Pragmatic | Explaining India’s economic troubles

The most lucid insight comes from Raghuram Rajan and TN Ninan

This is perhaps the best way to understand what went wrong with Indian economy in the recent years under the UPA. The insight comes from noted economist Raghuram Rajan:

Rajan said the problem in India was due to low growth in rural productivity, unlike China where rural entrepreneurship was the biggest growth driver for years. According to him, India has simply shifted resources to rural areas through transfer programmes like the guaranteed rural job scheme and minimum support price for crops, without the concomitant rise in farm productivity. That has fuelled demand for goods and services and led to high inflation.

“We don’t have the luxury of high growth (any longer) to indulge in populism,” said Rajan[BS]

TN Ninan builds on the argument in his column.

The professor of finance at Chicago, who is also an adviser to the Prime Minister, argued that productivity growth in Indian agriculture had been poor, so rural incomes were not growing fast enough. In its effort to deal with this, the government was pumping subsidies and income transfers into the countrywide, to put money in people’s pockets — which the recipients were spending. Since this expenditure was not matched by productivity growth, it was causing inflation.

…It is a line of thought that is worth staying with. If you look for the root cause of the power sector’s problems (high losses, disincentive for investors), it boils down to the virtually free electricity provided to farmers. That can’t be corrected because farmers don’t earn enough to be able to pay a higher electricity tariff. And there is a limit beyond which it becomes impossible for other users to cross-subsidise power to farmers; high electricity tariffs are already a burden for exporters who compete against rivals in countries that enjoy lower power tariffs. So you can’t fix the power sector’s problems without fixing agriculture. That argument can be taken a step further: Land revenue has virtually disappeared as a source of money for state governments — farmers can’t be taxed because they don’t earn enough. Irrigation charges cannot be levied at any reasonable level, for the same reason. Fertiliser prices cannot be raised, diesel prices have to be kept down because farmers use it for their pump-sets, and so on.

The bald truth is that half of India’s workforce toils in the fields to generate one-sixth of GDP. Since the other half produces the remaining five-sixths, non-agricultural incomes are typically five times agricultural incomes. The way to even out the imbalance is to get people off the land, and into non-agricultural occupations. But urbanisation and the growth of non-agricultural employment have been slow in India, an important reason being the stifling of industries that can provide entry-level, low-value work.

…The answer to the problems of high inflation and slowing growth, and low farm incomes, would lie in addressing the basic reforms that India is still to attempt – like labour laws. Instead, we have a food security Bill that will create irrational incentives which end up threatening agriculture itself. Talk of committing hara-kiri.[BS]

Who will explain this simple economic truth to the NAC and its chairperson, Mrs Sonia Gandhi?

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.