Development Paradox: Economic Growth and Inequality

Keshavcdas's Blog

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On completing one year in office, Modi government in India reported that India’s economy grew by 7.3 per cent during 2014-15.  The International Monetary Fund has projected that India will outpace China during the current fiscal year. This is very encouraging news. From the point of view of broader policy-making India is still a recovering economy.  The prime drivers of the growth were the significantly stronger performance of ‘manufacturing’, ‘electricity, gas, water supply and other utility services’ and the ‘financial, real estate and professional services’.

However, this is a development paradox. Indeed, this development paradox is applicable as a truth into most of the developing and least development countries economics; both in Asia and Africa. Taking the example of India, it is true that India has attracted global attention for rapid economic growth. India accounts for nearly 80% of the regional GDP of South Asia, and is the largest country…

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CAN INDIA GROW AT 7 % WITHOUT SUBSIDY?

Dilemma between National Interest and WTO, looking beyond for inclusive growth 

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India’s real GDP or GDP at constant (2011-12) prices for the year 2015-16 is estimated at INR 113.5 lakh crore showing a growth rate of 7.6 % over the first revised estimates of GDP for the year 2014-15 of INR 105.52 lakh crore. This will maintain its position as the fastest growing major economy, according to Central Statistics Office (CSO). For FY 2015-16, World Bank also estimated 7.6 % growth rate. India needs to grow at 8 % and more for several years in order to raise incomes, generate jobs and lift millions out of poverty. Union Budget 2016-17 highlights expected spending of government in subsidy to be nearly INR 2.4 lakh crore which is nearly 4% less than FY 2015-16. However, if spending on subsidy reduces, it will surely spark the growth engine and India may able to grow at 7 % or even more consistently. India has the capability to grow beyond the imagination. Without rhetoric verdict, there is a need to view the subsidy in a different way.

  • Is subsidy hindering the growth?
  • Imagine India without subsidy and its National Interest.

In order to find the above answer for the conclusion whether “India can grow at 7 % without subsidy”, various dynamic factors that contribute in growth and our National interest has to be taken into picture, including global phenomenon like WTO.

Highlights

 Definition: Growth Rate, Subsidy, Inclusive growth

  • Growth Rate indications and its impact
  • Subsidies: Are they solution or themselves a problem?
  • Opportunity cost of subsidy
  • Subsidy effect on efficiency
  • Dynamic effect of subsidy and its distribution
  • Dilemma over subsidy: Nation Interest and WTO
  • Growing India with and without subsidy: answer to introductory questions
  • Conclusion

 The real economic growth rate measures economic growth, in relation to GDP (Gross Domestic Product), from one period to another, adjusted for inflation. The real economic growth rate is expressed as percentage that shows the rate of change for a countries’ GDP from one period to another. GDP is the market value of all goods and services produced in a country within a financial year. Inclusive Growth is economic growth that creates opportunity for all segments of the population and distributes the dividends of increased prosperity both in monetary or non-monetary term, fairly across the society. Subsidy is given by government to groups or individuals usually in the form of cash/digital payment or tax reduction in an objective to bolster the welfare of society. It leads to fall in price of subsidised product. But in other way it also acts as expenditure from taxpayers’ money which may have been used as investment for other purpose.

GDP MP =  GDP FC + Indirect Taxes – subsidies

Real GDP = GDP/ (1+ inflation science base year)

Real GDP = (most recent years’ real GDP- previous years’ real GDP)/ previous years’ real GDP

GDP: Gross Domestic Product MP: Market Price FC: Factor Cost

Growth rate indications and its impact

Economic growth rates indicate a positive impact on the economy. It increases the aggregate demand encourage a corresponding increase in overall output that brings new resources of income and employment opportunity. This may result in increase in per capita income and overall development of individual and lifestyle.

Subsidies: Are they solution or themselves a problem

A welfare state without subsidies cannot be imagined. Government has to step forward in terms of subsidies for achieving socio-economic policy.

Category FY14 Actual ( Rs Cr) FY15 Revised Estimates (Rs Cr) FY16 budget Estimates (Rs Cr)
Urea 38,038 50,300 50,500
fertilizers 29,301 20,667 22,469
Food 92,000 122,676 124,419
Petroleum 85,378 60,270 30,000
Interest 8,137 11,147 14,903
Other 1,778 1,632 1,520
Total 254,632 266,692 243,811

(Union Budget  – subsidy distribution)

By this, they aim at

  • Making basic necessities affordable to poor people through extension of consumer services
  • To prepare a foundation of various economic sectors in which private sector can participate later. When economy is at lower stages of development, it is often unviable and unaffordable for private sector to step in production. This is mainly because there are limited resources with private investors and there are informational externalities/uncertainties. In such case government do handholding by supporting private sector by extending subsidies and withdrawing them when private sector becomes competitive

Opportunity cost of subsidy

People who are in favour of subsidies give the argument that due to the subsidies provided, more goods and services are being produced in that particular sector, and more employment opportunities are being created. But the point which is almost never acknowledged is the benefits the society would have reaped if the money would have been spent otherwise or left in the pockets of the taxpayers.

Example: Suppose a person has INR 1000 in his/her pocket and spends INR 800, on a party night, that INR 800 is no longer available to buy his/her necessities like food or clothes.

Example: Suppose the government spends INR 1000 crore in constructing a bridge that a very few number of people will use, that money is not available anymore to be spent on other services like healthcare, education and other policies which are on high priority.

     But when there is a budget constraint, all spending decisions are traded off. In an ideal situation, the aim of the government is to plan its expenditure in such a way that the return to the society is roughly same as the spending. But this balanced is disordered by subsidies. The biggest problem of subsidies is that they decrease the surplus in a disguise.

Example: Consider a hydropower plant. The water used to produce electricity is also utilized by a farmer to irrigate his/her field. Now, when a cubic meter of water goes through the turbine to generate electricity, it has much higher value than irrigating the farmer’s crops. The government then comes up with a subsidy policy which allows him to pump out water from the reservoir at a minimal cost. This results in diverting the water from the water source to a lower value use, which in turn shrinks the surplus and the economy as a whole generates a smaller surplus.

Subsidy effect on efficiency

Granting of subsidies has its first order of static effects. Economic experts often say that subsidies create economic distortions, especially the subsidies which are used to promote any particular sector or industry. In such cases, resources are more often than not, diverted to less productive use, thereby reducing the economic efficiency. Those who are in favour of subsidies counter this view by contending that these subsidies serve other redistributive goals. But again, what they miss out is that providing subsidies may have external effects, which were not anticipated.

 Dynamic effect of subsidy and its distribution

Over time, the benefit reaped from the subsidy policies capitalize into the least elastic form of production. Subsidies are transitional. It helps only that section of the society who can immediately take the benefits of the subsidies. The successor of these people ends up paying a higher price for the subsidized product. The beneficiaries of subsidy programs become socially trapped also. Matters become worse when subsidization is used to support employment. Due to the subsidies being provided, people are more inclined to enter the profession, and mobilization in that form of profession stagnates. The amount of dependence on subsidies becomes an obstacle when it comes to make new policy reforms. It is of no doubt that some subsidies do benefit some disadvantaged groups. But even in such cases, these subsidies benefit companies and richer people more. Ironically, the distribution consequences of subsidies are often the opposite of what had been really intended. The passage between the government and those who are intended recipient of the subsidy benefits is often more like a stream rather that a pipe which provides ample opportunity to other to dip themselves in the stream and reap the benefits of it before the actual intended recipient. But introduction of DBT(Direct Benefit Transfer) is doing better to reap away the middle hassles.

Dilemma over subsidy: National interest and WTO

Subsidies not only hurt the general governance of the society, but it also impacts the overall economic structure. Very recently, The World Trade Organization’s 2015 in its Nairobi Ministerial decided to scrap subsidies provided on cotton exports. Reacting to that, the Indian Government has stated that the eliminations of the subsidy will benefit Indian exports. According to the government, the scrapping of such subsidies creates a level playing field.

  • These statements reinforce the fact that elimination of subsidies helps in a larger way too. Talking about subsidies on fuel, these subsidies also cost Oil Marketing Companies a lot. According to a report, the under-recovery incurred by OMCs in the first quarter of the financial year 2014-15 itself was INR 28, 690.74 crore.
  • Contrary to popular belief, the duty and the excise on fuels is not much. The price of fuels like petrol and diesel keeps on going up due to the subsidies provided on them.

There are many examples like subsidy in agriculture, solar panel, direct benefit transfer etc. have cached eye at WTO, but India’s stand has been consistently on its national interest.

Growing India with and without subsidy: answer to introductory questions

India is an emerging market and many people are below poverty line. Our National Interest is to uplift the people from poverty and organising them into mainstream economy. Our National interest is to facilitate the needy people where subsidy can be a thrust to their development. Our National interest is to give priority to our people over other country. As India is going ahead to achieve the form of welfare state, government need to help the people for their overall socio-economic development keeping inclusive growth in mind.

Conclusion

Country like India, with a population of more than 120 crores, and half of them living in poverty, it is impossible to eliminate subsidies. Providing subsidies have become a part and parcel of the Indian economic structure. The missing link is a proper structure of distribution of subsidies between the government and the actual intended recipients. If the process is made water-tight, subsidies will cease to be a burden on the economy of the nation. On the other hand, the fact that subsidies are a burden also can’t be negated. But by keeping the prices low in a fabricated manner by providing subsidies, the government is not doing any good to the economy of the country. Therefore, the need of hour for introducing new policy reforms and start eliminating subsidy policies in a phased manner. If India can grow at 7.6% with subsidy than definitely with suitable policy India can grow at 7% and more, consistency without subsidy or practically with minimal subsidy. Indeed, soon India shall able to achieve inclusive growth more comprehensively.

Sankar Ray, Faculty

North East Institute of Advanced Studies [NE-IAS]

Assam

References

  1. http://economictimes.indiatimes.com/news/economy/policy/elimination-of-export-subsidies-on-cotton-beneficial-for-indian-exports-says-government/articleshow/52013264.cms
  2. http://pib.nic.in/newsite/PrintRelease.aspx?relid=107321
  3. http://www.financialexpress.com/article/economy/tax-payers-earning-over-rs-10lyr-not-to-get-subsidised-lpg/184675/
  4. http://www.firstpost.com/business/ending-lpg-subsidy-for-the-well-off-a-welcome-move-will-kerosene-urea-follow-soon-2563840.html
  5. https://www.iisd.org/gsi/effects-subsidies
  6. Wikipedia
  7. Investopedia
  8. Indian Economy by Dutta and Sundaram
  9. Indian Economy for Civil Services Exam by Ramesh Singh
  10. Union Budget 2016-17, Economic Survey 2016

 

Do we need a Parliament?

lok-sabha-650_650x400_81437719000

Contemporary events in the country has given rise to the question “Do we need a Parliament ?” Let’s see which events have propelled this question and then we will decide on ” Do we need a Parliament “.

First event happened May 2014 elections when India voted for NDA in such a manner that no opposition party was there as such to claim big as opposition. Opposition party didn’t have required number to have Opposition leader which is required to maintain the balance for healthy discussion required for democracy.

Second event which happened over the period of time was absence of PM Modi from Parliamentary discussions majorly due to his foreign visits and engagements often accruing to frustration of opposition parties who wanted PM to answer there questions in debate hours. Also the silence of PM on many issues being discussed in Parliament created unpleasant feelings in the opposition minds.

Third event which has triggered the final blow is Demonetisation. 86 % of the currency of the country is no more a legal tender anymore. Such a big decision was taken through executive order without holding any discussions with opposition. It was kept so confidential that even ministers associated with Government in power were not aware of this decision.

Let’s see the other side of these events one by one:

The majority of NDA in Lok Sabha was balanced by lack of majority in Rajya Sabha. For example GST bill has taken sufficient discussions in the Parliament in evolving the  draft of it.

Absence of PM in Parliament or his silence may sound counterproductive to discussions but the fact that PM is on official tour and is trying to work towards foreign engagements is also a requirement in the contemporary scheme of World Politics. World is acknowledging India’s presence more than before.

Third is the Demonetisation. The goals to be achieved through demonetisation were such that it had to be kept confidential and spontaneous. Black money, Money laundering, Human trafficking and Terror Funding etc had to be addressed. So people involved in these unlawful activities had to be caught unaware. It does create inconvenience to lawful citizens. But it has to be understood that this fight can not be won without their participation.

So whether we need a Parliament or not ? Answer is that We do need a Parliament. Few things we need to work on is: a)our understanding regarding the assumptions, implications of the steps taken by the government in power and should give time to assess the after effects before coming to any conclusion. B) we should stop politicising every issue without grasping the goals and objectives of that step. C) Responsible media is the need of the hour as media is considered 4th organ of the contemporary administration along with legislative, executive and judiciary. Media should not play in the hands of Political parties and their interests. If these three steps are implemented, the parliamentary system will seem working fine otherwise we will keep fixing the problems without fixing the origin of the problem and it will become chained reaction never culminating to anything fruitful.

Sunil K Awasthi

Faculty, North East Institute of Advanced Studies [NE-IAS]

Assam

Biodiversity integration with Development

diversity

Are we responsible and accountable to flora and fauna of the world? We may say yes superficially but truth is we are not sensitive to Biodiversity. We need to understand that very basis of our life is life around us whether animate or inanimate, biotic or abiotic. The alarming rate at which the biodiversity is being affected worldwide because of various industrialised developments taking place reveals that we humans are quite insensitive to other life forms.

Meaning

Biodiversity means the variability among living organisms from all sources including terrestrial, marine and other aquatic ecosystems. The diversity includes variability within species (genetic diversity) as well as between species (species diversity) and ecosystems (ecosystem diversity). It provides services such as water purification and supply, waste assimilation and the cleaning of air and water, regulation of pests and diseases, and soil nutrient cycling and fertility. Biodiversity helps mitigate unpredictable global changes and natural disasters. A rich biodiversity is the basis for good health, food security, economic growth, livelihood security and moderation of climatic conditions. The annual contribution of biodiversity to the world is put at $33 trillion.

 

What can be done

No doubt, Development is necessary. But we need to change the definition of development. In contemporary world, USA and Europe stand as an example of what development is and emerging economies are trying to follow the same footsteps which is actually a folly. It is estimated that if every human being on earth utilises the resources in same way as an average American then we may not leave anything for future generations. It may result in end of the civilisation.

So, what can be the changed definition of development in synch with contemporary scenario.

A skyscraper should be done away as a symbol of development. Instead a village where organic farming for food, solar panels or renewable sources for electricity, hybrid fuels for public transport etc. are used, should become exemplary to showcase development to world. Research and development results on renewable sources should be shared with emerging and least developed countries. Technology and equipment transfer of green technology should be done from Developed countries towards rest of world. This should be done thinking that we live in one Global village and contribution towards other countries’ green fund is actually a contribution towards contemporary global village we all are part of. Another way to bring the integration of development with biodiversity is to spread awareness to masses that what sustainable development is. Ozone layer depletion, endangered species, extinct species, carbon credits are actually alien terms to majority of masses.

It is clear that to achieve many national and international biodiversity goals such as the National Biodiversity Strategies and Action Plans and the Aichi Biodiversity Targets, as well as meet CBD objectives, biodiversity integration into developmental sectors is a pre- requisite. For this to happen active participation from Central and State governments is needed. Private sectors need to come forward for this cause and do funding for the research. Public Private partnerships is another efficient way to make this happen.

In the end, it is We the People who are responsible and accountable to our surroundings. We may not be capable of taking actions but very much capable of responding. Actions will follow once we start responding as a common man to our flora and fauna and also the initiatives being taken in the society. It is not only Government and Private institutions’ prerogative but also common man’s prerogative to bring in Green technology in simple housekeeping.

Sunil K Awasthi

Faculty, North East Institute of Advanced Studies [NE-IAS]

Assam

WATER: A BRIDGE TOO FAR TO REACH

An insight into Sutlej – Yamuna link (SYL) canal issue between Punjab and Haryana

river

 Jeopardising the construction of Sutlej – Yamuna Link (SYL) in Punjab by the order of five-judge constitution bench of the Supreme Court- status quo on land marked for the construction for the SYL, has exposed the weakness of entire edifice of constitutional governance in our country – elected governments, constitutional authorities, political parties, autonomous bodies and even the judiciary 

From the Indus water treaty

In 1960, the Indus Water Treaty was signed between India and Pakistan. This treaty provided that three eastern rivers are allocated to India for exclusive use before they enter Pakistan; while the three western rivers are allocated for exclusive use by Pakistan. The Indus river system comprises of three western rivers viz. Jhelum, Chenab and Indus; and three eastern rivers viz. Ravi, Beas and Sutlej. After signing of the Indus Water Treaty, the water of these three rivers viz. Ravi, Beas and Sutlej was shared between Punjab, Delhi and Jammu & Kashmir.

About the Crisis

In 1966, Haryana was carved out from Punjab on linguistic basis. As a successor state, Haryana was eligible to receive a share of Punjab’s river waters. But at the same time, Yamuna River, which used to flow in undivided Punjab before 1966, flowed only in Haryana. The water of Yamuna River was never considered a part of the arrangements made at the time of bifurcation of Punjab. In 1976, the then Prime Minister Indira Gandhi brokered a deal to divide the water, such that each state received 3.5 million acre feet (MAF) of water. Also, Rajasthan was to get 8 MAF and Delhi 0.20 MAF.

In both the states, the sharing of water became an emotive and political issue. Punjab maintained that it had already shared water with Rajasthan via Indira Gandhi Canal, it does not have additional water to share with Haryana.

To enable Haryana to use its share of the waters of the Sutlej and its tributary Beas, a canal linking the Sutlej with the Yamuna, cutting across the state, was planned. In April, 1982, Prime Minister Indira Gandhi ceremonially dug the ground at Kapoori village in Patiala district for the construction of the 214km SutlejYamuna Link (or SYL) canal, 122 km of which was to be in Punjab, and 92 km in Haryana. A tripartite agreement was also negotiated between Punjab, Haryana, and Rajasthan in this regard. However, in 1990, Punjab stopped work when the canal was 90% complete. In 1995, Punjab issued a white paper which said that it would not proceed with the construction of canal and suggested that Haryana be given water from Bhakhra Canal system. When the matter reached to Supreme Court, the court directed Punjab in 2002 to complete construction work by January 2002; and also, rejected the review petition. In 2003, another review petition was filed by Punjab in Supreme Court to relieve it from canal project. In 2004, Supreme Court asked the central government to constitute a high-powered committee to supervise the canal construction process. However, in the same year, the Punjab Government passed Punjab Termination of Agreements Act, 2004 to revert the land of the people acquired for the purpose of construction of Canal.

Presidential reference

Earlier in 2004, the Punjab government enacted Punjab Termination of Agreements act (2004) to scrap all water sharing agreements with neighbouring states. Presidential reference was made in the Supreme Court regarding this act.

What is the stand of Punjab?

Punjab has categorically rejected to execute the project saying that it does not have even a drop of water to share with Haryana. So, it has passed Satluj-Yamuna Link Canal Land (Transfer of Property Rights) Bill, 2016 to return all of the land acquired for Satluj-Yamuna Link Canal project. Without waiting for the bill to get governor’s assent, the local politicians have encouraged farmers to begin filling up the canal with mud. Punjab defends its act, stating that under Article 143, the Supreme Court has only advisory functions, and hence cannot pass an assumptive interim order. Subsequently, the canal was filled up in many areas before the Supreme Court directed to maintain status quo.

What is the stand of Haryana?

In 2004, the Supreme Court directed the central government to undertake the construction of canal under the supervision of a high-powered committee. So, the Haryana government claims Satluj-Yamuna Link Canal Land (Transfer of Property Rights) Bill, 2016 of Punjab is in violation to the Supreme Court’s ruling. Haryana claims to have suffered a loss of Rs 35,020 crore. Haryana finished constructing the canal on its side in 1980. 3.5 MAF of water from Ravi and Beas was allotted to Haryana. Haryana claims it would have grown an additional 8 lakh tone of food grains earning 1000 crore per year had the Punjab government completed the canal. Also, it claims it has spent nearly 20 crores to fight the cases related to the canal project in court.

What is the stand of farmers?

With escalating land prices, the farmers in the three districts (Ropar, Fatehgarh Sahib and Patiala) through which the 214  km long canal passes through in Punjab have begun to claim back their lands by filling it up with mud and by clearing structures such as canal walls, pillars etc. The support of the local politicians have encouraged the farmers to initiate such actions.

Similarly, the farmers of Haryana who had lost their lands for the project have started demanding that their government should also return back their lands.

Conclusion

Punjab’s stand on this issue has become a severe test for inter-state relations and is escalating bad precedent to other states that have similar disputes with their neighbours. By acting on its own way without any regard to the rights of other states, the actions of states like Punjab may have evil consequences to the federal structure and to the unity and integrity of the nation. However, with consensus governance and respecting the phenomenon of “Live and let live” will truly prevent many water wars.

Sankar Ray

North East Institute of Advanced Studies [NE-IAS]

Assam