women are introduced on a world-wise basis, it would facilitate
entering the work-place, rising cost of raising children, investment, trade and banking transactions, besides uni-
presence of social security systems and falling rates of child formity in record-keeping and comparability. Countries
mortality. Psychologically, the thinking seems to be to bring which do not follow uniform Accounting Standards and
fewer children into an uncaring world in unstable environ- follow historical methods/standards might get isolated.
ments and, instead, to have a few progeny and extend greater Moreover, there will be differences in procedures for

140 THE IIPM THINK TANK


provisioning which will open up differences in tax liabilities.
Hence, the entire financial edifice and reporting systems
built over the existing multi-standards in accounting will
require in-depth reviews as to identification of deficiencies
and likely implications. This being a matter of wide impact,
there should be consensus not only in the accounting
profession but also among economists, entrepreneurs,
business executives, bankers/financiers and financial
experts. Deviations in Accounting Standards will leave
C H A N G E F O R G O O D
issues unresolved. The Institute of Chartered Accountants
of India indicated that major public interest entities in India
should follow IFRS after April 1st, 2011. Such companies
have to organise preparatory work for having comparative
data for the previous accounting year as well. Under IFRS,
depreciation (cost minus the residual value) of property and
plant and equipment would have to be provided after the
management completes the task of determining the residual
value. Hence, timely and sufficient preparatory work is
essential before switchover to international accounting
principles and standards.22
Utilization of Sovereign Wealth Funds
Owing to huge accumulation of foreign currency arising out
of oil exports and large and consistent trade surpluses, many
a country has emerged in recent times as a source of invest-
ment finance and a keen player in international currency
and stock markets. It is of course a moot point whether these
countries could have invested some of these funds domesti-
cally to enhance social welfare, economic well-being and
security of their own citizens. Be that as it may, the substan-
tial foreign exchange earnings and internally-generated
resources have led to the creation of new stars on global
financial firmament, the Sovereign Wealth Funds (SWFs).
Investment funds owned by about 12 state-owned entities
in countries like Saudi Arabia, United Arab Emirates,
Dubai and Russia controlled roughly $ 2.5 trillion in 2007.23
The McKinsey Global Institute report (2007) describes four
new “power brokers” of the global economy viz. oil-export-
ing nations, Asian central bankers and their SWFs; hedge
funds; and private equity funds. Their assets have tripled
since 2000 to nearly $ 10 trillion.24 If the new “power
brokers” (SWFs, oil producers, hedge funds, and private
equity firms) withdraw from their global investments and
move into cash, there might be volatility in the global stock
markets. Despite having an effective game plan and road
map, the job of minimizing growing global imbalances and
smoothing inherent conflicts and tensions between powers
that be, could pose problems. There should be a credible
approach geared to the opportunities and risks of SWF
investments. The US Congress Committee on Foreign
Investment in the US could void foreign investment in the
USA on national security concerns.25
SWFs could increasingly become significant in future.
THE INDIA ECONOMY REVIEW 141
I N T E R N A T I O N A L E C O N O M I C S
Recently, some SWFs supported meltdown-affected banks
but they became overawed by the huge losses. The current-
account surpluses of oil exporters and Asian countries have
been recycled. The foreign financial assets controlled by
governments went up to reach $ 9.5 trillion in late 2008, of
which, it was estimated, one-fourth was held by SWFs. If oil
prices rule high and global boom resumes, in a decade or so,
SWFs could become as influential in stock markets as hedge
or pension funds. However, based on experiences in Russia,
China, Qatar, Japan and other Asian countries, it has been
estimated that the SWFs might not become as big as had
been projected. Since the credit crisis, SWFs are more
risk-averse, especially China. There is a viewpoint that they
may gradually move out to safe investments like US Treas-
ury bonds instead of riskier equities and alternative assets.
Saudi Arabian Monetary Authority, with $ 500 billion-odd
assets, has raised its holdings in gold, cash and deposits. Abu
Dhabi Investment Authority is reducing its equity alloca-
tion. Even Singapore is cautious. Russia and South Korea
prefer to buffer reserves with risk-free liquid assets, prefer-
ably in dollars. It is stated that the SWF investments have
declined from a torrent to trickle.26 Also, the savings-surplus
countries require funds for growth and for meeting their
contingencies.
In the beginning of 2008, the advanced countries were not
comfortable with the large-scale investments through SWFs.
The host countries were desirous of monitoring and regulat-
142 THE IIPM THINK TANK
ing the investments. They clam-
oured for greater accountability in
the home countries, including the
consideration of a voluntary code of
conduct. In India, in view of
comfortable forex reserves, one
view was that internal SWFs,
specifically created out of forex
reserves, could be used for infra-
structure development through the
India Infrastructure Finance
Corporation Ltd. as a special
purpose vehicle under the supervi-
sion of the RBI. However, the RBI
was not in favour of creation of
SWFs 27.
Conclusions and Suggestions
The recent developments have been pressing for early
decisions on global supervision over fiscal, monetary and
banking affairs. The G-20 world leaders underlined the
need for corrective measures. The rising Asia and Latin
America are looking up to the developed world for equity
and fairness in resolving the outstanding global issues so
that the world-wide discontents would be contained/mini-
mized. Conclusions and indicative suggestions are presented
below :
(1) Political hot-spots require closer attention by the U.N.,
the Security Council and other agencies combined with
more engaging and effective representation to the most
populous region of the world, South Asia, the oil-rich
Middle East, Latin America and Africa; also, complex
subjects be considered in-depth by specifically constituted
working groups to make recommendations to the appro-
priate bodies.
(2) In international trade negotiations, both the developed
and emerging world should adopt give-and-take attitudes
without resorting to beggar-thy-neighbour policies
seeking immediate, short-lived gains from trade.
(3) In the context of the demand of China, Russia and
oil-exporting countries, the U.S. dollar as a reserve
currency and preferred medium of international trade
would require joint evaluation by academicians and
practitioners. This is a crucial subject for creating a new
 C H A N G E F O R G O O D

world order. Endnotes and Additional Thinking

1
(4) Reshaping the international financial architecture calls Smick, David M. : The World is Curved, Portfolio, 2008,
for drastic reorganization at the Board, executive, profes- p.25.
2
sional and supporting staff levels and that equal opportu- Stiglitz, Joseph E. : Globalisation and Its Discontents,
nity be extended to citizens of all countries in the world in W.W.Norton, N.Y.,2003.
3
the selection of CEOs of the IMF and the World Bank. Kagan, Robert, Ibid, p.37.
4
Also, the quotas be refi xed on the basis of current position Krugman, Paul : Interview, The Economic Times, 11th
of each member country so as to reflect the realities. August 2009.
5
(5) The USA, as a world leader, has to adapt itself to the Obama, Barack : The Audacity of Hope, Crown Publish-
changed world and avoid abrupt policy changes and help ers, NY, 2006,p.359.
6
building a cohesive world. Make the Service Work for the Poor, Southern Econo-
(6) With BRIC countries and the rest of Asia assuming their mist, 15th July 2009.
7
place in terms of their GDP, level of industrialization, Mead, Walter Russel, Ibid, p.89.
8
modernization, educational and research attainments, Kim, Chan W. and Mauborgne, Renee : Blue Ocean
and the place of major currencies, the US dollar might get Strategy, Harvard Business School Press, 2005, Boston,
slowly and subtly replaced as the reserve and/or common- Massachusetts, U.S.A.
9
ly denominated international currency in the world; with Stiglitz, Joseph E. : Ibid, p.172.
10
more intra-regional and international deals in trade and The Economist : A special report on world economy, 11th
money, more than one single currency might occupy their October 2008, pp.28-30.
11
place as reserve currencies which may prove beneficial to Boughton, James M. : Finance and Development, IMF,
world trade. March 2009, pp.44-46.
12
(7) Demographic changes in the world markedly reveal that Stiglitz, James E. : Ibid, p.120.
13
Japan, Russia and Europe have relatively aged popula- Mada, K. U. : A Journey Through Development Bank-
tion, and China, India, the rest of Asia, and Africa have ing, Mumbai, p.1-2.
14
relatively young demographic profiles and this situation Stiglitz, James E. : Ibid, p.12-14.
15
necessitate a relook at the immigration policies and the Mada, K. U. : More Effective Global Financial Regula-
population policies (incentives, etc.) in all these countries. tion, The India Economic Review, 31st May 2009, p.121.
16
(8) With the world coming closure in many respects and Ibid, p.121
17
cross-border transfers of labour, capital and enterprise The Economic Times, Mumbai, 11th August 2009
18
are gaining ground; and, further with the experience Smick, David M. : Ibid, p.31.
19
gained in monitoring frauds and risks, uniformity will Ibid, p.35.
20
have to be ensured in the Accounting Standards, so that The Economist London, 8th August 2009.
21
the wired world will be able to adjust freely and fully to The Economist London, 18th July, 2009, p.66.
22
the emerging business needs and concerns. Agarwal, Sanjay : “It’s time to act on IFRS”, Business
(9) Countries that have come to own Sovereign Wealth Line, 18th June 2009.
23
Funds out of their surpluses in commodity trade and Smick, David M. : Ibid, p.32.
24
savings could find appropriate investment opportunities, Ibid, p.61.
25
lest the funds might get converted into gold, cash etc.; this Ibid, p.32.
26
subject requires specific considerations from the angle of The Economist London, 24th January 2009.
27
security, misuse of funds, transfer of funds etc. Reddy, Y.V.: India and the Global Crisis, Orient Black-
(10) There should be in-built mechanisms to sort out issues Swan, 2009, p.34
at global level in respect of situations where a strong
country or a group of countries dominate the trade world (The views expressed in the article are personal and do not
and resort to the banning of trade unilaterally. reflect the official policy or position of the organisation.)

THE INDIA ECONOMY REVIEW 143

P O L I T I C A L E C O N O M Y
Politics, Governance,
Political Economy of
Development or Stagnation:
West Bengal 2009
Amiya K. Chaudhuri
Senior Fellow, Maulana Abul Kalam Azad Institute of Asian Studies, Kolkata
Politics of the Left Parties
Certain common properties, either inherent or constitution-
ally contrived, characterize the working of the process of state
politics in India. Achievement of good governance through
democratic means for realizing political modernization and
development objectives has been the coveted goal. Besides,
the securing of equal opportunity and special provisions for
deprived social groups find a special place in this overall
objective. Whether and to what extent this objective and the
values underlying it are or can be realized depends upon the
way the political parties in India-both national and regional,
have conducted state affairs.
Differential endowments in respect of political space and
territorial size as also the magnitude and the density of
population are, of course, important components. However,
socio-political ethos, which differs from state to state, consti-
tutes the most important factor. The interaction of all these
factors has been instrumental in the prolonged rule of the Left
Front (LF) government in West Bengal. Of late, however,
there have been definite signs of its decline throwing up the
possibility that it might be driven out of power in the next state
election. It is against this background that the question of how
the LF, particularly, the Communist party of India (Marxist),
the CPI (M), came into power, ruled for more than three
decades, and is now showing definite signs of its decline,
assumes importance.
In West Bengal, anti-Congressism has been the mainstay of
144 THE IIPM THINK TANK
the Marxist political parties. The refugees who had to migrate
to West Bengal after Partition were more educated1 and the
Marxists targeted them to side with the oppositions; their
existential conditions made them susceptible to the leftist
ideology and propaganda.
If their existential condition turned them against the
Congress government in the state, their education helped
them to relate themselves meaningfully to leftist ideology.
This made it easier for the left parties to mobilize a large
number of the refugees against the Congress government
directly and indirectly through culturally mediated popular
movements. The cinema shows and musical programmes
depicting the miserable plight of the uprooted people helped
the process. Numerous refugee camps and colonies were built
on government khas lands and on lands left behind by the
Muslims around the state capital, Calcutta, and many of the
suburban areas including North Bengal. The left parties
continuously highlighted the problems. But the activities of
the Communist Party of India (undivided till 1964) were aimed
not so much at redressing the deplorable conditions of the
uprooted people from the erstwhile East Pakistan. Their
objective was to as to gain political advantage. Successive
election campaigns and electoral manifestos and election
results of the state from 1952 to 1967 would prove the point.2
Add to it the fact that there existed a deep-seated feeling
among the people of West Bengal that the Central govern-
ment, instead of following the strict principles of federalism,

paid little attention to the prevailing regional situation, as well
as the socio-political perspective and the legitimate aspirations
of the people.
Like other states, West Bengal too had several small parties
confined to the state. As their presence favoured the Congress
party electorally, the CPI (M), a new avatar of the Communist
party since the split in the communist movement in 1964, and
CPI, were contemptuous of other smaller parties. For oppor-
tunistic reasons, however, they did speak of some sort of a left
unity highlighting the Communist thesis of “United Front”3
strategy. But they did not care to recognize the pragmatic
necessity of establishing some equation between the powerful
and the smaller parties for the purposes of coalition making.
In West Bengal, specific politics revolving around the Marxist
parties seems different from that of the other states. The
Marxist very intelligently used their thesis that West Bengal
was discriminated both politically and economically by the
successive central governments. The Marxist parties, when
they came into power, exploited both the situations; when the
Central government was strong, it raised the bogey of discrimi-
M I C R O M A C R O
nation and in the case of a friendly but weak Centre, its
demands for autonomy for the regional parties4 became quite
strident and often met with success.
The well calculated expediential relationship of the CPI (M)
with the Congress is nicely illustrated by its decision in July
2008, when the LF (with its 61 MPs) withdrew its support from
the United Progressive Alliance (UPA) government. This was
meant to express its opposition to the Indo-US civil nuclear
agreement. The UPA government, however, survived because
it received support from the Samajbadi Party (SP) of Mulyam
Singh Yadav with 38 MPs, while Mayawati and her Bahujan
Samaj Party (BSP) did not oppose. The CPI (M)’s political cal-
culation was to further emasculate the Congress at the state
level in West Bengal and Kerala. At that juncture they thought
it prudent to distance the LF from the Congress with a view to
enhancing its image as Caesar’s wife, more honest and people
oriented in their traditional bastions of West Bengal and
Kerala.
Holding its strategy very close to the chest, the CPI (M)
wanted to carve out an exit route in view of their future course
THE INDIA ECONOMY REVIEW 145
P O L I T I C A L E C O N O M Y
of actions to maintain their electoral hold in Bengal. They did
not like to give up even an inch to the Congress and the
Trinamool Congress (TMC) in state politics. Rather, they did
everything possible to keep the Congress and the TMC at
loggerheads with each other. But this time, a large sections of
middle class, several groups of civil society, the refugees living
still in the colonies, the Muslims and the Scheduled Castes and
Tribes, -the mainstay of social coalition that sustained the LF
so long, appeared sternly to turn their back against the LF. The
LF was overbearing towards the Congress since the UPA
seemed to it to be dependent on its support to remain in
power. This belief was reinforced by their success in fleecing
their strategic pounds from the central government. The
intellectuals, artistes, singers and a number of literati, siding
with the CPI and CPI (M), were appointed or nominated to
important academic and other policy-
making bodies in the state.
These state institutions are very The refugees
important and their members are often existential
regarded as part of the think-tank of the conditions made
government. It was quite characteristic,
them susceptible
even though uncharitable, for the
highest leadership of the CPI (M) to
to the leftist
say: “the UPA coalition government ideology and
survives on the LF’s support. Therefore, party propaganda
if we want them to stand up or sit down
they must do that.”5 The other side of
the coin is the decided unwillingness of the LF to share
responsibility when the UPA government did unwittingly
commit mistakes. Actually, a large number of people in West
Bengal did not like this sort of vocabulary.
The LF led by the CPI (M) had to withdraw support from
the UPA government for tactical reasons. They were to go in
for parliamentary election next year in 2009 and do whatever
was possible to save its most important red bastion. If it had
made the decision earlier, it would have been wiser. This is so
for the reason that its support base had already begun eroding
because of its contradictory political stance: a pragmatic
support for the Congress at the Centre and throwing, at the
same 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 Party
as a team ‘B’ of the CPI (M) in the state after its split from the
Congress on January 1st, in 1998. The TMC was now in
146 THE IIPM THINK TANK
alliance with the Congress for the second time before 2001
Assembly election. Also, the CPI (M)’s duplicity6 in support-
ing Congress at the Centre and mock fight against the Con-
gress at the same time in the state was perceived by the people
quite ridiculous. Some of the left leaders thought that the LF
should have withdrawn its support much earlier to tidy up its
home turf. Its failure to do so is amply reflected in 2009
parliamentary election results.
The middle class people, possibly for reasons of their past
history, are in the habit of thinking that they are uncompro-
misingly radical.7 The communists and the ever-increasing
band of their supporters considered themselves to be a
superior species. They considered themselves as ideologically
progressive having a correct socio-political and economic
perspective. They continued to believe that the politics they
were engaged in, was guided by a
superior social ideology and political
objective as compared to other political
parties in different states of India.
More often than not they claim that
the LF led by the CPI (M) stands for the
poor and is more democratic and people
oriented than other political parties.
They also claimed that the caste,
communal divides and features that are
paramount in other Indian states are
absent in West Bengal. However, a close
look at social situation in West Bengal suggests this idea to be
a myth. This is confirmed by their mode of selecting candi-
dates for contesting elections at all the levels. But once the
charm of left ideology wore out, social divisions came to have
a large impact on how the people voted. It should also be
noted that the life styles of leftist leaders at all levels have
undergone a sea change since 1977; they began behaving like
the elites of society since long. This elite mentality percolated
down to the most of the leaders down below. Instead of
perceiving society in terms of caste and communal distinc-
tions, the left oriented Bengalee social groups would like to
divide it into two classes- bhadarlok (elite)8 and chhotolok
(subaltern). They take it for granted that the subaltern or the
chhotolok can, with subtle electoral engineering and political
manipulations, be brainwashed by continuous verbal outpour-
ings. Possibly they ignore that the rise of the chhotolok class
(in economic term) at certain historical junctures is a predes-

tined fact of social evolution.
To the upper and middle class elites, Mamata Banerjee and
her party TMC appeared to represent the rural subalterns.
They failed to realize that soon after the Assembly election in
the state in 2006, she would be able to mobilize the rural
masses on the basis of their fear against the government’s land
acquisition and Special Economic Zone (SEZ) related
industrial policies. In fact people begin to be disenchanted
with process of the Governance the LF led by the incumbent
chief minister Buddhadeb Bhattacharjee. Unchallenged in the
electoral politics for such a long period, Bhattacharjee went
ahead of his illustrious predecessor to obliterate the demo-
cratic distinction between the party and the administration.
He proceeded to think in terms of total equation between the
party run state and the civil society. According to Ross
Mallick,9 this government put party
interest above the people. No other
Indian state, not even Kerala, another To the upper and
CPI (M) bastion, is guided by such a middle class elites,
mind-set. As he says, “Given this record Mamata Banerjee
of failed reforms, non-reforms, and
and her party
regressive policies, the question remains
as to how such a singularly unsuccessful
TMC appeared to
government was able to achieve the represent the rural
world record for being the longest ruling subalterns
democratically elected Communist
government in history”.10
And, finally, the LF’s focused tirades against the Central
government’s discriminatory attitude and actions, whether real
or imagined, meant for popular consumption, have been
habitual. They also claim that people’s rights to equality of life
and liberty are better ensured in West Bengal than anywhere
else. But the fact of the matter is that the CPI (M)’s organiza-
tional dominance in Bengal, particularly in the rural hinter-
land, for the last three decades has alienated even its impor-
tant partners, the Revolutionary Socialist Party (RSP) and the
Forward Bloc (FB). The CPI (M)’s policy prescription and its
implementation of the recent land and industrial policies11
kept 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 real
political power, still cling together. An important minister
belonging to the RSP underlined the reason: “It is simple
electoral arithmetic and to a great extent of certain politico-
M I C R O M A C R O
electoral compulsion. If any of the major partners comes out
of the left fold the result would be disastrous not only for any
individual partner but the LF as a whole. The CPI (M) would
also suffer a political paralysis for years to come.”12 And this
perception has refused to die even when the people of West
Bengal nurture the sore caused to the people on different
occasions. Note that the people still remember that the three
leaders, who had a hand in massacring the Sain brothers, in
Bardhaman on 17th March 1970,13 the day after the second
United Front fell, are actively alive and leading the CPI (M)
from the front. The then chief minister, Ajoy Kumar Mukher-
jee, while submitting the resignation of his ministry, character-
ized his own 2nd United Front government as “uncivilized and
barbaric,”14 pointing to the partisan use of the police adminis-
tration by the then deputy chief minister, Jyoti Basu.
Another instance of the LF’s total
indifference to the well being of the
people they claim to serve is provided by
the tragic case of the refugees settled in
Marichjhapi, an Island near Sundarvan
in undivided 24 Parganas from early
1978 to May 16th, 1979. The refugees
came over to Sundarvan from Dandaka-
ranya where they were originally settled
in the arid areas of Madhya Pradesh and
Orissa. They built up a colony at
Marichjhapi. The CPI (M) committee of
refugee organization in the island and around asked them to
take the membership of the CPI (M). They refused and the
government retaliated harshly. The CPI (M) government
stopped the supply of drinking water and food and committed
the sin of murdering many of the helpless and innocent second
time refugees by burning their hutments and sinking their
boats while they were collecting food and drinking water, and
ultimately when they were fleeing from the island.
This left an indelible dark spot on the history of the first
phase of the LF government in West Bengal.15 Several private
individuals have meticulously documented the stories.16 Next
were the Bijon Setu (the Ballygunj Station Flyover) murders in
which the CPI (M) hoodlums burned alive 17 Sanyasis
(including a woman).17 The Bantala incident at South 24
Parganas was gruesome; but the then the chief minister Jyoti
Babu took no serious note of it and commented: “These are
nothing extraordinary; occasionally it may happen.”18 Another
THE INDIA ECONOMY REVIEW 147
P O L I T I C A L E C O N O M Y
incident concerns the murder of Anita Deoyan. The other lady
of the same team was brought back to Calcutta seriously
wounded and mentally traumatized, unable to speak about the
incident.19 All these incidents, heinous as they were, should
have stirred the people out of their passivity. They did not do
so for long. If the partners of the LF were worried about their
electoral fortunes, why did not the people of West Bengal
react to these atrocities perpetrated by the LF supporters and
activists? They seem to have never confronted this reality. A
scholar piquantly answered the question, which should have
stirred the earlier generations of the ever-protesting Bengalis:
“Bengalis have adjusted remarkably well with the reality. They
have opted to coil up and seek comfort in pursuing the simple
art of making money.”20 Another gruesome incident, which
occurred at Khandua, Arambag in Howrah, involved the CPI
(M) resorting to its method of politically
controlling the entire western belt of
rural West Bengal. It was some sort of a By providing
political cleansing. muscle and
Atrocities like these paved the way for money powers to
the overwhelming victory of the LF in
the leaders the
elections after elections particularly
since 1987.21 On 21st July 1993, the police
urban real estate
barricaded a Youth Congress procession promoters began
led by its president Mamata Banerjee to to rule the roost
symbolically encircle the Writers’
Buildings. When the younger restive
activists attempted to cross over the police barricade, the
police fired mercilessly without any heed to the police manual.
Thirteen people were killed on the spot and many more
injured. Thereafter, the police fired at the procession of the
Socialist Unity Cente (SUC) near Curzon Park. One person
was killed and a few others suffered heavy injuries. The CPI
(M) cadres mercilessly beat Mamata Banerjee, while still a
Youth Congress leader, near Hazra Road, while protesting
against a bundh called by the CPI (M). She had to be hospital-
ized with serious head and abdominal injuries for quite a long.
Such attacks on Ms Banerjee were mounted frequently even
while she was in the Congress as a Central minister. She
formed her own party, the Trinamool Congress (TMC) in 1998
after 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 come
to a halt in 1986. In fact, a reverse process started by 1988. The
148 THE IIPM THINK TANK
panchayat system as a spearheaded by the LF to spread its
tentacles to the remotest part of the rural areas, became by
now all “political panchayats,”22 and was totally centralized
politically and administratively by the CPI (M). The power at
all the three tiers came to be concentrated in the hands of the
local and regional committee leaders. The urban bodies and
their extended areas around urban conglomeration are
controlled by the central party apparatchik at district head-
quarters. By providing muscle and money powers to the
leaders the urban real estate promoters began to rule the roost
with the connivance of the party. Scholars from abroad, who
studied the functioning of panchayat bodies under the LF
front government, eulogized the LF government for its good
work in rural areas.23 However, D. Bandyapadhyay and
Nirmal Mukerji24 and Pranab Bardhan and Dilip Mukherjee25
were down to earth in their assessments.
Even those, who had benefited most
from the patronage of the government,
could not believe the extent of the
erosion of democratic values and the
prevalence of corruption among the LF
functionaries at different levels.
What has helped the CPI (M) main-
tain its hegemonic dominance almost all
over the state, was the policy of terrori-
zation in most of the rural hinterlands
and distribution of largesse to the
aspirant elite sections including the government employees,
trade unionists, rich peasants and teachers of all categories.
The higher echelon of the government officials and high-rank-
ing police personnel, who ever preferred status quo, was happy
because it was tension free for the reason26 that the opposi-
tions were too emasculated to throw any challenge to the
powerful regime. The successive LF governments were
particularly impatient and often vindictive against the opposi-
tion TMC. Ultimately Ms Mamata Banerjee emerged as a
charismatic mass leader. To the popular perception, she was
the only uncompromising main opposition political leader to
challenge the “social fascist party i.e. the CPI (M)”27 and the
“misrule of the LF government.”28 The chief minister, Jyoti
Basu, refused to meet Ms Banerjee--a central minister at that
time, when she went on a deputation to seek justice for a deaf
and raped victim of the CPI (M) cadres. She waited in front of
the chief minister’s chamber. The police evicted her forcibly

and put her in the Lal Bazar jail. The police released her at the
dead of night without any protection on her way home. Such
behaviour from the police officer and ordinary constables was
a regular feature during the last 33 years of the LF rule.
Misbehaviour with women by the CPI (M) leaders, their
constant ridicules and frequent ill treatments encouraged the
police administration to heckle Mamata Banerjee who had
endeared herself to the oppressed people of the state.29
Ms Banerjee began her fight for Maa, Mati, Manush
(mother, earth and men) during Singur land acquisition
incident. It was a magical symbol and a slogan that helped the
underprivileged Scheduled Castes, Scheduled Tribes and the
Muslim community at large to rally around the TMC. She
fasted for twenty-six days against the acquisition of the
multi-cropped 997 acres of agricultural lands of the suffering
peasants at Singur acquired for the Tatas
by the government agency, West Bengal
Industrial Development Corporation The successive
(WBIDC). Meanwhile, brutal killings LF governments
took place at Nandigram by the police were particularly
and the CPI (M)’s hired killers in police
impatient and
uniforms. The Governor of the state,
Gopal Gandhi characterized it as a “cold
often vindictive
horror.”30 A very important civil society against the
groups took up the cudgel and played a opposition TMC
very important role to expose the
“fascist method of the Buddhadeb
Bhattacharjee regime”31. After these two serious incidents for
three long decades, the people began shedding off their fear
and came out in the open to seek a “change.”32
Against this backdrop of the explosion of the desire for a
change, the parliamentary election was held in 2009. The
results of the election were absolutely “demoralizing for the
CPI (M) and signaled its decline after years of its control in all
aspects of life in the state.”33 The social coalition that created
the LF was the product of a reality prevailing in the beginning.
The Muslim, scheduled caste, scheduled tribes, the different
layers of middle classes, a large numbers of intellectuals and a
large section of Trade Union leaders etc, constituted the social
coalition, the LF was banking on. The LF began vaunting its
superiority as a party with progressive socio-political values.
Demonstrating its skill at showmanship, it began propagating
that only it could give good governance to the people. Marxists
of their brand posed that only they understood the “nature of
M I C R O M A C R O
Indian State.”34 They claimed that they were better able to
pursue political economy of development.35 The Chinese
development pattern, rather than the US and Western
economic institution’s imperialistic model, would safeguard
the sovereign decision-making process and serve Indian
interest better,36 the CPI (M) was supposed to claim. But the
leaders always deceived the people knowing it well that it was
not possible until and unless the Marxists of the West Bengal
variant were able to guide the total decision-making process of
the government of India
The Left Front Coalition Government has been continuing
since 1977. Only the Chief Minister was changed just six
months before the Assembly election in 2001. The younger
generation of leaders of the Communist Party of India
(Marxist) or CPI(M), in the face of a genuine electoral
challenge of the newer generation of the
Congress and the Trinamul Congress
(TMC), as evident from electoral data
(1996 Assembly election and1998, 1999
parliamentary elections) to a large
extent thought that the leadership of
Jyoti Basu as the longest continuing
Chief Minister in the state might not be
as fruitful as before. Buddhadeb
Bhattacharjee, took over to face the
challenge of two combined opposition
Parties. In the late 1990s the CPI(M)’s
younger leaders began to be assertive. The other partners of
the Left Front wanted Jyoti Basu to continue. They were used
to think that the coalition structures both at its social and
political levels were safe with the leadership of Jyoti Basu. But
their arguments did not cut much ice with the CPI(M) central
committee. The coalition partners demanded to create a post
of the deputy chief minister, and a core group of ministers to
discuss important policy matters before they were brought to
the public domain. The CPI (M) was lukewarm or to be
precise quite unwilling. The idea, however, did neither
materialize nor did the LF coalition face disintegration even
after the election when the CPI(M) was reduce only to a single
majority party of 143 MLAs rather than a predominant single
party majority in the coalition as earlier.
This coalition establishment is a unique experiment in
Indian states as also at the Centre where the coalition culture
is yet to crystallize or institutionally mature.
THE INDIA ECONOMY REVIEW 149
P O L I T I C A L E C O N O M Y
What are the factors that have tilted the balance in favour of
the a state to maintain a coalition system for such a long
period of time when the facts remain that the coalition
government in its very nature is unstable be it in European
countries or in any country belonging to Asia Africa and Latin
America. This problem requires to be addressed empirically
with the seriousness it deserves, and if possibly theoretically
also with the existing tools we have had in the already explored
paradigm by the western scholars.
The post emergency Assembly election in 1977 served as the
watershed in the politics of West Bengal both in its electoral
and political processes. The Jyoti Basu-led Coalition Govern-
ment that came into power in 1977 has been continuing still
with only a change of the Chief Minister in 2000. The Commu-
nist Party of India (Marxist) has been the predominant
partner. Coalition partners have become
more important since the 2001 Assembly
election. The three major coalition By virtue of its
parties-- Forward Bloc (FB), Revolu- capacity for
tionary Socialist Party (RSP) and “direct and
Communist Party of India (CPI)—theo-
mediated” social
retically now have more bargaining
power in the system. However, the other
mobilization, the
five smaller parties are absolutely CPI (M) became
dependent on the CPI(M). In 2006 predominant
Assembly election the CPI(M) regained
its earlier position of preeminence in the
LF coalition. Therefore, governmental stability hasn’t become
an issue. Congress Party, by contrast, appeared to be almost
decimated in the aftermath of the emerging socio-political
scenario since 1977.
The Contributing Factors of Stability
A number of factors contribute to the unique stability of the
Left Front regime in West Bengal. The CPI(M) and other
Front partners have to learn the lessons of history they had to
come through. It taught them to maintain courteous public
relations with the people at large. All the left parties particu-
larly the CPI (M) have acquired power through a series of
political movements that brought them closer to the people.
Measures of land reforms, reviving the system of rural self-
governance the way to get near to real power base, taking
some genuine popular policy decisions sometimes populist
though, determination not to go in for inter-party rivalries to a
150 THE IIPM THINK TANK
breaking point despite provocations, always to keep alert
against the politics of the opposition and building up of
formidable party organizations and spreading them to the
grassroots levels, trying to nurse the electoral bases, and
creating a congenial environment to foster a coalition culture,
are some of the important components of the leftist politics in
the state.
The Left Front Regime has been dominant for the last 28
years having won six consecutive elections. Predominance of
the CPI (M) is one major reason for this unique record in
India. By virtue of its capacity for “direct and mediated”37
social mobilization the CPI (M) became the predominant
Marxist political party. The CPI (M) itself held the majority of
the Assembly seats from 1977 to 1996. Again the CPI(M)
came back to its original position having won 176 in 2006
Assembly election. The party’s Assem-
bly seats began declining from the 1996
election, but its percentage share of
votes remained about the same. The left
parties came to realize from their
experience that the voters in the state
were in favour of anti-establishment
politics of the mainstream left parties. It
appeared to any unattached political
observer, Marxist ideology or not, a
social coalition in the sense of societal
spaces being as they were, was taking
place within. This indicated the mandate for the Left Front
with CPI (M) in government making.38 In earlier times, other
partners of the Left Front like FB and RSP were seen to be
quarrelling with CPI(M) regarding portfolio-sharing and other
office seeking claims. But that was only to a certain point. The
conflicts are dormant even now. The new developments are
that frequently in rural areas the smaller partners have had
clashes with local CPI(M) leaders. They seem to engineer split
within each of the smaller parties. The tendency of CPI(M) in
this process of having a horizontal spread in the electoral bases
of the minor partners is frequent in recent years. Noticeably
during elections all the partners putting aside their conflicting
attitudes come to depend on CPI (M). The junior partners
realize that without the support of the CPI(M) and its organi-
zation, their electoral forte is not secured. The secretary of the
state committee of the FB declared frequently that they are to
guard the “unity of the Left Front as the apple of eye.”39 The

left parties did not repeat the mistakes, they failed to assess in
the late 1960s. They used to talk about left consolidation in the
1930s and casually attempted to put together in the mid 1950s
and 1960s. But ideological rigidities and angularities among
themselves, despite their adherence to principles in a broader
framework of Marxism, stood in the way. Till then the Marxist
parties were not sure about the efficacies of western parlia-
mentary liberal democracy. Before 1977 they never “imag-
ined” to form a government themselves as a combination of
left parties.40 The political coalition of the left parties is the
outcome of a series of past socio-political movements.41
Ideologically all the left parties were on the same side of the
spectrum but before 1977 they could not come to put together.
For the first time they realized the impact of trying to socially
mobilize the people directly as also through programmes of
their frontal organizations.
The scholars have written volumes
about Bengal’s radicalism and sought to The question
justify CPI(M)’s rise to power. The to be seriously
question to be seriously addressed is the addressed is the
Left Front’s outstanding stability and
LF’s outstanding
electoral successes for such a long
period of time. In all other Indian states
stability and
including Kerala, endemic political electoral successes
instability, social fragmentation in terms over a long period
of castes, ethnicity and religions, crisis of
governance and electoral reverses are
common features.
The Left Front government was firmly established in 1977.
Electoral arithmetic indicates that the vote share of the left
parties together never came down below 50% till the parlia-
mentary elections in 1998. It is said that the left parties with
CPI(M) in the lead have been holding on in the crest of
Bengal’s proverbial radical politics. The politics of anti-Cen-
trism often put the left parties nearer. Having a weak govern-
ment at the Centre helped CPI(M) further strengthening its
electoral bases. It became successful to maintain its societal
spaces among the rural masses irrespective of castes, commu-
nities and economic class divisions. Caste distinctions and
Communal hatred do not play significant role in West Bengal
as elsewhere in other Indian states.
The millions of refugees that crossed over to West Bengal
both at Partition and after continued to support the politics of
the left parties. Earlier the left parties used to highlight Nehru
M I C R O M A C R O
government’s discrimination against West Bengal in regard to
its policy of refugee rehabilitation in comparison with what it
did in Punjab. The Centre’s policy of freight equalization
depriving Bengal of her natural advantages and industrial
licensing policy discrimination “against West Bengal” are two
other planks of the left politics that greatly influenced a large
section of people in the state. The influx of displaced persons
both Hindu and Muslim during the Bangladesh War in 1971
supported the Congress governments at the Centre and the
state run by Siddhartha Roy. Some of them mostly Muslims
went back after the liberation of Bangladesh. The people who
stayed back began to side with the left parties later. The
Muslim community42 possibly, because of minority syndrome
used to always support the establishment. The Congress as the
largest Indian party used earlier to enjoy their electoral
support. Gradually the Left Front
government was gaining in the state.
With the rise of the Bharatiya Janata
Party (BJP) in Indian politics, the
Muslim population stood solidly behind
the coalition of the left parties in West
Bengal.43 The people mostly Muslims
crossing over the border by stealth for
economic reasons, are patronized by
major secular political parties. Most of
them now constitute the support base of
the Left Front.44
Several scholars studied the politics of West Bengal and
made out incisive analysis from different perspectives.45 As
observed now, the idioms of West Bengal politics in earlier
decades were different. The styles and moorings have been
changed. The politics of a Congress dominant system with
multiple political parties competing with one another and
against the Congress on the other was a shade different from
that of the Left Front coalition. The number of political
parties has been reduced, paradoxically to the advantages of
the Left Front.
The Left Front government initially took very fruitful
decisions and sincerely sought to implement the same. Those
were the programmes of land reforms through “Operation
Barga” and secondly, to make the land reforms programme
effective in the rural hinterland. The government overhauled
the moribund Panchayat system. Following the recommenda-
tions of the Asok Mehta Committee Report, the three-tier
THE INDIA ECONOMY REVIEW 151
P O L I T I C A L E C O N O M Y
Panchayati raj system of rural self-governance was intro-
duced. The first election of Gram Panchayat, Panchayat
Samiti and Zilla Parishad, was held in 1978. It was a massive
exercise and people in rural areas began enthusiastically
participating in local governance. It was in fact the first but
determined effort on part of the New Leftist regime to spread
its politico-electoral tentacles to the rural areas. The last
elections in all the three tiers were held in 2003, the LF
winning the largest ever majorities46. In respect of land
reforms and “operation barga”, the LF government did not
commit the same mistake of alienating the rich and middle
peasants of the village communities, which it did in the
United Front eras. The Left Front government acquired more
than 1.30 million acres of benami (registered in other’s name)
lands and distributed the same to the poorer and marginal
peasants. Pranab Bardhan and Dilip
Mukherjee write, “A party with Leftist
ideology is more likely to have acquired More than 1.3
the political will”. The government million acres of
appears to have political will to under- benami lands
take a measure of land reforms and
were acquired
remove several legal and administrative
hurdles in the way. The authors
and distributed to
continue, “Alternatively, intrinsic policy the poorer and
preferences of elected officials may marginal peasants
derive from the partisan interests of
their electoral constituencies, and
additionally be subject to moral hazard wherein implementa-
tion requires effort on the part of the officials. Second, the
electoral competition or populism can matter; land reforms
may be motivated by the need to expand vote shares”.47 On a
sound judgment it transpires that the efficacies and claims of
policy implementation, later in the 1990s the claim of imple-
mentation faced criticisms on several points.
The urban and semi-urban middle classes were already
sympathetic to the politics of the left parties. From its earlier
united front experience, CPI (M) learnt an important lesson.
Through different channels it attempted to bring the members
of the staff of general administration as also police administra-
tion in the side of the leftist organizations. To make its policies
and objectives acceptable to the larger sections of people
CPI(M) attempted to woo the largest number of middle class
employees in different organizations and professionals. It
152 THE IIPM THINK TANK
allowed, unofficially though, the registered left oriented
Government Employees Coordination Committee to have
exercised supervision not only over the ordinary employees
but also over the officers. The employees of the government
and semi-government institutions like government undertak-
ings, cooperative societies, factories, schools, colleges and
even universities financially aided by the government were
mostly won over by the LF government, by way of changing
their service manuals, enacting laws for their security of
services and increasing the salary packets.48 Even the non-
gazetted police personnel were allowed to form association of
their own and began functioning as members of trade union,
as it were. In the beginning the chief minister Jyoti Basu made
such concessions and even allowed the ordinary police union
members in a meeting to criticize against their superior IPS
officers49 in the presence of the Calcutta
Police Commissioner, IGP, DGP etc.
All these policies brought about enor-
mous electoral dividends to the Left
Front regime making it as stable as
never before. Most of the government
employees were happy with the new
dispensation. The Left Front govern-
ment even allowed its employees to go
on strike to press their demands50 and
itself supported occasionally the politics
of Banglaband (All Bengal strikes) or
Bharatband (All India strikes) and Chakkajam (stopping rail
movements) when directed against the “anti-people policies”
of the “inconvenient” Central governments. The Left Front
regime undertook a large number of populist measures and
did not give sufficient thought about their economic sustain-
ability resulting in the near fiscal collapse later in the 1990s.
This prompted the government to roll back some of their
earlier political decisions after 2001.
The Finance Minister, Asok Mitra announced unemploy-
ment allowances without going into the long-term question of
feasibility. The government started a large number of primary
schools, later colleges and even Universities in the state. Salary
hikes were made not only for the government employees but
also for teachers of all categories, education workers, and the
employees of the panchayat bodies and municipalities. The
government implemented free education from primary to the
10+2 level. To reduce the number of dropouts in schools, at

the instance of the Left Front Committee the government
abolished English teaching in government aided schools up to
class six but this policy had to be discarded in the face of
severe criticisms after more than two decades. The rural poor
and the larger peasantries were already supporting the Left
Front. After the panchayat elections the middle and rich
peasants also crossed over, to support the new government.
Regular municipal elections began to be held from 1982 to the
advantages of the LF. These factors helped the Left Front
consolidating their politico-electoral bases for years to come.
The main opposition parties were in a shambles. The Janata
party government at the Centre failed in the middle of 1979.
The state unit of the party was split into factions. The honest
coins among them went out of circulation and the rest joined
the Left Front.
The Congress party was almost
decimated till it gained a little in1996
Assembly election. A little later the Historically,
party was vertically split. Mamata West Bengal is
Banerjee led the split away party the truncated state
Trinamul Congress (TMC). The Con-
with problems
gress and TMC came closer with
seat-adjustment before 2001 Assembly
peculiar to its
elections. Allegations were made that own. It is densely
CPI (M) manipulated some of the populated
congress leaders to make the adjustment
infractuous.51 The people disenchanted
with CPI (M) are yet to find a powerful opposition political
party or a coalition of parties. Moreover the organizational
strength of CPI (M) is fearfully imposing. The frontal organi-
zations52 of CPI(M) continuously work for the party in all
seasons. The members of all the opposition parties have been
crying hoarse about electoral malpractices of CPI(M). This
allegation is borne by all the opposition parties and cross-
sections of ordinary people. A few prestigious newspapers and
a section of intellectuals find some grains of truth in this
theory of politico-electoral engineering.53
Nossiter points out that “First the CPI (M) and the Left
Front have succeeded in identifying themselves with Bengali
resentment at what is perceived to be chronic central neglect
of the difficulties of the State”. He continues, “Whatever
deficiencies there have been in the performance of the Left
Front, it is perceived as having a mission, discipline and
leadership”, and “Last, the CPI (M) and its partners have
M I C R O M A C R O
shown a capacity to learn from past mistakes”.54 The foreign
scholars are really enamoured with the remarkable stability of
this Marxist regime within with a framework of parliamentary
democratic system. But after more than three decades of its
existence this factor of stability for various reasons particularly
actions, inactions and complacence of the big partners,
CPI(M) the stability factors have been subjected to serious
scrutiny. Why did the coalition government even during the
Jyoti Basu regime for twenty three and a half years fail to
deliver what the LF pledged to do? No new industry, rising
unemployment, deterioration of educational standard, poor
heath system but increasing party dominance in aspects of
public life became the signpost of the LF regimes. Even
Buddhadeb Bhattacharjee could not stem the rot. The stability
of the LF rather stood in the way to political modernization,
economic underdevelopment and
invisible social harmony. Therefore even
the exemplary stability during the long
years in Bengal under the Marxists as
eulogized by the leaders within the
country and around failed improve the
life and living of teeming millions. They
were mile to walk to redeem the pledge
of establishing equity with social justice.
A newspaper banner head line, “Stabil-
ity of Stagnation”55 began jolting the
discerning people of the state.
Demographic Feature and Cultural Attributes
The politics of a state is the product of a combination of
several factors, like history, geography, density of population
and the cultural differences within and lastly its format to
interact with geographic neighbours. Historically, West Bengal
is truncated state with problems peculiar to its own. It is a
densely populated border state. The borderline is porous and
infiltration is difficult to check. The state is having the largest
Muslim population of 25.25%.56 The Scheduled Castes and
Scheduled Tribes constitute 23.02% and 5.50% of the total
population respectively.
The cultural attributes of the population in different
regions of the state are varied. The cultural traits, tradition
oriented family vis-à-vis social norms, mores and rituals,
linguistic characteristics and style of dialects have been found
to be different from one region to another. The state of
THE INDIA ECONOMY REVIEW 153
P O L I T I C A L E C O N O M Y
economic development, occupational engagements and even
the idioms of politics as observed in the past do also vary quite
perceptively. In the recent years since the state-wise rise of left
ideological politics attempts have been made to usher in a
modernized secularization in the regions and the state at large
in an ideological baggage.
Process of Governance
A unique experiment and steady political process comes to
prevail. It is a period of accommodation among the partners
of the ruling Left Front. Political sanity among the warring
leaders of the earlier United Fronts has been obtaining. The
new process of governance follows.
To a great extent the claims of a government shedding aside
their earlier rigidities of Marxist ideological strapping are
justified. It was really possible for the simple reason that the
CPI (M) did not commit the political mistakes that were
committed during the late 1960s and early 1970s. The
absolute power, the CPI (M) was mandated for, to run the
state, cooled down the political temperature of the party. It
was a single party majority win for the CPI (M) along with
other left parties.
Secondly, predominant partner CPI (M) has a complete
sway over the rural areas. Maintaining a liberal democratic
façade the CPI (M) began exercising its party dictum of
“democratic centralism”, from the very beginning. Introduc-
ing democratic decentralization in running the panchayat
system of governance in the vast rural hinterland, the party has
been exercising a centralized control. Therefore, the question,
the party secretary himself stated above that the “Left Front
aims at growth with equity”, remains to be addressed. Having
ruled the state unhindered without any disrupting opposition
movements in social and political spaces for more than three
decades, the Left Front could have done better in its twin
objectives of growth and equity.57 Enough central funds have
been available for removing illiteracy, programmes for gender
equality, health and sanitation, rural housing scheme (Indira
Abasan Yojana) and alleviating rural poverty in the form of
issuing BPL cards (people living below poverty line).58 But it is
shown frequently in comptroller and auditor general’s (CAG)
Reports that the government could not utilize the total
amount of the funds released by the Centre for defaulting
matching grants by the state government facing financial
crunch for several years now.
154 THE IIPM THINK TANK
Political Economy of Development
This study to a significant way may reflect the socio-cultural
and political economy of the diverse elements of the state’s
prevailing political perspectives. A number of foreign and
Indian scholars in their effort to carry on micro studies on
democratic decentralization were offered to choose selected
panchayat bodies. Most of them were engrossed with the
change of rural faces as a result of the economic activities of
the Panchayati raj system in a Marxist state, pragmatically
diluting its earlier rigid theoretical framework of “democratic
centralism, class struggle, social revolution etc,” They
compacted their research findings of field survey data in
Western theoretical paradigm to highlight the politico-eco-
nomic developments within a liberal democratic framework
of politics.
Bardhan and Mukherjee are clear, and nearer the truth
when they observed that only those panchayat bodies, 80 in
number they surveyed, were looking well to the expectations
of the people of those areas where political party competitions
were apparent; or in other words, “Land reform and imple-
mentation was highest in villages where local governments
were more evenly contested between the Left and Rightist
parties”.59 The panchayat bodies took off well in the develop-
ment process of rural Bengal and continued with remarkable
success during the 1980s. The Left Front led by CPI(M), still
sporting its ideological strapping of “people’s democratic revo-
lution” in a diluted form though, resorted to its formula of
“democratic centralism”. The local party leaders that in-
creased by leaps and bounds over the years adapted them-
selves in their area of control to the “bourgeois liberal meth-
od” of combining the western process of modernization and
development. The consequences are many. As expected the
centralized control of the party spreads all over. In the process
a paradoxical reverse took shape in rural governance. The
local satraps of the party took over the Panchayats at the
levels- Zilla Parishad, panchayat samiti and Gram panchayat.
It was but natural in a state where influential rich and middle
peasants were used often to change their side in village
politics. In the last two decades many of the CPI (M) leaders
in local levels were seen to become the “party unto them.”
This was mostly felt in disjointed belt of underdeveloped
districts of North Bengal, the Western belts of Purulia,
Bankura, and Midnapur. The story of death by hunger in
Amlasole60 in southwest of Midnapur, in some tribal villages of
 M I C R O M A C R O

Table 1: Human Development Indices of District in West Bengal

Human develop-
Districts Health Index Income Index Education Index HDI Rank
ment Index (HDI)

Darjeeing 0.73 0.49 0.72 0.65 4

Jalpaiguri 0.61 0.38 0.60 0.53 10

Koch Bihar (Cooch Bihar) 0.50 0.41 0.65 0.52 11

Dinajpur 0.62 0.39 0.53 0.51 13

Malda 0.49 0.36 0.48 0.44 17

Murshidabad 0.57 0.29 0.52 0.46 15

Birbhum 0.53 0.27 0.61 0.47 14

Bardhaman (Burdwan) 0.74 0.47 0.71 0.64 5

Nadia 0.65 0.41 0.66 0.57 9

North 24-Parganas 0.72 0.49 0.76 0.66 3

Hugli (Hooghly) 0.77 0.46 0.67 0.63 6

Bankura 0.67 0.26 0.62 0.52 11

Purulia 0.61 0.18 0.55 0.45 16

Medinipur (Midnapore-east& west

0.68 0.45 0.74 0.62 7
together)

Haora (Howrah) 0.77 0.58 0.75 0.68 2

Kolkata 0.82 0.73 0.80 0.78 1

South 24-Parganas 0.71 0.40 0.68 0.60 8

West 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 be
symbolic but the facts are undeniable. In many tribal areas the
local leaders did not care to distribute the “Below Poverty
Line” (BPL) cards to the genuine poor.61 Even today, the
government itself admitted that a total number of 4612 villages
have been marked “under-developed”. The poor people
miserably living below poverty line number 4.6 millions as
reported in West Bengal Human Development Report 2004.62
The phenomenal growth of a communist party with all of its
frontal organizations is both a strength and weakness in this
state. In electoral politics the opposition parties like Trinamul
Congress (TMC), Congress (CONG), Bharatiya Janata Party
(BJP) or smaller parties like Socialist Unity Centre (SUC) and
others separately or even in a ramshackle combination were
no match for CPI (M) in this regard. The growth of the
Maoists and People’s War Group (PWG), Naxals, actively
engaging in the western belt of Purulia, Bankura, Birbhum and
southwestern part of Midnapur or Lalgarh to be exact ap-
peared to be disconcerting. The other “secessionist” leaders of
“Kamtapuri movement”, Gorkha National Liberation Front
(GNLF) led by Subhas Ghising, now reoriented Gorkha Jana
Mukti Morcha GJMM) led by Bimal Gurung and the move-
ments for “Greater Cooch Behar demand” in North Bengal
were not so conspicuous even a few years back.
Politico-electoral management by the party organization
does not go hand in hand with the governmental management
of the economy in the state. Recession in industries like jute,
smaller iron factories, manufacturing and engineering indus-
tries, tea processing units of the North Bengal region is
alarming. Absence of agro-industries and moribund village
industries, are plaguing the state. Scarcely there are well
running small-scale industries to provide alternative opportu-
nities for employment. Retrenchment of the workers, even
very low-paid workers and unemployment in other sectors are
increasing. Among the staggering unemployment of more 7.5
millions, there are a large number of educated unemployed

THE INDIA ECONOMY REVIEW 155

P O L I T I C A L E C O N O M Y
that tops the list among all other Indian states. The
government has made a survey and found that the poverty
stricken villages have a spread all over the state.63 Despite
a unique political stability of the regime for the last several
years and political management skill of the Left Front, the
inference that the government often failed to redeem its
pledges, is quite apparent.
Politics: Redefined or Stagnating?
Indirectly, due to this weak electoral presence of the politics of
opposition, the politics of the CPI (M) itself sometimes appear
to be stagnating. The party organizations could not launch any
movements against any shortsighted policies of government
they have been supporting. The industrial stagnation began.
Basu to revive the industrial sickness and rope in the foreign
investors or NRI visited different countries, but of no avail with
any visible results. The CPI (M) affiliated Centre for Indian
trade Unions (CITU) keeps quiet when workers of public
undertakings, several Jute Mills, industrial houses, Tea gardens,
Tea industries in North Bengal lost their jobs. Despite several
lacunas in the education policy, the students’ community under
the leadership of the Student Federation (SFI) remains mostly
silent as never before in the past. So is the Kisan Sabha, the
CPI (M)’s peasants’ organization. In the mean while groups of
miscreants under the patronage of some of the party high-up by
stealth entered the party folds. Real estate business under the
party backed promoters, land dealers, suppliers and contrac-
tors were having free hands in exchange for whatever was
demanded. It is all visible and can not escape the notice of even
the ordinary public but nobody has to do anything. Watching all
the circumstances around, one of the tallest leader of the
CPI(M) and minister of land revenue, Benoykrishna Chowd-
hury was pained to comment, “It has become a contractors
raj,” or a regime of the contractors. The Chief Minister Basu
retorted, “in that case why he is the government,”64 Benoy
Chowdhury did not quit because it was not easy for a man like
him to quit the government of a communist party.
The party functionaries and office bearers of panchayat and
urban civic bodies were mired in different types of corruption.
Many Newspaper stories and even administrative reports
mentioned this aspect of corruption often frequently. Corrup-
tions seemed to be seeping in almost visibly into different
layers of the party. But at least some consequences were
reflected in the voters’ choice in the 1996 elections. The
156 THE IIPM THINK TANK
number of the seats the CPI (M) was gaining in all the previous
Assembly elections was drastically reduced to 150 only, and the
total number of seats gained by the Left Front, as a whole was
203 as compared with 246 seats in 1991. The 1996 parliamen-
tary election provided a unique opportunity to Jyoti Basu. The
partners on consensus of the makeshift coalition at the Centre
offered the post of the prime minister to Basu. Basu was willing
but his younger party colleagues prevented him from accepting
the offer. Basu was debarred on the plea that such unstable
coalition with a Marxist leader at the head on the mercy of the
Congress party “still then a political enemy of the Marxists”
would do more harm than good to CPI(M). The objective
condition was not ripe enough for a communist party to accept
the offer. Basu did not suppress his frustration and commented
that “it is a historic blunder”65 on the part of the CPI (M). The
rise of Mamata Banerjee over-shadowing other leaders of the
state congress party indicated another phase of revival of the
congress party at the state level. Secondly, in 1997, Mamata
Banerjee came out of the party and founded her own Trinamul
congress (TMC) and joined the National Democratic Alliance
(NDA) as a partner. She came of a lower middle class back-
ground and within a very short period acquired some charis-
matic charm to mobilize enormous crowd around her. Her
joining the NDA and her capacity to attract large sections of
the people both rural and urban, who were dissatisfied with the
Marxist regime, sent a danger signal to the CPI (M). The
younger leaders of the party began thinking that Basu would
not fit in the bill in the emerging context. Buddhadeb took over
as the new chief minister. He was supposed to be the leader of
the younger generation. Since 1977 he was in the cabinet of
Jyoti Basu and Bhattacharjee was supposed to deliver when
Basu was failing. Looking back even Bhattacharjee could not fit
in the bill in the late 1990s and early 2000-2009s. Leaving aside
the result of the 2001 election, the parliamentary election result
in 2004 went in favour of the new chief minister, which also
reflected Assembly election for the CPI(M) in a massive way.
Possibly that were the turning point in three decade long LF’s
electoral fate.
Conclusion
During the last three years since 2006, a change has overtaken
the politics of the CPI (M). Due to their faulty industrial policy
ignoring the land interest of the poor peasants, peasants took
place in several places in the state. The civil society groups

4
supported it. Not to speak of good governance Buddhadeb
Bhattacharjee appears to stumble over in respect of both the
general and the police administration. The main opposition
leader Mamata exploited this unique opportunity by forming
5
an alternative coalition with smaller left parties and several
other civil society organizations. Her latest attempt to make a
near perfect seat adjustment with the Congress Party before
6
the Panchayat Raj elections in 2008 and Parliamentary election
in 2009 gave her unprecedented dividends. Now opposition
7
parties mostly led by Mamata Banerjee and her Trinamool
Congress Party gather enough strength to challenge the
Marxist monolith. The way the CPI (M) wanted to suppress the
peasants’ revolt in different places of the state and the popular
8
movements against the police and the cadres of the CPI (M)
atrocities became counter-productive. If things continue like
what it is now and the Buddhadeb Bhattacharjee government
fails reestablish its legitimacy, popular preference is very likely
to go against the CPI (M).
9
Possibly three tier Panchayat elections in 2008, several
by-elections, the Parliamentary elections in 2009 and several
other local elections as well for the last one year have been
10
showing the way West Bengal politics is going to be shaped up
11
in near future.
Endnotes and Additional Thinking
1
West Bengal : An Analytical Study, The Bengal Chamber of
Commerce and Industry, Oxford & IBH Publishing Co,
12
Calcutta, 1971.
2
Amiya K. Chaudhuri, “Electoral Politics in West Bengal : A
predominant Party in Government”, in Suchandana Chat-
13
terjee edited Asia Annual 2006,Standard Publishers (India),
14
New Delhi, 2007.
3
Leon Trotsky, General consideration of the United Front,
15
1924; In this connection the Marxists focused on the
contribution of Georgi Dimitrov’s concept of “united and
popular fronts directed against the rising tide of fascism”,
16
Vijay Singh, “Georgi Dimitrov and the United National
Front in China 1936-1944”, http://www.revolutionary democ-
racy.org/rdv5n2/drimitrov.htm; see also EN.Sivadasan, “A
17
comparative Study of the CPI(M) and CPI led Coalition
Government in Kerala: Politics and Policy Implementation”
(unpublished Paper), Department of Political Science, St.
Thomas College, Palai, Mahatma Gandhi university, June,
1971.
M I C R O M A C R O
Interview, Jyoti Basu, August 4th, 2004; this author, inter-
viewed Jyoti Babu, in connection with the UPIASI project
on “Coalition Politics in West Bengal”; Sri Basu expressed
this forthright opinion in this private discussion.
During a few LF rallies in the Kolkata Maidan after the UPA
coalition taking over the CM made this comment, The
Statesman, Kolkata, July 12th, 2008.
Popular perception as found in The Survey Report, West
Bengal Chapter, UPAISI, August 2005.
Marcus F. Franda, Radical Politics in West Bengal, MIT
Press Cambridge, Mass, 1971; Atul Kohli (ed), India’s
Democracy: An Analysis of Changing State Society Rela-
tions, Princeton, N.J, Princeton University Press, 1988.
John. Broomfield, Elite Conflict in a Plural Society, Berke-
ley, University of California Press, 1968. This categorization
of Bengal society in the 1920s among the political leadership
still holds good in the present day West Bengal society and
political classes.
Ross Mallick, Development policy of a Communist govern-
ment: West Bengal since 1977, Cambridge University Press,
New York, 1993.
Ibid, p.214.
Sangbad Pratidin, Kolkata, July 5th, 2009, it is a very well
circulated language daily that carries the story, the “RSP’s
Central Committee comes to the conclusion that the CPI(M)
has gradually been detached from the people for their land
and industrial policies”.
Kshiti Goswami, PWD minister of the LF government told
the author in a Television (DD, Kolkata centre) interview on
May 16th, 2009.
The Statesman, Calcutta, March 18th, 1970.
Udayan Nambudri, Bengal’s Night Without End, India First
Foundation, New Delhi, 2006.
Jagadish Chandra Mondal, Marichjhapi: Naishabder
Antarale( Gana hatyar ek Kalo Itihas)in Bengali people’s
Book Society Kolkata 2002.
Udayan Nambudri, Bengal’s Night Without End, op.cit; see
also the book written by Amitva Ghosh, The Hungry Tide,
Ravi Dayal, Publisher, New Delhi, 2004.
Niranjan Halder, former assistant editor of Ananda Bazar
Patrika who lived near the place of this gruesome incident
described the scene most vividly in his occasional writings
and told the author recently in an interview on April 12th,
2009; see also Udayan Nambudri West Bengal’s Night never
THE INDIA ECONOMY REVIEW 157
P O L I T I C A L E C O N O M Y
Ends in greater detail, op.cit.
18
The Statesman, Calcutta, May 18th, 1990.
19
Udayan Nambudri, Bengal’s Night without End, op.cit,
p393.
20
Ibid, p85.
21
Barun Sen Gupta, editor, Bartaman Patrika a language
Daily in post edit wrote extensively about the electoral
malpractices of the CPI(M) after most of the Assembly and
Parliamentary elections in West Bengal particularly since
1987; he even investigated every panchayat and municipal
elections and printed pictures to show as to how all those
happened during the days of elections; see also Prabir
Ghosal, CPIM-er rigging, (Bengali), Mukherjee Publishing,
2005 and a number of researched Bengali publications on
the subject.
22
D.Bandyapadhyay and N. Mukerji, New Horizon for West
Bengal Panchayats 1993, a report, the government of West
Bengal commissioned in 1992 but the published report was
withheld for circulation.
23
Glyn Williams, “Rethinking West Bengal’s Stability : From
Party Organization to Local Practices of Politics” in John
Zavos, et al edited, The Politic of Cultural Mobilization in
India, OUP, Kolkata, 2004: Arild Engelsen Ruud, Poetics of
Village Politics : The making of West Bengal Rural Commu-
nism, OUP, New Delhi, 2003; Neil Webster, Panchayati Raj
and the Decentralization of Development Planning in West
Bengal, KP Bagchi & Co, 1992; O.k. Lieten, Development,
Devolution and Democracy: village Discourse in West
Bengal, Sage Publications, New Delhi, 1996, and a few
others among them, Nossiter, Marxist State Government in
India :Politics, Economics and Society, Printer Publishers,
London, 1988.
24
D.Bandyapadhyay and Nirmal Mukerji, op.cit.
25
Pranab Bardhan and Dilip Mukherjee, “Political Economy
of Land Reforms in West Bengal." People.bw.edu/dilipm/
wkpap/wbpelref17.pdf
26
Interview, Jawhar Sarkar, joined as the secretary of Industry
being transferred from the post of the CEO of West Bengal,
November 6th, 2001
27
Debabrata Bandyapadhyay, the present state General
Secretary of the RSP, used the same term while the CPI (M)
led by Jyoti Basu took away the Panchayat port folio from
him and his party after 1987 Assembly election in West
Bengal; Shri Bandyapadhyay expressed the same opinion
158 THE IIPM THINK TANK
while talking to the present author while writing on “The
Coalition Politics in West Bengal” in an interview in August
8th, 2006.
28
Mahasweta Devi, Dainik Statesman (the Bengali edition of
The Statesman, Kolkata), July 20th, 2009.
29
Tusar Talukdar, this former Calcutta police Commissioner
assessed Mamata Banerjee’s rise to the political height that
Mamata Banerjee achieved, August 2nd, 2009.
30
The Governor, Shri Gopal Gandhi issued the statement in
the night of 14th March and published in all the leading
Newspaper, March 15th, 2007
31
Mahasweta Devi, Amitava Chaudhuri (SriNirapeksha),
Saoli Mitra, Bivas Chakraborty, Kaushik Sen, Kabir Suman
(singer), Nachiketa (singer) and many others took up the
causes and wrote several pieces in different Newspaper,
particularly the Dainik Statesman, Kolkata from the very
beginning of the Nandigram incident on March 14th, 2007
32
Just before the 2009 General Election in India, hoardings
conceptualized, devised by Shuvaprasanna- the renowned
Bengali artiste. Several faces of eminent Bengali intellectu-
als, writers, poets, social activists, Professors, cinema
directors, stage actors, and directors, artistes and singers
were seen in several different places in each of the 42
parliamentary constituencies; the theme was “We want
Change”; it appeared to be a surrealistic painting to the
discerning viewers; there were only a dozen faces on the
hoarding; on the faces and the ambience created on the
canvas one can imagine more than five crore voters who
might be desiring for a change after a span of 32 years of a
cartel of political oligopolies. This hoarding might have a
tremendous influence on the people of the state; the LF
particularly the CPI(M) became shaky and began making
wide allegations that American imperialistic forces and the
foreign money of the NGOs had been playing the most
significant roles to destabilize a “very well governed Marxist
government,” 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 up
their minds and exercised their options in West Bengal
election that was unique after 1984 when the opposition
Congress Party was able to garner only 16 seats.
33
Interviews, with several rational leaders, including Univer-
sity teachers, once holding the post of Vice-chancellors, of
the CPI (M), on different days, 20th, 25th May, and July 22nd,

2009.
34
Quoting the much earlier document the two commentators
dilated the phrase; Gene D. Overstreet and Marshall Wind
Miller, Communism in India, The Perennial Press, Bombay,
1960
35
Atin Sarkar, a member of the undivided Communist Party,
“Shameless False Propaganda is the forte of the CPI(M),”
Dainik Statesman, Kolkata, August 12th, 2009.
36
Istehar, Panchadash Lok Sabha Nirbachan, 2009, Bharater
Communist Party,(Marxbadi), [ tran, Manifesto, 15th Lok
Sabha Election, 2009, Communist Party of India (Marxist)],
37
Rudolf and Rudolf, “Determinants and Varieties of
Agrarian Mobilization”, University of Chicago (Mimeo)
1979, quoted by Rakhahari Chatterji, “Political Change in
West Bengal”, Rakhahari Chatterji (ed), Politics in West
Bengal: Institution, processes and problems, World Press,
Calcutta, 1985.
38
Electoral data substantiate the point.
39
Asok Ghosh, secretary state committee, Forward Bloc,
November 5th, 2004.
40
Interviews,Jyoti Basu, 4th September 2004.
41
Left parties’ popular movements, for refugee rehabilitation
within West Bengal since 1950s.
42
Census Report 2001,The Muslim Community constitutes
25.25% of the total population in West Bengal.
43
Survey, CSDS in1999&2001 elections, UPIASI Field survey,
2004-05.
44
Bangladeshi Infiltrations, The Statesman, Kolkata, May-
June 2005;The Times of India, Kolkata,May 15th-20th, ’05.
45
Myron Weiner, The Politics of Scarcity, Asia Publishing
House, Calcutta 1963, Political Development and Political
Decay in Bengal, Firma K. L. Mukhapadhyay, Calcutta,
1971, Paul Brass, Ethnicity and Nationalism, Sage New
Delhi 1991, Atul Kohli, The State and Poverty in India
Cambridge University Press 1987; Democracy and
Discontent, Cambridge University Press, 1991; Biplab Das
Gupta, Naxalite Movement, Bombay, Allied Publishers,
1975.
46
Out of more than forty-eight thousand six hundred seats in
all the three tiers, the LF won six thousand eight hundred
seats uncontested. There were no opposition candidates in
more than 22 thousand seats in 2003 election. The opposi-
tion parties and the local Newspapers widely reported the
allegations that the CPI(M) did not allow the main opposi-
M I C R O M A C R O
tion parties to file their nomination papers.
47
Pranab Bardhan and Dilip Mookerjee, “Political Economy
of Land Reforms in West Bengal”, Journal of Political
Economy, 110(2) pp.239-89.
48
Ross Mallick, Development Policy of Communist Govern-
ment: West Bengal since 1977, Cambridge University Press,
1993, chapter 5; The Statesman, Calcutta, February 10th,
1998,
49
Interviews, Two IPS officers (retired since), January 15th,
2004. Dr. Amiya Samanta IPS (Rtd DG) corroborated,
interview on August 17th, 2005.
50
The Statesman, Calcutta, May 25th, 1980, Basu agreed to
give them right to strike”. See also government sponsored
Srike, Ananda Bazar, Kolkata, September 30th, 2005
51
Interviews, Even the former chief minister Basu told the that
many of the congress leaders used to come to him while in
office for some personal favours, September 4th, 2004.
52
Sources, Central Party office, CPI(M) at Alimuddin Street,
Kolkata. Memberships of Student Federation, 13 lakh 2
thousand, DYFI – 70 lakh 71 thousand, Krisan Sabha – 1
crore 32 lakh 778 thousand and CITU – 12 lakh 74 thousand,
as of December 2004.
53
Ibid.
54
Nossiter, Marxist State Governments in India: Politics,
Economics and society, Printer Publishers, London and
NewYork, 1988, pp. 138-39.
55
The Statesman, Kolkata edition, Kolkata, January 16th, 2010.
56
Census of India, Report 2001.
57
The Pratichi Health Report, introduction by Amartya Sen
Number 1, 2005, Pratichi (India) Trust, Delhi, 2005.
58
Aloke Banerjee, “Bengal tops the hunger list” Hindustan
Times, Kolkata, July 14th, 2004.
59
Bardhan and Mookerjee, op.cit, pp 1-2.
60
Ananda Bazar Patrika, Kolkata July 27th, 2005.
61
Dainik Statesman, Kolkata, July 30th, 2005.
62
Ananda Bazar Patrika, Kolkata, August 8th, 2005.
63
Jayanta Ghosal, Ananda Bazar Patrika, Kolkata, August 21st,
2005.
64
The Statesman, Calcutta, December 10th, 1995; The States-
man, Calcutta, December 20th, 1995.
65
The Statesman, Calcutta, January 2nd, 1997.
(The views expressed in the article are personal and do not reflect
the official policy or position of the organisation.)
THE INDIA ECONOMY REVIEW 159
W E L F A R E E C O N O M I C S

Creating Jobs for

Rural Youth in Andhra
Pradesh, India
160 THE IIPM THINK TANK
 M I C R O M A C R O

Meera Shenoy
Executive Director,
Employment Generation and Marketing Mission
(EGMM), Hyderabad

Smriti Lakhey
Junior Professional Associate,
South Asia Sustainable Development Department,
World Bank

Parmesh Shah
Lead Rural Development Special,
South Asia Sustainable Development Department,
World Bank

Box 1:
The 5 Key Elements of a Successful
Job Promotion Strategy
1. Aggregating demand of the rural laborforce
2. Scanning the Market to Identify Employment
Opportunities
3. Setting up Market-Linked Job Academies
4. Matching job seekers with job placements
5. Providing Post Placement Support
O
ne job per poor rural family. This is the goal of
the Employment Generation & Marketing
Mission (EGMM), which was established in 2005
by the Andhra Pradesh Rural Poverty Reduction Program
(APRPRP)1. Andhra Pradesh’s unemployment rate (6.7
percent) is slightly higher than that of India (six percent),
but these numbers do not give the full picture of employ-
ment challenges. Rural areas are plagued with low incomes
and underemployment with many people working in the
informal sector, manual labor or seasonal small scale
farming. EGMM’s mission is to respond to this problem by
facilitating employment in the formal sector — which offers
more stable and higher incomes—for economically under-
privileged rural youth so that poor households can leave
poverty within one generation.
EGMM recruits unemployed or under-employed youth
from poor households by working through the institutional
network of rural self-help groups (SHGs) and their federa-
tions developed by APRPRP. By offering an end to end
employment solution (training —placement — post-place-
Table 1: The Scale of EGMM
Year No of Youth Trained No of Youth Placed
2005-06 12,320 11,200
2006-07 38,194 33,800
2007-08 74,750 65,000
2008-09 101,645 73,891
Total 226,909 183,891

THE INDIA ECONOMY REVIEW 161

W E L F A R E E C O N O M I C S
Figure 1: Employment Generation Model of EGMM
Monitors the overall program and
ZS Controls funds
MS Oversees the
Academy
Indentifies youth to be enrolled in the rural
VO academy Counsels identified youth
Registers youth in jobs database
SHG
Children of SHG members who are educated and
looking for work, but are held back by their poverty
ment support — alumni network) to rural youth, EGGM
enables the poor to fi nd jobs in the organized sector on
better terms, with better skills, and higher wages. Altogeth-
er 1,85,784 youths have been trained and linked to jobs.
To achieve its goal of generating employment for rural
youth, EGMM works with the state government, the private
sector, and community institutions of the rural poor.
Accurate targeting is an important component of the
program. EGMM targets rural youth from poor families of
SHGs who are between 18 and 28 years of age. Their
education levels vary – from having limited ability of just
being able to read and write to having graduate degrees.
Targeting is highly enhanced by a database of unemployed
youth from the poor communities which has been systemati-
162 THE IIPM THINK TANK
Employed
Youth
Job Placement in
Private Companies
EGMM Rural
Academy
Mar k e t S c a n
Job
Resource
Person (JRP)
cally gathered and updated from remote areas. Of those
who received training, about 80 percent have been linked to
jobs. While the EGMM program started small - and those
trying to start similar employment generation programs
should perhaps also begin with smaller pilots which will
allow them flexibility and customization to local needs
-today, EGMM has emerged as the single largest jobs
mission for the rural poor in India. Its programs, such as
Rural Retail Academies command a strong brand name. In
four years of operation, 2,26,909 youth have been trained at
450 EGMM training centers that are located in rural and
tribal areas. Forty-five percent of these are girls and 37
percent are from the most vulnerable groups of scheduled
castes and tribes.

The Institutional Framework
SHG Networks As The Core Backbone
EGMM was piloted by Society for Elimination of Rural
Poverty (SERP), the implementing agency of APRPRP, to
enable the poor households to diversify their sources of
livelihoods. SERP relies upon the extensive network of
800,000 SHGs — groups of 10 to 15 poor women who save
and rotate funds together, and carry out various livelihoods
activities — to target the poorest youth in the communities,
disseminate program information and penetrate remote
village areas. EGMM recruits children of SHG members in
its program. Between 2000 and 2006, during the fi rst phase
of the APRPRP program, members of SHGs invested 204
percent more in educating their children than before. This
program makes it possible for them to reap the benefits of
their investments.
The institutional platform of the poor and the governance
mechanism used by SHGs to run and monitor other commu-
nity programs is used in the jobs program as well.
Village Organizations (VOs) — the initial federation of
SHGs within the village — are responsible for overseeing
the identification of youth for employment and for coun-
seling them. Working with them is a
new cadre developed and trained by
the EGMM called Job Resource APRPRP piloted
Persons (JRP). At Mandal Samakya the EGMM out
(MS) level — the fi rst tier at which of realization
VOs federate — a three member “job
that there is a
committee” is formed that discusses
and shares experiences of the EGMM
high demand for
jobs program across the villages with formal sector jobs
the vision of creating unemployment- in rural areas
free mandals. The highest level of
federation of SHGs at the district level,
the Zilla Samakya (ZS), is responsible for monitoring
SHGs, VOs, and MSs and it controls the funds fl owing
down to the communities. ZS manages logistics such as
providing bus passes to youth when they travel to cities for
jobs and arranging their accommodations. They also
facilitate parent meetings and counsel parents to send their
youth, especially girls, to enroll in training centers. This
three tiered structure of rural institutions results in a
bottom-up approach and ensures ownership of the program
from the community.
M I C R O M A C R O
Box 2: Recruitment at the HDFC Banks’ Rural
BPO
HDFC Bank needed to quickly set up deliverables for new
customers for services such as opening bank accounts,
issuing credit cards, etc. The Bank set up back room
operations in nine larger cities but faced the twin problems
of attrition and the high cost of infrastructure. When the
Bank decided to set up a rural BPO, it approached EGMM
for manpower. Says A. Gopinath, Vice President, “This is
the best model the Bank has seen in 13 years of its existence.
Productivity is 200% higher than other BPOs- they fill 400
forms versus 75 in operations based in cities. Absenteeism is
minimal. Work ethics taught by EGMM is amazing.”
Public-Private Institutional Structure
EGMM has an executive committee with senior government
officers and an executive director with experience from the
private sector. In the field, government officers such as
District Collectors, Project Directors of the District Rural
Development Agencies (DRDA) and Project Officers of the
Integrated Tribal Development Agency (ITDA) support the
program. A core private sector team in EGMM at the state
level builds links with the private sector
and incorporates their feedback into
the programs of the academies. This
unique institutional structure that
incorporates governance mechanisms
and knowledge from both the private
and public sectors is critical for a
market-led program like EGMM.
Five Key Elements of the Job
Promotion Strategy
1. Aggregating Demand of the
Rural Labor Force
APRPRP piloted the EGMM out of realization that there is
a high demand for formal sector jobs in rural areas among
young people who are educated but have limited resources
and information to pursue them. Assessing the nature and
volume of job demands is critical in designing the training
programs and the job placements.
Job Resource Persons (JRPs) play an important role in
demand assessment and demand creation among the rural
youth. JRPs are also members of SHGs. They raise aware-
THE INDIA ECONOMY REVIEW 163
W E L F A R E E C O N O M I C S
ness about the job program in rural areas, facilitate the
process of identifying the poorest youth eligible for the
program, counsel them, and recruit them into the EGMM
program. Trained by the EGMM, these JRPs visit every
household in the villages and compile a database of unem-
ployed and vulnerable youth for monitoring and targeting
purposes. 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 the
market, registered youth are screened and enrolled in the
local training centers.
The VOs play an active role in identifying the eligible
youth for the job program and counseling them.
2. Scanning the Market to Identify Employment
Opportunities
Based on secondary source research
and data from market scan reports,
growth sectors—industries which are Companies recruit
experiencing relatively higher growth from EGMM both
for next three years— are identified for the quality
and targeted for employment opportu-
of trainees and
nities. EGMM officials visit potential
companies for employment with a view
support offered
to understand their entry level employ- to the youth
ment needs and their specifications of post-placement
trained manpower. Training centers
tailor their courses accordingly. Market
scans for assessing the job market are important elements of
the strategy for creating jobs for rural youth. Trainings for
retail, sales, security guards, restaurants business, data
entry, 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 their
education level and interests. For instance, those who have
limited literacy skills are trained in construction and textiles.
Meanwhile those with eighth grade to graduate level literacy
are 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 Academies
Rural academies for retail, security guards, English classes,
164 THE IIPM THINK TANK
work readiness, and computer operations, have been set up
in partnership with industry. A training course typically lasts
from 15 days to three months. Industry associations help
with curriculum development and teach at the EGMM
academies as guest lecturers. In addition to the sector
specific technical trainings in classrooms, techniques such as
role plays, mock job interviews, and grooming of the trainees
are necessary and are used to help students fit in their new
job roles. Emphasis is also given to soft skills development
such as grooming, personality development, time and money
management, and goals setting. Local teachers are great
resources who have been trained to become trainers at these
academies. Meanwhile, involving the private sector in
creating training modules ensures buy-in from them and
matches the supply of labor produced by the academy to the
market demands. Hence, most youth are placed with jobs
immediately after completion of their
programs. In just three years’ time
EGMM academies have become a
quality brand name among employers.
To broaden the range of training
offered, use the best resources avail-
able, and make strategic placements
through well-established networks,
partnerships have been developed with
other organizations that offer employ-
ment training. EGMM has forged
partnerships with organizations such as
Tally and National Academy of Construction, among many
others. EGMM works continuously with partners to improve
program quality and the curriculum. For example, EGMM
trained all trainers of their 14 partners in all 22 districts in
“counseling” and “coping with migration”.
4. Matching Job Seekers With Job Placements
Networking with reputable private companies that need
entry level manpower is an important element of the place-
ment strategy. The market scan, solicitation with companies
with employment opportunities and trainings designed to
meet the job market needs form a strong platform for the
placement part of the job creation strategy. Job fairs or “job
melas” are organized in rural training centers creating a
platform for many companies to showcase themselves and
meet their labor needs. EGMM organizes recruitment fairs

Box 3: Impact on Stakeholders
The 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 manner
The Government
• Employment creation for rural youth
• Poverty alleviation
• Prevention of social unrest from high underemployment in rural areas
The Private Companies
• Competent, loyal, cost-effective workforce
• An opportunity to fulfi ll its social responsibilities
at EGMM campus locations only. The purpose behind this
practice is to sensitize the companies to EGMM, its vision
and mission, and inspire them to be
mentors of the program.
By employing rural youth, private When the newly
companies take advantage of recruiting employed youth
in a more cost-effective manner return home,
compared to high urban salaries — a
they become
rural workforce can be employed at a
more competitive price. This model
powerful agents
also allows companies to fulfi ll the of recruitment
government mandate of providing themselves
employment to scheduled caste people
and fulfi ll their corporate social
responsibility. Additionally, the comparative advantage of a
well-trained and motivated workforce makes hiring EGMM
graduates an attractive option for the private companies.
Today EGMM supplies 80 percent of entry level manpower
in Andhra Pradesh to large retail chains like Aditya Birlas,
fast food chains like McDonalds and Café Coffee Day, and
Pureit sales of Hindustan Unilever, among others. EGMM is and the new environment. The module includes money
also a dedicated manpower supplier to the manufacturing
unit of Apache, of the global giant Adidas shoes.
Companies recruit from EGMM both for the quality of
trainees and support offered to the youth post-placement,
which reduces attrition that is a high cost to companies. In
retail companies, hiring EGMM trainees has reduced the
attrition rate from 55 percent to just 5-10 percent.
EGMM periodically rates companies according to the
salary offered; benefits extended such as boarding and
M I C R O M A C R O
lodging, insurance, etc; and the sensitivity of
supervisors toward their employees. It
blacklists companies with polluting work
environment—such as scraping of jeans in
textile factories, or in companies where
salaries are below the minimum wages
prescribed by the state, and does not place
the youths in such companies.
A month after placement, arrangements
are made for the mothers of the rural youth
to visit their children in their workplace in
the cities. The sense of pride they feel is
unmatched. This also raises awareness of the
program and helps in the scaling up process.
Additionally, government officials are taken on exposure
visits to understand the changing needs and expectations of
companies so that they can provide
support accordingly.
Experience has shown that when
these newly employed youth return
home, they become powerful agents of
recruitment themselves. They counsel
and motivate their friends and families
to enroll in EGMM. Each returning
employed youth, brings at least ten new
trainees to EGMM. This enables the
approach to become cost effective in
the long run.
5. Providing Post Placement Support: Orientation,
Microfinance Products, Social Support, and
Alumni Network
Orientation: Once the trainees are offered jobs in compa-
nies, EGMM offers them orientation to their new workplace
management, coping with city life, and other counseling
services. Research shows that just placing the trained youth
with companies is not enough. Their transitions from rural
surroundings to the urban cities need to be carefully man-
aged.
Microfinance Products: In many cases in the past, newly
placed youth quit their jobs within early days of the place-
ment due to the high expense of city living in the fi rst month
THE INDIA ECONOMY REVIEW 165
W E L F A R E E C O N O M I C S

Figure 2: How Households are Using the discussions with the management to address work issues.
Remittances (in percentage) This mechanism helps in supporting the new employees and
boosting their confidence in the city.

Others Alumni Network: The EGMM maintain a network of the

8
alumni and keep them engaged as role models for the
Education
Clearing Debts trainees. Senior alumni share their experience in the
12
38 training classes as guest lecturers and build the confidence
of trainees before job interviews. Alumni also provide tips
Assets on how to deal with customers, cope with city life, and plan
19
their career or goals for higher education. This is very
effective for coaching the trainees because most of the youth
Savings
23 are fi rst generation white collar workers whose parents are
agricultural or other wage laborers, from whom they can get
limited guidance when it comes to city jobs.

of employment. They were unable to cope when they had not
yet received their salaries. To prevent monetary constraints
from being the source of dropping out, EGMM facilitates
provision of fi nancial tools to smoothen the cost of transition
to the city life. It offers micro-loans through federations of
SHGs to cover living expenses of the fi rst month in the city.
The interest on the loan is decided by the federations and
payments are made in small installments.
Social Network: Youth are usually placed in groups in
private companies. Having people with similar backgrounds
and similar goals prevent a sense of isolation that youth
might otherwise feel in a new city environment. Additionally,
a help line with counselors is established to provide support
and guidance. When necessary, the counselors also facilitate
Using Information Technology to Monitor the
Program
Monitoring a program of this scale is a challenge. To over-
come this, EGMM uses transaction based software (www.
egmm.ap.gov.in) that gets training, placement and post
placement data from each training centre. This software
allows EGMM to monitor and analyze its performance even
at the village level. Placement and dropout analysis is done
seamlessly using this EGMM developed software. This IT
backbone has helped bring quality and transparency into the
program.
Impacts of EGMM
Increased Income: On average EGMM trained youth earn
an income at or above Rs. 42,000 per year in urban areas and

Table 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 41,484.20 365.36
Construction 6,178.33 3,564.78 42,777.36 592.38
EWRC 9,525.00 3,677.71 44,132.52 363.33
IKP Labs 8,450.00 3.149.81 37,797.72 347.31
Security 4,390.00 3,730.47 44,765.64 919.72
Skylark 10,525.00 5,116.67 61,400.04 483.37
Textile 5,416.67 2,934.00 35,208.00 549.99
Other Services 10,236.11 3,750.67 45,008.04 339.70

Source: EWRC: English Work Readiness & Computer Academy

166 THE IIPM THINK TANK

 M I C R O M A C R O

Box 4: Future in the Service Sector

Sudharani is from Old Chintalapudi Village in West Godavari District. She could not complete her college education as her
father an agricultural laborer could not afford her college fees. Her mother, an SHG member told her about EGMM English
and computer centers. After three months training she was placed at Big Bazaar, the largest retail chain in the country
earning a salary of Rs. 3500 per month as a customer service associate. Recently, she returned to her home district to work as
a cashier with Coromandel Fertilizers which brings in Rs. 5,000 per month. Sudharani says, “Now I will complete my gradua-
tion from the university.” She enrolled both her brothers in the EGMM Academy. Today the three working youths have
enhanced 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 is
three to four times higher than the average income earned
by a rural family in agriculture, which is about Rs 10,000 per
year. Fifty-one percent of trainees received incremental pay
increases within six months of employment. The average
increment of the trainees was about Rs. 550 per month.
Remittances: Surveys show that almost all of the working
youth send 20 percent of their earning back home. Remit-
tances have tremendous effect in improving the fi nancial
condition of the families. Those who receive remittances use
38 percent of this additional money to clear previous high
cost debts at high interest rates. Twenty-three percent is
deposited as savings and 19 percent is used to create assets
such as adding a room to the house, buying land, colored
televisions, etc. Twelve percent is used to educate younger
siblings, and eight percent for other purposes.
2 1
Improved quality of life: An impact study of youth trained
as security guards placed in a multinational company—G4
Securitas—showed that the quality of life of their families
has improved because of one family member working in the
city. Ninety-four percent of the households say that they are
able to afford more nutritious food and 30 percent of the
families have invested the money to improve their housing
conditions.
Less dependency on money-lenders: Financial conditions
have improved since household dependence on money
lenders reduced from 74 to 14 percent among the family
members. Meanwhile, 92 percent of the households say that
their dependence on local moneylenders has reduced.
Return on Investments (ROI)
EGMM invests Rs. 8,992.63 per trainee on average for the
job training program. Each trainee after placement earns
Rs. 3,487.35 per month on average. Therefore, ROI is 365.36
percent 3.
Creating Intellectual Assets And An Inclusive
Society
The intellectual assets generated through EGMM make
additional benefits to the society. The skills and the knowl-
edge generated from the training is a permanent asset,
components of which are transferable across jobs. The impact
on girls is marked with reduction in child marriages in rural
and tribal areas as girls opt for a career in hitherto male
dominated sectors like sales. Meanwhile, the rural-urban
divide and the unorganized-organized labor divide reduce as
rural youth get trained to work white collar jobs.
Endnotes and Additional Thinking
Jointly fi nanced by the World Bank and the Government
of Andhra Pradesh, the objective of APRPRP is to enable
rural poor and their organizations to improve livelihoods
and quality of life. The project invests in building self-
managed grass root level institutions and federations of
poor rural women. Ten million women have been organ-
ized into 850,000 Self-Help Groups comprising of 10-15
women in each.
2
Intellecap Study of Youth trained and placed by EGMM
3
Mariko Katsura, Goldman School of Public Policy,
University of Berkeley EGMM data
(The views expressed in the article are personal and do not
reflect the official policy or position of the organisation. The
document was reviewed and edited by Natasha Hayward and
Melissa Williams of the World Bank.)

THE INDIA ECONOMY REVIEW 167

M A N A G E R I A L E C O N O M I C S
RETAILERS’ PREFERENCES
FOR COCA COLA : A CASE STUDY
WITH SPECIAL REFERENCE TO THE
KOLKATA REGION
Ruma Kundu Indraneel Mandal
Lecturer, Management Lecturer, Management
Institute of Durgapur Institute of Durgapur
Introduction
It is a well recognised fact that India is one of the largest and
fastest growing economies in the world. Within the various
sectors that form the building blocks of this enormous entity
one of important and ‘evergreen’ sectors is the one occupied
by the so-called Fast Moving Consumer Goods or FMCGs.
Finally, a part of this FMCG sector is made up of food and
beverages. Indians belonging to the middle and upper classes
by nature invest a substantial amount of time, effort and
money against food and beverages, which includes snacks, fast
food and soft drinks. Such expenditure is of a discretionary
nature and has been observed to rise significantly during
festivals and traditional holidays. Again, in case of items like
ice creams and soft drinks there a seasonal element in the
consumption pattern.
This paper intends to concentrate on a specific player in the
soft drinks market (viz., Coca-Cola) so as to evaluate its
performance vis-à-vis the preference of retailers in certain
specific areas in and around Kolkata in West Bengal, India.
After going through a detailed analysis of market behaviour
and future prospect, it may also provide an opportunity to
Coca-Cola to frame a good future plan to satisfy maximum
needs of the retailers and established its guiding role in the
market of Kolkata city, West Bengal, in particular and
throughout the country as a whole. The study has undertaken
a detailed view of the tasks, which have been undertaken to
analyse the market of Coca-Cola. The methodology adopted
168 THE IIPM THINK TANK
Mithun Chakraborty
Student, MBA Final Semester,
Management Institute of Durgapur
involved the use of questionnaires in order to ascertain the
preferences of retailers regarding the Coca-Cola. The re-
search areas included Dunlop, Belghoria and Tobin Road in
Kolkata, West Bengal. It would now be relevant to consider
the salient features of the beverage industry in India.
Beverage Industry in India
In India, beverages form an important part of the lives of
people. It is an industry, in which the players constantly
innovate, in order to come up with better products to gain
more consumers and satisfy the existing consumers. The
beverage industry is vast and there various ways of segmenting
it, so as to cater the right product to the right person. Some of
the 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 premises
consumption
(d) Age wise segmentation i.e. beverages for kids, for adults
and 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 closely
noticed, it could be observed that consumers perceive bever-
ages in two different ways i.e. beverages are a luxury and that
beverages have to be consumed occasionally. These two
perceptions are the biggest challenges faced by the beverage

industry. In order to leverage the beverage industry, it is
important to address this issue so as to encourage regular con-
sumption as well as and to make the industry more affordable.
It has been found that the following strategic elements play a
strong role in increasing consumption of the products of the
beverage industry in India:
(a) The quality and the consistency of beverages needs to be
enhanced so that consumers are satisfied and they enjoy
consuming beverages.
(b) The credibility and trust needs to be built so that there is a
very strong and safe feeling that the consumers have while
consuming the beverages.
(c) Consumer education is a must to bring out benefits of
beverage consumption whether in terms of health, taste,
relaxation, stimulation, refreshment, well being or prestige
relevant to the category.
(d) Communication should be relevant and trendy so that
consumers are able to find an appeal to go out, purchase
and consume.
M I C R O M A C R O
Review of Literature
The literature on the marketing of the soft drinks is quite
extensive though there is lack of sufficient work on the
preference of retailers in the Indian context.
Stephen (2008) has stated that while formulating a new
beverage, the new product would need to be differentiated by
improving the sensory characteristics. Four factors were
identified for the formulation: four colour intensities), three
flavourings, two label types (soft versus hard), and two pack
sizes (standard versus oversize). By using both quantitative
(hedonic testing) and qualitative (focus groups) approaches,
the researchers found that the primary factors behind drive
consumer preference for this concept are colour intensity and
flavouring.
Tepper (1998) has examined the relative contributions of
taste and health considerations on consumer liking and
purchase intent of cola drinks. Davis (2007) has used prefer-
ence tests on varieties of cola drinks and orange juices using
three response protocols: the traditional paired preference
THE INDIA ECONOMY REVIEW 169
M A N A G E R I A L E C O N O M I C S
test with the "no preference" option, a 9-point hedonic scale
and a 6-point hybrid hedonic/ purchase intent scale.
According to Smith (2008) brand preference in FMCG
products and increasing competition, especially due to
globalisation, is motivating many companies to base their
strategies almost entirely on building brands.
Another paper by Snedden (2008) tried to investigate the
degree of brand awareness with regard to various food
products in relation to the background and education of the
household and the consumption pattern of various food
products consumed by respondents in the light of their areas,
income levels and education. The study reveals that there is
low degree of brand awareness in rural areas, whereas there is
a moderate degree of brand awareness in urban India. The
highly educated rural and urban respondents have high
degree of brand awareness for many food products while the
less educated rural and urban respondents have low degree of
brand awareness for many food prod-
ucts.
A recent study involving Danone A research study
found that the intensity of colour and involving Danone
flavour are the key drivers behind found that the
consumer acceptance of beverages.
However, packaging and labelling are
intensity of colour
not as important for winning over
and flavour are
consumers, according to findings very crucial in
published in the Journal of Food beverages sector
Quality and Preference.
Objectives of the Study
Based on the above samples of existing studies, it seems
imperative that the proposed study should be built around the
following basic objectives:
(i) To study the retailers’ preferences with regard to Coca-
Cola
(ii) Identifying the factors that are responsible for developing
preference towards accommodating soft drinks of Coca-
Cola product in the retail outlet.
(iii) Exploring the correlation between the volumes of demand
of the product with the overall preference level.
(iv) To understand the perception in the minds of the retailers
towards the offered schemes.
(v) To ascertain whether the credit policy, profit margin,
storing tools etc. are playing a vital role in the preference
170 THE IIPM THINK TANK
for Coca-Cola products.
Scope of the Study
This study consists of the data sources (primary as well as
secondary), sampling procedure, detailed analysis and
interpretation of data, methods used in data analysis. This
study may contribute to an understanding of the current
situation of the company as well as the brand position of the
products under Cola-Cola portfolio. It may also enable
development of appropriate measures for the various at-
tributes which contribute to making Cola-Cola the predomi-
nant preference among the retailers.
Research Area
In 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 the
basis of a pre-structured questionnaire
from different areas of Kolkata, West
Bengal under three distributors. Since
the areas are large in size and there are
many retail outlets under one distribu-
tor, purposive sampling has been
adopted to select the retail outlets under
each distributor. The number of samples
selected from each distributor is 20 and
the total sample size under the three
distributors is 60. The detailed descrip-
tions about the locations are given
below.
Location 1: The 1st location is Dunlop bridge area consisting
of many sub areas, viz., Narendra Nagar, Rabindra Nagar,
Dunlop Super Market, B.T. Road, Ashokgarh, Sabeda bagan
etc. under the Baranagar municipality.
Location 2: The 2nd location is Belghoria consisting Rifle
range RD., Nilganj Road, M.G. Road, Bata Gali, Old Nimta
Road, Patna school area, etc. under Kamarhatty Municipality.
Location 3: The 3rd sampling area includes Tobin Road, Pal
Para, Ananya, Z.B Road,etc. under the Baranagar Municipal-
ity.
Research Methodology
The basic research design of this paper has been outlined in
the following table:
 M I C R O M A C R O

Table 1: products.
H1B - The perceptions regarding the profit margin in the
TYPE OF • Explorative, Descriptive and Relationship
RESEARCH mind of the retailers are same across the distributors.
RESEARCH • Retailers’ preference for Coca-Cola products H1C - Profit margin is independent of the types of retail
QUESTION outlet.
SAMPLING • Convenience sampling
H2. Availability of Storage Facilities
TECHNIQUES • Stratified sampling
SAMPLE SIZE • 60 (20 for each Distributor)
H2A - The storage facility offered by the Coca-Cola Company
SAMPLING AREAS • KOLKATA-Baranagar & Belghoria plays a role for selling the Coca-Cola products.
PRIMARY DATA • Responses through questionnaire H2B - The perceptions regarding storing facility offered in the
• Personal interviews with the respondents. mind of the retailers are same across the distributors.
SECONDARY DATA • Websites H2C - The quality of the storing facility offered is independ-
• Company sources
ent of the types of retail outlet.
RESEARCH TOOLS • Z-test
• Analysis Of Variance (ANOVA) test H3. Credit Policy
• Chi-Square Test. H3A - The credit offered by the distributors plays a role for
UNIT OF ANALYSIS • Retail outlet owners or the retail keepers the selling of Coca-Cola products.
H3B - The perceptions regarding offered credit policy in the
Hypothesis Development mind of the retailers are same across the distributors.
To study the retailers’ preference for Coca-Cola products, H3C - The credit policy offered is independent of the types of
some attributes were very necessary upon which the frame- retail outlet.
work of the study could be designed. We have obtained these H4. The Schemes
attributes from the literature survey, objective evidence Here schemes refer to the extra facilities or the extra bottles
discussions with the company representatives and lastly, pilot or any type of gift given by the company to the retailers with
surveys in our sampling areas. Subsequently, on the basis of the particular purchase.
these identified attributes or factors, we developed hypotheses H4A - The schemes offered by the distributors play a role for
for identifying retailers’ preferences. We have developed the selling of Coca-Cola products.
various types of hypotheses for testing the significance of H4B - The perceptions regarding credit policy offered in the
those hypotheses, to test the variance between the different mind of the retailers are same across the distributors.
distributors and to check the dependency between various H5. Behaviour of the Distributors
types of retail outlets with some attributes. This development H5A - The behaviour of the distributors plays an important
of hypotheses was made on the basis of the identified at- role the sale and retention of Coca-Cola products.
tributes that are taken into account for measuring and H5B - The perceptions regarding the distributor’s behaviour
analyzing preference of the retailers for Coca-Cola products. in the mind of the retailers are same.
The attributes or parameters on the basis of which the project H5C - Distributors’ behaviour is independent of the types of
has been prepared are as follows: retail outlet.
1. Profit margin H6. Delivery
2. Storage facility (fridge and crate) H6A - The punctual delivery plays significant role in the sale
3. Credit policy of Coca-Cola products.
4. Schemes H6B - The perceptions regarding delivery of products by the
5. Behaviour of distributors distributors in the mind of the retailers are same for all the
6. Punctual delivery and distributors.
7. Communication in between distributors and the retailers H7. Point of Purchase Tools
The hypotheses tested are as follows: H7A - POP tools play a role for selling Coca-Cola products.
H1. Profit Margin H7B - The perceptions regarding the POP tools in the mind of
H1A - Profit margin plays a role in the sale of Coca-Cola the retailers are same for all distributors.

THE INDIA ECONOMY REVIEW 171

M A N A G E R I A L E C O N O M I C S

Findings
Sl. No. Hypothesis Test Statistic* Result Inference
1 Coca-Cola offers a good profit of margin Z REJECTED There is an iota of dissatisfaction towards the profit margin
over the competitors. offered by Coca-cola in comparison with its competitors.
2 The perceptions regarding the profit mar- ANOVA REJECTED The profit margin changes with the distributor.
gin in the minds of the retailers are same
across the distributors.
3 Profit margin is independent of the types ACCEPTED The type of the retail outlet has no impact on the profit
of retail outlets. χ2 margin.

4 Coca-Cola offers a better storage facili-
ties.
5 The perceptions regarding the better stor-
age facility in the mind of the retailers are
same across the distributors.
6 The offered storing facility is independent
of the types of retail outlets.
Z REJECTED There is dissatisfaction in the mind of the retailers regarding
the storage facilities offered by Coca-Cola.
ANOVA ACCEPTED As far as storage facilities are concerned, there is
no variance among the distributors.
ACCEPTED The storage facility remains same across
χ2 different types of retail outlets.

7 Credit offered by the distributor is satis- Z REJECTED There is scope for dissatisfaction in the
factory. minds of the retailers towards the credit offered by the
distributors.
8 The perceptions regarding the offered ANOVA ACCEPTED There is no variance among the distributors
credit policy in the minds of the retailers with regard to the credit policy.
are same across the distributors.
9 The credit policy offered is independent ACCEPTED The credit policy offered is same across all types
of the types of retail outlets χ2 of retail outlets.

10 The schemes offered by the company are Z ACCEPTED Sometimes the schemes offered are profitable.
very profitable.
11 The perceptions regarding the offered ANOVA ACCEPTED There is no variance among the distributors
schemes in the mind of the retailers are the matter of the schemes offered.
same across the distributors.
12 The behaviour of the distributor is satis- Z ACCEPTED Most of the retailers think that the behaviour of
factory the distributors is satisfactory.
13 The perceptions regarding the behaviour ANOVA ACCEPTED There is no variance among the retailers
of distributors in the minds of the retailers regarding the behaviour of the distributors.
are same for all the distributors.
14 The behaviour of the distributors is inde- ACCEPTED The type of retail outlet has no impact on the credit policy
pendent of the type of retail outlet. χ2 offered.

15 The delivery of Coca-Cola is very much Z ACCEPTED By and large, the retailers are satisfied about the delivery of
punctual Coca-Cola.
16 The perceptions regarding the delivery ANOVA ACCEPTED There is no variance among the retailers with regard to the
time in the minds of the retailers are delivery time of the distributors.
same for all the distributors.
17 Coca-Cola offers advertisement tools for Z ACCEPTED Retailers have expressed their moderate disagreement re-
facilitating the sale. garding this statement.
18 The perceptions regarding the delivery of ANOVA ACCEPTED There is no variance across the distributors regarding the
point of purchase tools in the minds of delivery of POP tools.
the retailers are same for all the distribu-
tors.
19 The distributor maintains good commu- Z REJECTED According to the retailers the distributors are not serious
nication. about maintaining proper contact.
20 The perceptions regarding the delivery of ANOVA ACCEPTED There is no variance in the perception regarding
point of purchase tools in the minds of the level of communication maintained by the distributors.
the retailers are same for all the distribu-
tors.
* at 5% level of significance

172 THE IIPM THINK TANK


H8. Communication with Retailers
H8A - Communication with the retailers plays an important
role in the sale of Coca-Cola products.
H8B - The perception in the mind of the retailers regarding
the communication maintained by the distributors is same for
all the distributors.
These hypotheses have been tested using the z-test, analysis
of variance (ANOVA) and chi-square test
Conclusions and Recommendations
During the course of the study it was noticed that the retailers
answered the closed end questions willingly without any
additional encouragement. From the analysis of the data
collected and from the experiences gained during the project
the following conclusions have been arrived at:
Coke is most popular amongst its retailers mainly because
of the demand of the consumers. It is well known that there is
strong competition between Pepsi and Coca-Cola.
In the opinion of the respondents, the most important
parameters affecting the business include profit margin, credit
policy and diverse schemes.
It is worth mentioning that throughout the survey the
preferred soft drink among the ultimate consumers has
turned 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 the
extent to which the profit margin afforded by Coca-Cola is
higher compared to the competitors, it was observed that
there was moderate disagreement among the retailers.
On the question of flexibility in credit policy the retailers
once again exhibited moderate disagreement.
On the basis of the preceding analysis the following recom-
mendations may be offered:
The Coca-Cola Company is advised to introduce more
schemes in order to maintain their market position.
The distributors are advised to make their credit policy
more flexible.
The company must be aware of and stay up to date on the
activities of its primary competitors.
From time to time the company should utilise greater and
more effective systems of word of mouth and POP advertise-
ments in 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 the
M I C R O M A C R O
retailers, thus affecting the goodwill of the brand.
The company should carry out a detail demand survey at
regular interval to know about the unique needs and require-
ments of the retailers. It should also resort to various types of
sales promotion to increase its sales volume.
The company should take the responsibility to inform
customers about their current as well as about upcoming
schemes to the retailers.
Lastly, we can say that the Coca-Cola company is on the top
of the market according to the consumer’s choice; but in order
to be the retailers’ preferred brands the company and the
distributors should focus on the parameters highlighted
above.
References and Additional Thinking
• Raz, C., Piper, D., Haller, R., Nicod, H., Dusart, N., and
Giboreau, A.; “From sensory marketing to sensory design:
How to drive formulation using consumers’ input?”; Food
Quality and Preference; Volume 19, Issue 8, pp. 719-726.
• Daniells, Stephen, “Colour and flavour rule consumer
preferences: Study”; Food Navigator.com; 7th October
2008.
• Muris, Timothy J, Scheffman, David T and Spiller, Pablo T;
“Strategy and Transaction Costs: The Organization of
Distribution 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 Health
Considerations on Consumer Liking and Purchase Intent
of Cola Drinks”; Journal of Food Science and Technology;
15th September 1998; pp. 21-32.
• Davis, W.; “Understanding Consumer Choice through
Preference Tests for Cola Drinks and Orange Juices using
Three Response Protocols”; Journal of Food Science and
Technology; July 31st, 2007; pp. 43-59.
• Smith, R.A.; “Study of Factors Responsible for Brand
Preference in FMCG Sector”; Journal of IMS; Vol. 5, no.1,
January-June 2008; p. 40-49.
• Snedden, M.R.; “Consumer Awareness and Consumption
Pattern 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 reflect
the official policy or position of the organisation.)
THE INDIA ECONOMY REVIEW 173
M O N E T A R Y E C O N O M I C S

INFLATION AND ITS CURES

Madhusudan Raj
Mises University Alumni,
Ludwig von Mises Institute, Auburn, Alabama, U.S.A.

174 THE IIPM THINK TANK


Introduction
Inflation is the most pressing and grossly misunderstood
problem of our time. The cures of inflation are simple. The
only difficulty with inflation is that its cures are politically
incorrect, and thus are never implemented. Political correct-
ness or incorrectness does not render the study of inflation
useless. Ideas are always important in the long run, and so we
need to understand the problem of inflation and its cures
without worrying for its political nature. For us its economic
nature is of utmost importance than anything else.
Inflation and Its Causes
A clear definition of inflation is essential to fully comprehend
its various facets. This is important because the modern
mainstream economics definition of inflation is faulty, and
thus completely misguiding. Mainstream
neoclassical economics defines inflation
as, an increase in the overall level of The only difficulty
prices in the economy (Mankiw, 2001, p. with inflation
13). A logical scrutiny of this definition is that its cures
reveals its serious errors. Traditionally,
after the Keynesian revolution [sic] in
are politically
economic thought, inflation is regarded
incorrect, and
as a macroeconomic phenomenon, and thus are never
so the term overall level of prices in its implemented
definition. But the crucial question here
is, does such phenomenon of overall
level of prices exist in the market of individual exchanges?
And the answer of this question is a definite No. In the market
economy there are only individual product prices prevailing at
a given moment of time. Adding up all these different prices in
one index, and then averaging them out to calculate various
indexes like WPI or CPI is wrong because there is no average
price here, and there are no average consumers who are
paying this average price. Measurement of purchasing power
of money is an impossible task because, as believed by the
economists, money never remains neutral. Its value is always
changing in the market. Every price of goods and services is
determined by a unique relationship between demand for
goods and services and money on one side, and their stock on
the other. In every exchange these factors are so intricately
interwoven that it is impossible to treat them separately.
Goods and services are only expressed and appraised in terms
of money, and not measured1. Money is not an objective
P R I C E P U Z Z L E S
standard of measurement. Moreover, prices do not have any
economy wide ‘level’. Different product prices rise and fall
several times in the market. Prices also do not rise at once so
that we can say that the level of overall prices has risen.
Actually when inflation is underway2, different product prices
changes step by step as newly printed money spreads through-
out the economy. This phenomenon was first analyzed by
Richard Cantillon in his famous Essays (Cantillon, 2001), and
is known as Cantillon Effect after him.
Apart from the impossibility of comparing various money
prices, and the untenability of the concept of level of prices,
the mainstream neoclassical definition also focuses solely on
the effects of inflation rather than its true causes. Rise in
prices is not a cause of inflation, but is its effect. Focusing the
attention on effects of inflation prevents one from knowing the
true causes of inflation. And unless and
until the true causes of inflation are
known it is impossible to cure it.
Let us then see the true causes of
inflation. To understand the true causes
we must define inflation in such a way so
that its definition focuses on its causes
and not on its effects. This correct
definition was given by the Austrian
school of economics. Henry Hazlitt
defined inflation as, ‘an increase in the
quantity of money and credit. Its chief
consequence is soaring prices. Therefore inflation—if we
misuse the term to mean the rising prices themselves—is
caused solely by printing more money. For this the govern-
ment’s monetary policies are entirely responsible’ (Hazlitt,
2004, p. 41).
Let us now analyze what happens when the quantity of
money and credit increases in the economy.
Inflation and Its Consequences
Rising prices
There are two chief ways in which the quantity of money can
increase in the present day monetary regime of government
paper money with its central bank, and the system of fractional
reserve banking. We take each case in succession and see its
consequences.
Money is one commodity in the individual market exchange.
This knowledge of money as a commodity was widespread in
THE INDIA ECONOMY REVIEW 175
M O N E T A R Y E C O N O M I C S
the past, but is lost today. Carl Menger (Menger, 2009) demon-
strated how some commodities (e.g. gold and silver) have
historically evolved as money (a common medium of ex-
change) from the barter economy. And because money is just
another good/commodity into the market process, its price is
determined, similarly like the prices of any other good, by the
forces of market demand for money and its available stock.
Price of money is its purchasing power. Purchasing power of
money determines how many goods and services a unit of
money can buy in the market. This also determines person’s
real income. We now see how price of money is determined.
Figure 1 presents the money relation. On vertical axis is the
PPM (purchasing power of money), and on horizontal axis is
the quantity of money. Dm curve represents the total demand
for money to hold, and vertical curve SS presents the total
available stock of money in the society. The intersection of
demand for money and the total available stock of money at A
determine the initial purchasing power of money at OQ. Now,
it can be seen that, as the total quantity of stock increases from
OS to OS1, the purchasing power of money (its price in terms
of other goods and services) decreases to OP from the initial
higher level of OQ.
This simply means that now a unit of money can buy less
number of goods and services. It also means that the real
income of a person, who is having these units of money in his
cash balances, has now declined due to this increase in the
quantity of money. Looking from the goods and services side,
this means that prices of goods and services have risen! Less
goods and services are now selling at the same amount of
money than before the increase in the quantity of money. This
price rise of goods and services is the effect of inflation for
which we all worry a lot.
As our analysis shows, money is just another commodity
whose price is determined by its demand and supply in the
market. The only important difference between money
commodity and other commodities is, that when price of other
commodities (e.g., Milk) decline it confers social benefit, but
when price of money declines it results into social misery!
Money is a common medium of exchange. Everyone demands
money to later exchange it for other goods and services. No
one wants to consume money directly. Precisely because of
this reason, increase in the quantity of money or stated
otherwise, erosion in the purchasing power of money results in
social misery by lowering the real income, and thus standard of
176 THE IIPM THINK TANK
Figure 1 Money Relation (Determination of Pur-
chasing Power of Money)
S S1
Dm
Purchasing Power of Monetary Unit
A
Q
P B
Dm
O S S1
Quantity of Money
living of the people.
Sometimes prices of goods and services do not rise rapidly
or are stable when inflation is underway. This happens because
most probably the productivity of labor and capital goods is
rising with the rise in the quantity of money. But, here again,
inflation is eroding the standard of living of people by not
allowing the market prices of goods and services to fall due to
the increased productivity of labor and capital goods. In-
creased productivity of factors of production will increase the
supply of various goods and services, which will lower their
prices. We do not see these lower prices because of inflation3.
What we see is slowly rising prices or stable prices. But the
notion of “stabilization of price” is absurd4. Everyone benefit
when prices fall, and not when they remain stable or when they
are rising. The tendency of prices is to fall in the free market,
but government intervention in the free market through
inflation never allows this fall to materialize.
Booms and Recessions
Rising prices is one menacing effect of Inflation, but not the
only one. Misallocation of resources is another chief evil effect
of Inflation. The easy money policies of the government’s
central bank induce entrepreneurs for starting new capital

projects. These projects are unsustainable in the long run
because they are not backed by actual savings of people.
Mal-investment results in the capital goods industries due to
artificial lowering of interest rates by the central bank. Re-
sources move from the consumer goods industries, where they
are actually required, to the capital goods industries. This
artificial boom finally ends in a bust5. Moreover, if govern-
ments continue to inflate during recession time too, then
recessions turn into great depressions6. 1929’s Great American
Depression and Japan’s 20 years long depression of present
time are prime examples of this phenomenon7. Such reces-
sions and depressions bring economic hardship and misery for
the masses.
After seeing the dire effects of inflation we now turn our
attention to the chief sources of increase in the quantity of
money. Thorough understanding of
these sources can only enable us in
eliminating inflation. Mal-investment
results in the
Sources of Inflation capital goods
Government Money Printing industries due to
Through Central Banks
We live in a world where governments
artificial lowering
around the world have monopolized the of interest rates by
issuance of money supply in the econo- the central bank
my. The legal tender laws inhibit any
private printing of money. There are two
major reasons why governments have slowly monopolized the
money market. Both these reasons are related with the
increase in governmental activities in our times. We now turn
our attention towards these reasons.
Welfare State
States use to be very limited in old times. Its only activities
were of protecting life, liberty and property of its citizenry. This
is the so called police or the night watchman state of the olden
times. But once monopoly of protection was granted to the
State, it slowly expanded its powers and its interventionary
activities (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 every
activity one can think of (except providing protection and
justice to its people8!). This expansion in activities is only
possible when it has resources (e.g. money) to carry them out.
P R I C E P U Z Z L E S
And these resources it can only have if it has a direct control
over the money supply. This control it gained by slowly mo-
nopolizing the money market. This monopolization was
necessary because government cannot produce anything to
earn money. Government cannot acquire money justly through
the sell of its production like other individuals. There are three
chief ways through which state can acquire resources:
1. Taxation,
2. Public debt; and
3. Money printing
First two options are limited in its scope for acquiring
increasing amount of resources. Government cannot impose
higher tax rates on its citizens because that will result in public
uproar against the government, and a possible demise of its
rule. Also, as the famous Laffer curve demonstrates, increased
tax rates will result in decreased rev-
enues from taxation. Through public
debt also it cannot acquire more
resources because those funds are
available in limited amount, depending
on how many people are voluntarily
willing to buy government bonds. In
such a situation, only third option is
open for acquiring the endless amount
of resources. Printing money is the
easiest and the most hidden way for the
government to get hands onto the
needed resources. For this reason, and this reason only, it has
monopolized the money market. This way, whenever in need
of money, it can just give orders to central banks to run the
printing presses day and night9. One clear evidence of this is
the endless money which government is printing in this
recession time to unduly bailout various banks and businesses
(the so called stimulus packages). Various governmental plans
require money, and this money is acquired easily by printing it.
This is the one major way in which the quantity of money is
slowly expanding in today’s societies. This slowly increasing
quantity of money (i.e. inflation) is pushing prices upward in
the economy. Whenever government prints and spends money
quickly prices soar up quickly, as is happening right now.
Prices of various goods and services were much lower 25 or 50
years back. We have frequently heard our grandparents
complaining that in their time things were much cheaper than
today. We all hear this from our grandparents, but very few of
THE INDIA ECONOMY REVIEW 177
M O N E T A R Y E C O N O M I C S
us try to find out the true reason behind this situation. Our
analysis tells us that this price rise is due to slowly increasing
governmental expenditures. As government expanded its
activities by printing money, it resulted into slowly (and
sometimes rapidly) rising prices. We must not forget one fact,
which is historically proven, that all governments are inher-
ently inflationary in nature.
Figure 2 below presents the data of Indian government’s
total expenditure in various years as seen in its budget, and the
CPI (consumer price index) with all its defects10. Evidence of
the welfare state inflation (figure A), and its effect (figure B)
can be clearly seen.
Misallocation of Resources through Government
Spending and Rising Prices
Increasing government expenditures result into rising prices
Figure 2. Indian Central Government Total Expenditure with CPI 11,12
1200000
1000000
Govt. Expenditure
800000
600000
400000
200000
0 1990
1990 1995 2000
Year
Govt. Expenditure (In Crores of Rupees)
(A)
from another way too. This way is misallocation of resources
by the government. Government squanders the scarce re-
sources; this results into lower supply of those goods and
services which consumers are demanding. Free market
allocates resources exactly where they are needed by the
consumers. For example, suppose in the economy there are
three types of fruits available, banana, oranges and apples.
178 THE IIPM THINK TANK
Consumers are enjoying all three fruits in the present time.
Now suppose consumer taste changes, and instead of eating
oranges they now want more bananas. They will increase the
demand for banana, and this will increase the price of banana
which will increase profits of banana farmers. On other side
the lower demand for oranges will reduce the price of oranges,
and thus profit of orange farmers. Seeing the higher profit of
banana farmers some orange farmers will shift their produc-
tion to banana from oranges. Resources will flow in the
direction of banana production instead of orange. This entry
of new firms will increase supply of banana which will lower
the price of banana. This situation will continue until new
changes occur in the underlying market data e.g. consumer
taste, their income, natural factors etc. In our dynamic world
market thus allocates resources where they are required most
by the consumers. Producers are guided by consumers. But
160
140
CPI and Govt. Expenditure
120
100
80
60
40
20
0
1995 2000 2005 2010
2005 2010
Year
Govt. Expenditure (In Thousand of Rupees)
CPI
(B)
governments do not allocate resources according to the
consumers’ requirements. They allocate resources according
to the wishes and whims of their central planners, politicians,
special interest groups etc. Only handful of such government
people decide where to direct resources. For example,
suppose, consumers’ needs are food and clothing but their
government will spend resources in producing gardens and
 P R I C E P U Z Z L E S

guns! This will reduce supply of food and cloth because private Figure 3. World Military Expenditure.
sector resources for production of these items are reduced
Military expenditure, by region, 2008
through government taxation, debt and inflation. And this
Spending, Increase,
Region
reduced supply of various goods and services will push up their 2008 ($b.) 1999-2008 (%)
prices in the economy. Africa 20.4 +40
North Africa 7.8 +94
Warfare State Sub-Saharan 12.6 +19
If welfare state is one evil cause of inflation then warfare state America 603 +64
is another sinister cause of inflation. For the state, any activity Caribbean .. ..
outside its own boundaries requires that it somehow gain Central America 4.5 +21
control over the resources of other nation states. This is only North America 564 +66
possible if they attack them and win their territories13. This South America 34.1 +50
desire of winning other nation states has resulted into the Asia and Oceania 206 +52
longest and bloodiest wars in the history. All these battles Central Asia .. ..
require gargantuan amount of resources14. Here again, East Asia 157 +56
taxation and public debt will be insufficient for acquiring these Oceania 16.6 +36
resources. Printing money is the only way which enables South Asia 30.9 +41
governments around the world to fight these bloody battles. Europe 320 +14
Without the central banks and their printing machines it is Eastern 43.6 +174
impossible for any nation state to wage such costly wars West and Central 277 +5
against other nation states15. Middle East 75.6 +56
Figure 3 presents the evidence of increased war spending in World Total 1226 +45
various regions around the world.
To allow comparison over time, the above spending figure are in US
Indian defense budget is increasing every year. Table 1
dollars at constant (2005) prices.
shows this data. It is evident that the military expenditures are
Source: SIPRI (Stockholm International Peace Research Institute) Yearbook 2009.
rising with time.

Credit Expansion by Banks

Apart from governments, commercial banks can also increase
Table 1. Indian Defense Expenditure
the quantity of money without the corresponding increase in
Year Total Defense Expenditure (Rs. in Crores)
production of goods and services. This inflation banks bring
about by using their system of fractional reserve banking. The 2005-06 80548.98

process of creating money out of thin air is famously known as 2006-07 85494.64

money creation17. Today’s banks can expand the money supply 2007-08 85494.64

without any efforts because they work (and are legally sup- 2008-09 105600

ported and allowed to work in this way by the government) on Source: Ministry of Defense website (http://mod.nic.in/aboutus/body.htm#as6 16).

the basis of the fractional reserve banking system. In this

system, banks are not required to keep 100 per cent reserve
deposits of the depositors with them all the time. They can
(and they do) misappropriate money of the depositors, and
use it to lend it to other people for making illegal profit out of
it. Banks evolved basically as the warehouse for keeping
people’s deposits safe. Their only work was to safe guard
people’s money18. But, as slowly bankers realized that not all
the depositors return at a time to withdraw their deposits, they
started lending these deposit receipts, mixed up with other
fraudulent pseudo-receipts, which are not backed by any
reserves, to other customers in the form of loans and other
such credit extensions. One example will make this point clear.
Suppose, person A deposits 1000 rupees in bank X. Bank X
knows that A is not going to return to withdraw his money

THE INDIA ECONOMY REVIEW 179

M O N E T A R Y E C O N O M I C S
until next two years. In this situation it sees an opportunity of
using A’s deposits to make illegitimate profit. It lends A’s 500
plus extra 500 rupees of pseudo-receipts to person B and C at
the charge of 10 percent interest rate for the period of one
year. Person B and C will return 1000 rupees plus 100 rupees
as an interest payment to the bank at the end of one year. In
this way, banks pocketed 600 rupees of profit out of 1000
rupees of original deposit. 500 rupees it created out of thin air,
without producing anything. This is how today’s banks create
inflation.
Cures of Inflation
After looking at the true causes of inflation, it is easy to see its
cures. In following paragraphs I discuss what we need to do to
stop inflation, and its malicious effects of price rise and booms
and busts.
We now know that the welfare warfare state is the major
cause of inflation. If anyone is serious about stopping inflation,
then s/he must favor a total cut in governmental activities. Any
step in the direction of total cuts in governmental activities will
be an improvement in the direction of halting and eliminating
inflation finally. Unless and until we do this, it is impossible to
cure inflation.
The fractional reserve banking system is a second major
cause of inflation. This system should be adjudged illegal
because of its fraudulent nature. All the deposit banks
should function on the basis of 100 percent reserve standard.
The activity of lending money to the businessman and needy
people should be left over to the stock markets and/or credit
banks, where explicit contracts about how the bank is going
to use their money are signed between the depositors and
the banks.
Central banks should be abolished because this is the
institution which helps the fraudulent banks to survive when
they go broke because of reckless embezzlements. In the
absence of central banks and their bailouts, all banks will
behave prudently in keeping their reserves in tact so that they
do not default on their deposit payments. Central bank is also
the institution which prints money for the welfare warfare
government, and thus it should be dismantled as soon as
possible19.
Today’s paper money standard allows governments, central
banks and the banking industry to create money out of thin air.
The cheap paper money can be printed endlessly. We need to
180 THE IIPM THINK TANK
stop this. Adopting the market based commodity money, such
as Gold or Silver, will take the endless paper money source
away from the fraud governments and banks. Market based
Gold standard with 100 percent reserve requirement is the
real solution of inflation.
Above outlined steps can only safeguard people’s standard
of living against the vicious inflation. No other options are
open for mankind to stop the inflationary policies of the
governments, the fraudulent banks and other such money
cranks, who think that by printing money they can make
people rich! To blame speculator, hoarder etc., for inflation is
a trick of the establishment for covering up their sins and
diverting people’s attention20. By blaming these people,
governments silently continue their inflation. On one side the
government (all the parties, without exception) promises
everyone that it wants to stop inflation, and on other side it
continually breaks this promise. Populace can never under-
stand these hypocrisies of government without a sound
knowledge of the science of human action i.e., Economics.
The Praxeological laws are necessary to understand, and fight
inflationary governments and banks. Without this knowledge
our world will never see an end of inflation.
Endnotes
1
For a detailed critique of this mainstream view of ‘money
as an objective standard of measurement’ and ‘level of
price’ please refer to, (Rothbard, 2004, pp. 831-851)
2
We will soon see the correct definition of inflation.
3
This is the unseen effect of inflation.
4
And thus absurd are all the central bank and governmental
policies of price stabilization. We do not want stable prices.
We want falling prices.
5
For a groundbreaking explanation of this phenomenon
please see, (Hayek, 1967; Mises, 2009).
6
For a detailed explanation of this phenomenon please refer
to, (Rothbard, 2000).
7
Discussion of Japan’s long economic debacle is given in,
(Powell, 2002). And the recent Dubai debacle is another
case at our witness here.
8
Professor R J. Rummel of the University of Hawaii has
estimated that, governments around the globe have killed
26,20,00,000 of its own people (See his website for evidence
and more analysis of this data - http://www.hawaii.edu/
powerkills/). This phenomenon is described as Democide by

Prof. Rummel. And once we take into account people being
killed between various nations wars (see next section for
discussion of this issue) the number reaches to mind
boggling heights.
9
The official words for this process are monetizing debt,
market borrowing etc. These fancy words are linguistic
tricks of government. Governments do not borrow anything
from the market i.e., people. Their borrowings come
directly or indirectly from the Central banks. The compli-
cated mechanism of issuance of treasury bills (T-bills) etc.,
is a hidden way of fooling everyone. To get a clear picture
of central bank as giant counterfeiting machine please read
Robert Murphy’s illuminating article (Murphy, 2010).
10
CPI is used here for the comparison because that is the only
available indicator of rising prices. What we actually need is
a time series data of separate product prices. For example,
the price of groundnut oil in two different years, say, 300
Rs/Ltr in 1980 and 1500 Rs/Ltr in 2009, provides a clear
understanding of rising prices to the common man, instead
of any index number or a percentage figure.
11
Source: Union Budget (various years) and KILM 6 soft-
ware, ILO.
12
In figure 2 (B) expenditure data is converted into thousands
of rupees to facilitate its comparison with the CPI.
13
The peaceful way of free trade with other nations again is
politically incorrect, and so hardly tried by the governments.
14
For example, Joseph Stiglitz in his famous work, The Three
Trillion Dollar War: The True Cost of the Iraq Conflict
(Stiglitz, 2008) estimates that American cost of Iraq war
alone is three trillion dollars.
15
For the evidence of the sinister role played by the central
banks in funding state wars see, (Koning, 2009).
16
Accessed on 1/19/2010 5:47:52 PM.
17
To further understand how today’s commercial banks
create money out of thin air through the process of money
creation, please refer to, (Rothbard, 2004, pp. 805-809).
Also see, (Samuelson & Nordhaus, 1998, pp. 477-481).
18
For a detailed analysis of the vital economic difference
between a deposit contract and a loan contract please refer
to Soto’s brilliant work (Soto, 2006). Also see, (Mises, 2009).
19
For the detailed arguments about dismantling the central
banks please refer to Ron Paul’s demolition of US Federal
Reserve, (Paul, 2009).
20
For a brilliant critique of such attempts of blaming specula-
P R I C E P U Z Z L E S
tors etc., for inflation please read Walter Block’s Defending
the 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 in
General. 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 World
War I. Mises Daily, Thursday, (November 12th).
• Mankiw, G. N. (2001). Principles of Economics. Bangalore:
Thomson South-Western.
• Menger, C. (2009). The Origins of Money. Auburn, Ala-
bama: 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 1st.
• Paul, R. (2009). End the Fed (1st ed.). New York: Grand
Central Pub.
• Powell, B. (2002). Explaining Japan's Recession. The
Quarterly Journal of Austrian Economics, 5(2), 35-50.
• Rothbard, M. N. (2000). America's Great Depression (5th
ed.). Auburn, Alabama: Ludwig von Mises Institute.
• Rothbard, M. N. (2004). Man, economy, and state with
Power and market (Scholars edition) (2nd ed.). Auburn,
Ala.: Ludwig von Mises Institute.
• Samuelson, P. A., & Nordhaus, W. D. (1998). Economics
(16th ed.). New Delhi: Tata McGraw-Hill.
• Soto, J. H. D. (2006). Money, Bank Credit, and Economic
Cycles. Auburn, Alabama: Ludwig von Mises Institute.
• Stiglitz, J. (2008). The Three Trillion Dollar War: The True
Cost of the Iraq Conflict. New York: W W Norton &
Company.
(The views expressed in the article are personal and do not reflect
the official policy or position of the organisation. The author
thanks Stéphane Couvreur and Jonathan Mariano for their
valuable comments. Special thanks to my student Dharmesh
Patel for preparing the article photographs.)
THE INDIA ECONOMY REVIEW 181
C A R E E C O N O M I C S

182 THE IIPM THINK TANK

 P I L G R I M S & P R O G R E S S

RELIGION AND
ECONOMICS:
AN EMPIRICAL
ANALYSIS
Atanu Sengupta
Reader, Economics Department,
Burdwan University, Burdwan

Krishanu Nath
Research Scholar, Economics Department,
Burdwan University, Burdwan

Introduction
Economists visualize man as rational. A rational behaviour may be
consistently explained by maximizing behavior (Sen 2003). However
rationality does not imply extreme ego-centrism and selfishness. It
presumes certain value structures that are imbedded in the mind of an
individual (Sen 1973, Arrow 1982, Basu 1983). As Arrow (1982) argues
“The model of laissez-faire world of total self-interest would not survive
for ten minutes; its actual working depends on an intricate network of
reciprocal obligations, even among competitive firms and individuals’’.
Herein come the role of religious, cultural and social values that consti-
tute a rational psyche-the backbone of modern mainstream economics.
Historians often take the view that India is a country, deeply embedded
in a religious fabric. Thus economic activities of human being become
closely related with his broader cultural affiliation and the religious
tradition of the country. The economic study of religious culture com-
prises a variety of sub-fields, which collectively embraces all aspects of the

THE INDIA ECONOMY REVIEW 183

C A R E E C O N O M I C S
social-scientific study of religion, is known as “The Economic
of Religion”. The study, that seeks to explain religious
behavior from an economic (or “rational choice”) perspec-
tive: that is people acquire religion in the same way that they
acquire other objects of choice & also evaluate its costs and
benefits and acts so as to optimize their utility. As in any
market, the consumers’ freedom is to choose constraints, the
producers of religion. It determines the content of religious
commodities and the structure, where religion is unregulated
and as a result, a competition among religious fi rms is
pronounced. One can imagine the entire gamut of economic
activities generated by religious activities. It is well noted that
consumer demand in India are closely related with religious
festivals (like Diwali, Dussehra, Durga Puja, Id, Christmas
etc.).
In our study we have selected Tarakeswar- a Hindu pilgrim-
age site in West Bengal-an Indian state
for analyzing the interaction between
the Economic Culture and Religious It is very well
Culture, especially emphasis on the noted and
temple culture. The flow of pilgrims to researched that
any place is strictly determined by the
pilgrim’s valuation of this religious site.
consumer demand
How the economic development of
in India is closely
society is generated by the acts deeds of related with
religious culture, i.e., on the basis of religious festivals
religious faith, is the matter of discus-
sion of our present study.
Concept
In the Traditional Economics production activity is inde-
pendent on the consumption activity and they occur at
different points of time. In the definition of Care Economics,
presented by Arrow (1963), the act of consumption is related
with the act of production. In fact the product and the activity
of production is identical (Arrow 1963). Shapiro (1960)
argued that the physician-patient relation effects quality of
medical care. There is an element of trust in the relation. This
importance of morality faith and placable in the care industry
also have some external effect. Good reputation which results
from positive externality may help to boost-up a doctor’s
demand, while negative externality tends to dampen it. Also
there is a multiplier effect, because more is the doctor’s
demand, more is the need for attendance and other semi-
184 THE IIPM THINK TANK
skilled persons. However, there is requirement of some
external forces (apart from the market mechanism) to control
the quality. Otherwise, the negative externality will operate
as demand exceeds below a point so as to exhaustive the
doctor’s capacity. The same logic may be applied for a
medical 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 active
participation of the consumer, in the generation process.
Suppose a classical dancer performs. The demand for such a
performance will depend not only on the positive and
negative externality, but also on the spectator’s readiness to
enjoy the performance itself. In the cultural term Aristotle
called this ‘sympathy’. A process, in which the viewer sympa-
thizes with the situation that created by the performer. In a
sense a spectator is also a part of the
performance.
Under secular part of care economics
consumers are passive but producers
are active. So we can measure benefits,
which arise from the demand-supply
interaction. On the other hand, under
cultural part both the consumers and
producers are active. That is, both the
activities are generated simultaneously
from the market by the active participa-
tion of the consumer. Here the benefit
is non-measurable. The more consumer participation, the
greater is his/her benefit.
This can be shown by the following figure (1). In this figure
the two sets are represented the activity of consumption (C)
and activity of production (P). Under Traditional Economics
in figure 1(b) both sets can’t intersect each other, since they
are independent. But both the sets under Care Economics
intersect each other, since the act of consumption is related
with act of production and both the activities are generated
simultaneously in the market, represented by the intersection
of both sets in figure 1(a).
Unrevealing the Temple Complex of Tarakeswar
The existence of the Temple Taraknath at Tarakeswar
changes considerably the economic pattern of the town. It
depends upon the occupational structure, standard of living
 P I L G R I M S & P R O G R E S S

Figure- 1

Economics

Traditional Economics Care Economics

Secular Cultural

C P

Consumers & Producers

both are independent
C = Consumption Activity C P C P
P = Production Activity
Consumers Passive Consumers Active
Producers Active Producers Active
Diagram 1(a) Diagram 1(b)

Figure- 2

Temple Culture
Demand Side Supply Side

Cultural Agents

Visitor Beneficiaries

Pilgrims Tourists Associates of Feligious Activities Associates of Non-religious activities

Temple Authority Transport Authority

Provider of local hospitality Municipal Authority

Handicrafts, other cottage industries

Different Components of Temple Culture

THE INDIA ECONOMY REVIEW 185

C A R E E C O N O M I C S
of the inhabitants, social-economic infra-structural condi-
tions etc. of the town. The occupational profile reflects that,
at Tarakeswer too a substantial portion of population earns
their livelihood from the Temple and its pilgrims and the
nature and extent of dependency vary from one group to
another group. That is some are acquiring more from it by
virtue of their ritual position or by the exclusive nature of
their 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, this
meticulous culture is consumed by the visitors who arrive to
this place to fulfill their mental and virtuous pleasure. On the
contrary from the supply side, the demands of the visitors are
Figure-3
Temple Earning
Permanent Income
Payments of annuities by the
State Government
Rent and tax of houses and establishment
Interest from the bank against fixed deposits
Lease-out of fishing ponds, stalls
Gifted & donation of pilgrims
fulfilled by the various types of beneficiaries.
The visitors are divided into two categories- Pilgrims and
Tourists. Tarakeswer has now arrived at phenomenal atti-
tudes; million of devotees are called pilgrims come to this
sacred place in long processions every year to fulfill their
religious desire ness, personal and pecuniary gains and so on
from far and near. On some auspicious seasons such as, on
‘Sivaratri’, ‘Chaitra’ Sankranti’ and ‘Sravani Purnima’, here
this number rises multiple times. In economic sense pilgrim is
186 THE IIPM THINK TANK
a typical consumer of this particular culture under the
religious cultural economics.
Now from the supply side the beneficiaries group is divided
into two categories- the group associated with religious
activities and the other associated with non-religious activi-
ties. The people who are supplying the religious goods and
services to the pilgrims are the former group, which are
classified into three groups. These are Temple Authority,
Provider of Local Hospitality and Handy-craft & Other
Cottage Industries. Now the later who are providing various
administrative hospitalities to the devotees in order to fulfill
their religious requirements in a smooth manner e.g., Trans-
port Authority and Municipal Authority.
The earning of the temple is divided into categories; (a)
Seasonal Income
Entrance fee from pilgrims
Entrance fee from vehicles
Sale of gold & precious metals
gifted by the piligrims
Permanent Income and (b) Seasonal Income, shown in figure
(3). The employees obtained a fi xed sum of money or allow-
ances paid yearly by the State Government to the temple
authority, gifts and donations from the pilgrims & also earns
a lump-sum amount of income as interest from the invest-
ment of these funds in the bank as fi xed deposit, rent and tax
by keeping houses and other establishment the estate author-
ity and also by leasing-out fishing ponds, tonsuring center,
sites for stalls through auctioning the temple authority earns

income.
With these permanent incomes, the temple authority also
earns a large amount of income seasonally. It collects taxes
through coupon as a parking charge from the vehicles by
which the pilgrims come to this sacred place. Especially at the
time of ‘Sravani’, the temple authority also collects entrance
fees as service charge through coupon from every pilgrim.
Therefore, the people under temple authority depend upon
this economic involvement of temple to maintain their
livelihood.
Local Hospitality Providers group is also divided into two
sub-groups- (1) Scared Group like Pilgrim Guide and Private
Priest, who are working in the religious complex for assisting
the pilgrims to fulfill their ritual demands and (2) Secular
Group like rest house owners, shopkeepers, restaurant
owners, barbers, florists, water carriers etc. who are supplying
various types of convenience and
opportunities to the pilgrims to accom-
plish their religious as well as their own The socio-
demand. By providing various types of economic
goods & services to the temple as well as existence of
to the pilgrimage place, the providers
earning income for their subsistence
Tarakeswar town
and also generate some sort of employ-
without 'Baba
ment. Taraknath' is
The cult of Taraknath helps to nearly nought
develop a number of handi-crafts and
cottage industries in the neighboring
areas at Tarakeswar. Different types of handi-crafts and
cottage industries like clay pot making industries, cotton
industries, fruit pickle making industries, armlet making
industries, manufacturer of portrayed of different Gods etc
are separated according their origin of production at Tarake-
swar. Conch shell industry, metal and stone image making
industry, reticulated sling making industry, yoke-pole
industry, manufacturer of plastic clay image industry all are
those regional cottage industries where many people are
engaged. Those are engaged with these industries, are living
away far from Tarakeswar and also obtain economic benefits
from the pilgrimage activities of that place.
The Associates of non-religious related activities are Trans-
port Authority and Municipal Authority at Tarakeswar. For a
long time, Tarakeswar has attracted many people from
diverse areas near and far from Tarakeswar. Pilgrims come to
P I L G R I M S & P R O G R E S S
this place mainly using by various land transport systems like
road transport (such as by bus, car, tracker, paddle rickshaw
etc.) and railway transport.
On the contrary the law and administration of Tarakeswar
Town is controlled by Municipal Authority. The authority
takes a special care for providing the different types of
facilities and comforts to the pilgrims to mitigate their
religious needs. As against this, this authority collects
different ritual taxes from the every pilgrim and also parking
charges from these pilgrims’ vehicles. It reflects that there
exists a significant impact of temple culture on the economic
condition of the municipal Authority. That’s why the author-
ity develops and modernizes the town Tarakeswar and also to
provides more comfort and amenities to pilgrims that attract
them for visiting this place.
From the above discussion, we can say that a wide stretch of
surrounding areas of Tarakeswar
comprises economically, culturally and
socially linked with the towns their
feeding center.
Information of Secondary Re-
sources
Analysis of the Railway Authority
The Railway Transport at Tarakeswar
is one of the most ancient Broad gages
Railway branch line of Eastern Railway
of India has inaugurated on dated 5th
January, 1884 from Howrah to Tarakeswar. In order to
exhibit the flow of pilgrims’ activities, we examine the
monthly statistical data of outgoing passengers from terminal
station Tarakeswar to any other stations obtained from
Railway Authority at Tarakeswar as well as the Statistical
Department of Eastern Railway, Howrah. Since the figure
includes both the pilgrims and non-pilgrims, do not provide a
correct estimate of the number of pilgrims. Besides these,
many people, who come to or left this place by different road
transports like buses, cars and also by foot and it also cover
obviously some non-pilgrims also. Despite all these limita-
tions, the railway data can yield a rough sketch about the
trend of visit of pilgrims on different time periods to Tarake-
swar.
In Hindu Culture an auspicious lunar day for rituals of any
god is fi xed with respect to Bengali months. So we had to
THE INDIA ECONOMY REVIEW 187
C A R E E C O N O M I C S

Figure-4: Detrend Value of Railway Outgoing Passengers Corresponding of Different

Months of Four Year

KARTICK
200000
BAISHAKH

AGRAHAYAN
JAISTHA

MAGHA
ASSHIN
BHADRA

FALGUN
PAOUS
ASHAR
150000
DETREND VALUE

100000
50000
0
-50000

CHAITRA
SRAVAN
-100000
-150000

MONTH

1404 1408 1411 1413

adjust the month wise railway data of year 2002 to 2007 as per minimum in the month ‘Agrahayan’. Therefore, the tenden-
Bengali Calendar. cies for pilgrimage activities are homogeneous for every year
The periodic movement of the outgoing passenger figures at Tarakeswar. This analysis can be shown graphically in
can be analyzed by applying the method of Time Series. To figure 4 which exhibits the Seasonal Pattern of the outgoing
find out the seasonal pattern in the outgoing passengers’ data, passengers.
we derive the detrend values of these data & by comparing Figure (4) represents that in the month of ‘Sravan’ and
these detrend values we can say that the flow of pilgrims to ‘Chaitra’, the two auspicious months of four years, the
Tarakeswar among the different months in four years are congregations of outgoing passengers are maximum and its
almost identical. In every four years, the detrend values of the seasonal pattern is all most same in all four years.
number of outgoing passengers is maximum for the month of So, it is obvious that in the auspicious months, the congrega-
‘Sravan’ and also two relative maximum values of detrend tion of pilgrims would increases and we obtain a seasonal
data in the months of ‘Kartick’ and ‘Chaitra’ respectively. It is effect on every year in the flow of pilgrims to Tarakeswar.

Figure-5: Month Wise NTDR for Three Years

30
25
NTDR VALUE

20
15
10
5
0
APR MAY JUN JUL AUG SEP OCT NOV DEC JAN FEB MAR

MONTH

1997-98 2001-02 2004-05

188 THE IIPM THINK TANK


Analysis of the Non-tax Earnings of the Municipal Authority:
The economic existence of town Tarakeswar without “Baba
Taraknath” is nearly nought. To examine the statement, we
have quantitatively formulated the influence of deity of the
temple and its religious activities on the Municipal Authority
of Tarakeswar. In order to access this, we evaluate the total
non-tax earnings of Tarakeswar municipality, related with the
temple on the basis of different months.
Analytically, we can visualize the total earnings of the
municipality, is coming from two different sources. These are
Non-secular or temple related earnings and Secular or
General earnings.
We define the ratio of monthly Non-secular earnings to
yearly total earnings as Non-tax Temple Dependency Ratio
(NTDR) of the municipality. It implies that we regard the
ratio between the municipality’s Non-tax earnings from
different temple related activities for a particular month in
comparison to its total Non-tax earnings over the year as the
Non-tax Temple Dependency Ratio.
The value explores that NTDR is higher in the month of
August and July than others. The auspicious month ‘Sravan’
consists by taking fifteen days of each of these months. So, in
the month of ‘Sravan’, the maximum percentage earnings
obtained from non-tax revenues to total non-tax earnings
over the year due to the important fair “Sravani Mela”,
implies the greater religious activities by the people in this
sacred town. It illuminates the flow of pilgrims would in-
crease in this month compare to other months. The value of
NTDR for the month July and August are 11.6% and 23%
respectively in year 1997-98. Again in the month of April, the
value of NTDR is also greater, that is 8.3% compare with
other months. Since in this month another important fair
named “Gajan Mela” is executed. This similar phenomenon
of NTDR figure is shown in other two years i.e., in 2001-02
and 2004-05. Therefore, greater religious activities generate
greater earnings as well as greater economic activities. The
NTDR values in the month of July and August are 16.6% and
25.2% 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-tax
earnings from the sources of non-secular or temple related
activities of the Municipal Authority is guided by the shrine
of “Baba Taraknath”.
Therefore, Tarakeswar is a pilgrim town, whose economy,
P I L G R I M S & P R O G R E S S
particularly depends upon the deity of the temple of “Lord
Shiva”. The entire service sectors under different authority of
Tarakeswar are somehow associated with this sacred centre.
Hence, the significance of the deity of “Lord Taraknath” and
the temple is by no means confined to the religious aspects
alone, but also can be marked into the social, economical and
cultural aspects at Tarakeswar.
Conclusion
Tarakeswar is a smallest town under Hooghly District in West
Bengal. But this place to be lighted by the glory of ‘Baba
Taraknath’ to all devotees, living in our country and also in
abroad. The town, Tarakeswar without establishment of
temple of ‘Baba Taraknath’ leaves nearly nothing. Due to
improvement of transport system many people come to this
place from various socio-economic backgrounds from
different areas that generate greater economic activities
which assist the people from inside and outside of Tarakeswar
to maintain their livelihood. Many people at Tarakeswar earn
a satisfactory level of income by providing different religious
and non-religious services to the pilgrims.
References and Additional Thinking
• Smith, P. Adam, 1776, An Inquiry into the Nature and
Causes 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 Prefer-
ence’, Economica 40: 241-59
• Engels Friedrich, Manifesto of the Communist Party, Karl
Marx, February, 1848; Marx/Engels Selected Works, Vol.
One, Progress Publishers, Moscow, 1969, pp. 98-137
• Iannaccone L.R., 1988, “Introduction to the Economics of
Religion”, Journal of Economics Literature, Vol. xxxvi
(September 1998), pp. 1465-1996
• Chakrabarti Prafulla, 1984, “Social Profile of Tarake-
swar”, Calcutta, Firma KLM Pvt. Ltd., Kolkata, 198
• Basu Kaushik, November, 1983, On Why We Do Not Try
to Walk Off Without Paying After a Taxi Ride, Economic
and Political Weekly, Vol. 18
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organization.)
THE INDIA ECONOMY REVIEW 189
W H A T N E X T ?
When Nationali
It is neither the market nor the state but the combination of the
two driven by passionate nationalism that have always created
the best nations of the world.
Pathikrit Payne
Senior Faculty Member, IIPM New Delhi
O
ne of the most important contributions of the
World War II was the polarisation of the world that
started in the post war era. Incidentally Cold War
was not just an era of face-off between the US and USSR but
was also the one which further galvanised the world into two
economic blocks. While the US and its allies came to be
commonly known as the First World nations, the USSR and
the countries under Warsaw pact were termed as Second
World nations with the former having deep faith in the
institutions of democracy and market capitalism while the
latter was associated more with communist regimes and state
controlled economies. By late 1980s, with the fall of the
Berlin Wall and the eventual disintegration of Soviet Union
in 1991, the very concept of the tug of war between the
Capitalist West and the Communist East lost its essence. But
what did not lose essence was the quintessential debate
between the state and the market. Even in the era of globali-
sation, this debate continues with many countries of Western
Europe like France, Italy and the Scandinavian countries
ironically tending to have more faith in socialism and in the
tenets of protectionism even as many erstwhile socialist
economies of the Second and the Third World have endeav-
oured to not only embrace market capitalism but have also
emerged as stronger nations through it. Strangely enough,
one of the biggest mysteries of the modern day that has
remained unsolved is whether the disintegration of Soviet
Block has diluted the essence of state in economic affairs and
made market stronger or not. All through the era of the Cold
190 THE IIPM THINK TANK
War, the Communist Block gave primacy to the state in all
economic 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 matters
more than anything or anyone else. Not just that, the paranoia
and hatred for market capitalism was spread with the words
that capitalism not only creates the perennial rich-poor
divide, but would make multinational companies more
powerful than state and often, at the cost of the state. Further,
an important aspect of the propaganda machinery was also
that while the state would always endeavour to take care of all
the basic needs of the downtrodden of the society, the
multinational giants driven market capitalism would only
make elitist products for the rich and the mighty. The mass
would be reduced literally to the level of slave and that they
would have no power, rights or ownership of assets.
Thus, in retrospect, more than two decades after the fall of
the Berlin Wall and the subsequent embracing of the tenets of
globalisation and market capitalism by the yesteryears’ poster
boys of socialism, i.e. Russia and China, it becomes impera-
tive to scrutinise as to whether globalisation has essentially
done what the Communist blocks always feared the most. Has
globalisation and market capitalism that has swept the world,
in reality diluted the concept of the state? Has the state
become subservient to the dictums of the multinational
giants? Has the state, in this era of globalisation forgotten its
basic responsibilities towards the common man? Do the state
and the market continue to be mutually exclusive and anti-
 A L O N G R O A D A H E A D

i sm is Socialism

THE INDIA ECONOMY REVIEW 191

W H A T N E X T ?
thesis of each other or that there is a profound symbiotic
relationship between the two? Well, to answer these complex
propositions and to find a common ground of convergence,
let’s start with the objective of trying to fi nd the answers of
few fundamental questions...
Even as China and Russia hopped into the globalisation
bandwagon, Cuba preferred to continue with its tryst with
Communist socialism and a completely authoritarian econo-
my. There the state continues till date to be completely
responsible for healthcare, education and employment. If one
looks at the Human Development Index (HDI) of the Human
Development Report of UNDP, Cuba is ranked at 51.
Incidentally HDI ranks countries on the basis of ‘Quality of
Life’ in those countries measured in terms of life expectancy
at birth, adult literacy rate, combined gross enrollment ratio
in education and GDP per capita. Barring the last factor
which could presumably be higher in
capitalist economies, the other three
factors are all those about which the While China
communist nations have always claimed and Russia joined
to be more concerned than capitalist globalisation
nations. Yet a glance at the HDI reveals
quite a different story. While Cuba is
Cuba continued
ranked 51 and China 92, in that very list
its tryst with
Cuba’s bête noire USA has been ranked communist
13, Japan 10, Germany 22, Canada 4 socialism
and France is ranked 8. In fact, barring
Russia, every other G-8 country ranks
among the top 25 in the chart. This vindicates the fact that
not only the market oriented economies are better-off
economically, (best measured in terms of nominal GDP and
GDP per capita), in terms of social indicators too, they are
generations ahead of their erstwhile and present communist
or say ideological adversaries. In fact the kind of social
security system that the US has in place, a prominent Chinese
think tank has predicted that it would not be before 2020 that
China could have such a system in place. Strange isn’t it? And
more strange is the fact that China can only do so by piggy-
backing on market capitalism and not by going back to the
tenets of Mao’s version of Communism. Now the prime
question here is why Cuba ranks 51 and China 92 instead of
USA’s 13? Should the blame go to the US for the trade
embargo that it has imposed on Cuba? And if that's the
reason then, should we accept the fact that Cuba’s well being
192 THE IIPM THINK TANK
depends completely on the dictums of the US which would in
any case dent the credibility of a state controlled economic
system? Or say, why is it that even today hordes of Cubans
prefer to undertake the risky journey across the sea on small
boats to somehow reach the shores of the US? Why can’t they
just trust the Cuban government for all its tall claims for the
last fi fty years, and stay back?
The second issue that needs to be addressed is why the
USSR collapsed under the burden of socialism while China
survived? Why all of a sudden all Soviet republics were so
very willing to come out of Soviet Union and become inde-
pendent? Does it vindicate the theory that Soviet Union was
synonymous with Russia and that the Russians considered
their race superior to all others in the Union and there were
tremendous levels of discriminations? Does it also vindicate
the fact that all that the garb of socialism did was to hide the
incredible levels of inefficiencies in the
economic system and also that, for all
the semblance of a classless society, all
that it bred was an elitist one wherein
only the members of politburo and high
ranking state officials had the right to
all privileges while the mass was left in
destitution? Strangely enough, most of
the countries of the Warsaw Pact and
USSR who clamoured for independence
are now again clamouring to become
part of another union, i.e. the European
Union. And almost all of them are far better-off economically
now than what they used to be two decades back.
The third and perhaps the most intriguing issue is that of
China. More than three decades back the Communist Party
of China under the aegis of Deng Xiao Ping, after the demise
of Mao Tse Dong, realised that three decades of 'Soviet-Style
draconian state ownership' and state control of the economy
had not resulted in any dramatic transformation of the
Chinese economy as well as in the well being of the common
man. Also, because of complete isolation from global trade,
not only China was falling behind but in essence the Western
Capitalist block was racing ahead at a much faster pace.
Deng’s decision to go for calibrated liberalisation of the
Chinese economy through the Bottom-Up Theory by taking
the villages as the building blocks of reforms, gradual liberali-
sation of prices, restructuring of the public sector enterprises

and eventually creating world class infrastructure in the five
coastal Special Economic Zones not (SEZs) only metamor-
phosed the Chinese economy into a potent force to reckon
with but also brought it within the striking range of overtak-
ing the US economically in the future. Mao’s dream is thus
being fulfi lled not essentially through pure communism but a
new genre of economic model endeavoured by Chinese
namely market socialism. In other words, Mao’s China
emerged stronger against their ideological adversaries not by
being dogmatic with their own ideology but with time, taking
the best of the attributes from the market economy to refine
their own concepts — thereby making it a more potent force.
China’s success lies in not undermining the key responsibili-
ties of the state with respect to education and healthcare even
while not letting the veil of socialism be the perfect camou-
flage for all kinds of inefficiencies blossoming in the economy.
Business should be done in the way
business is supposed to be done. This
essentially became the mantra of the The turnaround
Chinese government which made sure of the BRIC
that the kind the infrastructure it economies is
created in the Chinese Special Eco-
nomic Zones (SEZs) would put even the
because of
best industrial infrastructures of the
their creation
First World to shame. It made sure that of enabling
the very Western MNCs that the environment
communists hated would eventually
flock into the Chinese SEZs and
become the ultimate catalysts for China’s economic metamor-
phosis. Deng’s success lies in successfully transforming the
role of the state from a monopoly player to that of an enabler
whose task is to create an enabling environment where
business can thrive and execute far better than what in the
First World they could do. The resonance of the same could
be found echoing in the words of the Indian Finance Minister
while presenting the Union Budget for 2010-11. He stated in
no uncertain terms, ‘The third challenge relates to the weak-
nesses in government systems, structures and institutions at
different levels of governance. Indeed, in the coming years, if
there is one factor that can hold us back in realizing our poten-
tial as a modern nation, it is the bottleneck of our public delivery
mechanisms.’ He further stated, ‘With development and
economic reforms, the focus of economic activity has shifted
towards the non-governmental actors, bringing into sharper
A L O N G R O A D A H E A D
focus the role of government as an enabler. An enabling govern-
ment does not try to deliver directly to the citizens everything that
they need. Instead it creates an enabling ethos so that individual
enterprise and creativity can flourish. Government concentrates
on supporting and delivering services to the disadvantaged
sections of the society.’
In essence, the key reason for the turnaround of the
economies of Russia, India and China especially in the last
one decade is that they have realised the importance of
creating this very enabling environment where business and
newer ideas can be nourished and thrived. This in turn
vindicates the fact that the essence of the nation has not been
diluted even in this era of intense globalisation. In other
words market economy would simply not be able to survive,
leave alone thrive in a failed state or in a chaotic state. Ever
wondered why don’t great companies emanate from countries
like Afghanistan, Somalia, Sudan,
Ethiopia or Congo? Well, no prize for
guessing because the answer is obvious.
In fact the answer is so obvious that we
often ignore the inner essence beneath
the veil of simplicity in it. Thus, it goes
without saying that there is a profound
symbiotic relationship between the well
being of a country and the companies
operating in that country. A healthy
company at the end of the day is thus
the manifestation of how good the
society is. The reason being that for the sound functioning of
a company, it needs an environment where societal institu-
tions such as banking, judicial system, law & order, the
executive, legislative, regulatory environment as well as the
healthcare and educational infrastructure perform reason-
ably well. Reason? Well, every healthy and educated person
in a society is supposed to be employable and every employed
person (be it self-employed or otherwise) is always neverthe-
less a customer who would work and use his hard earned
money for a better living in a society where he presumes that
his hard earned money and assets are safe enough just as
much as a business entity would want security and safety of its
business assets. And therefore just as it is important for the
business to have its factors in right combination with the right
kind of market acumen, an ability to think ahead of time,
anticipate future competition, never undermine the essence
THE INDIA ECONOMY REVIEW 193
W H A T N E X T ?
of clients and above all, never let the feeling of ‘cloud number
nine’ make the feet go off the ground, the same laws probably
apply for a nation as an entity too while marketing the nation
as an investment destination and thus creating the sustainable
environment for business to survive and thrive which in turn
creates utility products, generates employment, creates a
healthy environment of competition, pays taxes to the
government and forces the government to bring structural
changes in the society. It also forces the government to
develop the underdeveloped regions of the country in terms
of physical, social and fi nancial infrastructure without which
the mechanism of invisible hand of the market economy
would not work. In western developed countries, the key to
their high ranking in the Human Development Index can be
attributed their efficient public delivery
mechanism (in spite of being market
based economies) which made sure that
the revenues generated by the govern-
ment through taxes is put to an
effective use through the develop-
ment of high quality education,
healthcare and physical infrastruc-
ture in the society. This in turn
churns out the army of skilled
employees and potential
customers that the market
economy thrives on. Thus, it
is a win-win situation for
both the market and the
state. Well, these are simple
rules of the game but then in
that very game with same simple
rules, some win while most lose.
In retrospect, the difference between the US and Cuba or
say between a reformed China and the erstwhile China has
nothing to do with the kind of ideology they followed or
professed. Rather, it has everything to do with how successful
each one of them has been in creating an enabling environ-
ment. China’s transition from state controlled economy to a
more pragmatic market oriented one and getting integrated
with the global economy has not necessarily made it keep
aside her own perspectives and become subservient to the
US. It has only created an effective environment where
productivity, business acumen and enterprising attitude have
194 THE IIPM THINK TANK
a higher chance of success than what it was in pre-1978 China.
Cuba unfortunately never learnt that and thus continues to
pay for it even when its one time mentor, i.e. USSR, in its new
avatar Russia like China, has been extremely successful in
making the quick transition to market oriented economy
(albeit with several upheavals) and leverage it to the hilt by
becoming a major player in the global defence, minerals and
oil & gas industry. Russia’s transition towards market econo-
my has similarly not made it subservient to the US or the
Western block. Rather it has strengthened Russia to the
extent that it has again started aspiring for a multi-polar world
with Russia as the only viable counterpart to China and US.
Today the popularity of Vladimir Putin is no less than that of
the incumbent US President. Today in the
changed geopolitical paradigm, Russia is
given much more importance by the US
than it ever got during the whole era of
the Cold War. Today US rather gives
more importance to Russia and China
than to countries like France, UK or
Japan. Yet like China; Russia too has
not given-up on its independent
foreign policy and both more often
than not are on the opposite side
of US when it comes crucial
issues of geopolitics like Iran.
This is exactly where the likes
of Fidel Castro failed their
respective nations by equat-
ing economic reforms and
institutionalising of the system
with capitulating to the Western
developed nations. For those who are still intoxicated by the
Marxian theories, the debate has always been about state
versus the market and never about the state plus the market.
The likes of Deng Xiao Ping and Vladimir Putin realised that
the key to the success of the US economy has been its ability
to keep aside this conflict and combine a cocktail of two to
make it an incredibly potent force. If today, the US is the
largest and the most powerful economy or say a nation of the
world and continues to be so, in spite of a crippling recession,
it is primarily because of the incredible feats, innovations and
market dominance that the giant corporations of US have
created. The 140-odd US based companies in the Fortune

Global 500 list is essentially the backbone of the US economy.
It is the clout of American Inc. which when combined with
shrewd policies of the US government that created the
indisputable clout of the biggest brand of the world i.e. dollar.
What would happen in the future and whether the supremacy
of the dollar would continue is a matter of debate. But at least
for the time being, it doesn’t seem that there is any real
competitor. That issue will be discussed later in the article but
an important thing that needs elaboration again is that even
when many of the American corporations have become
gigantic, with many of them having annual sales turnover
bigger than the annual GDP of some middle rung countries of
the world, it has not essentially made them bigger than the
nation they originated from. Even though it goes without
saying that lobbying by giant corporations with governments
is a common affair, still the corporations have not been able
to give-up their national allegiance and or replace the
national identities of people with corporate citizenship.
Everything said and done, GE or GM or the likes of Micro-
soft, IBM, Oracle or Wal Mart would always remain Ameri-
can companies. That identity can never
be diluted even if majority of their
present day employees, customers or Would American
workshops are located in other coun- defence
tries. In fact the most incredible companies ever
example of this national allegiance as
well as the symbiotic relationship
sell weapons
between the state and the market can be
systems to
found in the US defence industry. While enemies of US for
Pentagon remains the big daddy or say the sake of profit?
the nucleus of the entire system, almost
the entire defence manufacturing and
research work in the US is done in the realm of the America's
private sector. So if one considers the gigantic defense
contractors like Boeing Company, Lockheed Martin, Raythe-
on, Northrop Grumman, General Dynamics, L-3 Communi-
cations Holdings, General Electric or United Technologies, it
is these corporations and several others like them which form
the very backbone of American edge in defence technologies.
Yet at the same time these organisations are so-called private
corporations with their own board of directors and account-
ability to shareholders. But does that make their shareholders
or board of directors or say the profit margin of the compa-
nies more important than the nation they emerged from?
A L O N G R O A D A H E A D
Would it ever happen that Boeing Company for the sake of
increasing its sales turnover, endeavour to sell its cutting edge
F-18 Hornet combat aircraft to countries like China or Iran
much against the wishes and the policies of the US Govern-
ment? Would ever Lockheed Martin sell F-16s to Syria or
would ever General Dynamics sell the cutting edge M-1
Abrams or Stryker Armored Combat Vehicles to North
Korea just for the sake of increasing their profits and sales?
This is where the miracle of globalisation lies. Everything said
and done, globalisation might have spawned a plethora of
giant corporations but it has not necessarily diluted the
concept of nation or nationalism. Big talks of this world being
turned into one global village notwithstanding, the very
essence of today’s globalisation is not about diluting the
paradigm of nation-state but to eventually make the states
stronger. The concept of symbiotic relationship in this case
can be proved further by the extent of toil the US administra-
tion takes to make sure that American companies get global
contracts. The very issue of America’s sale of F-16s to Paki-
stan or pitching the same to India for the proposed near $10
billion Medium Multi Role Combat
Aircraft (MMRCA) deal of Indian Air
Force, has nothing to do with rewarding
Pakistan for its role in the 'War On
Terror' in Afghanistan or the crusade
against Taliban or about making India a
closer ally. Rather, it has everything to
do with keeping the assembly lines of
the American defence industry rolling.
To vindicate this point, I would take
recourse to one of the most happening
issues in the global defence industry at
this point of time. The MMRCA (Medium Multi Role
Combat Aircraft) deal of the Indian Air Force (IAF) which is
valued at $10 billion, on a conservative estimate, has entered
the second round with some of the fi nest fighter aircraft
manufacturers of the world pitching in with their products for
the trials. One of the key contenders of the same is Euro
fighter Typhoon from the European consortium of EADS. In
the recent past, the chief of the Eurofighter Typhoon cam-
paign in India, Dr. Matthias Schmidlin, gave an interview to
the defence journal StratPost in which he stated that the fi nal
decision of selecting the vendor would be a political one. And
he couldn’t have been more correct than that. The reason
THE INDIA ECONOMY REVIEW 195
W H A T N E X T ?
being that each of the vendor be it the MiG of Russia,
Lockheed Martin or Boeing of the US or Dassault of France
or SAAB of Sweden is backed by their respective govern-
ments because this deal would not only help in creating
thousands of jobs in their respective countries but would also
give assured business in terms of maintenance and upgrada-
tion, for decades to come, in addition to follow-on orders.
Now consider this, the Fort Worth factory of Lockheed
Martin in Texas is home to the assembly line of the F-16
combat aircraft. This fighter plane has been one of the finest
and time-tested hardware for decades now, but it has almost
reached the end of its life cycle. With the US Air Force
gradually shifting its priority towards the fi fth generation
fighter aircraft namely the Joint Strike Fighter or F-35, the
orders at the Forth Worth factory have almost dried up with a
potential of job-loss for thousands of people. Now it was
under this consideration that George Bush had pushed so
hard during his tenure to push the deal of selling F-16s to
Pakistan under the garb of furthering
the war on terror even when every one
knew that F-16 is probably the last The American
possible option to consider when the sale of defence
objective is to fish out rag tag Taliban systems is mostly
jihadis from densely populated regions
of tribal areas of Pakistan. The real
driven by domestic
objective no wonder was to save jobs
compulsions of
back home. Likewise the current keeping people
Obama Administration has been employed
leaving no stone unturned to push
through the latest or perhaps the India
specific version of F-16 namely F-16 IN which the US states to
even better than the one currently being used by the US Air
Force. In the same league, by clearing the path of India’s
entry into the elite nuclear club and letting it buy nuclear fuel
for civilian power production, even when India has not been a
signatory of the Non Proliferation Treaty (NPT), the US
played a master stroke in making India feel obliged by the US
favour to the extent that every now and then defense orders
are simply going to American companies than to others. So
while the MMRCA deal still hangs in balance, with Boeing
and Lockheed Martin both having fair chance to see through
it, US also succeeded in getting orders for six C-130 transport
aircraft (from Lockheed Martin stable for almost a billion
dollar), eight P-8I Poseidon Maritime Surveillance aircrafts
196 THE IIPM THINK TANK
for Indian Navy (from the Boeing stable for almost $2 billion).
Moreover US has also been able to make India get interested
in the C-17 Globemaster heavy transport aircraft for the
Indian Air Force (also from the Boeing stable) by almost
making it desert its time tested IL-76s. In fact the desperation
of Obama administration in pushing through this deal too
can be gauged by recent reports which stated that Boeing is
almost on the verge of closing its C-17 assembly line if fresh
orders from abroad don’t materialise. Thus the whole essence
of symbiotic relationship has been proved once more. The US
Government often pulls all the strings possible to secure
foreign contracts for its industry to keep their assembly lines
running and thus keeping people employed at home which
proves again that globalisation is all about making nations
more important than integrating the world into one.
Well, the Doubting Thomas can still argue that there’s
nothing great about globalisation helping the US to become a
stronger economy as it is as common as saying that without
oxygen, life would not have been possible
on earth. But the point of contention
here is that it is not just the Western
Capitalist block or countries like China
with sheer passion to go ahead and be
among the top league of economies but
also some of the former Communist
countries and the erstwhile torchbearers
of Communism as well as the fiercest
crusader against Capitalism i.e. USSR in
its new avatar as Russia have been
undoubtedly some of the biggest benefi-
ciaries of globalisation. Moreover as stated earlier Russia also
used it as a potent force to revive the nationalist pride in
Russia which was almost gone after the destitution and chaos
that swarmed in Russia after the disintegration of USSR. But
before that it is important to look at one of the key issues, i.e.
the reason for the disintegration of the Soviet economy. The
concept of planning of an economy and allocation of resourc-
es is not essentially a wrong or faulty concept as even the
economies of Western Capitalist blocks too had and still have
certain elements of planning. For example, the US has one of
the highest spending in the world when it comes to social
security (as stated earlier) which is a planned expenditure by
the US government. But the fault with the Soviet economic
planning was its rigid structure of command wherein bottom-

up criticism for any kind of top-down order or plan was
considered dissension. Thus the planners, imbued with a
distorted picture of what the reality is and overwhelmed by
intoxication of a prefi xed ideology, never really understood
the ground realities. Their immediate subordinates in order
to save their own skins, lives and jobs continued to feed them
with as much a rosy picture as possible. When the whole world
was going through a transitional phase of making a paradigm
shift to low-cost and energy effective technologies, the Soviet
Union continued to have faith in gigantic icons of their
industrialisation. Gradually, not only they became out of
favour when it came to international markets, the gap be-
tween the estimates of the planners and ground level demand
of products started creating a huge scarcity of basic products
in the economy even while Soviet
Union, for the sake of keeping the
Warsaw Pact countries under its
fold continued to feed them with
subsidised food. Where every-
thing else failed they resorted to
either printing more currency to
tide over the deficits (thus
gradually destroying the value of
the currency), or attempted to
browbeat the reality with the
propaganda machinery which
blamed everything to western
conspiracy. Thus, Soviet Union,
in spite of having far better
engineering skills and capabilities
than many had in west, floun-
dered. Just for the sake of
keeping pace with the defence
expenditure of US, it continued to commit almost 25% of its
GDP to defence production without realising that USA’s
increase in defence expenditure always went hand in hand
with increase in its overall GDP which made sure that the
overall expenditure in defence was always in single digit as
percentage of GDP. But Soviet Union fell into the trap and
the decline continued. This was aggravated even more
because of the absence of any kind of independent institu-
tional mechanism which could have exposed the big flaws in
the system. By late eighties, it was beyond repair and there
was much dissent among the mass because of the near
A L O N G R O A D A H E A D
irrelevance of the currency and the sheer disparity between
the lavish and often western type lifestyle of the politburo
members and other senior party members vis-a-vis the
destitution all around. In the aftermath of the disintegration
of the Soviet Union, it was no less than utter chaos which was
compounded further by an IMF prescribed panacea which
simply was destined to fail. Corruption reached to greater
heights. There was a systemic and a well planned liquidation
of state assets in the name of divestment, most of which went
in the hands of powerful oligarchs who kept no stone un-
turned to shift all their ill-gotten wealth out of the country.
The same was happening with the money coming from IMF
which was quickly going out of the country instead of being
put to good use for restoration of the beleaguered economy.
While many do rightly blame the
near crippling of the Russian
economy in the post Soviet
disintegration period to the IMF
prescribed Structural Adjustment
Program which forced Russia to
sell its state owned enterprises, cut
down of state expenditure (often
at the cost of social welfare) and
allow unabashed entry of foreign
players in the market, what is
never mentioned is that part of the
blame should also be put on the
Soviet form of governance for
decades which failed to create any
kind of institutional mechanism to
withstand shocks and yet survive.
Soviet Union was run by a party
and not by institutions. So, when the
party collapsed there was nothing left which could have
salvaged Russia. The state run institutions never knew what
efficiency was all about and always took the subsidy and easy
fi nancing by the state or bailouts for granted. Had those
institutions been in place, Russia’s transformation would not
have been so bloodied. Another important aspect with
respect to this which needs consideration is that IMF need
not be a symbol of globalisation. All those countries which
went for the IMF prescribed doses of economic liberalisation
eventually suffered systemic problems. In contrast, even
though India did face a severe foreign exchange crisis in 1991,
THE INDIA ECONOMY REVIEW 197
W H A T N E X T ?
and was forced to open up the economy for good, it did not
blindly follow the dictums of IMF because of which it has
since then never faced any severe economic crisis in spite of
recording spectacular economic growth year after year. The
reason for this is simply because for India, globalisation has
been a calibrated one instead of a shock therapy. It never
accepted the IMF version of globalisation. Globalisation for
India, in addition to opening up the economy as well as
inviting FDI, also included the very concept of making Indian
companies strong enough in not just being able to compete
and survive in the Indian market against foreign competition
but also make sure that they become strong enough to
eventually become strong global players. Globalisation for
India also meant making optimal utilisation of its large pool
of english speaking and technically qualified manpower to
either cater to offshoring of business from the US or migrate
to be part of the workforce, thereby creating a steady pool of
expatriates who are not only a leverage
for India in terms of their clout but also
remit nearly $50 billion annually. The concept
Coming back to the issue of Russia, of nation and
the thing that Russia learned, especially the government
from the era of Vladimir Putin is how to
market well made products, something
of the
that was considered redundant in the
nation need
Soviet era. In an era when OPEC not be
started to use its clout too much to synonymous
increase oil price randomly which often
put the global economy in much
turmoil, Russia realised the incredible leverage that it has
because of its huge abundance of oil and gas reserve. It not
only went in for being a counter to OPEC in oil market but
eventually started gaining trust of many countries which were
getting sick and tired of the tantrums of OPEC. By making
countries like India partner in its oil explorations and defence
research projects, Russia from the late nineties started
playing the game which US has been so adept in. The leader-
ship aspect of Putin is something that I would discuss later on
but with reining in of the powerful oligarchs and making the
Russian expertise in defence engineering the USP to sell it in
the global market, Putin’s Russia was a new avatar altogether
in the market which was no more inhibited by the prejudices
of yesteryears but was more than willing to collaborate with
the West on crucial issues even while not always bowing to
198 THE IIPM THINK TANK
their dictums. Russia’s superpower ambitions were back in
the reckoning but it didn’t forget the reality of the day and
thus, didn’t get into the arms race with the US any more. It
was more than willing to accept the second fiddle role
provided US gave it its due respect. Its brutal retribution of
the Chechen rebellion and later on the thrashing of Georgia
was more of a signal to the West that Russia was not to be
meddled with. It renegotiated the gas price with many former
Soviet nations like Ukraine, Belarus, Georgia and literally
used the leverage of gas to bring many of the European
nations to their knees. Russia was coming of age and all that
mattered to it was Russia and nothing else. It made very clear
to the former Soviet nations that they cannot continue to
warm-up to US and yet continue to have the luxury of gas
supply at Soviet era rates. While Russian giants of the Soviet
era like Gazprom or Sukhoi Corporation became much more
agile and adaptive to market changes, the Russian market too
became a lucrative one for the western
companies. Today Russia is not only
back in the reckoning but according to
the report of Goldman Sachs, it is one
of the four BRIC countries to watch out
for in the future.
One thing in this respect that needs a
special mention is that the very concept
of state is often confused with state
ownership of companies and factors of
production. Likewise the nation and
government of the nation need not be
the same thing. It is even more strange that it is always
presumed that socialism is more nationalistic than globalisa-
tion or liberalisation. Thus, one can be extremely critical
about the government of a country and yet be very committed
to the cause of the nation. This is something that was never
appreciated in communist nations which often led to their
downfall. There’s nothing wrong with state ownership of
factors but if one looks at most of the African impoverished
yet resource rich countries, there’s predominantly state
ownership of assets there but one knows pretty well as to what
state ownership there means. For, in most of those dictator
led nations with no institutional mechanism in place, ruthless
dictators and their coteries make billions and siphon it off to
safe havens abroad while the mass continue to remain in utter
destitution and even starvation. Thus it is not necessary that

welfare happens the best if the state has complete ownership
of everything in the nation. India in this regard would be a
wonderful example to vindicate it. In the late forties of the
previous century when it got independence from more than
two hundred years of British colonialism, it was in utter
turmoil as the independence came at the cost of a painful
partition. As a result of formation of Pakistan and India,
millions on religious ground migrated either from the present
day India to Pakistan (including Bangladesh which was then
known as East Pakistan) or vice-versa. Thus, there was a huge
population of refugees to take care of along with a severe
famine that immediately followed soon after. In those days
India did not have any industrial base worth talking about as
the British, for all the infrastructure they created in this coun-
try, never essentially wanted India to emerge as an industrial
hub as the prime motive was always to make this resource rich
state a prime supplier of raw material and semi-fi nished
products for the industrial zone of
Manchester. Thus, when India got
independence, it almost didn’t even Partition of India
have the capacity to produce a single was a master-
needle on its own. Further, everything stroke by the
said and done, the partition from the
British point of view was a master stroke
British to cut the
as it literally crippled whatever econom-
supply chain of
ic potential the Indian subcontinent the South Asian
had. While Mumbai was the textile hub, economy
the cotton fields existed mostly in the
present day Pakistan. While most of
prominent jute mills were in Kolkata, the fertile soils suitable
for jute cultivation were in East Pakistan or the present day
Bangladesh. Thus partition meant breaking of the critical
supply chain for the economy of South Asia. Essentially we
are talking about an era when there were no Reliance
Industries or IT industries or a thriving service industries
where one could have gone and sought a job. We are essen-
tially talking about an era when there were no industries and
all that one could have done to earn a living was to start some
kind of an economic transaction through business to sustain a
family. It was then that they realised that it was far more
difficult to conduct business in independent India than it was
perhaps during the British rule. The new regime and first
government of independent India had some other plans.
Their fascination for the Soviet style of socialism was not
A L O N G R O A D A H E A D
entirely wrong given the mayhem of Great Depression of 1929
that had left its scar on the world less than two decades back.
But what was appalling was the Indian polity’s sheer antipathy
towards private entrepreneurship and businesses. The
concept of Heavy Industry Oriented Economic Development
Strategy was not wrong given the sheer need of basic industry
those days for creating the foundation of India. But what was
unacceptable was the way Indian government was more than
willing to literally beg for money and technology from the
British or the Germans or Russians even while restricting
similar ambitions of TATA and others for long. In any case
India was perhaps one of the more fortunate nations to take
birth with an intact infrastructure created by the British and
not reduced to rubble by the mayhem of the Second World
War. This when compared to the devastation that Japan,
Germany, UK, France and other European countries were
left with after the end of the war, was incredible. Irrespective
of whether one was part of the Allied or
the Axis powers, all were reduced to
rubble and had to start all over again.
But not India. The cities of Delhi,
Mumbai, Chennai or Kolkata were not
hit by the mayhem of the Second World
War unlike Paris, London, Tokyo or
Berlin. But even then, can we compare
today's Delhi or Mumbai with today's
London or Paris? That's the answer we
need to seek...
The creation of the legacy of licensing
policy for keeping private industry under leash and to prevent
the 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 discretionary
powers to allocate licenses to new enterprises, it was only the
rich and the mighty with right kinds of contacts and bag full
of money who got the licenses to start business. The likes of
Dhirubhai Ambanis were considered outsiders and castaways
since they were from rustic India and didn’t know English, or
horse-riding or golf which in those days of 'elitist India' were
so very important to start a business. Thus, the concept of
rural-urban divide and corruption started in India from the
very time India got independence. One would not be sur-
prised if the likes of G.D. Birla, B M Munjal or Jamna Lal
Bajaj had to face similar harassment just for the sake of
THE INDIA ECONOMY REVIEW 199
W H A T N E X T ?
getting a license. Not just this, even when one got a license to
start a business, it was the government babus and not the busi-
nessman or the market who could decide on the level of
production. Production control was a key pillar of the licens-
ing system but the real flaw lay in the fact that there was
always sheer disconnect between the level of demand of
something in the market and the estimation of the govern-
ment. So suppose someone had this traditional knowledge of
making bicycles and eventually got a license to make bicycles.
And suppose that this company was allowed in the 1950s to
make 10000 bicycles in a year and in those days this ubiqui-
tous bicycle used to be the only source of mobility for the
poor mass. And so if one supposes that the demand in the
market was around a hypothetical figure of one lakh, (for a
population of more than 40 crore those days, the demand was
invariably more than one lakh) then the sheer disparity
between demand and supply was good enough to raise the
price. Realising this, the government also made sure that
along with production control, it would control prices also.
Now from the producer’s point of view,
within the installed capacity that he
had, to produce the commodity, he The seeds of the
realised that he could produce probably black economy
three times of the sanctioned produc- were sown
tion and sell it in the black market even
while showing on documents that only
in independent
the stipulated amount of units have
India in the
been produced. Thus, say for every so-called Socialist
10,000 units of a product, the producer era
was actually producing
200 THE IIPM THINK TANK
30000 and selling in the market even while showing on paper
that only 10,000 are being produced. This means that taxes
were being given for 10,000 units only while the rest of 20,000
were part of the black economy as they were not paying taxes.
And when the excise or the labour inspector comes for
inspection of documents, the easiest thing to do was to grease
their palms with enough currency that the whole hierarchy
from the excise inspector to minister could be kept content
and silent. No wonder then that when the license raj was
about to go, the political class was vehemently against it as
doing away with restrictions to production would also mean
no easy money forthcoming. Thus the seeds of black economy
were sown in independent India in the so called socialist era.
The government control on most of the prices made sure
that everything in this country was prohibitively expensive
and almost everything was considered a luxury. Limited
production meant long waiting period to get products or get it
in the black market. Now imagine today if the government
decides to go for production control and declare that not
more than 10,000 laptops or say one
lakh cellphones would be allowed to be
manufactured in a year, what would
happen then? Wouldn’t it create an
enormous scarcity in the market?
Wouldn’t the prices just shoot up?
Wouldn’t people just revolt? Yes, all of
it is right but the biggest casualty would
be with employment generation. Taking
the instance of just the cell phone
market only, the five hundred million
strong customer base and the exponen-
tial growth rate has created a pletho-
ra of jobs in the production of cell
phones, marketing of cell phones,
sales of connections, after sales
service, network and tower manage-
ment as well as promotions and
advertising. A complete restriction
of the market would just dry
up all the jobs. Now then
multiply the same effect with
say, similar restrictions in each of
the sectors and one can easily decipher the reason
for India’s stagnation for so many decades. Likewise,

would the cell phone rates or the prices of consumer durables
or FMCG products have come down so much in the last one
decade if the government were to fi x the prices? It's the same
telephone market where call rates were prohibitive for ages to
the extent that there are jokes in the bureaucratic corridors
that the prime minister of one South East Asian country once
visited India and while making a call back to his home state,
tried to find out the call rates and eventually stated that with
the money he had to notionally spend for making the call, he
could have flown back to his state, inform his wife that he has
reached India safely and then could have flown back to India
to continue with his rest of the tour. Now the question that
arises here is that what kind of planning was this and how did
it benefit India? Compare that with today's call rates and how
it has empowered the poorest of India through the ability of
affording a cell phone.
So while production and price control restricted consumer-
ism and thus stifled the economy to a great extent, the two
other pillars of licensing system were even more dangerous.
One of them was invariably the concept
of import substitution wherein the
whole objective was to create a viable The four pillars of
and a self reliant industry in the country licensing policy
for reducing dependence on imports. almost destroyed
Theoretically, it was not a bad concept
but practically it is difficult for any
the culture of
nation to produce everything on its own
entrepreneurship
and when someone tries to do that, it is in independent
nothing more than a self defeating India
endeavour. Being self reliant doesn’t
mean shutting the doors to foreign
inventions which are path breaking. Imagine if today Indian
government states that it would not allow let’s say, Microsoft
or Oracle products to be used in India or say it would not
permit the use of Boeing or Airbus airplanes in India simply
because they are foreign made and instead India would
endeavour to build the same from scratches over here. Who
would then dare to travel in a plane made by any governmen-
tal agency on an experimental basis? Or what would happen
to India’s prowess in software industry if they are asked to
work without the products of Microsoft, Oracle, IBM, Cisco
and many more? Today any decision like that would be like a
death knell for the incumbent government as not even the
most left leaning party can essentially think of doing that. But
A L O N G R O A D A H E A D
India, unfortunately did exactly the same for almost forty
years when imports were restricted and companies like
Infosys had to plead with the government for buying comput-
ers from abroad which was considered unnecessary by the
governments of those days. It was also for the same reason
that many industrialists like Dhirubhai Ambani were pros-
ecuted or even persecuted for importing machines for
improving productivity. Unfortunately India’s social planners
for the fi rst forty years were living in a utopian world with
respect to what growth in essence is. Imports were made so
prohibitively expensive that it was mostly counter-productive
to buy. So Indians had to depend on the products made in
India by some shoddy producers who were guaranteed
immunity from competition, from within and abroad, and
were almost given the free run to exploit the customers.
People had to book and then wait for decades to get a car or
wait for a minimum of five years to get a telephone connec-
tion thanks to production control. And even the car they used
to get was not any way up to the mark. Before the advent of
Maruti Udyog Limted in 1980s, the
choice was invariably between the
ubiquitous Ambassador from the
Hindusthan Motors stable and the
Premier Padmini from the Premier
Automobiles Limited. While choosing
between the two it was never a question
of which was better but to find out
which was less worse as if both the
producers in the absence of competition
had put in major effort to make a bad
car and now the issue was to find out as
to who has failed to make a bad car and by default had made a
better car. The same was for every product. Indians remained
intoxicated with black & white television sets even when the
rest of the world was enjoying the marvels of colour television
with remote control.
The fourth and the most dangerous of all the pillars of
licensing system was the concept of small scale industry. The
general presumption was that Small Scale Industry, since it
would generally use labour intensive techniques, instead of
capital intensive ones, would create much more employment
and thus would solve the problems of unemployment to a
great extent. The fact that this fallacy has been proved wrong
is no more a breaking news but two important things need
THE INDIA ECONOMY REVIEW 201
W H A T N E X T ?
mention. They need mention because even today in many of
the educational curriculum of India, students are taught that
Small Scale Industry is better. The fi rst important proposition
is that if capital intensive industry is so very anti-employment,
then how come the IT industry which is extremely capital
intensive, continues to be one of the highest generator of
employment in India? There was a similar fear about labour
becoming redundant with the introduction of Information
Technology and yet along with India’s IT industry, the
banking industry continues to be one of biggest recruiters of
young people in India with recent reports stating that Indian
banking system would hire around 200,000 banking profes-
sional in the next few years even when application of informa-
tion technology is reaching new heights in banking with each
passing day. This vindicates the decades of lost opportunities
for India when restrictions of investments and technology
stifled India’s growth. Shouldn’t we call
it faulty planning? While planning is
extremely crucial for the growth and the India, because of
future of an economy, planning cannot its idiosyncrasies
be done by bureaucrats sitting in air lost opportunities
conditioned offices with secure futures
and assured salaries. And when planned
while China
by such people, every nation is doomed
evolved its
to collapse. The end result is what own version of
happened to India during the days of socialism
state-managed-socialism. India because
of its idiosyncrasies lost opportunities
even while China evolved its own version of socialism. It
realised the incredible intrinsic value in the very essence of
economy of large scale production and literally captured the
imagination of the whole world. One doesn’t require to be a
rocket scientist to deduce the fact that when anything is
produced in large scale then the per capita cost of production
eventually comes down and thus the price, while in case of
producing the same thing in small quantity, the cost goes up
which in turn raises the price. In 1960’s the defi nition of Small
Scale Industry in India entailed any industrial unit with not
more than Rs 5 lakhs of investments. Shockingly even today
the defi nition of SSI veers around the investment tag of
around Rs 1 crore and if it goes beyond that, then it loses that
status of Small Scale Industry. Now consider a company like
Tata Consultancy Services. This company, with revenues of
$6 billion and assets of around $4.36 billion, today employs
202 THE IIPM THINK TANK
149,564 people. For decades this company was stifled by the
agonies of license raj. Now, if it were to be restricted till date
under the clauses of SSI, could it have created employment
for nearly a hundred and fi fty thousand people? Could it have
inspired a $60 billion plus IT industry which is growing at
more than thirty percent per year? For the fi rst forty years, it
was this kind of self defeating propositions that destroyed
India’s potential of creating jobs for its people. Can we call
that era which stifled India's growth or made India lose
opportunities a truly socialist era? Even today there are
several items which are reserved for the small scale sector
while if one looks just beyond India’s boundaries, in China,
those very products like say soft toys are produced in such
enormous economy of scale that no other nation in the rest of
the world can compete with them. Eventually what has
happened is that India’s romantic illusions of socialism and
upliftment of poor crash landed while
China has been extremely successful in
bringing out a substantial proportion of
its population out of poverty. In the
Policy Brief No 11 of ADB by Sebastian
Morris, Rakesh Basant and R Nagaraj,
namely Small Scale Industries In The Age
of Liberalization, it is stated, ‘The
unstated but manifest assumption in
policy has been that small firms need
essentially to be protected.. In the past this
approach sought to develop small firms
as an integral part of the Mahalanobis strategy. It was then
believed quite wrongly, as subsequent developments and the
historical experience of Japan and elsewhere in the late industri-
alization context reveal,that the traditional, typicaly handicraft-
based, industries producing a wide variety of consumer
products could gradually and through continuous investments
and upgradation of technology evolve into modern medium and
small enterprises (SMEs). This assumption could at best have
been right for a minuscule fraction of the small firms which were
largely household-based. Protection from large firms was
integral to the Mahalanobis strategy. Protection was sought to be
built, inter alia, by the ban on capacity addition in industries
like textiles in the mill sector. Such bans continued until 1984, to
the great detriment of the Indian economy. This measure and
overvaluation of currency negated completely the industry’s
potential to ride the postwar penetration of manufactured goods

markets of the advanced capitalist countries.’ It further states
that, ‘Ever since the Mahalanobis Plan regional development
was seen as integral to the development of small firms. Small
firms were seen as locatable virtually anywhere as long as the
basic physical infrastructure, water, electricity, roads, etc could
be provided. Simplistic statements, such as steel plus electricity,
with a policy of regional dispersal equals regional development
almost became dogma. The neglected truth was that small firms
are greatly dependent upon agglomeration economies and
access to city serving functions. The result was disastrous.
Industrial estates that lacked access to reasonably sized central
places failed. The survivors had to overcome and bear the
high cost of inappropriate location. Many SMEs were pushed
into inappropriate locations through fiscal and other conces-
sions and administrative measures. Not given enough time to
overcome location-related infirmities, as these push measures
were retracted, they became unviable and
closed down.’ From this perspective the
Chinese planning with respect to China never tried
national development has been far more to immune its
pragmatic as they were not reluctant to cottage industry
evolve and take cue from some of the
better concepts of the First World
from competition
countries. With respect to so called SSI,
through myopic
they not only never tried to immune policies like SSI
them from competition, big investments reservation
or agglomeration, on the contrary,
instead of pushing them to faraway
places in the name of balanced development, China created
the Special Economic Zones for creation of better facilities
for them and for access to international market and world
class infrastructure. The net result today is that most of the
SSIs in India fail to compete with Chinese products which are
not made by big entities but by unknown, ubiquitous Chinese
companies in very large scale. And this is exactly the point
where the likes of Dhirubhai Ambani differed from the
government. For them the concept was simple that if the
increase in the scalability of production eventually reduces
their cost which in turn would help the companies to sell it at
a lower price which would benefit the consumer also, then
why that policy shouldn’t be pursued? Yet the Indian govern-
ment’s fi xation with licensing system was so high that whoever
was thinking big was considered a criminal. Ironically
whatever Dhirubhai Ambani talked about almost three
A L O N G R O A D A H E A D
decades back, today those very policies are implemented by
every industry be it telecom, insurance, banking, or the
manufacturing industry. But the problem with Indian policy
planners was that they considered planning for the nation as
their exclusive fiefdom and no one beyond the politico-bu-
reaucratic class had any right to infringe into that. Should this
version of socialism be called more nationalistic than the
American version of liberal capitalism or the Chinese version
of market socialism?
Thus, because of all these, the alienation of the young
educated mass started in India from the very time India
started with the concept of state planning. The sixties and
seventies had witnessed a whole new generation of young
Indians who were politically very active and were passionate
about the cause of a new India. Many of those who were
graduates and post graduates from India’s elite universities
and colleges wanted an economic
revolution through entrepreneurship
but were devastated by the kind of
suffocating environment that was
created in the country. Business in
essence was looked down and business-
men were always tagged as sinners to
the extent that in most of the Bollywood
fi lms till the early 1990’s, the stereotype
image of a villain in evert fi lm used to
be that of a crooked businessman
involved in smuggling, trading of
counterfeit products, drugs and heist while the protagonist
was a typical angry young man, forever unemployed and
unrecognized. He would simply not get the job because given
the restriction on companies to grow beyond a point, there
was a limit on how many people they could have employed at
any point of time. So, a new candidate could only be em-
ployed when an old one dies, or when he has influential
contacts or was in a position to pay bribes. Today does anyone
need to pay a bribe to get into any private sector company?
Not really, for the simple reason that as the economy has been
gradually released from the clutches of license raj, the
expansion of the economy and consumerism meant more
people were needed to produce, sell, market, promote and
service the expanding customer base. India’s 500 million
subscriber plus telecom market means an incredible number
of jobs created both directly and indirectly in the manufactur-
THE INDIA ECONOMY REVIEW 203
W H A T N E X T ?
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 that
could be manufactured in a year or had it been reserved for
the SSI, could it have created the kind of economic revolution
and empowerment of the common man that happened in the
last one decade?
It was essentially because of this kind of myopic and self
serving policies that the educated class of India got alienated
from the very cause of India. The best of the lot preferred to
exit the country than to get suffocated by the bureaucracy
which would simply not let talent to thrive. The exodus that
started because of disgruntlement is continuing till date and
those who were considered worthless or never given their real
worth in their own country, went abroad and created a brand
out of the abbreviation NRI which stands for Non Resident
Indians and which continues to be one
of the most powerful diaspora commu-
nities in the world with an estimated net Dr Abid Hussain
worth of more than $1 trillion. Compare had said that
this with the GDP of India which is a brain drain
shade above $1 trillion now and one
would realise how faulty our planning
is better
has been. While 20 million NRIs have
any day than
net worth of $1 trillion, around 1.15 brain in
billion resident Indians produce goods the drain
and services worth $1 trillion in a year
out of which 400 million live below the
poverty line and 60% remain disguisedly unemployed in
agriculture which continues to be unviable because of faulty
state policies and control. Imagine had they been given the
right kind of environment and nourishment here, India's GDP
would have been almost twice of its present one. Add to it the
$1.5 trillion of black money stashed in Swiss Banks, India's
GDP would have been nearly at par with China's Now if it is
not so, who's to be blamed for that?
When the exodus started, many of the so called socialists
started terming it ‘brain drain’ and often accused the NRIs as
being selfish and unpatriotic. But Dr. Abid Hussain had
perhaps said it right that brain drain better than brain in the
drain. Consider the case of Pranav Mistry, presently a PhD
student at the MIT. His invention of the concept of Sixth
Sense is about to revolutionise the world of information
technology and user interface. But imagine if Pranav had
204 THE IIPM THINK TANK
stayed back and been in some universities of India say in
Kanpur or Lucknow or any other city. Would his invention
have got the kind of attention or acknowledgement that he is
getting now? Would it have even been considered worth?
That’s the real question. That is the kind of mockery of new
concepts and ideas that had forces millions of talented people
to leave the country. Can a system which forces its best
people to leave for greener pastures be called socialsim? One
simply has to look at the condition of the Indian universities
today and the kind of perpetual decay they have gone
through. Where does JNU or Univesity of Delhi stand today?
Why are'nt they anywhere near to the likes of Cambridge or
Oxford? While the exodus of the quality people continued,
policy planners carried on with their undeterred experimen-
tation with a faulty concept of development. The drying up of
employment opportunities because of the stifl ing policies of
the government was the fi rst step while
the creation of a whole new generation
of unemployable youth was the second.
Throughout the whole forty years of
socialism in India, its development
ironically remained city centric. Good
schools, good roads, good colleges,
good universities, good amenities, good
banking, good infrastructure were all
concentrated in the cities much akin to
the way it was during the British era.
Life or lives beyond the cities never
mattered. It was and still it is in the cities that the elite and the
middle class live and everything is always meant for them
starting from the subsidy on education, to subsidy on fuel to
subsidy on LPG — albeit in the name of common man. One
just has to simply visit any of the government colleges in New
Delhi and witness the kind of expensive cars parked outside
the campus. Those are the cars in which students come to
study in the colleges where they pay a pittance of a fee in the
name of socialism. The amount they pay is perhaps less than
they spend during their one time recharge of cell phone. And
it is more ironical that even today the families of the richest
Indians get a subsidy of around Rs 300 on every cylinder of
cooking gas they buy while 400 million poor Indians who
don’t even get two square meals a day don’t even know that a
scheme like this perhaps exists. With respect to education
there was and there still continues to be a paradigm differ-

ence between the kind of education being imparted in the
cities vis-à-vis the villages of India. So while one can easily
fi nd quality English medium schools both in private and
government arena in cities, in case of villages, not only the
schools were of bad quality, there was a concerted effort to
keep the pedagogy in vernacular languages devoid of any kind
of English education which eventually made them completely
uncompetitive in the long run even while the politico-bureau-
cratic class continued to send their progenies to private
convent schools and then abroad for higher education while
giving battle cry against English medium schools in India and
privatization of higher education. Unfortunately it was India’s
era of planned period and its faulty planning that eventually
led to the rural-urban divide that is plaguing the country
today. The very definition of rural India would make things
clear. Even today in India, rural means a place devoid of
sanitation, healthcare, electricity, roads,
quality education system or awareness.
Is this the way to empower people? And MRTP destroyed
can we call that socialism? If today competitiveness
India's has a pathetic ranking of 134 in of Indian industry
the Human Development Index of
UNDP Human Development Report, it
but failed to limit
is primarily because of this city centric
concentration
development that continued in India of power in the
since independence. And yet that city hands of few
centric planning too hasn't made Indian
cities anywhere near the global bench-
marks be it on the parameter of road, healthcare, efficiency of
the municipal corporations or law & order. Not that the
essence of planning is at fault as has been vindicated by the
planned liberalisation of the Chinese economy but what has
been at fault in case of India has been its bureaucratic
planning which completely kept itself immune from new ideas
and changes happening all around the world.
To take it further, let’s take the example of the act called
Monopolistic and Restrictive Trade Practices Act or the
MRTP which was created to contain the concentration of
resources in the hands of a limited number of companies and
entailed that no company should have more than 25% market
share. We will come to that issue later but let’s first under-
stand the nuances of MRTP and how it was detrimental to
India. In the Indian market of operating systems, Microsoft
almost has a 92% market share and yet most of us don’t
A L O N G R O A D A H E A D
generally buy original software for personal use. Now going
by the era of the socialist India, Microsoft would have been
censured by the Indian government for breaching the 25%
market share. Imagine if that law had still existed in India, the
extent of havoc it could have created in terms of computer
penetration and empowerment of the common man. MRTP
failed to restrict the concentration of wealth in the hands of
few because the ones with the right kind of contacts contin-
ued to get licenses but what it eventually did was completely
destroying the competitiveness of the Indian industry. When
the economy got liberalised, the cracks got revealed as many
of the conglomerates whose businesses had flourished
through political contacts eventually withered away while
only the genuine ones who had envisioned the future and
were truly competitive survived. In fact a larger economy of
scale and volume game eventually increases efficiency and
reduces the price of the product.
Moreover, in spite of MRTP, there was
no control on the monopolies of the
government which continued to wreak
havoc. Take for example, the Indian
Railways which is still a monopoly and
in the name of India’s mascot of social
engineering, has been reduced to a
milking cow by politicians for their self
serving agendas. While every year
newer trains are announced, no one
bothers about the broken tracks,
unrepaired bridges, safety norms or hygiene. Is there a count
of the number of accidents that happen in railways every year
and how many die in that? Is there a count of the number of
robberies, molestation, kidnapping happen every year on the
rail passengers? Why is it that most of the passengers till date
have to travel in the most inhuman conditions in railways?
Why is it that today it is easier to get a plane ticket in case of
an emergency but is next to impossible to get a train ticket?
Does a company require fourteen lakh employees to run a
company? Why is it that in spite of having 1.4 million employ-
ees it finds difficult to provide security guards and a compul-
sory doctor in every train? Why can’t Indian trains be run the
way trains in Europe or Japan or even in China runs? Why
have we allowed the railways to become some sort of personal
fiefdom of the ruling parties? Why can’t it be run profession-
ally the way Delhi Metro is run? At times given the kind of
THE INDIA ECONOMY REVIEW 205
W H A T N E X T ?
free passes and freebies are given to employees, it seems that
Indian Railways exist only for its employees and not for the
people. In fact the Indian Railways is an ideal example of the
legacy of the socialist era and how organisations were run
then without any kind of accountability. The same was there
in the era when there were no private banks or private courier
or insurance companies or to be more precise, an era when
there was no direct competition to the government monopo-
lies. One doesn’t need to be a rocket scientist to gauge how
India was then. One conversation to any elderly or middle
aged person would reveal the kind of harassment one had to
go through while visiting a government bank or the neigh-
bourhood post office. In fact up till the late nineties, when
competition from the private sector was still not prominent,
customers of public sector banks had to literally be at the
mercy of the bank employees while
going to fetch money from their depos-
its. This doesn’t mean that the nationali- The amount of
sation of banks was wrong but what it Indian black
means that job security and lack of money stashed
competition that came along with
nationalization ensured that the
in Swiss Banks
customer was relegated to the back-
accounts is a
burner and was considered more of a staggering $1.5
burden than anything else. Indian trillion
organizations were simply not customer
centric. There were jokes that a letter
was posted by a man though government postal service to his
parents in native home and a month later he had arrived there
but the letter was yet to arrive. When people went to banks to
fetch their own money out, the disdain, apathy and misbehav-
iour of staff used to come as free of cost compliments. And
the least said about inflated telephone and electricity bills, the
better. The ubiquitous Indian telephone run by the Depart-
ment of Telecommunication, Government, before the advent
of telecom revolution from the late nineties, didn’t use to
work on two days, on the day it rained and on the day it didn’t
rain. It would not run till the time the palms of many in the
hierarchy get greased. The conditions of the government
hospitals were even worse. Can anyone explain as to why
there’s only one AIIIMS for a country with such a vast
population? And then why is it that very hospital is half the
time reserved for the treatment of the VVIPs while the
patients who have come from the far flung areas of rural
206 THE IIPM THINK TANK
hinterland continue to languish in the corridors? Why the
socialist planners did never envisage the need of having an
AIIMS like hospital in every subdivision of every district of
India? Why was every good amenity kept as exclusivity of the
elite? Was it this kind of socialism that was supposed to create
national fervor and make the nation stronger? Was it this kind
of socialism that was supposed to empower the common
man? Forget everything else, municipal corporations till date
cannot even produce water worth drinking. Thus, in every city
and town worth talking about, packaged drinking water is a
norm than an exception. None trusts the municipal water
unless there is an undying urge to become a victim of Hepati-
tis or Cholera. Water-borne diseases continue to be one of the
biggest killers in rural India.
While entrepreneurship was never considered as a viable
option to empower the nation, the
planners always considered that private
companies would be unable to make big
investments. Thus the government took
it on its own the responsibility to make
giant investments in basic industries.
While many of them were actually
successful, the need to keep the balance
sheet on track was never given its due
importance. Thus, throughout the
socialist era, the government borrowed
heavily from the international develop-
ment agencies but failed to convert that in the creation of real
time assets resulting in massive external debt for the country.
Projects which could have been fi nished in five years time
took twenty five years to complete being caught in controver-
sies resulting in cost and time overrun to the extent that the
projects eventually became fi nancially un-viable. The Sardar
Sarovar Dam on river Narmada is an ideal case in point.
Moreover lack of accountability made sure that no one really
kept a tag on where the borrowed money and the black money
were going. Incidentally recent reports state that the extent of
Indian black money kept Swiss bank accounts stand at $1.5
trillion which is just a shade higher than India’s GDP. This
money is primarily one made by the politico-bureaucratic
class as well as the torchbearers of India’s crony capitalism
that milked India for forty long years. The common man was
as helpless as he was during the British era or probably he was
better off during the British era in certain respect. Police had

become completely subservient to the political class and going
to courts meant becoming a pauper given the cost and time
implications. Media was censored and there was nothing
called television media the way it is now. Doordarshan that
came into existence later on was autonomous only on paper as
everything was scripted to suit the government. It was nothing
more than a stooge.
The late sixties saw the chest thumping by the Indian
government over a much publicised Green Revolution which,
it was time and again stated, was about to make India self
sufficient in food production. While the Green revolution
indeed increased the productivity of Indian agriculture
through the introduction of high yielding seeds and extensive
use of chemical fertilizers, could our social planners guaran-
tee that no Indian would go to bed half fed or malnourished?
Unfortunately while the strangulating
hold of the government on the agricul-
tural marketing and procurement of Why did India was
food grains have ensured that India’s on the verge of
state owned godowns are brimming economic collpase
with food grains bought from rich
farmers of Western Uttar Pradesh,
in 1991 if it
Haryana and Punjab at hefty prices,
always had great
even today 400 million Indians go to leadership to steer
bed malnourished every night. Unfortu- it through?
nately the faulty system of procurement
makes sure that food grains continue to
rot in the mandis and the government prefers this than to
actually transport that food grain and distribute it through
the public distribution system among the destitute. It’s an
irony that today when the price of cell phones and consumer
durable products are coming down thanks to market competi-
tion, the archaic laws that still govern the agriculture sector
make sure that the prices continue to soar. While the cynics
and flag bearers of the Malthusian theory might say that it is
the increasing population whose pressure is to be blamed,
then how come the increasing demand of cell phones have
been able to crash the prices in the telecom market which has
eventually empowered the common man?
For the Doubting Thomases again, even if one considers
these justifications as lopsided then I just have one question.
How come an amazingly well planned economy with some of
the best leaders of the time, for all the big talks of laying the
foundation of the Indian economy, eventually ended up
A L O N G R O A D A H E A D
putting the economy on the brink of bankruptcy in 1991? And
how come in just seventeen years time, that very economy
which was on the verge of bankruptcy emerged as a dark
horse for the future and became a trillion dollar economy?
This, not to say that planning or socialism is not good but to
vindicate that market economy eventually helps in reaching
the goals of socialism if socialism is all about empowering the
common man. In today’s environment the common man has
been empowered by the media much of which can be wit-
nessed by how it played a critical role in making the rich and
the mighty pay for their sins. It’s not that cases like that of Jes-
sica Lall, Priyadarshini Mattoo or the Nitish Katara never
happened before but those days in the era of monopoly of
Doordarshan, no one would have dared to raise voice against
the politico bureaucratic class. The contrast is even more
prominent between the way wars were
covered by the media during 1962 and
that of the Kargil War in 1999. The way
private media championed the cause of
the hapless foot soldiers who have
always been used as pawn by the babus
sitting in Delhi, during the Kargil War
created massive awareness and patriot-
ism among people. Today in the era of
market economy, the educated youth do
not sit idle and can somehow get a job
without having to pay bribe to anyone.
In seventeen years' time the contours of the Indian economy
has changed much with awareness spreading all around, the
efficacy of education being realised by the common man,
plethora of job avenues opening up and a whole new genera-
tion of young Indians jumping into the bandwagon of entre-
preneurship by giving up their cozy jobs while the market
economy, call it for its own selfish reasons or whatever, has
been successful in forcing the government to improve infra-
structure and bridge the rural urban divide. Even today if
there still exist a deep divide between the urban and rural
India, then it is not because of market capitalism but for the
lack of it. The sixty percent of the population who depend on
agriculture still get a pittance for their produce while the
middlemen with their stranglehold of the agri-market con-
tinue to rule the roost forcing the end customer to pay a hefty
price. Bringing organised competition in the agri-economy
would not harm the farmers as is being propagated by the
THE INDIA ECONOMY REVIEW 207
W H A T N E X T ?
vested interests. Instead, it would make the market transpar-
ent and increase purchasing power of the rural lot and restrict
migration to cities through the creation of necessary physical
and social infrastructure in that place. Gurgaon is a case in
point as to how private investments can transform a place. In
fact the entire stretch along the Jaipur Highway is getting
developed one after another from Gurgaon to Manesar to
Bhiwadi thereby reducing pressure on the exiting cities.
Likewise a whole new generation of Indian private companies
with ability to compete globally has proved our socialist
leaders wrong. Today Infosys, TATA, or the Reliance are as
much pride and prowess of India as the good PSUs like
BHEL, IOCL or NTPC is. Together they have made a far
more stronger India today than what it was two decades back.
A trillion dollar economy, a near $ 300 billion forex reserve, a
strong Diaspora with a trillion dollar of assets under their
control, one of the fastest growing economies of the world, a
fast emerging consumer market have all helped in making
India a nation worth taking pride in. In
this respect China is even a better
example as to how planning of the The Diaspora
economy has made China one of the of any
biggest giants in the world. Films like country is no
Rang De Basanti or Chak De have
created a new genre of patriotism
way less
among the youth of this nation
nationalistic
Nationalism in this case is not just than the resident
about the citizenship but the nation to citizens
which one actually has his roots.
Otherwise how would one explain the
phenomenon so often evident during cricket matches between
England and India when played in England wherein one
would fi nd a disproportionately high number of Indian flags
being waved in Oval or Lord’s and the gallery blued by a
swarm of sky-blue jerseys to the extent that one would often
misconstrue it as a match being played in India. Thus the
question is why do people of Indian origin who have migrated
to England several decades back still feel more allegiance to
India than UK even when they hold a British passport? Why
does an Indian on a trip to UK feel the effervescent warmth
of a person of Indian origin as if someone from his own
family has come, when he steps in an Indian owned restaurant
in downtown London? Or say, what makes Indians take
nationalistic pride and even consider it as a sort of reverse
208 THE IIPM THINK TANK
colonialism when the TATA Group acquires British compa-
nies like Corus or JLR? After all it’s just a giant conglomerate
with huge cash reserves acquiring another giant. Isn’t it? Or is
it much more than that? Similarly why do Indians consider it
as an insult and a blow to their pride when the Taj Heritage
Hotel was literally decimated by the Pakistani terrorists? Is
Taj just another hotel of a business house or it has transcend-
ed the boundaries of private ownership and has become the
very symbol of India’s resurgence? Or why is it that Ratan
Tata takes it as a personal challenge to resurrect the bruised
hotel after the 26/11 siege and vowed to make it run again
within twenty one days? Why did, one of the fi rst things he
did after the siege was over was to hoist an Indian flag and
through it sent a message to the perpetrators across the
border that India cannot be cowed down by such heinous
acts? Why is it that Indians all across the world were on fi re
and felt so much for the victims that they were all willing to go
for an all out war against Pakistan? Or say why couldn’t
Indians residing in US or UK just shrug
it off as just ‘another incident’ and carry
on with their normal life? Why did they
feel the same passion as was felt by
every resident Indian or the people of
Mumbai on that dreaded day? Why
couldn’t they feel more allegiance to the
company they work for than to the ones
in a distant nation which was once their
place of birth? Thus one may conclude
that it is just a fallacy that globalisation
is all about permeating the boundaries
of nations. On the contrary globalization is nothing but a
mere medium to make the nations stronger. For, the enor-
mously powerful twenty million strong Indian expatriate
community with more than a trillion dollar of asset under
their fold, essentially works as an extension of India’s increas-
ing clout, be it through forcing the American government to
change policies in favor of India or sending back remittance
to motherland, the annual amount of which touched the
magic figure of $50 billion in 2008. Incidentally when India
went for the nuclear tests in 1998 and faced the American
wrath through Economic sanctions, it was the NRI commu-
nity which came to India’s rescue by participating in the
Resurgent India Bond through which India mopped up
$5billion to tide over any foreign exchange crisis. Thus the

essence of a strong expatriate community and the efficacy of
its die hard nationalism towards the country of origin was
vindicated beyond doubt. The same can be stated for the Jews
across the world and their passion for Israel. For China, the
whole essence of its introspection, metamorphosis and
eventually becoming the game maker in global business, has
nothing to do with its communist or say socialist ideology to
become the global hub for manufacturing for delivering low
cost products for the poor and the downtrodden. Rather, for
China the whole essence of globalisation i has been nothing
but a medium to reach that very zenith of political, ideological
and military success which Mao had perhaps envisioned long
time back. This medium, for China, is perhaps more effective
than the purest version of communism which they felt was
rather self-defeating. It has been vindicated by the fact that in
the last three decades, China’s meteoric growth has not only
been a spectacular exemplification of how globalisation can
help in mitigating poverty but has also shown how it is a great
leveller. In fact such is the reach and
omnipresence of Chinese goods
nowadays that its almost next to Both political
impossible to fi nd any product in and business
Europe or even in US which is not made leadership are
in China. Likewise the outsourcing of
business processes by US based compa-
equally needed
nies to India has created such paranoia
to steer a nation
of job losses in US that the quintessen- towards true
tial torchbearer of globalization and welfare
open economy has started advocating
protectionism and tax incentives to
companies who decide to stop the outsourcing. Similarly, such
is the extent of the Chinese impact that European companies
have no option but to outsource manufacturing to China in
order to remain competitive, thereby creating massive
unemployment in the whole of Europe. Today Europe is not
just clamouring for protection, but even in the very formation
of European Union, individual countries are wary of each
other. Today the West European nations are concerned about
the massive migration of low cost workers from East Europe
to West Europe as the integration process East European
states in European Union starts. The Icing on the cake is the
fact very fact that UK is still very paranoid about surrender-
ing its currency of Pound Sterling for Euro presuming that
surrendering Pound Sterling would tantamount to almost
A L O N G R O A D A H E A D
giving up the essence of its sovereignty. Even today there is a
strong under current of nationalism among the otherwise
developed nations of Western Europe. If one goes by the
display of passion during the soccer matches in the FIFA
World Cup or Euro Cup, it still seems that most of them are
still driven by the legacy of their colonial and empirical wars
of the past. In essence, the more the storm of Chinese and
Indian onslaught is increasing, the more protectionism in the
garb of nationalism is spreading across Europe.
Yet the whole essence of growth and resurgence of great
counties is as much because of good leadership as it is
because of planning, patriotism and unity. It is the leadership
of Putin that resurrected Russia after its near collapse in the
nineties. It is similarly the leadership and vision of Deng Xio
Ping and his calibrated reforms of the Chinese economy from
1978 onwards through the Bottom-Up approach and embrac-
ing of market socialism that created the wonder called China
today which can literally dictate terms to US. Yet leadership
is not just about political leadership
only but includes business leadership as
well. So while USA’ s prowess is as much
because of legends like Bill Gates, Steve
Jobs, Larry Ellison, Jack Welch,
Michael Dell or Henry Ford, it is also as
much because of the successive presi-
dents of the United States of America
who foresaw the importance of having a
functional, equitable and an institution
based democratic society where ‘ahead
of time’ ideas can be incubated, nour-
ished and blossomed in the right way. Sadly in India our
education system has been able to cerate mature and vision-
ary political leadership. Politics here have been reduced to
family business. In essence, an entrepreneur as a visionary
can only do as much as the society in which he is aspiring to
unleash his ideas for the future, allows him to do which in
turn depends on the visionary policies. Let’s imagine for a
change that a college dropout named Bill Gates walks up to a
banker in India and in the era when the Mainframe machines
were a norm than an exception, he proposes a revolutionary
idea of making an operating system to operate which, one
need not be a hardware engineer and that he would need a
loan from the bank to start a business of commercially
making such operating systems. Now would that Indian
THE INDIA ECONOMY REVIEW 209
W H A T N E X T ?
banker give money? Well chances are high that he would
actually think it as a crazy idea to innovate or invent some-
thing for business purpose as for him and his society, the work
of invention is that of the scientist and not of a businessman.
Sadly, his society or its political leadership have never
understood the magic of making a business out of invention,
innovation or improvisation. So Bill Gates’ proposal would
surely have been rejected. But even if the banker had been a
little more enterprising than what he is permitted to be and
even if he had agreed to lend money, he would surely then
have asked for a collateral as a security for the loan he is
giving. Well, if budding entrepreneurs had enough property
to give as collateral, they would have never gone to bankers.
But then in countries like India, the very thought of giving a
loan to a budding entrepreneur without asking any collateral
in return would be termed blasphemous,
and if the banker actually does so and
the business fails, he would surely be India has
behind bars for gross violation of rules. consistently failed
Thus, in this country, banks give to create and
business loans only to those who already
nurture both
have money and therefore it is so very
difficult to fi nd too many young men
visionary political
holding on to their convictions against and business
all odds and make the next big thing leadership
happen. It’s not for nothing that the
likes of Dhirubhai Ambani or Narayan
Moorthy are exceptions in this country. What Indian Inc.
does today, Dhirubhai started doing it nearly thirty years back
in an era when business was looked down and the licensing
system was throttling the remaining few. The price that he
had to pay for being a visionary and crusader against the self
defeating licensing system was that he became half paralyzed,
thanks to all the trauma, censure and agony he had to go
through for being a thinker. It never probably happens this
way in US. And thus it is easier to locate a successful entre-
preneur over there than here while those in business prefer to
go with the tide and cash in on it instead of thinking about the
next big thing. Thus the West makes the products and we in
India service it. It’s still not the other way round. Socialism in
real terms was never meant to discourage the youth and
follow the rules laid down by dead theorists. Sadly in India it
happened like that.
More than five decades back John F Kennedy had once
210 THE IIPM THINK TANK
stated, ‘Roads in America are not good because America is rich.
America is rich because her roads are good.’ This only exempli-
fies that the phenomenal growth of the US and the rise of US
global corporations was not incidental but an outcome of
political leadership and its nationalistic fervour to see the rise
of the nation through entrepreneurship and economic
dominance. The rise of hundreds of Japanese Fortune 500
companies which catapulted Japan to become the second
largest economy of the world, barely a few decades after its
humiliating defeat in the Second World War was also an
outcome of political leadership’s vision to erase the infamy of
fascism tagged to Japan and transform Japan’s image in the
world as a pioneer of technology and innovation. Thus market
economy for japan, like US was a route to further the cause of
nationalism. Israel's incredible feat in terms of not just being
able to survive in one of the most
difficult neighbourhood amongst
enemies all across and thrive as one of
the most efficient and technology driven
company can only be attributed to their
conviction of never allowing the dark
days of holocaust return ever again.
Being a nation of mandatory military
service and also as home to one of the
highest incidence of entrepreneurship
in the world Israel has been trans-
formed by the zeal of young Jews to
defend and prosper their holy land.
It is unfortunate that in India the whole concept of leader-
ship development has only remained restricted in business
schools and that too has remained restricted with respect to
running companies efficiently. However, there’s a limit as to
how much business leadership can achieve till the time
political leadership of a nation creates the right kind of
business environment. In the American Presidential system of
governance the president elect makes his own cabinet which
comprises of eminent people from the industry and the
intelligentsia. And they need not be the members of US
Congress or Senate. Therefore policy making is more attuned
to what would be beneficial to US companies and thereby to
US economy unlike in countries like India where for decades
successive government took pride is crucifying business
houses, not realising that there cannot be employees without
employers and there cannot be welfare without fruitful

employment. This vindicates again as to how for successful
nations state planning and private entrepreneurship worked
not against each other but with each other. Wherever each
worked against the other, it led to collapse. Thus, it’s not the
fault of the Indian bankers. In the US, being a college or
school dropout doesn’t carry any stigma. Moreover, innova-
tion and original thinking is always appreciated. Over here
people always scoff at every idea that originated here and
given importance to it only when the West or say the First
World endorse it. Be it spirituality, Yoga, or Indian culture or
creativity… the list seems endless.
The biggest company of US is nothing else but US Inc. So
long it survives and remains the most powerful; every other
company of US would survive. Thus there cannot be any great
company in a badly managed nation. That’s why political
leadership is so very important. And if leadership is all about
vision and then working towards materialising it, then that
vision is as much required in running a nation as it is required
for running a company. Sadly in India, for all the big talks of
leadership, not many from the industry seem to be interested
or involved in real time policy making. Contrast this with
Israel or US where majority of the heads of states had stints in
the armed forces of their respective nations. In Singapore, the
legislative members are some of the highest paid executives of
that country. And the rest is history.
In essence change would only come when things change
inside the parliament. Therefore, without entering that place,
merely shouting from the periphery would not change India’s
destiny. India can only be a truly welfare state when the
inherent inefficiencies of the state and the support system
are taken care of and entrepreneurship is allowed to flourish
in every nook and corner of the nation since it's only then
that jobs would be created through the unleashing of India's
intrinsic potential. Jobs invariably would mean more pur-
chasing power and welfare. If that happens then it can only
happen when India reaches anywhere near the predictions of
Goldman Sachs on BRIC economies. And if India has to go
anywhere near the predictions of Goldman Sachs on the
BRIC countries, where it has been stated that by 2050 India
would be the third largest economy of the world (with a GDP
of $38 trillion plus), it cannot reach that place (from the
present GDP of $1.2 trillion) merely by depending on
outsourcing of work from US or by flocking to US in large
number and neither by remaining glorified workers of US
A L O N G R O A D A H E A D
MNCs. For that dream to come true, it is not only important
to have the right kind of political leadership and passionate
seasoned technocrats who would take care of institutional
frameworks but India would also require a thousand more
Dhirubhais, NarayanMoorthys and Ratan Tatas. Sadly, one
wonders as to how many of the B-school graduates have that
in them to sacrifice twenty years of their prime life for one
single dedicated cause which would not only a create world
class company or institution but would also inspire others to
follow the footsteps? Can they come out of their comfort
zones, 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 when
it’s not generating money and wait for that perfect moment,
the way the promoters of Infosys held on to the dream of
Infosys for ten long years till liberalisation was ushered and
opened a new vista for the entrepreneurial Indians? In spite
of all the big talks of leadership, isn’t this country actually
ending up creating followers only? Or why is it that those
who were college or school dropouts worked better with their
gut feeling and instincts and created world class organiza-
tions while most educated people merely end up managing
the companies set up by them? Is state controlled education
killing the natural instincts of risk taking, passion and
though process among our youth, be it in political or business
leadership? Are today’s practitioners becoming prisoners of
dead theorists? And is it because those who never ventured
in higher education and thus remained free birds with free
minds ended up being the best creators and leaders of the
world? Well… it’s only then when young Indians would join
the political and business mainstream that would create a
powerful nation the Israel has been where socialism,
capitalism or globalisation would all be tools for betterment
of the -ism called Nationalism. It's only then that a true
welfare state would be created where all are for one and one
is for all the way it has been in Israel where they went for a
war with the Hezbollah, in 2006, just because one Israeli
soldier was taken prisoner by them. Need any better example
of socialism?
(The views expressed in the write-up are personal and do not
reflect the official policy or position of the organization. A very
small portion of this write-up by the same author was published
in the magazine The Human Factor of Planman Media)
THE INDIA ECONOMY REVIEW 211
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questions, answers and solutions...promises to usher in a potentially
better, if not necessarily newer, dawn of economic policies that radiates
the power to dispel the current darkness of socio-economic and socio
political confusion... the review exudes qualified optimism about country’s
prospects.”
Mr. S.R.Kasbekar Senior Editor, The Financial Express, Mumbai
“I have to say that the Indian Economic Review, 2005 Volume-
III, is very impressive and the material is very good. I send all of you
involved with it, my heartiest congratulations and wish you all the best.”
The Lord Paul, The Rt. Hon. Lord Paul of Marylebone
“Undoubtedly, it is of exceptional quality and amongst the best
that I have seen in my interaction with similar organisations in differ-
ent countries. I merely wanted to write to you and congratulate you
and your institution on an extremely well researched and presented
endeavour... I have taken the liberty of putting the copies that I had
FOR LIMITED AND PRIVATE CIRCULATION ONLY
got along in the WTO library.”
Mr. Shishir Priyadarshi, Development Division, WTO, Geneva
“...The Indian Economic Review is a very informative docu-
ment.”
Dr. V.L.Chopra, Member, Planning Commission, New Delhi
“...I found it very useful material, which has dealt with the vital
issues that we are facing in the field of education, health, poverty
and employment. I would like to compliment all the authors as well as
the editorial team for bringing out such a valuable publication.”
Dr. Arun Nigavekar, Chairman, UGC, New Delhi
“If the purpose of a think tank is not merely to think issues through
but also to ignite thinking among the readers, I think you have suc-
ceeded very well indeed.”
Mr. R.Badrinath, Director, Division of Trade Support Services, International
Trade Centre, Geneva
“Modern India certainly needs more think tanks like yours... unlike
most academic journals, yours is well-designed, readable and also
conveys a sense of aesthetics and humour through the illustrations...
it well reflects the high standards of the IIPM.”
Mr. Brij Khindaria, President, Diplomatic forum for Business, Geneva
“I have received the IER issue...very impressively put together with
a lot of solid analysis...kudos to those who are bringing it out.”
Mr. B.S.Raghavan, IAS(Retired), ex-US Congressional Fellow, ex-Policy
Adviser to UN(FAO), ex-Adviser to International Commission on Peace and
Development, ex-Director, Politician and Security Policy Planning, Government
of India
“I am much impressed by the content and quality of the journal
Indian Economic Review and the wide range of issues it covers.
The editors indeed fully deserve the title of ‘think tank’!”
Dr. V.M.Madiman Rao, Institute for Social and Economic Change,
Bangalore
 PRAISE FOR IER
“Thank you very much for sending me the Indian Economic Review
2007 on India’s Policy Deficit: Planning for Change. I appreciate the
initiative taken by the IIPM Think Tank in this area.”
Dr. Indira Hirway, Centre for Development Alternatives, Ahmedabad
“Your publication is interesting and useful to us in our work.”
Mr. Mihir.R.Bhatt, Honorary Director, All India Disaster Mitigation Institute,
Ahmedabad
“It is nicely designed and also rich in contents.”
Dr. Rudra Narayan Mishra, Gujarat Institute of Development Research,
Ahmedabad
“We at IDEI do appreciate the efforts being made by your organiza-
tion...IER which is committed to enhance public awareness of policy
issues in economics and management and to engineer solutions that
will fulfil the Great Indian Dream.”
Ms. Rajpreet Kaur, Program Support Officer, International Development
Enterprises (India), New Delhi
“I like the content, which is extremely detailed but balanced and
certainly offers a good non-ideological mix from leading authors.”
Dweep.I.Chanana, UBS Philanthropy Services, a consulting unit of UBS
AG, Zurich
“I managed to flip through the Review and found some of the articles
very interesting ... IER has an interesting mix of articles and the photos
and layout are also very well done.”
Ms. Kumkum Dasgupta, Hindustan Times, New Delhi
“They are highly informative, focusing on contemporary issues.”
Dr. Rajib Kumar Sahoo, Senior Economist, Canara Bank, Bangalore
“Presentation of IIPM Think Tank is really of high quality. Your team
led by Dr. M. K. Chaudhuri and Prof. Arindam Chaudhuri deserve
the appreciation from every one who has a vision and dream for a
new innovative India. Hope your effort will become a path finder for
innovative research workers.”
Dr. Gouri Pada Dutta, Chairman, Subject Committee (Health), State Plan-
ning Board, West Bengal, Kolkata
“I would like to Congratulate IIPM for bringing such critical policy
issues to the forefront, especially as India and world’s other great econo-
mies tread on the path of globalization and economic liberalization.
Your efforts at adding the human face to some very core management
areas are indeed commendable.”
Mr. Bharti Ali, Co-Director, HAQ: Centre for Child Rights, New Delhi
“I have been reading it with great enthusiasm, interest and curiosity
nonetheless. I would also like to congratulate you and your team for
truly high-quality editions of IER that are of the prime importance to
the future of India’s thriving economy.”
Dr. Rok Spruk, Slovenia
“I have received your energy /environment special issue. I enjoyed
reading it. This is one of the most comprehensive reviews available on
the subject today... This number is timely and will serve as a basic refer-
ence for leading policy makers/planners in India. In fact, I can say that
all your volumes are packed with information/ideas for development
workers. I wish you all the best in your new assignment.”
Dr. G.Poyya Moli, Member, CEM, IUCN & Member, SEAC & SHCC, Govt of
Puducherry, Reader, Department of Ecology & Environmental Sciences, Pondicherry
University, Pondicherry
“I am impressed particularly with the varieties of issues that you have
been able to cover in this publication. Thank you for this spectacular
piece of work.”
Dr. Soumendra K. Dash, Chief Economist, CARE Ratings Ltd, Mumbai
“I find that the journal covers a wide range of subjects in Economics,
and is very useful both for reference and research.”
Dr. Prabha Panth, Professor of Economics, Osmania University, Hyderabad
“The copies of IER are excellently produced and its so nice to see
that you have many new names from new institutions.”
Dr. PadmaPrakash, Editor, eSocialSciences