Category: Development Economics

India and it’s ‘Segregated Growth’

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 Economics of Remittances

Definition

According to Wikipedia, Remittances are transfers of money by foreign workers to their home countries. Remittances (also known as current transfers) include worker’s remittances and other private transfers on the current account. [Gupta 2006]

 

The Indian scenario

Remittances to India have increased at about 13 per cent a year since 1991, making India one of the largest recipients of remittances in the world. They have been the most stable type of external flows in India. They have been crucial in improving the current account and in the consequent build-up of foreign exchange in the last few years.

 

The effect of remittances on output and employment generation would depend on the end-use of the transfers. The effect would be larger if remittances are geared more toward investment expenditure.

 

In terms of percentage of GDP, remittances equaled about 3 per cent in 2003.

 

[These are excerpts from Poonam Gupta’s ‘Macroeconomic Determinants of Remittances‘ which came in the EPW.]

 

The Kerala scene

 

The great exodus of Keralites to the Gulf Countries during the 1970s oil boom was to a large extent possible because of the benefits these workers had gained from growing up in Kerala (better health and education, and more awareness of opportunities beyond their state). The money they send back today makes up 25% of the state budget, and one third of all remittances to India. It has not only helped to stimulate consumption levels in Kerala, which are among the highest in country, but it has also kick-started the boom in the tertiary (or service) sector of industry ‘IT, tourism, banking, private health care, etc. ‘ that has been the driving force behind Kerala’s economic growth spurt. While neither the manufacturing industry nor agriculture has experienced any significant growth over the past decade, the service sector now makes up something like 65% of the state economy, and has since 1986 until today gone from a growth rate of 3.25% to 7.5%. The remittances also probably served to underestimate Kerala’s economy throughout the financial dark ages, since they do not count directly towards the GDP. [Blomqvist 2006]

 

Reasons

Obviously, the most common motivation to remit is simply that migrants care of those left behind: spouses, children, parents, and members of larger kinship and social circles. First of all, remittances may just ‘buy’ a wide range of services such as taking care of the migrant’s assets and relatives at home, with the likelihood and size of remittances depending on whether and when the migrant intends to return. Secondly, it is clear that migration is primarily (but not only) driven by wage differentials, implying that people are ready to incur substantial moving costs in order to access to international migration. [Rapoport and Docquier 2005]

The main results established in the literature are: remittances are motivated more by an altruistic motive than by an investment motive; remittances are counter-cyclical, i.e., higher under adverse economic outcomes in the native country; they are used more for consumption than for investment; and they do not respond much to relative rates of return on investment in the home country. [Gupta 2006] This result is supported by The Hindu Business Line which says that ‘Unlike the capital flows, interest rate differentials are not found to be significant in determining the workers remittances, thus underlining the stable nature of these flows.’

 

A trade off’

Migration to other countries take place mainly when there are better employment avenues abroad. This usually takes place after the individual has completed his education. Large scale migration has been criticized by imposing on them the ‘brain drain’ stamp.

 

Thus when migration takes place, the home country is losing a significant chunk of its educated labour force. In developing countries like India, there is much to be done; but since the addition to labour force happens at a faster rate than the increase in employment opportunities, this ‘migration’ tends to become inevitable.

 

A trade off is evident between ‘brain drain’ and ‘remittances’. Though ‘brain drain’ is said to have a considerable pressure on the home economy (By withdrawing educated labour force) remittances tend to improve standard of living in the home country. But usually remittances better the standard of living of the ‘dependent population’. They do not affect or increase the productive capacity of the Indian economy directly, but they affect it indirectly through increased consumption.

 

Illegal flows

Unofficial remittances are sent through friends or migrants themselves or through traditional networks, known in some countries as hawala or chiti, which allow money deposited with a trader in one country to be paid out by a partner in the recipient country. [Mutume 2005]

 

Hawala is an informal banking system in which funds are transferred internationally, without being moved physically. Hawala brokers, whose relationships are based in part on trust, maintain running accounts with one another. Once a sender deposits funds with a hawala broker, the broker contacts another hawala broker in the relevant location and requests the dispersal of funds to the recipient. Hawala brokers employ fast methods of communication, such as phone or fax. The main users of the hawala system reside in the developed world and transfer funds to recipients in the developing world. [Fugfugosh 2006]

 

Conclusion

The increased inflow of remittances is what is fuelling the ‘consumption boom’ in India. The fact that the SENSEX is bullish and the real estate markets are booming are proof to this. (There has not been any proportionate increase in the intrinsic values. They might be a bubble which is financed almost to a large extent by remittances.) Adequate studies should be targeted at such interrelationships between remittances and various markets in the home country, so that the small investors do not incur huge losses.

 

Since, these remittances are relatively stable, this consumption boom will tend to sustain for longer periods. Moreover, these remittances are said to be one of the main reasons for lowering poverty. For example, remittances enhanced the standard of living of the people in Kerala. They also contributed to development in African countries.

 

The government is trying to improve the investment benefits accruing to the expatriates with a hope of increasing the flow of remittances. There is no doubt that remittances are beneficial to the receiving country.

 

Recipients spend these funds (remittances) in various ways: for some, remittances are their lifeline, without which they do not eat, as in Somalia; for others, remittances are transferred home specifically to be invested in savings schemes with attractive incentives, as in India. In Cape Verde, migrant remittances contributed to political change of the oppressive island government while for people from other countries, remittances are directed to community infrastructure development, such as collective projects in Mexico. These illustrations convey the message that in all corners of the globe, remittances are a precious tool for every single recipient and that the secure flow of remittances must be assured. [Fugfugosh 2006]

 

Thus for countries like India where additions to employment opportunities take place at a slow pace, migration will take place. Providing better investment avenues for these expatriates will help, although not significantly in bettering the flow of remittances. Moreover, by making such inflows easy and transparent, the unofficial inflows will reduce. Targeting these remittances and channeling them to socially productive investment avenues such as education and health will improve the condition of the Indian populace.

 

References

1) Steady rise in NRI remittances, The Hindu Business Line, 29th January 2004.

2) The Economics of Migrants’ Remittances, Hillel Rapoport and Fr’d’ric Docquier, March 2005.

3) Welfare and banana leaf thalis ‘ a foreign student’s take on Kerala, Part 1, Olof Blomqvist, 2006.

4) Informal Remittance Flows and Their Implications for Global Security, Miriam Ahmed Fugfugosh, 2006.

5) Workers’ remittances: a boon to development, Gumisai Mutume, 2005.

Special Economic Zones (SEZ)

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.]

The Demographic Dividend

India is growing with 7% GDP, Sensex crossing 10,000 and foreign reserves have crossed the $150 billion mark. Is this growth sustainable’ Yes it is, provided we reap the benefits of what is known as the ‘Demographic dividend’.

Simply stated, the demographic dividend occurs when a falling birth rate changes the age distribution, so that fewer investments are needed to meet the needs of the youngest age groups and resources are released for investment in economic development and family welfare. The falling birth rates reduce the ratio of the dependent population to the working population.

The demographic dividend, however, does not last forever. There is a limited window of opportunity. When the window of opportunity closes, those that do not take advantage of the demographic dividend will face renewed pressures in a position that is weaker than ever.

India’s current scene

India is and will remain for some time as one of the youngest countries in the world. A third of India’s population was below 15 years of age in 2000 and close to 20 per cent were young people in the 15-24 age groups. In 2020, the average Indian will be only 29 years old, compared with 37 in China and the US, 45 in West Europe and 48 in Japan.

But India’s developments in ‘human capital’ are exiguous. The poverty ratio for India is still somewhere around the 50% mark. Only 7% of the population is employed in the formal sector. Farmer suicides are being reported every now and then. The social infrastructure vis-‘-vis the physical infrastructure is disheartening.

The dividends

The generations of children born during periods of high fertility finally leave the dependent years and can become workers.

Working-age adults tend to earn more and can save more money than the very young.

And for given unemployment rates, the higher the ratio of those in the labour force to those outside it, the larger would be the surplus. If this larger surplus is mobilised for investment, growth would accelerate.

However, Fareed Zakaria in his book ‘The Future of Freedom’ depicts this bulge to be bad for the economy. He goes on to state that ‘A bulge of restless men in any country is bad news.’

Conclusion

To sum up, it is evident that India is entering the phase of demographic dividend. In order to realise maximum benefit from this population bulge, it is necessary that programmes aimed at improving health care facilities and education are undertaken. Moreover, farmer suicides are not decreasing; the debts are growing and burdening those employed in the informal sector generally and in agricultural activities particularly. Microfinance can help alleviate the farmers’ distress by granting loans without collaterals.

References

1) John Ross [2004]
1) C. P. Chandrasekhar and Jayati Ghosh [2006]