CHAPTER SIX AJAY GUPTA CURRENT ECONOMIC TRANSITION IN INDIA AND IMPLICATIONS FOR OTHER TRANSITIONS Introduction Since winning independence from Great Britain in 1947, India has been thrust abruptly into the 20th century. Modern, industrial, medical and infrastructural techniques have been grafted onto a society still characterized by age old beliefs and class structures, without undertaking badly needed reforms and dealing with the issues of inequality in distribution of resources and incomes. These policy decisions have proved vital for the transitions India has been undergoing, one result of not undertaking badly needed reforms has been the limited adaptive capacity of Indian society to change. This has consequently influenced the trajectory India is taking through its key transition and exacerbated the pressures on Indian policy makers. Compared with other countries in Asia such as Korea and Malaysia, India has certainly not performed well in the sectors of alleviation of poverty, economic growth, per capita income. In this paper I will briefly address some vital transitions affecting India, how these created the need for change and consequently influenced Indias economic policy. A family of transitions The demographic is critically important to Indias long term stability. With a population of 900 million in 1994 India is currently the second most populous country in the world. As figure 1 below shows from 358 million in 1958, Indias population has increased dramatically to its present numbers. Figure 1. Population Growth in India. Source: World Resources Database 1995 The population growth rate in India is currently 1. 9 percent and is not expected to decrease further at least until the turn of the century (World Resources, 1995). The reason for Indias rapid population expansion can be traced to the availability of modern foreign technology from the west. These technologies were developed in the west over several hundred years during which societal norms concerning the need for large families changed. As birth rates decreased, mortality rates due to technological improvements, also declined. In India, however, the sudden availability of these technologies resulted in death rates declining precipitously while birth rates remained constant resulting in a boom in the population. Rapid population growth in India creates many pressures. In rural areas it calls for intensified agricultural production to feed the growing numbers of people, which raises the risk of environmental degradation. Due to the intensification of agriculture, fallow periods needed for soil to regenerate are overlooked and cropland loses fertility which in turn, creates pressure to convert forests into cropland. Demands upon forests for fuelwood and grazing increase in tandem with population pressures. As family sizes increase, agricultural plots get smaller and the need for credit to purchase inputs to intensify production methods, or avert hunger, increases. The availability of credit from banks is inversely related to the size of the plot, which drives poor farmers to usurious moneylenders. The resulting need to repay loans or to escape from being trapped in such a desperate situations is one of the reasons behind rural to urban migration. Indias urban population currently comprises 26 percent of the countries population and is expected to keep increasing. Public health spending per capita is over 6 times higher in urban areas than in rural areas and urban dwellers manage to earn almost twice the amount of their rural counterparts (World Resources, 1995). Greater access to social services in urban areas acts as a magnet attracting people to cities. Most Indian cities consequently are ringed with slums and squatter settlements in which typically half of the cities population resides. The prevalence of diseases rises resulting in increased expenditures by the government which also has to provide industrial employment for urban dwellers. A large and growing middle class also creates a demand for consumer goods and also consumes more resources and energy. Urban dwellers also tend to be more aggressive and politically active than their rural counterparts and exert political pressure which cannot be ignored Therefore expectations on the government and demands on it have risen in tandem with increasing expenditures, driving the need for economic performance to alleviate these pressures. Confronted by these combined problems Indias government tried to expand the countrys industrial base to provide employment, by building a monolithic public service sector and by intensifying agriculture. Indian policy makers tried to adopt the best characteristics of capitalism and socialism and developed a form of economy called the mixed economy. The key facet of this was protectionism. Foreign access to the Indian economy was restricted to 49% of equity holdings in Indian firms and even this was discouraged. The state took on responsibility for providing the basic needs of the people through a large public sector which handled 18 key sectors. The industrial infrastructure was comprised mostly of public sector companies which were, however, mismanaged, poorly run and consequently incurred huge losses, draining the exchequer. Import substitution strategy in which trade and industrial incentives were biased in favor of production for the domestic market was emphasized. However, the inward looking focus on industrialization, and the excessive protection offered to industry by licensing and exorbitant import tariffs did not put any pressure on industry to reduce costs and increase efficiency. The result of this protectionism was that India could not produce key raw materials which had to be imported. Exports could not keep pace with imports and therefore therefore there was a gap in foreign exchange balances which was postponed by foreign borrowing and using remittances from Indians living abroad. Indian companies ended up relying more on costly capital than labor and industrial growth failed to generate much employment. The pattern of investment became highly elitist oriented, energy intensive, import guzzling and capital intensive. Fiscal deficits created by pumping excess money into the markets comprised 11 percent of GDP in 199, 1limiting the governments ability to intervene effectively(Ghosh, 1994). The deficit created excess demand which couldnt be satisfied by domestic production and therefore increased demand for imports and created an inflationary environment. Inflation created an upward pressure on interest rates, raising the costs of production all around which eroded competitiveness of Indian goods abroad. Rising interest costs added to the governments debt burden and played a role in adding to the budgetary deficits. Along with the revenue and expenditure accounts. See Figure 2 below. The narrow base of the tax structure, lack of tax on agricultural income and extortionate taxes among the middle to upper class, encouraged evasion. The expenditure account was burdened by massive subsidies reaching 2.5 % of the GDP in 1991, public sector and defence spending, therefore the government had to resort to borrowing. The public debt to GDP ratio approaching 60% in 1991, limited the governments ability to spend on vital social sectors such as infrastructure, education and health(Minocha, 1994).
Figure 2. Central Government Deficit. Source: World Resources 1995 This structural malady reduced India to a minor player in the global economy. The controls on production, licensing restriction along with high protective walls fostered monopolistic trends within the industry. The lack of competition ensured there was no pressure for change and the technological revolution which spread from the industrial nations to other Asian neighbors passed India by. Indian companies produced inferior goods which could only be sold in the domestic market. Since India does not have major reserves of petroleum its reliance on imports of petroleum and other bulk products consumed by the industrial sector required large amounts of foreign exchange which ensured large trade deficits on a regular basis since Indian industries earned negligible amounts of exchange through exports. All these factors increased Indias vulnerability to shocks, to finance these rising deficits India had to increasingly resort to costly foreign borrowings. This led to a huge foreign debt and the rise in debt service payments further weakened the balance of payments (Singh, 1994). This situation came to a head in 1991 when oil prices rose as a result of the gulf war and foreign exchange remittances from Indians in the gulf dried up. The foreign exchange reserves reached an all time low with the government in danger of defaulting on interest payments on foreign loans. To escape default the government took out an emergency loan of $2.2 billion from the IMF(Foreign Trade, 1995). Part of the of the conditions attached to the loan were to restructure the economy. The government used this opportunity to introduce a comprehensive package of measures aimed at reforming the inflationary and wasteful tendencies of the economy. A key point which needs to be made is that although the fiscal crisis of 1991 precipitated the shift in economic policies, these were long overdue. Pressures created by the other transitions were being felt much earlier and the government made a tentative attempt at economic reforms in 1984 which were subsequently abandoned. By 1991 pressures and indicators of crises from the other transitions could not be ignored any longer and provided impetus for change. New Economic Policy (NEP) The Government of India has begun implementing a comprehensive package of reforms aimed at correcting the distortions and weaknesses of the economy. The reforms fall broadly in to two categories: stabilization procedures and structural adjustment package. Stabilization procedures involved a sharp devaluation of the rupee to 50 percent of its previous value, drastic cuts in fiscal deficits of the government and huge borrowing from the IMF. The accompanying credit squeeze and rise in interest rates contained the inflation drastically from 17 percent in 1991 to about 6 percent in 1993 (Sinha, 1994). The structural adjustment policies are wider ranging and are aimed at opening up the Indian economy to foreign competition and encouraging foreign investment. Structural adjustment measures attempt to unshackle industry from the myriad of administrative and legal controls which plague it. Restraints on growth such as industrial licensing have been removed for all new units and expansion of industrial units. Most public sector undertakings will soon be privatized and only six areas of strategic concern have been reserved for the public sector, such as mining, oil and gas exploration and exploitation, defence. Private and foreign participation is invited in some specific areas of these (Ministry of External Affairs, 1995). India is seeking access to foreign capital and technology.With this end in mind, direct foreign investment of upto 100 percent is allowed and actively courted. Full repatriation of profits by private foreign investors who want to set up wholly owned power generation units in India is also feasible. An area, India is actively courting foreign investment in is the power sector. India needs to double its existing power generation capacity which would only be possible with foreign technology and help. Domestic industries have also been deregulated and delicensed and foreign capital and foreign equity participation is encouraged in Indian companies. According to Indias Finance minister the journey on the road to self reliance has begun. Self reliance in todays world means the ability to earn foreign exchange to pay for all imports(Singh, 1994). With this end in mind reforms in export and import policies have been undertaken and form the cornerstone of the new program. Integrating Indias economy with the world economy is expected to increase competition, flow of capital and technology to India and lead to more growth and increased employment. From a stage of believing, government regulations would ensure social justice, the current government has switched to a belief of market mechanisms ensuring growth and eventually poverty alleviation. The planning process and the public sector will take a back seat and market forces will be relied upon. Some key features of the new policy are discussed below.
Reliance on Foreign Capital and Debt The impetus for adopting reforms was provided by the critically low state of foreign exchange reserves in 1991. An emergency loan of $2.2 billion was taken out from the IMF to tide over the crises. Today the exchange scenario is looking much better with reserves standing at around $27 billion, enough exchange to pay for eight months of exports.(Ministry of External Affairs, 1995). However, Indias net indebtedness has increased sharply by $18 billion. Adding to the existing indebtedness of $ 75 billion, shown in figure 3, Indias external debt is expected to rise to $93 billion making it the second largest debtor nation in the third world after Brazil, see figures 3 and 4, below. Indias public debt to GDP ratio is approaching 60 percent of GDP. Interest payments on servicing foreign debts currently make up 4.5 percent of GDP and over 50 percent of current expenditure, as cas be seen from figure 4 debt service expenditures are approximately equal to current borrowing, which is creating a short sighted, cycle of incurring more debt to service interest payments (Sinha, 1994). South Korea and Malaysia avoided the debt trap during the 80s even though their debt was much higher. They did this by a fast expansion of exports which reduced their debt service to exports ratio. On the other hand Brazil and Mexico got caught in the debt trap in the early 80s with debt to GDP ratios of about 31% because of slow growth of their exports. Figure 3. External and Long Term Public Debt. Figure 4. Debt Service Expenditures and Current Borrowing. Source: World Resources Database 1995
India is trying to attract foreign capital for investment in industries and infrastructure. The NEP is promoting joint projects and equity participation in India and allowing upto 100% equity participation. It is particularly trying to attract investment in power generation and utilities. Foreign investors have poured more than $ 1 billion into the economy and an additional $ 5 billion into the stock market. The U.S. is the single largest investor with forty percent of the investments approved during the period 1991-1993 (Foreign Trade, 1995). The main areas of investment so far are in oil refining, power generation and consumer goods. Investment in India however, is still hampered by its continuing low credit rating. Standard and Poors, a leading U.S. credit rating agency recently decided to keep Indias long term credit rating at BB+ which is non investment grade (Prasad 1994). Despite this setback, foreign investment is expected to increase dramatically due to the incentives provided by the government such as automatic approval of projects, profit repatriation and convertibility of the rupee, use of foreign brand names. Indias decision to join GATT is also going to be a factor in this regard. Export- Import : India plans to achieve a high rate of growth and avoid the debt trap which has plagued countries like Mexico, through a policy of aggressively promoting exports and reducing its dependence on imports. India wants foreign companies to set up bases for global operations and generate exports. India has several characteristics conducive to this. It has a vast pool of skilled technical manpower and a developed industrial base. It has a history of entrepreneurship and a legal system which countries like China lack. Underscoring this, exports soared 20 percent in 1993 compared to 1992 however, imports have also increased by 23.9% and as in the past continue to outstrip exports, see figure 5 below. Figure 5. Exports vs Imports Exports are limping because of the higher rate of domestic inflation compared to other countries worldwide. This raises production costs which prices Indian goods out of foreign markets. The trade deficit has therefore continued to increase to 2.2 billion in the first four months of 92-93 as opposed to 770 million during the same period in 91-92 (Prasad, 1994). Most assumptions of India being able to repay its debt and interest payments have been made on the basis of assumptions of exports outstripping imports. This seems uncertain given the current worldwide recession in developed countries and the collapse of the Soviet Union which accounted for 16 percent of Indias export market (Sinha 1994). Korea and Malaysia avoided the debt trap in the early eighties by vigorous expansion of exports when the world economy was more open and booming. In the nineties this achievement may be harder to duplicate. According to the 1992 human development report of UNDP, 20 out of 24 industrial countries are more protective today than they were 10 years ago (UN, 1995). Although it is too early to tell, exports are expected to increase since profits from exports are exempt from taxes and foreign companies will be allowed to repatriate profits, India is specifically targeting intra firm trade i.e. companies obtaining components for products from different areas for its exports. This is where Indias large skilled manpower base and infrastructure and resource base will hopefully make a difference.
Government Expenditures and Revenues The NEP intends to reduce government expenditure in the market and redirect it towards social and poverty alleviation programs. Sick public sector enterprises will be closed and phased out and foreign equity participation invited where ever possible. Public sector monopoly will be maintained in six key sectors, some with foreign assistance. The government intends to focus most of its expenditures on several key areas such as defence, poverty alleviation programs and creating employment. The NEP intends to cut all subsidies including those to agricultural and to rural industries. No action has however been taken to reduce the bloated administrative expenditure. The continuous increase in government expenditure particularly in budgetary subsidies together without reforming the tax system and continuing losses in the public sector have also contributed to the budgetary gap. Tariffs have been rolled back from nearly 300 percent to peak rates of 50 percent with most duty rates unified at 25 percent (India Budget Statement, 1995-96) with further reductions planned. The complex and inefficient tax structure which is a cause for concern has been reworked to reduce customs and excise taxes and corporate taxes and personal tax exemption limits have been increased. However, it is still far to narrow with the bulk of the governments revenue coming from excise taxes and taxes on interstate commerce. Agricultural income and rural industries are not taxed which excludes 70 % of the population from the tax net. Although the number of Indians paying taxes is low, for those who do pay taxes, rates are high, therefore evasion is rampant. The government is attempting to widen its tax base and has proposed establishing a tax on agricultural income. Due to political opposition this has not been implemented therefore, the governments revenue gathering abilities are severely limited.
Fiscal Imbalances, Inflation and growth The NEP succeeded in bringing the rate of inflation down from 17 percent in 1991 to about 6 percent in 93. The fiscal deficit has been brought down from 11 percent of GDP in 1991-92 to 5 percent in 92-93. Economic growth has been a modest if unspectacular 5 percent and the stock market is trading near its all time high (Sinha, 1994 and Foreign Trade, 1995). However, with the population also growing at 2% per annum India has to aim at a higher rate of growth to record a improvement in the standard of living of its people. According to the eighth five year plan, the number of persons requiring employment would be 58 million during 92-93 and 94 million during the 10 year period 92-2002. These comprise a 23 million backlog of unemployment in 92, an estimated increase of 35 million in the labor force during 92-97 and by another 36 million during 97-2002. The adjustment measures will also add an estimated 11 million to the list of the unemployed. These figures imply the real growth in employment generation should be about 4.5 percent per annum if full employment is to be reached by the end of the eighth plan and 3.5 percent if it is to be attained by the end of the ninth plan (Sinha, 1994). There are criticisms that the reductions in deficit have been brought about by the soft option of reducing capital expenditure and postponing settlement of dues to domestic creditors. The adverse effects of this, on investment, growth rate and employment generation are a bomb in waiting The governments plans to close large public sector firms will also create a large amount of unemployment. The government hopes that these will be absorbed by new enterprises which will also provide full employment. However, if production trends continue as in the past most of the new enterprises and projects will tend to be capital intensive due to the availability of large amounts of foreign technology, foreign is geared toward employing as little labor as possible.
Implications for other transitions Demographic Transition There are vast demographic differences among Indias various regions. The transition from high to low fertility is nearly complete in some states, notably Kerala and Tamil Nadu in the south, with average fertility rates of two children. Indias demographic vulnerability is concentrated in a few states in the north, most notably Bihar and Uttar Pradesh which have fertility rates as high as eight children per woman. The impetus for population growth can be traced to the inequalities which characterize Indian society. People are not poor because they have large families, they tend to have large families because they are poor since in this case wealth flows from child to parent. Large families are in the economic interests of poor parents, in a situation like this having more children is a sensible and rational thing to do. Countries such as Sri Lanka and even Kerala a state in India, which have carried out land reform, reduced inequalities and made efforts to improve the welfare of rural masses have tended to be successful at reducing fertility rates (Murdoch, 1988). Landlessness is high in India, with percentages of agricultural landless households estimated to be 15 percent. Even more important is the proportion of smallholder households, whose landholdings are too small to provide a sustainable livelihood, with the percentage being about 40 percent (U.N., 1995). Therefore a necessary step in order to slow the impetus for population growth is to undertake social and economic reforms to raise the status of the poor and their standard of living. Indias NEP which will most likely, widen inequality and income gaps. The economic reforms could also result in higher prices of necessities which will be market determined, instead of controlled by the authorities, which will place an additional burden on the poor. The lack of emphasis on rural planning and paucity of funds to do so will make it harder to arrest the population growth rate, corresponding benefits in employment and income generation, GDP growth rate may be offset to an extent by the increased population. Consequently government expenditures will also rise in this regard. A larger population will place even greater pressure on the natural resource base in India and create demand for more cropland, agricultural products and demand more services, effecting the agricultural transition and exacerbating rural to urban migration. Agricultural Transition About 70% of Indias population is still agricultural and rural based. Over the last four decades India has more than tripled food production, due to green revolution inputs of fertilizes, pesticides and better seeds. As figure 6 below, illustrates cereal production has increased from 85 thousand tons in 1961, to 200,000 tons in 1989, this has been accompanied by a greater percentage increase in fertilizer consumption. Figure 6. Cereal Production and Fertilizer Consumption.
Source: World Resources Database 1995 With the increasing intensity of agriculture however, cropland has been losing fertility at an increasing pace as fallow periods necessary for soil to regenerate are overlooked. Soil degradation such as salinization, loss of nutrients and erosion seriously affect 85 million hectares of land(World Resources, 1995). Since the total amount of cropland has not declined it can be inferred as cropland has been abandoned, new marginal forest areas have been brought into forest production, thereby accelerating the loss of forests. As noted earlier, population pressures have fragmented family plots and increased intensification of agriculture. Therefore if the poor own land it is unproductive and they lack the credit to improve it. Large farmers may take over small plots, since credit is readily available to them, these farmers tend to practice capital and input intensive agriculture which displaces marginal farmers. Marginal farmers will be hit hardest by the NEPs goal of removing subsidies and may intensify unsustainable and environmentally destructive farming practices. To the extent that land fragmentation is not matched by the introduction of intensive and environmentally sustainable agricultural techniques, the farmers with exceedingly small plots will be forced to mine their land, by shortening fallow periods, cutting remaining trees, or by migrating and engaging in ecologically destructive practices of land extensification on marginal lands. The thrust in the current NEP is to promote application of green technologies, therefore there is an implicit thrust towards favoring large farmers in the NEP. The focus on promoting exports of farm products will also favor large farmers and provide an incentive for large factory farms. The government is also removing procurement quotas for grains and staples. An implication of this is the non availability of grains for the domestic market. For example, despite 91-92 being a bumper year for wheat harvests and India growing more wheat than the U.S and Canada combined, loosening of restrictions led to hoarding by farmers and traders despite the high prices offered by the government. The government eventually had to import 2.5 million tons of wheat from the U.S. and Canada at high cost(Gupta, 1994). Given the NEPs goal of removing all subsidies and letting the market determine prices, this does not bode well for the poor who cannot afford to pay high prices for necessities. Although the per capita availability of food has increased, from 1975 to 1989 the total proportion of households with adequate nutrition has remained the same 50 per cent of agricultural workers are still malnourished. From this it can be inferred that food resources are being appropriated by the affluent section of society, evidenced in the sharp rise of consumption of meat, poultry and dairy products. On the flip side application of better agricultural technologies could improve water efficiency, introduce modern soil conservation procedures and genetic technology and help raise agricultural outputs, which might lead to declining prices. However, intensifying agricultural production by applying modern capital intensive farming techniques will likely, lead to widespread rural unemployment. Urbanization Transition The urbanization transition is driven in India by the dual forces of rural to urban migration and existing population growth in cities. Population pressures in rural areas as well as declining productivity of agricultural lands and shrinking plots drive migration. Since the average urban citizen manages to earn more than his rural counterpart, migration is looked upon as a viable means of escape from a desperate rural situation and a way to repay debts. India has the second highest number of urban dwellers in the world at a total of 220 million or 26 % of the population. According to projections made by the World Resources Institute in figure 7, Indias urban population is going to increase steadily with a corresponding decline in the rate of growth of rural population reflecting the transformation from a predominantly agrarian to a manufacturing industry based economy. Figure 7. Rural vs Urban Population. Source: WRD 1995 Public health spending per capita is over 6 times higher in urban areas than in rural areas (World Resources, 1995). The urban poor also have greater access to social services, such as health care, than their rural counterparts which acts as a magnet driving urbanization. Increased urban pressure could amplify the urban problems of congestion and pollution. Most of Indias cities are already near full capacity or have exceeded it and a third to a half of residents live in slums, squatter settlements or the pavements. Most urban areas already face shortages in drinking water, energy, garbage disposal (World Resources, 1995). The spread of the plague in 1994 which was concentrated in large cities highlighted the role urban areas play in the spread of diseases. The contribution of Indias urban sector to net domestic product rose from 29% in 1950-51 to 60% in 1990-91(World Resources, 1995) Most of the employment in manufacturing, trade, commerce and transport is concentrated in urban areas while the rural sector is largely agricultural. In India the planning process is heavily biased in favor of urban areas to the detriment of rural areas, borne out by the pattern of allocation of resources, industries are generally not located in rural areas unless they pollute. The availability of employment opportunities in urban areas will attract rural populations especially since the goal of the NEP is to increase jobs in urban sectors and shift the employment pattern from agricultural to industrial. Urban populations also increasingly determine the countries political goals and the shape of its policies. Not surprisingly the greatest demand for change and continued reforms comes from the urban middle class, who stand to benefit most from these changes. Forestry and Toxicity The demographic, agricultural and urbanization transitions in turn will affect the forestry and toxicity transitions. Forested areas which covered 40 percent of the land area in 1947 has declined to 19 percent. Although forests are currently not shrinking, degradation is a serious problem, denuded wastelands cover 130 million hectares(UN, 1995) which may have been degraded cropland abandoned in favor of converting forests into farmland. As more land is degraded and abandoned due to the increasing intensity of agriculture, more forestland will be brought under cultivation. These lands are vulnerable to erosion and cause floods exacerbating problems elsewhere. Population pressures in rural areas place demand on forests for fuelwood and grazing. Indias forests can sustainable provide an estimated 41 million cubic meters of fuelwood per year, yet demand is estimated to be 240 million cubic meters. As Figure 8, below shows even exponential growth in fuelwood production cannot produce enough fuelwood, to satisfy demand. Figure 8. Actual Fuelwood & Charcoal Production and Projections Using Curve Fits Source: World Resources Database, 1995 This demand has increased in the wake of the reforms following increased prices of commercial fuels such as kerosene. Studies show heavy demand for fuelwood in cities (U.N, 1995) consequently forest cover surrounding urban areas is being reduced. Fuelwood is also being diverted from the rural areas where was a non commercial product to urban markets. Shortages in rural areas induce illegal collection without consequent replanting. In addition 25 percent of Indias 400 million livestock graze in forests which have a estimated capacity of only 31 million. Urban areas also create more demand for timber and paper, As Figure 9, below, shows from 1980 to 1990 paper production rose 105 percent accompanied by a significant increase in wood production ( World Resources 1995). Population growth increasing the intensity of agriculture which further leads to urbanization will only serve to increase pressures on forests. Figure 9. Sawnwood and Paper Production in Thousand Metric Tons. Source WRD 1995 Urban areas also create a demand for energy which results in large hydroelectric projects, intensified coal production and consumption which release pollutants. Suspended particular matter and sulphur dioxide constitute a major portion of the atmospheric pollutant load in many cities in India and cause respiratory problems especially among children, for example 3 out of 5 people in Calcutta are estimated to suffer from respiratory diseases related to air pollution. Urban and industrial growth emit greenhouse gases and other pollutants, emissions of carbon dioxide, a greenhouse gas have increased dramatically, in the past two decades. Levels of suspended particulates in most cities consistently exceed WHO standards. Most urban settlements in India exist without proper sanitation and waste disposal methods other than the nearest river. According to a survey conducted by the Central Pollution Control Board in 1988, of 212 cities with populations of more than 100,000 only 71 had sewer systems. of the 6.5 billion liters of sewage generated daily in the 12 major metropolitan areas, only 1.5 billion were collected. (World Resources, 1995).
Figure 10. CO2 Emissions. Source: WRD 1995 One of the challenges India faces over the next several decades is how to speed economic growth without exhausting the resources upon which growth relies. Environment health is of importance to Indias future. Economic growth may create capital to invest in environmental protection, better technology and efficiency can make a positive contribution. For example cookstoves can improve fuelwood efficiency, thereby alleviating pressures causing forest degradation and reducing demands on womens time which could be spent on being educated and learning marketable skills. Health hazards associated with burning biomass fuels which expose millions of women to high levels of harmful substances will be lowered by adopting cookstoves and other devices like solar cookers. India currently has the largest solar cooking program in the world, having sold over 250,000 by 1993(UN, 1995). However, India needs modern environmental management techniques and environmental laws need to be enforced. A comprehensive Environmental act was promulgated in 1986, compliance, however has been lax and most state governments have not shown much interest in enforcing regulations. Regulatory agencies also tend to be understaffed, underfunded and vulnerable to political and monetary pressure. Critical Issues It is only when people can satisfy their needs, have control over the resource base and have secure tenure to land that the long term requirements of environmental protection can be satisfied. In practice environmental values and their associated social costs are often regarded as secondary considerations, to be shifted onto other parts of society or future generations. In India the opportunity costs of resource saving technologies tend to be prohibitively high for the poor, whose production and maintenance strategy is shaped, instead to derive short term benefits from the available natural resources. The costs of resource depletion and degradation are externalized and sacrificed by both industry and the poor, alike. Rural families are characterized by high fertility preferences, faced with limited access to capital, improved technology and other production inputs, they can often exercise effective control over only one input, their own family labor. Because the same factors may be responsible for both high fertility and environmentally unsustainable resource use practices, their identification is important for the search of policy responses that may effectively integrate environmental, economic and demographic concerns. Governments can alleviate or exacerbate the stresses farmers experience in maintaining their livelihood, through pricing, monetary policies, land reforms, access to institutional credit, development of infrastructure and provision of health, education and contraceptive services. These policies can exert considerable environmental impact by altering the use of land based resources. These same policies can influence fertility behavior through their effects in the costs of and returns from children. The environmental effects of the different transitions India is undergoing have not been experience or have only been dimly perceived in the past, a number of their components cannot be fully anticipated until they actually occur, at which time it may be too late to counteract them. Hence there is a challenging task to choose an appropriate long term strategy when standard short term solutions such as market forces may not be able to provide sufficient insurance against the risks associated with the various transitions. Analysis and Policy Recommendations The Indian economy is going through a critical transition at the present. How India emerges from this transition will have broad implications for its populace and will determine the face of modern India. India badly needs modern technology, the efficiency it brings and resultant competition to its complacent industries. The infrastructure in India is inadequate and demand has far outstripped supply in many sectors such as energy generation. With a huge and ever expanding population India needs to husband its resources, discourage wastage and promote their effective usage, which modern technology has evolved to do. Based on Indias past performance and widening income distribution gap, increasing inequalities and inflationary tendencies it can be inferred, the past economic model was not working well. In this regard the NEP is a much needed shot in the arm. Rapid economic growth and efficient industrialization is possible through outward oriented policies for trade because they encourage efficient firms and discourage inefficient ones. Creating a more competitive environment for both private and public sectors promotes higher productivity and growth. producing a favorable effect on poverty alleviation. Some surface indicators however, do not seem encouraging, India is currently caught in a debt trap which is eating up most of its current expenditures with the result the government cannot play a role in the economy and protect the poor from market fluctuations. Due to exports not keeping pace with imports the trade deficit has widened, creating problems repaying debt,. How India handles the debt trap will determine whether it follows Brazil and Mexicos form of development or Koreas. Unfortunately India is going through its transition at a time when most world economies are not growing and are in recession and are themselves looking for markets. Most of Indias imports since 1991 have tended to be of consumer goods, foreign companies seem keen on exploiting Indias large middle class of 300 million who can afford to buy consumer goods. Even U.S. trade literature touts Indias huge market not its potential for investment (U.S. Dept. of Commerce, 1995). Therefore a short term solution might consist of, not eliminating tariffs completely and restricting import of consumer goods for the time being until the foreign debt and balance of payments deficit is resolved. Otherwise the burden of paying for the consumption of the well off Indian classes will fall on the Indian government in the form of increased foreign debt burden. While foreign technology and help in needed areas like energy generation, infrastructure should be welcome it is premature to throw open the Indian market to firms bent on exploiting it. India also needs to be wary of foreign capital. Foreign capital can create great social costs if it dominates the countries productive resources. By benefitting only the wealthy and foreign investors, it can accentuate inequalities and expose poor to market fluctuations beyond their control. The poor often end up paying for capital which they never wanted, benefitted from and only made their condition worse and purchasing power drop. India should not forget that foreign capital does not seek to democratize nations but seeks the highest possible returns. Therefore a path should be laid out that offers opportunities to direct capital investment in socially meaningful ways without jeopardizing national sovereignty and public and environmental health (Adapted from Cervantes, 1993). Structural issues may not also be resolved by a market friendly approach. Many countries which have relied on market forces for growth including Korea and Japan, implemented radical land reforms before they embarked on a high growth path. Privatization of social services came after a long period of government operated services, after people were able to pay for them(Sinha, 1994). The free market operates efficiently within a given structure of the economy. If a given structure is highly unequal the market will only reinforce it. Since the market takes care of effective demand only, it does not respond to the needs of poor people if not backed by purchasing power. So far economic growth in India has resulted in increasing concentration of economic power and widening inequalities, elitist oriented production structure, declining growth of employment, rising prices and growing social tensions. The NEP based on trickle down economics and the purchasing power of the top 30 percent of the population does not reverse this trend. It will have an immediate impact on 200 million people the other 700 million will see only pain in the beginning. Therefore the government has to balance liberalizing the economy with some measures to protect the poor and employment generation schemes which it intends to do. However, due to the resource crunch there has been a near stagnation in the governments outlay for social services for the past two years. The government therefore has to increase revenues and take care of foreign debt. This will be a hard task considering interest on debt consists of 50 percent of current expenditures. Other countries such as Israel and Malaysia have successfully negotiated debt write-off from the IMF and India could try to the same or negotiate more favorable terms. Due to political pressure the government has not been able to reduce expenditures by closing sick public sector units and increase revenues through broadening taxes. Unless these measures are carried out they may lead the government to increase borrowing and postpone spending on critical items like population planning, poverty alleviation and ecological regeneration. The large number of unemployed people is also a serious problem especially since this number will increase as sick public sector firms are closed. It is estimated the stabilization program will create extra unemployment of at least 8-11 million people who may not be absorbed by new enterprises(Ghosh, 1994). The NEP is bound to create greater inequalities in the short run and greater unemployment problems since new technology tends to be more capital intensive than labor intensive. A focus on employment generation and a feasible strategy for devising the same seems to be missing, in the NEP. Generating employment for 700 million people is not possible without having a labor intensive mix of technology. The NEP is geared to do just the opposite. In a poor country the composition of growth may have greater relevance than the rate of growth. Since the principal constraint in India is capital, investment should be allocated in areas where the amount of capital used per unit of output is low, as Table 1 shows, agriculture, therefore becomes the primary candidate for a higher share of investable resources. (Ghosh, 1994). Table 1. Capital Output Ratios Under 5 Year Development Plans ___________________________________________________________________ 1950-55 1955-60 1960-65 Annual Plans 1965-70 1970-75 1975-80 1980-85__ Agriculture 2.48 2.51 4.37 1.96 3.63 3.35 4.75 6.56 Manufacturing 5.52 7.49 6.67 29.76 11.64 8.73 6.96 7.63____ Source: Ghosh, 1994 In the field of rural and agricultural development there is hardly any change from the approach of treating them as appendages to the main development program. Given that 70 percent of Indias population is rural based and that is where the highest incidence of poverty is, this is a serious lapse. Spending on rural industries has remained stagnant. which has followed the example of earlier plans of treating rural areas as incidental to the planning process. The view of the NEP seems to be that rural and agricultural jobs are not productive consequently, there is a focus on encouraging rural to urban migration. In the words of Indias finance minister Manmohan Singh and architect of the NEP earlier industrial growth failed to attract the poor away from rural areas. With 70 percent of our society still dependent on farm and rural sector jobs, India is one of the most stagnant societies in terms of movement of labor towards more productive industrial jobs. Therefore the faster pace of job creation in the NEP would shift workers from less productive rural jobs to more productive urban jobs (Singh, 1994). Inferring from this statement the intention of the NEP seems to be shifting rural and agricultural populations to urban areas and replacing traditional subsistence agriculture with capital intensive agriculture. The industrial infrastructure would therefore have
to absorb the bulk of India's population which might not agriculture. The industrial infrastructure would therefore have to absorb the bulk of Indias population which might not be possible. This also has alarming implications for other transitions,
although population growth may decrease as a result of increased access to
health services and contraceptives and greater value of female labor,
urban squalor would be greatly increased. Epedimiological risks would
certainly increase as squatter settlements boom. The toxicity and forestry
transitions would be impacted as emissions and outflow of sewage and
wastes would increase and become concentrated spatially. The already overburdened
health, sanitation and infrastructural facilities would collapse. Demands for
energy would increase and lead to more pollution. As noted earlier government
expenditures on the average urban resident are much higher than the rural
counterpart, therefore government expenditures would greatly increase.
Since urban populations tend to be more aggressive, pressures on the
government for changes could increase accelerating the rate India takes
through its key transitions. This would further lower the adaptive capacity
of society and determine the trajectory and final outcomes of the transitions. So far the government seems to be taking a slow consensus based approach to reform. The slow rate of movement through the transition may be critical in enhancing Indian societies adaptability to change and may ensure negative effects are dealt with. The trajectory India takes through its economic transition will be determined by Indian policy makers who at the very least are conscious of the need to be re-elected. Their response to this factor will determine the outcome of the transitions India is facing. The IPAT Paradox Impact (I) on the environment is based on the interaction of population (P), affluence (A) and technology used (T). I = PAT (Ehrlich, 1990). The impact on the environment is related to the number of people and the amount they consume. Simply put a large number of poor people will place pressure on limited resources and have a large impact on the environment. This impact, however, is lessened if they are poor and they are relatively poor thereby consuming less. Technology plays a role in determining impact, traditional labor intensive technologies and advanced capital intensive technologies which produce more from a given resource with less pollution, have the least impact. In between are the, intermediate cheaptechnologies in vogue throughout the developing world which have the most impact and cause wastage. Affluence causes a large impact on the environment. Rich people consume more per capita than poor people, place more demand upon resources and industrial processes. Satisfying demands by the affluent classes will drive the industrial system and use more natural resources for energy and raw materials emissions of pollutants from industrial processes would be expected to increase. As Figure 11 shows there is a link between increased GDP and fuel production which causes pollution. In India commercial fuel production and consumption have closely mirrored increases in GDP.
Figure 11. Energy Trends vs GDP Source WRD 1995 In order to decrease the fertility rate and arrest population growth India first needs to increase affluence. In other words income inequalities need to be lessened and people need to be made affluent in order to remove the incentive to have children. Affluent people however place more demands upon the environment an have more impact than per capita than poor people. Thus India is caught in a catch 22 situation solving which needs a multi-pronged approach. Rather than pinning all expectations and hopes on market reforms it might be wise to take a lesson from the example of Kerala a state in South India which has made remarkable strides in areas such as health care, education and population control. Over several decades, the state government carried out land reform, mandated education through the tenth grade, instituted a minimum wage and the right of labor to organize and built the most extensive medical facilities in India. The results are impressive: despite a per capita income of about $ 300, many indicators such as literacy, infant mortality, and life expectancy are close to industrialized countries with far higher per capita incomes. More importantly, it also has the lowest fertility rate with an average of just 2 children per woman which is replacement level. References
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