A talk by Arundhati Roy and watching Peepli Live has motivated the contents of this post largely. I have been forced to rethink what ‘economics’ as a discipline should do in a country like India. How can it contribute to economic growth and human development. It is often forgotten that, economics studies the big black box that transforms the labour of the labourers into commodities for consumption by the labourers. People or rather, people who work, appear at both the ends of the tunnel. The black box or the tunnel consists of varied actors, markets, institutions, laws, power groups, social classes, etc.

Some economists try to make sense of this complex interaction using tools such as game theory, which throws light of certain aspects of the interaction. This in turn is supposed to aid in the design of better institutions. A few study labour, the main actor in the whole economic process. Some look at institutions and how various legal arrangements affect the economic outcomes. It remains to be asked: outcomes for whom? In this manner, the entire profession of economics has been divided into various sub-disciplines, each specialising in a particular aspect of the economy. And it is evident that communication between the above mentioned sets of economists happen rarely. Very often, the larger picture is forgotten. Each group presents their results with a tremendous sense of certainty, which is entirely misplaced. And, the joke that economists love their ceteris paribus clause comes true here. Except that, the clause in this case, assumes as constant the remaining processes or aspects of the economy!

Who are the real producers in an economy? What role do farmers (small, marginal and large) play in our society? Do they live in dignity? When inflation occurs, do these farmers get more incomes? Or do the intermediaries pocket the increase? Are proper institutions in place to provide them with adequate credit? Can these formal institutions compete with the informal ones, such as money lenders and chitti funds?

It is accepted that farming is not a profitable enterprise any more. Policy makers are calling for industrialisation. They want the farmers to come away from their lands and work in industries. And so arises the slums in and around major cities, where their living conditions are perhaps worse than in the villages. Or, most of them are forced to become construction workers. Urbanisation implies buildings, which creates construction jobs in plenty. Once the space in big cities are exhausted, the urbanisation will take place in small cities. Workers will be in demand. In short, labour migration and increasing labour distress, owing to improper housing conditions will become even more intense. It is time, serious attention is paid to farmers and the role of farming in the development of India.

To conclude, it is time we paid more attention to the condition of India and not blindly follow academic fashions. It is the duty of the civil society and especially, the academicians to study the problems and issues thrown up by the society. When the problems of the majority of the population in India –those who live in the rural areas, those who work in the informal sector and those who are farmers– are forgotten and relegated as “deviations from the normal” or “problems of the Indian economy” and not as characteristics of the society we live in, it is indeed a pitiable situation.

This article tries to show that high rates of GDP in India need not trickle down to the rest of the masses and also strives to explain why ‘segregated growth’ further fuels inequality. By ‘segregated growth’, I refer to growth which takes place in sectors which employ relatively a small percentage of the total labour force.

The IT revolution is happening but the GDP contribution of agriculture is decreasing.  One inference from this change could be that, labour from agriculture is migrating to the services sector; but that is not the case in India. India is witnessing farmer suicides, increased debts, droughts and low productivity in the agricultural sector.

Sustained economic growth requires progress in several dimensions – education, health, infrastructure, legal institutions, etc. [Noll 2006] For the whole of the population to enjoy sustainable growth, it is essential that growth takes place in all sectors of the economy. Otherwise, it will lead to growth, but only in a few sectors, like the IT boom which India faced. This growth is not sustainable in the long run. Another consequence of such ‘segregated growth’ is that, the GDP figures will show an increase. And as the GDP is the most commonly used (By the media) measure among the masses to portray economic growth, the picture presented will appear rosy.

Moreover, the per capita income will also show a rise due to the increase productivity coming from ‘such sectors’. This increased GDP will not trickle down as many economists and others state. This increased income accruing to the denizens of ‘such sectors’ will only be spent in conspicuous consumption. Thorstein Veblen coined the words ‘conspicuous consumption’ in his book ‘The Theory of the Leisure Class’. The basis on which good repute in any highly organised industrial community ultimately rests is pecuniary strength; and the means of showing pecuniary strength, and so of gaining or retaining a good name are leisure and a conspicuous consumption of goods. [Veblen 1899]

On Poverty

And though the country (India) has made significant strides – poverty levels are roughly 35%, down from close to 60% in the 1970s, (by the World bank’s $ 1 a day definition of poverty, though precise numbers are the subject of never-ending debate) – the benefits of this rapid growth are yet to trickle down to the masses. [Bhusnurmath 2006]

Development agencies define poverty as an income of less than $2 per person per day (about $3,000 annually for a family of four). By this standard, nearly 3 billion people are poor. [Noll 2006]

I wonder why India still defines poverty as an income of less than a dollar per day for a person. I had argued for a restructuring of the current poverty line in another article of mine. Probably the present estimate makes it easier to state that poverty levels have come down from 60% to around 35%!

On Development

Amit Bhaduri, in his recent paper in the Economic and Political Weekly, wonders if it is Developmental Terrorism or Development which is taking place.

Destruction of livelihoods and displacement of the poor in the name of industrialisation, big dams for power generation and irrigation, corporatisation of agriculture despite farmers’ suicides, and modernisation and beautification of our cities by demolishing slums are showing everyday how development can turn perverse. [Bhaduri 2007]

Conclusion

Thus, the Indian populace is dichotomized in terms of economic growth; there are certain areas where growth levels are very high along with a majority of sectors which are witnessing a decline. Thus, this kind of ‘segregated growth’ fails to ‘trickle down’ to other sectors of the economy.

References

1) Roger Noll, The Foreign Aid Paradox, SIEPR Policy Brief, October 2006.

2) Thorstein Veblen, The Theory of the Leisure Class, 1899. (Full book available here)

3) Mythili Bhusnurmath, Time for a reality check, www.forumblog.org, November 25, 2006.

4) Amit Bhaduri, Development or Developmental Terrorism?, EPW, February 17, 2007.

The decline of Indian manufacturing sector

This post will be one among a series of posts relating to the Indian economic history based on the book by Romesh Chunder Dutt called ‘The Economic History of India.’[Published 1902]

Being cognizant of what happened to the economy during the British rule in India will enable us to understand the causes and reasons of some of the contemporary social and economic issues. A thorough understanding of the British policies in India will bring to the fore the reasons why India, a relatively strong and mighty country earlier, faced famines, debts, etc.

This post tries to examine certain historical incidents brought out by Dutt in relation to the current socio-economic framework.

“The Englishmen introduced western education, built a strong and efficacious administration, framed wise laws and also established courts of justice.”

“India encountered famines during the years 1877, 1878, 1889, 1892, 1897 and 1900 which carried off more than 15 millions of people.”
Though British introduced such efficient institutions, India lost millions of lives in the famines. Famines further aggravate poverty and also undermine the confidence on the Government.

“Sources of wealth have been narrowed under British rule.”
Though they provided India with efficient enterprises, they thoroughly looted India of all its wealth. The British rule proved to be a lacuna in the growth of India which further accelerated and aggravated problems like high external debts, droughts even after Indian independence.

“India was a great manufacturing as well as an agricultural country in the 16th century.” “Indian loom supplied the markets of Asia and Europe.”
The manufacturing sector is increasingly dependent on the agricultural sector for raw materials. The demand for manufactured goods predominantly comes from the primary sector. Most of the populace was engaged in agricultural activities, and due to this they enjoyed a considerable ‘Demand capacity’, which provided them with the sufficient ‘purchasing power’ to consume manufactured products. This sort of a healthy relation between the 2 sectors is sustainable in the long run, rather than an economy which depends heavily on a single sector. Of late, the rhetoric has been to increase GDP growth rates, without mentioning the importance of contributions from Agriculture to these growth rates.

“East India Company and the British parliament, followed selfish commercial policy which discouraged Indian manufacturers.” “An excise duty was imposed on Indian cotton fabrics which disabled then to compete with Japan and China.”
The British ruined the manufacturing sector by imposing heavy duties on its exports thus making it costly in the global market. Owing to the fact that India had abundant natural resources, Agriculture could not be strangled.

“British made Indian people grow raw produce only.”
This enabled them to purchase cheap raw materials and had it processed in England which was later sold for exorbitant rates in India and elsewhere.

“Millions of Indian artisans lost their earnings.” “The invention of the power loom in Europe completed the decline of the Indian industries.”

Thus the Indian manufacturing sector was almost reduced to nothing by the end of 1947.

Advances in Economic History

A new branch of Economics, namely ‘Cliometrics’ which refers to the systematic use of economic theory and econometrics techniques to study economic history has helped economic historians in increasing the accuracy of their findings.

The Royal Swedish Academy of Sciences awarded the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel for 1993 jointly to Professor Robert W. Fogel, University of Chicago, USA, and Professor Douglass C. North, Washington University, St. Louis, USA, “for having renewed research in economic history by applying economic theory and quantiative methods in order to explain economic and institutional change.” [Nobelprize.org]

Further Links

1) The Cliometric society
2) Cliometrica (Journal of Historical Economics and Econometric History)

This post is based on an article titled ‘Special Economic Zones: Revisiting the Policy Debate’ which came in the ‘Economic and Political Weekly’ authored by Aradhna Aggarwal.

The discontents against the SEZs are

1) This will bring about a significant revenue loss to the government. This will result in a kind of ‘disguised industry’ just as ‘disguised unemployment’. There will not be adequate production quid pro quo of the investments undertaken.

2) This will not only ruin various societies of their livelihood, but will also contribute to escalating inequalities and poverty. Moreover, relief and rehabilitation is to be provided by the SEZ developer. How far this will be successful is questionable.

3) This not only affects the people living in the proximity but also the agricultural sector as a whole. Of late, there has not been much growth in agriculture. This, like the author posits, will have serious implication for food security.

4) This will exacerbate the income and wealth inequalities. Moreover, since the public does not have access to the proceeding of SEZ’s, it will be difficult to ensure if the remaining 65% area is being used for productive purposes. [For that matter ensuring the 35% will prove difficult]

“The trend is already seen in the initial approvals. The share of the four most industrialised states (TN, Karnataka, Gujarat and
Maharashtra) in total approvals is 49.5 per cent. Andhra Pradesh, Kerala and Haryana account for another 31.1 per cent of total approvals. Thus seven states account for 80.6 per cent of approvals. Their share of in-principle approvals is 63.8 per cent. On the other hand, industrially backward states of
Bihar, north-east and J and K do not have a single approval.”

Thus not only do these SEZ’s worsen the lives of significant number of people, but also contribute to widening regional disparities and that too all at a cost to the government and people.

[Since a reader had requested me to discuss about SEZ’s, I thought of writing this post; though it is late.]