A Macroscopic View

India transitioned from a slow-growing to a decently growing (about 5 per cent per annum) economy in the second half of the 1970s but was temporarily pulled down by the devastating drought of 1979–80, an event that pushed the annual growth rate of the GDP 5.2 percentage points below zero. This severe external shock has influenced the break-point analysis of growth regimes. The 5-year moving average growth rate picked up in the next three years to reach the level achieved before the shock, and over the following three decades the average fell only narrowly below 5 per cent level in just two short stretches of three and two years respectively in the mid-1980s and early 1990s (Figure 2.1 in Chapter 2). But there were prolonged phases when the average remained above 6 or even 8 per cent; these phases were located in time after the big comprehensive reform of 1991. Naturally, much of the attention of observers is focused on this phase. The present study, however, concentrates on roughly three decades since 1978–79. The study exploits the rich information contained in the input–output transactions tables (IOTTs) of the Indian economy, apart from data available from other official sources; the IOTTs are available roughly at quinquennial intervals and our reference dates are often based on their availability. In 1980 sectoral relative shares were in conformity with the stylized facts of economic growth (as discussed in Chapter 3). The relative share of the manufacturing sector reached a peak in 1979–80, which, frustrating expectations, has not been surpassed in the subsequent decades. Also, from about that time onwards the country was on the lookout for new policy directions. So, from the point of view of analysis of structural change, the turn of the 1970s provide a vantage point in time.

Some observers maintain reservations regarding the reliability of the IOTTs of the Indian economy as these are produced after adjustments for statistical discrepancy between production and expenditure sides, though sources of data are the same for the IOTTs and the National Accounts Statistics (NAS).

Introduction

Because of the agglomeration effects and rise in total factor productivity growth, economic growth is expected to be positively associated with urbanization. Also, in the process of urbanization, employment opportunities for all sections of the society including the unskilled and semi-skilled variety of the workforce are expected to grow through several forward and backward linkages between the dynamic sectors and the informal sector. In other words, even the activities that were residual in nature to begin with may acquire productivity gains in the process of urbanization and, thus, offer better levels of living to the workers located in the lower echelons. Since the cost of providing services in urban areas is usually less than that in rural areas (as a result of agglomeration effects), the decline in the incidence of urban poverty is likely to take place at a higher pace with rapid urbanization. Even the rural poor benefit in the process of urbanization through inter-linkage effects.

Growing inequality and increasing poverty are likely to have a direct relationship. Given the level of per capita income if inequality rises, it results in an increase in poverty. However, when both growth and inequality rise simultaneously, the poverty outcome is a bit uncertain. The beneficial effects of growth on poverty tend to get neutralized by the adverse effects of increasing inequality on poverty and thus the net decline in poverty can be quite modest. However, at higher levels of growth when inequality tends to decline, poverty is certain to fall. As economic growth, particularly its compositional change, is expected to bring in rapid urbanization, one may therefore infer that at higher stages of urbanization, the overall poverty is also expected to decline substantially. Since urbanization can offer opportunities to rural migrants to escape poverty—more so because of the agglomeration effects in large human settlements—the relationship between urbanization on the one hand, and rural and urban poverty on the other, can be an inverse one even at the lower levels of urbanization. If rural–urban migration is directed to large cities and much of the economic growth also originates from large cities, the decline in poverty and rise in urbanization can occur simultaneously.

In February 1972, Nixon went to China. While American bombers scoured the Vietnamese countryside with defoliants and explosive ordnance, killing and maiming its inhabitants by the millions, Richard Nixon arrived in Beijing, where flashbulbs popped on the tarmac, and a giddy American press corps – already primed to call this ‘the week that changed the world’ – went into ecstasy. An avowed anti-communist, no less, this president – the first to ever visit the People's Republic – had crossed the Pacific to extend a historic offer. Officially, it was peace. The US and China were not to be friends yet, but cordial acquaintances agreeing to agree on future agreements, eventuating in normalized relations.

By positioning the US – at arm's length – on China's side, Nixon and Kissinger had turned the mutual suspicion cleaving Sino-Soviet relations into an irreparable rift whose parties could now be dealt with on more favourable terms (Strategic Arms Limitation Talks [SALT] I, for example, was inked three months later). But this was not just an exercise in geopolitical manoeuvring, meant to isolate the USSR. There were other motives afoot, motives concerning the future of the world economy and America's place at its centre.

With the global financial and monetary system of Bretton-Woods deteriorating fast in the 1960s, it had become urgent that US monetary imperialism underwent transformation. First, by suspending gold convertibility of the dollar in 1971, US Federal Reserve Chair Paul Volcker removed the cap that was placed on America's balance of payments by tying it to a finite material. Next, an ingenious reversion: instead of acting as the world's creditor (drawing on its now-depleted gold reserves), the US would become its chief debtor, exploiting to the hilt that old saying, ‘If you owe the bank $100, that's your problem. But if you owe the bank $100 million, that's the bank's problem’ (the dollar's value being kept afloat by the petrodollar). By greasing the wheels of commerce, and the palms of politics, with a flood of American treasury bonds, it would remain the world economy's ‘indispensable nation’, still capable of exercising outsized authority – but now through a more elastic financial instrument. The US, of course, reserved the right to threaten war should anyone get any bright ideas and try to call in its tab.

Introduction

The manufacturing sector of the Indian economy has been widely held to be an underperformer, defying the traditional idea contained in stylized facts summarized by Kuznets (1971) and Chenery and Taylor (1968) (henceforth, K-CT) regarding the evolving pattern of sectoral shares in GDP in the development process of an economy. The World Bank (2004) has described India's recent experience as a services revolution. In more informal discussions, this development is often viewed with some degree of reservation – the feeling is that services are fleeting while material goods last; therefore, growth with a declining share of the secondary sector in GDP is not considered as solid growth. Even if one does not subscribe to this idea (we have discussed the point in detail in the next chapter), it still remains an interesting question from the point of view of structural changes. In this context we discuss the question: what really is the share of manufacturing or industry in Indian GDP and how should we regard it?

The K-CT line of thinking would suggest that the trend of industry's share in India should have been rising and placed at a higher level than what it is now. Comparison with China makes the point particularly stark and this point has appeared time and again in the literature (Bosworth and Collins, 2007; Kochhar et al., 2006). We raise some pertinent questions here regarding data and methodology in use, because underestimation in one case and overestimation in the other would make comparison very hazardous. Then, keeping these points in view, we proceed to evaluate India's standing with regard to levels and trends of relative shares of industry, manufacturing and services in the context of recent development experience of countries above a minimum size.

In the following section we take a hard look at the Chinese data on sectoral shares in view of wide misconceptions that prevail and take a quick look at the Indian data with respect to its nature and appropriateness for comparison with other nations.

Key stakeholder interviews included those with Ali Choudhary, Director of Research at the State Bank of Pakistan (SBP), Karachi; Mushtaq Khan, former Chief Economist at the SBP; Hanif Akhai, formerly seconded to the SBP on kerb market regulation; as well as Ishraat Husain and Shahed Hafeez Kardar, both former Governors of the SBP. Also Professor Abdul Salam, former head of the Agricultural Prices Commission, Government of Pakistan; Steve Davies at the International Food Policy Research Institute in Islamabad; Mubarak Ali at the Planning Commission, Government of Pakistan; and Mushtaq Gaadi at Quaid-i-Azam University, Islamabad.

On 23 April 2013, a national strike or hartal, called by the official opposition to Bangladesh's ruling Awami League, was in its third day and traffic in Dhaka was lighter than usual. Factory owners were under pressure to get their employees back to work. Only a few weeks earlier, the Bangladesh Garment Manufacturers and Exporters Association had reported that the combined cost of recent hartals was estimated at $500 million. Workers were scarce throughout the area's industrial corridors, but could still be found in Rana Plaza, a towering structure that loomed over the Dhaka-Aricha Highway. There, 20 miles from Dhaka in the town of Savar Upsala, on the main artery connecting the city to its garment districts in the suburbs, some five thousand workers worked on eight cramped floors, making clothes for Walmart, Primark, Mango, Benetton, and other Western brands.

Like a Bollywood villain, the man who owned the place could be seen driving around the town on his motorcycle, ‘as untouchable as a mafia don’, accompanied by several paid heavies. His name was Sohel Rana and he had acquired the land for his five-factory complex – which he humbly named after himself – through threats and intimidation, obtained building permits through bribes and graft, and constructed its top floors with no regard to government regulations. His position as Secretary of the local student chapter of the Awami League had enabled him to exercise control over local strikes and use them as bargaining chips. Rumours about guns and drug smuggling on the side had long been circulated.

The sound of an explosion echoed through Sohel Rana's third floor. Terrified workers ran outside and were told by supervisors to leave early. An engineer, Abdur Razzak, was called in to inspect the deep cracks that now appeared in the concrete pillars and walls. He warned that the building was structurally unsound, declaring it ‘vulnerable’. But Rana would not accept this verdict. As reporters arrived on the scene, he gestured at the damage, explaining, ‘This is not a crack … the plaster on the wall is broken, nothing more.

Introduction

The poverty headcount ratio for Nagaland estimated using National Sample Survey Office (NSSO) data varies abnormally over the years. Until 2004–5, Nagaland reported one of the lowest rural poverty rates in the country, but by the end of the decade, it was among the states with relatively high poverty rates. A substantial improvement in the reported human development and other socio-economic indicators for Nagaland (Agrawal and Kumar 2012b: Table 1), which is largely rural, seem inconsistent with growing rural poverty in the recent decade when the state has enjoyed relatively peaceful conditions after a long period of armed conflict. Another puzzling feature of NSSO surveys is the increase in the share of tribal households in its samples for Nagaland from 85 per cent in the 50th round (1993–4) to 96 per cent in the 66th round (2009–10), even though the composition of the corresponding census population has remained stable over the years (Table 4.12).

This chapter analyses the quality of household sample survey data collected by the NSSO. There are several reasons for restricting the focus to NSSO surveys. First, most national level household surveys either do not cover states in India's ethno-geographic periphery or cover them irregularly. The NSSO regularly covers peripheral states including Nagaland. We will argue that even the surveys such as the NSSO that regularly cover these states do not have sufficiently representative samples to generate reliable estimates. The data deficit – the non-availability and/ or the poor quality of data – affects developmental outcomes through its impact on policymaking. Second, the NSSO has been conducting surveys in Nagaland since the 1970s. This provides a reasonably long time series to examine how changes in the sampling design affect survey statistics. Third, other household surveys launched after 1991 do not share sufficient information about the sampling design. In comparison, the NSSO survey reports discuss sampling design in greater detail. Last but not the least, the NSSO data are the most comprehensive and widely used sources of household level statistics for India.

NSSO surveys cover a wide range of household characteristics. We will restrict our attention to monthly per capita consumer expenditure (MPCE), which is of singular importance as it is used to estimate the incidence of poverty.

The financial inclusion agenda calls for the redress of limited access to financial services, notably amongst the poor. From its humble origins in experimental microcredit in Bangladesh, financial inclusion has become a core component of the development work of governments and non-governmental organisations (NGOs) across the developing world. Driven by key philanthropic and private sector interests alongside the United Nations (UN), the International Monetary Fund (IMF) and the World Bank, the financial inclusion agenda now encapsulates not only microcredit, but also access to microdeposit and microinsurance facilities. This suite of financial tools is designed not only to mitigate the kinds of new risks that have been generated in developing economies as a result of economic and financial liberalisation since the 1980s, but to ‘enable’ and ‘empower’ the world's three billion poor. Celebrated as the ‘key to ending global poverty’ and a ‘revolution for the unbanked’, financial inclusion has become the darling of international development policy.

Financial inclusion's potential as a poverty alleviation tool is premised on its capacities to empower poor households to harness risk. Where the state has wound down welfare policies, and deregulated money and prices through its repeal of subsidies, import tariffs, fixed exchange rates, and fixed interest rates, financial inclusion promises to insulate households against shocks and open up new opportunities for household investment in human capital and entrepreneurship. By enhancing household risk tolerance through access to credit and savings facilities, financial inclusion seeks to spark bottom-up growth at the same time as it offers a safety net. Financial inclusion thus answers to the needs of both social policy and economic policy, marking out money – the basic unit of credit and savings – as the panacea for the new risks faced by households in globalised markets. Yet by engaging access to credit and savings as the tool with which households can attain financial stability amidst the instabilities that are characteristic of open markets, the financial inclusion agenda makes implicit assumptions about the money that constitutes those savings and credit facilities.

In fact, money is not uncontroversial. Rather, the Keynesian tradition, along with the sociological thought on which it draws, marks out money as contested terrain. Indeed, the viability of fiat money demands an unthinking trust in money – a trust long nurtured by central banks in order to ensure the economywide acceptability of money at a stable price.

The Historical Background

At Independence in 1947, India was a laggard by far, more than a hundred years, compared to the advanced countries of the time, led by the United States and the United Kingdom. The preindustrial level of per capita income of the developed countries was several times higher than that of the mid-twentieth-century underdeveloped countries, of which the classic examples were India and China. These great old civilizations remained unaffected by the reverberations of economic and technological revolutions that started in the late eighteenth century in Europe – changes that define much of the content of modern economic development. Almost two centuries of subjugation by an aggressive Western power distorted the country's internal organization, both economic and social. However, it did leave a heritage of having sown the seeds of a democratic political system, complete with an entrenched legal framework and a structure for modern education. This brought India to the moment ‘when the age ends, and when the soul of a nation, long suppressed, finds utterance’. What was the state of the Indian countryside at that time? A picturesque description is given by a British civil servant E. H. H. Edye for the period between the two world wars: ‘Bicycles appeared in every village, electric torches and cigarettes; it became a custom to drink tea, a thing unknown among the peasants before 1914. This was material progress’ (Mason, 1985: 278). Three-fourths of the labour force was engaged in agriculture, but the country's social milieu had a fine upper crust of extremely well-educated Indians while the illiteracy level was 83 per cent.

At that time, India had a small but eminently capable and spirited group of entrepreneurs. However, central planning, in one way or the other, caught the fancy of many, including the new government of independent India, with its strong inclinations towards Fabian socialism. A few initial years post Independence were spent in bringing the house to order after the terrible events and all-round mess created by the partition of the country. The real development efforts started with the Second Five Year Plan. The spirit underlying the strategy had a link to the idea of swadeshi, which was the rallying cry of the Independence movement in the early decades of the twentieth century and, thus, ingrained in the national mindset.