Thoughts on the Indian Economy

Thinking about assorted economic issues in India.

Wednesday, April 26, 2006

Do we care about inequality?

India is, slowly but surely growing, and getting richer. According to the World Bank, the average GDP per capita in the period 1984-1994 grew 3.3% and in the period 1994-2004, it grew at 5.5%. The average per capita numbers are fine (remember-- population is growing too) but what the distribution of the income growth? That is, is everyone benefitting equally? According to two influential economist Angus Deaton and Jean Dreze, the answer is no. Based on their analysis of the data in the National Sample Survey, on the whole the number of people living below the poverty line went down. The rural poor declined 12.7% between 1987-2000 and urban poor declined by 10.5%. However, the ithis poverty reduction was marked by inequality. While in states like Haryana, Gujarat and Tamil Nadu the number of poor decreased by 11.3%, 12.4% and 14.1% respectively; West Bengal, Orissa and Andhra Pradesh saw a reduction of 3.2%, .5% and 3%. In Assam, the number of poor actually increased by .1%. The authors also say that in the nineties, agricultural wages grew by 2.5% whereas public wages grew by 5%. Deaton and Dreze say,
"The overall decline of poverty in the nineties does not rule out the possibility of impoverishment among specific regions or social groups. That possibility, of course, is not new, but it is worth asking whether its scope has expanded during the last decade. As the economy gives greater room to market forces, uncertainty and inequality often increase, possibly leading to enhanced economic insecurity among those who are not in a position to benefit from the new opportunities, or whose livelihoods are threatened by the changes in the economy. The increase of economic inequality in the nineties, noted earlier, suggests that tendencies of this kind may well be at work in India today."
The real question here is how much, if at all, should we worry about inequality of growth? If the average income in India is increasing and everyone is better off, does the distribution really matter? The Indian voters, who did not get a piece of "India Shining" certainly thought it did when, in 2004, they voted out the incumbent BJP government. Growth is good and inequality may be an inevitable consequence. The economist Simon Kuznets formulated the Kuznets curve which essentially says that there is a U-shaped relationship between income inequality and economic growth. That is, as poor countries grow, inequality first increases and then as they become wealthier, it decreases. In thinking about the rightful place of inequality in growth, let's first think about its roots.

One theory as to why economic growth has benefitted groups differently is that rates of return in certain sectors has been higher. The average annual growth rate in agriculture, manufacturing and services between 1994-2004 was 2%, 5.6% and 8.2%. Let's assume that people in the service sector were the ones who benefitted most from economic growth that is, the returns to their human capital were the greatest. Higher productivity of labor is a good thing and should be encouraged. Everyone will be worse off if the most productive aspect of the economy is suppressed to promote more equality.

The real question to ask when thinking about inequality is what is keeping people from building their human capital and moving to higher-growth sectors and ultimately, being better off? I believe this why the way to address inequality in India is not through highly redistributive measure which constrain market mechanism but to address the inequality in accessibility to education, health, gender inequality-- basic building blocks of human capital.

Abhirup Sarkar sums it up well:
"The question is, can the poor automatically take part in the emerging markets, and the answer is an unqualified no. In fact, the state needs to help them with education, skill formation, health services and other infrastructural facilities like roads, electricity, sanitation and so on before this wretched lot can participate in the market. For a proper economic development, therefore, we need both the market and the state. The market would create new possibilities and increase the demand for labour. The state, on the other hand, can partly take care of the supply side by making the poor market-worthy. One should not worry too much if in the process there is a little rise in inequality."

Tuesday, April 18, 2006

The Economic Burden of the Naxalite Movement

The Naxalite movement in India traces its roots to the peasant uprising in West Bengal's Naxalbari district in 1967. This movement was grounded in Mao Zedong's Communist philosophy of empowerment of landless laborers and the poor by overthrowing the goverment and landowners. In its early years, the movement inspired not only India's rural poor but also bright and young students to join its ranks. However, in this day and age, the People's War Group (PWG) and the Maoist Communist Center (MCC), the two main braches of the movement, do not hold any sort of intellectual appeal. They have degenerated into a terrorist outfit that is thwartings its own goal-- a good life for the impoverished villagers and tribals, by its violence and extortionary activities. Scores of police and civilians die every year (on average, two per day) due to this extremist communist activity. Naxalite violence has been escalating recently. A few days ago, 11 policemen were killed on a Naxal raid on an armory. PM Manmohan Singh declared last week that this violence is the most serious challenge to India's internal security.

It is about time that the issue of Naxalites come front and center on the national agenda rather than as simply an occasional annoyance from remote forest belts. Grassroots support for Naxalites has eroded considerably in the past several years. Villagers and tribals are forcibly recruited into the Naxal ranks and they are forced to support the rebels economically as well.

But this is an economics blog, so I side-step the ideological arguments concerning the Naxals and argue why for sheer economic reasons, the Indian government must take bold steps to rid India's most poor and vunerable areas of these extremist.

Although they are present in almost 13 of India's 28 states, Maoist rebels have the strongest holds in many east-central Indian states like Chattisgarh and Jharkhand. The irony of the situtation is that the Naxal presence in these states is a huge barrier to unleashing the economic potential of these states, which are very well-endowed with mineral and natural resources.

The following are the two main ways in which Naxalites are suppressing economic growth and development in India's most needy regions and thus, depriving the citizens of the prosperity that they claim to be fighting for-

1. Breakdown of institutions
The instability resulting from violence will lead to flight of the basic institutions and persons needed for development like teachers and doctors. There have been reports that financial institutions have closed down in some areas, leaving the people at the mercy of moneylenders who are known to charge exorbitant interest rates. A recent New York Times article reports that,

"The top government official in one of Chhattisgarh's rural Maoist strongholds, Dantewada, acknowledged that the rebels had made some 60 percent of his 6,400-square-mile district a no man's land for civil servants. Not that
there are many civil servants. His district's police department has a vacancy
rate hovering around 35 percent; in health care, it is 20 percent."

2. Barrier to Riches
Chattisgarh is one of India's richest states in terms of mineral resources. It has extensive deposits of almost 28 minerals including coal, iron ore, limestone, dolomite, bauxite, tin ore and also, diamonds. The insecurity rendered by the Naxal rebels in Chattisgarh is a huge barrier to the development of a thriving mining economy. When a firm has uncertainty about security of its labor and capital, the cost of doing business will naturally rise. In the extreme case, businesses will not take on risky projects. The South Korean company Posco wants to $12 billion dollars in Orissa but given that there was a 50-fold increase from 2004 to 2005 in damages from rebel activity, how long will it stay? Another interesting perspective is that, if the firm is uncertain about how long it will be able to sustain its project to extract minerals, it might extract more quickly, thus leading to excessive and unsustainable depletion of resources. Some states in India where Naxals are very active, like Bihar, have human development indicator levels that match those of sub-Saharan Africa. These states could certainly use economic investment.

Proponents of the Naxal philosophy may argue that it is precisely the rich mineral wealth that needs prevention from the clutches of the government and private enterprise. Natural wealth belongs to the tribals and villagers of these areas and that the government is wrong to displace them. However, the economic impacts of mineral wealth is not just a thriving mining industry. Indirectly, mineral wealth can be highly complementary to a prosperous large-scale manufacturing industry, capable of providing decent jobs to lower-skilled and low-educated workers in rural areas. Supporting the complementary linkages between natural resources and manufacturing, economists have argued that,
"Furthermore, there is reason to believe that the condition of abundant
resources was a significant factor in shaping if not propelling the US path to
world leadership in manufacturing."

The end of the Naxalite movement will usher in a new phase of economic growth and prosperity for the villagers and tribals who currently live in a constant state of fear, coercion and also brain-washing by the Naxal rebels. The people of these Naxal-infested regions are a key piece of India's overall economic growth story. A story which currently, completely ignores these huge swathes of remote, forested heartland.