The Hindu Business Line : ‘Spatial balance of India’s economic development is unclear’

The boom in the Indian economy, while distributed across sectors such as Information Technology, auto and manufacturing, is leading to concerns of geographic concentration of economic activity and its consequences for economic development. Prof Munisamy Gopinath, who teaches applied econometrics and international trade at Oregon State University, US , says that though the country is on a high-growth path, the spatial balance of economic development, particularly the improvement of rural citizens’ welfare, is less clear at this time.

Giveaways, the key

In an e-mailed interview to Business Line on a range of issues, from States competing with one another to attract industry to IT growth resulting in higher real-estate costs, he said the (tax) giveaway competition among States limit ed in scope, as larger States with well-established industrial and tax base hold a distinct advantage over others. “But States at the losing end need not be discouraged because there is little systematic evidence that such instruments attract firms. In addition, it is not clear that the costs of these instruments outweigh their benefits.” He pointed out that the types of jobs created by these instruments and the share of those jobs filled by in-State workers is limited. “Additionally, inputs required for these companies may be sourced outside of the State, raising questions on the extent of backward/forward linkages generated by these instruments.”

According to Prof Gopinath, who has been with Oregon State University for a decade now researching trade and economic development with emphasis on agriculture and food industries, if two States are identical in demand patterns, infrastructure and human capital availability, such giveaways would help break a tie. “Unfortunately, these economic fundamentals exhibit substantial spatial variation, with urban or city centres accounting for the bulk of economic activity.” Raising the question of why States must go to great lengths to attract an individual firm, he said that other strategies to attract a host of firms are always available. “For instance, a State government’s investments in infrastructure would help lower business costs and possibly attract more than one firm. “Simultaneously, investments in locational amenities (such as water availability, air quality and sanitation) would attract educated folks, creating a large, skilled labour pool, which again would be attractive to a host of firms.” However, he added that there are limits to city size and growth.

Regulations should be priority

On how States can tackle the problems of rising rentals, higher traffic and worsening air quality, which accompany development, Prof Gopinath said that regulations to improve market-based outcomes should be the priority if the prices/rental rates of land are outcomes of well-functioning land, labour and credit markets, which account for current and future growth potentials. “With regard to externalities such as traffic problems and deteriorating air/water quality, the public sector has to play the primary role.” Suggesting that a combination of tax and other regulatory instruments can effectively address these issues, he said that pollution abatement requires investments from public and private sectors.

“However, the giveaways could come back to limit public policies if State governments’ spending heavily relies on corporate taxes. The foregone resources and the limited ability of these Governments to tax new companies would make investments in public goods follow rather than lead economic growth.” According to him, when markets do not function well and externalities are not alleviated, the benefits of locating in urban centres would be outweighed by costs.

“Deconcentration of urban centres will occur, as has in the case of Seoul. Again, the public sector’s role would be to encourage such deconcentration without hurting existing centres and by investing in the development of targeted areas.”

Increasing literacy rates and unwillingness to engage in traditional professions such as agriculture are driving large-scale migration from rural to urban centres. Saying that in the economic development process, agriculture is expected to release labour for industrial and eventually, service sectors, Prof Gopinath said that the process does not have to occur at the expense of either rural or urban sectors.

“For instance, agricultural productivity increases when transferred in the form of lower food prices could release consumers’ income to demand manufactured goods and services.”

And the demand-driven increases in industrial capacity and distribution networks could then absorb the labour released by agriculture. He added that the food processing and packaging industry could uniquely contribute to the transition process by providing quality jobs right next to rural areas, while helping improve agricultural productivity.

“Migration in response to labour market signals is important in the growth process. However, investments in infrastructure and locational amenities would ensure that citizens do not pay for economic development by compromising the quality of life.”

Globalisation Impacts

Globalisation is changing the way economies are structured and business is done; every country faces adjustment problems, there are few exceptions.

However, the key issue is how to enhance competitiveness and how to help segments that could be adversely affected by global competition, he said. “It is not clear whether trade and/or commercial policies could slow globalisation, when transport, information and communication costs have rapidly declined in the past two decades.”

In the Indian context, rural areas appear to be facing the greatest difficulty in adjusting to global competition, the reasons being absence or limited availability of safety nets and adjustment tools to tide over uncertainties of the marketplace.

“Without spatially conscious policies, globalisation’s flip side could be regional imbalances in economic development along with deterioration in the provision and quality of urban public goods. Hopefully, the high-growth environment will generate adequate resources to address these issues through public and private sectors.”