SOCIAL SECURITY IN INDIA

India is perhaps the only major democratic country which doesn't have a stated minimum social security cover for its citizens. This is despite the fact that alongwith fast economic growth, the country is also witnessing an increase in economic insecurity and vulnerability, resulting mainly from the growing economic disparities and the breakdown of the traditional joint family system and a supportive socio-cultural-moral structure.  In the days of yore when economy moved slowly (and the state wasn't the over-lord of all that it could get into), family members, relatives and the community at large used to furnish an umbrella of shared social responsibility for those facing bad times. But in an age when GDP is the God, it is perhaps too much to expect that feelings like sympathy, pity, sense of responsibility and care won’t get monetized too.

The False Start

Given the record of indifference that successive governments have shown to the cause of social security, many of us would be surprised to learn that India was the first Asian country to start Social Security program for its citizens though for a small section only.  The Employees' Compensation Act, which was enacted in 1923, was the first legislation to provide payment of compensation to the workman or his/her family in cases of employment related injuries resulting in death or disability. Immediately after independence, the government came up with The Employees’ State Insurance Act, 1948 which was aimed at providing medical services, continuing cash benefits due to employment injury or death, cash sickness benefits during periods of wage loss, and cash maternity benefits to around 2.5 million factory workers throughout the country. Another major legislation was The Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 which aimed to promote savings for old age as well as ensure terminal benefits, superannuation pension, and family pension in case of death during service. But after this promising start, things bogged down (as they usually do in our country), and today India spends just 1.4 % of its GDP on providing social security cover (to only a small percentage of its population) which is among the lowest in Asia, far lower than what China, Sri Lanka,  or even Nepal spend.

Even though the constitution describes the country, inter alia, as a socialist republic, the successive left leaning governments didn't make any effort to follow the erstwhile countries of the socialist system which were committed to providing comprehensive social security to their citizens even at low levels of economic growth. Nor was there any question of following the capitalist countries where social security is the primary instrument of public policy aimed at maintaining the living standards of all citizens absorbing over half the total government expenditure, and in most cases more than 20% of GDP.

Social security in the Constitution

Social Security is listed in the Concurrent List (List III in the Seventh Schedule of the Constitution of India). The following social security issues are mentioned:

Item23:  Social Security and insurance, employment and unemployment.

Item24: Welfare of Labour including conditions of work, provident funds, employers’ liability, workmen’s compensation, invalidity and old age pension and maternity benefits. 

Social Security also finds mention under the directive principles of state policy. Article 41 of the Constitution asks the state to “within the limits of its economic capacity and development make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of undeserved want”. Similarly, Article 42 enjoins the state to “make provision for securing just and humane conditions of work and for maternity relief”.

Government of India’s vision about social security is summed up in the following quotes from the Ministry of Labour website:

1.     Social Security is a comprehensive approach designed to prevent deprivation, assure the individual of a basic minimum income for himself and his dependents and to protect the individual from any uncertainties.

2.     The State bears the primary responsibility for developing appropriate system for providing protection and assistance to its workforce.

3.     Social Security is increasingly viewed as an integral part of the development process.  It helps to create a more positive attitude to the challenge of globalization and the consequent structural and technological changes.  

It is hardly a surprise to see that the vision is yet to be converted into reality. Citizens have little choice in the matter since these issues find mention in the Directive Principles which make them unenforceable, and in the Concurrent List, which turns these issues into shared responsibilities between the Central government and the State governments (effectively making these nobody’s responsibility). Also, it is a matter of priorities that any state sets for itself and India presumably has other priorities.  

The Conceptual Basis of Social Security

International Labour Organisation (ILO) explains social security in the following way, “The expression has acquired a wider interpretation in some countries than in others but basically it can be taken to mean the protection which society provides for its members, through a series of public measures, against the economic distress that otherwise would be caused by the stoppage or substantial reduction in earnings resulting from sickness, maternity, employment injury, unemployment, invalidity, old age and death; the provision of medical care, and the provisions of subsidies for families with children.”

This definition is based on the experiences of the developed countries and implicitly assumes that most citizens are generally employed with enough earning to meet their basic needs. In most of developing countries, this view is unjustified. The general view is that this definition focuses on contingencies rather than deficiencies, and therefore, it is inadequate and too narrow for the reality facing developing countries.

According to Jean Dreze and Amartya Sen, “The basic idea of social security is to use social means to prevent deprivation and vulnerability to deprivation”. In their view, income is one of the most visible and crucial factors restricting the basic capabilities of citizens in developing countries. Therefore, social security has to address both deprivation as well as vulnerability to deprivation. As a further elaboration of the concept, they distinguish between two distinct aspects of social security, viz., protection and promotion. “The former is concerned with the task of preventing a decline in the living standards as might occur, in say, an economic recession, or most drastically a famine. The latter refers to the enhancement of general standards and to the expansion of basic capabilities of the population, and will primarily have to be seen as a long term challenge”.

When Social Security Meets the Indian Reality

It is indeed paradoxical that in a country where three quarters of the population is estimated to be poor (as per UN definition with less than $2 a day earning) having nothing to fall back upon in case of accident or misfortune, most of the social security measures are aimed at only a small and relatively well off fraction of population. Many of us would remember the ridiculous debate about the poverty line estimated by Tendulkar committee (30% of population earning upto Rs. 32 in urban areas and Rs. 26 in rural areas). The crucial question that remained unaddressed during the debate was how these people protect themselves against old age, illness, droughts, famines, accidents, deaths, and floods which are regular happenings in their lives. Some of them do get benefitted by the govt. funded pension schemes for senior citizens and widows, but the amount of monthly pension is pitifully low (less than Rs. 1000 p.m. in most cases) and prone to usual leakages.

Even the job-linked social security schemes are not available for everyone in the country. The National Commission for Enterprises in the Unorganized Sector (NCEUS) set up in 2004 to look into livelihood conditions and social security for unorganized workers, found that it is only those working in the organized or formal sector, (around six per cent of India’s workforce as per NSSO survey 2004-05), who enjoy social security, with nearly 94 % (433 million) working in the unorganized sector enjoyed almost no social security cover at all. The Commission also found that there had been almost no growth in formal employment since 1991 (static around 26 million) and the entire growth in employment was in the unorganized sector (from 287 million to 433 million). Another finding of NCEUS that 79 percent of workers in the unorganized sector had an income of less than rupees twenty a day (in 2004), clearly shows the downside of the liberalization-globalization-privatization processes. The NCEUS proposed legislation for a national minimum security package for unorganized sector workers, social insurance, social assistance for life and health cover, old age benefits to all workers within a period of five years financed by the Centre and state governments, employers (where identifiable) and workers at a cost of less than 0.5 percent of Gross Domestic Product after five years. As can be surmised, the UPA government discarded the Commission’s recommendations for statutory backing to social security. NCEUS had proposed for setting up of National and State Social Security Advisory Boards but only 14 States set these up. 

So far, the NDA government too has not yet indicated any support to the idea of legally guaranteed social protection for all though it is proposing to issue a smart card--U-WIN (Unorganized Sector Identification Number), to every worker in the unorganized sector with a unique identification number for accessing social schemes. But what the associated benefits will be and what their legal status is going to be is not yet certain.

Pioneers of the Cost-less Social Security

The NDA government has recently launched three social security schemes with much fanfare-- Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY) and Atal Pension Yojana (APY), and going by the structure of the schemes, this new government can be called the pioneers of unfunded social security that costs the government exchequer nothing. And yet, the government had no qualms in naming these schemes after the PM.

The Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), will offer a renewable one-year life cover (covering death due to any reason) of Rs.2 lakh to all savings bank account holders in the age group of 18-50 years for an annual premium ofRs.330. The Pradhan Mantri Suraksha Bima Yojana (PMSBY) will offer a renewable one-year accidental death-cum-disability cover of Rs.2 lakh for partial/permanent disability to all savings bank account holders in the age group of 18-70 years for a premium of Rs.12 per annum. The Atal Pension Yojana (APY) will focus on the unorganized sector and provide subscribers (who shouldn’t be Income Tax payees) a fixed minimum pension of  Rs.1,000,  Rs.2,000,  Rs.3,000,  Rs.4,000  or Rs.5,000  per month from the age of 60 years, depending on the contribution option exercised (on entry at an age between 18 and 40 years).

The critics have rightly criticized the schemes as old wine in new bottle and have expressed skepticism about the success of these schemes. Given that nearly 1/3^rd of the 15 million savings accounts opened under Jan Dhan scheme don’t have any credit balance, it is perhaps highly optimistic to expect those earning less than Rs. 100 a day to pay a premium of Rs. 330 for (PMJJBY) or start subscribing to APY. Over and above these affordability issues are the massive barriers put up by the IAS led Indian Bureaucratic System (IBS). Newspapers are full of reports that many people had to pay sums ranging from Rs. 100 to Rs. 500 just for opening accounts under the Jan Dhan Yojana or for even getting Aadhar Cards.

PM Modi, while launching the three schemes in Kolkata on May 9^th , 2015, said, “The poor do not want sahara. We need to change how we think. The poor need shakti”. These are noble thoughts indeed but highly detached from reality. The poor may not want sahara but whether they want insurance and pension or not or can even afford these, given their more urgent needs, wants and demands, is a crucial question that is yet to be tested. Wouldn’t it have been better if the government had combined PMJJBY and PMSBY into one, and provided budgetary support for the entire amount of the premium? Even if the entire adult population were covered, the cost would have been in the region of Rs. 15000 cr, certainly a manageable figure for a $ 2 trillion economy. If, instead of handing over the project to insurance companies, the government decides to run the insurance schemes by itself, the costs can further come down.

Yet it can’t be denied that it is the first time in India that the government has come up with a framework for protection against vulnerabilities that is available for everyone at costs which are not very high. However, the record-sheet of this government regarding promotional action against deprivation and vulnerabilities is blank as yet. It has drastically reduced allotments for MNREGA and several other similar schemes aimed at enhancing living standards and capabilities by providing employment, nutrition, education and medical support, citing wastefulness and leakage. Statistics support the view that after the “aggressive espousal of costly welfare programs” such as MNREGA by the then government from 2011, the tempo of poverty reduction decelerated compared to the period  2005-2011 when reform process was going on, and therefore there is some merit in what the government is doing. But the government has yet to come up with alternative long-term solutions for poverty reduction that can satisfy its critics. Mere talk of Make in India is not going to provide jobs or earnings to the vast population of the country.

Conclusion

The oft-repeated excuse of the inability of the Indian state to meet the fiscal requirements for expanding social security coverage is no more acceptable. Nor can the government wash its hands from providing budgetary support for social security to the vast population suffering from deprivation and vulnerabilities. They have to set their priorities in sync with the guiding principle of Antyodaya and bring back the last man in the queue as the focal point of their policies. The new government has already spent one year in office and it is high time that it comes up with new thinking on how to provide a rights based-social security framework to all citizens. They have raised the expectations of the voters and they are not going to be satisfied with numerical or positioning juggleries anymore.

Copyright © author
Published in Current Affairs Survey July 2015

MUDRA for the Un-incorporated

On 8^th April 2015, Modi government decided to junk the report of the Committee that it had set up after last year’s budget, and announced the setting up of MUDRA (Micro Units Development Refinance Agency) Bank as the single regulator and refinancer for all types of entities in the microfinance space. This step has been hailed as a potential game changer which will bring urgently needed funding to the fund-starved “unincorporated micro-business sector”, integrate the large non-formal sector and the last mile financiers (LMFs) with the formal economy, and usher in a new era of “inclusive” growth.

This is an innovative idea whose time has finally arrived. It not only represents the recognition by the Indian state of the important role played by micro and small enterprises but also represents recognition of the fact that it is only the grass root institutions with local knowledge and expertise that can ensure profitable and recoverable lending to these micro and small enterprises. By setting up the MUDRA Bank, which in a way is also a reversal of the long trend of anti-microfinance mindset in the government (particularly since the SKS episode in 2011 but much older), the government aims to formalize the largely non-formal LMFs and put in place a robust and effective framework for credit delivery to micro and small enterprises and integrating them in the formal economy. This is expected to lead the country to a virtuous cycle of growth, job-creation and prosperity by harnessing the pent-up entrepreneurial potential.

MUDRA Mandate

MUDRA Bank is expected to play the following roles:

Regulation and Supervision

·         MUDRA Bank would be the sole regulator for all players in the Micro-Finance Institutions (MFI) sectorand apex-level supervisor, thereby bringing uniformity in regulations for the SHG-Bank linkage programme, NBFC-MFIs, and trusts/societies/not for profit NBFCs/chit-funds/nidhis/Section 25 companies engaged in MFI activities

Registration

·         Facilitating registration of MFI entities.

Policy Framework

·         Preparing policy guidelines, architecture and standard covenants for micro or small enterprise financing including Last Mile Credit Delivery.

·         Laying down responsible financing practices and ensure adoption by all lenders, prevent issues of overleveraging of borrowers, ameliorate indebtedness among the poor, ensuring robust and equitable client protection policies and modes of recovery.

Credit Rating

·         Accreditation/rating of MFI entities would not only encourage the adoption of best practices across the industry

Funding and Liquidity

·         Increase liquidity support to MFIs and reduce cost of funds for MFIs

Expansion in Outreach

·         Partnership with state level /regional level coordinators for a focused approach in increasing access to financial services in under-served areas

Credit Guarantee

·         Formulating and managing a Credit Guarantee Scheme for extending guarantees for loans to micro enterprises for risk mitigation which will encourage lenders to take higher exposures

Technology

·         Promoting technological solutions for efficiency and reach.

Resources for MUDRA

MUDRA Bank has been allocated a corpus of Rs. 20000 cr (made available from shortfalls of priority sector lending) which will be used for creating refinance facility for this segment. This will be a low cost fund which should, in course of time, lower the overall cost of fund. In addition, MUDRA has also been allocated a corpus of Rs. 3000 cr for Credit Guarantee Scheme as a risk mitigation mechanism for this segment. 

As estimated by ICRA, in two years time, the MFI sector(including SHGs and NBFC-MFIs) would have a loan portfolio in excess of Rs. 100000 cr (currently Rs.78000 cr), of which a significant proportion would be refinanced by MUDRA Bank. Even with a leverage of 4-5, the Rs. 20000 cr allocated to MUDRA Bank can easily do a business of this quantum. The access to low-cost priority sector funds is likely to reduce the average cost of funding from the median 14% (range 12-16%) at present by a whopping 100-400 basis points, the benefits of which will surely reach the micro-enterprises too. This is going to have a major impact in bringing about financial inclusion.

The Un-incorporated Sector in India: The Better Half

Prof. R Vaidyanathan of IIM Bangalore, who is credited to be the originator of many of the ideas that form the basis for MUDRA Bank, observes, “For the first time in our economic history, a government has thought for the segment that accounts for more than 50% of our economic activity instead of the five percent represented by the Sensex companies”( http://www.rediff.com/business/column/column-vaidyanathan-why-mudra-bank-is-a-major-landmark-in-our-growth-process/20150324.htm?sc_cid=twshare).

The dominant role played by micro and small enterprises in Indian economy was first brought to the attention of the "economic intelligentsia" and the policymakers by Credit Suisse Asia Pacific Equity Division in July 2013 by its report entitled “India’s Better Half: the Informal Economy”. The report affirmed that 90% of the jobs and 50% of the GDP in India originated in the non-formal sector and the entire private Corporate sector only contributed 15% to the GDP with the listed companies’ (8000 in number) contribution being only a measly 5%. It is clear from the report that the non-formal sector is the head and the formal sector is the tail of the Indian economy, but strangely, in India, it has always been the tail that has been wagging the dog.

Following are some of the strange but nevertheless true facts about Indian economy:

• ·         The non-formal sector (consisting of 5.78 cr micro and small enterprises) provides employment to 12.8 cr people. This doesn’t include jobs in the construction sector and the rest of the unorganized sector. The entire unorganized sector put together provides over 46 cr jobs. On the other hand, the entire private Corporate sector put together provides only 2.96 cr jobs, with annual job creation of only 1 lac every year since 1991, the year when reforms were launched. (NSSO Economic Census 2014)
• ·         The total asset base of the 5.78 cr micro and small businesses is Rs. 11.4 lac cr with annual value addition of Rs. 6.28 cr which comes to 55 %. In contrast the private Corporate sector has a value add of only 34 %. This shows who is more efficient. (Reserve Bank of India)
• ·         While Corporate sector pays 10-14 % interest, many of the micro and small enterprises pay 2-10% per month and yet manage to add around 62 % more value on their assets. Despite this, the corporate sector and its supportive media keeps up its clamour for further reducing interest rates (which will only come at the cost of small depositors).
• ·         These micro and small enterprises are owned largely (almost 2/3^rd) by Scheduled Castes, Scheduled tribes and OBCs with more than half of these being in the rural areas.
• ·         Corporate sector has managed to get Rs. 50 lac cr through banking sector, FDI and FII investments since 1991. On the other hand, only 4% of the total asset base of non-formal sector (Rs. 46000 cr out of Rs. 11.5 lac crore) is funded by the formal sector of economy. (NSSO Economic Census 2014)
• ·         The non-formal sector had around 60% share in the credit disbursed by commercial banks in 1991 which has come down to around 30 % now with the reduction in below Rs. 10 lac loan figure being alarming. In contrast, the private Corporate sector constituting 12 % of the GDP corners 40% of bank credit. (Reserve Bank of India)
• ·          According to estimates, only 4 % of the 5.78 cr micro and small enterprises have access to institutional finance, with the gap between loan demand and supply being Rs. 30 lac cr.

Indian economy presents a striking paradox. On the one hand we have the banking sector which is flush with money without any takers unless it reduces interest rates, and on the other hand we have the highly efficient but fund-starved sector of micro and small enterprises paying from 24% to 120 % per annum. The setting up of MUDRA Bank has to be seen in this context.

The Battle of Economic Theories

The concept behind MUDRA Bank also represents an important stage in the ongoing battle between different economic theories. On the one hand we have the largely unknown 1930s Soviet-era economist Alexander Chayanov (known for his “consumption-labour-balance” principle) who is taking on the combined might of both Adam Smith and Karl Marx. Chayanov, who had postulated the efficiency of family farming and family economics over both large Soviet style cooperatives and capitalist production system, is also turning out to be correct in the case of family owned businesses. He opposed the view of Marx and held that a working family was neither capitalist nor proletariat and was executed on 3.10.1937 for his views. The performance of micro and small businesses in India is a vindication of the views of this rediscovered economist.

The economic intelligentsia in India which had been waiting for the demise of micro and small enterprise sector for a long time (and even had been assisting in this process by slowly stifling the NBFC sector) had to finally bow its head before the winds of change and acquiesce to the setting up of the MUDRA Bank.

Caveat

It has rightly been said that many great ideas have met their nemesis at the altar of execution. This is more so in the case of our country which has turned into a graveyard of many promising concepts and projects. So we will have to wait and see how this great idea is implemented. God is in the detail.

• Apart from the implementation issues, there are other inherent dangers too about which the MUDRA Bank has to be careful:
• There is a built-in conflict of interest arising from the MUDRA Bank taking on multiple roles including refinancing agency as well as the regulator.
• The sector in which MUDRA Bank is going to operate has traditionally been considered a high risk sector. However, it is also true that risk measurement tools and methodology itself has been suspect. But the Bank will need to be circumspect when formulating policies.
• The Bank will also have to be on its guard against the growth of shadow banking in its domain.

copyright © author                                                                                     
Published in Current Affairs Survey, June 2015

Make in India: The Challenges Ahead

It has been a little over six months when on 25^th September 2014, PM Modi launched the Make in India initiative at a function in the Vigyan Bhawan, New Delhi. The slick campaign designed and run by Wieden+Kennedy (W+K) group (which had also worked on the Incredible India campaign) has seen unprecedented success in the virtual world. According to some reports, the Facebook page of ‘Make in India’ has become the most sought after government initiative ever on the digital media platform with a fanbase of over 3 million with the twitter handle too clocking a followership of over 340 K. In total, the initiative has already crossed 2 billion impressions on social media worldwide.

What exactly is Make in India?

Make in India initiative is aimed at making India a global manufacturing hub and reducing the dependence on costly imports by focusing on 25 selected sectors, which have strong potential for high growth and job creation. These sectors are Automobiles, Automobile Components, Aviation, Biotechnology, Chemicals, Construction, Defence Manufacturing, Electrical Machinery, Electronic Components, Food Processing, IT and BPM, Leather, Media and Entertainment, Mining, Oil and Gas, Pharmaceuticals, Ports, Railways, Renewable Energy, Roads and Highways, Space, Textiles and Garments, Tourism and Hospitality, and Wellness. This initiative is a belated attempt to correct the lopsided nature of Indian economy which without the intervening period of being a manufacturing-led economy straightaway jumped from a primarily agricultural economy to becoming a service- led economy.

This initiative doesn’t only have strategic implications with its focus on self reliance by making Indian industry a globally competitive one, but this is perhaps the only solution to the twin problems of poverty and unemployment that the country is facing and the only way to harness the demographic dividend. Unless jobs are created in newer fields (only possible in manufacturing), Indian economy won’t be able to provide meaningful employment to over 12 million youth who will enter the job market every year.  Also, agriculture is no longer able to support 65% percent of the population and its share in the economy is falling. The only solution lies in effecting a peaceful and swift transfer of population in large numbers from rural areas to urban, which means massive urbanization on a scale never experienced before, and from agriculture to industry, which will require an industrial revolution overshadowing the 18^th century phenomenon in terms of order of magnitude.

The changing paradigms  

In a country with a perennially worried visage, a country that is constantly bemoaning all the ill-luck that God and Pakistan have thrown at it and whose expressed national characteristic is an all embracing self-doubt and self-pity, it takes a visionary like PM Modi to inject optimism in the national discourse and refurbish an overused slogan like Make in India into a sort of national battle-cry around which all segments can rally. With this initiative, PM Modi has impressed two things upon the national consciousness –

1) the serious situation of unemployment, poverty and economic drift that the country is facing (which will only exacerbate if the present atmosphere of apathy, gloom and spiritlessness is allowed to continue), and

2) the self-belief in our capability to achieve these goals.

Reality Check

However, moving oratory and exuberance on the Internet is one thing and translating the vision on the terra firma is another. PM Modi has inherited the same work culture, the same processes, the same steel frame, the same personnel, and the same way of thinking which has made India the world’s top underachiever for the last two hundred years, and he has as yet not shown any urgency to change this status quo during the last ten months that he has been in power. That this is not going to work was very much in evidence during the presentations made by various ministries before the PM and the FM. It was the same old story of seeking financial incentives, tax holidays or tax rebates for boosting production.  Ministry of Steel even went to the extent of requesting steel to be kept out of Free Trade Agreements. This is not how a potential global economic giant should think and behave. It seems as if the system has no faith in the country’s ability to become a winner, all it can think of is to provide shelters behind which the country’s industries can hide and survive. There is no new thinking on how to make India the best competitive manufacturing hub in the world. Even the Finance Minister can’t think beyond highlighting the advantage of low cost labour that India has. There seems no awareness that competencies can also be created based on high technology, designing ability, high level skills, quality, and innovative products and processes. There is no urgency to tackle infrastructure and governance bottlenecks about which the country is talking about since 1990 but doing nothing beyond cosmetic retouches. This bureaucratic way of thinking and doing things is not going to take India far and it is certainly not what this initiative requires.

The Nokia saga

The closure of Sriperumbudur based Nokia plant (and its shifting to Vietnam), which used to manufacture 18 million mobile devices every month, and which fell  victim to tax dispute with the powerful bureaucracy, and the consequent loss of almost 30000 jobs, is an apt reminder that the biggest hurdle before PM Modi is internal and systemic. This action by the government looks ridiculous when 85% of the 300 million mobile sets that Indians will buy this year will be imported from Southeast Asian factories—even in the case of so called “Indian” brands like Micromax, Lava, Xolo, A1 etc.

Where does India stand?

The latest Global Competitiveness Report (2014-15) brought out by World Economic Forum  ranks India at 71^st position among a total of 144 countries. This report shows us the mirror regarding where we stand in the world and how difficult our pursuit for global leadership is going to be. This report can’t be spurned as another Western conspiracy (a common tendency) since it is based on the responses sent by CII which is an affiliate organization of WEF. What is even more worrying in the report is that India’s position has been continuously falling for the last six years and there is no visible effort to arrest this freefall. Another worrying element is that we don’t stand anywhere in terms of rank compared to the other BRIC (Brazil, Russia, India and China) nations.  According to the report, “The rank differential with China (28th) has grown from 14 places in 2007 to 43 today; while India’s GDP per capita was higher than China’s in 1991, today China is four times richer”.

How the world sees us?

The report has identified the most problematic factors for doing business in the country, some of which are given below:

·                     Access to financing   

·                     Tax rates 

·                     Foreign currency regulations  

·                     Inadequate supply of infrastructure  

·                     Corruption 

·                     Inefficient government bureaucracy  

·                     Restrictive labor regulations 

This is what the report had to say about India, “Continuing on its downward trend and losing 11 places, India ranks 71^st, the country’s new government faces the challenge of improving competitiveness and reviving the economy, which is growing at half the rate of 2010”.  To outline the lopsided nature of Indian economy, the report adds, “Overall, India does best in the more complex areas of the GCI: innovation (49th) and business sophistication (57th). In contrast, it obtains low marks in the more basic and more fundamental drivers of competitiveness”.

The difficulties that the the new government also becomes clear from the World Bank’s report where India’s ranks 186^th in terms of the enforcement of contracts, and 137^th in resolving insolvency. The World Bank has also ranked government effectiveness (on the basis of the quality and the implementation of capacity of the civil service) and sadly enough, India’s ranking is falling over the past decade from 55^th percentile in 2004 to 47^th percentile in 2013.

The major hurdles

Apart from the alarming situation in the social sector indicators like life expectancy, infant mortality, malnutrition, sanitation, extreme poverty, primary education, and governance, India’s biggest hurdles lie in Infrastructure sectors. Years of underinvestment and political inertia in combination with cumbersome administrative and environmental clearance processes and the all-pervasive inefficiency and corruption have left the country with a pathetic road transport system, choked ports, a fast deteriorating railway system, an overburdened loss-making aviation sector, electricity production that faces capacity constraints and consequent chronic shortages, and an inadequate, fragile and financially insolvent transmission grid that is characterized by frequent grid failures and highest transmissions losses in the world. As far as connectivity is concerned, the GCR says, “Despite mobile telephony being almost ubiquitous, India is one of the world’s least digitally connected countries”.

Growing trade and rapid urbanization are bringing all the fault-lines to the fore and the system lunges from one crisis to another. The reform process started with much fanfare in early 90s, has seen only indifferent outcome with government efforts being inadequate, foreign partnerships stalled, and private partnership falling much short of expectations. It is quite clear that the state centric approach to infrastructure development of building, owning, and managing projects is not working, but the noisy democratic circus with multiple vetoes ensures that alternatives with even small deviations are not allowed to emerge. 

Where is the money?

The Global Competitiveness Report has identified Access to Financing as the biggest problem and the government of PM Modi too seems to be alive to this need. A report by the erstwhile Planning Commission has pegged the need at $1 trillion for infrastructure development half of which has to come from non-governmental sources. With the commercial banks having already reached the exposure limits in this sector and given the Indian private sectors limited capabilities and average performance, FDI seems the one area that has to be tapped. But despite a slew of FDI limit enhancements in insurance (26 to 49%), defence (26 to 49%), and railway infrastructure (0 to 100%), FDI remains a politically divisive issue and after the poll debacle in Delhi elections, the new government is expected to curb its enthusiasm. Also, high inflation and high interest rates are other factors that are deterring domestic and foreign firms from investing in long-term infrastructure projects. In 2013, India has already seen the exit of 3i, the London based private equity, infrastructure and debt management firm which had the world’s largest India-dedicated infrastructure dedicated fund, from all its portfolio companies when its investments failed to meet investor expectations. India will need structural reform in the capital markets to create sources for long term funds but the recent RBI ban on bank purchase of new infrastructure bonds further limits PM Modi’s options.

PM Modi’s high profile meetings with global leaders have largely been geared to attract investments and he has seen good initial success. Chinese President Xi Jinping pledged $20 billion over the next 5 years mainly for modernization of Indian Railways and development of two industrial parks. Japan’s PM Shinzo Abe, which has been a major provider of funds for infrastructure projects in the past such as Delhi Metro, Delhi Mumbai dedicated freight corridor and Delhi-Mumbai Industrial corridor, has been more forthcoming with a pledge of $ 33.8 billion for various infrastructure projects over the next 5 years. However, the meeting with President Obama was not as successful even though it was high in terms of symbolism. Next month he is going to Europe where again the major focus will be on attracting investments.

Another major initiative that the new government has taken is to accord fast track regulatory approvals to hundreds of stalled projects which were mainly stuck awaiting environmental clearances. Many of these had involved huge FDI.

The coming urban boom and the related issues

Those days are long gone when India was equated with its 600000 villages. As per a Mckinsey report, urban India, which is home to 30% of population, contributed 57% to the country’s GDP in 2012, accounted for 43% of consumption and was home to 63% of its consuming class households. Out of this, 54 metro cities (with populations of over 1 million each) accounted for 40% of India’s GDP, 45% of its consuming class households and 37% of its consumption. By 2050 it is expected that 50% of India will live in urban conglomerates and will account for 75% of GDP. The importance of metros will also go up and it is expected that as early as 2025, 69 metros will house 78% of total urban population and contribute 77% of urban GDP.

This rapid urbanization is going to be the key to the success of Make in India initiative and the farm to factories push. The government is already working on a new model of urban development with its plan to develop 100 smart cities out of which work has already begun on 5 along the Delhi Mumbai Industrial Corridor. The other smart cities will also largely be located along the planned industrial corridors--1) Delhi-Mumbai Industrial Corridor 2) Chennai-Bangaluru Industrial Corridor 3) East Coast Economic Corridor with Chennai-Vizag Industrial Corridor as the first phase of this project and 4) Mumbai–Bangaluru Industrial Corridor. The 89 districts through which these corridors pass will play a central role in the Make in India push. These will witness large scale urbanization coupled with fast industrial development, both Greenfield and organic. Already several of these districts are seeing good amount of industrial development and in future they are expected to grow 10% faster than the rest of the country. 

To exploit this opportunity India will first have to overcome several internal challenges. Apart from the issues of land acquisition, environmental clearances, failing urban infrastructure and the need for several structural reforms, there is also another issue, that of governmental structure in the country. The 2-tier quasi-federal structure is a child of 1940s when cities were of little consequence. With growing importance of cities, it will become imperative to empower the municipalities and enhance the human resources at its command, if the quality of urban governance is to improve and cities are to become the drivers of India’s growth. This will require a constitutional amendment with consequent curtailment in the rights of the states—which is easier said than done.  

Conclusion

It is clear from the above that the challenge before the government is huge even though there is little doubt in the inherent capability of the country to achieve the goals. This government is attempting a growth miracle that historically few countries have managed to achieve. But the path that it is has chosen is correct as there is hardly any country other than the petro economies of Middle-East, which have become rich without creating manufacturing jobs. However, with growing competition from other developing countries, this quantum of industrialization is not going to be easy to achieve. It will require substantial changes on a wide spectrum and there are a lot of hurdles to cross before that happens. The government has started working on the low hanging fruits and the incremental issues, but the big bang will take time.  For the time being, it will be apt to conclude with what Rajan, RBI Governor, said in a speech—“In India, if you are looking for grand, big picture reforms it may take some time coming. But in terms of decentralizing, in terms of doing the small stuff which adds up to the big stuff, I think that is already happening”.

copyright © author
Published in Current Affairs Survey, May 2015

----------------------------------------------------------------- 

WTO, Agriculture and India

A lot has been written about India’s changed stance at World Trade Organization (WTO). The new Indian government made its "India First" policy absolutely clear, and resolutely stated that unlike the previous governments, it is not going to buckle under the pressure exerted by the developed countries over trade protocols of the WTO. It made no bones about the fact that agreeing to the Trade Facilitation Agreement (TFA) would compromise its own food security and livelihood security, thereby violating its own constitutional provisions which take precedence over any international agreement. This is completely different from the pusillanimous approach of the previous governments and this has forced the developed countries to wake up and look for a compromise.

The problem with TFA, which ostensibly aims to reduce, harmonize and standardize customs tariffs, rules and procedures to ease import-export practices and movement of goods across the world, lies with a clause that limits agricultural subsidies to a maximum of 10 percent of the value of agricultural production. If this cap is breached by any member country, other members can challenge it and also go on to impose trade sanctions on the country.

On the face of it, the position of the developed countries about limiting the subsidies seems a fair argument for increasing trade and growth benefiting the entire world, and the powerful Western media and some governments have painted India as the villain of the piece. But the devil lies in the details (in this case, the base year), and this episode in a prime example of how developed countries, led by US, have continued to derive unfair advantage from multilateral agreements even when truth, logic and ethics are with the other side. Using the façade of democracy, fair trade and free market, they have only furthered their own interests and negated these very concepts which they claim to champion.

The 10% Cap on Subsidies

Let’s first examine the 10% limit on agricultural subsidies for TFA that is at the core of the current disagreement. This is to be calculated on the basis of an External Reference Price (ERP) at 1986-88 prices (which comes to Rs 3.52 per kg for rice). This ERP has remained unchanged since base year as it is a non-inflation-linked and dollar-denominated adjusted proxy for the cost of production. In the meantime, the cost of production as well as food prices have increased several times. Also, during this same time-period INR has depreciated by almost four times from around Rs.12-13 to a US dollar in 1986-87 to Rs. 60-63 per dollar in 2013-14.

Last year the Indian government paid a subsidy of Rs. 260128 cr against a gross agricultural output of Rs. 1720373 cr (2013-14 prices). This subsidy as a percentage of gross output comes to 15.10%. The Indian government purchases food grains at a pre-defined Minimum Support Price which is a mechanism to save the producers (mainly small farmers) from the vagaries of an imperfect market (so that they can get compensated for the increase in production costs), and sell the food grains at an even lower price to the poor who can’t afford higher prices. Some economists have argued that even the MSP doesn’t fully compensate the farmers for the labour costs that they and their family members put into production. (Large amount of subsidies also go to fertilizer manufacturers, pesticide manufacturers and seed companies).

If we convert gross agricultural output to 1986-88 prices (using a discount factor of 8.2%), the gross output would come to 180517 cr on which permissible (TFA mandated) subsidy would be Rs. 18052 cr. What this means is that India will have to cut down its subsidy from its current level by a whopping 93.4%, which no government can afford to do. Such a step will have unimaginable repercussions, since 70 % of the population, most of them surviving on less than $ 2 a day, depend on agriculture for their livelihood. Such a step will also effectively kill the Public Distribution System (PDS), the food security tool that is responsible for providing cheap food to the poor (the numbers likely to go up to 81 cr against the 31.8 cr at present after the implementation of Food Security Act). 

Commonsense would suggest that India’s argument for correction in base year is justified given such a variation in price and currency value, but the developed world would have none of it.  They argue that India would dump its foodgrains in the international market even though the facts on the ground don’t support their contention—the domestic food price in India, for instance of rice, is almost the same as the international price.

Agricultural Subsidies and the Developed World

Even though it is India which has been put into a corner this time (mainly because of the failure of its own negotiators), the fact is that it is the developed world such as US, EU and Japan which are the major culprits of adopting trade distorting practices by providing humongous amount of agricultural subsidies, thereby rendering the products of developing countries uncompetitive, and forcing developing countries to spend substantial amounts on agricultural and food subsidies which could have been spent more productively. Major portion of subsidies that the developed countries are giving to their farmers and to large agricultural conglomerates are well disguised and classified as "non-distorting", thereby escaping WTO monitoring. During the past 3 decades, a few large multinational agribusinesses have increased their domination of global trade and food distribution to almost monopolistic levels on the back of their governmental support. Speculation in commodity futures markets, largely controlled by developed countries, has caused volatile price movements that are decoupled from demand and supply logic, harming the small farmers (and consumers) who lose when prices decline but don’t gain when prices go up. The combination of monopolistic tendencies and uncertainly has affected both food security and livelihood security in developing countries.

Anybody who has followed WTO (and earlier GATT) negotiations won’t be surprised to see the developed countries refusing to rectify such gross anomalies. As history shows, they demand their pound of flesh even for smallest of concessions (which sometimes are only notional and turn out to be paper concessions) and use all instruments at their command to bribe, cajole or force others to fall in line. All their focus is now on enforcing TFA with the usual trumpeting of how this will dramatically increase trade and employment all round the world, without the backing of any proper study. 

Anomalies in Agreement on Agriculture

The Agreement on Agriculture (AoA) came into force on 1^st January 1995 with the establishment of WTO. The agreement which was negotiated during the Uruguay Round of General Agreement on Tariffs and Trade (GATT), was a child of the peculiar circumstances of its times, selfish demands from diverse quarters, and consequently suffers from severe anomalies.

The practice of offering direct payments to farmers instead of price support had its origins in the 1958 Haberler Report in US. Whatever the logic given at the time, today it seems like an uncanny anticipation of the stance (or like preparatory steps) that the developed countries would take in future negotiations on farm subsidies. By 1980s, huge government doles to farmers in wealthy countries had resulted in huge surplus of farm produce, which were offloaded in the world markets with export subsidies, pushing prices down and making poorer countries uncompetitive in the only field in which they could be efficient producers.

Since 80s were a time of recession, the developed countries felt that opening up the world markets would give the required impetus to their moribund economies, bring in the much needed efficiency gains and get them out of the recessionary cycle. This led them to negotiate with the developing countries for measures to usher in free trade among countries.

As the pampered and electorally powerful farm lobbies in the West strongly resisted any compromise on agriculture, US first proposed in 1987 the idea of exempting production and ‘trade-neutral’ subsidies from WTO commitments. EU and Japan soon agreed as this step would let them pose as champions of free trade even while retaining their historical level of support to their farmers. So from the time of its birth itself, the Agreement ensured that developed countries would be allowed to continue with their subsidies that cause “not more than minimal trade distortion” for the “concession” of bringing agriculture within the disciplines of the WTO and committing to future reduction of trade-distorting subsidies, which has proved to be mere chimera. As we have seen, in course of time, instead of reducing support in developed countries or ensuring fair trade practices which was the logical need, AoA has become an instrument to force developing countries to reduce their subsidies.

The Three Pillars of AoA

The Agreement on Agriculture stands on three pillars or concepts-- domestic support, market access and export subsidies.

Domestic Support: The AoA agreed to classify subsidies into three categories or “boxes” depending on their supposed effect on production and trade. These are Amber (most directly linked to raising production levels), Blue (linked to production limiting programs that distort trade), and Green (causing “not more than minimal distortion of trade or production”). As per agreement, payments in the Amber box and Blue box had to be reduced but those in the Green box were exempt from reduction commitments.

The AoA's domestic support system currently allows EU, US and Japan to spend hundreds of billions of US $ every year (more than 1 billion every day by one count) on agricultural subsidies alone, apparently for protecting its poor farmers. But as one World Bank report has proved, this argument is only for public consumption. More than 50% of agriculture support in EU goes to 1% of its farmers while in US, 70% of support is meant for 10% of farmers and large agri-businesses. Apart from representing a net transfer of money from relatively less prosperous average tax-payer in developed world to the far richer farmers in their own countries, this has resulted in further impoverishment in developing countries and devastation to these economies.

Market Access: This refers to reduction of tariff (and non-tariff) barriers to trade by member countries of WTO. This provided for reduction commitment by member countries by certain percentage (different for developed and developing countries) whereas exempting the Least Developed Countries (LDCs), who were committed to either bind their tariffs to a ceiling rate or convert no-tariff barriers to tariffs.

Export Subsidies: This pillar required member countries to progressively reduce export subsidies over a certain number of years. As in the case of Market Access, the reduction targets were different for developed and developing countries.

It is the Domestic Support system that has attracted the maximum criticism. It is contended with empirical proof that the division into Amber, Blue and Green boxes has no logical basis and most of the exemptions based in Green box are also trade distorting. It is now a well documented fact that Green box subsidies do in fact distort trade, and not only harm the interests of developing countries but also harm the environment. While some Green box support has less impact on production and trade, others have high impact. The developed countries have progressively increased the support given under Green Box even while forcing other countries to reduce their Amber and Blue box support.

As Third World Network says, "This has allowed the rich countries to maintain or raise their very high subsidies by switching from one kind of subsidy to another... like a magician’s trick. This is why after the Uruguay Round, the total amount of subsidies in OECD countries have gone up instead of going down, despite the apparent promise that Northern subsidies will be reduced."

Conclusion

In conclusion, we can say that subsidies and disguised subsidies to agriculture in the developed countries is one of the greatest obstacles to free and fair trade and consequently to economic development in the developing countries. These subsidies result in overproduction in developed countries and depress world prices by flooding markets with surplus produce. Poorer countries which can’t afford to pay such subsidies to their farmers and agribusinesses are unable to compete with the developed countries. This has harmed their economic growth and negated their efforts to eradicate poverty. In addition, these subsidies have had a devastating impact on environment too by encouraging indiscriminate use of chemical fertilizers, pesticides and unprecedented exploitation of water resources. 

copyright © author   
Published: Current Affairs Survey, April 2015