Don’t forget political economy issues

The government that will come to power after today’s counting of votes will have its economic tasks cut out. There are a number of issues of development, ranging from slackening of growth rates in several sectors to the reliability of the numbers themselves, that need urgent attention. Even if the same government comes back to power these are issues that can no longer be brushed under the carpet.

The main task of the government would have to be to move away from a fixation with overall growth rates. India is undergoing a phenomenal transition with literally millions of agriculturists — both cultivators and agricultural labour — being forced by economic circumstances to move out of agriculture.

While some of them are in a position to find an alternative livelihood in the cities, a substantial portion of them cannot do so. They tend to find less than perfect arrangements to meet the challenge, which includes the men moving to cities while retaining their households in the village. The success of a few more advanced sectors has ensured that these costs of the transition out of agriculture are not reflected in growth rates. But as the distress in the rural economy grows and some of the advanced sectors grow less rapidly, the cover provided by growth rates could be blown away. The new government would need to address the rural challenge directly. As a first step they would need to reduce, to the extent possible, the uncertainties of agriculture.

It is not often remembered that Indian agriculture’s major success story, the Green Revolution, was built around a strategy that included guaranteed procurement prices.

The government of that time could afford to procure all that was offered because it could be sold in the Public Distribution System. With production exceeding what could be sold in the PDS this strategy became unviable. The government thus needs to find an alternative way of ensuring the farmers know the price they will get before they sow their crop. An effective forward market would ensure the farmer has this information before he makes his investment decisions.

Such a system would prevent dramatic losses of the kind that push cultivators to suicide, but it would still not be able to fully offset an increase in the number of people dependent on a unit of land. As the land is divided among members of each new generation, the farm size decreases and is bound to decline further.

Some of those who are dependent on agriculture would need to find non-agricultural options. And there are at least three major roadblocks in their path: the lack of skills required to make the transition, the slowdown in investment, and the cost of moving to urban centres that house these non-agrarian options.

The skills factor

Skill development has been at the forefront of the rhetoric of recent governments, but most of the initiatives have been focused on what industry and services need. There has been much less attention paid to the constraints faced by those leaving agriculture in picking up non-agricultural skills.

These constraints can be quite varied and severe, ranging from those in the cultural domain to the distance between the place of residence of the worker and the place of skill development. The new government would need to show a more explicit recognition of the fact that meeting industry’s demand for workers with the demand for work of those leaving agriculture, would require some attention being paid to the workers’ end of the problem as well.

It is also not clear that acquiring the specified skills would substantially improve the likelihood of getting a job. Investment as a share of GDP is well below levels it had reached a decade or so ago. It would appear that an increasing reliance on foreign investment has begun to take its toll. It is not just that the pace of foreign investment is showing some signs of faltering, but there are few signs of substantial Indian investment. Many Indian corporate houses are beginning to find greener pastures outside the country. And there are also fewer stories of the more decentralised accumulation of capital from agriculture finding new avenues of industrial investment. The new government would need to develop, and in some cases revive, mechanisms that helped the emergence of new Indian industrial houses in the past.

Dispersed industrialisation

The rise of new industrial houses emerging from new centres would also help the process of dispersed industrialisation. Such a process reduces the distance between the points where workers are being released from agriculture and the point where they can be absorbed into industry or services. This reduction of distance can play a significant role in reducing the costs of the transition to an industrial and services economy.

If it is accompanied by an effective local transport system it raises the possibility of workers in new industrial units continuing to reside in their villages. Dispersed industrial units, and the associated urban centres, also reduce the pressure on our metropolises that are already becoming very expensive to maintain. The potentially lower costs of these centres can also make them affordable for migrant workers. Such a dispersed transition led industrialisation would also result in a set of priorities in terms of industries that will best suit this process. These priorities would include industries that are best suited to absorb the labour being released from agriculture. Concessions and facilities can be offered to attract these industries. Additional concessions could also be offered for those industries that are willing to locate closer to the points where labour is being released from agriculture.

As the government works out such a bottom-up development strategy it would need to be acutely aware that there are no shortcuts in this process. It would need to avoid the temptation of schemes that it believes will act as a magic wand, particularly ones that would not stand economic scrutiny like demonetisation.

Whatever the election related position that the party that comes to power may have held, the time has come for realism with a ear to the ground.

The writer is Professor, National Institute of Advanced Studies, Bengaluru

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