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Resource centre on India's rural distress
 
 

Economy will recover by Arjun Sengupta

The Indian economy should recover from the recession caused by the global meltdown. India’s exposure to the world economy is quite limited. It is mainly through the exports market and partly through foreign investment flows either as equity or debt capital that financed private investment. The extent of the dependence, however, is quite low. The recession in the exports market affects only few sectors, such as textile and labour-intensive manufactures and some industrial raw materials and engineering goods with limited feedback on other intermediate products. The effect of recession on final demand, mostly from domestic market, remains limited when there is a downturn, although expansion in demand often is significant in pushing up domestic production.

The fluctuations in capital flows may, however, have much larger impact, especially when an increasing amount of private investment has been financed by foreign borrowing. Now that the international capital market is reviving and the rate of return in the Indian industries remains reasonably high, the revival of the international capital market will act as an impetus for Indian investment. The existence of a large domestic market provided a basic cushion for the Indian economy to the negative effect of global recession. But as the world demands start picking up the market response would go beyond the domestic interdependence to further increase the growth impulses in the Indian economy.

I, therefore, feel that the Indian economy will get back its high growth trajectory in 2010 unless some unforeseen development takes place. Several reforms may improve the matters, but they are not that important to keep the growth momentum. The investors should not lose their confidence in the continuation of the growth outcomes, which would result if there is no reversal of policies.

But does the revival of the economic growth answer all the major concerns of Indian development? By now, almost two decades of high economic growth after the economic reforms of 1991 have taught us a lesson that high rate of growth may be necessary, but is insufficient to produce the inclusive development that has been the principal goal of the Indian policy. Inclusive development does not mean that all sections of the economy should experience some development. Sustained high growth for some years will, in due course, impact most sectors through increasing demand and supply and general increase in productivity. Inclusive development implies increasing equity, improving the livelihood conditions of the poor and more than the average growth of the economy. Nobody in our country today would ask for growth for the sake of growth. It should improve the welfare of the people reducing the disparity in income and opportunity, poverty and destitution, lack of health and education. The least advantaged must improve their welfare more than the national average.

A number of studies have shown that high performance of economic growth in India has not made much impact on the income and welfare disparities. India is now divided — the poor and the vulnerable and the rich luxury consumer.

I think the challenge to the Indian economy next year and in the years to follow would be — how to change the dismal dichotomy between two Indias? This division not only makes mockery of tom-tomming our high growth rate as the index of prosperity, it is also fraught with the danger of widespread violence and anarchy forcing the policymakers to reverse the reform process with investors eventually losing their confidence in our economic prospects. If that happens, it will take very little time for the high growth performance of the country to collapse. It is high time that we change the emphasis of our economic policy and plan for an inclusive development that removes the prevailing disparities.

The United Progressive Alliance government has worked out major programmes, which can tilt the balance in favour of the poor, if faithfully implemented. Five programmes — National Rural Employment Guarantee Scheme, Bharat Nirman, rural infrastructure including roads, irrigation, sanitation, and electricity, Savarashiksha Abhyan and Rural Health Mission — would take us a long way towards changing the nature of our economic development. If the government added to this the employment creating programmes in our informal economy, providing the 92 per cent of our unorganised workers access to enterprise, credit, technology, and marketing, it would place us firmly on the path of development bringing equity and social justice to the high level of economic growth.

We have, however, learnt a major lesson from our attempt to implement these programmes — they are not dependent only on provision of finance or public expenditure. With economic growth, the volume of revenue realisation has increased over the last five years, which has allowed us to increase public expenditure on these projects. But we have failed to work out effective delivery of these programmes, without leakage and inefficiency and with accountability and transparency. We no doubt need financial provision, but more importantly we need organised public action, making the stakeholders responsible for delivering the programmes and being accountable through a proper process of evaluation and scrutiny and mid-course correction when necessary. In other words, we need a different approach to governance where accountability should be established, whether by the panchayati raj institutions or local level organisations. We need a new model of governance.

Planning for development in India, from now on, should be done from the point of view of equilibrating demand and supply and generating investment and capacity expansion of specific sectors where there are bottlenecks. The methods of carrying out those exercises will have to be much more decentralised going to the grassroots level. A simple top-down approach will not work because the top does not have and cannot have all the information necessary for implementing the programmes.

Apart from decentralisation, this new model of governance involves a new model of accountability and transparency holding the different agents responsible for carrying out specific functions. Where agents fail in discharging the responsibilities, there should be a mechanism of correction as well as reprimanding and punishing. The government machinery at the district, state, and Central levels must fully engage in identifying their responsibilities. They would derive their legitimacy from carrying out that exercise of governance and there should be a method of changing them if they fail. I very much hope that year 2010 would mark the beginning of a process of reforming our system of governance, so that we can achieve our cherished goal of economic growth with equity.

Dr Arjun Sengupta is a member of Parliament and former economic adviser to Prime Minister Indira Gandhi