Dec 9, 2008

India - Planning for inclusive development

Arjun Sengupta

India needs to evolve quickly strategies to meet the global crisis by increasing domestic demand.

The international crisis is continuing, and India has to protect itself from global contraction by increasingly relying on the domestic market. All the sops given to exporters, even a major depreciation of the rupee, have not helped overcome the slack in world demand for exports. Unless Indian growth picks up to revive confidence in the country’s future, the liquidity crunch in the industrial countries will continue to pull out foreign capital from India. As the Indian stock markets remain depressed, the asset value of Indian corporates will continue to fall, reducing their creditworthiness. The reluctance of the banks to lend them even funds to meet working capital needs will lead to a cut-back in production and employment. With the outflow of the dollar continuing, there is hardly any likelihood of interest rates falling. The global financial crisis will then convert itself into a real economic crisis — unless India effectively insulates its markets, compensating for the slack in the global market by expanding domestic demand.

Although the Indian economy is very large, its growth over the last 20 years was confined to only a small fraction of the population — catering to roughly 23 per cent of the people. It has bypassed the other 77 per cent. This section has seen very little increase in income and consumption, and its members have been producing and trading mostly among themselves. The rapid economic growth has trickled down to them only partially. As a result, only some people who were extremely poor and were spending less than Rs. 12 a day moved out of poverty to just one stage above and joined the ranks of the 77 per cent in 2004-2005, but they still live below Rs. 20 a day. They have remained stuck at that level, watching helplessly as the growth process bypassed them.

However, the other 23 per cent, constituting more than a billion people, has provided a market larger than most other economies of the world and attracted world investors and traders. But the 77 per cent who were bypassed comprise the poorest of the country’s people. Most of them are illiterate or have only primary-level education, and suffer from malnutrition and ill-health. Most of them are unemployed or belong to the working poor, or self-employed unorganised working class. In agriculture 84 per cent of our farmer households belong to this economy. They are small and marginal farmers with less than 2 hectares of land with low level of productivity. They can barely survive on their land and have to look for means of livelihood in non-farm jobs in the local markets.

In industry there are 58 million enterprises providing employment to 104 million workers. They work mostly in units with an investment of less than Rs. 5 lakh, and under miserable working conditions. Yet they contribute 31 per cent of GDP, spread over the whole of India, working in handloom, handicraft, coir, leather, apparel, food processing and metal products enterprises, among others. Almost 90 per cent of their product is absorbed in the domestic market. A fiscal stimulus meant to get the country out of the economic crisis must now concentrate on stimulating this part of the economy and through that expand domestic demand.

First, we must increase finance and credit to the 58 million tiny, non-farm units. Of them, 54 million have an investment of less than Rs. 5 lakh, and get only 2.2 per cent of the net bank credit extended in the country. The remaining four million units with an investment of up to Rs. 25 lakh get hardly 4 per cent of the net bank credit. Even a 1 per cent increase in credit to them will increase employment by roughly 10 million and output by about 0.4 per cent of GDP. As only 10 per cent of that product is exported, there will be no problem in absorbing that in the domestic economy. Except producers of gem and jewellery and so on that are specifically export-oriented, other producers of textiles, garments and leather goods will not find it difficult to adjust their exports to suit the domestic markets.

Providing finance to these enterprises will of course need some institutional changes. The National Commission for Enterprises in the Unorganised Sector (NCEUS) worked out a scheme more than a year ago to create an institution similar to the National Bank for Agriculture and Rural Development (NABARD), called NAFUS. It will be a development finance institution, refinancing commercial credit and providing marketing, technology and risk cover facility. This was a promise set out in the Common Minimum Programme, a promise that was specifically meant to promote enterprises in the unorganised economy. That proposal needs to be cleared by the government immediately, with substantial provision of capital and leveraging facilities. That should be by means of a programme for small and marginal farmers who hold less than 2 ha. They require substantial support for extension services, land development, minor irrigation and development of a marketing network. Most often they will not be viable within agriculture and have to be persuaded to move on to non-farm activities with financing and credit support, similar to non-farm micro-enterprises. The NCEUS has proposed a Rs. 5,000-crore programme for the development of small and marginal farmers through the provision of incentives for the dissemination of information among groups and for carrying out productive activities. That has to be in addition to the general plan of agriculture development, whose benefits — including subsidies, credit and finances — are captured by big farmers in the absence of a specifically targeted programme.

The fiscal stimulus should also cover the expansion of infrastructure, especially for the unorganised economy. Overall infrastructure investment such as that in the power, transport and communication sectors will also benefit the unorganised sector, although a public-private partnership policy in this area has not picked up. But infrastructure investment in areas such as rural roads, rural markets, and rural electrification, together with watershed development or minor irrigation programmes, must be carried out mostly through the public investment route. Their effect will be to increase allround efficiency in the rural sector and cause a large expansion of purchasing power, expanding domestic demand.

Expanding the scope of the National Rural Employment Guarantee Act (NREGA) can also effectively increase domestic demand. The schemes are supposed to be asset- creating, increasing productive capacity and generating additional purchasing power. If the 100-day cap on employment is removed, and additional funding is provided to those districts which have a number of unfulfilled projects on their shelf, the programme can quickly expand. Even if some of the schemes do not create productive assets as planned and some of the expenditure just leaks out, it will inject purchasing power in the rural areas, multiplying domestic demand.

There is no need to be apologetic about a genuine income transfer to the poor and the vulnerable, the 77 per cent bypassed population. The ultimate aim of development in this context is to improve the welfare of the common people. This will require a programme of social security that provides protection for health and life and accident insurance, maternity benefit, pension and a minimum level of employment insurance to those who had some employment. This will directly impact on their welfare. The NCEUS worked out the details of a minimum social security scheme that will cover more than 360 million unorganised workers, at a cost that will amount to 0.5 per cent of GDP.

The government introduced recently a Bill to meet partially the requirements of a fraction of the unorganised workers. It should have a second look at this scheme and modify it to cover the whole of the unorganised sector within a few years. This will protect the poor and the vulnerable from unforeseen shocks, and insulate them from losing purchasing power.

The income transfer schemes will expand the consumption of the poor and vulnerable 77 per cent of the population, who have high expenditure elasticity for durable goods and ‘essential and other’ non-food items. All of them can be produced by micro-producers in the farm and non-farm sectors, supported by the NAFUS programme.

The Indian responses to the economic crisis have to be different from those of other capitalist countries to their financial crisis. That is not just because the origins of India’s crises are different or because its banking and financial sector is less affected by failures of prudential regulation. The Indian programme should be different because the country has a large domestic economy which has remained neglected when economic growth accelerated. It has been seriously affected by lack of credit and a lack of market. Both these problems can be addressed by domestic policies, independent of international developments. A programme to stimulate this overwhelming unorganised sector of the economy will increase domestic demand and within a short period, domestic production, reviving economic growth. To this must be added the effect of a reduction in poverty and vulnerability feeding back on domestic demand and economic performance. As growth is revived and the confidence in the national economy comes back, we shall overcome the crisis.

(Dr. Arjun Sengupta is a Member of Parliament, Rajya Sabha, and Chairman of the National Commission for Enterprises in the Unorganised Sector, Government of India.)

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