The Singur Judgment: Is there another way to understand the politics of industrialisation?

First published on The Dialog.

On August 31st the Supreme Court of India struck down as illegal the acquisition of 1000 acres of prime agricultural land by the West Bengal government on behalf of Tata Motors for their Nano factory in Singur village of Hoogly district. The judgment, coming ten years after the land was initially acquired in 2006, was widely covered in the media. One of the Justices handing down the judgment disagreed with the state government that the land had been acquired for “public purpose” and took the side of farmers whose livelihoods had been taken away from them. The other Justice argued from the perspective of the need for West Bengal to industrialize but nevertheless agreed that the state government had failed to follow the 1894 land acquisition law to the letter.

Disputes such as Singur have generally been framed in terms of “need for industrialization” versus “need to protect livelihoods.” This pits “traditional communities” such as farmers, adivasis, and petty producers of all kinds against “modern industry” such as malls, dams, mines, and factories. On the one side are those who wish to see the country industrialise and modernise, and displacement of these communities is seen as inevitable in this process, the only debate being whether the displaced are compensated and rehabilitated adequately. On the other side are those who argue that industrialization and development will displace these communities from their existing livelihoods but offer them no better alternatives in return, thus making them worse off in absolute terms in order to benefit others who will get jobs in the new industries and consume their products. Unfortunately we have been stuck in this “traditional versus modern” debate for many years with the pro-development camp unable to see anything beyond “adequate compensation” and the pro-people camp unable to offer an attractive and compelling vision of the future.

It is clear to all who are paying attention that the vast majority of the country still earns a livelihood in the petty production sector as farmers, artisans, and petty producers as well as retailers. This is also known as the “informal sector.” The standard of living in these occupations is five to ten times lower than that in the formal sector. For example a typical monthly income in informal jobs is around Rs. 7000 per month compared to Rs. 35000 per month or more for formal jobs. Even where land is not a constraint, modern industry and services have not been absorbing labour at the pace necessary to reduce the size of the informal sector (see my pervious post here on “Jobless Growth”). As long as this remains the case incomes will not rise very much in real terms for this majority. Thus protection of their meagre livelihoods is only a short-term strategy. There must policies and a politics that envisions a rapid improvement in their standard of living without the chimera of hope that they will somehow be magically absorbed into the formal sector.

Luckily this county also has a long tradition of thought and experimentation with industrialisation of various kinds, not only the capital- and resource-intensive, labour-saving kind that has developed in the advanced industrialized countries and that is ill-suited to the conditions here. The Gandhian experiment during the late colonial period was one such. Subsequently, the idea of labour-intensive, small-scale industrialisation caught the imagination of many others including Rammanohar Lohia. Thinkers such as K.R. Datye, author of Banking on Biomass: A New Strategy for Sustainable Prosperity based on Renewable Energy and Dispersed Industralisation, have written provocatively on this. In their book Churning the Earth, Aseem Shrivastava and Ashish Kothari recount more examples.

A Gandhian or dispersed pattern of industrialisation does not mean “handicrafts.” It only means an approach that draws upon peoples’ own existing knowledge-base and techniques (“lokavidya”), carries them forward, and puts livelihoods before productivity and local before long-distance wherever a trade-off becomes unavoidable. Such lokavidya-based, community-controlled development is the need of the hour. We must stop fetishizing “glass and aluminum development” as the only kind of development and recognise that such a process as we have launched upon in India destroys much more than it creates in terms of livelihoods, culture, and ecology. In other words, everything that matters. The losers of this process have, for decades, tried to highlight this and have fought against it, but only with very limited successes. This is because the juggernaut of development places in the hands of the winners hitherto unseen material and soft power to be able to effect the outcomes that they desire. In fact, the entire debate on development (both sides of it) is shaped by those who have benefitted from it. The integration into the global economy only rewarded the beneficiaries even more and conferred even greater power and public visibility on them.

Only a politics of knowledge can change this. By this I mean a politics that organises farmers, adivasis, petty producers of all kinds to raise their voice not in defense of their livelihoods, as they have done so far in Singur and other places, but in order to assert the claim that their knowledge is not inferior to any other kind of knowledge; that their practices can constitute the basis for a way forward that genuinely delivers the good life to all instead of delivering it today to the select few and promising it at some endlessly deferred time to the rest. If pro-people struggles against land acquisition and industrialization, such as Singur, Narmada, Niyamgiri and many others assert themselves not as defense of meagre livelihoods but as harbingers of a future India based on industry suited to our conditions they can become future-oriented. They cannot then be seen as anti-development or backward-looking. Needless to say this is not easy and it means taking on not only the domestic beneficiaries of the development process but also global economic forces. But the strength of such movements lies in their size and the knowledge they possess. The Singur judgment, though it does not go this far, combined with the Niyamgiri judgment that ruled Vedanta’s claim on the Dongria Kondh land illegal along with hopefully more such to come, create space for such a politics and also are an opportunity to raise the above issues among the classes who have benefitted from development and globalisation.

Minimum wage: wage subsidy is the solution to income disparity

First published on WION.

The recent one-day general strike on the 2nd of September brought several parts of the country to a standstill. Among the demands of the trade unions was one for raising the minimum wage to Rs. 18,000 per month. The NDA government, in an attempt to ward off the strike, had announced a hike earlier in the week from Rs. 246 per day to Rs. 350 per day (Rs. 9,100 per month for 26 working days). The unions, with the exception of the RSS-affiliated Bharatiya Mazdoor Sangh, denounced the government’s efforts and the strike went ahead as planned.

Trade unions in India have historically fought for periodic raises in minimum wages. In 2013 there was a nationwide strike (20-21 February) during which one of the demands was for a minimum wage of Rs. 10,000 per month. There was a similar strike on 2nd September 2015 in which a minimum wage demand for Rs. 15,000 a month was made. But even though the unions have been raising this issue consistently for the past several years, increases have been paltry.

Minimum wages in India are regulated under The Minimum Wages Act (1948) and there are wage floors that, in the words of the Act, “ensure that the laws of demand and supply are not allowed to determine the wages of workmen in industries where workers are poor, vulnerable, unorganised, and without bargaining power.” Thus, it is based on moral or ethical and not only economic principles.

The method of calculation of the “need-based” minimum wage dates back to 1957 when the Indian Labour Congress came up with a formula that included food, clothing, and shelter requirements for a family of four. The exact amount of the wage differs based on the occupation and geographical region. The Indian states have the freedom to set higher minimums, but conceptually these wages constitute the minimum level that the central government thinks those who work for it should earn.

After periodic inflation adjustments, the minimum wage is now in the range of Rs. 9,100 to 13,600 depending on the geographical location of the worker. One may ask, whether this constitutes a living wage in India today for a family of four. Given the rapid increases in the price of housing, education, health, and food in the past few years, the answer must be in the negative. The concept of a “living wage” as distinct from a “minimum wage” has recently gained a lot of political traction in countries such as the United States.

The Committee on Fair Wages in India has defined a “living wage” that includes education, health, social needs, and insurance in addition to food, shelter and clothing. Studies have shown that rapid increases in expenditures on items such as education, health, fuel, and conveyance have cut into people’s food budgets. Indeed rise in non-food expenditures has been advanced as one of the explanations for India’s famous calorie puzzle wherein nutritional intake has been falling even as incomes are increasing in real terms. With these economic facts in mind, the claim that the official minimum wage is not a living wage and the demand for a much larger increase in the minimum wage are both justified.

An even more important issue is that, while the central and to some extent the state governments can try to enforce the minimum wages for their own employees (either direct or employed via contractors), enforcing them in the informal or unorganised sector where the vast majority of the Indian labour force earns a living is another kettle of fish.

The present increase in wages applies to unskilled non-agricultural workers in the central sphere, which means employees of the central government or workers in affiliated undertakings in occupations, such as stone breaking and crushing, mining, sweeping and cleaning, loading, unloading, construction et cetra. The National Commission for Enterprises in the Unorganised Sector (the Sengupta Commission), which became famous for observing that 77 per cent of Indians spent Rs. 20 a day or less in 2004-05, observed that even though The Minimum Wages Act covers all workers in the formal and the informal sectors, several studies have shown that the vast majority of informal sector workers are paid below the official minimum wage for their occupation.

In some instances, there exists no official minimum wage for a given occupation, so the question of compliance does not arise. Further millions of workers in the informal sector do not receive daily wages but instead, work on their own account (self-employment) or are paid in piece wages that are not easy to convert into time wages in the absence of data on usual working hours. The earnings of such home-based and other workers often fall well short of even the low official minimum wage.

In my own fieldwork in the textile industry in Varanasi, I found that weavers were routinely paid piece wages that translated into daily wages of around Rs. 100-150 per day (in 2010), far below the stipulated minimum wage for skilled silk weavers in Uttar Pradesh, which at that time was more than Rs. 200.

The situation was even worse for women workers who were paid as low as Rs. 25 to 30 per day for embroidery work. A 2010 study by the All India Democratic Women’s Association (AIDWA) in the Delhi-NCR region found that even after working for nearly seven hours a day home-based women workers managed to earn only Rs.32.54 per day. The daily minimum wage for unskilled workers in Delhi at the time was Rs.140. Abysmally low wages for women are often justified on grounds that they are “supplementary earners” or that they work in “spare time”. Both these are questionable, not to say sexist, assumptions.

How then, can we ensure that at least the basic minimum standard of living that the government stipulates should accrue to every Indian family does, in fact, accrue to them? One way to do this is to end contract work as well as the practice of allowing informal workers in formal establishments, including public sector ones. This will make wage implementation easier. This was indeed one of the demands of the general strike as well.

In the post-reform period, employment of contract workers has become a prominent feature of the way private sector firms and even public ones operate to reduce labour costs and increase flexibility. The result has been a rapid rise in contract labour and almost no increase in regular formal jobs that come with some measure of job security and other benefits.

But what about the vast numbers who work in the informal economy beyond informal employment in formal establishments? As mentioned above, the millions of workers in India’s small workshops, shops, and homes who produce a large variety of goods and services from food, metalware, and textiles to mobile and auto repair earn wages far below the official minimum. Most of these businesses are tiny, employing fewer than 10 workers each. Won’t forcing such businesses to pay higher wages, closer to the official minimum wage, result in them going out of business and destroying jobs?

This is indeed a possibility because many informal businesses do operate on very small margins. In such cases, a wage subsidy, where the government supplements private sector incomes up to a certain level, may be the way to go. We are familiar with various subsidies that the government gives to the industrial sector in the form of tax breaks, depreciation allowances, SEZs, price supports etc. However, thousands of crores of rupees worth of such subsidies have not been particularly effective in creating jobs as the subsidising capital, not surprisingly, incentivises capital-intensive production.

Instead of subsidising capital, if we seriously believe that the official minimum wage constitutes an ethical lower bound on what a worker should earn then why not subsidise labour such that informal sector wages rise to that lower bound? Such a “wage subsidy” has recently been suggested by the well-known economist Pranab Bardhan.

Unlike a capital subsidy, this will encourage job creation as opposed to merely economic growth. It will also have large effects in boosting spending in the economy at a time when weak demand has been an important constraint on economic growth. Further, it will end the dualism between the formal sector with its minimum and inflation-indexed wages, and the informal sector that enjoys no such protection. Moreover, it will end it by moving the informal up to the level of the formal instead of bringing the formal down by informalising it, as has been the practice thus far in the post-reform period.

The curious case of ‘Jobless growth’ in India

First published on The Dialog.

The problem of “jobless growth” under the wider umbrella of Indian economy has attracted a lot of attention in media recently. Of all the challenges thrown up by the neoliberal reforms of the late 1980s and early 1990s, this one is among the most serious and the one with potentially catastrophic long-term consequences, if not addressed soon. One way to visualize the seriousness of the problem is via the data presented in Figure 1 below. It shows annual growth rates of GDP and of formal sector employment over ten year periods starting in the 1970s. Notice that while GDP growth becomes faster, employment growth becomes slower. During the pre-economic crisis spurt in GDP growth where the Indian economy grew at an average annual rate of over 8%, the rate of formal job growth was less than 0.5% per year. The result has a persistent informality and casualness of employment and lack of stable jobs with benefits and inflation-adjusted wages.

Figure 1: Jobless Growth

job

The previous UPA government’s inability to create jobs acted as a catalyst for a change and Modi campaign promised a much more rapid rate of employment growth. While more time may pass to see if they achieve this, the initial indications are that the problem will persist. Quarterly job creation data from the Labour Ministry shown in Figure 2 suggests that, if anything, jobs are being created more slowly under the present regime. The figure shows cumulative jobs added each quarter since the end of 2008 up to the end of 2015.

Figure 2: Quarterly formal sector job creation (Labour Ministry data)

job2

Some of the reasons for such a sluggish growth might be mechanization, global competition, skill mismatch, and labor strife, however are these discourses being addressed at the policy level? While global economic conditions and factors outside the control of Indian policy-makers may be part of the reason, it is equally the result of self-imposed ideologically motivated constraints.

It is true that increased openness to trade and capital, places certain important constraints on developing country government who might want to pursue policies that depart from the “Washington Consensus.” But scholars such as Dani Rodrik have argued in his book, One Economics, Many Recipes, that developing country policy-makers are not even using the policy freedom that does exist in order to suit their own domestic conditions and meet their own challenges. Instead they are choosing to accept deregulation, liberalisation, and openness as goods in themselves rather than as one among many policy options to be followed selectively in the pursuit of broad development goals.

A case in point is the obsession with labour laws and lack of flexibility in the labour market as the reason for lack of formal job creation. Despite the fact that surveys show, constraints such as lack of infrastructure and weak demand are much more binding than labour laws (for e.g. see Kotwal, Ramaswami and Wadhwa 2011).This is even truer of employers in micro, small and medium enterprises, who often operate well under the ceiling at which labour laws apply and can hire many employees before the laws kick in, but who are still unable to expand employment because of inadequate electricity, lack of access to markets and/or credit, and weak demand.

Another case is aversion to the very mention of any “industrial policy” for fear of a return to the “license-quota-permit raj.” Never mind that the entire gamut of policies followed under the neoliberal regime, such as Special Economic Zones, FDI, Make in India and so on are all industrial policy measures, though not labeled as such. Industrial policy in the service of export promotion and foreign investment is welcomed and any policy focusing on domestic firms and markets is viewed with suspicion and has to prove itself twice as hard.

An employment-first development strategy will involve fundamentally different choices than the growth-first strategy that we have followed for the past 25 years and that has brought us to the present-day crisis. It is clear that such a strategy cannot be implemented if precedence is given to the latest technology (which almost always has been developed in labour-scarce, capital-abundant contexts) and to global competitiveness. But such is the hold of these two ideologies that the merest mention of departing from them invites allegations of wanting to “take India back” to some dark time. Of course these allegations come from those whom the present economic regime has blessed with well-paying, secure jobs; precisely the thing that is denied to the vast majority by the very same regime.

It is now abundantly clear that uncritically accepting deregulation, trade openness and openness to capital flows (FDI or short-term) leads to highly undesirable outcomes such as increasing capital intensity of production, resulting in growth without jobs. The solution to this is not more globalization and reliance on some mythical foreign demand (for which the moment may, in any case, have passed), but rather doing the hard work of designing appropriately open trade policy, providing key infrastructure, particularly to MSMEs, and raising rural incomes (and therefore demand) by raising public investment in agriculture. After all sound agricultural policy is the bedrock of any decent industrial policy.

Paul Romer’s Charter Cities: Bold Vision or Neo-Colonial Nightmare?

First published on The Dialog.

A few days ago the World Bank announced that its new Chief Economist, taking over from Kaushik Basu, would be New York University based Paul Romer. Given Romer’s controversial ideas for developing countries, such as “charter cities,” the topic of this essay, and the fact that once again an American has been appointed after two developing countries economists (Justin Lin and Basu), his appointment has elicited surprisingly few critical comments.

Romer is a “star” whose name is synonymous with the theory of Endogenous Growth, a theory that tries to explain the role of knowledge and ideas in causing economic growth.

Traditionally (until the 1950s) economists emphasized the role of capital accumulation (increase in stock of machines and physical structures) in causing growth. In the 1950s researchers like Robert Solow produced models showing that accumulation of machines and physical infrastructure could only go so far in explaining why economic growth happens. There was always a large unexplained portion, the so-called “Solow residual.” This was usually attributed to technological progress that increased the productivity of labour. Romer’s contribution, in the late 1980s was to make a growth model that “endogenized” technological change rather than leaving it exogenous or outside model as it had been so far.

After making a name for himself in growth theory, in the early 2000s Romer left academia to develop an online teaching tool called Aplia. A few years later (2009-10) he was back in the news as far as developing countries are concerned, with his idea of charter cities,  sold as a bold new concept in urbanization and development. Now that he has been appointed at the World Bank many are expecting charter cities to come back on the development agenda. Mint and The Economist have already suggested this, approvingly. But charter cities are a disastrous idea. And here is why.

First, what are charter cities? In a nutshell these are enormous special economic zones containing an entire city. Instead of an SEZ dedicated to a few industries or sectors, an empty piece of land in a developing country is developed as a city from scratch, under a “charter” or a set of rules decided in advance. However, since SEZs have gotten a bad name for giving large concessions to corporations, Romer is careful to say that “the goal of a Charter City is reform, not giving out concessions, so in this sense, the motivation for a Charter City is totally different from the motivation behind most special zones.”

Romer’s vision, hundreds of charter cities across the developing world, housing and employing millions, in functioning, well-run environments, is bold and alluring indeed. As we are all only too aware Third World cities suffer from severe lack of infrastructure relative to demand and crisis of public goods such as transport, health, and education as well as a general governance deficit. They are usually mismanaged and prone to severe corruption. Since poor countries cannot govern their cities and cannot create conditions where new migrants want to live in them, these migrants, if they can afford it, migrate to richer countries for work and for building a new life, giving rise the to immigration challenge in the rich countries. Finally, new projects invariably run afoul of resistance from those who stand to be affect negatively. All these problems are side-stepped in a startup charter city. In Romer’s words:

I think what is unusual about a Startup City, as opposed to an existing city, is that you can propose something new without having to go through a long process of consultation and agreement amongst the people that might be affected by a change…With a Startup City, you can propose something entirely new and let people choose whether they want to live under its rules…People who want to try the reform can go there, and people who don’t, they don’t have to.

Romer’s favorite examples are Hong Kong and Singapore followed by Shenzhen, the Chinese city that Deng Xiaoping established to mimic Hong Kong.

To an extent, this idea comes out of Romer’s work on endogenous growth theory. Romer has written, that more and more “emphasis is shifting to the notion that it is ideas, not objects, that poor countries lack.” So here, finally, is Romer’s insight. If Third World citizens are voting with their feet when they can, and choosing to live in First World cities rather than their own, why not get First World governments to come to poor countries and run their cities for them? In Romer’s view, poor countries lack the ideas necessary to run a city well. So to take his example, the Cuban government can go to the Canadian government and ask it to start and run a new city in Cuba. If Third World governments were willing, such charter cities could come up all across the developing world. None of the existing laws in a poor country would apply to these spaces. They would be run according to the rules of the charter agreed on in advance by the governments in question.

Not surprisingly, when he first floated this idea Romer was severely criticized and accused of neo-colonialism. In addition, there is also the danger of “misinterpretation” by corrupt governments resulting in corporate takeover. Romer’s proposal has already been misused in Honduras where the concept was taken in the direction of a “company town” where the “investing company write(s) the laws that govern the territory, establish the local government, hire a private police force, and even has the right to set the educational system and collect taxes.”

The response to the allegation of colonialism redux was that this was purely an “emotional” reaction and that sound rational thinking would show the virtue in such an approach to urbanization in the Third World. The problems with ceding sovereignty over a city to a foreign government are, I think, obvious to anyone with a sense of history. But apart from such “emotive” arguments, there are other even more fundamental reasons as to why this is a bad idea.

By its nature the charter city is an exclusive, enclave space. True, Romer repeatedly emphasizes the voluntary nature of the concept. People choose to move into a charter city knowing fully well that they will have little say in how it is run. They are not being coerced into living in a city, they are choosing to live in it. Even accepting this argument at face value, the charter will contain rules of migration into the city. Effectively this brings the problem, of immigration facing Europe and America right now within our own borders. Within Indian border the government of Canada or the United States will decide who gets to live inside the city. Perhaps one reason that charter cities are attractive to some is that they will reduce immigration pressure on developed countries. But at the cost of reproducing those problems within developing countries, since a charter city takes care of none of the structural problems plaguing the global economy (such as lack of adequate jobs where people already live).

But the real bankruptcy of the idea is that it suffers from the same “failure of the imagination” that Romer says plagues urban policy. It can only imagine one institutional solution to the problem of urban living, viz. that developed over the past two hundred years in Europe and America. In place of the badly managed copies that we currently have, it promises a well-run copy. Evidence is gathering by the day that the Euro-American city is ecologically unsustainable. It relies on large resources and sinks, freely externalizing its costs to more disadvantaged parts of the world. China has been moving rapidly along this unsustainable path, but India does not have to mimic Europe, America and China.

Our ecological footprint is still low. Of course this is mainly due high levels of poverty and accompanying low consumption. But as more and more cities in Europe and elsewhere move to bicycles, local economies, and low production-low consumption “artisanal” lifestyles, space is opening for imaging alternative urban futures. Instead of moving through the phase of mass automobiles only to arrive at bicycles (as Northern European cities have done), we can chart our own path, bypassing the automobiles stage entirely, if only we have the imagination and the will. We also have a repository of ideas and wisdom that takes sustainability seriously. We have had thinkers such as Gandhi who recognized the problems of indiscriminate urbanization and offered alternatives. It is up to us to take these ideas into the 21st century and offer the world a genuine alternative to the crisis created by Europe and America.

Make no mistake, the urbanisation challenge in India, as in other developing countries, is large and unprecedented in scale in social, economic, political and ecological terms. Over the next few decades more than half the world will be urban. More people will live in cities than at any point in human history. If we want our cities to be socially inclusive, economically equal, political democratic, and ecologically sustainable we have a very large task on our collective hands. We will need all the ideas we can get to meet this challenge. But solutions such as charter cities that only mask “business as usual” under new names do not rise up to the challenge.

India’s New Intellectual Property Policy: A Critique

First published on The Dialog.

Last month the Modi government introduced a new policy on intellectual property rights (IPRs). It lays out the government’s approach to strengthen IPRs with a view to foster innovation and protect India’s traditional knowledge, and envisions “an India where knowledge is the main driver of development, and knowledge owned is transformed into knowledge shared.” (p.1)

Several commentaries on the policy have appeared over the past month. Some have been critical of its “maximalist” orientation arguing that India is at a stage of development where its domestic economic interests are not served by excessively strong IPR laws. Others have argued that the new policy has been drafted with the interest of multinational corporations in mind, rather than ordinary Indians. MNCs are generally in favor of stringent IPR laws because they stand to gain monopoly rents via patents, trademarks, and copyrights and stand to lose the more these are infringed by local businesses. Still others have noted that Indian IPR laws were changed recently under the UPA government and that there was no need for another comprehensive policy change so soon.

In this piece I want to use the policy document to raise some fundamental questions about intellectual property and its relevance for India. In the current climate, IPRs are often seen as the only way to ensure that creators of knowledge and culture receive returns for their creative efforts. Given the structure of India’s economy and the nature of knowledge production in it, what should be our approach to property rights in knowledge and culture? Can we lead the way in offering an alternative to privatisation? These issues remain un-debated even as policies continue to be drafted and implemented.

Knowledge and culture are what economists call “non-rival” and “non-excludable” goods. Om purnamadah purnamidam…as the Sanskrit shloka goes. Sharing does not reduce knowledge but adds to it. A common property or commons approach to knowledge has been the defining feature of our society, as the policy document acknowledges, noting that “monetisation of knowledge has never been the norm in India.” (p.8)

But private property rights in knowledge and culture are rapidly replacing open-access and common property regimes all over the world. International agreements such as TRIPS go a long way in ensuring this. Within such agreements, access to developed country markets for developing countries is often predicated on stringent domestic IPR laws. The policy document notes that the traditional Indian approach mentioned above, “while laudable and altruistic”,

…does not fit with the global regime of zealously protected IPRs. Hence, there is a need to propagate the value of transforming knowledge into IP assets. This requires a major paradigm shift of how knowledge is viewed and valued – not for what it is, but for what it can become. (p. 8)

The “major paradigm shift” referred to is the shift from treating knowledge and culture as common heritage and property to treating it as private property. Globalisation has brought with it an unprecedented level of experimentation with common property approaches to knowledge and culture. The FLOSS (Free/Libre Open Source Software) movement, peer-to-peer (P2P) movement, wikimedia commons and many similar movements across the world are changing our idea of knowledge and cultural production.

India’s knowledge and culture landscape is well-suited to a commons regime. Unlike countries like the US or EU members, a very large proportion of knowledge production and culture creation in India occurs outside the corporate sector. The so-called “informal sector” which employs 90% of our workforce is the site of this production. Whether it is farmers innovating new techniques, weavers and other artisans figuring out new ways of working with new designs and fabrics, food workers innovating new products, folk singers with new songs, or countless others, these knowledge and culture producers are untouched by an IPR regime.

This system, over centuries, has created a highly diverse and sophisticated ecology of knowledge and culture in food, music, textiles, and various household goods. In this sector, dissemination of knowledge and culture is rapid. A new product quickly spreads in the market by imitation. Thus, monopoly rents for innovation disappear quickly but competition serves as a motivator for innovation. The writers of the new policy certainly recognise this fact.

Eventual privatisation of the immense informal knowledge commons is the goal of the policy. The strongest defense offered for such an effort, in a poor country like India, is that it will enhance incomes in the informal sector (e.g. see this World Bank report). The argument goes that unlike the knowledge commons such as Wikipedia alluded to above that have been developed “on the side” by people who do not earn a living from this activity, informal knowledge commons are created and sustained by those whose livelihoods directly depend on them.

It is true that lack of formal property rights makes it easy for larger market actors, say in the corporate sector, to capitalise on knowledge produced in the informal sector. Generally we are used to thinking of piracy as the other way around; small, informal businesses producing knock-offs of large brands such as Nike shoes or Gucci bags. But piracy occurs the other way too; the most famous example being biopiracy. It is the appropriation of traditional knowledge particularly of medicinal plants, by large pharmaceutical companies.

Further, patent and trademark protected products are rapidly displacing informal products on which they are often based (for example countless varieties of bhujia, sweets etc). A small “innovation” on top of a local product by a large corporation with the resources to secure an IPR results in a trademarked product. The local product on which the trademarked product is based is forced out of the market by economics of aggressive pricing, and attractive packaging and marketing. The resulting destruction of local economies means the destruction of jobs (with women being hurt more than men) and communities. Thus on the face of it, the argument for strengthening IPRs for this knowledge is strong.

But millions of scattered innovators are not easily amenable to private IPRs. One way to get around this problem is to create community-based IPRs for the informal sector, e.g. Geographical Indications (GIs) which are IPRs that cover not an individual or a company but a community of producers, such as Banarasi Sari weavers or Moradabad metalworkers. Since 2005 India has created more than 400 GIs in diverse agricultural and artisanal products. A second way to safeguard informally produced knowledge from appropriation is the Traditional Knowledge Digital Library (TKDL). Here the strategy is to ensure that patent officials all over the world have access to “prior art” that they can use to evaluate if a particular product is new enough to deserve a patent or copyright. The new policy outlines the need for expanding the TKDL to include other fields besides Ayurveda, Yoga, Unani and Siddha, that it already covers.

Both these approaches are better suited to India’s knowledge ecology being community-oriented rather than private. But they are also severely limited when juxtaposed with the immense diversity of products and scale of innovation that occurs daily in the millions of micro, small, and medium enterprises in the unincorporated informal sector. It is not only a matter of “traditional knowledge” that matters to a few artisanal communities. Rather it is the livelihood basis of 90% of our workforce. Further, in a context where the informal sector is severely underserved in terms of infrastructure (such as electricity) and several reforms that aid production in this sector are overdue, banking on more stringent IPRs to enhance informal sector incomes is, to say the least, unrealistic and unwise.

Our challenge is to develop an intellectual property regime that can aid local economies in their fight for earning decent livelihoods based on their own knowledge and resisting corporate take-over, while developing a commons-based alternative to private property rights in knowledge and culture. This will not be easy since it means taking on powerful global vested interests in intellectual property. But the payoff will be very large both in terms of helping local economies and leading the way in treating knowledge and culture as a commons.

Central Banking and Monetary Policy: Independence versus Political Economy

First published on The Dialog.

“Despite many protestations to the contrary, the RBI, far from being the exclusive domain of experts and technocrats, is actually a site of politics.”

In the past week or so there have been several articles in the press on whether Reserve Bank of India (RBI) governor Raghuram Rajan will get a second term, come September. Rajan came under fire from BJP MP Subramanian Swamy for, among other things, not being Indian enough and for trying to wreck the economy deliberately.

Theatrical claims aside, substantive disagreements between the RBI and the government seem to be of the usual kind. The central bank is focused on keeping inflation low and is therefore, reluctant to keep interest rates as low as the government, looking for more growth, wishes. This is nearly always a point of contention between politicians and central bankers. And it is expected given the usual division of responsibilities, at least within the framework of a capitalist economy and a parliamentary democracy.

But the general point that the present controversy illustrates, yet again, is that despite many protestations to the contrary, the RBI, far from being the exclusive domain of experts and technocrats, is actually a site of politics. In this article, I want to use the current controversy as an occasion to reflect briefly on this political economy aspect, and on what democratically accountable central banking should look like. In my opinion we, in India, have not debated this question enough.

In mainstream economic thinking today, the principle of “central bank independence” is sacrosanct. This principle mandates that monetary policy should be the domain of a body of experts that is as independent as possible from the elected government of the day. Two reasons are usually given for such an arrangement. First, the macro-management of money is a complex affair and is best left to experts. Politicians and ordinary citizens do not understand the technical aspects well enough to make decisions that will ensure that the nation’s monetary goals are achieved. And second, independence will ensure the central bank does not become beholden to short-termism but instead remains consistently focused on a long-term goal of price stability. The specter invoked is one of a fiscally profligate regime that leans on a willing central bank to finance its spending by printing money. This debases the currency and causes runaway inflation and economic collapse.

“The way money works in modern economies is complex and there are lots of ideas out there about money, some of them not well-thought out and some plain crazy. So the role of experts is certainly crucial.”

Both these arguments have some merit in them. The way money works in modern economies is complex and there are lots of ideas out there about money, some of them not well-thought out and some plain crazy. So the role of experts is certainly crucial. And as a society we hope that the RBI governor and his team have all the details about the functioning of money and banking system in their heads, while also having the interests of the vast majority at heart. The second fear is also understandable and we can find historical support for it. Indeed, central banking in India during the Planning period was much more subservient to the government’s overall economic plan and brought some well-known macroeconomic problems with it.

But neither argument is immune to challenge. First, economic experts are notorious for disagreeing on fundamental issues. Witness the deep disagreements over fiscal and monetary policy that arose between Nobel-laureates in the aftermath of the 2008 economic crisis. Second, monetary policy is a key factor in economic performance and governments are judged by the performance they deliver. So they will always have a strong interest in formulation of monetary policy.

“Interest rates, the primary intervention of the central bank in the economy, change the distribution of income and wealth in society.”

But the central point that the argument for central bank independence obfuscates is that central banking is always an intensely political activity. Indeed it cannot be otherwise, because interest rates, the primary intervention of the central bank in the economy, change the distribution of income and wealth in society. Harry Johnson, an American conservative economist once said,

“From one important point of view, indeed, the avoidance of inflation and the maintenance of full employment can be most usefully regarded as conflicting class interests of the bourgeoisie and the proletariat respectively, the conflict being resolvable only by the test of relative political power in the society.”

Thus class conflict in a society is reflected in its monetary policy. Further to argue today that monetary policy should be formulated by experts insulated from political pressures is to ignore the ever increasing crucial role of international finance capital. Even if a central banker were to be insulated from domestic politics, in today’s financially globalized world, how independent is a central bank really? Does “independence” only mean freedom from the constraints of popular democratic control? What about independence from the global financial elite? These days, barring a situation of a deep economic crisis, a central bank that tries to be accommodative of economic growth and goes easy on interest rates at the risk of some (moderate) inflation is likely to find itself the target of ire from international investors who will threaten to move money out of the country.

“In today’s financially globalized world, how independent is a central bank really? Does “independence” only mean freedom from the constraints of popular democratic control? What about independence from the global financial elite?”

Rapid movements of portfolio capital and ever reducing controls on capital flows across national borders in effect mean a loss of control over domestic monetary policy. India has historically relied heavily on capital inflows to balance its persistent current account deficits (since export-led manufacturing never really took off for us as it did for China). This makes us vulnerable to volatility in capital flows. In fact for many years it is the RBI that has, wisely, resisted freer flows of capital across our borders. But it may be a losing battle. Cries for central bank independence are not really demands for independence of experts to take a long-term view in the interests of the majority of the people. Rather they are about control over monetary policy by the financial investing class who want freedom from democratic constraints imposed by the citizens of a country.

If we accept that central banks are never really independent, but rather are sites where competing interests clash (domestic elites, international financial elites, the professional and middle classes, the poor) then what are the institutional mechanisms by which they can be made politically accountable? What would central banking under control of the majority of India’s people look like? This is not an unproblematic notion. Many liberal democracies, including India’s, are very unequal societies where power rests with a tiny elite. Under such circumstances, it is not unreasonable to suppose that governments will not have long terms interests of the people in mind, but rather will cater to their elite masters while throwing some populist policies to the people periodically. In such a case, a central bank that is under the control of such a government is obviously not democratically accountable either.

But if the founding principle of democracy is that the people are sovereign and that they are capable of making decisions in their own interest, we should be able to have democratically accountable central banking that is still a separate power center from the elected government of the day. But this will require RBI governors to be courageous enough to face ordinary people (not other economists, specialists, or politicians) and be clever enough to explain their policy stances. Maybe even stand for elections and win them! Then hiding behind technocratic jargon would no longer be an option. Is it unreasonable to expect a central banker to be directly accountable to the people? After all his or her decisions profoundly affects us all everyday.

Further reading

Blinder, Alan (1996) Central Banking in a Democracy, Federal Reserve Bank of Richmond Economic Quarterly Volume 82/4.

Ray Partha (2014) Political Economy of Central Banking in India, Paper prepared for the Conference on the Political Economy of Contemporary India, IGIDR, Mumbai, November 20-21, 2014.

Stiglitz Joseph (1998) Central Banking in a Democratic Society, De Economist 146, No. 2,

I thank Arjun Jayadev for drawing my attention to the Johnson quote and for comments and criticism.

Geographical Indication: Will it Save Traditional Indian Art?

First published on Policy Wonks.

India has always been famous for her hand-crafted goods. Most readers will not need an introduction to the rich diversity of textiles, fabrics, jewelry, metalwork, woodwork, ornaments, perfumes, etc. that have been manufactured here for centuries. The millions of artisans, men and women, employed in these industries possess a great wealth of knowledge and skills relating to local ecology and materials, production techniques, art, design, and market trends. These are the original “knowledge workers.” However, they usually do not receive material returns commensurate with this knowledge. For example, in the textile industry of Banaras, handloom weavers, the makers of the world-famous Banarasi Sari, who are paid piece-wages per sari, end up earning as little as Rs. 10-15 an hour. This amounts to barely Rs. 150 for a day’s work on the loom, less even than manual laborers make in a day.

Recently, Government of India, in collaboration with the United Nations Conference on Trade and Development (UNCTAD), began awarding Geographical Indication (GI) status to handicraft industries. Since their formalization as a part of the Trade-related Intellectual Property Rights (TRIPS) agreement in the early 1990s, GIs have become increasingly popular among international development agencies, non-governmental organizations, policy-makers, and academics as a means of protecting traditional knowledge and developing traditional brands for global markets. A GI is a “place-based” collective intellectual property right. All producers who operate in a designated geographical area and produce specified products using specified methods can avail of the GI-status and thereby claim to be “authentic producers.” GI and related “marks indicating conditions of origin” (MICOs) have been used extensively in Europe for wines and cheese (think Champagne or Camembert).

The attraction of such a policy approach is obvious in a country where place-based crafts abound; Banarasi saris, Pashmina shawls, Moradabad metal, Kanjeevaram silk, the list could go on. In India the first GI was awarded to Darjeeling Tea in 2003. As of today nearly 500 GIs have been awarded, of which over half are for artisanal products (and the rest for agricultural products). The idea behind this effort is to promote a national and international brand name for traditional handicrafts and prevent imitation of craft goods by machines, thereby securing and enhancing artisanal incomes. If they work, GIs have the potential of benefiting millions of working Indians.

But are GIs the answer to reviving our traditional industries and promoting artisanal livelihoods? In a recent study (Basole 2015) I investigate the conditions under which GIs can address problems of poor but skilled artisans and what are their limitations in doing so. Based on a case study of the famous Banarasi sari industry, that was granted a GI in 2009, I make three points.

GIs must be designed through a participatory process.

Ordinary artisans, who are the producers of the knowledge in question, must take an active part in deciding which products and which processes of production need to be protected. Nominally this participatory process is in place. For example, in Banaras the GI effort involved a local NGO, governmental agencies, trader organizations and producer cooperative societies. But while this list appears to be a broad cross-section of interest groups in the industry, I found on the ground that with the exception of a few weavers directly associated with the NGO, ordinary weavers, who have contributed most to the knowledge commons that the GI seeks to brand and protect, were left out of the process. This is because the more powerful actors such as master-weavers and traders control the collective local bodies that represent artisans. Unions are absent. The consultations took place in hotels located outside weaver localities with officials, traders and well-off master weavers taking the lead. The entire GI application was drawn up in English with no copies available in the local language. As a result, even five years after the GI was granted, there is widespread ignorance about its existence among weavers. And many are skeptical that it will do anything to improve their lot.

GIs must be sensitive to the dynamic nature of artisanal knowledge.

The Banaras GI also highlights another problem with the way GIs are being used. It is primarily motivated by a desire to protect handloom weaving against powerloom competition and lays out rigorous criteria for what makes an authentic Banarasi fabric. In the process it unwittingly freezes knowledge by declaring only certain methods and designs to be “authentic.” But like all industries, artisanal industries are dynamic and they change both their products and processes to keep up with changing raw material sources, technology, and policy and market conditions. For example, silk has been substituted by synthetic fibres in Banaras and powerlooms are an outgrowth of the handloom sector, largely having taken off due to falling demand for handloom products, competition from Surat and other advanced weaving centers, and flawed trade policy that kept tariffs on Chinese silk high while reducing tariffs on Chinese fabric.

It is true that the market is awash with locally and foreign-made powerloom saris being sold as “handmade.” No enforcement exists and a lot of money is being made, as well as employment generated in the powerloom sector. But there already exists legislation that protects the handloom market, such as the Handloom Reservation Act, 1985 and certification schemes such as the Handloom Mark, whose intent was to prevent passing-off of machine-made cloth as hand-made. These have largely failed due to corruption and complicity of government officials with powerloom producers. In these circumstances, it is unclear how much impact a GI would have in protecting handlooms.

More generally, should it? It is clear that if fabric is made in China or Surat and sold as “Banarasi,” this is a case of free-riding on the city’s reputation and should be stopped. The GI is an effective mechanism to check this. But is a powerloom sari made in Banaras not a “Banarasi Sari?” Do weavers believe they are now producing a qualitatively different product undeserving of the name Banarasi? Does it not make sense to recognize and reward all the efforts of Banarasi weavers, whether in hand or mechanized weaving? These questions should have been debated widely, but were not. I believe one reason is that ordinary weavers were not part of the deliberations (the first point).

Wider consultations are needed and if necessary the GI must be broadened to include powerloom-made products from Banaras. A dual system that consists of a GI incorporating both hand and power produced saris (as long as they are made in Banaras), combined with a certification mark that protects the handloom market, is a better solution. A handloom mark can prevent encroachment of powerloom products on handlooms, while an inclusive GI will allow powerloom producers in Banaras to avail of the industry’s reputation thereby increasing the demand for powerlooms and creating jobs in that sector. Such a scheme would be analogous to multiple certification systems such as “fair-trade,” “organic,” and region of origin used, among other products, for coffee.

A GI cannot address problems that arise out of the political economy of artisanal industries.

Even a well-designed and implemented GI cannot make up for structural problems facing the artisanal sector today. At best, GIs can ensure higher premiums to those merchants or master-manufacturers who are able to navigate the GI bureaucracy and secure formal registration. Whether these will be passed on to the artisan-workers who work for piece-wages depends on the power relations between merchants/masters and artisans. For example, it is not difficult to imagine that in Banaras, eventually powerlooms will indeed be included in the GI, but nothing will change as far as the lot of ordinary wage-working weavers is concerned because, like most informal workers, they are unorganized.

Indeed today, it is harder than ever before to draw a line between artisanal production and the rest of the informal manufacturing sector. The same problems that plague the rest of the sector are also found in most artisanal industries. Long subcontracting chains, asymmetric relations between powerful merchants and subordinate artisan-workers, lack of marketing knowledge, credit constraints, precarious employment, lack of infrastructure etc.

Under these circumstances, GIs could be one component of a comprehensive industrial policy, but are not a magic bullet. They especially cannot substitute for the hard work of supplying adequate credit and infrastructure, formalizing informal contracts, and building unions and other collective bodies that represent the interests of ordinary artisans as well as those that speak on behalf of master-weavers who organize production. Without strong collective institutions at the local level, neither will acceptable and appropriate standards be developed nor will a more equitable sharing of value occur nor will favorable industrial policy result. If bad industrial and trade policy, and prevalence of exploitative conditions continue to undermine the livelihood of the ordinary artisan, the GIs will not have any crafts to protect.

Further, instead of viewing “traditional crafts” are somehow frozen in time, consumers as well as policy makers should appreciate that “tradition” changes continually. It is this dynamism that brings crafts into existence in the first place! Artisans know this well. Communities of artisans, if they receive returns commensurate with their skills and knowledge, will continue to produce ever more beautiful things. If they do not receive these returns, no amount of pious wishes to preserve India’s traditions will work.

Further Reading:

Banaras Bunkar Samiti. (2009) Human Welfare Association, Joint Director of Industries, Uttar Pradesh Handloom Fabrics Marketing Co-op Federation Ltd., Eastern U.P. Exporters Association, Banarasi Vastra Udyog Sangh, Director of Handlooms and Textiles U.P, Banaras Hathkargha Vikas Samiti, and Adarsh Silk Bunkar Sahkari Samiti Ltd. ‘GI Application No. 99- Banaras Sarees and Brocades’, Geographical Indications Journal, 29, 30–65.

Basole A (2015) Authenticity, Innovation and the Geographical Indication in an Artisanal Industry: The Case of the Banarasi Sari, The Journal of World Intellectual Property, 18(3/4), 127-149.

Das, K. (2007) ‘Protection of Geographical Indications: An overview of select issues with particular reference to India’, Center for Trade and Development, Working Paper 8.

Liebl, M. and Roy, T. (2004) Handmade in India: Traditional Craft Skills in a Changing World, in J. M. Finger and P.E. Schuler (eds.), Poor Peoples’ Knowledge: Promoting Intellectual Property in Developing Countries, World Bank and Oxford University Press, Washington, DC, pp. 53–73.

Rangnekar, D. (2010) ‘The Law and Economics of Geographical Indications: Introduction’, The Journal of World Intellectual Property 13(2), 77–80.

 

Income Inequality in India: Insights from the World Top Incomes Database

First published at Ideas For India.

Given the lack of reliable wage or asset data, tax returns-based World Top Incomes Database is important for measuring income and wealth inequalities. Analysing the India series of the database, this column find that starting in the 1980s average incomes grew faster than ever before, but that most of the gains went to the super rich. The trends mirror massive shifts in Indian political economy during that period.

Thomas Piketty’s bestseller ´Capital in the Twenty First Century’ has given a much-needed boost to the discussion on economic inequality in the long-run as well as during the neoliberal period. In India too, in the past decade, there have been a series of studies on various dimensions of inequality (Banerjee and Piketty 2005, Cain et al. 2010, Jayadev et al. 2007, Motiram and Vakulabharnam 2011, Pal and Ghosh 2007, Sen and Himanshu 2004, Vakulabharnam 2010). While consumption inequality is relatively easy to estimate based on household expenditure data, income and wealth inequalities are harder to measure particularly for developing countries where reliable wage or assets data is rarely available. The lack of data is even more pronounced for those at the top of the income or wealth distribution. Here the World Top Incomes Database (WTID) of 29 countries constructed by Piketty and colleagues using mainly income tax returns data becomes important (Alvaredo et al. 2014). While tax-based data suffer from several limitations for an economy like India’s which has a preponderance of informal (and hence officially untaxed) economic activity, tax evasion, and a narrow direct tax base, the WTID is an important complement to the National Sample Survey (NSS) data that typically underestimates inequality). WTID clearly illustrates the massive shift in Indian political economy in the 1980s, as seen through the lens of income inequality at the top of the distribution.
The WTID has been used to study the dynamics of inequality in several different countries (Atkinson et al. 2010). The series for India has been constructed by Abhijit Banerjee and Thomas Piketty using tax returns published in the ‘All-India Income-Tax Statistics’ (AIITS) series for the years 1922 to 1998 (and extrapolated to 1999).1 Banerjee and Piketty (2005) present income shares of the top 1%, 0.5%, 0.1% and 0.01% of the income distribution in India from 1922 to 1999, and compare the trends to those found in the US, UK and France. In this column, I extend their analysis by looking at trends in relative as well as absolute inequality, and calculating decadal growth rates in top incomes.2  I also place these trends in the context of India’s political economy Basole (2014).
Income inequality in India in the 20th century
The share in national income of the top 1%, 0.1%, and 0.01% peaked in the 1930s and then steadily declined following the Second World War and decolonisation (Figure 1, left). Throughout the planning period, inequality decreased continuously. The share of the top 1% fell to its lowest point (4.4%) in 1981 before starting to rise in the 1980s and accelerating in the 1990s. Note that the increase in inequality starts 10 years before the 1991 economic reforms. Banerjee and Piketty (2005) attribute this reversal to the pro-business policies brought in by the Indira Gandhi and Rajiv Gandhi governments of that period. This view is consistent with other recent scholarship that has put forward the view that the neoliberal period in India starts in the mid-1980s, several years before the 1991 reforms (Kohli 2012, Rodrik and Subramanian 2004). I discuss this further in the next section.
A second point that emerges from Figure 1 (right panel) is that there has been a divergence within the top 1%, with the very top (0.01%) pulling away from the rest of the 1%. Consistent with the behaviour of the income distribution in other countries (Atkinson et al. 2010), inequality increases sharply at the top of the distribution. The 1% to average ratio in 1999 was 9:1, but the 0.1% to average ratio was 36:1 and the 0.01% to average ratio was 157:1. Strikingly, the 0.01% to average ratio, which had reached a historic high of 300:1 in the colonial period decreased significantly to 45:1 by 1979 before climbing back to 200:1 in 1995. Thus, a mere 15 years of a changed political economy were enough to restore a substantial portion of the inequality of the pre-independence period.
Figure 1. Income shares of the top 1%, 0.1%, and 0.01% (left) and top to average income ratios (right)
 
Source: Author’s calculations based on WTID.
The measures presented in Figure 1 show that inequality was on the rise throughout the 1980s and 1990s, though not reaching colonial levels. However, these relative inequality measures only give us part of the picture. Subramanian and Jayaraj (2013) and Ravallion (2014) have recently argued in favour of measuring absolute inequality in addition to relative inequality.3  A simple measure of absolute inequality is the real rupee difference (as opposed to the ratio) between the average income and the income of the top 1, 0.1, and 0.01%. To appreciate the difference between relative and absolute measures, note that if two incomes of say Rs. 1,000 and Rs. 10,000 increase, in real terms, to Rs. 2,000 and Rs. 20,000 respectively, the relative inequality, as measured by shares/ratios or the Gini coefficient,4  is unchanged but the absolute inequality has doubled from Rs. 9,000 to Rs. 18,000. This is clearly an important change in this hypothetical economy.
Figure 2 shows real incomes for all three categories over the data period. For reference purposes, the national average is reproduced at the top left. The subsequent charts add the real annual incomes of the rich (top 1%, top right), the super-rich (top 0.1%, bottom left), and the ultra-rich (top 0.01%, bottom right). Note that, even though the average income rises in real terms throughout, real incomes actually fell for the rich, very rich, and super rich during the 1960s and 1970s. Thus for the average to rise during this period, incomes in the middle and at the bottom have to have increased to compensate for this decline at the top. This indicates that economic growth though anaemic, was certainly more pro-poor during the planning period than afterwards.
Figure 2. Top incomes compared to average: Average (top left), top 1% added (top right), top 0.1% added (bottom left), and top 0.01% added (bottom right)
Source: WTID.
After reaching an all-time low in the late 1970s, top incomes rose, first slowly in the 1980s and then rapidly in the 1990s. During the 1980s and 1990s, all the losses experienced in the earlier decades were more than recovered and we see that absolute inequality increased in India to unprecedented levels (Figure 3). The 1990s are characterised by a pulling away of the 0.01% from the rest of the 1%. The real rupee difference in annual income between the top 0.1% and the 0.01% was Rs. 896,810 per year in 1990 but had ballooned to Rs. 3,099,421 per year in 1999, a three-fold increase.
As can be surmised from the data presented above, the planning period was not a good era for the growth of top incomes in the Indian economy. In particular, the 1960s and 1970s were decades during which average income grew at a decadal growth rate of around 10-12%, but incomes of the rich, very rich, and super rich fell sharply (Figure 4). The decadal growth rates for the three were -56%, -68%, and -79% respectively. But the situation had dramatically reversed itself by the end of the 1980s. The same growth rates in the very next decade were 54%, 55%, and 49%. In comparison, the national average grew by 23% in the 1980s as opposed to 12% in the 1970s. Another strong decade of top income growth in the 1990s more than restored the real incomes of the rich that had taken a hit in the turbulent 1970s.
 
Figure 3. Absolute inequality between the 0.01% and 0.1%, the 0.1% and 1%, and 1% and national average
 
Source: Author’s calculations based on WTID. 
Institutional context
The structural transformation that the Indian economy underwent in the 1980s is clearly reflected in the data presented here. A particularly striking aspect of the data is the sharp decline in real income at the top in the 1960s and 1970s. The prolonged industrial stagnation of this period (Raj 1976, Nayyar 1978) likely contributed to this. But several years before the economic reforms of 1991, incomes had recovered substantially. Allowing for artifacts such as improved ability of the State to tax incomes and increased incentives to pay tax due to reduced rates (which would also result in a rise in top incomes in the data), Banerjee and Piketty (2005) suggest that changing social norms, booming economy, international trade and globalisation can explain the rise. Indeed, the WTID data fits very well with the emerging view that a pro-business policy climate was the hallmark of the post-Emergency Indira Gandhi government as well as the Rajiv Gandhi government and that Indian political economy had shifted unmistakably from the Nehruvian Statist model to a pro-big business regime several years before the reforms of 1991 (Frankel 2005, Kohli 2012, Rodrik and Subramanian 2004). The result was a reversal of the industrial stagnation and industrial growth rate increased from 3.8% in the period 1965-1979 to 6.5% during 1980-1990 (Kohli 2012). As the emphasis shifted from redistributive justice to increasing productivity as well as private investment via relaxing of licensing requirements, taming labour, and host of other by-now familiar neoliberal policies, faster growth was indeed achieved, but the gains went disproportionately to the top.
Figure 4. Decadal growth in real incomes for the top 1%, 0.1%, and 0.01% compared to the national average
Source: Author’s calculations based on WTID. 
Conclusion
The WTID data clearly reveals the nature of growth experienced by the Indian economy since the 1980s. While average incomes grew faster than they ever did before, most of the gains went to the very top and inequality exploded. In absolute terms, inequality at the end of the 1990s was far higher than it had been even in the colonial period. India’s new political economy, taking shape since the 1980s, has failed to deliver inclusive growth.
Notes:
  1. For a detailed description of the Indian database, how it was constructed, and what its limitations are, the reader is referred to Banerjee and Piketty (2005). Unfortunately, the Government of India stopped publishing detailed tax return data after 1999, so the series stops there.
  2. The decadal growth rate is the rate of growth of income over a period of ten years.
  3. A relative inequality measure is unchanged when a distribution is uniformly scaled up or down by any factor. An absolute inequality measure is unchanged when the same value is added to or subtracted from every value in a distribution (Subramanian and Jayaraj 2013).
  4. The Gini coefficient is one of the most frequently used measures of inequality. It varies between 0 and 1 with a value of 0 indicating perfect equality (all households or individuals earning the same amount of income) and a value of 1 indicating perfect inequality (one household or individual earning all of society’s income).
Further Reading
  • Alvaredo, F, AB Atkinson, T Piketty, and E Saez (2014), ‘The World Top Incomes Database’.
  • Atkinson, AB and T Piketty (eds.) (2010), Top incomes: A global perspective, Oxford University Press.
  • Banerjee, Abhijit and Thomas Piketty (2005), “Top Indian Incomes, 1922–2000”, The World Bank Economic Review, 19(1), 1-20.
  • Basole, Amit (2014), “Dynamics of Income Inequality in India”, Economic & Political Weekly, 49(40), 15.
  • Cain, J. SalcedoRana Hasan, Rhoda Magsombol and Ajay Tandon (2010), “Accounting for inequality in India: Evidence from household expenditures”, World Development, 38(3), 282-297.
  • Frankel, F (2005), India’s Political Economy 1947-2004, Oxford University Press.
  • Jayadev, Arjun, Sripad Motiram and Vamsi Vakulabharanam (2007), “Patterns of wealth disparities in India during the liberalisation era”, Economic and Political Weekly, 3853-3863.
  • Kohli, A (2012), Poverty amid plenty in the new India, Cambridge University Press.
  • Motiram, S and V Vakulabharanam (2011), ‘Poverty and inequality in the age of economic liberalization’, India Development Report.
  • Pal, P and J Ghosh (2007), ‘Inequality in India: A survey of recent trends’, Economic and Social Affairs, Working Paper  No. 45.
  • Piketty, T (2014), Capital in the Twenty-first Century, Harvard University Press.
  • Raj, Kakkadan Nandanath (1976), “Growth and Stagnation in Indian Industrial Development”, Economic and Political Weekly, 11:5/7, pp. 223-236.
  • Rodrik, Dani and Arvind Subramanian (2004), ‘From” Hindu growth” to productivity surge: the mystery of the Indian growth transition’, National Bureau of Economic Research, Working Paper No. 10376.
  • Nayyar, Deepak (1978), “Industrial Development in India: Some Reflections on Growth and Stagnation”, Economic and Political Weekly, 13:31/33, pp. 1265-1278.
  • Ravallion, Martin (2014), “Income Inequality in the Developing World”, Science, Vol. 344, No. 6186, pp. 851-855.
  • Sen, Abhijit and Himanshu (2004), “Poverty and Inequality in India: II: Widening Disparities during the 1990s”, Economic and Political Weekly, 4361-4375.
  • Subramanian, Sreenivasan and Dhairiyarayar Jayaraj (2013), “The Evolution of Consumption and Wealth Inequality in India: A Quantitative Assessment”, Journal of Globalization and Development, 4:2, pp. 253-81.
  • Vakulabharanam, Vamsi (2010), “Does class matter? Class structure and worsening inequality in India”, Economic and Political Weekly, 45(29), 67-76.

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Why is India’s calorie intake falling even though it is getting richer?

The Indian “Calorie Consumption Puzzle” has attracted the attention of many scholars in recent years. All of them have been struck by the same question: why has the country’s nutritional intake been declining over the past few decades while people’s purchasing power is increasing. When it is generally true that richer people consume more calories, why is the Indian trend the opposite?

Read more here.

 

The 2015-2016 Budget: Business as Usual?

First published at Sanhati.com

INTRODUCTION
A popular quip goes, “a politician is that person who, when he comes to a fork in the road goes both ways.” This contains a significant truth about political decision-making. In an electoral democracy like India moneyed interests wield a large influence on policy. But the vast majority of votes lie with the poor. The former exert great pressures to steer government policy in an anti-people direction. But the latter ensures that extreme steps cannot easily be taken. Government must be at least seen to be taking both forks in the road.

The 2015-2016 budget presented by Finance Minister Mr. Arun Jaitley on February 28 is of this nature. One way of looking at the budget that has been widely reflected in its corporate media coverage is that this is not a “bold,” or “courageous” budget. It has not met expectations of “big-bang reforms.” Another way of looking at it is that the Narendra Modi government has not been able to move as decisively in the anti-people direction as the corporate sector wished it to. This has surprised some observers given that general elections are several years away. As one pundit observed on TV, every subsequent budget takes the government closer to the next general election and hence pulls it further in the “populist” direction (incidentally, a whole article could be written on how the word “populist” has been skillfully used to cast aspersions and suspicions on any pro-people actions).

But the 2015 budget also negotiates another tension, that between domestic and international capital. In the build up to the budget there was a noticeable tension between what the domestic capitalist class wants and what international finance would have liked to see. Taking into account the sluggish rate of economic growth over the past few years and continued anemic domestic demand, there were corporate voices asking for government to stimulate demand (“not just show us the money, but show us the market” as one put it). There were also domestic capitalists calling for larger investments in infrastructure. On the other hand, the pressure for “fiscal consolidation” continues unabated and international finance would like to see the fiscal deficit reduced as per plan since its financial returns are potentially placed in jeopardy otherwise.

For example, the fiscal deficit target of 3% of GDP has been postponed by one year to be achieved by 2017-18 instead of 2016-2017 (the fiscal deficit targets are 3.9%, 3.5% and 3.0% in FY 2015-16, 2016-17 and 2017-18 respectively). The space created for spending is supposed to go to infrastructure and welfare spending. In the words of the budget documents, “Despite pressure on Union Finances, Government has decided to run welfare programmes for poor and socially disadvantaged in an unchanged manner.” In this respect it is worth nothing that the MGNREGA budget has increased by around 4% from what was actually spent (as opposed to budgeted) on its last year from 32456 crore rupees revised estimate in 2014 to 33700 crore rupees. Of course accounting for inflation this is not necessarily an increase in real terms. Also in continuation with last year’s budget, money for Centrally Sponsored Schemes such as MGNREGA will be given to the States to spend.

The budget that has been presented could thus be seen as the product of these three sets of class forces: the working masses, the domestic corporate class (including its middle-class hangers on), and the international financiers. In addition there is the institutional inertia that comes with a large economy like India’s. Seen in this context, it is not surprising that the budget is more a continuation of medium-run trends than a radical departure from them.

EXPENDITURES
One way in which the budget is substantially different is a result of the implementation of the recommendations of the fourteenth Finance Commission (FFC). This involves the transfer of a much larger proportion of certain revenues to the states. A much-noted feature is thus the jump in States’ share of taxes from 32% to 42% of the gross tax revenue. Figure 1 shows that net resources transferred from central revenues to State and UT governments have been increasing steadily. While the spin that the Modi government has been putting on this goes by the name of cooperative federalism, it remains to be seen what the actual impacts will be on the ground. In principle of course, decentralization of finance is to be desired. However, a real danger is that under the guise of decentralization of decision-making states will be forced to compete for domestic and foreign investment. And they obviously have lesser resources to withstand the threat of capital flight than does the Centre. Further, what has occurred is a compositional change. Together with the substantial increase in tax revenues going to the states there has been a big decline in plan assistance to states, and some increase in non-plan assistance. As a result while total transfers to States have grown in absolute terms they remain the same in proportion to total government spending.

A little bit of terminology is useful here. For historical reasons expenditures are categorized in two main categories: plan and non-plan. Plan expenditures, as the name suggests are developed as part of the planning process while non-plan expenditures cover all spending not included in the Plan, such as expenditure that is obligatory in nature (e.g. interest payments, statutory transfers to States) and expenditures on essential functions (e.g. defence, internal security, external affairs). This distinction has lost meaning with the scrapping of the Planning Commission. And may soon disappear.

In keeping with the anti-planning view of the present regime, several critical analysts have noted the general reduction in plan spending over the proposed amount last year. In fact the actual amount of spending in this category fell far short of the proposed amount, as Figure 2 shows. When one sees the actual amount of plan spending over the past few years, it seems that it has been stagnant rather than falling, at least in nominal terms.

Figure 1: Net Resources Transferred to State and UT Governments
Budget 2015 fig 1
Source: Resources transferred to State and U.T. Governments (Union Budget 2015-16)

Figure 2: Plan spending (revenue and capital)
Budget 2015 fig 2
Source: Expenditures (Union Budget 2015-16)

However, within the stagnant or slightly declining plan spending, there are big differences in how different sectors have been prioritized. But these differences have largely been inherited from the previous regime, though the present government has put its own stamp on it also. For example, agriculture and rural development were very small parts of plan spending even in last the UPA budget, but the steep decline in social services and increase in transport is a feature of the NDA government (Figure 3). That social sector spending under different heads has been cut sharply can be seen here.

Figure 3: Breakdown of plan spending by sector
Budget 2015 fig 3
Source: Central Plan Outlay (Union Budget 2015-16)

TAXES
The Indian fisc continues to be plagued with the problem of a narrow tax base further narrowed by tax write-off and evasion at the top of the income distribution. The tax-to-GDP ratio has not grown in the past year. In 2013-14 it stood at 10% of GDP. The target for 2014-15 was 10.6% but the revised estimates show it to be 9.9%. As an article in the Wall Street Journal noted, even today, only about 3% of Indians are subject to an income tax, compared to 20% of Chinese. Total tax revenue as a percentage of GDP is only 10% in India, among the lowest in emerging economies.

But the tax regime is being made more regressive via a proposed cut in corporate taxes and a rise in indirect taxes. The proposed reduction in the corporate tax rate from 30% to 25% over the next four years has had a mixed reception. The fiercely pro-corporate ex-Finance Minister Mr. P. Chidambaram, now in the role of the opposition and hence suddenly concerned about the present government’s “pro-corporate tilt,” noted in a post-budget press conference that India already has a “competitive” corporate tax rate and that the effective rate is 23% right now. And this is the average effective rate. Breaking down the numbers by firm size shows that smaller firms pay close to the official 30% rate while larger the company the lower the tax rate it ends of paying (see Figure 5). Since one percentage point in corporate taxes represents Rs. 4,000 crore, the government has effectively promised a relief of this amount every year for the next four years to the corporate sector. This combined with the “tax expenditures” (projected revenue foregone due to exemptions) which amounts to Rs. 62398 crore, together this corporate subsidy comes to Rs. 78,398 crore or 32% of the entire subsidy budget for the upcoming year. As before, P. Sainath has analyzed the “Statement of Revenues Foregone” document that lists corporate write-off in detail (link). See point 7 in this Hindu article which has other useful charts and data.

Figure 4: Tax Shares for the upcoming year (top) and revised estimates for 2014-2015 (bottom)
Budget 2015 fig 4a

Budget 2015 fig 4b
Source: Receipts (Union Budget 2015-16)

Of course, the news media coverage of this is accompanied by Mr. Jaitley’s provisio that tax exemptions will be reduced to maintain revenue constant while simplifying the code. On the face of it this may appear reasonable. But really, what else was Mr. Jaitley expected to say? That we are reducing the tax burden of corporations, full stop? Obviously this would be politically difficult given India’s already low tax-GDP ratio. So the reduced exemptions sop is to be expected. Whether it will be realized in practice remains to be seen.

Figure 5: Effective corporate tax rates across firm size
Budget 2015 fig 5
Source: Statement of Revenues Foregone

BACK TO CONSOLIDATION
Finally, the government has continued the tradition of slashing expenditures to meet fiscal targets. Gross Tax receipts are estimated to be 14,49,490 crore. Devolution to the States is estimated to be 5,23,958 crore. Share of Central Government will be 9,19,842 crore. Non Tax Revenues for the next fiscal year are estimated to be 2,21,733 crore. With the above estimates, fiscal deficit will be 3.9 per cent of GDP. As has happened over the last few years, once again the tax receipts were overestimated (13.6 trillion estimated, 12.5 trillion realized). Hence the fiscal deficit target of 4.1% announced last year is being achieved by spending less than announced in last year’s budget (16.8 trillion instead of 17.9 trillion proposed).

Bulk of the reductions (94%) are to plan spending as expected. But slashing spending obviously has limits. So the Fiscal Policy Strategy Document notes that “Given the resource constraint explained above on the revenue side, only option to raise additional resources remains through borrowing…”

As if it were not enough that an insistence on fiscal deficit reduction (itself a symptom of the class interests of international finance as noted above) and corporate giveaways (class interest of domestic and international capital) create a situation where expenditures that would be in the class interest of the working majority have to be cut or kept stagnant, the government also continues to subscribe to the much-criticized “crowding out” theory of public spending. Thus the budget document notes:

…attempt to raise higher resources from the market [via borrowing] has to be viewed in the larger monetary policy context. Higher Government borrowing will adversely impact private investment and make it difficult for reduction of interest rates. This would adversely affect the revival of growth, which has just started to show positive signs. Therefore, government has decided to continue with the fiscal consolidation phase…

Never mind that investment depends much more on the state of expectations about the future than interest rates in the present. And never mind that there is ample evidence to show that government spending can create conditions for “crowding in” private spending rather than crowding it out.

This is not to suggest that borrowing to bridge the deficit is a class-neutral strategy. Far from it.
At 6 trillion rupees, debt servicing remains a large part of the budget as always (38%). Most of this is domestic debt that the government owes to Indian citizens (external debt now represents only 8.3 percent of total government debt). But this does not change the fact, as we have noted in last year’s article on the budget, that in class terms debt servicing represents a transfer of income from tax-payers to bond-holders.

In summary, the best that can be said for the budget is that the pace of anti-people “reforms” has not picked up to the extent that the corporate media was clamouring for. Though in conclusion, going beyond the budget, it is worth pointing out that various executive decisions of the government that have been taken already have been anti-people. For example, the decision to restrict NREGA to only the poorest districts, the decision to cap NREGA fund remittances to the state, the land acquisition ordinance were all take outside the budget. Needless to say these have important consequences on peoples’ lives and livelihoods.

I thank Deepankar Basu, Debarshi Das, and Partho Ray for comments.