Sustaining growth Confidence marks India's entry into 2010 Business Standard / New Delhi January 1, 2010, 0:17 IST The entire media has been focusing this past week on the decade that was, the year gone by, and what lies ahead. The exhaustive coverage of events and trends in newspapers, magazines, websites and on television has left nothing out. All the great achievers have been toasted, the important events analysed, the failures and foibles listed and the major challenges ahead noted. What is interesting about this carpet bombing is its generally upbeat tone. Exactly an year ago, the global crisis had turned expectations bearish. Few had a good estimate of the extent of India’s global exposure and dependence and whether India could “decouple” itself or not. Opinions varied from misplaced optimism to excessive pessimism. Even as the economy showed signs of stabilising, despite the many knocks it took, uncertainty about the outcome of the 2009 elections kept most investors on the edge. The turnaround in the nation’s, and market’s, mood began with the elections in the summer and then the third quarter’s good news on the economy. India enters the new year more confident. However, if growth has to be sustained and stabilised, the economy and the polity need special attention. The Indian economy may be taking off, but it cannot be placed on auto-pilot and is nowhere near the Rostowian “self-sustaining” growth phase. While both investment and consumption are driving growth, a large part of both are still fuelled by public expenditure. Despite a stable majority in Parliament, the Union government has still not got its act together and seems to lurch from one faux pas to another. The second United Progressive Alliance government has wasted its first six months in office. The government has got bogged down in handling the consequences of avoidable mistakes, like in Telangana. Institutions of governance, from Parliament and the Supreme Court to gram panchayats and urban municipalities, are in need of nurturing and revitalisation. The coming decade will pose even greater challenges than the previous one, even as it offers more opportunities. If Indians have to be able to take advantage of the opportunities, the challenges need to be addressed. India will have its inevitable tryst with destiny, but there’s work to be done. http://www.business-standard.com/india/news/sustaining-growth/381287/ ...and I am Sid Harth

Tower of Babel Too many government gurus confuse the market Business Standard / New Delhi December 31, 2009, 0:43 IST Economists are known to be a fairly harmless lot with a penchant for disagreeing with each other. This can be mildly annoying or simply amusing, depending on one’s perspective, and has given rise to a rather tame brand of “economist” jokes. But when the economists happen to belong to different agencies of the government and differ on their forecasts or their opinion on policy, the discord could have deeper consequences. Take the case of GDP growth forecasts for 2009-10. The Reserve Bank of India has a forecast of 6 per cent for the year. The Prime Minister’s Council of Economic Advisers (CEA) has an official forecast of 6.5 per cent, but recent statements by its chairman suggest that it could revise its forecast up to a range of 7-7.5 per cent. The deputy chairman of the Planning Commission believes that growth could be somewhat higher than 7 per cent. The mid-year review of the economy released by the finance ministry earlier this month forecasts growth at 7.75 per cent or more and the finance minister seems to believe that the economy will grow by 8 per cent. One could argue that this difference is actually good for policy- making. Dissent rather than consensus creates awareness of the risks associated with policy choices and could make policy-making robust. The problem, however, is the fact that financial markets tend to take these forecasts quite seriously and _base_ investment and trading decisions on them. They also, perhaps somewhat naively, expect the different agencies of the government to speak in a common voice. When the government appears to speak in a “babel” of voices instead, it confuses market participants, often leading to a rise in market volatility. The problem becomes even more acute when there are conflicting opinions on specific policy measures. The recent confusion in the government bond markets over the likely monetary response to food inflation is an example. Officials from both the finance ministry and the Reserve Bank of India have repeatedly emphasised that they view the current inflationary episode as essentially “supply-driven” and hurried monetary action would not have much impact. The chairman of the CEA on the other hand suggested a few days back that if food prices did not abate soon, an “early reversal” in monetary policy is warranted. This led to a sharp spike in bond yields. The 10-year bond yield (a commonly-used benchmark for the bond market), fearing an imminent rate hike, went up by almost a quarter of a percentage point in response to the CEA chairman’s statements. It settled down later as the monetary move did not come through and the fear abated. The global financial and economic environment remains fuzzy and financial markets have more than their fair share of risks and uncertainty to deal with. Government economic agencies might want to desist from adding to this with their cacophony of discordant views. This does not, of course, mean that there should be no difference of opinion between them. But it is perhaps best to keep these behind closed doors and present a more consistent view to the public. http://www.business-standard.com/india/news/towerbabel/381184/ ...and I am Sid Harth

How many mouths to feed? Estimation of poverty and poverty of estimation Business Standard / New Delhi December 17, 2009, 0:56 IST It used to be a quip in the 1970s that estimation of poverty in India is stymied by the poverty of estimation. The other joke was that far too many economists and statisticians had prospered trying to estimate poverty! So, we have yet another estimate of poverty in India. Rural poverty numbers for 2004-05 are up from the earlier estimate of 28.3 per cent to 41.8 per cent — with no change in the urban poverty estimate of 25.7 per cent, the all-India poverty estimates are up from 27.5 per cent to 37.2 per cent. However, the Planning Commission report on new estimates of poverty in India, prepared by a committee chaired by the renowned economist Suresh Tendulkar, cannot be compared with any previous estimate. This is because the reference basket of goods and services is different. Indian poverty estimates are _base_d on consumption, not income, since the latter is notoriously difficult to measure. Since the early 1960s, Indian poverty numbers have been _base_d on a calorie norm, i.e. a person is deemed to be poor if his calorie intake is less than 2,400 kcal per day for rural areas, and 2,100 kcal for urban areas. This norm has remained unchanged, even though the actual consumption pattern has changed vastly. Various NSS surveys have confirmed that Indians have moved away from coarse to fine cereals, from cereals to non-cereals (including dairy, meat and poultry) and indeed from food to non-food. Hence the consumption basket, the basis for the unchanged calorie norm, is very different from that of the 1960s. Clearly, this was the motivation behind the decision of the Planning Commission to seek a reassessment of poverty numbers. In recent years, there have been numerous attempts at poverty re- measurement, with different views being expressed. Indeed, a celebrated study published five years ago by renowned Princeton economist Angus Deaton was called the “Great Indian Poverty Debate”. Deaton commented that the debate was often more about dogma rather than data, and the various claims more political than statistical. That debate is _link_ed to the bigger debate on whether economic reforms have dented poverty or not. The earlier official estimate of a reduction in overall poverty from 1993 to 2000 had detractors from both sides, i.e. too little or too much reduction. Hence, not surprisingly, we have independent expert estimates ranging from 70 per cent (Arjun Sengupta committee on small and unorganised sector), to 11 per cent (Surjit Bhalla in his book Imagine there is no country). But, despite the disagreement, there is a remarkable consensus on two things: that there has been a reduction in poverty rate from 1993 to now (whatever your starting point); and that the official numbers still underestimate vulnerability of the poor, whether it is to illness, malnutrition, illiteracy, social insecurity or any other calamity. Hence those hovering just above the poverty line can easily drop below due to an unexpected family emergency. We will not even try to go into the other debate on inequality — regional as well as across income classes, and between Forbes billionaires and the rest. The present Tendulkar estimates may spark yet another debate, but implications for policy-making remain largely unchanged — more social security, emphasis on education and health, employment generation in non-farm activity, industrial and infrastructure development, and policy reform aimed at opening new economic opportunities. http://www.business-standard.com/india/news/how-many-mouths-to-feed/3... ...and I am Sid Harth

Waterless Mumbai All Indian cities can make better use of the available water Business Standard / New Delhi December 16, 2009, 0:15 IST The irony will not have missed newspaper readers, who are informed on one day that the Central government will guarantee service delivery, to give effect to a citizen’s charter, while on another day the Maharashtra government announces that no water connections will be given to new high-rise buildings for a couple of years — even if the buildings have been approved by the civic authorities. Without a water connection, no building gets a completion certificate — so hundreds, if not thousands, of flats will lie built and unused till the state government feels it can supply water. In 2012, Mumbai hopes to get substantial additional water from the Middle Vaitarana project, but the deadline is not sacrosanct and so the wait could be longer. For Mumbai, which has long since given up its old self-belief that it is the country’s premier metropolis, and where the majority of residents struggle without basic civic amenities, this will come as further proof of the dysfunctionality of the governing apparatus. For there can be no doubt that citizens are being made the scapegoats for what is a government failure to make water available. The government will plead that the problem is the result of the monsoons having failed this year. Perhaps, but Mumbai’s water shortage is not new. The fact is that Indian cities could manage better with the available water if there were efficient management, and less waste. The problem of inadequate supply is compounded by waste because public taps are perennially leaky. Private consumption too is profligate because the civic authorities refuse to charge for the true cost of water (well over Rs 10 per kilolitre); Delhi has just announced a near trebling of water rates, but even that may not be enough. Mumbai needs a third more than the 3,350 million litres of water that it gets. The 455 million litres that the Middle Vaitarana project will provide, on completion in 2012, will not be enough to fill the gap. Bear in mind that 650 million litres are currently stolen or wasted. The problem which the whole country needs to focus on is that India is on its way to a water crisis, in its cities as well as in its villages (the water table in states like Punjab has plunged to great depths). There has to be a new culture of using water frugally, and of recycling water. The chief minister has already announced that rainwater harvesting and recycling of water will be made mandatory by April. The Brihanmumbai Municipal Corporation has been told to come up with plans for desalination in six months. Chennai, for example, was plagued by severe water shortages but is seen to have mitigated it through rainwater harvesting and desalination. Mumbai can afford to pay for desalinated water at Rs 5 per litre. So why did the city delay taking action till the situation reached crisis proportions? http://www.business-standard.com/india/news/waterless-mumbai/379682/ ...and I am Sid Harth

ECONOMY Fragile growth C.P. CHANDRASEKHAR The gains of 25 years of neoliberalism are negligible; India's moderatemiracle phase may come to an end before the vast majority of people taste its benefits. The neoliberal TRIO INDIA’S economic development over the past 25 years has been a long journey down the road to a more market-driven and globally integrated “neoliberal” regime. By dismantling controls on investment (domestic and foreign), production, prices and trade; by deregulating financial sector operations; and by privileging private sector activity; the nature of the development trajectory India pursues has been fundamentally altered when compared with the first three decades after Independence. Advocates of this transition say the journey is still incomplete though none can deny that a regime change has already occurred. The beginnings of the transition can be traced to the Indian government’s decision in 1981 to approach the International Monetary Fund (IMF) for an SDR 5 billion (roughly $5.8 billion) Extended Financing Facility loan, quoting among other reasons the need to restructure the economy in response to the oil shocks and earn the foreign exchange needed to pay for the country’s oil imports. In practice, it turned out that India did not really need that foreign exchange, with the government even choosing to forgo the last instalment of the line of credit equal to about $1.1 billion. The Bombay High oil and gas bonanza, which the government exploited in full, and remittances from and exports to West Asia steadied the balance of payments (BoP). What the loan did achieve, intentionally or otherwise, was that it whetted the appetite of the government and the elite of the country for borrowed foreign exchange to import the intermediates and capital goods required to produce commodities hitherto considered non-essential and, therefore, not easily available under the protectionist regime with state intervention instituted after Independence. Credit without COLLATERAL It was this appetite that was unleashed through the liberalisation of trade in the 1985 Budget under Prime Minister Rajiv Gandhi. Combined with deficit-financed spending, this release of the pent-up demand for import-intensive manufactures not only raised the rate of growth of the system but widened the current account deficit. This deficit, which earlier was financed with borrowing from the IMF, was now financed with external commercial borrowing that India, like many other “emerging markets”, had gained access to. Among the consequences was not only the burgeoning of India’s stock of external debt and a rise in its debt service ratio but a rise in the share of short-term debt in the total. Unfortunately, by this time international banks overexposed to emerging markets had burned their fingers many times since the Mexican debt crisis of 1982. Not surprisingly, even when India’s debt-to-gross domestic product ratio was much lower than in many other developing countries, the fact that debt service costs were a rising proportion of current receipts of foreign exchange provided the basis for a growing reluctance on the part of lenders to extend new debt and rollover past short-term debt. The result, in an increasingly open economy, was a sharp decline in reserves, leading to a BoP crisis when those reserves fell to levels equal to a few weeks’ imports. It was at this point in time that the Indian government chose to take another IMF loan of around $2.5 billion (besides borrowing against its gold reserves) and accepted conditionalities that served as the spur for an engineered shift in the direction and content of India’s development strategy. That shift is still under way despite having traversed much distance. Advocates of this shift, within and outside the government, point to the remarkable improvement in India’s GDP growth performance since the 1980s (when creeping liberalisation began), from a 3 per cent-plus rate of growth to 5 per cent-plus initially and, subsequently, to close to 9 per cent over a five-year period preceding the recent slowdown. That growth has occurred in what is seen as a virtuous context in which there are some limited signs of “fiscal correction” in the form of a reduction in deficit-financed government spending and no signs of a return to the BoP difficulties of the 1980s and earlier. Combined with the obvious opulence visible in metropolitan and urban India, evidence of a more generalised revolution in access to communications as epitomised by the ubiquitous cellphone, and a services boom that has absorbed a significant number of educated middle- class Indians, this growth is presented as proof of the success of neoliberal “reform”. Conspicuous CONSUMPTION There are, however, four features of this growth performance that are disturbing. The first is its rather uneven and imbalanced sectoral distribution. Growth has only marginally touched agriculture, with evidence that over a prolonged period starting in the early 1990s, the per capita output of foodgrains was on the decline for the first time in the country’s post-Independence history. Around 55 per cent of the increment in GDP over the last decade has come from the services sector, with less than half of that contribution being due to an expansion of organised services, public administration and defence. Since unorganised services consist largely of low-paid work accepted for lack of alternative employment opportunities, the burgeoning of this sector as evidenced by the statistics should be an indicator of growing distress rather than progress and development. And organised manufacturing growth has been volatile, with an increasingly small number of sectors accounting for a very high share of the growth occurring in this sector. In the case of 52 three-digit industries, the top three in terms of rates of growth during the period 1993-94 to 2003-04 accounted for 38 per cent of the growth in all industries, with the figure for the top five rising close to 55 per cent and for the top 10 to almost 75 per cent. The second feature is that unlike the case of China, India’s large foreign exchange reserves, which are seen as a sign of economic strength, are not owing to current account surpluses earned through exports or garnered from remittances but because of large inflows of capital in the form of portfolio investments and external commercial borrowing by the private corporate sector. This kind of accumulation of reserves is not only expensive (as measured by the difference between the rate of return paid by residents to foreign investors in the Indian economy and the interest earned from the investment of reserves by the Reserve Bank of India) but is also unstable and prone to rapid depletion through capital outflows. Services BOOM A third feature of this growth is that it rests on tenuous stimuli. Fiscal reform has meant that the role of public expenditures as a stimulus for growth is on the wane, excepting for the most recent period when the implementation of the Sixth Pay Commission’s recommendations combined with post-crisis initiatives to generate a spike in expenditures. Further, though there has been some improvement in India’s export performance, exports are not large enough to constitute the basis for manufacturing growth. If there is a new stimulus to growth it appears to come from credit-financed investments in housing, credit-financed purchases of automobiles and credit- financed consumption. One consequence of financial liberalisation and the excess liquidity in the system created by the inflow of foreign capital has been the growing importance of credit provided to individuals for specific purposes such as purchases of property, automobiles and consumer durables of various kinds. Not only has credit expanded at a scorching pace, resulting in a sharp increase in the bank credit-to-GDP ratio (it increased from 27 per cent at the end of March 1997 to about 60 per cent by the end of March 2008), but the share of personal loans in total non-food credit has risen from a small magnitude in the early 1980s to around a quarter in 2008. Ubiquitous CELLPHONE This implies a degree of dissaving on the part of individuals and households. It also implies that financial institutions, which are willing to provide such credit without any collateral, are betting on the inter-temporal income profile of these individuals, since they are seen as being in a position to meet their interest payment and amortisation commitments on the basis of speculative projections of their earnings profile. These projections are speculative because with banks and other financial institutions competing with each other in the housing and consumer finance markets, individuals can easily take on excess debt from multiple sources without revealing to any individual creditor their possible overexposure to debt. Since there is a strong speculative element involved in lenders providing credit and borrowers increasing their indebtedness, the state of confidence of both parties matters. When such confidence is “good”, we can experience growth or even a mini-boom. When such confidence is low, we can experience recessionary conditions. The evidence increasingly is that such confidence is on the decline. Not only has the RBI cautioned banks against increasing their retail loan exposure, but according to Financial Times (November 23, 2009), Moody’s rating agency has issued a report flagging deteriorating credit conditions and rising problem loans in India’s banking sector. During the fiscal year ending March 2009, the level of gross non- performing loans for commercial banks rose by 22.5 per cent, almost double the 11.9 per cent recorded during the previous year. This could lead to an end of the credit-financed boom. S. THANTHONI Miracle economy does not work for the deprived. Finally, a fourth feature of the process of growth is
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Volume 27 - Issue 01 :: Jan. 02-15, 2010 INDIA'S NATIONAL MAGAZINE from the publishers of THE HINDU ECONOMY Starvation deaths in Andhra Pradesh BY A FRONTLINE INVESTIGATION TEAM AS you drive along the roads of Guntur and Prakasam districts of Andhra Pradesh, never very far from the bustling city of Vijayawada, the paddyfields stretch away, lush and green, to the horizon. The verdant landscape affirms that it has been a good year for agriculture in coastal Andhra, one of South India’s most fertile and productive regions. And, one assumes, it has also been a good year for the local people. But if you stop at any of the weavers’ hamlets or colonies that dot the landscape, the story you will hear is very different. It is a story of narrowing options, desolation and despair – and, increasingly, of death. Reports of starvation deaths and of suicides triggered by sheer desperation are currently filtering out of the area with disquieting regularity. While officialdom may quibble over what exactly constitutes a “starvation death” (Did not the victim’s family draw its rice ration a few days before the death? Did not the stomach of the deceased reveal some remnants of nourishment?), what is clear beyond dispute is that the weaving community of this relatively prosperous accessible region of Andhra Pradesh is today trapped in an acute and deadly crisis. H. SATISH FOR THE HANDLOOM weavers of Prakasam and Guntur districts survival itself is a delicately poised matter. An old woman and a young boy work on a jacquard loom. In the reckoning of Pragada Kotaiah, Congress(I) MP and general secretary of the Andhra Pradesh Handloom Weavers’ Congress, at least 73 starvation deaths among weavers took place in the region between August 30 and November 8, 1991. Local officialdom and the Congress(I) government of the Prime Minister’s State have been at pains to deny that these deaths were caused by starvation. True, in one or two cases the final act of destruction was self-inflicted. In others, post-mortem reports turned up evidence of scraps of food in the victim’s stomach. Yet, as Frontline’s investigation team discovered when it visited some weavers’ communities in late 1991, the term “starvation death” cannot be wished away in a callous quibbling over definitions. As our case studies show, the current situation in the weaving communities of Guntur and Prakasam districts is one of sharply deteriorating conditions of life. Many weavers and their families, already existing below the threshold of poverty, seem poised to descend beyond the point of physical survival unless intervention is decisive, large- scale and immediate. Frontline’s case studies point to three broad conclusions. First, the general conditions of life of the weavers of Guntur and Prakasam districts are so desperately low that survival itself is a fragile, delicately poised matter. It is therefore meaningless to pose the clinical question whether deaths such as those investigated by the Frontline team are technically starvation deaths. Here, weavers subsist on painfully low levels of nutritional intake; they have access to very poor health care facilities; their weakened bodies are susceptible to all manner of infections and diseases which work to reduce further their physical “well-being”. Any crisis – a family problem, a reduction in income – is certain to accelerate the downward spiral, further lowering nutritional intake and reducing the body to the threshold of mortality. The final cause of death may be an infection; it may be something else. The second point from the Frontline case studies is that none of the survival strategies normally resorted to by people in crisis appear open to the Andhra weavers. For those who seek to migrate to nearby towns, there are simply no jobs. Thirdly, Frontline’s case studies suggest that recent Central and State government economic measures, especially those adopted by the Central government in its 1991-92 Budget, have in effect tipped the weavers over the edge. The sharp increase in yarn prices that followed the Budget has perhaps more than any other single factor precipitated the current crisis. This is no crisis affecting some outback, some “peripheral” section of the people and the economy. Weaving in India provides employment to the largest number of people in any sector other than agriculture; there are an estimated 3.5 million handlooms in the country, supporting roughly 17 million people. Of this, Andhra Pradesh has an estimated 525,000 handlooms on which some 2.5 million people subsist; nationally, it ranks next only to Tamil Nadu as a handloom-weaving State (with an estimated 556,000 looms and 2.8 million people). As yet, the unfolding tragedy of Andhra’s weavers has stimulated no meaningful or sensitive response from the government, whether at the Central, State or local level. On the contrary, the governmental emphasis is on assuring the world that Andhra’s weavers do not starve and that this season’s bountiful harvest does not coexist with death by starvation. The investigation team members were K. Nagaraj, Asha Krishnakumar, M. Venkateswara Rao, K. Rajaram and photographer H. Satish. http://www.flonnet.com/stories/19911206030.htm ...and I am Sid Harth