Saturday, October 25, 2008

Obituary: Yasser Arafat (1929-2004)

The death of Yasser Arafat on November 11, 2004 was a severe blow to the struggles of Palestinian people and people all over the world against imperialism and the Empire. While the US media describes him as “… a leader who has failed his own people” (The Economist November 13, 2004; quoted by the author), but to the struggling masses of Palestine, he was a hero who brought them their freedom and land. The life and times of Arafat have been both interesting and dangerous, which is difficult to capture in a few words. But a sincere attempt will be made in the following passages to cover his life, which was full of struggles, from personal to political, and all for the cause of a free Palestine. Mohammed Abdel-Raouf Arafat As Qudwa al-Hussaeini was born on 24 August 1929 in Cairo, Egypt. His father was a textile merchant, and his mother was from an old Palestinian family in Jerusalem. She died when Yasir, as he used to be called, was five years old. He was sent to live with his maternal uncle in Jerusalem, the capital of Palestine, then under the British rule, which the Palestinians were opposing. Not much is known about his childhood except one bitter incident when British soldiers broke into his uncle's house after midnight, beating members of the family and smashing furniture.

After four years in Jerusalem, his father brought him back to Cairo, where an older sister took care of him and his siblings. In Cairo, before he attained seventeen Arafat got involved in the Palestinian struggle against the British. At nineteen years of age, during the war between the Jews and the Arab states, Arafat left his studies at the University of Faud I (later Cairo University) to fight against the Jews in the Gaza area. The defeat of the Arabs and the establishment of the state of Israel left him in hopelessness. In the year 1953, as a student he wrote “Don’t Forget Palestine” in blood and presented the petition to General Neguib, Egypt’s military leader. Disenchanted with the Arab world’s inability to do anything about Israel’s 1948 conquests, he and his friends founded Al-Fatah (fatah meaning conquest) in 1958. Al-Fatah was an underground network of secret cells, which in 1959 began to publish a magazine advocating armed struggle against Zionist Israel.

In 1964, the Palestine Liberation Organisation (PLO) was established, under the sponsorship of the Arab League, bringing together a number of groups all working to free Palestine. When the Arab League was defeated by Israel in the 6 days war in 1967, Fatah emerged from the underground as the most powerful and best organised of the groups and took over the PLO in 1969. After Arafat became the chairman, PLO no longer remained as a stooge of the imperialist power backed by the Arab states, wanting to keep the Palestinians quiet, but an independent nationalist organisation, based in Jordan.

Arafat took great pains to develop the PLO into a state within the state of Jordan with its own military forces. But in 1971, Jordan expelled PLO. Arafat sought to build a similar organisation in Lebanon, but was driven out by an Israeli military invasion in 1982. He kept the organization alive, however, by moving its headquarters to Tunisia. From there, he supported the 1987 Intifada, the first widespread uprising of Palestinians against Israeli rule. In the meanwhile, Arafat survived many assassination attempts by the Israeli intelligence agencies and recovered from a serious stroke.

In 1988, there came a change of policy on the part of Arafat. At a special United Nations session held in Geneva, Switzerland, Arafat declared that the PLO renounced terrorism and supported "the right of all parties concerned in the Middle East conflict to live in peace and security, including the state of Palestine, Israel and other neighbours". The prospects for a peace agreement with Israel then brightened. After a setback when the PLO supported Iraq in the Persian Gulf War of 1991, the peace process began leading to the Oslo Accords of 1993. Yasser Arafat shared the Nobel Peace Prize 1994 with Shimon Peres and Yitzhak Rabin "for their efforts to create peace in the Middle East". As per the Oslo Accords, elections took place in early 1996, and Arafat was elected President of the Palestine Authority. But the peace process suffered due to the emergence of right wing leadership in power in Israel. The Israelis postponed their promises, missed deadlines for withdrawal and ceaselessly built ever-expanding settlements on the land that was destined to be Palestine. Furthermore, the rise of religious fundamentalism associated with US intervention in the middle-East after the Gulf war, gave little scope for Arafat to carry forward the peace process. The Camp David talks between Ehud Barak and Arafat in 2000 failed due to these obvious reasons. In 2003, Sharon and the Bush administration chose to end negotiations with Arafat, excluding him from talks because of the Palestinian leader's perceived failure to crack down on militant Islamic groups like Hezbollah and Islamic Jihad. By the year 2004, there had been many crackdowns on Arafat’s regime both from inside by the religious fundamentalists, and also from outside by Israel and the US, particularly. India always stood for the causes of Palestinian people, except during the period when the National Democratic Alliance (NDA) was in power. The staying away from extending the hands of friendship policy was relentlessly pursued by the erstwhile Bhartiya Janta Party (BJP) government in order to constantly appease and get applauds from the two military powers namely the US and Israel. A recent stance by the BJP not to send any of its representatives to join the official Indian delegation to Palestinian Embassy in order to condole the death of Arafat somehow corroborates BJP’s policy perspective towards its West Asian friend as well as the minorities (The Hindu, November 13, 2004). However, the Left which was always sympathetic to the Palestinians’ struggle came out clearly with the statement that “..he (Arafat) has stood up against all odds through more than four decades of struggle against the Zionist Israeli government and its armed forces backed by the US imperialists... (and) … was a source of inspiration for the worldwide struggle against imperialism” [Press Release by CPI(M),, November 11, 2004; quoted by the author]. One must know that when former Prime Minister Indira Gandhi invited PLO leader Yasser Arafat to New Delhi in order to establish formal diplomatic relations, she was called Gamal Nasser’s niece, King Faisal’s daughter and Yasser Arafat’s sister in the Arab world. (taken from the article 'Indira Gandhi—An Outstanding International Leader' by M Saleem Kidwai, The death of Yasser Arafat will leave a vacuum difficult to be filled up. His passion, love and commitment for a free Palestine will be remembered in the days to come.

[Note: The views expressed are personal and are not meant to hurt anybody].

*The above image has been taken from

Friday, October 24, 2008

Performance of the Indian Economy during 2007

1. Introduction
The present article on the performance of Indian economy is based upon various reports, produced by various government agencies, international and national donor agencies and think-tanks, and reports which flashed out in the media, during various points in 2007. In most of the reports, it has been pointed out that Indian economy's performance has remained comparable to China. But it has also been increasingly felt that the slowdown of the US economy can adversely affect other economies, particularly the economies from South-East Asia, and may be—India. India has recently faced problems like rise in food prices and hike in the price of crude oil at the international level. Moreover, Indian economy is constantly struggling with its under-performing agricultural sector. According to the Annual Report of the Reserve Bank of India 2006-07, since the mid-1990s, the growth of the agricultural sector has been low as well as volatile; the agricultural growth decelerated from an annual average of 4.7 per cent per annum during the 1980s to 3.1 per cent during the 1990s and further to 2.2 per cent during the Tenth Plan period. Despite this, policy-makers are hopeful that Indian economy will grow at 9 % during 2007-08. There have been various steps taken up by the Government of India in order to curb inflation and promote growth, but during the 11th Five Year Plan, the main goal has been to achieve 'inclusive' growth. There have been papers and articles, written in various newspapers and journals, regarding the current state of the Indian economy, and the worth of India pursuing the goal of 'equitable' growth. For a comprehensive idea about the state of Indian economy, kindly have a look at the table 1, provided above. The present article provides a cursory look at the performance of the Indian economy during the year 2007.

2. Annual Policy Statement of the Reserve Bank of India
The Reserve Bank of India (RBI) while unveiling the Annual Policy Statement, during April, 2007, for the fiscal year 2007-08 has lowered the growth forecast for 2007-08 to 8.5 per cent and promised to keep the inflation close to 5 per cent. While announcing a feel-good policy, the RBI has taken a number of initiatives toward capital account convertibility and encouraging hedging of price risk on global commodity exchanges. The RBI Governor YV Reddy has put in place measures to develop the corporate bond market, futures contract, establishment of credit information companies and a number of steps to help distressed farmers and to promote micro-finance. The RBI Annual Policy Statement has proposed to expand the range of hedging tools available to the market participant, and also facilitate dynamic hedging by the residents. The RBI wants to include corporate bonds in the repo market after stabilising trading platforms for this purpose and a robust settlement systems. The RBI has kept the bank rate unchanged at 6 per cent, short-term repo rate at 7.75 per cent, and cash reserve ratio at 6.5 per cent. The RBI has said that the role of the monetary policy will be to reinforce emphasis on price stability and well-anchored inflation expectations, while ensuring a monetary and interest rate environment that supports export and investment demand for boosting growth. It has also re-emphasised credit quality and orderly conditions in financial markets for securing macroeconomic and financial stability, while ensuring greater credit penetration and financial inclusion. India's CEOs (chief executive office) and CMDs (chief managing directors), according to a survey study by Associated Chambers of Commerce and Industry of India (ASSOCHAM), especially from the real estates, automobiles, housing finance, banking and financial services, were worried about the yet to be released Annual Monetary Policy of the Reserve Bank of India (RBI).

3. Health of the Indian Economy
According to the Reserve Bank of India's document 'Macroeconomic and Monetary Developments: Mid-Term Review 2007-08', which was released on 30 October, 2007, Indian economy continued to maintain strong growth momentum during the first quarter of 2007-08 due to the sustained performances of the manufacturing and services sectors. However, India saw consumer price inflation and deceleration of the infrastructure sector. Consumer price inflation (CPI) remained strong during the second quarter of 2007-08 and continued to be above the wholesale price index (WPI) inflation, thereby reflecting the impact of higher food prices. The wholesale price index (WPI) came down from 4.4% by June 2007 to 3.1% by October 13, 2007. The report says that the real gross domestic product (GDP) growth stood at 9.3% during the first quarter of 2007-08 as compared with 9.6% at the same period in 2006-07. During April-August 2007, the index of industrial production (IIP) rose by 9.8% as compared with 11% recorded during the corresponding period of the previous year. Manufacturing sector saw a growth rate of 10.3% in April-August 2007. The services sector faced a growth rate of 10.6% in April-June 2007. The Mid-term Review consists of two parts: Part I Mid-term Review of the Annual Statement on Monetary Policy for the year 2007-08; and Part II Mid-term Review of the Annual Statement on Developmental and Regulatory Policies for the Year 2007-08. The Report has retained the GDP growth forecast at 8.5 percent during 2007-08, assuming no further rise in international crude prices and barring domestic and external shocks. The real GDP growth during the first quarter of 2007-08 is placed by the Report at 9.3 percent as against 9.6 percent in the corresponding quarter a year ago. According to the Report, merchandise exports rose by 18.2 percent in US dollar terms during April-August 2007 as compared with 27.1 percent in the corresponding period of the previous year, while import growth was higher at 31.0 percent as compared with 20.6 percent in the previous year. India's foreign exchange reserves increased by US$ 62.0 billion during 2007-08 and stood at US$ 261.1 billion on October 19, 2007. The rupee appreciated by 10.3 percent against the US dollar, by 2.4 percent against the euro, by 5.4 percent against the pound sterling and 7.1 percent against the Japanese yen during the current financial year upto October 26, 2007. The appreciation of rupee vis-a-vis the dollar has also adversely affected the business process outsourcing (BPO) industry in India, according to some economists. The Ministry of Finance, Government of India during September, 2007, asked all Central Ministries and Departments to effect a 5 % cut in their non-Plan expenditure sanctioned in Budget 2007. The revenue collections have shown remarkable buoyancy during the initial months of the financial year, with direct taxes growing by over 40 %. The Government of India had pegged non-Plan expenditure during 2007-08, 6.5% higher at INR 4,35,421 crore. All Central Ministries and Departments have been asked to curtail the allocation by 5 % as the Government of India has to find resources for priority schemes. The mandated Fiscal Responsibility & Budget Management (FRBM) Act targets also need to be met, under which revenue deficit needs to be wiped out by the year 2008-09. The fiscal deficit has to be brought to 3.3 % of gross domestic product (GDP), and it has to be brought down to below 3% in 2008. The instructions emphasize that not more than one-third of the Budget estimates be spent in the last quarter of the financial year and the expenditure in March 2008 should not exceed 15 % of the estimates. Payment of interest, debts, salaries, pension and defence capital as also Finance Commission grants have been exempted from the 5% cut in the non-Plan expenditure, which is at the same level as slapped in 2006-07. These instructions mandate the government offices to reduce expenses to the "minimum essential" in areas like building maintenance, office equipment, transport, communication, furniture, furnishings, stationery and hospitality, regulate advertisements and publicity campaigns.

3.1 The Case for Manufacturing Sector Growth
The Confederation of Indian Industry (CII) released the July 2007 issue of 'State of the Economy' analysis for the last quarter-Q4 (Jan-March) results on 16 July, 2007. According to the CII 'State of the Economy', the impressive performance of the corporate sector is consistent, and has been led by the services sector. The July 2007 CII 'State of the Economy' has surveyed and analyzed results of some 3,283 firms comprising 1,971 firms from manufacturing, and 1,312 firms from services. According to the CII Survey, the impressive performance of the corporate sector continued in the last quarter of the financial year 2006-07, showing consistency with the GDP growth rate of 9.1 per cent achieved in that quarter (Q4). On almost all the parameters, the corporate sector has been doing better during Q4 in comparison to the same quarter in the previous financial year. The analysis shows that the net sales has recorded a growth rate of 19.35 per cent in the fourth quarter (Q4) as compared to the growth rate of 17.86 per cent achieved during the same quarter in the financial year 2005-06. The profit after tax (PAT) has registered a significant increase in the growth from 13.68 per cent in Q4 of 2005-06 to 19.12 percent in Q4 of 2006-07, owing to a lower rate of growth in input-cost and operating expenditures. The analysis finds that it is mainly the performance of the services sector that has resulted in the overall increase in the profits growth of the corporate sector. The services sector has recorded a significant decline in the growth of operating expenditure from 16.33 per cent to 10.41 per cent while showing an increase in the growth rate in net sales from 16.48 per cent to 24.74 per cent. 'The State of the Economy' Report has highlighted a distressing trend in the area of Agriculture - decrease in oilseeds production. In fact, oilseeds production, has registered a negative growth rate of 14.79 per cent. This is likely to lead to increase in the import of edible oil due to its reduced domestic production and rising demand. The demand is rising owing to the rising income levels and growing popularity of fast foods among the rich and upper middle class. It is interesting to note that the recently released index of industrial production shows declining growth rate for manufacturing to 11.9 per cent in May 2007 from 15.1 per cent in April 2007, which is in line with the warning given in this issue of the 'State of the Economy' about the lagged effect of the increase in interest rate. The dip stick survey done by CII on behalf of National Manufacturing Competitive Council (NMCC) to assess the impact of the rise in interest rates has reported negative impact on business due to the increase in the cost of financing. The Confederation of Indian Industry (CII) survey for April 2007- June 2007 over April 2006 - June 2006, which tracks the performance of the various sectors of the industry was released in September, 2007. The survey study showed that most sectors recorded a growth of over 10%. Out of a total of 101 sectors reporting production, 23 sectors recorded an excellent growth rate of more than 20 percent, 27 sectors recorded a high growth rate of 10-20 percent, 36 sectors registered moderate growth rate of 0-10 percent, while 14 sectors reported negative growth. The percentage of sectors in each category remained almost constant over the period April 2006 to March 2007, which reaffirmed that Indian manufacturing is on track. Almost 50% of the manufacturing sectors have shown above moderate growth despite various pressures in terms of the appreciating rupee and hardening of interest rates. According to the CII-ASCON survey, Cold Rolled Steel Strips, Pig Iron, Textile Machinery, Industrial Gases, Electric Fans, Microwave Ovens, to name few, are in the excellent growth category. One of the new entrants to the excellent growth category is Electric Two Wheelers in the auto sector showing growth of over 100%. Energy meters, Abrasives, Industrial valves, Machine Tools, Water equipment, Air conditioners, and Vanaspati were all in the high growth category. According to the CII-ASCON survey, out of the 27 sectors reporting sales, 6 sectors registered excellent growth, 11 sectors registered high growth, 4 sectors reported moderate growth, and 4 sector recorded negative growth.

3.2 A Room for Business Confidence
Business confidence in India slipped in the first quarter of the financial year by 8.8 per cent from the last quarter of the previous fiscal, according to the quarterly Business Expectations Survey for July 2007, which was conducted by the New Delhi-based economic think tank National Council of Applied Economic Research (NCAER). The survey study by the NCAER saw the Business Confidence Index falling across sectors for the second consecutive quarter. In April, 2007 the index had dropped by 3.8 per cent over its January, 2007 level. The NCAER report said the fall was more due to seasonal factors than the impact of the tight monetary policy. The fall, at 15.6 per cent, was the sharpest in the capital goods sector. Services saw a decline of 18.7 points, the intermediate goods sector 10.3 points, the consumer durable goods sector 6 points and the non-durables sector 4 points. Big and small firms showed less buoyancy than mid-sized firms. However, firms with more than INR 100 crore (INR 1 billion) turnover showed improved performance over the previous round. According to the newly released report titled 'Asian Development Outlook 2007 Update (ADO Update)' by the Asian Development Bank, which is based in Manila, Philippines, developing economies from Asia will register solid economic growth in 2007, driven by fast growth in the People's Republic of China (PRC) and India. The PRC and India, which together account for 55.3% of the total gross domestic product (GDP) in developing Asia, recorded their fastest growth in 13 years during the first half of 2007 and 18 years in fiscal year 2006, respectively.

4. EXIM Policy of the Government of India
The Annual Foreign Trade Policy for 2007-08 is considered to have pleased exporters in India because it promises refund of service tax on export goods. However the move can cost the exchequer an estimated INR 550 crore annually. The Third Annual Review of the Foreign Trade Policy 2004-09 saw the introduction of two export promotion schemes incentivising hi-tech exports as well as agro processing. It is expected that the refund of service tax on export goods, will encourage exporters meet the ambitious export target of US$ 160 billion during the fiscal 2007-08 (compared to US$ 125 billion in 2006-07). The policy prescription is vital since the US economy is seeing slowdown, the EU is facing static demand and the rupee is hardening vis-a-vis the dollar. The new foreign trade policy has tried to give impetus to exports of high-tech and agri-products by introducing new incentives and by expanding existing ones like the Vishesh Krishi and Gram Udyog Yojana. Other measures which were included are: extension of the export promotion capital goods (EPCG) scheme to spares and parts, flexibility in meeting export obligations under the EPCG scheme, expansion of the focus product and focus market schemes, extension of the DEPB scheme for a year, and a change in the categorisation of status holders. A new scheme is being worked out to replace DEPB, presently. India's exports have more than doubled in the last three years, and India's share in world trade has increased from 0.7% to 1.0% during the period. The inclusion of new countries (mostly from the CIS region) in the focus market scheme is expected to help India reduce its dependence on traditional markets like the United States (US) and the European Union (EU). In addition, new items like mica and its variety, barley, oats, soyabean, cigar/cheroots, bovine fat and copra have been included under the Focus Product Scheme, which gives a duty-free credit equivalent to 1.25 per cent of the freight-on-board (FOB) value of exports.

5. Indian Economy and the Rest of the World
In a study titled 'Benchmarking Developing Asia's manufacturing sector', which has been sponsored by the Asian Development Bank, Jesus Felipe and Gemma Estrada have tried to look at the growth of the manufacturing sector in various Asian countries. The study is quantitative in nature to arrive at certain policy related conclusions. The paper by Jesus Felipe and Gemma Estrada show that during the last three decades, most economies in developing Asia have undergone massive structural change, particularly in terms of changes in both output and employment sectoral shares. The rise in developing Asia's share in world manufacturing value-added, during the last three decades has been significant. The joint share of the People's Republic of China (PRC), the newly industrialized economies (NIEs), and ASEAN-422 has more than doubled since the 1980s, representing in 2000–2004 close to 14% of the world total. This rise has been due to a much faster growth of the manufactured value-added in this region—8–10% per annum since the 1970s—compared to the rest of the world. The share of the PRC (the highest among all developing economies) is just over 5% of the world's manufacturing value-added, significantly less than the shares of Japan or the United States (which is more than 20% each), while the share of India has barely risen. Growth in manufacturing value-added has been substantially higher than that of gross domestic product (GDP) in many economies in developing Asia, including India; the NIEs (except Hong Kong, China, which registered a contraction); ASEAN-4 (except the Philippines, which also registered a fall); as well as the economies under Other Southeast Asia-3 and Other South Asia. Several of the ex-Soviet republics (including Armenia, Azerbaijan, Kyrgyz Republic, Tajikistan) registered contraction in manufacturing value-added after the breakup of the Soviet Union. India's manufacturing output share has remained stable at about 15–16% since the 1970s, while the share of manufacturing employment has been at around 11% during the periods under consideration. In terms of labor productivity, there is still a large gap between most developing Asian economies and the OECD average. The product mix of new employment has been toward relatively lowproductivity industries. The increase in employment has taken place in low-productivity techniques. During the 1970s, food and beverages; textiles; and apparel, leather, and footwear accounted for about 39% of total manufacturing, while electrical and nonelectrical machinery and transport equipment accounted for about 17%. By the period 2000–2003, the former three accounted for a substantially lower 22%, while the latter three accounted for about 34%. This shows a very clear change in the structure of manufacturing production. The most salient conclusions that can be drawn from this paper, are as follows:

(a) The share of developing Asia in world manufacturing output has risen significantly since the 1970s. However, the rise is concentrated in a number of economies, mostly the NIEs, the People's Republic of China (PRC), Indonesia, Malaysia, and Thailand.

(b) The NIEs have started experiencing a de-industrialization process, particularly in the case of Hong Kong, China (in terms of both output and employment shares). This is the result of maturation of this economy and the transfer of production facilities to the PRC.

(c) There has been an important upgrading as the share of more technologically advanced manufactures has increased.
(d) The productivity levels of most developing Asian countries is below than that in the OECD countries, with the exception of NIEs.

According to an Annual Report by the United Nations Conference on Trade and Development (UNCTAD), which has been released recently, the economic outlook for developing countries is positive for the first time since the early 1970s, driven in large part by the growth in China and India. Developing countries–including many of the world's poorest nations–will see ongoing benefits from strong demand for primary commodities, and this positive trend in terms of trade since 2003 has allowed such countries globally to bolster investment in their economies. The Report noted that per capita gross domestic product has increased nearly 30 per cent between 2003 and 2007, compared to 10 per cent for the Group of Seven (G-7) highly industrialized countries. Overall, the world economy will mark growth for a fifth consecutive year, with a 3.4 per cent expansion this year. UNCTAD has warned that a major recession in the United States could lead to diminished exports for China and India. The Report also cautioned that North-South bilateral and regional free trade or preferential trade agreements could prevent poorer nations from developing their industrial sectors and reduce their control over foreign direct investment. UNCTAD has pointed to the positive feature of protection to infant and nascent industries by the first world nations, which hone their abilities to meet the challenges of international competition. The Report has called for intensified regional cooperation in exchange rate arrangements as a means to reduce the vulnerability of developing countries. The absence of appropriate global exchange rate arrangements could lead to exchange rate instability, especially in developing nations by impeding their overall competitiveness, according to the report. Regional collaboration could also benefit developing countries in terms of long-term development as it can help countries build up their economic capabilities to allow them to compete globally. Such cooperation should include joint policy action–focusing on macroeconomic, financial, infrastructure and industrial policies–to boost growth and structural change potential. Economic growth in emerging East Asia was stronger during the first half of the 2007, buoyed by strong consumption growth and external demand, and the rapid 11.5% growth in gross domestic product faced by the People's Republic of China (PRC). The combined gross domestic product (GDP) in the nine largest economies of the ASEAN (i.e. People's Republic of China, Hong Kong China, Indonesia, Republic of Korea, Malaysia, Philippines, Singapore, Taipei China, and Thailand) grew by more than 8.1% in the first quarter of 2007 (Q1), marginally lower than 8.2% in 2006. The growth in GDP was supported by strong consumption growth and external demand. In the first half of March 2007, GDP growth was 5.6% in four middle-income countries of the Association of Southeast Asian Nations (ASEAN-4), above 2006 levels. However, the four newly industrialized economies (NIEs)--Hong Kong, China; Republic of Korea (Korea); Singapore; and Taipei, China—moderated in Q1, with GDP growth slowing to 4.5%, from 5.4% in the year 2006. In the PRC, strong investment and solid consumption continued to support high growth rates. Domestic demand in the ASEAN-4 economies remained strong due to high level of private consumption, as public sector salary hikes and higher overseas remittances propped up household income. According to the Asia Economic Monitor, July, 2007, continued strong growth in the People's Republic of China and only slightly moderating expansions in the newly industrialized economies (NIEs), and most of ASEAN would lead emerging East Asia to robust 8.1% GDP growth in 2007 and 7.9% in 2008. However, surging capital inflows—which reached a record US$ 269 billion in 2006—brought with them increasing pressures for currency appreciation and fast-rising prices of assets. Inflation continued to fall in most ASEAN economies, but started to rise in the PRC, Korea and Singapore. Throughout the region, current account surpluses were sustained during the first half of 2007, while capital inflows remained strong. Financial markets gained across the region in the first half of the 2007 despite some volatility, with several policy makers increasingly anxious about the risk of a possible equity market bubble. Monetary policy responses varied across emerging East Asia—with the PRC; Korea; and Taipei, China tightening policy, Malaysia keeping policy rates unchanged, while policy rates in Indonesia, Philippines, and Thailand were lowered. Against a background of favourable economic conditions, financial sectors in the region have generally remained resilent, although signs of stress related to sharply higher asset prices and higher volatility in several markets are emerging. The potential risks to the economic outlook include greater than expected inflation; increased financial market volatility; a sharper US economic slowdown; a disorderly adjustment of global payments imbalances; and noneconomic events, such as geopolitical disruptions, or further outbreaks of diseases like avian flu.
According to the July, 2007 Update of the International Monetary Fund's (IMF) World Economic Outlook (WEO), the international economy has continued to expand at a brisk pace during the first half of 2007. As per the IMF estimates, emerging market countries have led the way, with the People Republic of China (PRC) growing by 11.5 percent in the first half of 2007, and India and Russia also growing very strongly. Although growth in the United States slowed in the first quarter, recent indicators show that the U.S. economy has gained strength during the second quarter. In the euro area and Japan, growth has remained above the trend with some positive signs that domestic demand is taking a more central role in the expansions. There are projections that international economic growth would be 5.2 percent in the year 2007. Among the advanced economies, growth in the United States is now expected at 2 percent in 2007 (0.2 percentage points lower than projected in the April 2007 World Economic Outlook). The risk of an oil price spike remains a concern. With sustained strong growth, supply constraints are tightening and inflation risks have edged up since the April 2007 WEO, while increasing the likelihood that central banks will need to tighten monetary policy further. Credit risks have risen, where the weakening of credit discipline identified in the IMF's April 2007 Global Financial Stability despite strong global growth, although some emerging market and developing countries have faced rising price pressures especially from energy and food prices. A slowdown in the US economy could represent a significant downside risk to the global economy. In the past, East Asia became vulnerable to slowing growth in the US economy given its relatively high export reliance on the US market. This fact is important to know since the United States (US) is facing slowdown in 2007. During the last slump in 2001–2002, the US imports fell by a cumulative 4.2% and this fall was translated into falling exports, cuts in industrial production, and declining growth rates in East Asia. Traditionally, East Asia has been viewed as a region that relies heavily on exports for growth. Thus, the East Asian economy has been considered vulnerable to external demand shocks. East Asia saw an average growth rate of
7.6% per year over the past 5 years, contributing nearly one-fourth of global growth in the same period. Yet despite its increasing share in world output, East Asia's economic size remains small relative to the US's 30.6% of world GDP, Japan's 14.0%, and European Union's (henceforth, G3 economies) 24.9%. East Asia's weight in global demand is also less than its weight in income, as it has continued to run large current account surpluses. According to the IMF's World Economic Outlook (WEO) released in October 2007, the forecast for global real GDP growth on a purchasing power parity basis has been retained at 5.2 percent for 2007 as in the July 2007 update, down from 5.4 percent in 2006, but forcast for 2008 has been revised down to 4.8 percent in October from 5.2 percent in the July 2007 update. In the US, real GDP growth had risen to 3.8 percent in the second quarter of 2007 as compared with 2.4 percent in 2006. The IMF's October 2007 WEO expects the US economy to grow at 1.9 percent in 2007 and 2008 as against 2.9 percent in 2006. According to the Global Financial Stability Report (April 2007), favourable global economic prospects, particularly strong momentum in the euro area and in emerging markets led by China and India, continued to serve as a strong foundation for global financial stability. However, underlying financial risks and conditions have shifted since the September 2006 Global Financial Stability Report (GFSR). The sub-prime segment of the US housing market is showing signs of credit quality deterioration, as per the Report. The economic impact of the housing market slowdown has been limited and some market indicators have begun to stabilize, suggesting that the financial effects may also be contained. There was a sudden fall in credit market confidence in late July 2007 brought on by the spread of risks from exposure to the US sub-prime mortgages with credit crunch spreading into corporate bond markets and equity markets. The US Federal Reserve has been the most aggressive in terms of easing monetary policy, with a higher than expected rate cut. The Report said that the shift to private sector debt flows especially bank-based flows into emerging Europe and portfolio flows into other regions, including sub-Saharan Africa, shows that foreign investors are taking more risk and an abrupt reversal cannot be ruled out. Institutions may well be acting in accordance with their own incentives but collectively their behaviour may cause a build up of investment positions in certain markets, possibly resulting in a disorderly correction when conditions change, the Report added. Flows and stocks of cross border claims have increased both in absolute size and relative to the volume of domestic economic activity, according to the Report. The diversity of assets, source countries and investors types now involved in cross-border asset accumulation suggested more stable flows. For some countries, the sharp rise in capital inflows has contributed to rapid credit growth and asset price inflation, at times complicating the conduct of policies. Report has resulted in rising difficulties in the U.S. subprime market and leveraged loan market. Financial market risks have also increased as credit quality has deteriorated in some sectors, and market volatility too has risen.

6. Conclusion
The Prime Minister's Economic Advisory Council, chaired by C. Rangarajan, during July, 2007 expected that the Indian economy will grow at 9% in 2007-08, with inflation contained at 4%, despite slowing credit expansion and pressures of a climbing rupee. The Indian economy is expected to be on an unprecedented strong trajectory of economic growth. With a 36.3% investment rate driving growth and net foreign capital flows expected to remain strong at US$ 58 billion, there is need for selective controls on the flow of debt funds into the country, namely external commercial borrowings (ECBs). Controls on FDI (foreign direct investment) or equity would be most unwise, according to C Rangarajan. The Economic Advisory Council estimates that net FDI will almost double from US$ 8.4 billion last fiscal to US$ 15 billion, and portfolio flows will grow by 76% from US$ 7.1 billion to US$ 12.5 billion. Although much has been promised as per the predictions made by the Government of India and others, yet the forthcoming Economic Survey 2007-08 may solve all our apprehensions regarding the real economic growth faced by India. The declaration of the National Policy for Farmers, 2007 and the successful implementation of the National Rural Employment Guaranty Act, 2005, may be fruitful for agricultural development, poverty eradication, rural development, and for inclusive growth.

Thursday, October 23, 2008

Governance Knowledge Centre on Capacity Building for Poverty Reduction

The Centre for the Study of Law and Governance, now a 'Governance Knowledge Centre on Capacity Building for Poverty Reduction' has been entrusted with the task of evaluation of capacity building programmes for the poor. We share our nation's concern and our government's mission driven approach for improving governance. This endeavour will enable the benefits of higher economic growth percolate down to the poorest in the country, thereby subsequently transform India into an equitable society.

First: Before our researchers proceed to the field it is important that the indicators of mapping field research is defined. Where poverty reduction programmes are implemented and classified in the government and donor agency lists as 'Best Practices', it is imperative that we understand the source of data and the meaning of some of the words used intermittently in evaluation literature. Some of these words are: Best, Successful, Participation, Efficiency, Replication, Nature of legitimacy, Sustainability, Cost-effective, Democratic, Empowerment, Independent and Self-governed. Second: An important aspect of research is an understanding of the research methodology for evaluation. This would help provide an insight into the process, mechanisms, and strategies used to explore the seen and the unseen aspects of implementation. While on one hand it would be a study of the tangibles which would account for the assets and liabilities in a programme in terms of entitlements for the poor, on the other hand it would discerningly be an ethnographic study dealing with the history, social structures, deliberative bodies, indigenous systems and local norms which create a system of participation and feed its spread and replication. The source of distress, nature of poverty, common handicaps due to a poverty situation, distance and availability of medical, occupational and educational services, social structure and its role in sharing the burden of implementation, environmental loss, respect for law, nature of crimes in the region, degree of government and non-government participation in what people aspire to achieve. Third: Regional variation which affect the delivery of services, attitudinal characteristics that seek or prevent a particular type of service delivery, climatic conditions which create detours in implementation and individual spaces for the poor in technology, which could be appropriate or modern hi-tech ICT or training needs of a particular area need to be also considered.

Research Methodology to Evaluate the Capacity Building Programmes for Poverty Reduction, Centre for the Study of Law and Governance, Jawaharlal Nehru University, First Floor Conference Room on 26th October 2007 at 3.00 pm-5.00 pm.

Programme Schedule

Welcome Address: Prof. Amita Singh, Project Director,GKC
Chair: Mr. Sreerupa Mitra Choudhury, National Adviser and National Programme Implementation, Head—Access to Justice, National Legal Services Authority (NALSA)

International Experience Sharing: Lt. Gen. N Kayumba, Ambassador of Rwanda
Research Methodology: Prof. Amita Singh and Dr. Jennifer Jalal, Centre for the Study of Law and Governance, JNU

Discussion with Participants
Summing up and Road Ahead: Dr. Mondira Dutta, Field Co-ordinator, GKC

The welcome address was delivered by Prof. Amita Singh. She said that the aspect of sustainability in poverty reduction has to be looked at. The amount of money spent on poverty reduction programmes is enormous. So, there is need for evaluation of such programmes. She informed about the latest Global Hunger Index, which has been brought out by the IFPRI, which shows that most of the countries are coming out of poverty. By looking at the poverty situation in the Sub Saharan Africa (SSA), one can learn a lot. She said that looking at the research methodology part is imperative. Lt. Gen. N Kayumba gave his presentation on Poverty Reduction Strategy in Rwanda and Capacity Building. He informed that Rwanda has a history of poverty and poor governance. Since Rwanda is situation in the highlands (altitude 4829 ft.), so it experiences a lot of rain. With the help of a map, he showed that Rwanda is surrounded by Congo, Uganda and Burundi. Rwanda is much more developed compared to Congo, he informed. The main causes of poverty in Rwanda are: 1. Lack of education/ displacement (60% of the population in Rwanda are illiterate); 2. Ignorance; 3. Lack of land; 4. Lack of employment; 5. Poor soil health; 6. Inadequate infrastructure; 7. Lack of access to water; 8. Sickness/ disability; 9. Population pressure; 10. Poor and inadequate financing facilities; 11. Natural calamities (droughts/ soil erosion, floods); 12. Poor governance and management. While talking on poverty distribution, Lt. Gen. N Kayumba spoke on the following categories: 1. Destitute; 2. Poorest; 3. Poor; 4. Serving; 5. Vulnerable; 6. Others. Lt. Gen. N Kayumba said that 'governance' determines the level and extent of poverty. His discussion touched the following points: 1. Proper policy formulation and circulation; 2. Increasing transparency of policy making; 3. Participation of civil society in design, implementation and monitoring; 4. Decentralized integrated rural development programmes; 5. Relax constraints which prevent policies from being carried out; 6. Carry out public administration reforms to promote accountability; 7. Improve incentives to execute policy; 8. Strengthening public financial management; 9. Transparent procurement methods and processes; 10. Performance-based budgeting; 11. Identification and resolving implementation problems; 12. Enhancing political accountability; 13. Establish or improve monitoring systems; 14. Carry out regular and targeted evaluations. While speaking on social interventions, Lt. Gen. N Kayumba touched upon the following points:

1. Increase coverage and quality of education; 2. Strengthening technical and vocational education; 3. Streamlining food preservation and marketing; 4. Reduce transportation costs; 5. Ensure security and affordability of energy supplies; 6. Settlement patterns and housing improvement; 7. Improve hygiene and access and affordability to health care services; 8. Sustainable and integrated water resources management; 9. Provide social assistance to the needy; 10. Maintain peace and security (without peace, poverty cannot be reduced); 11. Issue of gender, AIDS and social inclusion. Lt. Gen. N Kayumba informed that in Rwanda the groom pays dowry to the bride, which is quite the opposite to the Indian case. While speaking on environmental stress, he touched the following points: 1. Rehabilitation of degraded areas; 2. Rational land use planning and management; 3. Soil and water conservation; 4. Reforestation; 5. Preservation of biological diversity; 6. Adaptation and mitigation against impacts of climate change; 7. Early warning systems and co-ordination. On poverty reduction, he made the following points: 1. Human capital development; 2. Resource mobilization; 3. Improvement of policy implementation; 4. Co-ordinated interventions; 5. Sustainable growth and job creation; 6. Investment in infrastructure; 7. Access to credit/ long-term finance; 8. Governance with low incidence of corruption and accountability.

Lt. Gen. N Kayumba touched the following points while concluding: 1. Appreciation of the gravity of the problem; 2. Proper methodology in research and approach; 3. People's participation in resolving the problem; 4. Participation of non-state stakeholders in mobilization and implementation process; 5. Resource mobilization and proper accountability; 6. Peace and security; 7. Political will. Amita Singh and Jennifer Jalal presented the research methodologies of the project. They informed that the project duration is of 2 years. The selected projects are: 1. Presently 81 best practices have been given to the researching team from the Ministry; 2. China, Ghana and Brazil have done well in poverty reductions; 3. Focus on international best practices on a comparative scale would be considered as the project advances.

The points discussed under the Methodology-I are as follows: 1. Two main components of evaluation—Policy and its micro-components such as ICT entrepreneurship and asset distributional framework including legal framework would be studied in the light of the ethnographic action research where communities evolve and consolidate their prospects of good governance; 2. Study of information to look for sources of historical date for cross cultural survey and comparative sociology as a tool for governance reform; 3. Functionalism studied as a set of dynamic processes in which one has to examine the contribution which social items make to the social and cultural life of human collectivities (order, stability and sustainability through arrangements within institutions.

Many points were discussed under the Methodology-II. Beneficial consequences of people's actions that help to maintain the equilibrium of the social system was stressed upon, along with the following points: 1. Distinguishing between manifest (intended consequences of decision-making) and latent (unintended consequences) functions; 2. Elaborating functions/ dysfunctions in the light of variables of age, class, caste, geography, political influence, cultural acceptability, respect for law; 3. Potential for local entrepreneurship and availability of local untapped resources through social networks available.

The projects are divide into three categories:
a. Exclusively rural-BPL (below poverty line) projects ratings to be done under fifty cents segregation.
b. Rural poor between 50 cents and US $ 1 (PPP).
c. Urban poverty right under US $ 1 (PPP) category.
d. Middle-class category in urban area.

8 main indicators (or aspects of poverty reduction) selected to bridge the assessment subjectively
1. Transparency
2. Participation
3. Accountability
4. Ease of service delivery
5. Social well being
6. Replicability
7. Sustainability
8. Partnerships

Each indicator (or aspects of poverty reduction) is further divide into sub-indicators:
1. Participation of local people
2. Generation of entrepreneurship thru self-help groups
3. Speed in service delivery

4. Reduction of corruption, graft and rent
5. Equity and fair distribution of public resources
6. Women's participation and capacity building
7. Harmonizing caste/ communal relations
8. Support from local administration/ District Collector's office
9. Single Window Access to services
10. Affordability
11. Behavioral responsiveness of local administrators to deliver to people.
12. Infrastructure support (space, electricity, Internet, connectivity)
13. Reduction of paper work.
14. Decentralized decision-making
15. Transparency in public dealings.
16. Need for increased vertical and horizontal coordination in delivering services.
17. Political influence on policy decisions/ services
18. Sustainability factor
19. Replicability aspect
20. Potential for upscaling
21. Accountability mechanisms
22. Partnership arrangement, if any
23. Other social programmes/messages conveyed through the ICT tools

The project report would rely on primary and secondary data:
1. Observation for social phenomenon
2. Inter-subjectivity and inter-objectivity of data yields to ensure validity of the relationship between the manifest and the latent and also to help quantification problem.
3. Unstructured interviews wit local beneficiaries, service providers and fund managers, inlcuding few set of questionnaires (both close and open ended)
4. Attitude scales, projective techniques

The questionnaire would consist of:
1. Range of services provided—government or non-government
2. Availability and assistance in seeking services

At the end of the programme, a lot of suggestions were put forwarded:
1. What are the ways and how to evaluate the best practices?
2. What is the exact criteria to judge that something is a 'best practice'?
3. The research project should look at: public accountability, public evaluation system, public distribution system, vested interest of donor agencies, caste factor, social justice, food security, infrastructure development etc.

Annotated Bibliography (from the journal: Agricultural Situation in India)

(1) Determination of Inter-State Disparities in Rice Productivity
--ND Shukla, SK Sharma and Krishna Murari (AS9-13, Agricultural Situation in India)

This article looks at the various determining factors behind rice productivity: abiotic factors (flood and drought; temperature; changes in soil properties, nutrient loss and difficulties in crop management practices), biotic factors (pests; weed), socio-economic and institutional constraints (inequalities in fertiliser consumption, use of local cultivators, improper distribution of credit and low capital investment, insufficient marketing infrastructure, costs and return of paddy, and lack of mechanisation). The study concludes that aberrant weather conditions and socio-economic factors apparently deteriorate the rice productivity, creating inter-State disparities. Socio-economic factors well as flood and drought bring down rice productivity in various states particularly in rainfed areas. Higher levels of crop loans forwarded to farmers of Punjab, Tamil Nadu and Kerala leads to better yields in these states compared to the states of eastern region. Lack of mechanisation, low purchasing power, lack of technical knowledge, low efficiency of farm labours and conservative thinking also brings down rice productivity.

(2) Participatory Planning for Livestock Development
--K Ponnusamy, K Ambasankar and N Thenmathi (AS9-14, Agricultural Situation in India)

The present article brings forth a study that took place in Kattur village 50 km north of Chennai, which was based on participatory rural appraisal (PRA) technique to assess rural resources, problems and requirements. A matrix ranking of livestock farming carried out revealed that the farmers preferred local milch cattle and poultry birds due to easy maintenance, less labour requirement, resistance to disease and low initial investment. The low milk yield has been due socio economic factors such as low investment capacity; labour scarcity; poor linkage with research and extension system; poor management practice; lack of timely availability of veterinary facilities and lack of awareness in value addition of crop residues, and biophysical factors such as usage of local breeds; imbalanced nutrition; diseases and endo and ecto parasites. By applying the various PRA tools, the livestock farmers were able to prepare a blue print for economic upliftment through technology assessment and refinement.

(3) Sustainability Perspective of Small and Medium Farmers in High Altitude and Tribal Area Zone of Andhra Pradesh
--KN Ravi Kumar, PSS Murty and D Chinnam Naidu (AS9-15, Agricultural Situation in India)

The focus of the paper is to study the distribution of land holdings according to number and size in High Altitude and Tribal (HAT) zone. It has been found from the study that in all the 40 mandals of HAT zone, there is predominance of small and medium farms. Paddy is the major crop cultivated both by the small and medium farmers, which is followed by ragi and maize. The net returns derived from all the selected crops is higher in medium farms when compared to small farms. The study revealed that both in small and medium farms, the benefit cost ratios were higher for maize and niger crops. Agriculture with apiculture, agriculture with sheep rearing, and agriculture with sericulture are the important farming systems identified in the study area. In terms of number of mandays generated by the selected farming systems, the highest the percentage of man days is generated by sheep enterprise in sheep rearing farming system.

(4) Women Empowerment for Rural Development in India
--B Hemalatha, M Jayachandra Reddy, YVR Reddy and G Sastry (AS9-16, Agricultural Situation in India)

The major finding of the study is that rural development through women activities/ enterprises is faster and it stabilises the society/ family system. Income generating activities help in promoting status of women in India. Government should develop suitable plans/ schemes in self-generating income activities/ enterprises for women in rural areas so as to avoid migration to towns/ cities.

(5) Crop Diversification in India: Analysis by State and Farm Size Group
--Praduman Kumar and Surabhi Mittal (AS9-12, Agricultural Situation in India)

The study shows that changes in cropping pattern is taking place as a result of substitution from low productivity crops to high productivity crops. Some of these crops are paddy, wheat, maize, groundnut, rapeseed, mustard and sugarcane. Coarse cereals and pulses have shown a steady decline in this area. Regional pattern in crop specialisation is increasing. Small farms practise multi-diversified farming and grow a number of crops even on fragmented plots, involving allocation of area under seasonal fruits, vegetables and dairy etc. for maximising their household income and employment in almost all regions of the country.

(6) Crop Diversification in Indian Agriculture
--SS Acharya (AS 9-9, Agricultural Situation in India)

The present study shows that the process of crop diversification in Indian agriculture commenced after the objective of agricultural development strategy was changed from maximising the production of foodgrains to evolving a production pattern in line with the demand pattern in early eighties. During the last 20 years, the relative area under foodgrains as a group declined and that under non-foodgrains increased. However, there was no absolute decline in area under major staple cereals like rice, wheat and maize. The trend in area under non-foodgrains during the nineties reveals negative impact of imports of edible oils and pulses on the area under these crops after the launch of liberalised import policy. Overall the degree of crop diversification is relatively low in West Bengal and Assam and relatively high in Karnataka, Gujarat, Madhya Pradesh and Rajasthan.

(7) Crop Diversification for Sustainable Agriculture
--M Velayutham and SP Palaniappam (AS 9-10, Agricultural Situation in India)

The present study finds that although the net sown area has remained without much fluctuation over the last 3 decades, it is disturbing to note that the area under permanent pastures and grazing land has declined. There has been continuous deficit in the fodder production to meet the requirements of the increased livestock population during this period. The area under principal staple food crops viz. rice and wheat has increased from 55.8 million ha in 1970-71 to 72 million ha in 1998-99, although the area under total cereals has remained static at about 102 million ha. Economic return is one of the major considerations for adoption of certain cropping systems at farm as well as regional level. Changes in government policies which affect the input costs and prices of the produce and trade and market forces determine the sustainability of cropping systems for a longer period and make the area adoption of the crops fluctuating over years to a considerable extent.

(8) Crop Diversification in Indian Agriculture
--DM Hegde, S Prakash Tiwari and M Rai (AS 9-10, Agricultural Situation in India)

The present study provides a theoretical understanding behind changes in cropping pattern. Crop diversification may be adopted as a strategy for profit maximisation through reaping the benefits of complementary and supplementary relationships or in equating substitution and price ratios for competitive products. It also acts as a powerful tool in minimisation of risk in farming. Domestic policy in India is biased towards increasing production of foodgrains like rice and wheat. Gains which are likely due to crop diversification are: a. alternative crops may enhance profitability; b. diversified rotations can reduce pests; c. labour may be spread out more evenly; d. different planting and harvesting times can reduce risks from weather; e. new crops can be sources of renewable resources or have nutraceutical traits. There are 2 approaches to crop diversification: vertical and horizontal.

(9) Evaluation of Watershed Development Programme in India—SWOT Analysis
--G Sastry, YVR Reddy, Om Prakash, CA Rama Rao and HP Singh (AS 9-6, Agricultural Situation in India)

On the basis of SWOT analyses, the authors of the present paper claim that any programme which runs for longer will develop its own weaknesses and threats due to taking the advantages of the system for individuals interest/ benefit leading to failure of the programme and not achieving the desired results. The programmes need modification and introduction of new elements with stringent rules for punishment. NGOs should be made accountable as they utilise the funds of the donors in implementation and running of the programmes. Watershed Development Programme needs modification, necessary checking, corrections, rectifications and new procedure to develop dryland farming regions through Watershed Development Programme with stringent rules for higher returns in addition to having proper institutional arrangements to maintain after closure of the project.

(10) Path Co-efficient Analysis of Yield Gaps in Cotton Production in Karnataka
--GM Gaddi (AS 9-7, Agricultural Situation in India)

The study shows that the potential yield of cotton was estimated to be 2669 kgs per hectare. As against this, the yield realised on the demonstration plots and the overall category of farmers’ field were 1805.50 kgs per hectare and 1172.70 kgs per hectare. The estimated total yield gap worked out to be 1526.30 kgs per hectare. Path coefficient analysis revealed that lower uses of human labour and bullock labour were the most important factors conditioning yield gap. Non-application of inputs, particularly plant nutrients and seeds at the recommended levels were responsible for the wider yield gaps. Reduction in the use of plant nutrients, capital (plant protection chemicals) and seeds would result in substantial productivity gain on the farmers’ fields. Identification of extension education activities, rigorous campaigns and systematic demonstrations of the new technology on an extensive scale should be the prime concern of the policy makers.

(11) Trends in Crop Diversification: Need for a Policy Shift
--Munish Alagh and YK Alagh (AS 9-8, Agricultural Situation in India)

The study shows that there was from 1980-81 to mid-nineties a remarkable shift away from grain crops in India’s agriculture. This emerged from the faster growth of the Indian economy and the working of the Engels Law accompanied with a better understanding of the diverse supply possibilities of India’s agroclimatic potential in a market setting. Shifts in policy making and understanding of the underlying developing market structures was much slower. Domestic and global demand factors and arteriocelerotic policy reactions led to diversification processes to non-foodgrains substantially stopping since the mid-nineties. There is now the urgent requirement of knowledge based domestic incentives and disincentives and strategic trade policy initiative to return to a faster output, income and employment growth path for the agricultural economy.

(12) A Study into Growth Analyses of Production and Acreage Response of Cotton in Punjab
--SS Chahal, Ravinder Singh Harika and Satwinder Singh (AS 9-1, Agricultural Situation in India)

The results of the study show that area under cotton during the period 1950-51 to 1965-66 increased at the rate of 1.67 per cent per annum. However during the period 1966-67 to 1989-90, the area under cotton declined. The compound growth rates (CGRs) pertaining to the period 1950-51 to 2000-01 show that area under cotton increased significantly at annual CGR of 0.25 percent. The production and yield grow at 2.43 and 2.18 percent per annum. It was noticed that the area under American cotton increased at the rate of 5.04 percent per annum in Punjab. The results corresponding to the acreage response of American cotton and desi cotton relating to desi cotton show that the lagged area has significant and positive effect on the allocation of area to desi as well as American cotton in Punjab. The results at the national level show that yield contributed maximum to the production of American cotton.

(13) Changes in Costs and Returns of Major Crops in Punjab
--Silesh Damte, Bant Singh and Jasdev Singh (AS 9-2, Agricultural Situation in India)

The current study reveals that the rising costs of cultivation and instability in returns are due to variability in yields and prices. The increase in total costs of cultivation of major crops over the years was mainly due to the rise in the cost fixed of resources, mainly the rental value of land and interest on fixed capital. The variable costs increased mainly due to increase mainly due to increase in the costs of human labour, machine labour, fertilisers, insecticides and weedicides used in the cultivation of these crops. This implies that the increase in productivity and production of these crops in the state has been achieved at higher costs and there is urgent need of technology upgradation and farmer friendly farm price policy to sustain the growth of farm sector which the backbone of the state economy.

(14) Farm Diversification in Tamil Nadu: Problems and Prospects
--Isabela Agarwal (AS 9-3, Agricultural Situation in India)

The present study was taken up to study the goal preferences and farm decision making process of the farmers; to extricate the problems encountered by the sample farmers in their existing cropping pattern and to suggest possible measures for the same. There had been a shift in the cropping pattern and an increase in the livestock rearing over the years in the study area. Increase in dairy animals enhanced the farm income and reduced the risk. The farming decisions differed by the size of farms and the extent of irrigation facilities available. There existed a positive association between diversification and size of holdings under irrigated situation. Therefore, in the development measures, diversified farming approach with improved irrigation facilities may be encouraged. Specifically, the drip irrigation may be popularised at a faster rate with sizeable subsidies in the area studied. As cultivation of lucerne was on the uptrend in the study area, installation of small lucerne meal preparation units may be thought of with a view to commercialise farming systems, the agricultural development programmes may be aimed at by diversifying the crop and livestock enterprises with whole farm approach.

(15) Production and Export Performance and Plan Allocation: Review of Fishery Sector in India
--SS Guledgudda, BL Patil, GK Hiremath and MT Dodmani (AS 9-4, Agricultural Situation in India)

In this study the authors emphasize the importance of fishery sector in providing direct employment and employment in downstream industries and earning a sizeable foreign exchange of about Rs. 6400 crores at national level. It is estimated that about 6 million people are employed in the fisheries sector. The contribution of the fishery sector to total GDP was 1 percent in 2000-01 at current prices. The quantity and value index numbers were observed increasing trend over a period of time (1962-2001). The export share in the domestic fish production exhibited a fluctuating trend but its share was lowest in 1960-61 and the highest export share was noticed during 1997-98. The share of fishery sector in country’s total outlays and agricultural sector outlays were not even through out the various plan periods. The total fish production in India was 56.56 lakh tonnes comprising 28.33 lakh tonnes from marine and 28.33 lakh tonnes from inland fisheries during 2000-01. West Bengal occupied a first place in export both in terms of quantity and value, followed by Orissa and Karnataka. The share of fishery sector in total country’s export and agricultural export earnings showed a steady increasing and decreasing trend over a period of time. The compound growth rates of fishery sector were 8.95, 20.49 and 10.59 percent in quantity, value and unit value terms, respectively. Fisheries is an important source for augmenting food supply, raising nutritional levels, generating more foreign exchange, employment opportunities and health for the people of India.

(16) Impact of Drought on Saurastra Agriculture
--RL Shiyani, BH Kakadiya and VD Tarpara (AS 9-5, Agricultural Situation in India)

The present study reveals that drought is a major cause of concern for the policy makers of the State. The best way to develop dryland agriculture in Saurastra is by following the watershed approach. Proper management of natural resources towards obtaining a sustainable and steady growth in productivity can help to break the major constraints of Saurastra agriculture. Creation of more number of fodder banks and distribution of fodder at reasonable rate to the affected farmers would help to save the livestock economy in th region. The government should accord high priority on the relief works pertaining to the development of irrigation work.

Tuesday, October 7, 2008

On Economic Theory and Institutions

There is no pure economic theory of institutions. One has to draw the theme from other streams. Marxian theory gives emphasis on institutions. Most of the earlier theories emphasized on institutions. Myrdal’s Asian Drama is a milestone in development theory. The American school is known as the old institutionalists. New-institutionalist theory depends on transaction cost approaches. Old institutionalists depend on behaviorial approaches in understanding economic problems. Non-economists are much more concerned about behavior of institutions. If one looks at cross-country differences, then s/he can find the evolution of institutions. The nature of institutions does not affect the cross-country differences, according to Olson.

Production and exchanges are two basic spheres in an economy. Production depends on availability of factors of production. In the exchange sphere, consumption takes place. How does efficient allocation of resources occur? Basic problem of the economic theory was provided by Arrow. Under certain conditions, one would have optimum exchange and efficient production. These conditions are: existence of perfect market; large numbers of buyers and sellers; all the economic agents are capable of making rational decisions; firms maximize their profits and consumers maximize their utilities; firms and consumers come together to determine the terms of exchange. An exchange emerges under certain conditions. In this exchange process, there is free entry and free exit. There is perfect information, which is available at free of cost. The buyers have all information about the commodities. The exchange occurs at free of cost. There is no enforcement of cost on transaction. There is some implicit bidding process to determine price of exchange. (There is some imaginary auctioneer to initiate the bidding process). Then, there is attainment of equilibrium, when demand becomes equal to supply at the equilibrium price. Nothing is left unsold at the equilibrium price. The market gets cleared at the equilibrium price. There is no exchange which take place anywhere except the competitive market price. Exchange occurs at the market clearing price, and it happens at free of cost. Coase says that enforcement cost do take place. There is an implicit contract between the buyers and the sellers during the process of exchange. But exchange does not occur at free of cost. The moment costs are brought into the picture, the Arrow-Debreu theorem fails. Coase asks for the introduction of transaction costs. Similarly, transaction costs occur if the firm deals with other entities. Theories of economic development have arisen due to market failures. The postulates of perfect competition may not hold due to: (i) uncertainty; (ii) presence of capital markets, where moral hazards take place; (iii) presence of externalities.

Externalities happen due to interdependence. They can be positive or negative and are deemed to be time-bound. Under conditions of uncertainty, externality can give rise to market failures. Markets cease to follow a particular way. So the problem has to be tackled in some other way. All the earlier development theories assume that market failures are pretty pervasive in underdeveloped economies. A public good is the best example of externality and this can lead to the problem of free-riding. If free-ridership occur, then production would be stopped since nobody is paying for the good which is produced. Non-exclusion gives rise to the problem. Earlier development theories declined in the 1960s. Markets fail due to the introduction of transaction costs. Transaction costs are of various types: enforcement, monitoring, co-ordination, information etc. Share-cropper has an incentive in undersupplying his labour. So, the landlord makes certain rules. That is why the sharecropper has to bear half of the cost. So the transaction cost goes up since one has to see whether the share-cropper is using his 50% of fertilizers or the landlords’ fertilizer. Transaction cost creates a situation for market failures. So, to deal with it, property right legislation is introduced. The thing to do is to ‘internalize the externality’, and thus reduce the transaction cost. According to Douglass North, institutions are responses to reduction in transaction costs. Institutions are developed to reduce transaction costs. So, if market failures take place due to high transaction costs, then economies respond by reducing such costs.

The contemporary history of economic development and underdevelopment take into account the breaking-up of institutions. Some economists like Joseph Stiglitz, Pranab Bardhan et al argue for looking at economic theory through the framework of information cost since it is a better approach than the competing ones. Although both transaction and information cost are quite similar, still the latter is quite amenable. Stiglitz has focused on rural institutions like tenancy, share-cropping etc. Transaction cost approach is not impeccable as it does not reveal why institutions come into being into the first place.

Information involves cost. Perfect information is accessible and available at some cost. But this assumption can be challenged. So, there is a need to move to imperfect information. Information may be asymmetrically distributed. If A has certain information which s/he is not ready to pass to B, then the information becomes asymmetric.

Exchange may occur in the presence of multiple imperfections. Imperfections mean there is a market. In the case of rural organizations, there may be absence of market. Institutions may be a response to ‘missing markets’. Stiglitz assumes rational individuals who are utility maximisers. Individuals act consistently and they respond to changes in external environment. If information is costly, then the decisions of individuals will differ from the decisions when information would have been costless. Institutions then adapt to reflect these costs. Institutions are endogenous. Outcomes would be Pareto-inefficient when exchange takes place that involves costs. There could be a potential role of the government to effect some kind of Pareto improvement, which may depend on many conditions—(a) Government should know about the working and the structure of the economy; (b) Within government there should be at least as much information as is being held by private agents; (c) Those making policies should have the incentive to make policies, which are Pareto-efficient rather than mere re-distribution (transfer gain from one group to another). There is also the need for providing incentive to efficient government workers. So, government should have the ability to make better choices.

Stiglitz then compares his approach with 3 alternative approaches i.e. theory of rational utility maximizing individual (in the Arrow-Debreu case), General Theory of Transaction Cost, and the Exploitation Hypothesis. There are three internal and external criteria from evaluation. The set that come under the internal criteria are: (i) Internal consistency (assumptions are internally-consistent); (ii) Simplicity (Fewest possible number of assumptions); (iii) Completeness (Primitive assumption).

The set for external criteria are: (i) Verifiablity (Relation of theory to reality); (ii) External consistency (Assumption of theory should be consistent with the reality); (iii) External completeness (With one’s theory, how much one can explain? How much externally complete is one’s theory?); (iv) Specificity (Theory should be able to make specific kind of outcomes. It should have predictive power).

Having set-up these tests, Stiglitz evaluates the information cost approach as against other approaches and shows that his approach met the criteria, whereas the other approaches partially met the criteria.

He finds ‘exploitation hypothesis’ very vague, which is quite opposite to what Utsa Pattnaik and Kaushik Basu talk about. Stiglitz has used his approach to see a large variety of rural organizations like share-cropping, rural credit market, interlocking of factor markets and labour market.

When one moves away from personalized exchange, then there is gradual emergence of a regulatory regime. In the case of a personalized exchange, bazaars, haats, mandis and other markets of villages, parties know each other. There is no need for guarantee. There is no division of labour, as opposed to what Adam Smith talks about. There is no specialization. There are no risks of defaults. There are no former rules as such. But there are certain customary norms.

In case of an impersonalized exchange, there is specialization which brings into existence interdependence. There is also exchange of goods between parties located at two different places and payments may be at two different time-periods. In such conditions, chances of opportunism are very high. To provide liability and stability, institutions in the form of rules or regulations emerge.

The entire concept of property rights has emerged over time. An entire gamut of institutions emerged during 7th-14th century A.D. in the Western Europe according to North. Not only rules and regulations emerge from the government but also from the private parties as well, such as in the form of corporate social resposibilities (which is controversial in nature). A third party is required for the private parties i.e. the State is required to influence and stabilize property rights. Emergence of State is the result of the breakdown of common life. There was no central authority but there were oral customs and laws in the earlier times. Rise of the State emerged with written rules and regulations (remember oral history in the subject Anthropology). State created the judiciary, legislative and the executive.

Pranab Bardhan has also examined the institution of caste-system. North has studied the emergence of State. He has observed two things: (a) Population growth leads to economies of scale in the exchange market; (b) Minimisation of the transaction cost.

This however unfolds before us the politics behind population control, which is based upon the neo-Malthusian ideology, that has been discarded by not only neo-Ricardians but also by the very scholars like Laxmi Murthy, who was associated with Saheli, once upon a time. It has also been found in the literature that the olden times are not gone when the civilized West came to tame the South with a gun in one hand and a Bible in another hand, simply to civilize the 'Man Friday'.

The key thing of emergence of institution is factor price ratio of land and labour. When there is increase in population, it impacts upon the wage-rent ratio and also on the size of the market. Thus the scale of exchange increases. When there is an expansion of the exchange, it gives rise to economies of scale. When population increases, pressure on land rises, wage rates goes down and rent rises. Hence, demand for land goes up and labour supply goes up. (This is based on a very simplified logic). At a later stage, because of fall in population growth, due to migration of labour to non-agricultural sector, pressure on land goes down but since labour becomes scarce, wages goes up. This is the case in the US and in Europe. Regulations emerge to make land a commodity. People start asserting their rights when scarcity increases. In case of tenancy, there is a transition from share cropping to fixed tenancy. In the case of labour market, various kinds of rules and regulations emerge. There is collapse of bonded and slave labour system. Casual labour emerges. Scarcity of labour governs the land-labour relations. Factor price ratio has led to some kind of emergence of institutions. When population increases, demand increases and so supply increases (Say’s law). So, economies of scale appear. For producing per unit output, it takes lesser money (cost). Douglass observed the change from individual enterprise to corporation (MNCs or national MNCs or share-holding companies shift from unlimited liability to limited liability). It happens when production happens on a larger scale. Proprietorship changes from one individual to many individuals (joint stock companies or share holding companies).

Population growth-->Higher demand-->Higher Exchange-->Large scale production

Douglass explains three cases that lead to minimization of the transaction cost:
(i) Externalities
(ii) Imperfect Information
(iii) Risk and Uncertainty

There are three market situations which are outside the normal situation. These things can lead to market failure. So, institutions are needed to avoid market failures.

Market works on purchasing power. Sellers sell to those who pay the price. Externality is a situation when consumers can use a good without paying for it. For e.g. market failures happen in the case of public goods like constructing road. Enforcement cost/ task is very high/ difficult. There is problem of estimation. The producer thus will not have the incentive to produce. In this kind of situation, institutions develop. For e.g. consider the case of patent rights. Therefore, according to Douglass North several regulatory mechanisms were developed to continue the production of certain commodities, which may not be accessible to free-riders. Water charges, surcharge, road-tax, irrigation tax were introduced. Concept of surcharging emerged. Concept of fees emerged. (Nowadays economists talk about public private partnership). Concept of intellectual property rights and royalties emerged.

Most of the mainstream theories assume perfect information in the market. But in reality, we do not have perfect information. Several institutions were developed to bridge information gap. From the side of manufacturer, there are certain things to consider—information about the market, size of the market, creation of market bureaus, trading centres, stock exchanges etc. Concept of stock-exchange is an institutional set-up to inform the share-holders. Concept of brokers emerged. They tell about the price and profitability of the company’s share. Concept of magazines, journals emerged. All these and more to bridge the information-gap. Concept of all sellers located at one place, give the idea of competitive information. The motto is to provide as much information to producers and buyers.

Risk is involved and this leads to market failures. In the financial market, risk is very high. Even in the case of durable goods, risk is involved. So guarantee is needed to provide incentive to the consumers to purchase goods. To avoid losses, partnerships, joint stock companies were made. Insurance is a major innovation. It was developed over a period of time. During trade, transport insurance is introduced. Car insurance is nowadays available. Medical insurance too is available. Hence, one finds a number of institutional changes. Technology has played an important role in economic development. But at the same time, institutions have played a positive role in the development.

Growth of institutional economics was because of the contributions by economists, sociologists, lawyers etc. The economic aspect/ dimension of law was contributed by lawyers. There is an element of rule/ law in economics. One of the approaches, which thus emerged was property rights approach. There are four issues which property rights approach deals with. What are property rights? How do they emerge? Whether property rights are equivalent to institutions? System of property rights assigns an individual the authority to use factors of production in a specific manner. Whenever property rights are assigned, one has the right to use the factors of production/ consumer durables. But there are constraints in the usage. Use of property should be in a particular manner. There is an element of restriction. Property rights can be of different types/ forms. It can be in the form of private ownership, state ownership or communal ownership. In private ownership, there is an element of exclusivity. There is a principle of exclusion of others. So, enforcement issue arises. In a state property ownership, the right to use is given to the citizens but in a particular way. In case of communal ownership, there are rules for utilisation. There are restrictions on usage. One must remember the case of tragedy of commons here. Property rights are a legal step. If property (say land) is an income earning asset, there can be exchange and so there is a market. Several laws have emerged, which are laid down by the government for ensuring private property rights. Society also makes rules to use resources—in the case of communal property. Property rights developed/ emerged to internalize the externalities. There has been a transition from communal property rights to State ownership and then private property rights.

Externalities emerge when goods are used without payment. This leads to market failures. Pricing mechanism fails and free riding take place. Externalities mean those who can’t pay are allowed to use. When there was open land (community owned), everybody used it as population was scarce and land was abundant. But communal property rights started moving out since population pressure increased and land became scarce. So, factors of production, which became scarce led to their valuation. We must know that Economics is the study of scarce resource. Failures of the norms in the community led to the creation of State in pari pasu with the rise in private property. Rise of the State means breakdown of the community. There are variations in the way private property is defined by different type of States i.e. autocracy, democracy etc.

In the property rights approach, theory of the State has not been developed properly. Rules of property emerge due to population pressure. After the rules emerge, are these rules economically efficient? Do these rules have fair income distribution? The impact of social rules (such as caste system) determines property rights. Customs too determine user rights/ property rights. Are the set of rules efficient and promote equity? What kinds of property rights promote economic efficiency? How do you define economic efficiency vis-à-vis property rights? The key cost is enforcement cost. What is enforcement cost? Enforcement of property rights also means coercion to exclude others from consumption of that property. Neo-classical economics say that there is no enforcement cost. But enforcement cost is positive Property rights are efficient if enforcement cost is minimum. If the enforcement cost is high, property will become expensive and its rate of exchange will go down. Government land is bought less since the enforcement rate is high. Exchange value is determined by the degree of enforcement. The easier is acquisition of property rights, the lesser will be the enforcement cost (such as registration fee). Property rights should be allowed to lease in and lease out assets/ property. So, tenancy should be allowed so that more land is available for cultivation. Tenancy rules should be changed to increase productivity. Property rights should be such that acquisition cost and enforcement cost be minimized.

There are two kinds of approaches for understanding institutional changes:
(i) Neo-classical explanation.
(ii) Marxian explanation.

In the standard neoclassical approach, there are those who look at institutional change in a historical way such North. Neoclassical approach is based upon ‘institutional determinism’ whereas Marxian approach is based upon ‘technological determinism’. Neoclassical economists look at two things: factor price ratio and size of the market. General theoretical understanding is that if one has some rules, which govern economic decisions/exchanges, the motivation to change customs will come provided change leads to economic gains (additional economic gain). But change of institution will lead to certain additional cost. The mainstream neoclassicists will say if gain is greater than cost, then institution will change. If there is net gain, then there will be motivation to change. Historically, institutions change if there is net economic gain, according to North. The rise of private property rights depends on scarcity and thus relative price ratio. If price of land changes due to excess/ less supply of land, then the rules governing the ownership of land also changes. People start enforcing their rights owing to scarcity of land. In the case of labour (excess labour), there can be bonded/ attached labour system. But when there is labour scarcity, there exists free labour, which is mobile. So, due to scarcity of labour, the rules governing use and exchange of labour changes. North has also brought into the picture population pressure concept i.e. if population pressure increases or decreases, scarcity increases or decreases accordingly. Population pressure not only affects the rules governing the usage of factors of production but also the demand for output. There are economies of scale associated with the size of the population. Ruttan says that there are forces on the demand side and forces on the supply side. If the price of the land becomes high, then the owners of land will ask for change in the rules governing ownership of land. Relative factor price ratio on the demand side will lead to changes in rules. The concept of cost sharing increases income owing to technological changes, which leads to institutional change. So, technology can bring in institutional change. Capacity to innovate depends on certain factors. It depends on existing knowledge base. The more advanced is the social science knowledge, more regulations will crop up, which is economically efficient. Investment in knowledge depends on rate of return. There is not much literature on the supply side of institutional change. Institutions change due to demand and supply side factors. It is the profit/ utility maximization motive that leads to change in institutions.

In the Marxian framework, Marx talks about mode of production. (For one's knowledge, one must read 'mode of production debate). In the mode of production, one has forces of production and production relations. There are 5 modes of production: primitive communism, slavery, feudalism, capitalism, socialism and communism. Forces of production are nothing but factors of production and technology. Technology is the operative knowledge of the factors of production. Production relations are determined by distribution of the means of production. Forces of production determine production relations. Production relations are nothing but institutions. The contradiction between the production relations and forces of production lead to transition from slavery to feudalism. So, this leads to a new mode of production. Institutions are created which are economically efficient.

Labour market efficiency is possible when there is a market situation which closely resembles perfect competition. There are certain characteristics of a labour market. There are large numbers of labourers and there are large numbers of employers. There is perfect information of wage. Productivity of labour is identical. There is no restriction on entry or exit. This situation leads to competition, which determines competitive wages. Competition between factors of production leads to competitive remunerations. Economic outcomes will then be optimum.

In an imperfect market situation, one can find monopolist or monopsonist. Any imperfect market is a sort of market failure. There are other situations of market failure. Informal institutional set-up can favourably or unfavourably make an impact on economic transactions. In the Indian situation, the role of caste system in the working of the market has been analysed by many economists.

Caste-system is an economic organization, which determines rules of production and distribution (factor distribution). They recognize features: (a) Caste-system rewards distribution of occupation across the social groups. The property-right is pre-determined by caste. (b) Caste-system notably determines division of property rights but it fixes those rights to the ownership by different social groups. (c) It not only divide the property rights and restricts its ownership but encourages unequal distribution. Caste division involves division of labour.

(a) Brahmin-Right to education
(b) Kshtriyas—Right to enter army but not education
(c) Vaishyas—Right to trade but not education
(d) Shudras—agriculture—right to land but not education
(e) Untouchables—No right to anything but only to serve the above four

Akerlof has not gone for economic foundation but only features of caste-system.

The features of perfect competition are:
(a) Large numbers of buyers and sellers
(b) Perfect information (zero transaction cost)
(c) Free entry and exit
(d) Homogeneity
(e) Perfect mobility

There is no perfect mobility of factors of production since under the caste system occupation and property rights are fixed. Investment across the occupation is not allowed under the caste-system. It brings segregation in the market particularly in the sellers’ side. There is not a single homogenous market. There are specialized, fragmented and segregated markets. Since capital mobility is not allowed, so it leads to no factor price equalization. Knowledge is not allowed to spread because there are social barriers. All these lead to imperfect market situation. Ultimate economic outcome is not Pareto-optimal i.e. production level is less and cost associated is high. Wage differences exist in the labour market. Rate of return if high in one sector would not lead to mobility of either labour or capital. So, caste system leads to inefficient outcome. Neither land nor capital is mobile. So Akerlof, Scoville, and Lal argue that economic outcome is economically inefficient under the caste-system. Caste-system never promotes optimum results.

There is an element of social ostracism/ punishment or penalty. The informal rules of property rights/ occupation if challenged will lead to punishment. So, there is an in-built enforcement mechanism. It is a very cost-effective mechanism. Social boycotts are tools to enforce social rules. All these features operate in all the markets i.e. labour, land, capital, entrepreneurial and consumers markets.

One must know that 97% of untouchables do not own land in Punjab because a caste law is converted to formal law by the Britishers in 1901 that jats can only own land for cultivation in Punjab.

There is restriction on the mobility of labour from one sector to another. Voluntary unemployment takes place due to social restrictions on the mobility of labour. People do not take others’ occupation because of the feeling of dignity.

George Akerlof and Deepak Lal argue how economic dimension function leads to imperfection in the labour market. Market imperfections come from immobility of factors of production. For a competitive market, mobility is the necessary condition. Caste-system involves economic discrimination in the market of certain groups, which brings imperfection in the factor market. In fact, restrictions on the mobility of factors of production is effected through discrimination. Economic discrimination is also found among gender and race (according to Baker). Economic analyses of neo-classical economists lead to the conclusion that caste-system lead to economic discrimination.

According to the Marxian approach, caste system is an economic institution. Economic structure determines the social structure. At a larger level, all institutions or social relations are determined by class relations. Caste-system which include norm, culture etc. is determined by economic structure. Social aspect of caste-system (superstructure) is basically determined by economic foundation (base). Differences between high and low caste is the difference between high and low class. Caste is determined by class-status. Role of the ownership of property is used to explain the caste-system. Marxists won’t talk about efficiency but would definitely talk about exploitative/ equity aspect of the caste-system. To change the social structure, ownership structure of the caste-system needs to be changed.

Like neo-classical economists, Ambedkarians say caste-system is a production organization and a distributive system. Caste-system specifies the property rights of individual group, which is unequal. Property rights distribution is pre-determined. Caste system put restrictions on the mobility of the factors of production. Neo-classical economists argue that social ostracism is used to control the caste-system. But Ambedkar makes two additional points—occupation is not only fixed but there is dignity attached to the occupation. There is a concept of dignity of labour which has its implications on efficiency. How the superstructure affects the base is not explained by Marxists. Ambedkar argue that there is inter-relation between Hindu ideology and the caste-system. The religious principle of Hinduism forms an ideological base for the economics of caste-system. Both Lal and Ambedkar have argued like this. Like Islam, in the caste-system the moral economic principle is strengthened by the religion. (However, one should not forget that in Islam, there is ban on interest rate on loans). Religious principles are not positive in nature: (i) It is not efficient; (ii) It does not promote equity.

Caste system does not promote growth and efficiency. Neoclassicists look at the caste-system from the aspect of labour market efficiency. Even Lal focuses on labour market. But Ambedkar went beyond labour market. Caste system put restrictions on whole lot of things. There is a restriction on the land market. Trading community and shudras are not allowed to own land in Punjab. There are restrictions on capital flows. Caste system involves specification of all property rights. Caste system is not confined to only labour market. Caste-system brings economic inefficiency in all markets. So the system is inefficient at the macro-level.

Lal says that caste system provide second best Pareto optimality (which is a sympathetic stand against caste-system). But Ambedkar says that not only labour but capital too is not allowed to flow. The system is totally inefficient. That is why monopolies are found. People from higher castes suffer from voluntary unemployment as they do not take low dignity occupations. Non-voluntary unemployment is faced by low caste. Unemployment rate is high among low castes. No Indian economist has theorized the caste-system. Economists have not applied their minds but political scientists and sociologists have. Notion of dignity of labour affect efficiency. Under the caste-system, social status is determined by economic occupation. Occupations are prioritized. Education is good but scavenging is bad, as per the Hindu ideology. So, people involved in scavenging are considered to be unclean. Concept of purity and impurity is attached to one’s occupation. In the Western society, this dignity aspect is missing. But in India, scavengers live differently. If by doing a particular job the status goes down, then this definitely affects economic efficiency. The incentive to work decreases. This is called work shrinking i.e. not working efficiently because of the stigma of social discrimination, which affects production. People from low caste are excluded from better off jobs. Dignity leads to inefficiency. By and large, neoclassical economists are involved only in efficiency and not in income distribution. Some Indian intellectuals talk about wage, unemployment and inefficiency. General argument is that the caste system as an economic organization is based on the principle of economic inequality.

Economic inequality is the basic ideology. Certain groups are more privileged than others. Untouchables as a matter of fact do not have the right to own property. Their job is to serve the upper castes. Economic inefficiency leads to economic inequality, according to neoclassical economists. The actual mechanism of economic inequality has not been examined by the Marxists and the neoclassical economists. Economic inequality has not crept into the caste-system accidentally from history. Caste-system itself is based upon inequality. That is why there is wage discrimination.

[Based upon the class lectures delivered by Prof. Ravi Srivastava and Prof. S.K. Thorat, Centre for the Study of Regional Development (CSRD), School of Social Sciences, Jawaharlal Nehru University].