India's Economic Growth in 2005-06 Likely At 7.5%

This is what India’s Finance Minister Chidambaram indicated yesterday. He attributed this high rate of growth to peoples’ realization that hard work and efficiency alone will take them to prosperity! The change in the earlier estimate of growth rate at 6.9% however came about primarily due to the change in the base year from 1993-94 to 1999-00.

Mr. Chidambaram recognized that rising international prices for oil was a problem but in the interest of price stability, government would not pass on the full burden of rising oil prices to consumers. While commending RBI for doing an excellent job of containing inflation to about 5 to 5.5%, Mr. Chidambaram emphasized the importance of prudent fiscal polices.

To sustain this growth rate, Mr. Chidambaram wants more investment in roads, air and sea ports and railways and cooperation from trade unions in their implementation. In earlier posts, we noted the importance of increasing the savings rate in the economy, attracting FDIs through the medium of public-private partnerships, and reducing (or increasing efficiency of) public expenditures by reducing waste and untargetted subsidies within the limits of well-defined social safety nets. It may also become necessary to inject a "larger dose of prudence" in state governments' fiscal policies.

Mr. Chidambaram hopes to address some of these questions in the forthcoming issue of the Economic Survey and the Budget for 2006-07. We are looking forward to these documents and do more detailed work on individual topics.

At WEF: India says Rural Infrastructure and Rural Employment Critical For projected 8% Growth

At the on-going World Economic Forum at Davos (Switzerland), India's Deputy Chairman of the Planning Commission, Dr. Montek Ahluwalia, made a big pitch for rural infrastructure and rural employment, which he said were crucial to achieve the projected growth of 8 per cent -- he also said that it was important to review policy issues that hold development in rural areas? Wow...looks like he is beginning to shake up the Planning Commission and Ministries of Agriculture and Rural Development. Will he succeed? Can he get the state governments on board?? This is what this blog has been harping upon -- see earlier postings.

Finance Minister, Mr. Chidambaram, who was also at WEF wanted to raise resources for capital investment by increasing domestic savings, opening doors wider to foreign direct investment, and making India a major manufacturing hub. He is reported to have said that India and China were not competing with each other (what?), that both countries were following different models for growth and development (really?), and there was enough capital in the world for the two countries to attract (Is it ?). Mr. Chidambaram, if this is so, why not international capital flowing to India as much as it does to China? And what about China's phenomical growth in exports relative to India's.

Let us watch how Mr. Chidambaram's forthcoming budget proposals for the fiscal year 2006-07 respond to these challenges?

Farmer Suicides in India

I propose to shortly put out a brief analysis of the farmer suicide syndrome in India for purposes of discussion in response to Chandra's recent comment on the poverty issue that is being discussed in this blog.

The growing numbers of farmer suicides in India is a tragic topic -- in an environment of a rapidly growing economy, involving complex political, social and economic issues --- especially in the area of rising disparity in incomes in rural India per se and between rural India and Urban India.

There are many reasons that lead farmers to commit suicide but perhaps the most prominant of those are those which affect farmer incomes and increases his indebtedness to money lenders.

These include:

-- crop failures due to irregular and inadequate rains, drought or flooding; lack of crop insurance in terms of coverage and products that are cost effective;

-- lakc of access to working capital due to failure of the formal credit system and/or fully used up credit rating and eligibility with local money lenders and family friends;

-- farmers' resultant inability to buy inputs such as seeds, fertilisers, draft power and water;

-- serious problem of spurious or poor quality seeds and fertilizers that are sold in the market fradulently using brand names; severe land fragmentation and resultant uneconomic farm sizes;

-- slow progress on land reform; large number of land-less labor exacerbated by lack of employment opportunities in rural areas;

-- ineffective implementation of public employment guarantee schemes; and

-- undeveloped and inefficient marketing infrastructure; and government procurement and support price policies though prima facie helping some farmers, leading to serious market distortions and inequalities.

Small and marginal farmers' economic situation is additionally exacerbated by age-old social enviornment that involves payment of huge dowries in marriages of daughters, and huge expenditures on obligatory feeding of village communities in the event of a death in the family. An integrated social safety net for farm households is yet to emerge in India.

Nevertheless, the problem of accurate statistical assessment of farm suicides remains: we really do not know how serious is this problem vs. other suicides in rural areas and those in rural areas vs. urban areas.

Or is there much media hype on this issue -- especially for political reasons? It is well known that the issue of farmer suicides led to the fall of the government of Chandrababu Naidu during AP's last assembly elections -- Mr. Naidu's remarkable work on modernizing the provision of public services did not help.

At the national level, BJP which made a big story of "India Shining" during the last Loksabha (Parliamentary) elections ended up in losing power at the Center on account of farmer perception that they were not getting a fair deal in an otherwise growing economy. All this seems to suggest that India's programs for rural areas are screwed up in many dimensions, excerbated by fast-melting social support framwork at the village level that was in the past readily accessible to farm families. The village communities generally did not allow a hunger death to occur among them.

We need to get back to all these issues but with a constructive effort toward nailing down an approach that is practical and capable of implementation not only with more efficient and effective public sector involvement but with greater community ownership and involvement.

Swaminathan on Indian Agriculture

Agriculture Minister Sharad Pawar is concerned that India could not be internationally competitive in the field of agriculture without sufficient investments! He said "the demand for foodgrains would go up in the next five to seven years and to meet this demand, the country would need a second Green Revolution". Food security essential for national security.

True, but how do we get to the Second Green Revolution? Mr M. S. Swaminathan, father of the first Green Revolution recently observed that the Second Green Revolution was not possible unless the prevailing neglect of the farm sector was halted and cutting edge technologies were taken to farmers.

Okay, but why farmers should adopt cutting edge technologies if there are no financial incentives to do so; access to quality inputs is not assured; and markets are distorted by government policies and regulations?

Indian agriculture's problems are one way or other contributed by faulty government policies and programs, perpetuated for decades in the so-called interests of farmers, largely guided by socialist ideologies that have since failed in former Soviet Union including Russia as well as in China.

China rejuvenated its agriculture by gradually introducing principles of market economy, which became an engine of growth during 1980s, the first decade of China's recent economic miracle and continues to be so. Russia is on her way to do so as many other FSU countries.

Indian Government must reform its agricultural policies on a priority basis to allow market forces to play their role, within the framework of a social safety net, and promote public-private partnerships to assure a better deal to the farm sector -- promoting flow of new investments and cutting edge techologies.

This blog knows that all this is easy to say but difficult to achieve in the prevailing political economy of India, where failed socialist ideologies are still rampant and misused. A classic example of this is the opposition by some political parties to Mr. Pawar's recent proposal to reduce food subsidies to largely urban population that is above the poverty line and use this money to increase investments in agriculture?

Wake Up India, Wake Up --to face this challenge!!

Some Comments on the Recent Poverty Reduction in India

As per the Planning Commission’s official statistics based on 55th round of National Sample Survey, BPL population declined from 36% in 1993 to 26% in 2000, i.e. by about 100 million. However, this number has been a subject of hot debate among economists because the survey methodology that was used for the 55th round of the National Sample Survey was not compatible with that used in earlier quinquennial, 50th round survey. However, it is acknoledged by experts that even if alternative methods were used there was a fall in poverty rate though it could be lower than that shown by the official statistics.

Scaling Up Poverty Reduction in India

There is much debate among economists, academicians and policy-makers in India and abroad about how poverty is officially defined in India. India’s Planning Commission for many years defined poverty in terms of level of per capita consumer expenditure sufficient to provide an average daily intake of 2400 calories per person in rural areas and 2100 calories per person in urban areas, plus a minimum allocation for basic non-food items. Based on these benchmarks, estimated state-level poverty lines vary according to cost of living differentials. The poverty line at all-India level in terms of monthly per capita during 1999-2000 ranged at about Rs. 328 for rural areas and Rs. 454 for urban areas. In terms of the progress in reducing poverty, the All-India head count of the population below the poverty line (BPL) declined from 46 per cent in rural areas and 41 per cent urban areas in 1983 to about 30 per cent and 25 per cent respectively in 1999-00. While this is a remarkable progress, there are still about 300 million people in India who live below the poverty line with the majority of them in rural areas.

In taking stock of the progress being made in India in the sphere of scaling up poverty reduction, this blog hopes to track, on a continuing basis, a range of issues including emerging disparity in incomes and concentration of wealth, and explore how the country’s policies and programs for reducing poverty could become more efficient and equitable. In particular, this blog would focus on ongoing and prospective poverty reduction strategies; explore how opportunities for the poor can be enhanced to increase their welfare, especially in the context of deepening of economic reforms and the expanding role of globalization; and assess if the national, state and local governments are indeed improving the governance, which is so vital for reducing poverty.

Please comment and share your thoughts on this important topic.

Watch Forthcoming Posts On Critical News Items

Friends: We have important topics on hand to write about:

1. Poverty in India: India has made impressive progress in reducing poverty over the past five decades, more so during the last two decades with economy growing at rates ranging from 5 to 7% p.a. Yet, there are important issues coming up including efficiency of poverty alleviation strategies and program, and growing ineqality in income distribution.

2. Agricultural Subsidies. Agriculture Minister, Mr. Sharad Pawar's recent attempt to reduce food subsidies that go to the population above the poverty line (APLs), which had the cabinet approval, was abrumptly stopped by some political parties that support the national government. What is behind this opposition to reducing food subsidies to APLs, a courages move by Mr. Pawar to reduce inefficiencies in public expenditures and better target subsidies? Are so-called communist and socialist parties scared of losing votes of industrial union workers? Is emerging political economy in India contributing the country to grow or slowdown the growth?

3. Equal Treatment to India and Pakistan on Nuclear Energy Issue? Senator John Kerry, in his recent visit to India, supported US-India deal on technology transfer for nuclear energy for civil use. Mr. Kerry wants US to give equal treatment to Pakistan in this area. Looks like there is little change in the democratic party's mindset ....its leaders are not reckoning that while India is the World's single largest democracy, Pakistan is still a dictatorship. Mr. Kerry, are you trying to rock the very rationale for the emerging US-India relationship based on the foundation of the two countries' faith in democracy? Let us explore this topic further as we go along?

Meanwhile, please feel to comment and contribute.

Save a Girl Child India?

According to a study published in the Britain’s leading medical journal, the Lancet, some 10 million female fetuses may have been aborted in India over the past two decades following pre-natal gender checks! says Google

Fewer daughters have been born to couples who have not yet had a boy. This was the conclusion of a study on female fertility from a continuing Indian national survey of 6 million people in 11 million households.

Analyzing information about 133,738 births, the researchers found that the deficit in the number of girls born as second children was more than twice as great among educated mothers than among illiterate ones. The Lancet study noted that by conservative estimate, pre-natal sex determination and selective abortion accounted for 0.5 million missing girls yearly for over the past two decades.

This reminds me of China’s failed one child policy, pursued by the government since 1979 in order to control population. , which also led to millions of abortion of female fetuses. The inhuman practice of killing female fetuses raises serious ethical, social and economic questions, whatever may the underlying reasoning. What do you think?

Rethinking Bank Regulation: Till Angels Govern

I must bring to your attention the recent publication of the new book -- Till Angels Govern -- by the Cambridge University Press. Edited by James R. Barth (Auburn U and Milken Institute), Gerard Caprio Jr (The World Bank and Williams College), and Ross Levine (Brown U), the book "provides a striking evidence (using a unique data set created at the World Bank) that strengthening of discretionary powers of prudential supervisors in countries with weak institutional environments leads to lower level of bank development, greater corruption in lending, and banks that are less safe and sound. Following the Basel II recommendations of strengthening supervisory powers, therefore, may do more harm than good in developing countries, unless it is unaccompanied by substantial progress in institutional development. This book provides an important warning to policy makers that what works for advanced countries may not work for developing countries." Reserve Bank of India and its Board of Supervision may take a note. One reviewer has commented that "developing countries need to place far more emphasis on policies that promote market discipline, like disclosure requirements, than on command and control regulations that often translate into discretionary abuse". More later ....

Bharat Nirman: What Are the Risks?

India faces a near crisis situation in all categories of urban and rural infrastructure requiring billions of dollars of investments, which public sector is unlikely to be able to raise on its own. There is thus a clear need for private and foreign investments in infrastructure, which will happen only if the policy environment is right. The private sector will not step in unless financial returns on investments are attractive and risks are manageable, especially the political risk which in India has many dimensions including bureaucratic delays, corruption, and interference in procurement and pricing of inputs and outputs. The flow of FDI is growing in recent years but is still not a scale that is sufficient to meet the massive resource gap – FDI will be of help only at the margin and that too predominantly for urban projects.

Against this background, the “Bharat Nirman” initiative, launched by Prime Minister, Dr. Manmohan Singh, in December 2005 is an ambitious plan for strengthening India's rural infrastructure including water supply, power, housing and roads involving an outlay of about $40 billion during the next four years or so (2006-09). Most of this funding is expected to come from the Government's development outlays. Government is also proposing a specific financing window through the National Bank for Agriculture and Rural Development (NABARD) for selected components of Bharat Nirman.

It is indeed gratifying to note that GOI has thought of public-private partnership (PPP) in rural infrastructure, previously unthinkable, with involvement of local governments (panchayats). The Planning Commission is reportedly working on models to be used for rural PPPs. State governments will be the key implementing agencies, with panchayats engaged in generating demand without which service delivery would not be effective. Bharat Nirman has set ambitioous goals in six selected areas of rural infrastructure - irrigation, water supply, housing, roads, telephony and electrification.

It remains to be seen if GOI and state governments which together account for annual budgetary deficits equal to about 10% of GDP will be able to provide required priority in allocating resources for the Bharat Nirman initiative and if pachayats could mobilize required capacity to efficiently plan and implement the program. Also, unless local communities are directly made responsible to design, oversee, implement, and manage finance for various elements of the program (outside the pachayat bureaucracies), Bharat Nirman seems to be at risk!

Increasing Public Savings Crucial to Sustain Economic Growth

We all know that one of the major obstacles in sustaining India's economic growth (including the agricultural sector) is the scarcity of capital. Recent years have seen some improvement in the country's savings and investment rates, though with marginal reversal in the trend of growing dissavings of the public sector. The public sector savings rate still remains negative. It is the private sector that is largely contributing to recent improvments in savings and investment rates. We will watch what GOI's forthcoming issue of Economic Survey has to say on this question. Unlike in the past, characterized as it was by politicians, we now have three well-known professional economists -- Messrs. Manmohan Singh (Prime Minister), Chidambaram (Finance Minister) and Montek Ahluwalia (Dy Chairman, Planning Commission) at the helm of India's macroeconomic affairs. The country should expect to have sound macroeconomic policies in place that are conducive to much-talked about increases in the rate of economic growth, currently at 7% going to 10%. Without determined effort to increase both public and private savings and investment rates, the launching of programs such as Bharat Nirman or Mission 2007 will prove to be merely populous, with limited or no outcomes? What do you think?

Mission 2007: Every Village A Knowledge Center

WITH an accent on broadening the benefits of science and technology to rural India, the on-going 93rd Indian Science Congress seeks to focus on issues relating to multitude of problems faced by rural India. The 93 rd Indian Science Congress is focusing on the familiar theme of “integrated rural development". The President, Mr. A.P.J. Abdul Kalam, will be launching a "Mission 2007: Every Village — A Knowledge Center" at the Congress. Let us watch if and how this new programs reaches rural India and its outcomes? Although the President himself is a well-known scientist and a serious individual concerned with the welfare of rural India without looking for votes, he can do very little without the help of the vast bureaucracy of the Indian national and local governments, which has time and again proved to be ineffective in reaching the local communities. What is important is to prepare communities to take upon themselves the responsibility to take advantage of the new program and benefit form science and technology. The local governments' prevailing extension systems are poorly equipped any way. This blog provides a high priority to the subject of rural development and will watch what shape the new Mission 2007 takes and if it can potentially make Every Village A Knowledge Center?

Renewed Emphasis on Agricultural Research

India's Research in Agriculture is practically stalled. The second Green Revolution sought by the Prime Minister Mr. Manmohan Singh and Agriculture Minister Mr. Sharad Pawar is unlikely to take roots without new directions to and investments in agricultural research including the appropriate use of biotechnology. At the inauguration of the 93rd Science Congress in Hyderabad (India), Prime Minister Manmohan Singh recognized this need and asked the community of scientists to provide a greater thrust on research to step up farm productivity and value addition. According to him, there are three challenges that Science and Technology must address to promote rural development: (a) augmenting agricultural productivity, (b) affordable technologies for energy and water and (c) efficient farm and non-farm technologies. This blog will get back to this topic soon looking at what various public sector research institutions are working on and what role the private sector reserch institutes are playing in this effort.

Are Incentives Right for Indian Agriculture? Where is the New Deal For Rural India?

India’s Finance Minister Mr. P. Chidambaram, in his new year message to the country, noted that Indian economy would grow by about 7 % during 2006 following an investment boom particularly in infrastructure, agriculture and the social sectors.

While infrastructure and social sectors have their own problems, my immediate reaction was: are incentives right for greater investment in India’s agriculture?

As recently as in the 2005 Agricultural Summit, Prime Minister Manmohan Singh noted that there has been a neglect in agriculture in the past decade. If we must step up the rate of growth of the economy to 7 to 8%, India must accelerate the rate of growth in agriculture; unfortunately, there has been a deceleration.

While the Tenth Plan assumed that agricultural production would grow at the rate of 4%, during the first three years of the plan, the growth rate has been below 1.5%. The Prime Minister said “to reverse this neglect, his Government would give a New Deal To Rural India".

We need to know where that New Deal stands today? The "New Deal" hopes to reverse the declining trend in investment in agriculture by stepping up credit flow to farmers; increasing public investment in irrigation and wasteland development; increasing funds for agricultural research and extension; creating a ‘single market’ for agricultural produce; investing in rural healthcare and education; investing in rural electrification; investing in rural roads; setting up commodities futures markets; and, insuring against risks which are inevitable in an increasingly commercialized agrarian economy.

Indeed, an ambitious agenda! As we go along, we must take stock of how effective the implementation of this agenda is? On December 9, 2005, Agriculture Minister, Mr. Sharad Pawar told the Parliament that India could not be internationally competitive in the field of agriculture without sufficient investment! Yes, Mr. Pawar, but this “investment” will not be forthcoming unless GOI and state governments implement major policy changes in pricing of agricultural inputs (fertilizers, water and power) and outputs (especially grains), and generates incremental resources by making full cost recovery of publicly-funded inputs, which is currently as a very low level. Also, the focus should be on public-private partnership in agriculture, which has much potential, if agriculture sector must grow.

Mr. Pawar told the Parliament that the demand for foodgrain would go up in the next five to seven years and that the country would need a second Green Revolution? Let us hope, Mr. Pawar who indeed knows what rural India and agriculture, will succeed in this effort, at least in setting up the right policy environment for revitalizing agriculture on which 80% of India’s population depends for employment and livelihood.