Category: Agricultural sector

Economic Survey of India 2010-11: A Critical Look

The Union Budget is presented based on the Economic Survey conclusions and recommendations. Therefore, the Economic Survey becomes a crucial document to examine and interpret. This time as well, the hands of its architect remain quite visible. Like the previous attempt, there is an increased use of economic theory ‘ game theory, mechanism design, rational choice theories, etc ‘ which provide support to various policy recommendations. According to this economic architect, all solutions are to be found in incentives. If the right incentives are provided, then economic and political governance will be smooth like that of the most competitive market. Agreed! What commonsense and insights from various social processes tell us is that individuals have heterogeneous preferences and what is an incentive for one might be poison for another. This blog post will examine some of these suggestions in detail (from Chapters 1 and 2 of Economic Survey 2010-11). In particular, the suggestions examined below will be those which have been favoured or disregarded based on arguments drawn from (neoclassical) economic theory.

Fiscal policy

Economic Survey 2010-11 assures the reader that India has recovered from the global financial crisis because of the high growth rates. For all practical purposes, this information indicates that we can now call for fiscal consolidation or lowering of the fiscal deficit. The usefulness of the government is over; let market forces function peacefully now without any government intervention!

‘With clear evidence of economic recovery in 2009-10 as indicated by the Advance Estimates of the GDP, the Budget for 2010-11 resumed the path of fiscal consolidation with a partial exit from the stimulus measures.’

It is at the same time interesting and worrying to see this sort of rhetoric. Such rhetoric rests on the following premise: the opportunities for investment are limited (read: scarce) and the entry of the government will crowd out private investment. Surprisingly, this neoclassical idea, which is much promoted in our academic textbooks, fail to point out the fallacy of composition on which this argument is based. This argument does not recognise the interdependence in an economy. Wages generated from government jobs are not only used to purchase goods and services from the government sector. In fact, the wages and salaries generated by the government sector are spent in consuming goods and services produced by the private sector. It is certainly time policy makers understood the benefits of crowding in effects of government intervention. The expenditure, one should look for, is mainly in social services ‘ education, health and employment.

Agriculture

Agriculture has been identified to be critical for macroeconomic stability and growth; although services sector is our potential growth engine. This can be read as: agriculture needs to grow at a level which will enable (the favourite word of the economic architect) the service sector to grow. Agriculture is carried out by majority of our fellow Indians (around 60 %) and it provides us food and raw materials. Our economic architect argues:

‘The rise in prices of agricultural produce would in part help incentivize production; the moot question remains what proportion of the rise accrues to the producer and what proportion gets appropriated by middlemen. The creation of more direct farm-to-fork supply chains in food items across the country would be critical in incentivizing the farmer with higher producer prices and at the same time would lower the prices for end-consumers.’

Why are middlemen always blamed’ Are they not the ones who aid production’ Who exactly are these middlemen’ Be that as it may, what is clear is that the middlemen have often more power (economic and social) than the actual producers. Majority of the farmers are forced to sell their product immediately after harvest owing to debt obligations. In addition, the (small) farmers do not benefit from the price rise because they do not have adequate storage facilities. As a matter of fact, even the Government only stores certain food grains in its godowns. Vegetable and fruits are not procured by the government. The undue emphasis placed on incentives by our economic architect is of concern. For one, production can only be carried out if the farmers have sufficient capital to purchase inputs. In India, the phenomenon of inter-linked markets is common in agriculture. That is, the same person provides credit as well as inputs to the farmers, thereby enjoying a very strong bargaining position over the farmer. Now, when our economic architect recommends FDI in retail food because they incentivise production, he is being blind to the production conditions of Indian agriculture. This can exacerbate the plight of the Indian farmer by making him/her subject to the contracts of the foreign firms. In this scenario as well, the farmer, owing to his/her weak bargaining power will never be able to enjoy higher prices. But yes, this could mean a lowering of prices for our urban consumers!

Inflation & employment

The subject of inflation has been dealt with in great detail in Chapter 2 of the Economic Survey 2010-11. In recent times, inflation has affected both the rural and urban consumers. However, as we know, the effect of inflation on the consumers are not equal in magnitude. Consumers who have very less income will be deeply affected by inflation. For instance, the small and marginal farmers are severely impacted when prices rise. Given this plight, the following statement by our economic architect is indeed baffling:

‘It may be mentioned that food price inflation during the last financial year was mainly driven by high inflation in pulses, cereals, and sugar due to bad monsoon. The rise in the purchasing power owing to the rapid growth of the economy and inclusive programmes like the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) partly might have contributed to the upward trend in inflation.’

First of all, the above statement indicates an inadequate understanding of inflation. Secondly, what about the rising purchasing power of the urban consumers or the employees of BPOs. What makes our economic architect point fingers at those who barely manage a living’ If the beneficiaries of NREGA were surviving by barely subsisting before NREGA, their purchasing power would not have risen so much post-NREGA to contrbute, as our economic architect suggests, to inflation. In fact, such statements indicate a gross misunderstanding of inflation, a lack of knowledge of how rural India operates and a insensitivity towards subsistence and livelihood in general.

Conclusion

It is high time that we seriously examined some of the tenets of conventional (neoclassical) economic theory. Today, a lot of students and professors of economics world over are questioning the premises and logic of neoclassical economics. However, we find neoclassical economics still domination in various forms, such as new institutional economics, mechanism design, law and economics, microeconomics etc. Given that some of the foundations of economic theory are in question, it is surprising to see how much our economic architect bases the policy recommendations on such apparent scientific and objective truths!

Krishna Bharadwaj: The Ideal Economist

Krishna Bharadwaj is an economist who made lasting contributions to economic theory. She is especially known for her understanding of the classical theories of value and distribution. In particular, she has successfully traced out the history of classical as well as neoclassical economics. This kind of conceptual history writing is important, especially for the economist who wants to apply these theories in understanding the socio-economic reality. And because of her firm grasp of various theoretical approaches in economics, she was able to judiciously analyse problems of the Indian economy. She was, in fact, the first economist to point out the exploitative nature of inter-linked markets which are prevalent in Indian agriculture. She also placed emphasis on the power relations which dominated the production structure of agriculture in India.

Apart from struggling to show the distinct and superior nature of classical economics over neoclassical economics, Bharadwaj also relentlessly worked on Indian economic issues. In particular, Bharadwaj analysed the structural linkages between agriculture and industry in India and also examined the production conditions which characterise Indian agriculture. In her latter study, she pointed out the inadequacies of neoclassical economics in understanding Indian agriculture. She particularly criticised the application of production functions. In addition, Bharadwaj explained the origin of neoclassical economics and how it suffers from various logical as well as other methodological issues.

For Bharadwaj, theory was only a tool to understand the questions and problems which arose from the social reality. This is why, she promoted the teaching of different economic approaches in Centre for Economic Studies and Planning (CESP) at Jawaharlal Nehru University (JNU), such as classical, Marxian, Keynesian as well as Walrasian. As Prabhat Patnaik writes in a foreword of The Krishna Bharadwaj Memorial Lecture, ‘according to her [Bharadwaj]…we had to evolve a research-cum-teaching agenda of our own. No centre in India could flourish, by international standrads, merely by mimicking what was happening abroad, merely by showing proficiency in solving problems which were posed abroad. The problems has to be rooted in the social reality of our own country, and the effort to grapple with them had to be, very consciously, located within the intellectual endeavour of our country…[However] Her emphasis on taking up problems rooted in the Indian social reality was not a plea for turning one’s back upon theory or theoretical struggles. On the contrary, her plea for investigating our real problems, was simultaneously a plea for a richer theory, a theory with a body to it, one which is all the more powerful because it has been used for investigating real problems facing economies like ours.’

From her work on economic theory and its applications to the Indian economy, what becomes clear is her philosophy that economic theory should be based on concepts which can be observed and be amenable to measurement in reality. This is one of the reasons why she criticised the demand and supply theories; for, values were determined by subjective utilities. Another quality worth mentioning is her firm belief that economic theories are not mere intellectual constructs; rather, they arise out of a particular socio-historical situation, often to promote a certain ideology. In her R C Dutt Lecture, which was later published as a book in 1986, she makes it clear that the emergence of demand and supply theories were primarily a reaction against Ricardo and Marx. For, in both Ricardo and Marx, a conflict of interest is visible between social classes. In order to promote the ‘idea’ of a just and harmonius system, the theories (especially the labour theory of value) of Ricardo and Marx were criticised as being limited, and an alternative was proposed. This new theory completely did away with social classes. Individuals were chosen as the primary unit of analysis. Social classes, actually was modified into ‘factors of production’. A very interesting and important methodological shift, with powerful political implications! All the factors of production were assigned equal importance, and it was also shown how both labour and capital recieved incomes according to their contribution to the production process. That is, a capitalist system, with free mobility of labour and capital and with clear property rights (contracts), is essentially a just and stable system.

To conclude, the following are the reasons why Krishna Bharadwaj is an ideal economist. (1) She had an in-depth understanding of the various theoretical approaches in economics, be it, Marxian, Classical, Neoclassical, Austrian or Keynesian. (2) She did not blindly apply these theories (mainly Classical and Marxian) to understand the Indian economy; instead, her inquiry was based on extensive empirical observations, which made the theory richer. (3) She considered it very necessary to understand the history of economic theory, especially because of the historical specificity of all theories. Also because, most theories are responses to certain socio-political events or interests. (4) Lastly, she applied all her experience in setting up a new centre, which paid close attention to both economic theory and its application to the Indian economy, in close connection with other disciplines.

References

Bhaduri, Amit (1992), Krishna Bharadwaj, Economic and Political Weekly, Vol. 27, No. 10/11 (Mar. 7-14, 1992), p. 490.

Bharadwaj, Krishna (1963), ‘Value Through Exogenous Distribution’, The Economic Weekly, August 1964.

Bharadwaj, Krishna (1986), Classical Political Economy and the Rise to Dominance of Supply and Demand Theories, Calcutta: Universities Press.

Harcourt, G C (1993-94), ‘Krishna Bharadwaj, August 21, 1935 – March 8, 1992: A Memoir’, Journal of Post Keynesian Economics, Vol. 16, No. 2 (Winter, 1993-1994), pp. 299-311.

Patnaik, Utsa (1991), ‘Krishna Bharadwaj: 21 August 1935 – 8 March 1992,’ Social Scientist, Vol. 19, No. 12. (Dec., 1991), pp. 63-67.

Patnaik, Prabhat (1996), Foreword, in Time as a Metaphor of History: Early India, by Romila Thapar, The Krishna Bharadwaj Memorial Lecture, New Delhi: Oxford University Press.

Roncaglia, Alessandro (1993), ‘Krishna Bharadwaj, 1935-1992. In Memoriam’, Metroeconomica, Vol. 44, No. 3, pp. 187-194.

To Economists: please pay attention to the ‘real’ problems

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.

The Indian Constitution and Human Dignity: for Economists

The field of law and economics is a glamorous one with economists such as Ronald Coase, Gary Becker and Richard Posner. It was Coase who provided the inspiration to law and economics through his introduction of ‘transaction cost economics.’ And Becker was the one who extended the domain of economics to virtually any social phenomena. Issues such as law, crime, marriage, family, etc came to be studied by economists. Although, the tools used never varied. It was the same old microeconomic baggage of neoclassical economics. Suddenly, neoclassical economics started feeling successful all over again. Their theory of value and pricing started explaining various social and cultural processes in the economy. However, this post is not a commentary on law and economics that is practised. For an excellent commentary on its origins and methodology, see the article by William Davies ‘Economics and the ‘nonsense’ of law: the case of the Chicago antitrust revolution’ in Economy and Society published in 2010.

The content of this post certainly falls under the label of law and economics. However, this post discusses certain aspects of the Constitution of India in the the light of economic policies undertaken-that of liberalization. The quotations in this post are from Dr. Durga Das Basu’s Introduction to the Constitution of India, reprinted in December 2009.

Economic Justice

The banishment of poverty, not by expropriation of those who have, but by the multiplication of the national wealth and resources and an equitable distribution thereof amongst all who contribute towards its production, is the aim of the State envisaged by the Directive Principles. Economic democracy will be installed in our sub-continent to the extent that this goal is reached. In short, economic justice aims at establishing economic democracy and a ‘Welfare State’.

The idea of economic justice is to make equality of status meaningful and life worth living at its best removing inequality of opportunity and of status-social, economic and political.

That is, an increase in growth rate is seen as the way to banish poverty. This principle is certainly based on the idea that growth trickles down. As has been witnessed in India, all that liberalization has achieved is ‘jobless growth’. Hence, the need for policy documents to shout for ‘inclusive growth’.

Now, all those who contribute to wealth by being producers are supposed to be compensated. It is on this class, that the burden of development falls. For, they do not have the adequate social and economic voice to demand for ‘just distribution’.

Can India claim social justice just by making opportunities equal’ Equal opportunities perform their function only in an already just and equitable society, and not in countries where inequality of income and wealth is so skewed. Thus, an active intervention is necessary at the level of production as well as distribution of GDP.

Nehru’s idea of Socialism is that ‘every individual in the State should have equal opportunity for progress.’ However, this idea cannot hold any water until the institutions in the State are examined- judiciary, executive, military, private enterprise, unorganised sector, etc. For instance, some groups of people are exploited as producers, where they are paid less than minimum wages. Therefore, as a consumer, they get exploited as well. This then passes on to their access to health, schooling, sanitation, housing, and so on.

Individual Liberty

The Preamble, therefore, says that the State, in India, will assure the dignity of the Individual. ‘All citizens men and women equally, have the right to an dequate means of livelihood, just and humane conditions of work, and a decent standard of life and full enjoyment of leisure and social and cultural opportunities.’

When economists and policy makers talk of ‘inclusive growth’, it is the dignity of the individual which is at stake. Often, India’s characteristics such as high reliance on agriculture, a large percentage of unorganised sector, immobility of labour and the like are labelled as detrimental to India’s growth and development. One cannot help but ask: Whose growth’ Such perceptions by the academia are largely a result of the manner in which human beings figure in micro and macro economics. If you take a moment to think about it, you will realise that poor people-who are a heterogeneous group- is absent from our theoretical edifice. Why’ Who are we analysing’ And to discuss poverty, we have created a sub-discipline called ‘development economics’.

In any case, human dignity appears to be of lesser importance than the computation of growth rates using yearly and quarterly data. We are satisfied to decipher whether stock market exhibits volatility or not’ Or whether market A is co-integrated with market Z. Does this satisfaction come from the fact that stock market data is easily available’ What about the farmers, the child labourers, the migrant labourers who are forced to leave their place and family, of street vendors, and all the others who actually engage in production’

Until dignity of human life features implicitly or explicitly in economics, it will continue to be a lifeless endeavour. Sadly enough, we are taught economics is the study of choice’ Whose choices’ Those who have the ability to choose’ It is time we discarded such economics and re-visited economists such as Adam Smith, Joan Robinson, Amit Bhaduri, and others whose works show a concern for humans.