Thoughts on the Indian Economy

Thinking about assorted economic issues in India.

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.


Anonymous Jake said...

One issue with the Kuznets theory is the "Latin American" effect. That is, it might not be that middle income countries have innate inequality, but rather that most middle income countries are in Latin America, which may be highly unequal for an unrelated reason.

7:35 AM  

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