Make Reservations Effective to Eliminate Them
Arun Kumar
CESP/SSS, JNU, N Delhi 110067.
Mainstream June 10, 2006. Vol. XLIV No 25.Pp. 5 –11.
The government has announced that the Mandal Phase II is on, come what may. It has been called a commitment to the nation. The anti-reservation agitations are continuing. A confrontation is building up which seems to have no solution. The issues are complex and the various parties in the conflict – political parties, students, professionals and intellectuals - have taken partisan positions so that the situation of conflict is likely to prolong and it would become one more festering sore for the nation. Often the government adopts a delaying tactic to tire out people and this may also happen now that the agitating students give up but it creates long term issues of loss of credibility and growing alienation.
The anti reservation protestors have down played the issue of equity and focused on merit. In spite of the limited perspective adopted by the students, they are doing those who have favoured reservations a service by forcing them to reexamine and reassess the issues involved so that the schemes in operation can be made more effective. While this may or may not alter the elitist consciousness of the agitating students, a bigger benefit would be the change in those who have been in favour of the scheme in a formalistic sense; who in a sense have led to the discrediting of reservations.
When the reservations were introduced in the country, it was hoped, perhaps naively but perhaps in the spirit of nation building that this would help eliminate caste and the associated disparities and that in a short time span, reservations would not be required and could be eliminated. None of this has happened and reservation has become a permanent feature of our existence. Who is to blame for the failure? The indefinite extension of reservations means that it has not been successful. However, it has had partial success to the extent that the number of the deprived in all categories of education and jobs has gone up. The emergence of the creamy layer amongst the Dalits is a visible sign of its partial success.
Why has the problem cropped up again? Have some people become more deprived recently and if so, who are they? Are there no other ways to compensate for the deprivation of these people than reservation? Will not some other form of affirmative action do? Of course, there are many political aspects that underlie the actions of the various actors in today’s confrontation but here the attempt is to not focus on them except tangentially. Most people agree that on grounds of equity affirmative action should be there but what and for whom are the questions people do not agree on. Most people agree that reservations should end at some point of time but when? There are large disagreements on these issues.
Who are the deprived?
The backward castes have been demanding reservations, especially after the Mandal Commission Report but have not been considered to be as deprived as the Dalits were. Deprivation is a continuum from the most backward to the most privileged. The question is up to what point special privileges need to be created to compensate the under-privileged? At the time of independence, it was clear that the line should be drawn at what are today’s Dalits and no more. The others who today are demanding reservations were not considered backward enough to justify being granted reservations.
In reality, India as a whole was a backward and under-privileged nation in 1947. Today, at $600 per capita and in terms of most social indicators it is still one of the most underdeveloped nations in the world. At the turn of the century, barely 2% of the population was students and only 11% of the population was literate. There was hardly any higher education in the country – whether for the upper or the lower castes. In brief, a majority, including many belonging to the upper castes were under privileged in the educational sense. Death rate was high for all groups because of the poor social conditions. The per capita income was low for all groups. All groups were deprived of political power by the British, except those who collaborated but then they enjoyed only derived power not because of their being a part of an elite caste group. Hence, in 1947 almost all of India was under-privileged economically and socially but the Dalits were the most under privileged since they were also historically socially deprived and were exploited by all the groups above them in social ranking. These are broad strokes and there are various nuances that need to be taken into account for analysis.
It was a social contract of the national movement that all groups would be brought up and those who were at the bottom would be specially provided an opportunity to come up by assuring them reservations. They were given quotas in the legislatures, public sector jobs and educational institutions. It was realized that there was a possibility of ghettoization in this but that was considered a lesser evil since a historical wrong needed to be corrected. It was hoped that as opportunities open out, discrimination would also decline. As stated above, there was limited success.
In brief, data indicate that at the time of independence, all sections were deprived in most senses. After independence great strides have been made in literacy, health, incomes, etc. Thus, for most sections deprivation has declined. What is true is that disparities have increased and in that sense deprivation continues. Given that poverty persists, absolute deprivation also continues for some. For reservations to be extended, data need to be collected to show what has happened to deprivation amongst the backward castes? Has it increased compared to what it was at the time of independence. Scattered evidence suggests that many of the backward castes have done well.
Working of the Reservations
There are several reasons for the limited success of reservations. First, the national spirit could not be sustained beyond the initial years and the task of nation building was replaced by working for narrow sectarian interests. The notion of sacrificing for the task of nation building has been replaced by working for one’s narrow self-interest. Second, the incorrect development strategy adopted by the Indian elite since independence based on the top down approach in their own narrow self interest. This meant that the poor were marginal and the idea of equity (on which the notion of reservation was based) in society weakened.
Third, the small creamy layer of the Dalits was coopted in the elite ruling class. They did not challenge the development strategy or the marginalization of their own people. They have not worked for the change of the consciousness of the country in favour of democratization. Fourth, there was the massive failure of the state and its incapacity to deliver due to growing and rampant corruption. Consequently, high quality education is not available to all and adequate number of jobs have not been created so that there is a fight over the few spoils. Fifth, the belief in the various emerging politically powerful groups that the secular state cannot deliver so they have to grab privileges through capturing state power by any means.
The striking feature of all this is the role of the creamy layer. Their cooption into the ruling groups and inability to lead democratic movements which could change social consciousness and help all their own people to come up. At times, it appears that they have a vested interest in the continuation of reservations and an indifference to the others of their own groups. In a sense, they have acted no different than the other elite groups. Their large numbers in the parliament and the legislatures did not mean greater force for democratization which could have benefited all the under privileged in the continuum. Partly, this is political and partly it comes out of an insecurity.
In general, when any incompetent person (of any caste) moves up due to privileges, like, money or political power or family connections, they are insecure and defensive. In India, we are still feudal and this characterizes our political, business, professional and academic groups. Their relatives move up no matter what their capabilities. Unfortunately, most of those who come up through reservation have also adopted this approach. Consequently, they are also less confident and insecure. Rather than developing a broader perspective they often display a narrow defensive mould. The decline of the wider social consciousness all around enabled them also to justify their own narrowing of perspectives. The truly under privileged have lost out.
In brief, the blame for the lack of success of reservations is not only on the upper caste elite but also on the creamy layer of the Dalits. Reservations based on equity and social justice requires that horizontal equity be respected. Since the creamy layer has moved up and is perhaps better off than many in the upper castes, they should volunteer to be excluded from reservations. Those who today distrust reservations would then see the merit of going for vertical equity and positive discrimination for the poor.
Market and Merit
Today, with the market philosophy ruling, where is the question of sacrifice by any one. The dominant ideology has changed to `me for myself’. This is not only true for the business classes but also the political classes. Leaders from the national movement, led by Gandhi, set an example of sacrifice which everyone else followed. Nation building rather than me first was the motto of those in the national movement. Today, in Parliament or in the parties where are the symbols of sacrifice? Designer clothes are replacing Khadi, jet setting to come to parliament has replaced walking down to parliament and making money hand over fist through corruption has become the norm for successful politicians. Even those who wear Khadi in Parliament come out in fancy suits in the evening to socialize in five star hotels. Our leaders break most rules in the law book and then expect that the students will be idealistic and sacrifice. What examples are we setting that we ask the students to be different?
One may say these people have no ideological commitments so why expect them to be any different? This is itself a sad commentary on our politics that now there is little commitment to wider goals. However, there is a section of our society which has attained its status due to intellectual commitment - the academics. Even amongst them those professing socialist philosophy are busy making money rather than advancing the cause of the deprived. They take on projects and consultancies rather than do genuine research and teaching – killing the democratic spirit of the Universities and Colleges. They are the most immediate examples to students of what success is. We need to ask ourselves, when is the last time anyone of us in the elite groups agreed to sacrifice even a small privilege? Even those in the creamy layer are refusing to give up their privilege.
Why expect the students or anyone else to sacrifice for a very imperfect reservation? It is clear that the reservation policy does call on some students to sacrifice – those in the middle. Fifty per cent of the seats will remain for the general category students so the very best will have no problem of admissions. Some good students (possibly still at the top or in the middle) will be replaced by the less meritorious who enter through reservations.
If the state had been successful in delivering high quality education and full employment, would the problem have arisen? Everyone would have been meritorious and would have had jobs. The situation has become more desperate since the market based policies have led to decline in employment generation and led to the deterioration of public institutions of higher learning. Today, the Communist governments are openly seeking foreign capital which has little to do with the poor and can only worsen their situation through reduction in employment. The Lohiaite CMs are seeking the blessings of the big industrialists and making them the members of their development boards. Would such people serve the interest of the deprived? Media is projecting the image of the successful as those with pots of money. Then we ask the students to sacrifice. Can the policy makers and the elite begin to look beyond their noses?
The failure of the state and of the legislators from the deprived sections has been that they have not been able to ensure either good quality education or jobs. Have the latter worked systematically for Right to Employment or full literary? They have not protested the mockery of education through Sarva Shiksh Abhiyan, paying teachers Rs. 750 per month (below poverty level income). Who would be genuinely prepared to teach at that income? Surveys reveal that our children from deprived areas are not able to acquire the basic skills needed. They have not protested the growing corruption which undermines all development. They have not only not launched a campaign against corruption but have indulged in it. Elite sections not doing any of this is understandable but why the creamy layer created by the reservations? Clearly, the latter is coopted and hardly interested in social reform.
Different Forms of Reservations
This is not to deny that in our society we do not have reservations by various means. When we set up full paying courses, we are reserving by money. When the son of an industrialist inherits the management of the company that is also reservation. We are not going by talent or merit in these instances. This draws little protest since all of us have accepted private property as a rule and with market based policies dominating we have accepted that those with money have special privileges.
The question is how is merit defined? By the market. Yes, indigenous people have tremendous knowledge and corresponding skills but these are not valued in the market hence not counted as merit in the market. Skills are valued in the market and called merit but these are not necessarily based on social needs. Selling oil in ITC or toiletries in Hind Lever is paid far more so considered more desirable than being a teacher or a doctor in the villages. So the former is supposed to be more skilled than the latter so that the good students go for that. Why are the best students going for IIT or IIM? Because this is a passport to such high paying jobs or for going abroad again at high salaries. Is talent not being wasted in the process? What good is such merit if talent is only going to be wasted as far as society is concerned. It is equally true that in today’s market milieu, the students who come through reservations will adopt the same strategy as the general category students. They will not further the indigenous knowledge or serve in the villages and therefore also not serve the social purpose – they want a passport to a good life; a slice of the cake.
There is a legitimate argument for merit and skills in a complex and rapidly changing world. The anti-reservationists argument for merit is all too easily brushed aside by the pro resevationists. Many jobs are highly skilled all over the world and those lacking adequate skills cannot cope with them. Can it be denied that doctors have to be highly skilled or that space scientists or teachers have to be of the highest quality for new knowledge to be generated? Otherwise, we would further lag behind the rest of the world. Knowledge is built up, layer upon layer. Weaknesses in earlier stages result in continuing weakness. It is also true that skills and merit are not inherent or genetically determined but often are acquired due to opportunities, training and practice and in this the upper castes have clearly had a huge advantage.
Mrs. Gandhi’s political skills were honed by being in close proximity to power at the top. Many children of businessmen pick up skills of business through contact and work experience. This is denied to even the very best minds of the under privileged (including those from the upper castes). The elite classes, including the creamy layer from the deprived sections also win in the current system. The latter have a disproportionate amount of opportunity since they have limited competition - a fraction of the community has the entire community’s quota. Often they have even more opportunities than the upper caste students.
Are those against merit going to argue that they would give up merit in selection amongst those to be taken under the reservation quota? Will those taken under quota be selected by lottery, irrespective of their ranking because merit does not matter? Why is there pass or fail or grades or marks in exams? They represent different level of skills amongst the students. It is another matter that the exam system is imperfect and there are different kinds of knowledge and skills that the exam system does not represent. Are we asking for a radical reform of the system itself, including the examination system? But, as long as we live by the system, there is a difference in the level of skills amongst different students and those with the best skills need to be selected for jobs requiring high degree of skill. If merit is defined by the markets, giving up merit also means giving up the market.
In brief, merit and skills are important in many jobs relating to knowledge generation and perhaps not in selling oil or toiletries. Some of these skills can be acquired through training and opportunity which the poor do not get. To that extent reservations in certain course (like, management or administration) provide opportunities but the argument would not hold where high level of skills are required (like in medicine and R&D). Merit and skill should be delinked from salaries and there is a need for a national incomes policy to channel talent to social purposes and not into selling tobacco or moving funds around.
Our Formalistic Politics
Today, our political processes throw up formalistic solutions for short term gains. Where are the tall leaders who can stand up against this trend and work for building a different kind of politics? Today, no political party can stand up and say yes we made mistakes in the past and we will not give in to the vote bank politics. If reservation for the backward castes were a genuine move perhaps no one would have minded. What worries many is that it will be one more nail in the coffin of the task of nation building and eliminating the caste system. It would become a vested interest of some to continue to be categorized as backward. Just as today it is impossible to vote in Parliament against reservations, it will be even more difficult tomorrow to vote for its elimination. No one would even moot such a proposal.
Now there is talk of immediately expanding the number of seats for the general category students. Firstly, no one believes this is going to happen since such things have not happened in the past. Imagine the fuss when there is talk of raising the education budget to 6% of GDP or giving subsidies to the poor. Second, even if there exists the will to raise the expenditures it would still be impossible to expand higher education by 50% in a few years. One may also ask why the government has suddenly woken up to the idea of the need to expand higher education in the public sector. It has been arguing against this all the while on the plea of resources and dilution of quality, etc. Now it is waiving a magic wand and saying all would be well.
Expansion of higher education is a structural matter and not a matter of fiat. It is the quality that matters and not just numbers. One good lecture is better than hundred insipid lectures; actually they would put students off from learning. No wonder there is absenteeism of teachers and students from the classes. Universities and Colleges work like offices; nine to five. Today there is an acute shortage of good teachers because of the operation of the market mechanism. The salaries of College teachers do not compare favourably with those of other comparable jobs. Further they have few promotional avenues. How are we suddenly going to attract fresh talent given that with what is available, we are unable to fill vacancies in engineering and Medical colleges?
It is a chicken and egg problem. Given the status of teachers, good students do not enroll for Ph.D. except by accident. This is the situation in institutions, like, JNU. Thus, we are producing few good teachers and researchers. Hence the quality of teaching is suffering. In good institutions like the IITs or the IIMs, the students are inherently so good that the quality of teaching is more or less immaterial. Can this continue with reservations? Firstly, where are the 50% extra teachers? There are not even the teachers to fill the existing 20 – 30% vacancies. Yes, the undergraduate labs can be replicated with money but the teachers cannot be created overnight. Classrooms will get crowded and those admitted under the reserved category who would need extra help will flounder. They will be angry and insecure.
If justice is to be done to the students admitted under reservation, then much more than 50% expansion of faculty will be needed to help them. Another possibility is that teaching will be done at the expense of research so the long term standing of the institutions will decline. Finally, to attract talent, salaries of faculty will have to be at least trebled to match those in the corporate sector or to attract talent from abroad. The resources required would be a multiple of those estimated. Since none of this is likely, standards will decline and we will run down some of the better institutions and then end up creating other institutions at huge expense. Can we replicate good institutions like the IITs? With difficulty, since institutions are not just buildings and labs but also the human content and traditions.
Who amongst the backward castes would come to take the quota seats in elite institutions? Quite clearly, not the most deprived who are very poor and most of whose children drop out of school. Their families need them to work to earn and supplement family income. There are perhaps 20 million child workers. Further, a large number of these children are malnourished or they have learning deficiencies due to malnourishment of the mothers. They cannot even complete school much less go to College. Very few have the staying power to go to College and they are of course from the creamy layer. So reservation in higher education for the backward castes will be cornered by the creamy layer. Do these people need affirmative action like in JNU or reservation?
JNU Formula for Affirmative Action
There are some who talk of the success of the reservation formula in JNU. As they say, `Andhon me Kana Raja’ (the one eyed is the king amongst the blind). Yes, JNU is different and perhaps the most progressive institution of higher learning in the country. We have been giving points to those with a variety of backwardness. But if one asks how successful has it been, to be honest, not much. Most of the Dalit students are struggling in the class and suffer from social problems. We believe in formalism. Fulfill the quota and throw them in at the deep end. We hardly provide them with remedial help to overcome their handicap. Many do not come forward to take advantage of the remedial courses for fear of being labeled as weak. Mind you this is also the case with other students from backward areas not just those who are Dalits or backward. Finally, in today’s corrupt society, it is easy to get false certificates and no educational institution has the capacity to check all this. JNU experiment shows that the best of ideas do not get implemented the way they should because of inadequate commitment and belief in symbolisms.
Why has the problem arisen now?
The problem of reservation has slowly become acute since there is a growing crisis of unemployment. Out of the 9 million children joining the job market annually, hardly 2% of them will get the desired organized sector jobs paying well to enable them to afford a good life. The rest will be doomed to low paying unorganized sector jobs. The fight is over these few jobs and hence the need for reservations. The situation has been aggravated by the demonstration effect from the West and growing consumerism. Children brought up on high pressured advertising and Bollywood masala wish to live like their heroes but with little chance of fulfilling these aspirations at the low incomes most of them would be locked into for life. The failure of small business in India is high in today’s competitive world (with China breathing down the necks) so that there is not much prospect of starting own business. There are more than 3 lakh sick small scale units so that few of the poor students dare to start own businesses.
The public sector jobs are declining in numbers so that reservations in jobs has lost its meaning; the private sector does not reserve jobs. If we are to depend on the private sector alone for new jobs for all those coming into the job market, we need to have a different technology and an incomes policy. The market is not going to be an ally in this.
Further, the quality of most of our schools is rather poor specially of most government schools. Then how do students acquire skills. There is need for effective literacy and not just formalistic one. To do well in today’s world, one needs to be able to understand the current technology – even the three R’s are not enough. There is a need to have equally good quality schools for all. This is feasible if we go in for neighbourhood schools for all. But will the elite agree? Regarding higher education, they have actually been arguing against the expansion of the public institutions and suggesting privatization. They have been arguing that its rapid expansion has led to dilution of quality. For them privatization means profits and they wish to have no part of affirmative action. In Delhi, private hospitals were given cheap land on the condition that they would treat poor patients but this has not been practiced.
We have to change this mind set which is letting the public sector whither away even though it is known that the private sector would not cater to the poor. It is often argued that the government does not have the resources. Massive tax concessions are given to the well off sections so that the tax GDP ratio fell after 1990-91 and now the Receipts Budget of the Union Budget 2006-07 has confirmed this by showing that concessions worth Rs. 90,000 crores have been given to the corporate sector. Further the black economy is at least 40% of GDP and the government is losing at least Rs. 4.5 lakh crores of taxes. This is not peanuts. Allowing the black economy to flourish reflects the lack of political will and that is why we have not been able to implement good intentions in the past.
An individual in society has a social contract for life. During the British rule it was weakened but after independence it was revived and democratized. However, the ruling elite of India with its feudal mindset has weakened this social contract over time and specially after 1991. The market has led to its further dissolution. All this has let loose social tensions on a large scale and that is what our politicians are trying to exploit in a negative sense. There is a need to revive this democratic social contract to resolve our problems – employment, education, health, housing must be available to all.
Conclusion
Perhaps it was naïve to think that reservations would quickly dissolve exploitative caste divisions. It is not caste that matters but the discrimination associated with it. But did we do enough to change things? The failure of the state has been an important reason for the continuation of deprivation and poverty and the pressure for reservations. Today, we cannot ignore the argument for equity and social justice since it is still compelling. But horizontal equity requires that the creamy layer should volunteer to be excluded. The issues raised by the anti-reservationists need to be addressed if we want workable affirmative action. There is merit in arguments from both sides and it is not easy to steer a middle path since there is also lack of trust (leading to impasse) amongst different sections given that the issue is seen in narrow political terms.
We need to ask whether all the backward castes are so deprived that they need to be given reservation and nothing less? Can it be something less, like, a handicap in admission and that too to select backward castes? Would not that serve the purpose of equity much better? Has the status of some castes not improved greatly in the last 55 years? Why the admitted backwardness of the Muslims and women is not a reason to extend reservations to them also? Why not review the entire issue of reservation afresh and have a uniform well defined non-partisan policy. There should also be constitutional guarantees regarding expenditures and other such support to policy. If the government can have an FRBM for fiscal responsibility why not a social responsibility bill spelling out definite goals? We have to rise above formalistic policies and give them real content.
Today, the real problems are being ignored – right to work for all and high quality education to all, to not only give equal opportunity to all children but to make every child meritorious. The really deprived drop out of schools and do not get to higher education. Today the fight is over a small and shrinking pie – formalistic solutions are being attempted which can only worsen the situation with regard to caste consolidation. There is also need for an incomes policy which is difficult to implement at the best of times.
The argument about resource shortage has been proved to be a red herring since the government is now willing to find an additional Rs 8,000 crores which till now it said was not available. The blame for the failure of reservations has to be borne by the ruling elite including the creamy layer Dalits and the backwards whose consciousness has not broadened. Since they have been in substantial numbers in the Parliament and the legislatures for a long time they could have initiated moves for basic changes. Instead, they have chosen to be coopted into the ruling classes.
All groups now understand the political message of how to get to power in the short run; nation building is secondary. That is why the problem today is intractable. There is no doubt that there are vast numbers of under privileged in our society and they need to be helped to come up but no one is willing to sacrifice because in today’s India, with market as god, no one does, not even the creamy layer. Dramatic expansion in public sector higher education is a proposition which is unlikely to be realized – in quantity or quality terms. Some say that given the present political structures, reservations is the only way to eliminate the caste system. It is argued here that as it is structured at present, it would not do so.
In brief, because of our past failures, political compulsions of the ruling elite and narrowness of thought, today we cannot escape the argument for equity even if reservations have not served their purpose but we can be sure that if horizontal equity is not respected we can only aggravate the situation further by consolidating caste in its negative sense.
nuramarku@gmail.com.
Saturday, June 10, 2006
Monday, May 15, 2006
Exiting Through In-Gate, Initiative and Efficiency
Exiting through In-gate, Initiative and Efficiency
Arun Kumar
The Economic Times, May 15, 2006.
http://www1.economictimes.indiatimes.com/articlelist/1836347985.cms
On regular visits to a private Hospital in Delhi three years back I observed that a majority exited the hospital through the in gate rather than the adjoining out gate. Does it matter when in India traffic (especially, police vehicles) can be seen going in the wrong direction? It reflects the mind set of the elite, who should know better. The impetus for completing the article came while driving back home during the heavy and chaotic Delhi traffic on the day Mrs. Gandhi resigned from the Parliament. There is a deep interconnection in all this.
Just like exiting through the in-gate is mundane so is the violation of the conventions by say Ms Bacchan or Ms Gandhi. Breaking of rules and conventions is now an integral aspect of the working of the Indian system. It is the underlying reason for why systems break down or quality is poor or living conditions are poor. So, water in the tap cannot be trusted, milk may have urea in it, cheques in transactions are not accepted, people avoid the police, etc. All this affects economic efficiency and the collective welfare.
On the road, stuck in crawling traffic and unnerved by frequent violations of traffic rules, the links cannot be missed. Light poles or signboards obstructing a view of traffic lights, buses standing in the middle of the road to drop off passengers and causing pile up of traffic, poorly designed new flyovers leading to jams at the beginning or the end of the flyover, unmarked potholes, etc., create the mosaic of chaos. It is not that traffic is very dense but it is the way everyone drives that everyone is stuck. Even those violating rules to get ahead take longer to reach their destination than if everyone followed the road rules.
Our rulers are in a race to get ahead, whichever way. MPs do not mind taking up jobs/work they should know better to stay away from. But is it surprising if they take dirty money for fighting elections, freebies from businessmen or money for asking questions or fixing meetings, etc. They feel they are the rulers and above the law. They believe they can change rules as and when required. Those who have recently resigned feel aggrieved and not ashamed and want to come back to power again. Any notion of shame and morality is missing. As is often said, what is the use of being in power if one cannot bend the rules – what is shame?
Our rulers have a feudal mind set and think of themselves as above the rule of law. They have got away for long with thinking of themselves as special - giving themselves huge perks to live a regal life. Leaders are not in service of the public and the executive is not `Public Servant’. They, in cahoots with the vested interests, indulge in misuse of their power to amass wealth through corruption. They set the standards that others follow.
The other elite sections in cahoots with the politicians and the executive are businessmen, professionals, entertainers, and so on. The PM and the Chief Justice have now also pointed fingers at the judiciary. In other words, large numbers in the elite circles in India routinely break the law. So exiting through the in-gate is natural.
When rules are broken with impunity, systems become run-down and inefficiency follows. Is there a trade off between the efficiency of the system and the creativity of the individual. Is it the case that systems kill individual initiative and lead to loss of creativity?
In India, initiative often means flirting with rules and bending them as much as possible. Farm houses in Delhi and educational institutions in Maharashtra are only a case in point. It is said in the bureaucracy, the file work of those who are the most corrupt is impeccable. The MCD engineers checking the violation of building bylaws, after taking bribes also note the violation in the files and send notices but do not act thereafter. The file is complete and sleeping.
Successful businessmen are supposed to have the highest degree of initiative. Most of them bend as many rules as they can – environmental rules, labour laws, tax laws, etc. So the black economy is flourishing and large - at least 40% of GDP. Great, our GDP is larger than reported and we are better off than the official statistics reveal? So, individual initiative seems to work even if it propagates illegality.
Certainly, those who are rich have higher incomes than they declare. But, 93% of the workforce is in the unorganized sector and certainly has little part of the black economy. Many in the middle class hardly earn any black incomes. Thus, a small elite section, a mere 3%, has a substantial part of the black economy.
Much of the black economy is like digging holes and filling holes, where there is activity without productivity. Roads are repeatedly repaired. To check illegality, there is a bloated bureaucracy – the inspector raj. Laws have become complex and a battery of lawyers and chartered accountants are employed to creatively interpret them. Consequently the overall economic potential of the economy is not achieved - the level of output is lower and the rate of growth is less than it could be (10%). We collectively make ourselves inefficient just like stalled traffic.
Can laws ever be perfect? If the spirit is unwilling, human ingenuity can always circumvent any law. The government that governs the least should mean that it needs to intervene the least because people automatically follow rules and the regulatory apparatus required is the least. If a few rules are broken, it would not matter but when each one breaches some rules, it becomes systemic and we stall. More thieves and therefore more police would lead to employment but little productivity. If the black economy had not existed, each one of us would be many times richer than we are; even the rich.
Initiative in breaking rules slows everyone down including those who break rules, like in Delhi traffic or in the Indian Parliament which seems to be perpetually stalled because skeletons are falling out of the rotting doors of the closets at regular intervals.
CESP, SSS, JNU, N Delhi 110067.
nuramarku@gmail.com.
Arun Kumar
The Economic Times, May 15, 2006.
http://www1.economictimes.indiatimes.com/articlelist/1836347985.cms
On regular visits to a private Hospital in Delhi three years back I observed that a majority exited the hospital through the in gate rather than the adjoining out gate. Does it matter when in India traffic (especially, police vehicles) can be seen going in the wrong direction? It reflects the mind set of the elite, who should know better. The impetus for completing the article came while driving back home during the heavy and chaotic Delhi traffic on the day Mrs. Gandhi resigned from the Parliament. There is a deep interconnection in all this.
Just like exiting through the in-gate is mundane so is the violation of the conventions by say Ms Bacchan or Ms Gandhi. Breaking of rules and conventions is now an integral aspect of the working of the Indian system. It is the underlying reason for why systems break down or quality is poor or living conditions are poor. So, water in the tap cannot be trusted, milk may have urea in it, cheques in transactions are not accepted, people avoid the police, etc. All this affects economic efficiency and the collective welfare.
On the road, stuck in crawling traffic and unnerved by frequent violations of traffic rules, the links cannot be missed. Light poles or signboards obstructing a view of traffic lights, buses standing in the middle of the road to drop off passengers and causing pile up of traffic, poorly designed new flyovers leading to jams at the beginning or the end of the flyover, unmarked potholes, etc., create the mosaic of chaos. It is not that traffic is very dense but it is the way everyone drives that everyone is stuck. Even those violating rules to get ahead take longer to reach their destination than if everyone followed the road rules.
Our rulers are in a race to get ahead, whichever way. MPs do not mind taking up jobs/work they should know better to stay away from. But is it surprising if they take dirty money for fighting elections, freebies from businessmen or money for asking questions or fixing meetings, etc. They feel they are the rulers and above the law. They believe they can change rules as and when required. Those who have recently resigned feel aggrieved and not ashamed and want to come back to power again. Any notion of shame and morality is missing. As is often said, what is the use of being in power if one cannot bend the rules – what is shame?
Our rulers have a feudal mind set and think of themselves as above the rule of law. They have got away for long with thinking of themselves as special - giving themselves huge perks to live a regal life. Leaders are not in service of the public and the executive is not `Public Servant’. They, in cahoots with the vested interests, indulge in misuse of their power to amass wealth through corruption. They set the standards that others follow.
The other elite sections in cahoots with the politicians and the executive are businessmen, professionals, entertainers, and so on. The PM and the Chief Justice have now also pointed fingers at the judiciary. In other words, large numbers in the elite circles in India routinely break the law. So exiting through the in-gate is natural.
When rules are broken with impunity, systems become run-down and inefficiency follows. Is there a trade off between the efficiency of the system and the creativity of the individual. Is it the case that systems kill individual initiative and lead to loss of creativity?
In India, initiative often means flirting with rules and bending them as much as possible. Farm houses in Delhi and educational institutions in Maharashtra are only a case in point. It is said in the bureaucracy, the file work of those who are the most corrupt is impeccable. The MCD engineers checking the violation of building bylaws, after taking bribes also note the violation in the files and send notices but do not act thereafter. The file is complete and sleeping.
Successful businessmen are supposed to have the highest degree of initiative. Most of them bend as many rules as they can – environmental rules, labour laws, tax laws, etc. So the black economy is flourishing and large - at least 40% of GDP. Great, our GDP is larger than reported and we are better off than the official statistics reveal? So, individual initiative seems to work even if it propagates illegality.
Certainly, those who are rich have higher incomes than they declare. But, 93% of the workforce is in the unorganized sector and certainly has little part of the black economy. Many in the middle class hardly earn any black incomes. Thus, a small elite section, a mere 3%, has a substantial part of the black economy.
Much of the black economy is like digging holes and filling holes, where there is activity without productivity. Roads are repeatedly repaired. To check illegality, there is a bloated bureaucracy – the inspector raj. Laws have become complex and a battery of lawyers and chartered accountants are employed to creatively interpret them. Consequently the overall economic potential of the economy is not achieved - the level of output is lower and the rate of growth is less than it could be (10%). We collectively make ourselves inefficient just like stalled traffic.
Can laws ever be perfect? If the spirit is unwilling, human ingenuity can always circumvent any law. The government that governs the least should mean that it needs to intervene the least because people automatically follow rules and the regulatory apparatus required is the least. If a few rules are broken, it would not matter but when each one breaches some rules, it becomes systemic and we stall. More thieves and therefore more police would lead to employment but little productivity. If the black economy had not existed, each one of us would be many times richer than we are; even the rich.
Initiative in breaking rules slows everyone down including those who break rules, like in Delhi traffic or in the Indian Parliament which seems to be perpetually stalled because skeletons are falling out of the rotting doors of the closets at regular intervals.
CESP, SSS, JNU, N Delhi 110067.
nuramarku@gmail.com.
Sunday, December 25, 2005
Growth Scenario: Is the Common Man in the Picture?
Growth Scenario: Is the Common Man in the Picture?
Arun Kumar
Introduction
The Economic Survey notes `the growth performance of the Indian economy during 2003-04 and 2004-05 indicates a possible ratcheting up of the trend rate of growth of the economy from around 6 per cent to about 7 per cent per year. Developments in the current year provide supportive evidence.’ (p. 14). A graph is produced alongside on p. 15 which is used as supportive evidence. How far is this a valid claim? The recent rise in the Saving Investment rate is seen as a cause of optimism for achieving higher growth rates.
Growth at any cost has become acceptable to many under the influence of conservative economists who believe that nothing much can be or should be done about distribution. They express faith in trickle down. Government economists also express faith in this view. Such arguments are based on a mechanical view of Man as a sophisticated machine devoid of social linkages and consequences. Government need not worry about them, they will take care of themselves.
Further, the public has got used to tall claims from the government, like, during the `India Shining Campaign’ of the previous government, even while it finds its lot deteriorating. It needs to be asked, how far has this growth benefited the poor and the common person in the country? The continuing problems of the farmers, youth looking for employment and those in the unorganized sectors suggests that all is not well.
Section I of this paper presents the government’s claims of positive features of the economy in 2004-05 and then critically examines its case for a transition to a higher growth path in Section II. Implications of the current growth path for employment generation and the marginalized sections of the people are discussed in Section III. Section IV analyses the nature of the growth path and the growth impulses in the economy. It also looks at the philosophical underpinnings and the deeper implications of the growth path for the common man. The rising Investment and Savings rate are analysed in Section V. The final section presents the conclusions.
I. The Positive Features of the Economy in 2004-05
The Economic Survey 2004-05 argues that the economy performed well (expected growth rate of 6.9%) in spite of the drought experienced last year. The Index of Agricultural production is expected to show a marginal decline over 2003-04 (179.2 as compared to 180.1). However, data on Rabi crops indicates that the fall may be greater than this. The index of wholesale prices is expected to grow by 5.0% instead of 4.6 % last year in spite of the drought and the raise in petroleum goods prices which had its impact on internal prices. Rate of Industrial growth has continued to rise to reach 7.8% while the services sector grew at 8.9%. India, therefore, presents the image of one of the fastest growing economies in the world with moderate rates of inflation.
This picture looks even better when the fact of higher Savings and Investment rates is factored into the analysis. The Investment (Graph 1) and Savings rates declined after 1999-00 and started to pick up in 2002-03 and have gone up to reach a new high last year. This suggests that with a constant capital output ratio, the rate of growth can pick up.
On the external front, exports have continued to rise strongly (25.6% in $ terms) and the foreign exchange reserves rose by a further 22.7% in $ terms to reach the record figure of $128.9 billion on February 4, 2005. This would cover 16 months of imports and places the economy in a more stable situation than earlier. These resources provide the base for a faster expansion of the economy without the worry of higher inflation.
The other critical resource for a faster expansion of the economy is the availability of food. The stocks have declined sharply in the last three years but they remain at comfortable level and no shortage of food is anticipated. In other words, neither foreign exchange nor food would be a constraint to faster growth of the economy. While infrastructure could be a constraint to the faster growth, government has been claiming that the economy has transited to a higher growth path. How far is this correct?
II. Higher Growth Path or a Downturn
The Economic Survey presents a graph (p. 15) that gives the rate of growth of a year as the average in the preceding 10 years. Graph 2 presents this along with the actual annual growth rate and the decadal average growth rate for comparison. The graph of the past averages shows that the growth rates have been rising since 1980-81. However, this graph can be read in different ways. There is no dispute amongst analysts that the growth rate went up in the 1980s as compared to the 1970s. The decadal average growth rate shows that the averages for the 1980s and 1990s are certainly higher than for the 1960s and 1970s. However, they are not very different from each other. So where does the argument for the higher growth rate come from?
Even the graph in the Economic Survey suggests that there is a stagnant rate of growth in the last 10 years. Further, it displays a cyclical pattern and one cannot project from that to argue that the rate of growth will now rise. Finally, it distorts the pattern of actual growth so that it is not a good way to show that there would be a higher growth in the future. For instance, in 1990-91, there was a sharp downturn but the graph shows an upturn. In fact, why take the average for the last ten years and not five years or some other number of years. Graph 3 presents for comparison the past 5 and past 10 year averages. The 5-year graph shows more fluctuation as expected and shows that the trend is falling in the recent past. From that can one conclude that now the rate of growth of the economy will fall, contrary to the expectation in the Economic Survey. One needs to more carefully interpret the kind of graph presented in the Economic Survey.
If an economy is on a steady rate of growth at r%, the past ten year average income bears the following relationship:
(Yt)av α Yt-10.
If Y displays a cyclical pattern with a periodicity of 10 years (or a sub-multiple), the fluctuation would be eliminated. In other words, the graph crudely represents the past and that is hardly the basis to project if there is a new growth path based on some parametric changes in the economy.
Further, if the authors of the Economic Survey wish to claim that this graph is useful then they must also accept that according to them the economic up turn started 25 years back when the old policies were in operation. Then where was the need for the New Economic Policies with all their iniquitous consequences? Are they trying to make a case that if equity is a concern there was no need for the New Policies launched in 1991?
The past 10 year average Graph also shows that while the peaks are narrow the troughs are wide. This is the classic pattern of business cycles. What this suggests is that the rate of growth after reaching a peak in 2003-04 is now on its way down. The New Economic Policies by limiting the role of the government in the economy prevents the government from implementing anti-cyclical policies to give a boost to the economy (Kumar, 1996). The cyclical pattern is also a consequence of the narrowness of the base of the growth impulses of the economy (discussed below) and the rise in the size of the black economy that accentuates the tendency for deficiency of demand in the economy (Kumar, 1999).
III. The Weaknesses: The Positive Hides the Implications for the Poor
Since 1991, governments have been using the Economic Survey to paint its policies in a positive light. It therefore, tends to gloss over the negative aspects of its actions. Much of the national media, controlled by the corporate sector, also plays a supporting role. For instance, in the post budget discussion, the views of the corporate world are given predominance even though they produce a tiny fraction of the GDP. The media has been a party to spreading the `feel good’ factor. It has put out stories of Indian students getting high starting salaries abroad (up to a crore per annum) and by Indian standards high salaries in India itself. What is not pointed out in these stories is that they are only talking of a few thousand such lucky young people. A bulk of the 9 million young Indians who join the workforce annually struggle to get jobs and often will get salaries of just a few thousand rupees per month.
The fact that the economy will grow at around 6.5% while agriculture witnessed a drought itself is an indication of the growing divide between the few and the many. While close to 60% of the population, dependent on agriculture, will witness a declining per capita income, the rest of the economy employing 40% of the work force, will experience a growth rate of 9%. This picture is not undifferentiated and needs refinement.
The share of the unorganized sectors in National Income has dropped from 64.3% in 1991-92 to 58.5% in 2001-02 (Kumar, 2005). However, employment in this sector is rising as a fraction of the work force. The organized sector employs 5% of the work force (counting child labour also) but produces about 41.5% of the output. Thus the ratio of the per worker output in the organized sector compared to that in the unorganized sector would be 13.5. Since 65% of all investment is going into the organized sector, the organized sector worker is getting 35 times more capital than a worker in the unorganized sector. This underlies the wage differential between the two sectors.
Consequently, those in the organized sector of the economy (5% of the work force) will experience a rising income but not those in the unorganized non-agricultural sectors (35% of the work force) whose share in output is falling while their share in employment is rising (Kumar, 2005). Further those in the fast growing sectors of ICE, software and BPO are a minuscule fraction of the organized sector workforce and will experience even higher growth in incomes. In brief, around 3% of the households (in the organized sector and self employed) will see their average incomes rise, about 60% in agriculture will see average incomes fall and the rest will have stagnant or marginally rising average incomes.
Further, since most of the private investment is going into the already developed areas and government is cutting back capital and developmental expenditures, the backward areas are languishing and this is resulting in growing differentiation between the advanced and the backward regions. In sum, growth is leading to rising inequity which would explain the continuing distress of the farming community as reflected in the unabated suicides, the distress of the youth which is unable to find proper work, the marginalization of the unorganized sector and the backward areas of the country.
The government has delayed the passage of the Employment Guarantee Bill. Even though it is only a safety net device and in itself inadequate to take care of the problem it is necessary to at least meet the urgent needs of the really poor in society. Further, there is no overall appreciation of the causes of the problem amongst the policy makers and of the fact that a comprehensive view of the problem is necessary to boost employment generation in the country. What they do not realize is that they need to look at each of their actions to see which ones are reducing employment generation. The following makes this clear:
1. The government, in spite of build up of foreign exchange reserves that are proving to be an embarrassment is continuing to welcome FDI in areas which have been traditionally labour intensive like, retail and construction. These moves will cause a further decline in employment elasticity. This reflects a mind set in which the poor do not count and only the needs of the elite are important. The question is why should India not be protecting employment when the employment situation is reaching crisis proportions? The capital needed in the sectors that are being opened up is available within the economy. After all, total approval of FDI in 2003 was about 5,500 crore, a mere 0.9% of all investment in the economy. Even though it is small, it is also forcing Indian industry to also upgrade and use more capital intensive industry. The net effect of new technology (even though it creates some jobs) is lower employment in the organized sector and also elsewhere. Use of new technologies like telecom or computers in older industry is reducing employment in traditional industries.
2. To appease industry and specially foreign capital, the government has been trying to push through labour reforms on the plea that flexible labour markets will result in more employment. All this is resulting in is that employment is declining in the organized sectors which are using VRS, etc., to reduce their work force. If the argument was correct, why is employment generation not dynamic in agriculture where employment elasticity is now close to zero whereas there is full freedom to hire and fire since it is entirely in the unorganized sector?
3. Reduction in customs duties since 1991 is undermining not only the large-scale sector but more importantly the small scale sector and this is effecting employment generation in the country. In 1991, the customs duties were of the order of 4% of GDP and now they are down to 1.7%. In 1991, they were roughly equal to excise duties but now they are around 40%. Since internal indirect taxes feed from one good to the other, they raise prices which effects even the small-scale sector which is otherwise mostly outside the net of such taxes. Further, the benefit of cheap imports goes mostly to the large and medium sectors which are more import intensive than the small scale sectors. Cheap imports effectively means dereservation for the small-scale sector. In brief, the small-scale sector suffers both due to internal and external competition.
4. The stagnant employment generation is also linked to the narrowness of the growth. It is dependent on the well off sections (say, 3% as pointed out above). The demand from this upper crust is for imported and/or high technology goods. These have low employment elasticity.
5. Agriculture is not only starved of investment but whatever it is getting is mostly labour displacing and that is why it is generating little work. Opening up and build up of stocks has led to stagnant or declining prices while the new investment has raised costs due to the adoption of new technology. This underlies the crisis in agriculture which is resulting in low investment and little employment generation.
6. Higher budget deficit of the government and cut back in social sector expenditures is accentuating the hardship of poverty (See the Chapter on Public Finance in this volume). Public health and education which have a huge potential for employment are in a state of near collapse.
Commercialization in the social sectors (health, education, drinking water, etc.) is on the rise creating two markets one for the elite and the other for the rest and creating problems for the common man who does not have the wherewithal to pay the higher costs for these basics of life. It is leading to a collapse of public education which is effecting research and making it more narrowly focused on courses with commercial value. The focus on learning is changing to that on passing exams. This has the potential of locking the country in a low value added and low productivity production using cheap labour. The country is becoming a part of the global division of labour. The poor with low levels of skills are the residual in the process. The backward parts of the country are also at the tail end of this process. In brief, commercialization in education will strengthen accentuate differentiation.
Growth has been based on the consumerism of the well off and has overlooked normal welfare decreasing consequences, like, displacement, polluting production, growing malpractices in social sectors, etc. In other words, growth is associated with a decreased amount of welfare of the common person. Drinking water, air and food are all polluted, resulting in a decline in health and increased medical costs. The growing malpractice in the health sector is adding further to costs. The growth in the services sector because of these rising costs is in part spurious.
There are two consequences of this. First, there is a need to redefine poverty and second, economic growth rates need to be reassessed to bring them more in line with increase in the true welfare of the people. Environmental damage, loss of assets due to displacement also need to be deducted to calculate the actual rate of growth of the economy. In brief, the current data does not adequately represent the growth rate of the economy and does not measure the welfare implications for the poor.
IV. Narrowness of the Growth Impulses
Growth since 1990-91 has been accompanied by:
Growth in share of output of the a) organized sector, b) services sector and c) more developed regions and a fall in the share of a) employment in the organized sector and b) expenditure of government on development and especially in the social sectors, like, health and education.
So, a) fewer people are producing more and earning more, b) the poor who need more government support are getting less of it and c) poverty is getting concentrated in agriculture and in rural areas of the backward regions.
Thus the base of growth of the Indian economy is becoming more and more narrow. If child labour and women who are at home and wanting work are also counted then the unorganized sector is 95% of the work force and the un and under employment rates higher than the official data reveal (Kumar, 2005). Since their incomes are rising slowly or stagnant, mass demand is rising slowly.
The elite whose incomes have risen fast, accentuating disparities, can sustain high growth in demand only for a short period of time. This results in demand deficiency manifesting itself repeatedly. Prior to 1990-91, while the down turn was associated with a downturn in agriculture now that is also modified by the business cycle in non-agricultural sectors due to demand factors. The reduced role of the government lowers its capacity to boost demand when there is a downturn. The economy has to revive on its own through increases in private investments but since that is flowing into the more developed parts, the poorer areas become more marginal and more dependent on the government which is in retreat.
Growth is also narrowly based in the urban areas and in the more developed areas. Given that poverty is entrenched in the rural areas in the backward states, the higher growth does not benefit the poor. The divide is only likely to grow with this narrowly based growth. The dilution of the role of government has also affected the backward states more than the others.
The growth in black economy leads to an increase in disparity, reduces the effectiveness of expenditures by the Government and leads to failure of policy (Kumar 1999). As the Finance Minister said in his budget, `expenditures do not mean outcomes’. All this reinforces the cyclical factors.
Underlying the post 1991 policies and the growth path is a philosophical view – a faith in the efficiency of markets. Markets marginalize Man (Kumar, 2005). They cater to the purchasing power of the individual and not to her needs and wants. Markets are based on a mechanical view of Man - that of a sophisticated machine which can be switched off or on at will with no social consequences. People are seen as demand or suppliers of factors. Nothing else matters. Everything else is put under `ceteris paribus’ as of little consequence.
This view underlies the present policies. So unemployment is not important but the stock market is. Faith in the markets is also an expression of distrust of people and their ability to contribute to society for non-monetary reasons. For instance, privatization implies that the public sector cannot be run on a spirit of public purpose while the same institution can be run on the profit motive. For example, take the privatization of services in the Railways. The same people will not do a task for the railways but do it if they can earn a profit by doing it. The task is the same and the person may also be the same but the argument is that the work would only be done for a profit. Markets cater to the greed of Man and promote it and then its proponents argue that Man only works for a monetary incentive.
Health and education have traditionally been considered to be priceless for a good reason. More than monetary reward is associated with them. Teachers and doctors were given a high status in society and they were expected to show the way to society and individuals. Sacrifice was involved in it. Today, markets consider sacrifice to be foolish. In these fields, there is a move to charge what the market will bear. Commercialization is forcing the valuation of these services and they are becoming a source of high profit. Public education and health system which are still cheap have been devalued by society and the private sector is emerging rapidly making legitimate and illegitimate profit. Society is inevitably taking a narrow view of these services.
However, these services can only be valued if a narrow and mechanical view is taken about them and they are treated as other normal goods. This contradicts the very idea underlying them – of treating Man as a being. If we squeeze the patient and the student dry because the market will pay the price, what will they do tomorrow? If these services are treated as non-market and as builders of society, distinct from other goods and services, there would be a profound impact on policy.
This underlying view is also undemocratic since people do not count. It divides people and hands over the reins of control to those who control capital. Leaders are not leaders of men but of capital - those who operate on behalf of capital and do not believe in the finer aspects of human existence. This is the distinction between today’s leaders and those of an earlier generation. Market as an ideology has become so dominant that even the common man is subject to its control and unable to resist because of lack of alternative visions. They need to be created but little is being done in that direction. This, in spite of the hardships that the common man has to undergo not only in poor countries, like, India but also in the more advanced countries.
In India, it is clear that since NEP were launched, through each cycle and there have been three of them, the common man is getting more marginalized. The economic processes are complex and most do not understand the direction they are likely to take. This atomizes them and they only act in a limited framework leaving the bigger picture to Capital. The media is not helping to understand the big picture. Leaders are untrustworthy since they have repeatedly failed so who to look up to except film actors and cricketers who anyway push for the corporate sector through their life style and advertising.
V. Savings and Investment
The growing disparity, pointed to above, underlies the rise in the savings propensity. As incomes get concentrated in the hands of the few, in spite of more luxury goods consumption, since these people have a higher savings propensity, the overall savings propensity rises. This argument can also be understood in terms of the rise in the share of services sector and the decline of the agricultural sector in National income. The former has higher per capita incomes than the latter so the savings propensity is higher.
However, it may be argued that the rise in the share of the savings propensity has taken place through the Nineties so why was this phenomenon not visible earlier? The reason is that the growing black economy masks the rise through siphoning out of the savings from the economy through flight of capital. The measured savings propensity is not the true value. In the last few years, there is evidence of a return of capital that had earlier gone out. This is one cause of the rapid build up of reserves. As flight of capital has slowed down, the Savings propensity is rising to its true value. Thus, the rise is partially statistical and will not have any real effect.
Data on the rate of Investments shows that it has also risen but not as much as the Savings propensity. After a long time, the savings propensity is now higher than the Investment rate. Graph 1 presents data on GDCF and it indicates that Investment increased more or less secularly till 1991 (to peak at 26.3%) but after that there has been a cyclical pattern with peaks in 1995-96 at 26.9% and again in 1999-00 at 25.3% and now in 2003-04 at 26.3%. Interestingly, the figure is now just what it was in 1990-91. Hence there is little scope for claiming that the economy has now transited to a new growth path of around 8%. Further, the Savings-Investment gap that has opened up will actually dampen demand and act to reduce the rate of growth.
Public sector disinvestment could also be playing a part in the return of capital. Assets are being sold cheap by the government and the private sector is trying to take advantage of it and bringing back a part of its capital stashed abroad. There is also the capital that is trying to take advantage of the higher interest rates available in India and the possibility of the strengthening of the rupee viz-a-viz the dollar.
Some may argue that public sector assets are not going cheap but at market valuation. The Ambani case points to the difficulty of valuation of a company and its assets. The two brothers have tried all means available and have not been able to agree to a price. The problem is even more complex in the case of public sector because it was not run to make a profit so current profits cannot be a criterion for valuation. When the private sector takes over a unit, it does not fulfill any of the earlier social obligations so that immediately it reduces costs and cuts losses and increases profits. Thus, valuation has to be on potential profitability. The recent adverse comments by the CAG on disinvestment are a pointer in that direction.
VI. Conclusion
`Accelerating growth is necessary but not sufficient for reaching out to the poor in the economy’ (p.18). Yet, the entire strategy of the government is to go in for more market based changes in economic policies which will mean that the poor will remain marginal. The paper shows that growth is narrowly based in a small elite in the organized sectors of the economy. Consequently, and past experience bears out, the economy is now ready for a downturn after a cyclical high. The graph produced in the Economic Survey (p. 15) that the economy has been accelerating for the last 25 years is hardly useful since it is sensitive to the number of years chosen and using a 5 year average one may come to the opposite conclusion than presented in the Survey. Further, even if it is taken at face value, it is not only not useful to project for the future since if new factors are at play, one cannot use it to project, it also shows a) that there is a stagnation of growth rates and b) if one can accept that growth has been on the upswing for 25 years, then there is no need for the iniquitous growth propelled by the New Economic Policies. One could have continued with the old policies and had growth with less of inequity.
The paper argues that the current growth in the economy is narrowly based and because of the reduced role played by the government in the economy, the economy is witnessing business cycles. This along with the return flow of capital is the cause of the rising Savings rate. It is statistical and the excess of Savings over Investment is likely to lead to a down turn. These cycles are coupled with shocks from agriculture so that there is a complex pattern of rates of growth which is not in the control of policy makers. This is resulting in distress for large sections of the population – farmers, young seeking employment, small scale sector, those in the unorganized sectors of the economy and those in the backward areas of the country.
Growth is not only not generating adequate employment, the welfare associated with it is declining so we need to reassess the growth rate itself. Through the cycles, the poor suffer the most. They are at the edge of survival and each downturn affects them adversely and cumulatively this erodes their condition. The decreased intervention by the government is resulting in lower expenditures on social sectors at a time when the common person needs more of it rather than less. The state of collapse of public education and public health has long run consequences for the country as a whole. The nation is becoming a part of an international division of labour in which it is getting more marginalized and the poor suffer its worst consequences.
References.
Government of India. National Accounts Statistics, Central Statistical Organisation, Various issues.
Government of India. 2005. Union Budget 2005-06.
Government of India, Ministry of Finance, Economic Division. 2005. Economic Survey 2004-05.
Kumar, A.1999. The Black Economy in India. New Delhi, Penguin.
-------------. 2005. Factors Underlying Jobless Growth in India And the Need for a New Development Paradigm. Bhartiya Samajik Chintan. January - March. Vol. III, No. 4 Pp. 215-229.
Graph 1
Arun Kumar
Introduction
The Economic Survey notes `the growth performance of the Indian economy during 2003-04 and 2004-05 indicates a possible ratcheting up of the trend rate of growth of the economy from around 6 per cent to about 7 per cent per year. Developments in the current year provide supportive evidence.’ (p. 14). A graph is produced alongside on p. 15 which is used as supportive evidence. How far is this a valid claim? The recent rise in the Saving Investment rate is seen as a cause of optimism for achieving higher growth rates.
Growth at any cost has become acceptable to many under the influence of conservative economists who believe that nothing much can be or should be done about distribution. They express faith in trickle down. Government economists also express faith in this view. Such arguments are based on a mechanical view of Man as a sophisticated machine devoid of social linkages and consequences. Government need not worry about them, they will take care of themselves.
Further, the public has got used to tall claims from the government, like, during the `India Shining Campaign’ of the previous government, even while it finds its lot deteriorating. It needs to be asked, how far has this growth benefited the poor and the common person in the country? The continuing problems of the farmers, youth looking for employment and those in the unorganized sectors suggests that all is not well.
Section I of this paper presents the government’s claims of positive features of the economy in 2004-05 and then critically examines its case for a transition to a higher growth path in Section II. Implications of the current growth path for employment generation and the marginalized sections of the people are discussed in Section III. Section IV analyses the nature of the growth path and the growth impulses in the economy. It also looks at the philosophical underpinnings and the deeper implications of the growth path for the common man. The rising Investment and Savings rate are analysed in Section V. The final section presents the conclusions.
I. The Positive Features of the Economy in 2004-05
The Economic Survey 2004-05 argues that the economy performed well (expected growth rate of 6.9%) in spite of the drought experienced last year. The Index of Agricultural production is expected to show a marginal decline over 2003-04 (179.2 as compared to 180.1). However, data on Rabi crops indicates that the fall may be greater than this. The index of wholesale prices is expected to grow by 5.0% instead of 4.6 % last year in spite of the drought and the raise in petroleum goods prices which had its impact on internal prices. Rate of Industrial growth has continued to rise to reach 7.8% while the services sector grew at 8.9%. India, therefore, presents the image of one of the fastest growing economies in the world with moderate rates of inflation.
This picture looks even better when the fact of higher Savings and Investment rates is factored into the analysis. The Investment (Graph 1) and Savings rates declined after 1999-00 and started to pick up in 2002-03 and have gone up to reach a new high last year. This suggests that with a constant capital output ratio, the rate of growth can pick up.
On the external front, exports have continued to rise strongly (25.6% in $ terms) and the foreign exchange reserves rose by a further 22.7% in $ terms to reach the record figure of $128.9 billion on February 4, 2005. This would cover 16 months of imports and places the economy in a more stable situation than earlier. These resources provide the base for a faster expansion of the economy without the worry of higher inflation.
The other critical resource for a faster expansion of the economy is the availability of food. The stocks have declined sharply in the last three years but they remain at comfortable level and no shortage of food is anticipated. In other words, neither foreign exchange nor food would be a constraint to faster growth of the economy. While infrastructure could be a constraint to the faster growth, government has been claiming that the economy has transited to a higher growth path. How far is this correct?
II. Higher Growth Path or a Downturn
The Economic Survey presents a graph (p. 15) that gives the rate of growth of a year as the average in the preceding 10 years. Graph 2 presents this along with the actual annual growth rate and the decadal average growth rate for comparison. The graph of the past averages shows that the growth rates have been rising since 1980-81. However, this graph can be read in different ways. There is no dispute amongst analysts that the growth rate went up in the 1980s as compared to the 1970s. The decadal average growth rate shows that the averages for the 1980s and 1990s are certainly higher than for the 1960s and 1970s. However, they are not very different from each other. So where does the argument for the higher growth rate come from?
Even the graph in the Economic Survey suggests that there is a stagnant rate of growth in the last 10 years. Further, it displays a cyclical pattern and one cannot project from that to argue that the rate of growth will now rise. Finally, it distorts the pattern of actual growth so that it is not a good way to show that there would be a higher growth in the future. For instance, in 1990-91, there was a sharp downturn but the graph shows an upturn. In fact, why take the average for the last ten years and not five years or some other number of years. Graph 3 presents for comparison the past 5 and past 10 year averages. The 5-year graph shows more fluctuation as expected and shows that the trend is falling in the recent past. From that can one conclude that now the rate of growth of the economy will fall, contrary to the expectation in the Economic Survey. One needs to more carefully interpret the kind of graph presented in the Economic Survey.
If an economy is on a steady rate of growth at r%, the past ten year average income bears the following relationship:
(Yt)av α Yt-10.
If Y displays a cyclical pattern with a periodicity of 10 years (or a sub-multiple), the fluctuation would be eliminated. In other words, the graph crudely represents the past and that is hardly the basis to project if there is a new growth path based on some parametric changes in the economy.
Further, if the authors of the Economic Survey wish to claim that this graph is useful then they must also accept that according to them the economic up turn started 25 years back when the old policies were in operation. Then where was the need for the New Economic Policies with all their iniquitous consequences? Are they trying to make a case that if equity is a concern there was no need for the New Policies launched in 1991?
The past 10 year average Graph also shows that while the peaks are narrow the troughs are wide. This is the classic pattern of business cycles. What this suggests is that the rate of growth after reaching a peak in 2003-04 is now on its way down. The New Economic Policies by limiting the role of the government in the economy prevents the government from implementing anti-cyclical policies to give a boost to the economy (Kumar, 1996). The cyclical pattern is also a consequence of the narrowness of the base of the growth impulses of the economy (discussed below) and the rise in the size of the black economy that accentuates the tendency for deficiency of demand in the economy (Kumar, 1999).
III. The Weaknesses: The Positive Hides the Implications for the Poor
Since 1991, governments have been using the Economic Survey to paint its policies in a positive light. It therefore, tends to gloss over the negative aspects of its actions. Much of the national media, controlled by the corporate sector, also plays a supporting role. For instance, in the post budget discussion, the views of the corporate world are given predominance even though they produce a tiny fraction of the GDP. The media has been a party to spreading the `feel good’ factor. It has put out stories of Indian students getting high starting salaries abroad (up to a crore per annum) and by Indian standards high salaries in India itself. What is not pointed out in these stories is that they are only talking of a few thousand such lucky young people. A bulk of the 9 million young Indians who join the workforce annually struggle to get jobs and often will get salaries of just a few thousand rupees per month.
The fact that the economy will grow at around 6.5% while agriculture witnessed a drought itself is an indication of the growing divide between the few and the many. While close to 60% of the population, dependent on agriculture, will witness a declining per capita income, the rest of the economy employing 40% of the work force, will experience a growth rate of 9%. This picture is not undifferentiated and needs refinement.
The share of the unorganized sectors in National Income has dropped from 64.3% in 1991-92 to 58.5% in 2001-02 (Kumar, 2005). However, employment in this sector is rising as a fraction of the work force. The organized sector employs 5% of the work force (counting child labour also) but produces about 41.5% of the output. Thus the ratio of the per worker output in the organized sector compared to that in the unorganized sector would be 13.5. Since 65% of all investment is going into the organized sector, the organized sector worker is getting 35 times more capital than a worker in the unorganized sector. This underlies the wage differential between the two sectors.
Consequently, those in the organized sector of the economy (5% of the work force) will experience a rising income but not those in the unorganized non-agricultural sectors (35% of the work force) whose share in output is falling while their share in employment is rising (Kumar, 2005). Further those in the fast growing sectors of ICE, software and BPO are a minuscule fraction of the organized sector workforce and will experience even higher growth in incomes. In brief, around 3% of the households (in the organized sector and self employed) will see their average incomes rise, about 60% in agriculture will see average incomes fall and the rest will have stagnant or marginally rising average incomes.
Further, since most of the private investment is going into the already developed areas and government is cutting back capital and developmental expenditures, the backward areas are languishing and this is resulting in growing differentiation between the advanced and the backward regions. In sum, growth is leading to rising inequity which would explain the continuing distress of the farming community as reflected in the unabated suicides, the distress of the youth which is unable to find proper work, the marginalization of the unorganized sector and the backward areas of the country.
The government has delayed the passage of the Employment Guarantee Bill. Even though it is only a safety net device and in itself inadequate to take care of the problem it is necessary to at least meet the urgent needs of the really poor in society. Further, there is no overall appreciation of the causes of the problem amongst the policy makers and of the fact that a comprehensive view of the problem is necessary to boost employment generation in the country. What they do not realize is that they need to look at each of their actions to see which ones are reducing employment generation. The following makes this clear:
1. The government, in spite of build up of foreign exchange reserves that are proving to be an embarrassment is continuing to welcome FDI in areas which have been traditionally labour intensive like, retail and construction. These moves will cause a further decline in employment elasticity. This reflects a mind set in which the poor do not count and only the needs of the elite are important. The question is why should India not be protecting employment when the employment situation is reaching crisis proportions? The capital needed in the sectors that are being opened up is available within the economy. After all, total approval of FDI in 2003 was about 5,500 crore, a mere 0.9% of all investment in the economy. Even though it is small, it is also forcing Indian industry to also upgrade and use more capital intensive industry. The net effect of new technology (even though it creates some jobs) is lower employment in the organized sector and also elsewhere. Use of new technologies like telecom or computers in older industry is reducing employment in traditional industries.
2. To appease industry and specially foreign capital, the government has been trying to push through labour reforms on the plea that flexible labour markets will result in more employment. All this is resulting in is that employment is declining in the organized sectors which are using VRS, etc., to reduce their work force. If the argument was correct, why is employment generation not dynamic in agriculture where employment elasticity is now close to zero whereas there is full freedom to hire and fire since it is entirely in the unorganized sector?
3. Reduction in customs duties since 1991 is undermining not only the large-scale sector but more importantly the small scale sector and this is effecting employment generation in the country. In 1991, the customs duties were of the order of 4% of GDP and now they are down to 1.7%. In 1991, they were roughly equal to excise duties but now they are around 40%. Since internal indirect taxes feed from one good to the other, they raise prices which effects even the small-scale sector which is otherwise mostly outside the net of such taxes. Further, the benefit of cheap imports goes mostly to the large and medium sectors which are more import intensive than the small scale sectors. Cheap imports effectively means dereservation for the small-scale sector. In brief, the small-scale sector suffers both due to internal and external competition.
4. The stagnant employment generation is also linked to the narrowness of the growth. It is dependent on the well off sections (say, 3% as pointed out above). The demand from this upper crust is for imported and/or high technology goods. These have low employment elasticity.
5. Agriculture is not only starved of investment but whatever it is getting is mostly labour displacing and that is why it is generating little work. Opening up and build up of stocks has led to stagnant or declining prices while the new investment has raised costs due to the adoption of new technology. This underlies the crisis in agriculture which is resulting in low investment and little employment generation.
6. Higher budget deficit of the government and cut back in social sector expenditures is accentuating the hardship of poverty (See the Chapter on Public Finance in this volume). Public health and education which have a huge potential for employment are in a state of near collapse.
Commercialization in the social sectors (health, education, drinking water, etc.) is on the rise creating two markets one for the elite and the other for the rest and creating problems for the common man who does not have the wherewithal to pay the higher costs for these basics of life. It is leading to a collapse of public education which is effecting research and making it more narrowly focused on courses with commercial value. The focus on learning is changing to that on passing exams. This has the potential of locking the country in a low value added and low productivity production using cheap labour. The country is becoming a part of the global division of labour. The poor with low levels of skills are the residual in the process. The backward parts of the country are also at the tail end of this process. In brief, commercialization in education will strengthen accentuate differentiation.
Growth has been based on the consumerism of the well off and has overlooked normal welfare decreasing consequences, like, displacement, polluting production, growing malpractices in social sectors, etc. In other words, growth is associated with a decreased amount of welfare of the common person. Drinking water, air and food are all polluted, resulting in a decline in health and increased medical costs. The growing malpractice in the health sector is adding further to costs. The growth in the services sector because of these rising costs is in part spurious.
There are two consequences of this. First, there is a need to redefine poverty and second, economic growth rates need to be reassessed to bring them more in line with increase in the true welfare of the people. Environmental damage, loss of assets due to displacement also need to be deducted to calculate the actual rate of growth of the economy. In brief, the current data does not adequately represent the growth rate of the economy and does not measure the welfare implications for the poor.
IV. Narrowness of the Growth Impulses
Growth since 1990-91 has been accompanied by:
Growth in share of output of the a) organized sector, b) services sector and c) more developed regions and a fall in the share of a) employment in the organized sector and b) expenditure of government on development and especially in the social sectors, like, health and education.
So, a) fewer people are producing more and earning more, b) the poor who need more government support are getting less of it and c) poverty is getting concentrated in agriculture and in rural areas of the backward regions.
Thus the base of growth of the Indian economy is becoming more and more narrow. If child labour and women who are at home and wanting work are also counted then the unorganized sector is 95% of the work force and the un and under employment rates higher than the official data reveal (Kumar, 2005). Since their incomes are rising slowly or stagnant, mass demand is rising slowly.
The elite whose incomes have risen fast, accentuating disparities, can sustain high growth in demand only for a short period of time. This results in demand deficiency manifesting itself repeatedly. Prior to 1990-91, while the down turn was associated with a downturn in agriculture now that is also modified by the business cycle in non-agricultural sectors due to demand factors. The reduced role of the government lowers its capacity to boost demand when there is a downturn. The economy has to revive on its own through increases in private investments but since that is flowing into the more developed parts, the poorer areas become more marginal and more dependent on the government which is in retreat.
Growth is also narrowly based in the urban areas and in the more developed areas. Given that poverty is entrenched in the rural areas in the backward states, the higher growth does not benefit the poor. The divide is only likely to grow with this narrowly based growth. The dilution of the role of government has also affected the backward states more than the others.
The growth in black economy leads to an increase in disparity, reduces the effectiveness of expenditures by the Government and leads to failure of policy (Kumar 1999). As the Finance Minister said in his budget, `expenditures do not mean outcomes’. All this reinforces the cyclical factors.
Underlying the post 1991 policies and the growth path is a philosophical view – a faith in the efficiency of markets. Markets marginalize Man (Kumar, 2005). They cater to the purchasing power of the individual and not to her needs and wants. Markets are based on a mechanical view of Man - that of a sophisticated machine which can be switched off or on at will with no social consequences. People are seen as demand or suppliers of factors. Nothing else matters. Everything else is put under `ceteris paribus’ as of little consequence.
This view underlies the present policies. So unemployment is not important but the stock market is. Faith in the markets is also an expression of distrust of people and their ability to contribute to society for non-monetary reasons. For instance, privatization implies that the public sector cannot be run on a spirit of public purpose while the same institution can be run on the profit motive. For example, take the privatization of services in the Railways. The same people will not do a task for the railways but do it if they can earn a profit by doing it. The task is the same and the person may also be the same but the argument is that the work would only be done for a profit. Markets cater to the greed of Man and promote it and then its proponents argue that Man only works for a monetary incentive.
Health and education have traditionally been considered to be priceless for a good reason. More than monetary reward is associated with them. Teachers and doctors were given a high status in society and they were expected to show the way to society and individuals. Sacrifice was involved in it. Today, markets consider sacrifice to be foolish. In these fields, there is a move to charge what the market will bear. Commercialization is forcing the valuation of these services and they are becoming a source of high profit. Public education and health system which are still cheap have been devalued by society and the private sector is emerging rapidly making legitimate and illegitimate profit. Society is inevitably taking a narrow view of these services.
However, these services can only be valued if a narrow and mechanical view is taken about them and they are treated as other normal goods. This contradicts the very idea underlying them – of treating Man as a being. If we squeeze the patient and the student dry because the market will pay the price, what will they do tomorrow? If these services are treated as non-market and as builders of society, distinct from other goods and services, there would be a profound impact on policy.
This underlying view is also undemocratic since people do not count. It divides people and hands over the reins of control to those who control capital. Leaders are not leaders of men but of capital - those who operate on behalf of capital and do not believe in the finer aspects of human existence. This is the distinction between today’s leaders and those of an earlier generation. Market as an ideology has become so dominant that even the common man is subject to its control and unable to resist because of lack of alternative visions. They need to be created but little is being done in that direction. This, in spite of the hardships that the common man has to undergo not only in poor countries, like, India but also in the more advanced countries.
In India, it is clear that since NEP were launched, through each cycle and there have been three of them, the common man is getting more marginalized. The economic processes are complex and most do not understand the direction they are likely to take. This atomizes them and they only act in a limited framework leaving the bigger picture to Capital. The media is not helping to understand the big picture. Leaders are untrustworthy since they have repeatedly failed so who to look up to except film actors and cricketers who anyway push for the corporate sector through their life style and advertising.
V. Savings and Investment
The growing disparity, pointed to above, underlies the rise in the savings propensity. As incomes get concentrated in the hands of the few, in spite of more luxury goods consumption, since these people have a higher savings propensity, the overall savings propensity rises. This argument can also be understood in terms of the rise in the share of services sector and the decline of the agricultural sector in National income. The former has higher per capita incomes than the latter so the savings propensity is higher.
However, it may be argued that the rise in the share of the savings propensity has taken place through the Nineties so why was this phenomenon not visible earlier? The reason is that the growing black economy masks the rise through siphoning out of the savings from the economy through flight of capital. The measured savings propensity is not the true value. In the last few years, there is evidence of a return of capital that had earlier gone out. This is one cause of the rapid build up of reserves. As flight of capital has slowed down, the Savings propensity is rising to its true value. Thus, the rise is partially statistical and will not have any real effect.
Data on the rate of Investments shows that it has also risen but not as much as the Savings propensity. After a long time, the savings propensity is now higher than the Investment rate. Graph 1 presents data on GDCF and it indicates that Investment increased more or less secularly till 1991 (to peak at 26.3%) but after that there has been a cyclical pattern with peaks in 1995-96 at 26.9% and again in 1999-00 at 25.3% and now in 2003-04 at 26.3%. Interestingly, the figure is now just what it was in 1990-91. Hence there is little scope for claiming that the economy has now transited to a new growth path of around 8%. Further, the Savings-Investment gap that has opened up will actually dampen demand and act to reduce the rate of growth.
Public sector disinvestment could also be playing a part in the return of capital. Assets are being sold cheap by the government and the private sector is trying to take advantage of it and bringing back a part of its capital stashed abroad. There is also the capital that is trying to take advantage of the higher interest rates available in India and the possibility of the strengthening of the rupee viz-a-viz the dollar.
Some may argue that public sector assets are not going cheap but at market valuation. The Ambani case points to the difficulty of valuation of a company and its assets. The two brothers have tried all means available and have not been able to agree to a price. The problem is even more complex in the case of public sector because it was not run to make a profit so current profits cannot be a criterion for valuation. When the private sector takes over a unit, it does not fulfill any of the earlier social obligations so that immediately it reduces costs and cuts losses and increases profits. Thus, valuation has to be on potential profitability. The recent adverse comments by the CAG on disinvestment are a pointer in that direction.
VI. Conclusion
`Accelerating growth is necessary but not sufficient for reaching out to the poor in the economy’ (p.18). Yet, the entire strategy of the government is to go in for more market based changes in economic policies which will mean that the poor will remain marginal. The paper shows that growth is narrowly based in a small elite in the organized sectors of the economy. Consequently, and past experience bears out, the economy is now ready for a downturn after a cyclical high. The graph produced in the Economic Survey (p. 15) that the economy has been accelerating for the last 25 years is hardly useful since it is sensitive to the number of years chosen and using a 5 year average one may come to the opposite conclusion than presented in the Survey. Further, even if it is taken at face value, it is not only not useful to project for the future since if new factors are at play, one cannot use it to project, it also shows a) that there is a stagnation of growth rates and b) if one can accept that growth has been on the upswing for 25 years, then there is no need for the iniquitous growth propelled by the New Economic Policies. One could have continued with the old policies and had growth with less of inequity.
The paper argues that the current growth in the economy is narrowly based and because of the reduced role played by the government in the economy, the economy is witnessing business cycles. This along with the return flow of capital is the cause of the rising Savings rate. It is statistical and the excess of Savings over Investment is likely to lead to a down turn. These cycles are coupled with shocks from agriculture so that there is a complex pattern of rates of growth which is not in the control of policy makers. This is resulting in distress for large sections of the population – farmers, young seeking employment, small scale sector, those in the unorganized sectors of the economy and those in the backward areas of the country.
Growth is not only not generating adequate employment, the welfare associated with it is declining so we need to reassess the growth rate itself. Through the cycles, the poor suffer the most. They are at the edge of survival and each downturn affects them adversely and cumulatively this erodes their condition. The decreased intervention by the government is resulting in lower expenditures on social sectors at a time when the common person needs more of it rather than less. The state of collapse of public education and public health has long run consequences for the country as a whole. The nation is becoming a part of an international division of labour in which it is getting more marginalized and the poor suffer its worst consequences.
References.
Government of India. National Accounts Statistics, Central Statistical Organisation, Various issues.
Government of India. 2005. Union Budget 2005-06.
Government of India, Ministry of Finance, Economic Division. 2005. Economic Survey 2004-05.
Kumar, A.1999. The Black Economy in India. New Delhi, Penguin.
-------------. 2005. Factors Underlying Jobless Growth in India And the Need for a New Development Paradigm. Bhartiya Samajik Chintan. January - March. Vol. III, No. 4 Pp. 215-229.
Graph 1
Source: Economic Survey 2004-05
Graph 3
Graph 3
Source: Economic Survey 2004-05
Graph 2
Source: Economic Survey 2004-05.
Graph 2
Source: Economic Survey 2004-05.
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