IASbaba’s Daily Current Affairs – 26th July, 2016

IASbaba's Daily Current Affairs Analysis, IASbaba's Daily News Analysis, National, UPSC

IASbaba’s Daily Current Affairs – 26th July, 2016

NATIONAL/ECONOMICS

TOPIC: General Studies 3

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

Inclusive growth and issues arising from it

Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth

It never trickles down

The 1991 reforms

As commonly believed, the reforms were not a retreat of the state in favour of the market, but a change in the nature of the state.
It was more of a spontaneous outcome of the introduction of the reforms themselves rather than a conscious decision.
Reforms entailed the opening of the economy to freer cross-border flows of goods and capital, including of finance which is highly mobile and whose sudden outflow could induce a financial crisis
Thus, the state policy had to be in conformity with the “confidence” of the international financiers under this “reform regime” to ensure that the economy remains intact.
Result: As earlier when the state used to promote capitalist development along with protecting traditional small producers, including peasantry and workers against capital exploitation, the 1991 reforms tilted the state’s concern towards the interests of globalised capital. The domestic corporate financial oligarchy also aligned with it.

Withdrawal of state support

The traditional petty production, including peasant agriculture suffered crisis due to withdrawal of state support
This led to increased agricultural input prices due to reduced government subsidies (Fiscal deficit had to be maintained by not raising taxes on rich to ultimately calm the financial capital flow)
The market intervention role of Commodity Boards was brought to an end as the government withdrew price supports for various crops
The nationalised banks were allowed to default on providing agricultural credit. This forced the peasant to depend on private moneylenders who charged exorbitant high rates.
Public extension services were winded up (Extension is a process of working with rural people in order to improve their livelihoods. This involves helping farmers to improve the productivity of their agriculture and also developing their abilities to direct their own future development.)
Insulation to agriculture from world market price fluctuation provided in form of tariff and quantitative restrictions were removed
Budgetary cuts in agriculture and irrigation investments
Poor state of agricultural research and development in public institutions
Agribusiness was given permission to deal with peasants in a direct, unmediated and unregulated way. This increased chances of peasant exploitation
The state also slowly retreated away from providing essential services like quality education and health care by allocating less financial aid.

Impact on peasants

Adversely affected their income
Handicapped profitability of peasant agriculture
Reduced its growth
Brought acute distress to countryside, economically, physically (health wise), mentally (agri-stress and suicide) and more

The same is the case with fishermen, artisans, craftsmen, weavers and others.

Income squeeze

Taking over of peasant’s land for infrastructure and industrial projects, often at throwaway prices and against their wishes
Even when consent is obtained, not all are consulted who are dependent on land
With ‘smart city’ as an ambitious government programme, these actions are set to gain momentum
This would have been not an issue if jobs were available to peasants who migrated to urban areas.
Sadly, the scale of job creation has been little despite high GDP growth.
As Karl Marx says- “Primitive accumulation of capital is rampant not only in “flow” terms (income squeeze) but also in “stock” terms (asset dispossession).”

Primitive Accumulation of capital= a process by which large swaths of the population are violently divorced from their traditional means of self-sufficiency.

A weakened workforce

Joblessness has variety of forms which misleads the picture of unemployment scenario.

Casual employment
Intermittent employment
Part-time employment
Disguised unemployment (camouflaged often as “petty entrepreneurship”)

National Sample Survey

The ‘usual status employment grew at 8% per annum during 2004-05 to 2009-10, a period of high GDP growth.
This was below the natural rate of growth of the workforce itself, even when the job-seeking displaced peasants are not included.

Result

Proliferation of risky and insecure employment
A burgeoning lumpenproletariat– the unorganized and unpolitical lower orders of society who are not interested in revolutionary advancement.
Weakening of bargaining power even of the unionised workers
Hence, compression of the per capita real income of the working people as a whole (agricultural labourers, traditional petty producers, and non-white-collar workers.)

Statistics supplement the results

Rural population– food intake below 2,200 calories per person per day= 58.5% (93-94) and 68% (2011-12)
Urban population– food intake below 2,100 calories per person per day= 57% (93-94) and 65% (2011-12)

Decoding the results

It is often claimed that increase in calorie deprivation does not necessarily mean worsening economic status.
It could arise for other reasons such as changing tastes, greater health consciousness, reduced physical work effort, or greater emphasis on children’s education and health care.
However it is difficult to explain that-
- Reduced calorie intake occurred because of other reasons even when real incomes of the working people were rising and also, an increase in calorie intake when real incomes were also rising, such as between 2009-10 (a poor crop year) and 2011-12 (a good crop year).

Thus, the reasonable explanation for declining calorie intake is a decline in real income of the working people — that is, income deflated by a price index that takes into account the effect of privatisation of essential services.

Middle class gains

The reforms thus brought “primitive accumulation of capital” without the creation of adequate employment opportunities to absorb those who are displaced by it.
It caused worsening of the conditions of the working people as a whole.

The other side of reforms

The growth of the financial sector (financialisation)
Growth of service sector outsourcing from developed countries owing to the comparatively lower wages prevalent domestically.
Increase in relative incomes of middle class
Thus, middle class emerged in support of the “development” paradigm of the “reform regime”

However, the global financial crisis still persists and its end is a long due in future. This will remove the sheen of high growth benefits from minds of middle class and then support a development strategy which would entail to interests of working class and surpass the ‘neo-liberal’ capitalism.

The infamous trickle-down

What is it: Trickle-down theory is an idea that tax breaks or other economic benefits provided to businesses and upper income levels will benefit poorer members of society by improving the economy as a whole.
However, it has been globally experienced and proven that cutting tax rates of the richest does not lead to economic growth, income growth, wage growth or job creation.
Thus, trickle down never happens.

Connecting the dots:

‘Targeted approach’ and not ‘Trickle-down theory’ will aid and assist development of underprivileged and exploited population of India. Examine.

Refer:

It doesn’t trickle down

Punjab: A case study in agricultural and economic mismanagement in India

ECONOMICS

TOPIC: General studies 3

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

Effects of liberalization and 1991 reforms on the economy, changes in economic policy and their effects on overall growth.

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

Assessment of 1991 reforms:

As India celebrates 25th anniversary of the 1991 reforms, there have been a flood of retrospective assessments in the national media.

This article deals with some of the key messages and highlighting their implications for the future.

Highlights:

The record on growth

There was a huge criticism and fears that the dismantling of government controls and greater reliance upon the private sector and market forces would be ruinous for the economy.

However, results of many assessments shows that India has done quite well after the reforms.

1991 reforms have transformed India from a low-income economy at the start of the reforms to one at the lower end of what the World Bank calls the middle-income range.
We are also currently the fastest growing emerging market country at a time when both the industrialized countries and the major emerging market countries have slowed down.
If we judge only by gross domestic product (GDP), we can say the reforms succeeded.

External vulnerability

Another criticism in 1991 was that the opening of the economy to trade and capital flows would make us vulnerable externally, and the International Monetary Fund (IMF) loan would be a precursor to continuous recourse to IMF and extended submission to its intrusive conditionalities. This fear too was ill-founded.

After reforms, India went to IMF in 1981, and again in 1991, but we have not needed IMF since then.
India did experience external difficulties a few years ago when the current account deficit increased to almost 4% of GDP in 2012-13, actually worse than in 1990-91. The fiscal deficit had also worsened because of the fiscal stimulus.
Rupee was depreciated to some extent in the face of market pressure.

However, we were able to handle the crisis without having to call in IMF. The situation was brought to normal very quickly due to the credibility provided by the large reserves (thanks to 1991 reforms).

The decision in 1992 to open up to foreign institutional investment (FII) was much criticized at the time as making the country vulnerable to hot money flows. The fact is that while there was some outflow of FII money, it was for a brief period only, and was easily managed.

Have the reforms helped the poor?

The impact of the reforms on the poor is obviously a critical factor in any retrospective assessment.

In the pre-reform period the percentage of the population below the poverty line (based on the Lakdawala committee estimates that were then used) increased marginally from 44.5% in 1983 to 45.3% in 1993-94 and the absolute number of the poor increased from 323 million to 404 million.
In the immediate post-reform period 1993-94 to 2004-05, the percentage in poverty (using the latest Tendulkar committee estimates) declined, from 45.3% in 1993-94 to 37.2% in 2004-05.

However, because population had increased, the absolute numbers increased marginally by 3.5 million.

In more recent years, when growth accelerated sharply, the percentage of the population in poverty declined much faster than before from 37.2% in 2004-05 to 21.9% in 2011-12.
For the first time ever, the absolute numbers declined by almost 140 million from 407 million in 2004-05 to 269 million in 2011-12.

This achievement is now internationally recognized, with the World Bank highlighting it as a major positive development in the fight against poverty globally.

Still poverty is a concern

However, there is no doubt that the numbers in poverty are still too large. To have 269 million below the poverty line, and a very austere poverty line at that, is not something that should be seen as a victory.
Nevertheless, we can say that if we can grow at 8% or so, and the growth is as inclusive as it has been in the recent past, we can expect to see poverty reduced to a truly marginal level in another 20 years.
It is a different matter that by then our goalposts will have changed and government will have to meet higher expectations.

Access to essential services

The real failure is perhaps less in reducing poverty defined in terms of consumption expenditures and more in the failure to deliver basic services such as education, health, clean drinking water and sanitation to the mass of our population.

Access to these services is critical for human welfare. It is also critical for growth since they affect the productivity of the labour force and an unhealthy and inadequately educated/skilled workforce cannot sustain high growth.

In the case of education, we have achieved near universal enrolment in primary schools, but the quality of education provided is poor.
The situation in healthcare is even less impressive because the roll-out of facilities, and especially their staffing, is much less widespread, especially in rural areas.
Access to clean drinking water and sanitation, which is closely related to health, is a major problem. Although the percentage of the population said to have access to protected water sources has increased markedly, the quality of water, especially in rural areas, cannot be certified because it is not regularly tested.
Open defecation is still practised by almost 50% of the population, much higher than in many other countries with lower per capita incomes.

The way ahead:

These shortcomings are all interconnected because poor sanitation and poor quality of drinking water leads to ill health and reduced learning outcomes.

Improving performance in these areas should be a priority for governments for the next 10 years.
Additional financial resources will be needed, but there is also the problem of the institutional capacity to spend money well.
Both Central and State governments have to put combined efforts and should be accountable in regard to institutions for delivery and personnel in these areas.

Reforms have failed to provide quality education and health care.

For instance, some years ago, the Organisation for Economic Co-operation and Development–sponsored Programme for International Student Assessment (PISA) survey, which is conducted in several countries, was conducted in India for the first time on a pilot basis.
It showed that the levels achieved by students from two relatively advanced states (Tamil Nadu and Himachal Pradesh) ranked at the very bottom of developing countries!
Lant Pritchett, a professor at Harvard University, has pointed out that India’s top 100,000 students compare with the best anywhere, but quality collapses beyond this thin layer.
Rapid growth cannot be achieved on the basis of a thin layer of excellence. It has to be based on a much broader level of quality, and our public educational system is very far from getting there.
However, unless there is agreement that a problem exists, we cannot expect a solution.

A systematic resort to PISA type testing in all states, after allowing for cultural differences which could skew results, is essential to form an independent opinion on the quality of outcomes. There is considerable evidence from other countries that once the problem is identified and accepted, corrective steps do help.

The employment problem

Perhaps the greatest unhappiness about the reforms is because the growth process they have produced has not yielded a sufficient expansion of job opportunities, and the opportunities created are of poor quality. (Jobless Growth)

Rapid growth is certainly necessary for this outcome, but it is not enough. It must be accompanied by growth in more labour-intensive sectors.
Small and medium manufacturing units are a part of the solution because they are typically more labour using.
However, the objective must be to create an environment in which even large units in labour-intensive sectors can do well, even as smaller units in the same sectors expand in size.
Policies that discriminate against organized sector units in favour of unorganized sector production, for example, modern retail formats, need to be reviewed because they discourage the expansion of the organized labour force.

The way ahead:

Some of what is needed has been on the reform agenda for some time and is uncontroversial, though complex. This includes the provision of good quality infrastructure to all parts of the country, building an efficient banking system and the related set of financial sector reforms, including the new bankruptcy code and its supporting infrastructure, ease of doing business, etc.
Some of what is necessary is controversial, notably labour reform. Leaving it to state governments could help, but it is important to be sure that states implement the right kind of reforms. What we need is flexibility of the right kind, available to firms employing many more workers.

Corruption

A common worry of many people is that the reforms have increased the level of corruption.

The fact is that the elimination of industrial licensing and import licensing eliminated corruption and cronyism from areas where it was once widespread.
Where scams are alleged today are the areas that were not reformed, notably allocation of spectrum, mining rights and land.
Land is a state subject. In the case of mining rights and spectrum a decision was taken in United Progressive Alliance (UPA)-II that all future allocations would be by auction.

In these areas there should be no problems in future and very successful spectrum auctions were conducted under UPA-II and this is continuing under the present regime.

Conclusions

The central message coming out of the anniversary celebrations is that the reforms did well in many fields, but not as well as might have been hoped in some important areas.
India has to renew its efforts in what remains undone.
Meanwhile, an economy that has moved into middle income status is bound to face new challenges. If the government doesn’t respond, we run the risk of getting stuck in what has been called the “middle income trap”.
The lesson is clear: we need more reforms and not less, but as the economy becomes more complex, the reforms have to be much more carefully designed.

Connecting the dots:

India is celebrating the 25^th anniversary of the 1991 reforms. Critically analyze their achievements and highlight their implications for the future.
In future India may run the risk of getting stuck in what has been called the “middle income trap”. What do you mean by this “middle income trap”? Suggest some suitable reforms to escape from this trap?