IASbaba's Daily Current Affairs Analysis

IAS UPSC Prelims and Mains Exam – 22nd May 2019

(MAINS FOCUS)

NATIONAL/ECONOMY

TOPIC: General studies 2 and 3

Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

Inclusive growth and issues arising from it.

Geography of industrial growth in a federal polity

Introduction:

Just six states—Tamil Nadu, Maharashtra, undivided Andhra Pradesh, Gujarat, Uttar Pradesh, and Bengal—account for close to two-thirds of all factories in the organized sector (64.3%) and a similar share of workers in the sector (62.2%). These states also account for over 63% of establishments and 59% of workers in the informal sector.

Industrial establishments and workers are thus highly concentrated in these six states that constitute the core of industrial India.

What accounts for such concentration?

Differences in transport costs, economies of scale, factor mobility and market size, collectively described as “the economies of agglomeration”, lead to concentrated patterns of industrial location.

India is not an exception in this. Industrial agglomeration is the global norm.

The pattern of industrial growth across Indian states:

Industries were scattered across several states at the time of Independence, the cities of Kolkata and Mumbai alone accounted for 50% of total manufacturing output. By 1961, manufacturing industry had spread to 89 industrial districts located mostly in Bengal, Maharashtra, Gujarat, Tamil Nadu, Uttar Pradesh and undivided Andhra.

At the turn of the century, the same six were still the leading industrialized states, as noted earlier.

However, Bengal had by now slipped to the fifth rank in share of organized sector factories and employment. Meanwhile, three new states had appeared as new industrial states with rising shares of factories and employment both in the organized and unorganized sectors—Karnataka, Haryana and Punjab.

How government policy affects industrial growth?

As the capital of the British empire in India, Kolkata and its hinterland emerged as a pre-eminent industrial hub in the late 19th and early 20th century.
The shift of the capital to Delhi and political independence triggered Bengal’s gradual decline.
The freight equalization policy of the new national government deprived the entire eastern region of its locational comparative advantage in mineral-based industries.
Then the collapse of public investment, especially in railways, killed the state’s engineering industry.
In the 1960s turbulence arising from militant political movements led to a massive flight of capital, from which the state is yet to recover.
Similar stories of industrial decline could be recounted for Uttar Pradesh and Bihar.
At the same time, aggressive industrial development programmes pursued by state governments led to further industrial agglomeration in the old industrial states of Maharashtra, Tamil Nadu, Gujarat and undivided Andhra alongside the emergence of new industrial states such as Karnataka, Punjab and Haryana.

Agglomeration and deglomeration:

With increasing concentration of industries in a hub, competition drives up the cost of labour and, especially, the price of land. Crowding, traffic snarls and demand for utilities drive up congestion costs in the core of the conurbation.
Beyond a point, the negative “backwash effects” outstrip the positive “spread” effects and deglomeration sets in. Industrial units progressively relocate to the periphery and eventually move to a new location altogether.

Way ahead:

The Union government will play a critical role. Its spatial allocation of investment in infrastructure and its guidance to public sector financial institutions that dominate the allocation of capital among the states will be important drivers.
At the same time it needs to be ensured that the Union government maintains neutrality, without tilting the playing field in favour of one state or another.

One way of preserving Union government neutrality is to empower the Inter-State Council as a federal institution to oversee and ensure that financial resources flow to states transparently in accordance with reasonable criteria.

The states can collectively push for its re-invention as a powerful federal body, like the GST Council.

Conclusion:

The political alignments that emerge after recent general elections will be an important determinant of the future geography of India’s industrial growth.

Connecting the dots:

Industrial establishments and workers are highly concentrated in just a few states in India. The phenomenon of the negative “backwash effects” outstripping the positive “spread” effects hasn’t worked. Comment.

INTERNATIONAL

TOPIC: General studies 2

India and the World

International Relations

Policies of developed and developing countries and their impact on India’s interests

Indian Economy and related issues

US-China tariff war: An opportunity for India

Background:

A year into the US-China tariff war, its implications for India are still unfolding. India is losing its surplus with the US. It is gaining exports, and hence, narrowing its deficit with China. India can take the space vacated by the warring partners.

India hasn’t escaped unhurt:

The simmering tensions between the world’s two largest economies has wrought a knock-on effect, taking down global growth, disrupting trading arrangements and production systems and, above all, injecting uncertainty into the already fragile global environment and weakening investor sentiment.

India’s exports slowed to 5.5 per cent in the second half of fiscal 2019, compared with 12.7 per cent in the first half.
Overall growth for the fiscal printed at 8.6 per cent on-year, lower than 10 per cent in the previous year.
India’s trade surplus with the US had increased significantly since fiscal 2012. However, this surplus started to shrink in fiscal 2019, as export growth slowed to 9.5 per cent from 13.4 per cent in fiscal 2018, while import growth rose sharply to 32.6 per cent from 19.3 per cent.
Protectionist measures by the US were beginning to tell on India’s exports. Key items hit by US tariffs last year were iron, steel, and aluminum.

Missed opportunity:

The tariff actions by US and China have been one-on-one, making imports from each other expensive. It has resulted into improved relative competitiveness of other economies exporting the same products.
If this trade war continues over a longer horizon, it could even result in shift of production bases and restructuring of global supply chains. Chinese firms are already moving production to their plants in other countries. India also figures in the list of such probables.
But such opportunities for growing exports have come and passed earlier too. Even before the trade war, low-end manufacturing (readymade garments, leather garments and footwear) had started moving out from China, as labour costs rose and it moved to more sophisticated manufacturing.
However, India fell behind countries like Vietnam and Bangladesh in capturing export share in these sectors because of higher costs and lower incentives.

What hinders India from becoming an export powerhouse?

India lags in competitiveness.
At 58, India still ranks below China (28) in World Economic Forum’s Global Competitiveness Rankings for 2018. In World Bank’s Logistics Performance Index 2018, it ranks 44, below China (26) and Vietnam (39).
Land and labour reforms are still pending, hindering largescale investments in export sectors.
India remains a tightly regulated market.
Under the World Bank’s Doing Business rankings, India ranks 77, compared with China at 46 and Vietnam at 69.
India’s slow progress in drafting trade agreements impacts its ability to participate in global value chains, affecting export growth.

Conclusion:

India must proactively address above mentioned concerns. Reaping every opportunity that presents itself has become more crucial now, given that the global environment is in for even more challenging times.

Connecting the dots: