The Hindu Business Line : Policy myopia and the economic disconnect

The other day, someone made an interesting comment. When asked why the US was the world's biggest economic power, he said: "Well, that's because the US is not bogged down by a `heavyweight' legacy and the fact it has less history gave it more time to dwell on a high potential future."

Having heard that, one would dare not ask him about India. While the enthusiasts still advocate the rapid economic growth and software leadership as a potent combination for Brand India, but what about the country's inherent social problems that seem to have taken the back seat. The reason for this is its heavyweight history. Not the cherished culture or the freedom struggle, but the country's historical `myopia' — in social and economic reform making.

If that's a strong statement, then what of the economic disconnect between a `phenomenal' 8 per cent-plus GDP growth and the continuing lack of improvement in the standard of living of a large section of the people, with 26 per cent (one-third of the world's population) of Indians still mired in dire poverty?

Strong growth story

The protagonists of the the strong economic growth story should ponder on how much an average Indian participates in the economic growth. The software-story enthusiasts must be asked: "It is great that the services sector is growing at 7 per cent, but what of the agrarian economy; agriculture still contributes significantly to GDP, in absolute if not in real growth terms?

As long as India continues to be myopic to reforms that would help it move towards a long-term competitive position, the economic disconnect will increase. But this is easier said than done. For in allocating the scarce resources, it may even imply investing less on market-driven reforms compared with the much-needed social reforms. Or, it may lead to sluggish growth in the short term.

In this perspective, if one were to discuss India's stand at the World Trade Organisation on agricultural products and try to look at the inherent disconnect, the common man would perceive India's economic (political) stand against the developed countries, which stick by their farm-subsidies, as a show of strength by the biggest democracy in the tough international arena.

But the problem is that this has not taken the country far. By fighting bitterly at the WTO India has ensured there is no loss but then this has not helped in gains either. And, again, this leads to an economic disconnect. It is not when developed countries end farm support that India's agricultural competitiveness will improve, but only when the country implements agrarian reforms.

To some extent this is also linked to social reforms, and the threemain areas of focus in this context are investments towards healthier life, infrastructure and micro-credit.

Grave issues

The healthier life issue is truly grave considering the health-hazards faced by many villages that lie in the periphery of even the most developed urban areas. Considering that 67per cent of labour in India is employed in agriculture, a significant number of households suffer from water and air-borne diseases reducing the labour days and hence the farm productivity.

The presence of many non-profit organisations, which have been working on this issue in many affected regions, of course, cannot be ignored. One example is the Naandi Foundation, an NGO working to provide clean water to villages around Andhra Pradesh. However, the number of such organisations is far less compared to the number of affected villages.

Poor infrastructure is a major hurdle to the agricultural delivery system. Good roads, warehousing facilities and means of transport are still dream in many a village. As for the issue of poor financing or lack of credit, such a `financial crunch' often leads to a loss of life.

In such a situation, some remedy may lie in collective bargaining. The concept of cluster formation among small enterprises (typically of artisans and weavers) is not new to India and some early adopters have benefited from `collective bargaining'.

cluster development

Farmers can benefit from cluster development too. Forming clusters among farmers growing similar produce will result in two-fold advantage — eliminate the cons of selling inadequate quantities, and gain better visibility to access credit. To ensure quality credit facility to these clusters, micro-finance institutions (MFIs) should play a major role, typically with one MFI catering to a set of farmer-clusters. Andto incentivise these MFIs, the government should give them sufficient support.

delivery system

The issue of inadequate delivery systems is more complicated. On the storage front, state-owned warehouses can be offered for storing produce of a select number of clusters at a subsidised rate. On the physical infrastructure front, consultant reports will not really help unless effective investments are made.

It is a vicious cycle, but it is the responsibility of the Government to break this cycle. There will have to be bitter medicine, the side-effects of which may be a compromise on high-return market-oriented investments. If one is ready to forget the country's true backbone, then one must call architects to build more Silicon Valleys on the farmland.

(The author, a chartered accountant, is pursuing an MBA programme.)