‘Economic reforms have taken into account growth but ignored equity.’ Briefly explain this statement.
Answer. Economic reforms were introduced in 1991 by the congress government led by P.V Narasimha Rao. India is the second fastest growing economy in the world. Only China grew faster than India. Last few years have witnessed growth rate above 7%. During the last two decades India has transited from a low-income to a middle income country. It would also mean a transition in the lives of the common people. Fast, efficient and sustained growth over two decades would be accompanied by a rapid and sustained growth of productive employment that would eliminate disguised unemployment and underemployment in agriculture and informal services. Associated with this would be elimination of poverty among families headed by able-bodied healthy persons. The challenge would be translation of these into reality.
The reforms in the 1990s in the industrial, trade, and financial sectors, among others, were much wider and deeper. As a consequence, they have contributed more meaningfully in attaining higher rates of growth but the benefits of growth have not percolated to weaker sections.
Reforms in India have failed to focus on the end objectives of development, namely, reduction of poverty and improvement in the quality of life of bulk of the population. The reforms pursued so far have bypassed the poor and benefited mostly the rich and the middle-class segments.
The rate of increasing disparity between the ‘haves’ and the ‘have-nots’, is hard to miss in tech centers like Bangalore, Chennai and Delhi. It is quite obvious that India’s recent economic growth has not trickled down to the bottom. The majority of the population has been sitting by the sidelines watching the buildings grow taller and the roads get wider. What’s concerning is that there doesn’t seem to be any concerted government effort to rectify the situation. For the poor, a severe lack of basic health, education and training opportunities mean that not only are they in a miserable condition today, there isn’t much hope for the future either. It is only a matter of time when they barter their spades for knives, in a desperate attempt to liberate themselves from the throes of poverty.
There are concerns over the slowdown in agriculture and employment generation, post-reform, as also the growing regional disparities and the rural-urban divide. The impoverishment of rural India is largely attributed to the big decline in public investment in agriculture as also the flow of institutional credit to the sector. There is no doubt that the economic reforms so far pursued have helped the country to overcome the severe foreign exchange crisis it faced in 1991 and gain significant resilience against any external shocks.
Similarly, Indian industry has improved its productive efficiency and quality of products significantly and is today better prepared to face international competition. Quite a few Indian companies have joined the billion-dollar club in terms of sales and market capitalization and are all set to become multinational companies by setting up shop abroad. However, the fiscal situation has witnessed a deterioration after some initial success, and employment growth has decelerated. The state has failed to protect the interests of the socially disadvantaged and weaker sections of society by empowering them through active intervention in social sectors to improve the rate of literacy, public health and nutrition.
While market-oriented economic reforms are no doubt important to step up the rate of growth of the economy, as the Nobel Laureate Prof Amartya Sen has pointed out: "The markets can be used by all fruitfully, rather than by a few selectively, if general healthcare is good, if land reforms have occurred, if micro- credit is widely available, and if initiative is encouraged even from underdogs of society."
In this context, the recent Asian experience suggests that to ensure increased social welfare along with economic growth, the major thrust will have to be on the development of human capital. India's record in this regard continues to be dismal.
The hierarchy of priorities of contemporary Indian policy-makers, for instance, privatization has gained ascendancy over poverty reduction. Measures to encourage savings and investment and to promote employment have been relegated to the background. There is no denying that the steps towards liberalization and globalization were obviously designed to enhance the rate of growth of the economy. However, growth alone is not enough. There is need to ensure that the fruits of growth are equitably distributed. Attention must be paid constantly to the social dimensions of growth by expanding social services and building a strong social infrastructure.
The priority should be eradication of illiteracy and covering the country with primary health care centres and access to safe drinking water. Evidently, all this cannot be done by the private sector; it would require active state intervention and state funding.
Economic reforms were `indeed' critical at the first phase of transforming the economy. However, neglect of agriculture during the reform period has resulted in an erosion of the growth base of the economy. During this period, public investment in agriculture declined, net addition to irrigated area decelerated, and the flow of institutional credit to the sector suffered a setback. Not surprisingly, in the 1990s the annual average growth rate of agriculture decelerated sharply to 2.6 per cent from 5.2 per cent in the 1980s and the share of agriculture and allied activities in the country's GDP declined from 32.2 per cent in 1990-91 to 24 per cent now. However, since 70 per cent of the country's population continues to depend on this sector for livelihood, reforms have failed to make a dent in rural poverty. If at all, the rural-urban divide has only widened because of the failure to create job opportunities outside agriculture both in rural and urban areas.
In our priorities, we should aim at elimination of hunger first and poverty later and suggest utilization of surplus foodgrains with the Food Corporation of India for undertaking massive food-for-work programmes.
The most suitable programme for the purpose could be micro-watershed development, which could be undertaken on a massive scale throughout the country and the bulk of the wages could be paid in kind, namely, foodgrains.
On the question of privatization of public sector units, Dr Mujumdar (former Principal Advisor, Reserve Bank of India) advocates a systemic approach instead of being unduly obsessive about it. According to him, the question to be posed is: Would privatisation in a particular segment lead to greater efficiency in the use of resources and promote faster GDP growth?
Further, what you do with the proceeds of privatization is as important as why you need to privatize a particular unit or segment of the public sector. The real economic issues are obfuscated because of the emotional and political undertones the debate has acquired.
So far, the Government has been using the proceeds from privatization to reduce fiscal deficit. This is counter-productive. Fiscal profligacy per se needs to be condemned. But the suggestion that such profligacy be balanced by using the proceeds of privatization needs to be condemned severely.
In an effort to replicate an American-style financial system in India, there has been mindless pursuit of a soft interest rate regime that may eventually affect the savings rate.
I am particularly critical of the gross neglect of agriculture by the public sector banks, post-reform: 1990s was a lost decade for agriculture and rural development generally, with shrinkage of the flow of resources to the rural sector, a misconceived interest rate policy which discriminated against agriculture. The rural credit delivery system became a victim of the emergence of a new banking culture and rural development and rural employment suffered a setback.
The casualties of the new banking culture also included the small borrowers, small-scale and tiny industries, micro businesses and the whole range of institutions involved in rural credit. If the reforms in the economy in the post-1991 period have come to acquire an anti-poor image, the way the financial sector reforms were implemented are also to be blamed for it.
For the banks now prefer to lend to corporate elite and high worth individuals and park huge amounts in government securities rather than lend to farmers and small and tiny industries.
More important, the moral pollution in contemporary society, adversely affects economic development. I emphasize the need for incorporation of a `development conscience factor' in growth models aimed at improving the quality of life of the bulk of the population. I advocate the need to sensitize the youth to the abject poverty, the squalor, disease, ignorance and illiteracy that surround us.
The first phase of reforms, which started in 1991, essentially concentrated on reforms at the Central government level. Now these have to be taken to the level of the States and district local bodies. Almost 40 per cent of our revenue and fiscal deficit are because of poor State finances. A number of reforms are required to improve the delivery system, too, since all social services such as education, health, and so on are delivered at the State level. The State-level reforms are of particular importance to promote regional equity, which is a matter of fundamental significance for a federal polity like India.
Showing posts with label economic reforms. Show all posts
Showing posts with label economic reforms. Show all posts
Wednesday, May 18, 2011
“Economic reforms have an adverse effect on food security.” Comment.
“Economic reforms have an adverse effect on food security.” Comment.
Ans
Most of the things that I will be presenting are from a paper about economic reforms in agriculture liberalization program point to urban India and there is a tendency to believe that reforms not targeted to agriculture. Reformers, however, felt that they were targeting agriculture indirectly and that what they were doing would be beneficial to agriculture. In international development circles there is a view that when you protect industry by having high tariff rates, you are discriminating against agriculture because you are shifting the terms of trade in favor of industry. In 1950 we decided that industrialization and that was possible only if industry was protected and that's how we got high tariff rates. The principle manifestation of liberalization since 1991 if you ask any economist is that the tariff rate has been reduced for industry. The argument is that if tariffs for industry were lowered, industrial goods prices would be lowered and that prices of agriculture products would now be higher relative to industrial goods. Let me read out an address by Manmohan Singh to the Indian association of agriculture economists in 1994. "The policy of excessive protection of Indian industry hurt Indian agriculture in several ways. It raised the prices of industrial products relative to agriculture products that hurt the rural sector of the economy as consumers of industrial products. You also increased the profitability of industrial production compared to agriculture production thus drawing away inevitable resources from agriculture.
This shift takes place in various ways. Low returns in agriculture activity reduced the ability to pay economic prices for many inputs such as power, water and credit. Instead of continuing with the subsidies for these inputs it would be much better to reduce the protectionist bias against agriculture by lowering tariffs favoring industry and altering relative prices in favor of agriculture. This would create potentially a more profitable agriculture which would be able to bear the economic costs of technological modernization and expansion". In some sense, this argument of agriculture being worse off because of protection is not entirely correct because inputs that Manmohan Singh speaks about are not traded on the international market and the prices of this are set by the government in a way that is reasonable favorable to farmers or actually not priced at all such as in water. Let us take a look at some data and see if what they say is borne out. Let us take a loot at Table 2 titled protection and relative prices.
Year Tariff Rate Price
1990 87 108.5
1991 * 116.4
1992 64 113.2
1993 47 111.6
1994 33 114.4
1995 27.2 112.8
1996 24.6 117.5
1997 25.4 116.7
1998 29.7 126.3
Notes: 'Price' is the ratio of the index of agricultural prices to the ratio of index of manufacturing prices, base 1981-82=100; the tariff rate is the import weighted average percentage rate for the economy as a whole; the tariff rate for 1991-92 was not computed in the source.
Source: Economic Survey 1998-99 and the World Bank: 'India 1998: Macroecomonic update'
In a broad sense it is true but it comes about only after the second half of 90s. The question to ask is whether this bias has improved due to the process that the government had in mind of due to some other process. I think that it is not because what the government had in mind but due to the deliberate intervention by the government. Interestingly when we talk about the reducing of the government involvement as part of liberalization, government intervention in some sectors has been increasing.
Let us now talk about reforms and growth -what has happened to growth? While we all know that growth by itself is not enough, purchasing power is also important. Table 1. shows the annual rate of growth before and after 1991.
Table 1: Growth, Before and After 1991
Period FOOD GRAIN NON FOOD CROPS
1949-50 to 1964 2.93 3.54
1967-68 to 1989 2.74 2.72
1970-71 to 1979 2.08 1.66
1980-81 to 1989 3.54 4.84
1990-91 to 1997 1.66 2.36
Note : Annual Compound growth rate, except for non-food in th 1990s where it is the
average of the year-to-year change Source: Rows 1-2 from 'Area and Production of Principle Crops in India 1989-90' Directorate of Economics and Statistics, GoI;the rest from Economic Survey 1998-90, and author's estimates
The point is that in comparison to the 3 decades 70s, 80s and the 90s, the 1990s performs worse than 80s both in the growth of food grains and nonfood grains. The 80s was a period that grew exceptionally well. The 80s was a period when poverty declined at the fastest rate.
Even casual empiricism shows that general levels of prosperity in the economy rose quite rapidly. The point is that agriculture growth is very important for overall growth. Table 4 shows the progress of selected agriculture programs. It shows that the rate at which they all increased between 1970 and 1990 is faster than its increase in the 90s, the programs being area under HYVs, irrigated areas, fertilizer consumption, public investment.
Table 4: Progress of selected agricultural development programmes
Program 1970 1980 1990 1996
Area under HYV 15.4 43.1 65 76.4
Irrigated area 38 54.1 70.8 80.7
Fertiliser consumption 2.2 5.5 12.5 14.3
Public Investment 2.1 4 2 1.8
Note: Area is in million hectares, fertilizer consumption is in million tones and public investment is as a share of sectoral GDP. Source: Economic Survey 1998-99 and National Accounts Statistics', Summary tables It is quite very worrying to note that public investment in the mid 1990s is lower than in 1970-71. One of the broad conclusions is that even though the relative price seems to have moved in the favor of agriculture exactly as the finance minister predicted, the rate of growth of agriculture has not improved. And as much as prices, development programs are a driver of growth of which public investment being one of them. Table 5 shows gross private capital formation and you will find that in the private sector there is a substantial increase in private investment as a share of total output and by 1996-97, private capital formation is higher than before.
Table 5: Gross Private Capital Formation
GCF 1970 1980 1990 1996
Volume 1969 2840 3440 5867
Rate 5.5 6.7 5.6 8.1
Notes: 'Volume' is in rupee crore at 1980-81 prices, 'rate' is volume as a percentage of sectoral GDP. Source: Economic Survey 1998-99 and National Accounts Statistics',CSO There are 2 ways to interpret all this data. One is to say that the future is yet to come. Or you could say that that is a matter of faith and that unless public investment really improves, growth will not improve. Table 3 shows the intervention price.
Table 3: Intervention price (Rs quintal on a crop year basis)
Commodity 1980 1990 1994 1998
Paddy 105 205 340 440
Wheat 117 225 360 550
Cotton 304 620 1000 1440
Jute 160 320 470 650
Source: Economic Survey 1998-99
Even though relative price of agriculture has improved, you may want to ask if it is because of why the architects of reform had said. For most crops, intervention prices had grown faster in the 1990s than in any other period. So the relative price increase is because of intervention.
Most crops where there has been no intervention have been doing worse off. And I keep emphasizing this because I strongly believe that it is this form of intervention that has made food security even more tenuous after 1991 than before. Let us now discuss reforms and welfare. The simplest approach to this is the price of food in relation to your income. Given the price of a commodity, it is your income that determines your access to that commodity. It could be completely independent of the availability of the commodity according to Amartya Sen. The price of food is very important in determining the food security, especially in India where poverty is highest. If reforms don't improve poverty at a faster rate than before then it is useless. So will the reforms be able to reduce it at a faster rate? Let’s talk about the factors by which the reduction in poverty is being slowed down in the economy. It is related to the nature of intervention of the government in the economy.
Table 7 gives data about 4 indicators -procurement price, market price, general price level (general price of all commodities in the economy which is how inflation is measured), stocks in the economy.
Table 7: Foodgrain price, inflation and stocks
Foodgrain price, inflation and stocks
Year Procurement price Market price General price level Stocks MnTn
(index) (Index)
1980 100 100 100 16.7
1990 193 179 185 11.3
1991 225 216 218 17.9
1992 261 242 235 13.9
1993 296 261 251 11.8
1994 314 293 283 22
1995 333 313 304 30.3
1996 375 354 328 28.5
1997 406 363 340 20
1998 455 384 379 18.2
Notes: (1) The procurement price index is based on a weighted average of the price of rice and wheat, the weights being the quantities procured. (2) Stocks of rice and wheat are as of January 1s; the prescribed norm for the buffer stock is 15.4 million tones. Source: Economic Survey, God, various issues.
Once again by the mid 90s the procurement price had increased as much as it had increased in the entire 80s. So procurement prices are rising at a very fast rate. Same for market price of food. The general price level has not risen quite that fast. Which is the point that I want to make? In India the relative price of food is rising. This is happening precisely at a time when reforms are being carried out which are meant to make the economy more modern. A high relative price of food is a feature of a very under developed economy. If you look at international trade market, from 1940-80 the relative price of food is declining at a steady rate and from that point of view the Indian experience is contrary to the rest of the world and it is extremely worrying. So for those sections whose incomes are fixed or not rising as fast as the rest of the economy, it is a matter of even more concern. This is no doubt the result of the nature of government intervention in the market. The government is pegging the price of food and raising it from year to year at a rate higher than the inflation rate for which there can be no justification except for placation certain lobbies. Especially when the stocks of food are quite high. That explains the whole puzzle. Stocks are piling up because the government is raising the price above what the market will bear. And because there is a procurement policy where the government will take up whatever is given to it at the MSP that cannot be sold because most of the population is tightening is belt because they cant afford the food and are getting poorer and that results in greater stocks. So the point that I want to make is that there is a conflict between producer prices and consumer welfare. All this is happening at a time when the food subsidy is ballooning. It is happening not because more is being distributed but more is being held. The ballooning subsidy does not prove that the government is doing good work and giving more to our fellow citizens but the fact is that the food policy is being conducted in the maniacal sort of way where the price of food is constantly being raised and many sections are getting priced out. The stocks are also rising relative to total production and not just in absolute terms. The reason I mention food subsidy is that the argument from any economist cannot be from the level of subsidy but the use of the subsidy -in the Indian case it is just the operational loss of the FCI -it is not used to feed people. It is better to just go out and give the money to people who need it rather than buying food at a price determined at a political level and not being able to sell it.
There is a great deal of debate about the PDS. Well, there is some debate and there should be more in my opinion. There is the PDS being the answer to the high stocks. That is only the partial solution according to me. Generically, can PDS do anything much about poverty in the long term? I'd say no. The PDS is a supply side arrangement. It is giving you a certain amount of grain at a fixed price but it is getting the grain out of somewhere else in the economy. It is getting grain that the FCI has procured. If the FCI keeps getting grain at a higher price then unless it keeps increasing the subsidy to the PDS then it cant maintain the price of food in the PDS. In an accounting price it is not feasible to do it without subsidy. So my thought is that the PDS is some sort of an afterthought. The principle purpose is to ensure a high price to the farmers, everything else is an afterthought. If maintaining food consumption levels was the primary purpose then you will not keep doing that by raising producer prices. It is not sustainable. There is a complete contradiction between the 2 policies. There is lot of talk about Kerala's levels of living having improved due to the PDS;
Let me wind up by making another argument in the PDS. I have looked at some measure of the PDS and a measure of poverty. Table 6 has a ranking of the states in terms of the PDS and poverty
PDS and poverty: Statewide ranking
PDS Poverty
Andhra Prades 5 12
Bihar 11 2
Gujarat 4 10
Haryana 12 13
Karnataka 7 8
Kerala 1 11
Madhya Pradesh 9 5
Maharashtra 6 7
Orissa 10 1
Punjab 13 14
Rajasthan 8 9
Tamil Nadu 3 3
Uttar Pradesh 14 6
West Bengal 2 4
Source: The estimates, pertaining to the years 1986-87 and 1987-88 by ShikhaJha and thePlanning commission respectively, are as reported by Mooji(1999) If the PDS were an important element in combating you would expect a positive relation. The poorer should have a greater PDS. If you take off Punjab and Haryana, which are very rich states, then the correlation is negative. What it shows you is that the PDS is not where it is needed most. I'd like to relate my own experience when I lived in Bangalore. I went to the civil supplies office close to my house. You will really have a shock if you go there because the staff there have no idea what is happening and you can’t blame them. The government is not giving them any support. They are in no position to monitor what is going on. And this is the case for a person who was living with a valid address and paying income taxes. What if you are migrant labor? What if you live in a slum? I'm not sure if the PDS will help in its current state. My more general point is that a system that gives you food at a fixed price when the input prices are rising cannot work. The origins of the PDS were in Bengal when the government was pumping in a lot of money for the war effort and demand for food soared and prices spiraled. So in order to maintain urban prices, the government procuredgrain from the farmers at any price. So it benefits the people in the urban areas. But what about the people in the rural areas who grow chills or fish or whatever? They are affected because their access to grain is limited because prices are being bid up. Hence the PDS's viability is questionable.
Ans
Most of the things that I will be presenting are from a paper about economic reforms in agriculture liberalization program point to urban India and there is a tendency to believe that reforms not targeted to agriculture. Reformers, however, felt that they were targeting agriculture indirectly and that what they were doing would be beneficial to agriculture. In international development circles there is a view that when you protect industry by having high tariff rates, you are discriminating against agriculture because you are shifting the terms of trade in favor of industry. In 1950 we decided that industrialization and that was possible only if industry was protected and that's how we got high tariff rates. The principle manifestation of liberalization since 1991 if you ask any economist is that the tariff rate has been reduced for industry. The argument is that if tariffs for industry were lowered, industrial goods prices would be lowered and that prices of agriculture products would now be higher relative to industrial goods. Let me read out an address by Manmohan Singh to the Indian association of agriculture economists in 1994. "The policy of excessive protection of Indian industry hurt Indian agriculture in several ways. It raised the prices of industrial products relative to agriculture products that hurt the rural sector of the economy as consumers of industrial products. You also increased the profitability of industrial production compared to agriculture production thus drawing away inevitable resources from agriculture.
This shift takes place in various ways. Low returns in agriculture activity reduced the ability to pay economic prices for many inputs such as power, water and credit. Instead of continuing with the subsidies for these inputs it would be much better to reduce the protectionist bias against agriculture by lowering tariffs favoring industry and altering relative prices in favor of agriculture. This would create potentially a more profitable agriculture which would be able to bear the economic costs of technological modernization and expansion". In some sense, this argument of agriculture being worse off because of protection is not entirely correct because inputs that Manmohan Singh speaks about are not traded on the international market and the prices of this are set by the government in a way that is reasonable favorable to farmers or actually not priced at all such as in water. Let us take a look at some data and see if what they say is borne out. Let us take a loot at Table 2 titled protection and relative prices.
Year Tariff Rate Price
1990 87 108.5
1991 * 116.4
1992 64 113.2
1993 47 111.6
1994 33 114.4
1995 27.2 112.8
1996 24.6 117.5
1997 25.4 116.7
1998 29.7 126.3
Notes: 'Price' is the ratio of the index of agricultural prices to the ratio of index of manufacturing prices, base 1981-82=100; the tariff rate is the import weighted average percentage rate for the economy as a whole; the tariff rate for 1991-92 was not computed in the source.
Source: Economic Survey 1998-99 and the World Bank: 'India 1998: Macroecomonic update'
In a broad sense it is true but it comes about only after the second half of 90s. The question to ask is whether this bias has improved due to the process that the government had in mind of due to some other process. I think that it is not because what the government had in mind but due to the deliberate intervention by the government. Interestingly when we talk about the reducing of the government involvement as part of liberalization, government intervention in some sectors has been increasing.
Let us now talk about reforms and growth -what has happened to growth? While we all know that growth by itself is not enough, purchasing power is also important. Table 1. shows the annual rate of growth before and after 1991.
Table 1: Growth, Before and After 1991
Period FOOD GRAIN NON FOOD CROPS
1949-50 to 1964 2.93 3.54
1967-68 to 1989 2.74 2.72
1970-71 to 1979 2.08 1.66
1980-81 to 1989 3.54 4.84
1990-91 to 1997 1.66 2.36
Note : Annual Compound growth rate, except for non-food in th 1990s where it is the
average of the year-to-year change Source: Rows 1-2 from 'Area and Production of Principle Crops in India 1989-90' Directorate of Economics and Statistics, GoI;the rest from Economic Survey 1998-90, and author's estimates
The point is that in comparison to the 3 decades 70s, 80s and the 90s, the 1990s performs worse than 80s both in the growth of food grains and nonfood grains. The 80s was a period that grew exceptionally well. The 80s was a period when poverty declined at the fastest rate.
Even casual empiricism shows that general levels of prosperity in the economy rose quite rapidly. The point is that agriculture growth is very important for overall growth. Table 4 shows the progress of selected agriculture programs. It shows that the rate at which they all increased between 1970 and 1990 is faster than its increase in the 90s, the programs being area under HYVs, irrigated areas, fertilizer consumption, public investment.
Table 4: Progress of selected agricultural development programmes
Program 1970 1980 1990 1996
Area under HYV 15.4 43.1 65 76.4
Irrigated area 38 54.1 70.8 80.7
Fertiliser consumption 2.2 5.5 12.5 14.3
Public Investment 2.1 4 2 1.8
Note: Area is in million hectares, fertilizer consumption is in million tones and public investment is as a share of sectoral GDP. Source: Economic Survey 1998-99 and National Accounts Statistics', Summary tables It is quite very worrying to note that public investment in the mid 1990s is lower than in 1970-71. One of the broad conclusions is that even though the relative price seems to have moved in the favor of agriculture exactly as the finance minister predicted, the rate of growth of agriculture has not improved. And as much as prices, development programs are a driver of growth of which public investment being one of them. Table 5 shows gross private capital formation and you will find that in the private sector there is a substantial increase in private investment as a share of total output and by 1996-97, private capital formation is higher than before.
Table 5: Gross Private Capital Formation
GCF 1970 1980 1990 1996
Volume 1969 2840 3440 5867
Rate 5.5 6.7 5.6 8.1
Notes: 'Volume' is in rupee crore at 1980-81 prices, 'rate' is volume as a percentage of sectoral GDP. Source: Economic Survey 1998-99 and National Accounts Statistics',CSO There are 2 ways to interpret all this data. One is to say that the future is yet to come. Or you could say that that is a matter of faith and that unless public investment really improves, growth will not improve. Table 3 shows the intervention price.
Table 3: Intervention price (Rs quintal on a crop year basis)
Commodity 1980 1990 1994 1998
Paddy 105 205 340 440
Wheat 117 225 360 550
Cotton 304 620 1000 1440
Jute 160 320 470 650
Source: Economic Survey 1998-99
Even though relative price of agriculture has improved, you may want to ask if it is because of why the architects of reform had said. For most crops, intervention prices had grown faster in the 1990s than in any other period. So the relative price increase is because of intervention.
Most crops where there has been no intervention have been doing worse off. And I keep emphasizing this because I strongly believe that it is this form of intervention that has made food security even more tenuous after 1991 than before. Let us now discuss reforms and welfare. The simplest approach to this is the price of food in relation to your income. Given the price of a commodity, it is your income that determines your access to that commodity. It could be completely independent of the availability of the commodity according to Amartya Sen. The price of food is very important in determining the food security, especially in India where poverty is highest. If reforms don't improve poverty at a faster rate than before then it is useless. So will the reforms be able to reduce it at a faster rate? Let’s talk about the factors by which the reduction in poverty is being slowed down in the economy. It is related to the nature of intervention of the government in the economy.
Table 7 gives data about 4 indicators -procurement price, market price, general price level (general price of all commodities in the economy which is how inflation is measured), stocks in the economy.
Table 7: Foodgrain price, inflation and stocks
Foodgrain price, inflation and stocks
Year Procurement price Market price General price level Stocks MnTn
(index) (Index)
1980 100 100 100 16.7
1990 193 179 185 11.3
1991 225 216 218 17.9
1992 261 242 235 13.9
1993 296 261 251 11.8
1994 314 293 283 22
1995 333 313 304 30.3
1996 375 354 328 28.5
1997 406 363 340 20
1998 455 384 379 18.2
Notes: (1) The procurement price index is based on a weighted average of the price of rice and wheat, the weights being the quantities procured. (2) Stocks of rice and wheat are as of January 1s; the prescribed norm for the buffer stock is 15.4 million tones. Source: Economic Survey, God, various issues.
Once again by the mid 90s the procurement price had increased as much as it had increased in the entire 80s. So procurement prices are rising at a very fast rate. Same for market price of food. The general price level has not risen quite that fast. Which is the point that I want to make? In India the relative price of food is rising. This is happening precisely at a time when reforms are being carried out which are meant to make the economy more modern. A high relative price of food is a feature of a very under developed economy. If you look at international trade market, from 1940-80 the relative price of food is declining at a steady rate and from that point of view the Indian experience is contrary to the rest of the world and it is extremely worrying. So for those sections whose incomes are fixed or not rising as fast as the rest of the economy, it is a matter of even more concern. This is no doubt the result of the nature of government intervention in the market. The government is pegging the price of food and raising it from year to year at a rate higher than the inflation rate for which there can be no justification except for placation certain lobbies. Especially when the stocks of food are quite high. That explains the whole puzzle. Stocks are piling up because the government is raising the price above what the market will bear. And because there is a procurement policy where the government will take up whatever is given to it at the MSP that cannot be sold because most of the population is tightening is belt because they cant afford the food and are getting poorer and that results in greater stocks. So the point that I want to make is that there is a conflict between producer prices and consumer welfare. All this is happening at a time when the food subsidy is ballooning. It is happening not because more is being distributed but more is being held. The ballooning subsidy does not prove that the government is doing good work and giving more to our fellow citizens but the fact is that the food policy is being conducted in the maniacal sort of way where the price of food is constantly being raised and many sections are getting priced out. The stocks are also rising relative to total production and not just in absolute terms. The reason I mention food subsidy is that the argument from any economist cannot be from the level of subsidy but the use of the subsidy -in the Indian case it is just the operational loss of the FCI -it is not used to feed people. It is better to just go out and give the money to people who need it rather than buying food at a price determined at a political level and not being able to sell it.
There is a great deal of debate about the PDS. Well, there is some debate and there should be more in my opinion. There is the PDS being the answer to the high stocks. That is only the partial solution according to me. Generically, can PDS do anything much about poverty in the long term? I'd say no. The PDS is a supply side arrangement. It is giving you a certain amount of grain at a fixed price but it is getting the grain out of somewhere else in the economy. It is getting grain that the FCI has procured. If the FCI keeps getting grain at a higher price then unless it keeps increasing the subsidy to the PDS then it cant maintain the price of food in the PDS. In an accounting price it is not feasible to do it without subsidy. So my thought is that the PDS is some sort of an afterthought. The principle purpose is to ensure a high price to the farmers, everything else is an afterthought. If maintaining food consumption levels was the primary purpose then you will not keep doing that by raising producer prices. It is not sustainable. There is a complete contradiction between the 2 policies. There is lot of talk about Kerala's levels of living having improved due to the PDS;
Let me wind up by making another argument in the PDS. I have looked at some measure of the PDS and a measure of poverty. Table 6 has a ranking of the states in terms of the PDS and poverty
PDS and poverty: Statewide ranking
PDS Poverty
Andhra Prades 5 12
Bihar 11 2
Gujarat 4 10
Haryana 12 13
Karnataka 7 8
Kerala 1 11
Madhya Pradesh 9 5
Maharashtra 6 7
Orissa 10 1
Punjab 13 14
Rajasthan 8 9
Tamil Nadu 3 3
Uttar Pradesh 14 6
West Bengal 2 4
Source: The estimates, pertaining to the years 1986-87 and 1987-88 by ShikhaJha and thePlanning commission respectively, are as reported by Mooji(1999) If the PDS were an important element in combating you would expect a positive relation. The poorer should have a greater PDS. If you take off Punjab and Haryana, which are very rich states, then the correlation is negative. What it shows you is that the PDS is not where it is needed most. I'd like to relate my own experience when I lived in Bangalore. I went to the civil supplies office close to my house. You will really have a shock if you go there because the staff there have no idea what is happening and you can’t blame them. The government is not giving them any support. They are in no position to monitor what is going on. And this is the case for a person who was living with a valid address and paying income taxes. What if you are migrant labor? What if you live in a slum? I'm not sure if the PDS will help in its current state. My more general point is that a system that gives you food at a fixed price when the input prices are rising cannot work. The origins of the PDS were in Bengal when the government was pumping in a lot of money for the war effort and demand for food soared and prices spiraled. So in order to maintain urban prices, the government procuredgrain from the farmers at any price. So it benefits the people in the urban areas. But what about the people in the rural areas who grow chills or fish or whatever? They are affected because their access to grain is limited because prices are being bid up. Hence the PDS's viability is questionable.
Economic Reform and Employment
Economic Reform and Employment
The new economic reforms have been emphasing new power projects both in the public and the private sectors. Besides causing environmental problems, these projects have been displacing people from their traditional livelihood systems. By encouraging multinationals to enter food-processing industries, the reform process by the sheer competition from these business giants has led to labour displacement. The entry of big business in agriculture has also led to displacement of labour displacement. The entry of big business in agriculture has also led to displacement of labour engaged in the marketing of agricultural produce. The case of fisherman is glaring and has resulted in massive protests from fishermen who were faced with a threat to unemployment as a consequence of competition from mechanized boats. Consequently, there is a good deal of evidence to corroborate the view that the process of economic reform has generated far greater backwash effects in terms of labour displacement, than in generating spread effects in terms of enlarging new employment opportunities. The net effect of these trends is the deterioration in the quality of employment opportunities. The net effect of these trends is the deterioration in the quality of employment and this is witnessed in the growing increase in the number of casual labourers – the most unprotected form of Indian labour. Casualisation of a labour is witnessed even in industry as a result of the growing phenomena of lockouts and closures. G. Parthasarthy reviewing the impact of structural adjustment on employment concludes: “Given this short period experience, what the medium-term has in store for the Indian poor is anybody’s guess. It is essentially dependent upon the rate and composition of growth and its effects on employment. With past experience as a guide, we may achieve a high growth rate, the benefits of which may flow to the affluent and middle class. The poor may not gain because jobs are not found to grow with incomes. This type of scenario could call for effective safety nets for unorganized sectors in the form of right to work at a minimum subsidized wage and guarantee against unemployment through unemployment insurance.” (Parthasarthy G, Social Security and Structural Adjustment, the Indian Journal of Labour Economics, Vol. 39, No. 1, Jan-March 1996).
The new economic reforms have been emphasing new power projects both in the public and the private sectors. Besides causing environmental problems, these projects have been displacing people from their traditional livelihood systems. By encouraging multinationals to enter food-processing industries, the reform process by the sheer competition from these business giants has led to labour displacement. The entry of big business in agriculture has also led to displacement of labour displacement. The entry of big business in agriculture has also led to displacement of labour engaged in the marketing of agricultural produce. The case of fisherman is glaring and has resulted in massive protests from fishermen who were faced with a threat to unemployment as a consequence of competition from mechanized boats. Consequently, there is a good deal of evidence to corroborate the view that the process of economic reform has generated far greater backwash effects in terms of labour displacement, than in generating spread effects in terms of enlarging new employment opportunities. The net effect of these trends is the deterioration in the quality of employment opportunities. The net effect of these trends is the deterioration in the quality of employment and this is witnessed in the growing increase in the number of casual labourers – the most unprotected form of Indian labour. Casualisation of a labour is witnessed even in industry as a result of the growing phenomena of lockouts and closures. G. Parthasarthy reviewing the impact of structural adjustment on employment concludes: “Given this short period experience, what the medium-term has in store for the Indian poor is anybody’s guess. It is essentially dependent upon the rate and composition of growth and its effects on employment. With past experience as a guide, we may achieve a high growth rate, the benefits of which may flow to the affluent and middle class. The poor may not gain because jobs are not found to grow with incomes. This type of scenario could call for effective safety nets for unorganized sectors in the form of right to work at a minimum subsidized wage and guarantee against unemployment through unemployment insurance.” (Parthasarthy G, Social Security and Structural Adjustment, the Indian Journal of Labour Economics, Vol. 39, No. 1, Jan-March 1996).
Tuesday, May 26, 2009
Role of government and economic reforms
How economic reforms have affected the role of government? Explain in detail with examples/illustrations.
Economy reforms have also witnessed a big change in the role of the Government over time. Ever since independence till around the 1980s, as we discussed in the previous units, our objective was to have planned economic development without adopting extreme forms of capitalism or communism.
Heavy industry and infrastructure were left in the hands of the Government to develop. The Government decided upon priority sectors. In agriculture, development was encouraged along capitalistic lines. To prevent monopoly, mitigate cyclical fluctuations, lessen interpersonal inequalities of income and wealth and promote economic development, measures of command and control were frequently resorted to, though some measures operating through the market mechanism were also adopted. Little attention was however paid by the Government to prevent environmental degradation or reduce inter-regional or gender-based inequalities.
The situation in which we found ourselves by the 1980s was not a happy one. Our
Government could not provide adequate infrastructure facilities. While we had some success in increasing agricultural production, the level of our per capita consumption of food was woefully low. Further, agriculture, even now, seems affected by the vagaries of the weather, causing cyclic fluctuations in the economy. You will find that there have been an official statement that while the Indian economy has grown, this growth has not trickled down sufficiently. Further, Government-owned enterprises in basic and heavy industries were functioning far from efficiently and have mostly been using outdated technology. Moreover, because of resort to command and control measures, a number of private sector units of the Indian economy were also more or less in the same boat. There were hence slow rumblings of change in India’s economic policy form the 80s.
It soon became clear, however, that such gradual changes will simply not work. The unprecedented crisis in the Indian economy in 1990-91 was the last straw on the camel’s back. Our foreign exchange reserves fell to an all-time low level of $ 2.2 billion. Inflation rate had already crossed the double-digit figure and was actually at 14%. Fiscal deficit had risen to 8.4% of the Gross Domestic Product. The current account deficit on balance of payments was as high as $ 9.9 billion. International Credit Rating agencies went on to considerably downgrade India’s creditworthiness.
The Government and many economists agreed that a shock therapy was immediately required to pull the Indian economy out of the woods. The World Bank agreed to bail India out, but imposed certain conditionalities for doing so. It wanted two major types of programmes to be carried out. Firstly, there were to be short-term stabilization measures to control inflation and wipe out the balance of payments deficit. These were agreed upon. You are aware that attempts are being made to rationalize subsidies and cut down wasteful Government expenditure to reduce the fiscal deficit. The rupee has been devalued to correct the balance of payments deficit. Secondly, there had to be structural reforms to make the Indian economy competitive and attain a high rate of growth with social justice. These have also been accepted and measures are being taken to liberalize and globalize the Indian economy.
As a result of all this, there was considerable rethinking, reinforced by the conditionalities imposed by the World band to help India out of her difficulties. Steps began to be initiated in the 1980s and these gathered considerable momentum in the 1990s. A sea change has thus come about in the economic role of the Government in India since the 1990s. Many of the sectors reserved for the public sector have now been thrown open to the private sector. More and more physical controls are being replaced by measures to guide the economy through the market mechanism. Restraints in the way of international trade and factor movements are being gradually reduced. The seeming intention is to make the Indian economy face international competition and become efficient in performance. The Government role in the provision of public goods is not likely to increase, but as regards the protection of the environment, the Government is likely to play an increasing role.
Economy reforms have also witnessed a big change in the role of the Government over time. Ever since independence till around the 1980s, as we discussed in the previous units, our objective was to have planned economic development without adopting extreme forms of capitalism or communism.
Heavy industry and infrastructure were left in the hands of the Government to develop. The Government decided upon priority sectors. In agriculture, development was encouraged along capitalistic lines. To prevent monopoly, mitigate cyclical fluctuations, lessen interpersonal inequalities of income and wealth and promote economic development, measures of command and control were frequently resorted to, though some measures operating through the market mechanism were also adopted. Little attention was however paid by the Government to prevent environmental degradation or reduce inter-regional or gender-based inequalities.
The situation in which we found ourselves by the 1980s was not a happy one. Our
Government could not provide adequate infrastructure facilities. While we had some success in increasing agricultural production, the level of our per capita consumption of food was woefully low. Further, agriculture, even now, seems affected by the vagaries of the weather, causing cyclic fluctuations in the economy. You will find that there have been an official statement that while the Indian economy has grown, this growth has not trickled down sufficiently. Further, Government-owned enterprises in basic and heavy industries were functioning far from efficiently and have mostly been using outdated technology. Moreover, because of resort to command and control measures, a number of private sector units of the Indian economy were also more or less in the same boat. There were hence slow rumblings of change in India’s economic policy form the 80s.
It soon became clear, however, that such gradual changes will simply not work. The unprecedented crisis in the Indian economy in 1990-91 was the last straw on the camel’s back. Our foreign exchange reserves fell to an all-time low level of $ 2.2 billion. Inflation rate had already crossed the double-digit figure and was actually at 14%. Fiscal deficit had risen to 8.4% of the Gross Domestic Product. The current account deficit on balance of payments was as high as $ 9.9 billion. International Credit Rating agencies went on to considerably downgrade India’s creditworthiness.
The Government and many economists agreed that a shock therapy was immediately required to pull the Indian economy out of the woods. The World Bank agreed to bail India out, but imposed certain conditionalities for doing so. It wanted two major types of programmes to be carried out. Firstly, there were to be short-term stabilization measures to control inflation and wipe out the balance of payments deficit. These were agreed upon. You are aware that attempts are being made to rationalize subsidies and cut down wasteful Government expenditure to reduce the fiscal deficit. The rupee has been devalued to correct the balance of payments deficit. Secondly, there had to be structural reforms to make the Indian economy competitive and attain a high rate of growth with social justice. These have also been accepted and measures are being taken to liberalize and globalize the Indian economy.
As a result of all this, there was considerable rethinking, reinforced by the conditionalities imposed by the World band to help India out of her difficulties. Steps began to be initiated in the 1980s and these gathered considerable momentum in the 1990s. A sea change has thus come about in the economic role of the Government in India since the 1990s. Many of the sectors reserved for the public sector have now been thrown open to the private sector. More and more physical controls are being replaced by measures to guide the economy through the market mechanism. Restraints in the way of international trade and factor movements are being gradually reduced. The seeming intention is to make the Indian economy face international competition and become efficient in performance. The Government role in the provision of public goods is not likely to increase, but as regards the protection of the environment, the Government is likely to play an increasing role.
Comment: Economic reforms have an adverse effect on food security and health security’
Economic reforms have an adverse effect on food security and health security’. Comment.
Food security and health security have been adversely affected for the poor as a consequence of new economic reforms. The poor avail of less than one-third of the food grains provided by the Public Distribution System.
Food security is related to (i) employment security via rate of growth of the economy, (ii) government policies regarding prices of food grains and food subsidies, and (iii) general rate of inflation and more especially the prices of food grains. Since the period of economic reform has been characterised as the period of jobless growth or very slow growth of employment, this has produced an adverse effect on food security of the poor by a fall on employment. The continuous rise in the prices of food grains, more especially of consumer price index of agricultural labourers, remaining above the double-digit level, also adversely affected food security of the poor. Agricultural labourers suffered the impact of double squeeze – firstly, lower level of employment resulted in an erosion of their real earnings over the year;
Secondly, the continuous rise of Consumer Price Index for Agricultural Labourers (CPIAL) by over 10 per cent for the entire 5-year period (1990-91 to 1995-96) has reduced their real wages in two ways – a depreciation of the purchasing power of the Rupee and the failure of the wage to increase commensurate with the rise of CPIAL. There is no doubt that the food security of the poor has been adversely hit by the reform.
Employment Security and New Economic Reform
The new economic reforms have been emphasing new power projects both in the public and the private sectors. Besides causing environmental problems, these projects have been displacing people from their traditional livelihood systems. By encouraging multinationals to enter food-processing industries, the reform process by the sheer competition from these business giants has led to labour displacement. The entry of big business in agriculture has also led to displacement of labour displacement. The entry of big business in agriculture has also led to displacement of labour engaged in the marketing of agricultural produce. The case of fisherman is glaring and has resulted in massive protests from fishermen who were faced with a threat to unemployment as a consequence of competition from mechanized boats. Consequently, there is a good deal of evidence to corroborate the view that the process of economic reform has generated far greater backwash effects in terms of labour displacement, than in generating spread effects in terms of enlarging new employment opportunities. The net effect of these trends is the deterioration in the quality of employment opportunities. The net effect of these trends is the deterioration in the quality of employment and this is witnessed in the growing increase in the number of casual labourers – the most unprotected form of Indian labour. Casualisation of a labour is witnessed even in industry as a result of the growing phenomena of lockouts and closures. G. Parthasarthy reviewing the impact of structural adjustment on employment concludes: “Given this short period experience, what the medium-term has in store for the Indian poor is anybody’s guess. It is essentially dependent upon the rate and composition of growth and its effects on employment. With past experience as a guide, we may achieve a high growth rate, the benefits of which may flow to the affluent and middle class. The poor may not gain because jobs are not found to grow with incomes. This type of scenario could call for effective safety nets for unorganized sectors in the form of right to work at a minimum subsidized wage and guarantee against unemployment through unemployment insurance.” (Parthasarthy G, Social Security and Structural Adjustment, the Indian Journal of Labour Economics, Vol. 39, No. 1, Jan-March 1996).
Health Security
As a result of the process of economic reform, privatisation of health services is recommenced. But according to the 42nd round of NSS, the average payment for private hospitals in rural areas was Rs. 735.4 as against Rs. 304.3 for Government hospitals i.e. 2.3 times more than charged by Government hospitals. In urban areas, the situation was even worse. Private hospitals charged Rs. 1,206 as against Government hospitals charging Rs. 355. In other words, charges in private hospitals in urban areas were 3.13 times more than in Government hospitals. Privatisation is thus bound to affect adversely the maintenance cost of health services of the poor. This has been compounded by the fact that in view of the patent rights payments to be made to patent-holders, viz. multinational corporations, the cost of medicines has been rising under the new economic reforms.
Food security and health security have been adversely affected for the poor as a consequence of new economic reforms. The poor avail of less than one-third of the food grains provided by the Public Distribution System.
Food security is related to (i) employment security via rate of growth of the economy, (ii) government policies regarding prices of food grains and food subsidies, and (iii) general rate of inflation and more especially the prices of food grains. Since the period of economic reform has been characterised as the period of jobless growth or very slow growth of employment, this has produced an adverse effect on food security of the poor by a fall on employment. The continuous rise in the prices of food grains, more especially of consumer price index of agricultural labourers, remaining above the double-digit level, also adversely affected food security of the poor. Agricultural labourers suffered the impact of double squeeze – firstly, lower level of employment resulted in an erosion of their real earnings over the year;
Secondly, the continuous rise of Consumer Price Index for Agricultural Labourers (CPIAL) by over 10 per cent for the entire 5-year period (1990-91 to 1995-96) has reduced their real wages in two ways – a depreciation of the purchasing power of the Rupee and the failure of the wage to increase commensurate with the rise of CPIAL. There is no doubt that the food security of the poor has been adversely hit by the reform.
Employment Security and New Economic Reform
The new economic reforms have been emphasing new power projects both in the public and the private sectors. Besides causing environmental problems, these projects have been displacing people from their traditional livelihood systems. By encouraging multinationals to enter food-processing industries, the reform process by the sheer competition from these business giants has led to labour displacement. The entry of big business in agriculture has also led to displacement of labour displacement. The entry of big business in agriculture has also led to displacement of labour engaged in the marketing of agricultural produce. The case of fisherman is glaring and has resulted in massive protests from fishermen who were faced with a threat to unemployment as a consequence of competition from mechanized boats. Consequently, there is a good deal of evidence to corroborate the view that the process of economic reform has generated far greater backwash effects in terms of labour displacement, than in generating spread effects in terms of enlarging new employment opportunities. The net effect of these trends is the deterioration in the quality of employment opportunities. The net effect of these trends is the deterioration in the quality of employment and this is witnessed in the growing increase in the number of casual labourers – the most unprotected form of Indian labour. Casualisation of a labour is witnessed even in industry as a result of the growing phenomena of lockouts and closures. G. Parthasarthy reviewing the impact of structural adjustment on employment concludes: “Given this short period experience, what the medium-term has in store for the Indian poor is anybody’s guess. It is essentially dependent upon the rate and composition of growth and its effects on employment. With past experience as a guide, we may achieve a high growth rate, the benefits of which may flow to the affluent and middle class. The poor may not gain because jobs are not found to grow with incomes. This type of scenario could call for effective safety nets for unorganized sectors in the form of right to work at a minimum subsidized wage and guarantee against unemployment through unemployment insurance.” (Parthasarthy G, Social Security and Structural Adjustment, the Indian Journal of Labour Economics, Vol. 39, No. 1, Jan-March 1996).
Health Security
As a result of the process of economic reform, privatisation of health services is recommenced. But according to the 42nd round of NSS, the average payment for private hospitals in rural areas was Rs. 735.4 as against Rs. 304.3 for Government hospitals i.e. 2.3 times more than charged by Government hospitals. In urban areas, the situation was even worse. Private hospitals charged Rs. 1,206 as against Government hospitals charging Rs. 355. In other words, charges in private hospitals in urban areas were 3.13 times more than in Government hospitals. Privatisation is thus bound to affect adversely the maintenance cost of health services of the poor. This has been compounded by the fact that in view of the patent rights payments to be made to patent-holders, viz. multinational corporations, the cost of medicines has been rising under the new economic reforms.
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