Twenty K.R. Narayanan orations: Essays by eminent persons on the rapidly transforming Indian economy

Jha, Raghbendra (Ed.) Book Twenty K.R. Narayanan orations: Essays by eminent persons on the rapidly transforming Indian economy Provided in Cooperation with: ANU Press, The Australian National University Suggested Citation: Jha, Raghbendra (Ed.) (2021) : Twenty K.R. Narayanan orations: Essays by eminent persons on the rapidly transforming Indian economy, ISBN 978-1-76046-435-6, ANU Press, Acton, https://doi.org/10.22459/TKRNO.2021 This Version is available at: https://hdl.handle.net/10419/251123 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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NARAYANAN ORATIONS ESSAYS BY EMINENT PERSONS ON THE RAPIDLY TRANSFORMING INDIAN ECONOMY EDITED BY RAGHBENDRA JHA To the memory of Dr K.R. Narayanan Published by ANU Press The Australian National University Acton ACT 2601, Australia Email: [email protected] Available to download for free at press.anu.edu.au ISBN (print): 9781760464349 ISBN (online): 9781760464356 WorldCat (print): 1247155802 WorldCat (online): 1248765159 DOI: 10.22459/TKRNO.2021 This title is published under a Creative Commons Attribution-NonCommercialNoDerivatives 4.0 International (CC BY-NC-ND 4.0). The full licence terms are available at creativecommons.org/licenses/by-nc-nd/4.0/legalcode Cover design and layout by ANU Press This edition © 2021 ANU Press Contents An Introduction to the Volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Raghbendra Jha About the Australia–India Council . . . . . . . . . . . . . . . . . . . . . . . . . . .xxiii Oration 1: 1994 K.R. Narayanan Oration .....................1 Reforming India’s Tax Base for Economic Development Raja J . Chelliah Oration 2: 1995 K.R. Narayanan Oration ....................17 Space Technology for Sustainable Development in Asia U .R . Rao Oration 3: 1996 K.R. Narayanan Oration ....................49 India: Retrospect and Prospect Jagdish Bhagwati Oration 4: 1999 K.R. Narayanan Oration ....................69 Stronger Branches, Deeper Roots: The Democratisation of India’s Economic Reforms P . Chidambaram Oration 5: 2001 K.R. Narayanan Oration ....................85 Monetary Policy in a Developing Economy — The Indian Experience C . Rangarajan Oration 6: 2002 K.R. Narayanan Oration ...................103 Democracy and Development: India 1947–2002 Meghnad Desai Oration 7: 2003 K.R. Narayanan Oration ...................119 Political-Economy and Governance Issues in the Indian Economic Reform Process Pranab K . Bardhan Oration 8: 2004 K.R. Narayanan Oration ...................133 India: On the Growth Turnpike Vijay L . Kelkar Oration 9: 2005 K.R. Narayanan Oration ...................169 Science and Shaping our Agricultural Future M .S . Swaminathan Oration 10: 2006 K.R. Narayanan Oration ..................205 India’s Space Enterprise: A Case Study in Strategic Thinking and Planning K . Kasturirangan Oration 11: 2007 K.R. Narayanan Oration ..................233 Coping with Climate Change: Is Development in India and the World Sustainable? R .K . Pachauri Oration 12: 2008 K.R. Narayanan Oration ..................245 Why Environmentalism Needs Equity: Learning From the Environmentalism of the Poor to Build Our Common Future Sunita Narain Oration 13: 2009 K.R. Narayanan Oration ..................269 Rocket Science, Other Science: A Trajectory of Indian Science and Technology from the 20th to the 21st Century Roddam Narasimha Oration 14: 2010 K.R. Narayanan Oration ..................287 India’s Prospects in the Post-Crisis World Montek Singh Ahluwalia Oration 15: 2011 K.R. Narayanan Oration ..................315 India and the Global Financial Crisis: What Have We Learnt? Duvvuri Subbarao Oration 16: 2012 K.R. Narayanan Oration ..................333 The Indian Economy: Rising to Global Challenges Kaushik Basu Oration 17: 2015 K.R. Narayanan Oration ..................355 Australia and India: Combining Technology and Entrepreneurship to Innovate the Future Kiran Mazumdar-Shaw Oration 18: 2016 K.R. Narayanan Oration ..................367 The New Economics of Financial Inclusion in India Arun Jaitely Oration 19: 2017 K.R. Narayanan Oration ..................385 India: A Resurgent Maritime Nation, Harnessing the Blue Economy R .K . Dhowan Oration 20: 2018 K.R. Narayanan Oration ..................397 Dismantling Inequality through ASSURED Innovation R .A . Mashelkar xv AN INTRODUCTION TO THE VOLUME engaging industry, academia and international bodies. The program had overcome a myriad of challenges emanating from difficulties in the creation of a scientific organisational culture in a bureaucratic set-up: from forging linkages between creators and users of technologies to coping with geopolitical vicissitudes of technology denials; and from sustaining confidence of multi-party democratic political systems to maintaining a conscious drive for cost efficiency, autonomy and the ethic of social responsibility. Kasturirangan also outlined a conceptual model as to how India’s space achievements could be shared with neighbouringcountries. The rapid growth of India’s economy and developments in the world economy have combined to produce new challenges. One of the most pressing of these challenges — climate change — was addressed by Dr R.K. Pachauri (deceased), Director-General of The Energy and Resources Institute (India) and Chairman of the Intergovernmental Panel on Climate Change, in the 2007 Narayanan Oration. Pachauri argued that, although the concept of sustainable development had been espoused by the Brundtland Commission several years earlier, the recently discovered threat of irreversible climate change had started to spur the world into action. He reviewed the potential for the mitigation of climate change and argued that Australia was in an advantageous position to take a leadership role in this region. He also argued that coordinated action by Australia and India to address climate change would be superior to the two countries acting alone. The 2008 oration was delivered by Sunita Narain, Director of the Centre for Science and Environment (India). She argued that we are living in an age of the environment in which environmental issues are interlinked and the world is coming to the realisation that the current consumption growth model cannot be sustained. Further, she maintained that while this realisation is leading to some action, there is a major difference between the environmental approaches of the rich and the poor. Rich countries have come to this realisation after long periods of wealth accumulation and high consumption whereas less well-off countries like India have to confront this issue against the backdrop of mass poverty and substantial inequality. The poor have always tackled environmental issues in their own way and equity is a prerequisite to managing scarce resources in a sustainable manner in a country like India. In this context, leapfrogging technologies and people’s widespread participation become central to the task of ameliorating environmental degradation. TWENTy K .R . NARAyANAN ORATIONS xvi A trajectory of Indian science and technology from the 20th to the 21st century was the theme of the 2009 oration by the celebrated scientist Dr Roddam Narasimha (deceased), FRS, from the Jawaharlal Nehru Centre for Advanced Scientific Research (India). He provided a succinct and insightful account of the path of development that Indian science has taken from the 20th to the 21st century. The untapped technological capacity of the nation at the time of independence was roughly equivalent to what was available in the US about 200 years ago (i.e. there was immense scope for development of India’s scientific and technological capacities). Drawing on his own experience as a space scientist, Narasimha provided an account of how rocket science had developed in India from the establishment of the National Committee on Space Research in 1962 to the present time in which India was regarded as being at the forefront of space technology. He examined the impact of the 1991 economic reforms program on the development of India’s prowess in science and technology. Other areas of scientific development in India discussed by the author included parallel computing and supercomputers. Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, delivered the 2010 oration on the topic ‘India’s Prospects in the Post-Crisis World’. ‘Crisis’ here refers to the 2008 GFC. This was also the time when India’s Planning Commission had started work on the country’s Twelfth Five-Year Plan (2012–17). Ahluwalia believed that the Indian economy’s trend growth rate was rising. Indeed, it was above 9 per cent for the four years to 2008–09. After the slowdown in India’s economic growth following the GFC, he expected the growth rate to recover to 8 per cent and above relatively quickly so that India would emerge as a major economic powerhouse, second only to China in Asia. A key question concerned whether this assumption was safe or whether the economy would again lose momentum. Ahluwalia reviewed the major reasons for India’s recent growth acceleration. These included factors from both the supplyand the demand-sides. He also pointed out challenges for the economic reforms program to address, such as inclusivity of economic growth, adequate provision of basic services like health, water and electricity, and addressing the emerging challenges ofrapid urbanisation of the Indian population. Dr Duvvuri Subbarao, Governor of the Reserve Bank of India, delivered the 2011 oration. He provided an account of how the Indian economy in general, and the Reserve Bank of India in particular, had addressed the many challenges thrown up by the GFC since September 2008. Heargued that the GFC was a crisis of unusual proportions since it engulfed more xvii AN INTRODUCTION TO THE VOLUME or less the whole world. The Indian economy, too, was affected and the growth rate of output and exports started to slip. The investment and credit climate worsened considerably and the outlook for the economy gradually became bleaker. He discussed why India was caught up in the crisis and how policymakers had addressed it. Finally, he recounted some key lessons that could be learnt for better economic management of any future crises, including the realisation that i) the decoupling of economies does not work in a globalised world economy, ii) global imbalances need to be addressed at the global level, iii) global coordination is central to attaining stability, iv) price stability and macroeconomic stability do not guarantee financial stability, v) microeconomic prudential regulations need to be supplemented by macro-prudential oversight, vi) capital controls may be unavoidable in certain circumstances, vii) economic policy cannot be guided by scientific principles alone, and viii) having asense of history is critical to addressing macroeconomic crises. Dr Kaushik Basu, Chief Economic Adviser, Ministry of Finance, Government of India, and Professor of Economics at Cornell University, delivered the 2012 oration. This oration dealt with the emergence of India as a major economy on the global stage and the challenges and risks this entailed. Basu began with a recount of the major economic policy reforms in India as well as a summary of the performance of the economy. Hethen concentrated on discussing the impact of the GFC on the Indian economy and how policy had responded to these challenges, including a slowdown of output growth and investment. He demonstrated that these downturns were short-term in nature and did not reflect any longterm downward trend in India’s economic growth path. Both China and India started their modern phase of development in the late 1940s. In the intervening decades, China had managed to get its economic house in order and India had managed to get its political house in order, building a robust democracy with free speech and a free press, which Basu saw as the more important achievement. He also discussed some policy reforms that could easily be undertaken and would stand India in good stead forthefuture. Dr Kiran Mazumdar-Shaw, Chairperson of Biocon, India, delivered the 2015 oration. A successful innovator and businessperson in the area of biotechnology, Mazumdar-Shaw began by observing that information technology, communication technology and biotechnology are rapidly and disruptively changing the way we communicate with each other, conduct research and approach issues related to health. A key challenge, TWENTy K .R . NARAyANAN ORATIONS xviii therefore, is to ensure that we have the right business and financing models for the rapid development of innovations in these sectors to facilitate the ongoing technological revolution. She discussed ongoing cooperation between Australia and India in these areas and outlined many promising opportunities for the future. The Hon. Arun Jaitley, Minister for Finance, Corporate Affairs and Information and Broadcasting, Government of India, delivered the 2016 K.R. Narayanan Oration. He recounted the major economic reform and welfare programs initiated by the government of Prime Minister Modi, which came to power in 2014. In particular, he focused on the key area of financial inclusion. If large sections of the population were outside the formal economy, these people would participate only tangentially in formal economic activity so that benefits of government programs would not adequately trickle down to them. With this in mind, the new government in India aggressively pursued what is now recognised as the world’s largest program of financial inclusion. This policy worked through the so-called ‘JAM trinity’. JAM is an acronym for Jana Dhana(J), Aadhar(A) and mobile (M). Jana Dhana accounts are bank accounts opened by ordinary people (even with zero balance), and Aadhar is a unique identifying card (using biometric technology) that has been introduced for India’s population. A person’s Jana Dhana (or other bank) account is linked to their Aadhar card and this account can be operated through mobile phones. This policy has led to a massive expansion of bank accounts and other associated benefits such as insurance, direct benefit transfers in respect of government subsidies and other support programs. As is evidenced by further developments, the JAM program has facilitated the implementation of many new policy measures in India. The 2017 oration was delivered by Admiral R.K. Dhowan, PVSM, AVSM, YSM, immediate past chief of the Indian Navy and current chairman of the National Maritime Foundation. He spoke of India’s engagement with the oceans in general and the country’s blue economy in particular. It is evident that the Indian Ocean has emerged as the world’s centre of gravity in the maritime domain. India sits astride busy sea lines of communication that transit across the Indian Ocean. It has along coastline of 7,516km, over 1,300 islands and islets, and an exclusive economic zone of over 2 million sq. km, as well as 12 major ports and over 200 minor and intermediate ports, and 90 per cent of the country’s trade by volume transits by sea. India has a vibrant shipbuilding industry, a thriving fishing industry, offshore oil and gas interests, and deep-seabed mining areas in xix AN INTRODUCTION TO THE VOLUME the central Indian Ocean. Thus, India has vast maritime interests. These comprise the enablers of the so-called ‘blue economy’. This economy would need to be harnessed by the efficient utilisation of marine resources without hurting the environment. In these areas, Australia and India have much in common and can partner effectively in a broad range of blue economy and maritime activities. The 2018 Narayanan Oration was delivered by Padma Vibhushan recipient Dr R.A. Mashelkar, FRS, Chairman of the National Innovation Foundation of India. He argued that rising inequality of economic outcomes and attendant social disharmony are matters of global concern, particularly because the reduction of such inequality would take an unacceptably long amount of time. However, he claimed that it was possible to reduce inequality of access through what he called ‘ASSURED’ innovation. ASSURED stands for affordable (A), scalable (S), sustainable (S), user-friendly (U), rapid (R), excellent (E) and distinctive (D). Mashelkar argued that a game-changing combination of policy, technological and non-technological innovations could achieve ASSURED innovation. He illustrated these possibilities with examples of exemplary innovation in India that had changed the lives of millions in a broad range of areas including health care and communications. A concerted program of government procurement and support could help accelerate and disseminate innovation in these and other areas. Thus, ASSURED innovation could be a ‘single word’ indicating a national innovation strategy for any nation that wished to achieve accelerated inclusive growth. He showed how ASSURED innovation could enable corporates to shift to a new high-impact paradigm of ‘doing well by doing good’, rather than the old paradigm of ‘doing well and doing good’. This collection of the Narayanan Orations is thus at once both an expert account of key aspects of the economic development process in India and a peek into India’s potential in the future. As such, the publication of these essays marks a watershed in the intellectual debate on India’s economic reforms program and should be welcomed by all those interested in the economic development of the country. Apart from the orators themselves, a number of individuals have contributed to the success of the Narayanan Oration series. Dr K.R. Narayanan sent messages of introduction for the 1994, 1995, 1996, 1999 and 2001 orations and remained a supporter of the oration series almost until his tragic demise in November 2005. Dr Narayanan TWENTy K .R . NARAyANAN ORATIONS xx was vice-president of India during the 1994, 1995 and 1996 orations and president during the 1999 and 2001 orations. His successor, His Excellency President DrA.P.J Abdul Kalam, sent messages for the 2002, 2004, 2005 and 2006 orations. Her Excellency President Pratibha Patil sent messages for the 2007, 2008, 2009, 2010, 2011 and 2012 orations. Subsequently, His Excellency President Pranab Mukherjee sent messages for the 2016 and 2017 orations, and His Excellency President Ram Nath Kovind for the 2018 oration. These messages are printed along with the respective accompanying orations. ASARC is honoured to have the high office of the president of India continue to be associated with the oration. We are much obliged to the Australia–India Council (AIC) for its consistent and unflinching financial support for this oration. In addition, several members of the AIC have participated generously and enthusiastically in the planning of the oration series. We are also grateful to our other funding agencies over the years: the Australian Bureau of Statistics (2001); the Network Economics Consulting Group (2001–03); The Australian National University’s National Institute for Asia and the Pacific (2004), National Institute of Economics and Business (2003–05), and Research School of Pacific and Asian Studies (2004 and 2006); and the Australian Centre for International Agricultural Research (2005). The 2018 oration was co-hosted by the Research School of Physics and Engineering at ANU, which provided generous financial and logistical support. In Canberra, the office of the High Commissioner of India has been very helpful in organising the oration. The high commissioner read out DrNarayanan’s messages. Since 2002, the high commissioner has read out the messages sent by the incumbent president of India. We are grateful to their excellencies A.M. Khaleeli (1994), G.S. Parthasarathy (1995–96), Jordana Pavel (acting 1999), R.S. Rathore (2001–03), P.P. Shukla (2004– 06), Deputy High Commissioner Vinod Kumar (2009), Sujatha Singh (2009–10), Biren Nanda (2011–12), Navdeep Suri (2016) and Dr A.M. Gondane (2017–18) for reading out the messages. The first four Narayanan Orations were organised by (the now deceased) Dr Ric Shand, first executive director of ASARC, to whom we remain deeply grateful. I have organised the remaining 16 orations. Over the years, a number of professional staff members of ASARC and the ArndtCorden Department of Economics have organised the details of the oration xxi AN INTRODUCTION TO THE VOLUME and helped to ensure that each oration was a success. Carolyn Sweeney managed the 1994–96 and 1999 orations, and Hilda Heidemanns, Loan Dao-Czezowski and Bonny Allen were associated with the 2001 oration. ASARC is grateful to all of them for their contributions. Stephanie Hancock worked tirelessly and efficiently in organising the minutest detail of many of the past orations. Sandra Zec and Heeok Kyung have also helped with several of the orations. Several PhD students at the ArndtCorden Department of Economics helped out at various times. ASARC expresses its sincere gratitude to all of them. At ANU E Press (now ANU Press), Vic Elliott and Lorena Kanellopoulos were supportive throughout and saw the first edition of this book through from conception to final product with efficiency and good humour. My thanks to them and other staff involved in the production, storage and distribution of this book. Emily Tinker has been very supportive throughout the process of production of this updated edition. In producing this second edition, I received very helpful editorial comments from my colleague, Andrew Kennedy. I am grateful to him for these and also for his encouragement. However, all opinions expressed in this introductory essay are mine. Canberra March 2021 xxiii About the Australia– India Council The Australia–India Council (AIC) was established on 21 May 1992 inresponse to a recommendation by the Senate Standing Committee on Foreign Affairs, Defence and Trade, following an inquiry into Australia’s relations with India. The AIC’s purpose is to broaden the relationship between Australia and India by encouraging and supporting contacts and increasing levels ofknowledge and understanding between the peoples and institutions of the two countries. The council initiates or supports a range of activities designed to promote a greater awareness of Australia in India and a greater awareness of India in Australia, including visits and exchanges between the two countries, development of institutional links and support of studies in each country of the other. The council offers support, in the form of funding, for projects likely to contribute to the development ofthe relationship, within the context of AIC objectives and guidelines. By initiating and supporting a range of activities that have put it on the map, the council has played a recognised and respected role in promoting the relationship between Australia and India. It has informed and educated Australians about India, and it has informed persons interested in the bilateral relationship about the way it is developing. It has furthered theAustralian Government’s foreign policy and trade objectives and added value to Australia–India relations. 7 ORATION 1: REFORMING INDIA’S TAx BASE FOR ECONOMIC DEVELOPMENT on relative prices or on the pattern of expenditure of households could not be easily known; nor did the government bother about such matters although they swore by the commitment to progression and equity in the distribution of tax burden. To quote the Tax Reforms Committee: It was a truly irrational system from the economic as well as equity point of view; and the misallocation of resources and the loss of welfare caused by the high and desperate import duties and the multi-rated cascading type excise and sales taxes was palpable. While the unduly large number of rates resulted in classification disputes, the high rates spawned evasion abetted by corruption (Ministry of Finance, Government of India 1991, p. 98). In 1986 a system called MODVAT was introduced in the Central excise under which excise paid on many important inputs became eligible for credit against tax payable on output. This represented a major step in the reform of the Central indirect tax system. However, under the MODVAT system only tax paid on inputs that physically get incorporated in output or those that get consumed in the process of production qualified for setoff. Capital goods were not covered by MODVAT. Also three important sectors, namely, petroleum products, tobacco products and textile products were kept outside this system. After the changes introduced in 1986, there was hardly any progress towards a full-fledged value-added tax. While there had been some sincere attempt to reform the Central excise, there was no attempt to reform the import duty structure. In fact, in pursuit of the revenue objective, duty rates were considerably raised in the late ’80s. At the beginning of the ’90s, the Indian import duty structure presented a bewildering picture of combination of ‘basic’ and ‘auxiliary’ duties with combined rates on different goods varying widely and often consisting of double application of ad valorem and specific duties. (Ministry of Finance, Government of India 1991, p. 38) The duty rates ranged from over 400 per cent ad valorem to 0 per cent. With the bulk of the imports falling in the range of 50 to 150 per cent, the average effective rate worked out to 85 per cent excluding exempted items (around 50 per cent if they are included). Furthermore, the statute gave only the maximum rates. The actual rates applied to different products or their varieties were fixed through numerous executive notifications. TWENTy K .R . NARAyANAN ORATIONS 8 The notifications gave exemptions or concessional treatment to particular classes of users or sub-categories of goods, introducing further rate differentiation. The special treatment given to the small-scale sector under the excise taxation system represented and still represents another distortion. Theconcessional tax system extended to this sector has been a source of substantial tax evasion. The exemption of a substantial part of the industrial sector from excise taxation represents an obstacle to the introduction ofafull-fledged value-added tax. As can be easily imagined, the application of many rates of excises led to numerous classification disputes. Much time, effort and money was expended by the department and the assessees in relation to disputes regarding classification. Of course, if the tax is limited to the manufacturing stage, there is always a temptation for the producers to under-estimate the values of the products. Apart from this, there have been problems arising from the difficulty in unambiguously defining the manufacturer’s price. On the irrational and complicated structure of central indirect taxes represented by import and excise duties, was imposed the State sales taxes. The State sales taxes are levied on industrial as well as agricultural products; however, numerous exemptions are granted. The sales tax is imposed on prices inclusive of excise. Various types of sales taxes were experimented with by the different States, but most of them have shifted, in the main, to a first-stage, single-point tax, although in some States this is supplemented by a low rate turnover tax or an additional tax payable by the larger dealers.2 The sales taxes in the different States are also levied at many rates and the rates of tax on particular commodities vary between States. As already noted, in general the sales taxes levied by the States are of the cascading type. To quote a recent report by the National Institute of Public Finance and Policy (1994), Reform of Domestic Trade Taxes in India: Neither the structures nor the procedures are, however, simple in any State. Also, with the shift in the point of levy to the first point, the problems in excise taxation associated with the definition of manufacturing, under valuation and commodity classification, 2 Most interestingly, the additional sales tax is not to be passed on to the buyers according to law which has been upheld by the courts. Of course, nothing can prevent the dealers from altering the price if they can. 9 ORATION 1: REFORMING INDIA’S TAx BASE FOR ECONOMIC DEVELOPMENT are revisited when one looks at the sales tax system. In sheer complexity and irrationality, the sales tax systems, as they are structured and implemented at present, surpass the excise even at their worst (p. 12). This is not all. In 1956 the Central government enacted the Central Sales Tax Act authorising the States to impose a tax on inter-State sales emanating from within their respective territories. The tax was imposedon the recommendation of the Taxation Enquiry Commission, 1953–54, which argued that the producing State (i.e. state of origin) should geta small part of the total sales tax burden that could be imposed on a commodity. That Commission recommended that the rate of the inter-State sales tax (or Central sales tax) should be fixed by the Central government and suggested a 1percent rate of tax, presumably believing that such a low rate of tax would not be a serious barrier to inter-State trade nor lead to any significant cascading. In course of time, the rate of Central sales tax was raised by the Central government in stages to 4 per cent which taken together with the unremitted sales tax on inputs not only became an effective barrier to inter-State trade but also added significantly to the total cascading effect. Incidentally, the 4 per cent inter-State sales tax combined with the unremitted sales tax on inputs made possible substantial tax exportation by the industrially more advanced States. It is obvious that the rate of Central sales tax was raised with connivance of the Central planners in the mistaken belief that such increases would enable the States as a whole to raise more resources, whereas in fact the taxable capacity of the States to which there was net exportation of inter-State sales tax was reduced. The Logic of Tax Reform The complicated structure and deficiencies of the Indian tax system and the way in which the taxes were administered were mind boggling. But the shortcomings were so prominent that it was easy to lay down the basic lines of reform and suggest the ultimate structure that the government should aim to bring into existence. The problem was to initiate the first steps and then recommend other measures in proper sequence so as to reach the final goal. In practice, the tax reform process encounters much opposition because of ignorance and inertia. Also, there are always losers and gainers when changes are to be effected and long-term gains are often overlooked because of fear of short-term losses. But the job TWENTy K .R . NARAyANAN ORATIONS 10 had to be done because, aswas pointed out earlier, the irrational and totally antiquated tax structure in the country was a stumbling block to accelerating the growth of the economy. It is to be said to the credit of the Central government of India that within a period of three years they have brought about very substantial reform of the structure of the Central taxes, although even in the Central sphere much remains to be done in the field of administration. Tax reform has barely started in the realm of the State governments. The principles that have guided tax reform in India may be briefly stated as follows: a. economic rationality which involves (i) removal or avoidance of distortions in economic decision making as well as of unnecessary cost escalation, and (ii) ensuring that economic incentives will not be affected to any significant extent by the tax structure and tax rates. b. horizontal equity is as important as vertical equity. Hence a satisfactory definition of income (if that is chosen as the index of ability) and atax system that would enable one to move close to the fulfilment ofhorizontal equity were called for. c. broad bases with limited concessions. This would mean simplicity ofstructure and make possible the reduction in rates. d. Reduction of the high rates prevailing particularly marginal rates, both to preserve incentives and to encourage compliance. e. Ensuring that the well-to-do sections will pay proportionately more taxes. This should be ensured not through high marginal rates of income and wealth taxes but through a proper combination of taxes on income and wealth and taxes on expenditure. A steep degree of progression was undesirable and was in any case unenforceable. f. Considerable improvement in tax administration and enforcement. The above-mentioned principles or criteria laid down by the Tax Reform Committee were broadly accepted by the government. These principles have been generally applied in the reform of tax systems in many other countries. In the context of globalisation of Indian economy which the government wanted to promote, it was necessary to align the Indian tax system in important respects with those of our trading partners; and if India wanted to attract foreign investment, the rate of corporate profits tax could not be far out of line with those in countries competing for the same capital flows. Thus a regime of moderate rates had to be brought 11 ORATION 1: REFORMING INDIA’S TAx BASE FOR ECONOMIC DEVELOPMENT into existence for several important reasons. However, it must be pointed out that if the reforms suggested were fully implemented, there would not only be greater horizontal equity — which should be a great gain — but also a sufficient degree of vertical equity. In fact, if enforcement was strengthened, the actual degree of progression would perhaps be greater than under the previous regime. This assumes much more effective tax enforcement which would become possible due to the reform. Reform Carried Out To-Date Import Duties The import duty structure has been simplified by the amalgamation of the basic and auxiliary duties. On the eve of reform the combined duty rates ranged from 250 per cent to 0 per cent and the number of statutory rates, which were many, were effectively multiplied by special or concessional rates brought about through notifications. By now the peak rate has been reduced to 65 per cent and the total number of statutory rates has come down to 14. With the reduction of the peak rate, there has been general reduction in the level of rates and with such reduction a large number of notifications have been abolished. The import duty structure has become much simpler and less irrational, although several anomalies exist and the rates on raw materials such as metals and certain intermediate products particularly chemicals still remain high. The Tax Reforms Committee suggested that by 1997–78 (at the latest) the rates of import duty should range between 30 and 10 per cent (There should be no zero duty items). The only exception was to be consumer goods whose imports are now banned. When they are allowed in, the Committee suggested that the rate of duty initially should be 50 per cent to give time for the domestic industry to adjust itself. It is clear that we still have a long way to go to arrive at the structure recommended by the Tax Reforms Committee which itself has been criticised for not going far enough. Union Excise Duty Here again there has been progress in terms of reform towards a fullfledged value-added tax. A major reform has been to make capital goods eligible for MODVAT credit. Additionally, the rates of duty have been unified and the number of rates has been brought down to 10 apart from TWENTy K .R . NARAyANAN ORATIONS 12 the rate of tax on tobacco products. Another major change is the switch over from specific duties to ad valorem duties which would facilitate the introduction of the value-added tax and also would make revenue more responsive to increases in nominal income. With the reduction in import duties, almost all imports have been made subject to countervailing duty and the countervailing duty in turn has been made eligible for MODVAT credit like the excise duty. There have also been several procedural improvements and subject to certain limitations the invoice has been made the basis of tax assessment. Some attempt has also been made to broaden the base through the removal of exemptions, although here the fear of political opposition and the strong pressures exerted by the affected groups have prevented the inclusion of many commodities within the tax net whose exemptions are clearly unjustified (for example, umbrellas and bicycles). But there is no denying the fact that the excise tax system is amuch more rational and simpler system today than it was in 1991. Direct Taxes The direct tax structure has been greatly simplified. There is now only one rate of corporate profits tax for all domestic companies at 40 percent. Thepersonal income tax is levied at three rates: 20, 30 and 40 per cent and the surcharge on personal income tax has been removed, while the surcharge on the corporate profits tax (retained for revenue reasons) is expected to be abolished shortly. The rate of tax on branches of foreign companies has been brought down from 65 to 55 per cent. Government has not found it possible to bring under tax all perquisites wholly or partially and thus remove tax shelters. Also, many tax concessions for industry continue such as partial tax holiday for a specified period of time for new industries or those located in backward States. Since the several perquisites of government employees, public sector employees and ministers have not been brought under tax, it is difficult to justify strict taxation of all perquisites in the private sector. The real solution is, of course, to raise the salaries of senior government officials and ministers and subject all their incomes in money and kind to tax. But this would demand a major change in the salary structure and is not likely to take place soon. Meanwhile, some broadening of the income tax base has been accomplished. For example, the property incomes of minor children is now included in the income of the parents. Again, all capital gains are now subject to tax provided taxable income including capital gains rises 13 ORATION 1: REFORMING INDIA’S TAx BASE FOR ECONOMIC DEVELOPMENT beyond the exemption level. Long-term capital gains which are worked out after proper indexation are taxable at a separate lower rate. Now there is no possibility of avoiding the tax on long-term capital gains by investing the proceeds in approved securities as could be done in the past. An attempt has also been made to broaden the base through the introduction of a presumptive tax in the form of a fixed sum payment by small businesses, and for certain classes of businesses an estimated income scheme has been introduced according to which the net taxable income is simply taken to be a given percentage of gross receipts, so that the assessee is freed of the necessity to produce detailed accounts and claim deductions and allowances. Lastly, efforts are under way to introduce comprehensive computerisation of the operations of the income tax department, which in the course of time would lead to the broadening of the base. However, it must be pointed out that the existence of several untaxed perquisites constitutes a violation of the principles of horizontal equity. This problem remains on the agenda of further tax reform. The wealth tax on all assets other than what are termed as unproductive assets has been abolished. Unproductive assets which include jewellery, bullion, real estate (excluding one house where the assessee resides), passenger automobiles, yachts, aeroplanes, and urban land are subject to a flat 1 per cent tax on the excess of their value over Rs 1.5 million. This tax together with the marginal rate of income tax at 40 per cent represents in our view a sufficient degree of progression. In fact, with buoyancy in revenues it should be possible to reduce the marginal rate of personal income tax as well as the rate of corporate profits tax to 30 per cent which in the Indian context would lead to substantial improvement in taxcompliance. As noted earlier, one of the major shortcomings of the indirect tax system in India was the absence of any tax on the service sector — i.e. the value added by the service sector has been left untouched. It is clear that ifacomprehensive value-added tax is to be introduced, the tax on services must become an integral part of the system. A beginning has been made in this respect. Recently, tax at 5 per cent has been introduced on telephone services, on the services of stock brokers, and on premia for insurance of jewellery, real estate and passenger automobiles. There is also a so-called expenditure tax which is a tax to be paid on hotel bills whether for food or accommodation (cheaper hotels are exempt). The idea is that more and more services will be brought under tax and after a sufficient number of services are included, the services tax will be merged with the TWENTy K .R . NARAyANAN ORATIONS 14 Union excise, in terms of eligibility for obtaining set-off for taxes paid on services by the manufacturers of goods and for getting set-off for taxes paid on goods by the producers of services. The regime of indirect taxes levied by the State governments still remains basically unreformed and quite unsatisfactory. The State indirect taxes, of which the sales tax forms the major component, are a source of distortion and cause hindrance to the smooth flow of trade and economic activity. The main sources ofdistortion are the sales tax and the octroi. The major shortcomings of the existing system of State and local indirect taxes may be summarised briefly: a. The sales tax is levied on the price inclusive of excise at every stage ofmanufacture. b. In most States, there is no complete set off for the sales tax paid on inputs; however, the cascading is to some extent mitigated by the lower rate of tax for inputs bought by manufacturers. The administration ofthe special rate creates problems. c. The inter-State sales tax (or the Central sales tax) levied by most State governments at the maximum rate of 4 per cent (except where reduced for reasons of competition) acts as a hindrance to inter-State trade and also adds to the total cascading effect. d. The octroi levied by local authorities in several States not only leads to physical obstacles to the smooth flow of trade but acts as an additional trade barrier in the economic sense. By the same token it adds to the cascading effect. e. The sales tax in general is levied at multiple rates creating compliance problems and leading to classification disputes. There is unnecessary interference with consumer preferences. f. Most State governments rely on the so called first-point tax, that is, they levy the tax on the first sale in the State effected by the manufacturers and importers. As the first-point tax does not cover the value added at subsequent stages, the rates have to be higher than otherwise and there is temptation and attempt to undervalue commodities at the stage of taxation. g. In their quest for revenue some States have levied a low rate, multipoint tax or turnover tax in addition to the first-point tax, thus further complicating the structure and adding to cascading. 15 ORATION 1: REFORMING INDIA’S TAx BASE FOR ECONOMIC DEVELOPMENT h. States indulge in intense tax competition: the rates of tax on particular commodities are reduced from time to time in order to divert trade and industry from other States. This competition has sometimes led to the bizarre situation in which taxes on motor vehicles become lower than those on foodgrains. i. The States also offer tax incentives under the sales tax to attract industries. Such offers by several States tend to become a zero-sum game which leads to the erosion of the tax base and artificial diversion of trade. j. The administration of State taxes leaves much to be desired. The whole system needs to be modernised and computerised. As things stand now, assessments are kept pending too long and there is much prolonged litigation. The State governments have become aware that their tax systems should be rationalised and tax administration modernised. They are now making efforts to bring about greater uniformity in their sales tax systems. Acommittee of State Finance Ministers has been appointed by the Finance Minister of India. Under the auspices of this committee, work is being done to fix floor rates for particular groups of commodities (toprevent tax competition) to rationalise the systems of incentives and to evolve uniform procedures. With only three or four rates besides zero, it should be possible for the State governments to adopt a State value-added tax. This would essentially involve two steps: The first is to give full credit for tax paid on inputs by manufacturers against the tax payable by them; and the second is to convert the single point tax into a multi-point tax with a set-off for tax paid at the earlier stage. Before these steps are taken, there would have to be a fairly widespread educational program and training of the officers. The Government ofIndia is expected to provide assistance in respect of these matters. Conclusion Several critics of the tax reform program in India have tended to judge the success or failure of the program in terms of increases in revenue that the reform has brought about. Adequacy of increase is measured in terms of revenue to GDP ratio. To be sure, one of the objectives of tax reform is to improve revenue elasticity and the tax ratio. However, it should be TWENTy K .R . NARAyANAN ORATIONS 16 remembered that the impact of the reform on revenue increase will not be immediate; tax compliance will increase with reduction in rates only gradually. Similarly, improvements in tax enforcement will take time. It has been emphasised in the Report of the Tax Reforms Committee that mere reduction in rates would not lead to an increase in compliance and that stricter enforcement, which becomes easier with rate reduction, is a necessary complementary step. Secondly, the growth in revenue is not to be measured only by the tax ratio. A major objective of the tax reform is to facilitate and promote faster growth of the economy. What is needed is not an immediate increase in the tax ratio but a faster growth in revenue arising from a higher growth rate of the economy. With an elasticity greater than one, in course of time, the tax ratio will rise. It could be said with some confidence that the tax system has been reformed in India significantly enough to facilitate a higher rate of growth. It must be admitted, however, that the structural reform is far from complete, although quite a bit of ground has been covered in a short period of three years. Again, there has been only slow progress in the reform of the tax administration. Tax policymakers and tax administrators will have their hands full in the coming years. References Ministry of Finance, Government of India (1991), Tax Reforms Committee, Interim Report, New Delhi, India: Ministry of Finance, Government of India. National Institute of Public Finance and Policy (1994), ‘Reform of Domestic Trade Taxes in India: Issues and Options’, New Delhi, www.nipfp.org.in/media/pdf/ books/ BK_39/Reform%20Of%20Domestic%20Trade%20Taxes%20In %20 India %20Issues%20And%20Options.pdf 23 ORATION 2: SPACE TECHNOLOGy FOR SUSTAINABLE DEVELOPMENT IN ASIA considered as an indicator of the level of economic development. Even with the impact of satellite communication revolution, the availability of telephones in the metropolitan cities of the developing countries is less than one for every 100 persons as against one for every two persons in the developed societies. The picture in the rural developing areas is even more dismal with over 2,000 persons having to compete for access to a single telephone (Rao 1993). While practically all the developing countries have taken some advantage of satellite communication, only just about 20 out of the 170 geostationary satellites in orbit today, belong to the developing nations and at the present rate of growth, the share of the developing countries either in leased transponders or in terms of dedicated satellites is unlikely to exceed 15 per cent of the global usage even by the year 2000. The close organic linkage between development and education is abundantly clear from the existence of the powerful functional relationship between the literacy index of a country and its gross national product. Analysis indicates that least developed countries with 70–80 per cent illiteracy have only a per capita income of about $200 per year whereas middleincome group of nations with illiteracy rates of 35–50 per cent have an annual per capita income of about $600 as against over $10,000 annual per capita income enjoyed by the citizens of developed nations having less than 5 per cent illiterates (Gao and Rao 1992) (Figure 3). According to UNESCO 1985 statistics, almost 30 per cent of the global population were illiterates, 98 per cent of whom belonged to the developing countries. The geographical distribution of illiterate population indicates that Asia alone accounted for 75 per cent of the total illiterates, in the world, Africa coming a close second with 18 per cent and the rest 7 percent being distributed in Latin America and other parts of the world (Rao 1995a; World Bank 1994), most of them being in dispersed and remote rural areas. Unless eradication of illiteracy is tackled on a war footing and not by mere slogan adoption, over 2.5 billion or about 30 per cent out of an estimated 7.2 billion population in the developing countries will continue to remain illiterate even by the year 2025 (Rao 1988). In spite of the wide recognition that the existing socioeconomic imbalance between developed and developing nations is directly attributable to the significant difference in their levels of educational advancement, lack of adequate resources continues to prevent the developing countries from overcoming their fundamental disadvantage. In 1986 alone, out of a total investment of about $800 billion on education, 40 developed nations accounted for 80 per cent of this expenditure while the total share of TWENTy K .R . NARAyANAN ORATIONS 24 the 161 developing nations (Rao 1995b; Gao and Rao 1992) was just 14 per cent. The annual per capita investment in all forms of education including higher education in the third world countries is hardly $25per year compared to over $500 per year in the developed world. Many of the rural areas of the third-world countries do not even possess an elementary education facility and where schools exist, they seldom have more than a single qualified teacher and are often run without even a blackboard. Typical is the example of China, where most of the teachers employed in the primary schools, are those who graduated from the same schools under poorly qualified teachers, resulting in massive inbreeding which has perpetuated the vicious circle. It is estimated that over 3million poorly qualified teachers in China comprising of 40 per cent of teacher population in primary schools and 72 per cent in junior schools are continuing to cater to the educational growth of that country (Liu 1994). Statistics clearly indicate that the birth rate as well as infant mortality of children drastically gets reduced with the increase in female literacy level. Considering that education of women is most crucial for achieving social equilibrium, through population control and health care (Figure 4), the task of eradicating illiteracy among women who constitute over 60percent of the total illiterates in a developing society, becomes the single most important goal for promoting cultural growth and socioeconomic prosperity of any rural society. The answer clearly lies in the wide spread utilisation of distance education involving satellitebased TV and radio broadcasting media, which are most ideally suited to provide basic education as well as continuing education to the vast, inaccessible and sparsely distributed population of the world. State of Agriculture and Environment A dramatic increase in the global food grain production since the 1960s occurred with the initiation of the green revolution, which was primarily based on the high technology package involving large-scale use of chemical fertilisers, pesticides, high response better seeds and extensive irrigation. The increase in India’s annual foodgrain production from just about 55million tons in 1947 to about 180 million tons in the 1990s is clearly a result of the emphasis given to large-scale irrigation which has risen from less than 20 per cent to over 35 per cent of total arable land of 160 million ha during this period. Ironically however, the negative repercussions of the very practice of irrigation due to water 25 ORATION 2: SPACE TECHNOLOGy FOR SUSTAINABLE DEVELOPMENT IN ASIA logging, inadequate drainage and indiscriminate use of chemical fertilisers have resulted in making the soil in the irrigated areas highly saline and unproductive. It is estimated that over one-third of the approximately 200million ha of irrigated cultivable land in the world is already salt affected (Swaminathan 1980). Almost 40 per cent of the highly fertile Indo-gangetic plain in India, which was once the cradle of civilisation, suffers from intense salinity making it unfavourable for crop growth. Almost 25 per cent of the arable land area in every continent has be come problem land with another 25per cent having very low productivity. The extreme pressure of population and industrialisation particularly in the developing countries has resulted in the annual rate of deforestation of 17 million ha including almost 4 million ha in Asia (Figure 5). An imperative consequence of deforestation is increased run-off of rain water and severe soil erosion resulting in the deterioration of the top soil, degradation of land and sedimentation of water bases. The high rate of soil erosion in deforested areas in India, China and elsewhere ranges from 10 t/ha in the plains to almost 30 t/ha in the north-eastern hilly regions, as against just 1 t/ha in the forested area. Worldwide soil erosion has reached the limit of 100 million tons per year as against 45 million tons in 1860 and less than 16 million tons 300 years ago. Extensive deforestation has resulted in increased carbon dioxide in the atmosphere, increased rain precipitation run off from 20 per cent to almost 50 per cent, frequent flooding and a gradual extinction of biodiversity (Khoshoo 1990; Brown 1992). Overgrazing, deforestation, encroachment by agricultural crops and general mismanagement of land and water resources have resulted in increasing desertification in Asia, Africa and Latin America. About 3,000 million ha, a quarter earth’s land surface has now turned out as desert or damaged by factors that contribute to desertification. On a global scale the desertification is increasing almost by 1 million ha per year. The changes in climatic and rain patterns gradually setting in because of deforestation are yet to be fully understood due to our inadequate understanding of the phenomena, particularly the energy exchange between the surface aerodynamic roughness over the forest and the atmosphere above it. Management of water resources particularly in the developing countries, has been even more pathetic. Optimal management of water becomes crucial in the dry land tracts of tropical countries where most of the precipitation occurs in less than 100 days as compared to midand highlatitude countries where snow and rain precipitation continue to keep the soil moisture intact for almost eight months in a year. With the added TWENTy K .R . NARAyANAN ORATIONS 26 problems of higher temperature regimes and higher evapo-transpiration rates, need for optimal harvesting of run off and recharging of underground aquifers in tropical countries assumes paramount importance. Although major irrigation projects and big dams have contributed to improved agricultural production in the last few decades, the problem of waterlogging, salinisation and loss of valuable bio-resources have led to gradual degradation of land in many areas in the developing world. Intensive use of chemical fertilisers and pesticides combined with poor management of water-sheds and highly fragmented land holdings have resulted in severe water stress, pesticide contamination not only in the water but also in the agricultural crops, resulting in the severe degradation of over 1.2billionha across the world, in the last 45 years alone (Figure 6). The material delivery from rivers to the oceans which was just 9.3 billion tons 50 years ago has now increased to 25 billion tons a year, with the largest discharge of over 15 billion tons per year coming from Asia alone. Superimposed on these seemingly insurmountable difficulties is the real prospect of the widely accepted global warming scenario due to theunprecedented anthropogenic intervention causing a rapid increase in thegreen house gases, upsetting the delicate greenhouse equilibrium which could lead to irreversible climatic changes (Ramanathan 1985). Particularly since the beginning of the industrial revolution, CO2 concentration in the atmosphere has steadily increased from 280 ppmv to 350 ppmv and at the present rate of increase is expected to reach 450ppmv by 2050. Concentration of methane in the atmosphere has also been increasing steadily at the rate of about 0.9 per cent per year and has now already reached 1.7 ppmv. Detailed rigorous analysis of surface temperature over the last century indicates an average increase in global temperature of about 0.5oC. While the primary cause of the global temperature increase in the past has been the increasing atmospheric concentration of CO2 due to industrialisation, fossil fuel burning and extensive deforestation, the rapid increase of CFCs in the last decade which has large residence time of over 100 years in the atmosphere has further added to the global environmental problem. In spite of the universal adoption of the Montreal Protocol the spectre of global warming, which can cause depletion of ozone, rise in sea level, inundation of highly populated coastal areas and severe modification of climatic and rain pattern, continues to pose a real threat unless all countries, both developed and developing, make appropriate structural adjustments in their lifestyle and consumptionpattern. 27 ORATION 2: SPACE TECHNOLOGy FOR SUSTAINABLE DEVELOPMENT IN ASIA Communication Revolution The remarkable developments in space communication in just three decades since the successful relay of TV signals across the Atlantic in 1962 using TELSTAR, have brought us to the threshold of achieving the capability of establishing human connectivity anywhere in the world, on land, air or sea. The superior quality and reliability of satellite links in combination with their high percentage of availability, distance insensitivity, high degree of flexibility for rapid reconfiguration and their ability to aggregate small requirements to provide cost effective specialised services across vast territories have made satellite communication the most vital link for establishing human connectivity promoting a new perspective of our planet, that of a global village. The evolutionary nature of satellite communication is reflected in their capacity increase, from just 240 voice channels in 1965 to the present day satellites which on an average can easily carry over 20,000 voice circuits, in addition to several TV channels (Pant 1994). Practically all the developing nations in the world today including Asian countries have taken advantage of satellite communication by either leasing transponders from international systems like INTELSAT, INMARSAT and INTER SPUTNIK or by establishing regional systems like Arabsat. Recognising the paramount need of the governments, societies and institutions to quickly respond to fast changing situations in a demassified society where niche markets, customised services and rapid transactions are essential to successfully compete in the liberalised global market place, a few Asian countries like India (INSAT), Indonesia (PALAPA), China (CHINASAT), Japan (JCSAT) and Australia (AUSSAT) have already established their own satellite communication systems. Other Asian countries like Korea (KOREASAT), Thailand (THAICOM) and Malaysia (MEASAT) are in the process of establishing their own communication systems to meet their growing requirements of telecommunication and TV distribution services. Unlike most of the countries, India decided to build its own indigenous technology base and use space technology for solving its national problems on a self-reliant basis. Establishing the feasibility of using satellite medium for imparting education in health, hygiene, family planning and better agricultural practices to over 2,400 remote rural villages through the year long Satellite Instructional Television Experiment (SITE) conducted using NASA’s ATS satellite during 1975, India successfully launched TWENTy K .R . NARAyANAN ORATIONS 28 and operated its own three axis stabilised experimental satellite APPLE in 1981 followed by the introduction of the unique, multipurpose INSAT series of communication satellites to provide operational services on a continuing basis. INSAT system, with over 5,000 two-way speech circuits covering 140 routes amounting to 150,000 route km initiated a communication revolution in the country (Figure 7) connecting for the first time, even remote rural areas and off-shore islands with the main stream of the nation using Low Cost Terminals (LCTs). The nationwide geographic reach of INSAT satellite has been advantageously used for a variety of applications such as administrative, business and computer communications through a number of captive networks using small terminals. New specialised services such as rural telegraphy to remote areas, news service, facsimile transmission and emergency communication for post disaster relief operations have been commissioned. The National Information Center’s Network (NICNET) using VSATs and spreadspectrum techniques with over 700 micro-terminals provides reliable data communication links interconnecting district headquarters, state capitals, and central government departments. The Remote Area Business and Message Network (RABMN), to provide data communication between city-based industries and construction projects located in remote areas is already operational with over 450 micro-terminals and with a registered demand for more than 2,000 terminals (Rao 1995b). Similar expansion of telecommunication to provide low cost VSAT services in addition to point to point communication has been achieved in China, Australia, Indonesia and other countries in Asia either through satellites procured from abroad or through leased transponders. Increasingly all over the world the future trends in communication is towards establishing personalised communication services to meet the needs of the people at individual and group levels. Remarkable developments in digital compression techniques, use of advanced modulation systems for optimal utilisation of space segment and innovative use of low-cost VSATs to provide several value-added services have initiated the new age of information super-highway making it possible to have information on demand. The merging of large computation and communication capabilities through technological innovations are paving the way for the establishment of seamless networks to provide personalised communication and multimedia services including audio, video and data transmission, thus creating a world where communication, information, entertainment and motivation are literally at the will of one’s fingertips. The imminent introduction of mobile communication services in the next 29 ORATION 2: SPACE TECHNOLOGy FOR SUSTAINABLE DEVELOPMENT IN ASIA three years will surely make the dream of every communication engineer of establishing human connectivity anywhere in the world, on land, air or sea come true. Space Technology for Universal Education The phenomenal success of the Satellite Instructional Television Experiment (SITE) conducted in India followed by similar experiments conducted elsewhere in the Appalachian Region, Rocky Mountains, Alaska, Canada, China and Latin America in the mid-’70s and early ’80s, clearly established the tremendous potential of using satellite TV for educational purposes (Rao 1987). It is very satisfying to note that operational beginning of satellite-based distance education facility is already making a significant impact in Indonesia, providing an effective educational system to the sparsely distributed population in 14,000 individual islands stretching across a distance of over 5,000 km, many of which are inaccessible mountainous or jungle terrain. Successful use of PALAPA satellite in Indonesia, INSAT in India and AUSSAT in Australia have prompted other developing countries like Brazil, China and Mexico also to develop their own satellite-based educational system. Extensive use of satellite medium in China provides 31 hour adult educational programs every day to 30 million people annually through 6,300 TVRO earth stations and more than 50,000 learning centres. Most dramatic impact of INSAT has been in the rapid expansion of TVdissemination in the country through installation of more than 600TV transmitters and use of a large number of direct reception community sets in sparsely populated areas, for providing access to over 80 per cent of India’s population, through national and regional transmissions. INSAT is being extensively used for Educational TV broadcasting with about 100 hours of programming per month to over 4,000 schools and colleges. An effective educational system requires not just a one-way system of instruction but a two-way interactive communication system enabling the target audience to ask questions and obtain clarifications from experts, in real time. Special inexpensive talk back facilities have been developed within ISRO to promote this activity in the country and anumber of selected large-scale experiments aimed at improving the level of understanding of rural people, providing refresher courses to industrial workers in cities and specialised education to schools and colleges were conducted to demonstrate the effectiveness of the satellite media for TWENTy K .R . NARAyANAN ORATIONS 30 imparting interactive education (Rao 1995b). Recognising the acute need for eradication of illiteracy, particularly in the rural areas, ISRO has conceived of dedicated GRAMSAT satellites (Rao 1993) (Figure8), carrying six to eight high-powered C-band and Ku-band transponders which together with video compression techniques can disseminate region and culture specific audio visual programs of relevance in each of the regional languages through rebroadcast mode on to an ordinary TVset. Vast improvements in technology have made it possible to reach millions of homes with antenna dish sizes as small as 90 to 45 cm in Ku-band. The recent upsurge in video compression technology now enables several TV channels to be carried on a single transponder. Availability of about 150 channels from a single satellite location can entirely change the complexion of home entertainment through direct to home television broadcast. Video-on-demand which includes specific group interest programs in addition to general entertainment programs, allows individuals to choose and even manipulate programs of their choice. What was cost prohibitive yesterday has suddenly become affordable today with the availability of TV using only a small space segment resource in an economic way which can have a dramatic impact on educational and developmental services. Management of Natural Disasters The enormous havoc and dislocation caused by natural and man-made disasters have become a great burden particularly on the highly populated and poverty stricken developing countries causing perpetual misery to thousands of lives and livestock. Over the past 20 years alone, these extreme natural disasters have resulted in the loss of life of more than 3 million people and have affected over 800 million people all over the world, causing damage to property to the tune of $50–100 billion, 50 per cent of which is due to floods and cyclones. Over 60 per cent of all the major disasters have occurred in the developing countries, two-thirds of which have been in the developing Asian regions (Rao 1995a; World Resources Institute 1992). Even though extreme natural events such as floods, drought, cyclones and earthquakes are not totally under human control, prediction of occurrence of some of these events with a good degree of certainty is possible, thanks to the developments in space technology. Instead of collectively taking up the challenge of preventing or at least mitigating the effects of such disasters, 31 ORATION 2: SPACE TECHNOLOGy FOR SUSTAINABLE DEVELOPMENT IN ASIA providing aids after the events which are both inadequate and untimely has only resulted in perpetuating the misery of the worst affected, silently suffering victims of disasters. An effective disaster management system consists of four main components — disaster prediction, disaster warning, disaster management and disaster relief. Disaster warning is a basic prerequisite for ensuring disaster preparedness and in some cases to help in the prevention of disaster itself. Clearly the most important application of satellites is in detecting, predicting and delivering early warning of impending disasters such as flood, drought, cyclone and even forest fires (Rao et al. 1987; Heath 1994). Continuous monitoring by both geostationary and low earth orbiting weather satellites like GOES, INSAT, METEOSAT and NOAA is capable of providing early warning on cyclones and floods. Forest fires, environmental hazards, volcanic eruptions and even propagation of desert locust phenomena can be detected well in time by remote-sensing satellites like, LANDSAT, SPOT and IRS. Sustainable development strategy must address this important issue in order to provide stability and reasonable security to the vulnerable rural population in these countries. Remote-sensing information are now operationally used to regularly monitor flood conditions, volume of water flow and damage assessment. From such a database collected over years, it is possible to identify different risk zones in the flood prone area based on the severity index for flood proneness of each zone. Optimal treatment of each zone on a long-term basis, depending on the severity, can then be attempted to achieve reduction in flood damage without impairing environmental integrity (Rao 1993) (Figure 9). Data relay and communication satellites have the ability not only to deliver early warnings on various disasters but also in disseminating requisite information on hazard awareness and educating the local people in preparing themselves to face such hazards. Locale specific unattended Disaster Warning Systems (DWS) installed by India along the vulnerable eastern coast of the country, using communication and meteorological capability of INSAT multipurpose satellites, have proven their immense value in providing timely warning on cyclone and flood disasters over the last 10 years. Most dramatic use of DWS, consisting of over 150 disaster warning receivers was during the cyclone that hit the eastern coast of India in May 1990, enabling the civic authorities to evacuate over 170,000 people from the cyclone affected area, which saved thousands of lives and livestock. But for the operation of DWS, analysis of cyclone events which TWENTy K .R . NARAyANAN ORATIONS 32 occurred in the pre INSAT era indicates that the total human death toll would have been at least 20,000 during this event, as against only 800 deaths recorded (Rao 1995a; 1995b). Drought is a complex phenomena, the causes for which are many involving both natural and induced factors such as atmospheric perturbation, climatic variability, sea surface temperature changes and human intervention, ranging from deforestation and poor land management to destabilisation of greenhouse effect. While it is difficult to identify the exact onset and the end of drought because of its slow creeping nature, remote-sensing derived Vegetation Index (VI) has been very effective in monitoring drought conditions on a real time basis, often helping the decision makers to initiate appropriate strategies for recovery by changing crop patterns and practices. The use of meteorological satellite data to assess spatial and temporal inadequacies of rainfall at critical crop stages and subsequent assessment of the crop condition status based on VI analysis provide an excellent drought monitoring mechanism. Comparison of the temporal changes in the bi-weekly VI indices with the corresponding figures in a normal year can easily provide advance information on the onset of drought conditions in any given region (Figure 10). Under the National Agricultural Drought Assessment and Monitoring System (NADAMS), bi-weekly drought bulletins are issued, almost on real time, to all the drought prone districts in India to enable decision makers to assess the severity of drought and take appropriate remedial measures (Rao 1995c). Food Security The solution for providing food security to the world without affecting ecological balance lies in the adoption of new scientific tools available, particularly the use of vital inputs from space remote-sensing and biotechnological advances. While India and China have built an impressive capability in space technology by developing their own launch vehicles, communication and remote-sensing satellites and application programs, other countries in Asia have also successfully used space imageries available from international satellites for monitoring and management of their natural resources through cooperative arrangements. India for example, has effectively used its own IRS series of remote-sensing satellites to establish and continuously monitor its national forest inventory and to prevent further encroachment of its forest wealth. Extensive use of satellite imageries for mapping soil characteristics, land-use in terms of single crop, 39 ORATION 2: SPACE TECHNOLOGy FOR SUSTAINABLE DEVELOPMENT IN ASIA Figure 1: Foodgrain productivity in developed and developing countries Figure 2: Growth of population in the developed and developing countries of the world TWENTy K .R . NARAyANAN ORATIONS 40 Figure 3: Literacy and per capital GNP (the numbers in the diagram indicate the per cent global population under each grouping) Figure 4: Relation between female literacy and fertility rate and mortality rate 41 ORATION 2: SPACE TECHNOLOGy FOR SUSTAINABLE DEVELOPMENT IN ASIA Figure 5: Annual deforestation in the tropical region (1981–90) Causes of land degradation Per cent of total degraded land Asia Africa North America South America Central America Europe Oceania Deforestation 40 14 0 41 22 38 12 Industrialisation 1 0 0 0 0 9 0 Agricultural activities 27 24 66 26 45 29 8 Overgrazing 26 49 30 28 15 23 80 Overexploitation 6 13 4 5 18 0 0 Figure 6: Causes of land degradation in past 45 years TWENTy K .R . NARAyANAN ORATIONS 42 Figure 7: Satellite telecommunications in India 43 ORATION 2: SPACE TECHNOLOGy FOR SUSTAINABLE DEVELOPMENT IN ASIA Figure 8: Gramsat (concept) Figure 9: Flood risk zone map of part of Ganga basin TWENTy K .R . NARAyANAN ORATIONS 44 Figure 10: NDVI indicating seasonal vegetation conditions (Bhiwani district, India) Figure 11: Typical land-use pattern in a developing country — India 45 ORATION 2: SPACE TECHNOLOGy FOR SUSTAINABLE DEVELOPMENT IN ASIA Figure 12a: Resources management at micro-level of sustainable development — Drought-prone area Figure 12b: Resources management at micro-level of sustainable development — Hill area TWENTy K .R . NARAyANAN ORATIONS 46 References Brown, L. (ed.) (1992), State of the World, W.W. Norton & Co., New York. FAO (Food and Agricultural Organization) (1988), World Agriculture, Towards 2000, FAP Report, Rome. Gao, F. and Rao, U.R. (eds) (1992), Space and Education in Developing Countries, Proceedings of 43rd IAF Congress, Washington DC. Heath, G. (ed.) (1994), Space Safety and Rescue, Science and Technology Series, Vol. 84, American Astronautical Society, Washington. Khoshoo T.N. (1990), Indian Geosphere-Biosphere, in T.N. Khoshoo and M.Sharma (eds), Proceedings of National Academy of Sciences, 178. Liu, D. (ed.) (1994), Satellite Communication for Mass Education, Proceedings of45th IAF Congress, Jerusalem. Murai, S., et al. (1990), ‘What Population Can the Earth Feed’, Report, Mitsubishi Research Institute, Japan. Pant, N. (1994), ‘Satellite Communication Technology and Application, 1995– 2010’, Journal of Spacecraft Technology, 4(1). Ramanathan V., et al. (1985), ‘Trace Gas Trends and Their Potential in Climate Change’, Journal of Geophysical Research, 90, 5547. Rao, U.R. (1987), Perspectives in Communication, Vol. 2, World Scientific Publishing Company, Singapore, 1422. Rao, U.R. (ed.) (1988), Space and Humanity, Proceedings of 39th IAF Congress, Bangalore, India. Rao, U.R. (1991), ‘Remote Sensing for Sustainable Development’, Vikram Sarabhai Memorial Lecture, Anna University Madras, India. Rao, U.R. (1993), ‘Space Technology for Achieving Socio-Economic Revolution’, 29th Sri Ram Memorial Lecture, Sri Ram Institute for Industrial Research, New Delhi. Rao, U.R. (1995a), Space Technology for Sustainable Development, Tata McGraw Hill, New Delhi. Rao, U.R. (1995b), Satellite Communication in India — Past, Present and Future, Proceedings of SATCOM ASIA 1995 Conference, Hong Kong. 47 ORATION 2: SPACE TECHNOLOGy FOR SUSTAINABLE DEVELOPMENT IN ASIA Rao, U.R. (1995c), ‘Space Technology for Enhancing Sustainable Carrying Capacity’, Zaheer Hussain Memorial Lecture, Zaher Hussein Foundation, New Delhi. Rao, U.R., et al. (1987), Earth Safety and Disaster Response Employing Space Borne Systems, Proceedings of 38th IAF Congress, Brighton, UK. Rao, U.R., Chandrasekhar, M.G. and Jayaraman, V. (1995), Space and Agenda 21 — Caring for the Planet Earth, Prism Books, Bangalore, India. Swaminathan, M.S. (1980), Perspectives in World Agriculture, CAB. United Nations (UN) (1992), Proceedings of UN Conference on Environment and Development, RioDe Janerio, Brazil. United Nations (UN) (1994), World Population Projections, United Nations, New York. World Bank (1993), The East Asian Miracle, World Bank Policy Research Report, Oxford University Press, New York. World Bank (1994), World Development Report 1994, Oxford University Press, New York. World Commission on Environment (1987), Our Common Future, Report of World Commission on Environment and Development, Oxford University Press, New York. World Resources Institute (1992), Report of World Resources Institute, Oxford University Press, New York. 55 ORATION 3: INDIA: RETROSPECT AND PROSPECT The planning framework then rested on two legs. First, it sought to make the escalated growth credible to private investors so that they would proceed to invest on an enhanced basis in a self-fulfilling prophecy. Second,it aimed at generating the added savings to finance the investments so induced. The Five-Year Plan framework was an important aspect of this two-pronged policy. Simply by demonstrating that the government was committed to ahigher growth rate, it assured potential investors that demand would grow at higher rates and that the risk of investment would be correspondingly reduced. Besides, at the core of the plan there was commitment to substantial governmental spending, mostly on infrastructure, that added yet greater credibility to the high-growth scenario in what was otherwise an ‘indicative’ plan in terms of its investment profile. Moreover, the commitment to use fiscal policy to raise public savings to levels necessary to finance the projected growth of investment was also a credibility-enhancing factor for bringing about the enhanced investment. The bulk of the 1950s can then be called the favourable Phase I of Indian developmental effort; and it broadly coincides, in approach, to much of the East Asian experience where, however, the Five-Year Plan framework was not utilised. The governmental intervention, as described, led to an investment boom and hence to an enhanced growth. I may, in fact, recharacterise what happened, in more familiar technical terms, by reference to the Rosenstein-Rodan argument that has now been formalised by Vishny and Shleifer in their fine article in the Journal of Political Economy as a case of multiple equilibria.1 In his classic 1943 Economic Journal article,2 which is arguably the most beautiful piece of creative writing on development, Rosenstein-Rodan was basically arguing that, for developing countries stuck in a Nash equilibrium with low levels of investment, there existed a superior cooperative equilibrium with higher levels of investment and growth. The Indian planners, in formulating the first Five-Year Plan (1951–56), were essentially exploiting this insight. This was an indicative plan, without the straitjacket of controls and targeted allocations that would presumably reflect the contours of the superior equilibrium. In fact, it is absurd to 1 Andrei Shleifer and Robert W. Vishny (1988), ‘The Efficiency of Investment in the Presence ofAggregate Demand Spillovers’, Journal of Political Economy, 96(6): 1221–31. 2 P.N. Rosenstein-Rodan (1943), ‘Problems of Industrialisation of Eastern and Southern-Eastern Europe’, The Economic Journal, 53(210–211): 202–211. TWENTy K .R . NARAyANAN ORATIONS 56 imagine that anyone, either in India or in East Asia, could have worked out such a Rosenstein-Rodan–Vishny–Shleifer equilibrium even if there had been complete information to do so! What did happen instead was that, as I already suggested, the large component of public spending on infrastructure which was built into these indicative programs made the government’s commitment to kicking the system up into some bastardised version of the Rosenstein-Rodan–Vishny–Shleifer equilibrium quite credible to the private sector, triggering the self-fulfilling private sector investment response that lifted the economy into higher investment and growth rates.3 What Went Wrong: Derailing after the 1950s, Phase II What went wrong with India, and was still not entirely manifest when Swan arrived in India, can be characterised by contrasting India with East Asia once we go beyond the 1950s. In fact, by understanding better why East Asia went ahead to build greater success post-1950s helps us to understand why India went ahead to decline instead in her economic performance: hence, I will focus on East Asia’s success and its causes fornow. Let me begin by observing that, in my judgement, the critical difference was that India turned to the IS (import substitution) strategy and East Asia to the EP (export promotion) strategy. A central implication, which I have not drawn sharply in my earlier writings (which have focused, not on the inducement to invest, but rather on the social returns from investment) is that India, during this Phase II, handicapped the private inducement to invest, while East Asia wound up enhancing it. 3 Dani Rodrik seems to share broadly this view of how private investment rose but seems to err in two ways. He seems to suggest, presumably in sympathy with the Amsden–Wade thinking, that the bureaucrats could figure out the sectoral contours of the superior equilibrium, a presumption that I find ludicrous especially having seen the best bureaucrats in India confess to their inability to choose industrial favourites on any rational grounds. Moreover, he extends the argument well beyond the 1950s whereas, as I argue later in the text, this makes little sense. See Dani Rodrik (1995), ‘Getting Interventions Right: How Over the Home Markets South Korea and Taiwan Grew Rich’ Economic Policy, 10(20): 53–107. 57 ORATION 3: INDIA: RETROSPECT AND PROSPECT India turned inwards, starting with a balance of payments crisis in 1956–57 which precipitated the imposition of exchange controls which then became endemic to the regime, reflecting the currency overvaluation that implies the effective pursuit of an IS strategy. Again, the explicit pursuit of an IS strategy was also desired, reflecting the economic logic of elasticity pessimism that characterised the thinking of India’s planners. The result was that the inducement to invest in the economy was constrained by the growth of demand from the agricultural sector, reflecting in turn the growth of that sector. But agriculture has grown almost nowhere by more than 4 per cent per annum over a sustained period of over a decade, so that the increment at the margin in India’s private investment rate was badly constrained by the fact that it was cut off from the elastic world markets and forced to depend on inevitably sluggish domestic agricultural expansion. Thus, it became customary for Indian economists to talk about ‘balanced growth’ and about the problem of raising the investment rate which, by the mid-1980s, was still in the range of 19–20 per cent. By contrast, the East Asian investment rate began its take-off to phenomenal levels because East Asia turned to the EP strategy. The elimination of the ‘bias against exports’, and indeed a net (if mild) excess of the effective exchange rate for exports over the effective exchange rate for imports (signifying the relative profitability of the foreign over the home market), ensured that the world markets were profitable to aim for, assuring in turn that the inducement to invest was no longer constrained by the growth of the domestic market as in the IS strategy. Private domestic savings were either raised to match the increased private investment by pol icy deliberately encouraging them or by the sheer prospect of higher returns. This argumentation is not easy to defend once you face up to what my student Don Davis, now at Harvard, has called the ‘tyranny of the StolperSamuelson’: for, when this theorem holds, wages and rentals on capital are inversely related.4 When exports are the labour-intensive, the EP strategy may be expected to raise the wage of labour but depress the return to capital, thus depressing, not raising, the inducement to invest. Clearly, 4 I am drawing here on the preliminary draft of Don Davis’s paper, ‘Miracles of Accumulation: Models of Trade and Growth in East Asia’ (mimeo), Department of Economics, Harvard University, January 1996. TWENTy K .R . NARAyANAN ORATIONS 58 therefore, the force of Stolper-Samuelson argument must be broken: as indeed it can be by relaxing one or more of the assumptions underlying that theorem. Thus, Davis suggests that the forces of comparative advantage may be argued to have been sufficiently strong as to make East Asia specialise in the production of the labour-intensive goods. This decouples factor returns from the factor price frontier for the capital intensive good, leaving wages and rentals dependent only on productivity in the labor intensive good and the price of that good. In moving from autarky to free trade, both factor prices can rise, inducing an accumulation ‘miracle’. Another way out would be to assume productivity differences across countries, as in Ricardian theory. In this case: if we assume that the relative productivity gap of East Asia relative to the rest of the world is largest in the capital intensive sectors, and that trade serves to close this gap, then it is again possible for both wages and rentals to rise.5 While therefore it is possible to formalise the argument I have made that the EP strategy increased the inducement to invest, I must also address Dani Rodrik’s recent objection that exports were a relatively small part of the economy at the outset so that EP strategy could not have resulted in any significant impact, and therefore the source of the investment must be found in governmental subventions and interventions whereas the growth of trade is simply a passive result of the growth induced by these other factors. This argument is unpersuasive because East Asia would have run into precisely the problem of demand constraint that India was afflicted with if an IS strategy had been followed, with the efficacy of these other policies in generating investment seriously impaired. Moreover, the ultra-EP strategy, with its mild bias in favour of the export market and the policy-backed ethos of getting into world markets, meant that export incentives must have played a major role in influencing investment decisions, not just in the exporting industries, but also in the much larger 5 Ibid., p. 2. Davis proceeds to formalise these ideas in a dynamic framework, more appropriate to the accumulation problem at hand. 59 ORATION 3: INDIA: RETROSPECT AND PROSPECT range of non-traded but tradeable industries.6 In any event, the growth of exports from East Asia was so phenomenal that the share of initial exports in GNP quickly rose to levels that would lay Rodrik’s objection to rest, even if it were conceptually correct. The flip side of the process was, of course, the generation of substantial export earnings that enabled the growing investment to be implemented by imports of equipment embodying new technical change. Now, if the social marginal product (SMP) of this equipment exceeded the cost of its importation, there would be a ‘surplus’ that would accrue as an income gain to East Asia and would also, as I argue below, boost the growth rate. For this argument to hold, however, the international cost of the newer-vintage equipment must not reflect fully its SMP for East Asia. In a competitive international market for equipment, therefore, I must assume that East Asia was a small player whose higher SMP did not pull up the world price to reflect the higher SMP — i.e. that East Asia could, even without ‘piracy’ and ‘theft’ of intellectual property (which was widespread in the region until the new WTO regime), get embodied technology at bargain prices. This seems a reasonable assumption to make, especially when one sees that the world prices of the last-but-one vintage equipment fall drastically due to rapid obsolescence in the presence of quick product innovation: just think of your PCs. (To understand fully the foregoing point, note that an economy in 1970 such as Soviet Russia’s which was confined to using its own 1930s-vintage technology in equipment would not lose to East Asia which could use a heuristically 20times more productive 1960s technology if East Asia had to pay a20times greater price for it. The surplus arises because East Asia pays, say, only a five times greater price in world markets for equipment that is 20times more productive in East Asia.) 6 Rodrik (op. cit.) also seems to think it pertinent that the export incentive, in the shape of the real exchange rate, did not continue improving. However, it is not necessary for it to be improving continuously for the export incentives to operate. Thus, an excess of the effective exchange rate for exportables over that for importables (as distinct from continuous increase in this difference) will suffice to provide a continuing incentive for the export Martin Wolf has also critiqued Rodrik’s antiEP-strategy argumentation, as also the Krugman argumentation, in two excellent recent columns in the Financial Times, ‘The Tyranny of Numbers’ and ‘A Lesson for the Chinese’. TWENTy K .R . NARAyANAN ORATIONS 60 This argument is illustrated in Figure 1 in a simple diagram, with the SMP curve for increasing imports of the vintage capital equipment for East Asia put against the international cost of importing it, the striped area then representing the surplus that accrues to East Asia. But there may also be another reservation about this argument’s effect on the growth rate, as distinct from its effect on income. It is fair to say that, thanks to the focus on the steady state in Solow-type models, it has now become fashionable to assert that the gains from trade, like any allocative efficiency gains, amount to one-time gains, not affecting the growth rate. This is, however, wrong-headed as a general assertion. Thus, consider the simple Harrod–Domar corn-producing-corn growth model with labour a slack variable. If allocative efficiency regarding land use (say, from one inefficient farm to another efficient farm) leads to agreater return to the total amount of (‘invested’) corn being put into the ground, the marginal capital-output ratio will fall, ceteris paribus, and will lead to apermanently higher growth rate. Similarly, it takes no sweat for a first-rate theorist to construct models where trade in capital goods leads to higher growth rates, without building in externalities, etc. and relying exclusively on the fact that they can be imported more cheaply than constructed under autarky. Thus, T.N. Srinivasan has extended the Mahalanobis-type putty-clay model to include trade and demonstrated precisely this.7 Thus, he assumes (inplace of just one capital and one consumer good in the autarkic version) that there are two of each class of goods, with the marginal product of capital constant in each sector as in the Harrod–Domar model. The social utility function and the function that transforms the output of the two investment goods into aggregate investment are Cobb–Douglas. There is no inter-sectoral (i.e. between the consumer goods and the capital goods sectors), as against intra-sectoral (i.e. between the two goods in each sector), mobility of capital: this is the clay assumption. 7 See his comment on ‘Two Strategies for Economic Development: Using Ideas and Producing Ideas’, by Romer, Proceedings of the World Bank Annual Conference on Development Economics 1992, World Bank, Washington DC, 1993. Srinivasan also makes the valid point that the Mahalanobis– Feldman putty-clay models are among the earlier examples of ‘endogenous’ growth theory since the growth rate is determined by the discretionary policy choice of the share of investment goods being allocated to the capital goods sector. The neglect of the considerable literature on such models by the originators of the current endogenous growth theorists is to be attributed to the fact that these theorists have come to their models from the Solow model and have no acquaintance with the growth models that came up in the context of developmental problems in the 1960s. Of course, most of us are rediscovering great ideas all the time! 61 ORATION 3: INDIA: RETROSPECT AND PROSPECT Assuming that all four goods are produced under autarky, that free trade is undertaken at fixed terms of trade, and that the share of investment going to augmenting capacity in each of the two sectors is fixed exogenously, Srinivasan then demonstrates plausibly that free trade in consumer goods (but with autarky continuing in investment goods) will raise welfare relative to autarky but not affect the growth rate of income or utility. Onthe other hand, freeing trade in investment goods will have a positive effect on transitional as well as on long-run (steady state) growth effect, and also a beneficial welfare effect relative to autarky. The vulgar belief that trade gains cannot affect the growth rate is thus easily disposed of. However, how does one reconcile the ‘surplus’ argument with the findings that TFP growth has been a negligible factor in East Asia? So, is my story plausible but not borne out by the facts, as is often the case with our most interesting theories? I think not. Thus, consider precisely the case where the imported equipment is 20times more productive in Period 2 than in Period 1, but its price is only five times as high. If the valuation of this equipment is at domestic (producer) opportunity cost, as it should be, then it will indeed be priced 20 times higher than the older-vintage equipment of Period 1, so the measure of capital contribution at the level of the industry will rise commensurately and I presume that the estimated TFP growth in the industry will be zero: in that case, my thesis about the surplus is totally compatible with measured TFP emerging as negligible. But, of course, if the equipment is priced at its international cost, then I presume that TFP growth will pick up three-fourths of the gain that accrues from the ‘surplus’ of SMP over the international cost. My guess then is that, in East Asia, the former was the case. This might have been, not because the accountants were smart and valued Period 2 equipment at domestic opportunity cost, but because I guess that much of the imported equipment may have gone through importing trading firms which collected the three-fourths premium rather than the producing firms. The role of literacy and education comes in precisely at the stage of the second step in my story above. For, the productivity or SMP of the imported equipment would be greater with a workforce that was literate and would be further enhanced if many had even secondary education. Thus, as shown in Figure 2, the SMP curve could shift to the right with literacy and education, leading to greater surplus for any given international cost of newer-vintage equipment. TWENTy K .R . NARAyANAN ORATIONS 62 Here I may cite Little,8 using the pretext that a lecture justifies the informality of argumentation that a conference paper does not: It was largely from the experience of conducting this [1975, South Korean] survey, involving visits to the [28 randomly selected] firms ranging from 1.5 to 3.5 hours, that my own impressions of such matters as the acquisition of technology and skills on the part of the labour force … were formed. I also visited a number of high exporting medium-size labour-intensive firms in Taiwan in 1976 … Two points are mainly relevant in the present context. First the technology was simple, non-proprietary and easily acquired … Secondly, both Korean and Taiwan workers were very quick to learn. Employees would usually reach the expected high level of productivity within a few weeks. This would probably not have been the case if the standards of primary education had notbeenhigh. Of course, as these economies grew rapidly, the demand for secondary and higher education in turn would rise and a virtuous circle would follow: primary education would enhance the growth that the EP strategy brought whereas the enhanced growth would demand and lead to a more educated workforce. I see therefore primary education and literacy as playing an enhancing, rather than an initiating, role in the EP-strategyled East Asian drama. Thus, my story of East Asia’s success, and by contrast that of India’s failure, combines in its own way three major elements, in that order: (i)theenhanced inducement to invest due to the EP strategy; (ii) the benefit from the surplus of domestic SMP over international cost of imported newer-vintage capital equipment; and (iii) the raising of this SMP by the presence of a literate workforce. But if the main plot is this, the story has doubtless many sub-plots. I will touch on just one of them, especially as the analysis dates back to the early 1970s and to the NBER project, which I had the pleasure of codirecting with Professor Anne Krueger, yet another of Australia’s gifts to Economics. 8 Ian Little (1994), ‘Picking Winners: The East Asian Experience’, Social Market Foundation Occasional Paper, London. 63 ORATION 3: INDIA: RETROSPECT AND PROSPECT In my synthesis volume9 for the NBER Project findings, I had noted that among the advantages of the EP strategy, which the project had found beneficial, one had to count the fact that trade barriers-jumping DFI in the IS countries was likely to be limited for these countries by the size of the domestic market by which it was motivated — there are shades here of the inducement-to-invest argument I have made today, but only in the faintest strokes. Secondly, such DFI as was attracted in the IS countries was also likely to be less productive because it would be going into economic regimes characterised by significant trade distortions that could even generate negative value added at socially relevant world prices — a possibility that was discussed by me (based on an extension to the DFI issue of the contribution by Harry Johnson to the theory of immiserising growth in tariff-distorted economies)10 and then nailed down in well-known articles into a certainty under certain conditions by Hirofumi Uzawa11 and by Richard Brecher and Carlos Diaz Alejandro12 independently. I should mention that both these (thoroughly plausible in terms of their economic rationale) hypotheses have been examined, with some success, in cross-country regressions by another former student of mine, V.N. Balasubramanyam at Lancaster University and his co-authors.13 So, this element may also be added to the explanation of East Asia’s superior performance relative to that of IS-strategy-plagued countries such as India.14 9 Jagdish N. Bhagwati (1978), Anatomy of Consequences of Exchange Control Regimes, NBER, Ballinger, Cambridge, Mass. 10 See Jagdish Bhagwati (1973), ‘The Theory of Immiserising Growth: Further Applications’, in Michael Connolly and Alexander Swoboda (eds), International Trade and Money, Toronto University Press, Toronto. 11 Hirofumi Uzawa (1969), ‘Shihon Jiyuka to Kokumin Keizai (Liberalisation of Foreign Investments and the National Economy)’, Economisuto, 23(December): 105–22. 12 Richard Brecher and Carlos Diaz Alejandro (1977), ‘Tariffs, Foreign Capital and Immiserising Growth’, Journal of International Economics, (4): 317–22. 13 See, in particular, V.N. Balasubramanyam and M.A. Salisu (1991), ‘EP, IS and Direct Foreign Investment in LDCs’, in A. Koekkoek and L.B.M. Mennes (eds), International Trade and Global Development: Essays in Honour of Jagdish Bhagwati, Routledge, London, for the former hypothesis; and V.N. Balasubramanyam, M.A. Salisu and David Sapsford (1996), ‘Foreign Direct Investment and Growth in EP and IS countries’, The Economic Journal, 106(434): 92–105, for an indirect test of the latter hypothesis (explaining growth as the dependent variable). 14 Of course, as Magnus Blomstrom has reminded me, I should also note that there is considerable evidence at the micro-level of beneficial spillover effects from DFI, including from several studies he has undertaken in developing countries. However, reconciling this evidence with the contention that there is little evidence of TFP in the Lau–Young-type studies remains an unresolved issue. TWENTy K .R . NARAyANAN ORATIONS 64 Indeed, the inefficiency of the limited investment that did occur is the other side of India’s miseries in the post-1950s Phase II. As India turned inward, the absence of competition and its salutary effects on efficiency were also lost. This loss was further compounded as the original, promotional apparatus established in the Ministry of Industry (theDGTD) turned swiftly into a restrictive agency instead. The government turned from indicative planning to a mechanism for masterminding, with the aid of a stifling licensing system, the production, investment and import decisions in the economy to a degree unimaginable to anyone outside the regime. I am reminded that, eventually when, in the early 1990s just prior to the beginning of the reforms in earnest in 1991 under what we might call Phase III, The Economist ran a long piece on India, describing and denouncing its policies, a visiting Russian economist, Maxim Boycko, who then went on to play a major part in the Russian privatisation program of Anatoly Chubais, told me: ‘that article could well have been describing the Soviet Union’. We had clearly reproduced beautifully the disadvantages of communism without any of its benefits! In addition, the early policy adopted in the 1950s itself, under which agrowing share of the country’s investments would occur in the public sector, spawned inefficient public sector enterprises whose losses would make a significant contribution to a macro-crisis in the 1980s and which, in addition, crippled the efficiency of the private sector as well since the public sector enterprises supplied, or rather failed to adequately and efficiently supply, infrastructure inputs such as electricity and transportation over which they were granted monopoly of production. So, if I were to summarise briefly the period of three decades between the end of the 1950s and of the 1980s, I would reach the following sobering conclusion: We had started out in the 1950s with: • high growth rates • openness to trade and investment • a promotional state • social expenditure awareness • macrostability • optimism; and hence • admiration of the world. 71 Stronger Branches, Deeper Roots: The Democratisation of India’s Economic Reforms P . Chidambaram It is a privilege to be invited to The Australian National University. ANUhas had a long association with India. Sir John Crawford, one of your former Chancellors, played a key role in the 1960s in making the Green Revolution possible in India, and we are grateful for that. Few institutions around the world have a centre dedicated to research on South Asia. This university has set an example by establishing the Australia South Asia Research Centre (ASARC). I have no doubt that the seed that was sown in 1994 will grow into a huge tree, providing opportunity to hundreds ofscholars to study the unfolding South Asian drama. There could have been no better occasion for me to visit here — which is also my first visit to your beautiful country — than to deliver the K.R.Narayanan Oration. It is my privilege to have known Mr Narayanan personally for many years. Mr Narayanan is a distinguished son of India and has impeccable intellectual and moral credentials. He has served his country with commitment and far-sightedness. His rise to the high office of President is a modern-day version of ‘log cabin to the President’s House’, and throughout his life he had no assets other than hard work, integrity and humility. I hope I can measure up to the great honour attached to alecture that bears his name. TWENTy K .R . NARAyANAN ORATIONS 72 The Development Challenge India is a large and diverse country and its development has many dimensions. A population of nearly a billion people is just one aspect that sets it apart from most developing countries. True, China makes agood comparison. But China does not have the religious, ethnic, social or cultural variations and diversities that mark India. No other nation has such a large underclass — of backward castes and classes — that seeks empowerment. We cannot also forget that, unlike in many other developing countries, demo cracy has flourished in India for over five decades now and has struck deep roots. Its federal polity and the division of political power make the nature of State intervention in the economy somewhat different from other systems. Therefore, while comparisons with East Asia and China could certainly help in analysing India’s economic trajectory and the success or failure of its policy responses, such an approach suffers from obvious limitations. India’s development problem has to be probed on its own and solutions found that are specific to its needs. The theme that I have chosen for my lecture today rests on this premise. My endeavour would be to look at both the political and economic aspects of the development challenge in India. Soon after India launched its reforms in 1991, its economy responded strongly to the bold initiatives taken by the government. The foreign exchange crisis of 1991 had brought down the GDP growth rate to a mere 0.8 per cent in 1991–92. The rebound thereafter was strong and, during the five years ending 1996–97, GDP growth rate averaged 6.9 per cent, the highest ever for a five-year period. This was accompanied by a turnaround in macroeconomic balances. The current account deficit improved from a high of 3.5 per cent in 1991 to 1.2 per cent in 1996–97 and the debtservice ratio declined from 32.4 per cent to 23 per cent. External debt as a percentage of GDP fell to 25 per cent in 1996–97 from a high of 37 percent a few years earlier. Fiscal deficit of the Centre declined from 8.6 per cent in 1990–91 to 5.1 per cent in 1996–97. Foreign exchange reserves improved dramatically, rising from a mere $1 billion to over $27billion now. And this has happened despite substantial liberalisation of the trade regime and reduction in tariffs. While the improvement in the macro-economy has been remarkable, no less remarkable have been the changes that have taken place at the grassroots. Let me give you a flavour of the impact of economic reforms 73 ORATION 4: STRONGER BRANCHES, DEEPER ROOTS on the rural population of India who constitute the bulk of our poor, illiterate and deprived. Between the National Sample Survey 46th round (July 1990 – June 1991) and the 53rd round (January 1997 – December 1997), the total number of employed in rural India increased from 268million to 294 million, a gain of 26 million in the space of six years. While no accurate estimates are yet available for changes in rural per capita income, an indication can be had from the changes in real wages of unskilled agricultural labour. After a sharp decline in 1991–92, the first year of reform, real wages increased at an average annual rate of 3.6 percent in the next six years. Gross capital formation in agriculture, another useful indicator, shows a 50 per cent rise at constant prices in the six years between 1991–92 and 1996–97. What is more remarkable is that there is a clear shift in favour of private investment in agriculture, and the share of private investment has increased from 75 per cent to 83 per cent. These changes are also reflected in the social indicators for rural India. Infant mortality rate for rural areas has declined from 86perthousand live births to less than 80 per thousand (the national average is 71). Literacy in rural areas has improved from 44.7 per cent to 56 percent (thenational average is 62 per cent). The birth rate for the whole country has declined from 29.5 per thousand to 27.2 and the death rate from 9.8per thousand to 8.9. These tentative trends are consistent with the view that rapid economic growth has brought about an improvement in the living standards of the people in general. During the last two years, however, while macroeconomic balances have not deteriorated, growth rate of GDP has tended to slow down to about 5 per cent. The IMF’s forecast for the current year (1999–2000) is that the GDP growth would once again be only 5.1 per cent. The sector responsible for the slowdown is manufacturing, where growth has slipped from a peak of 15 per cent in 1995–96 to less than 4 per cent in 1998–99. What has also raised concern is that during the ’90s, as a whole, trend growth rate in agriculture has been lower than it was in the ’80s. Recent researches have confirmed that economic growth has contributed much more to reduction of poverty in India than subsidies or the government’s anti-poverty interventions targeted at the poor. The rate of decline in the poverty ratio in the late 1980s and early 1990s has been doublethe rate achieved in the 1970s. This happened because the average growth rate of GDP improved from 3.5 per cent in the 1970s to5.3percent in the 1980s and even higher to 7 per cent during 1994–95, 1995–96 and 1996–97. Clearly, India needs to sustain GDP growth rates TWENTy K .R . NARAyANAN ORATIONS 74 of 7 per cent plus to eliminate poverty over the next 15 to 20 years. What is also required is some sort of balanced growth across sectors because of the pivotal role of agricultural growth in povertyalleviation. Three Constraints Among the constraints to sustainability of high growth and poverty reduction in India, three are most apparent. First, India’s infrastructure is in urgent need of repair and expansion. Huge amounts need to be invested in ports, power generation and distribution, telecommunication, railways, roads and bridges, irrigation systems and water resources, infrastructure in urban and rural settlements, and afforestation and rehabilitation of degraded land. Second, the quality of India’s human resources is abysmally poor. India has the highest number of illiterate people among all countries. A third of India’s children between the ages of six and 10 do not get to school. Of the children that do, a good number drop out well before they acquire the skills needed to earn a decent wage. India has also the world’s largest share of children who remain malnourished. A large proportion of the Indian population does not have access to basic health care or basics like drinking water, shelter and toilets. Communicable diseases and prenatal and maternal mortality cause about 470 deaths per 100,000 persons in India — a rate four times that of China. In sum, a third of all Indians are poor, malnourished, illiterate and in bad health, and a robust growth rate of population only adds more to the bottom third of the Indian people. In a country like India, reduction in population growth becomes a crucial variable. Experience of some Indian States clearly suggests that a fall in population growth rate has strong link ages with social indicators like health and literacy, particularly of women. Third, the government needs to redefine itself both in terms of what it should do and what it must spend on. While deregulation has already reduced the role of government in industry, infrastructure and services, and has expanded the space for the private sector, much more needs to be done. The process of privatisation remains tardy. But deregulation and privatis ation alone will not help. This is because high fiscal deficits continue to threaten the sustainability of the growth process. Huge borrowings by the government hamper resource mobilisation by the private sector 75 ORATION 4: STRONGER BRANCHES, DEEPER ROOTS and keep interest rates high. It follows that redefinition of government is closely linked with fiscal reform, especially reduction of the deficit and re-orientation of expenditure. Trends in Indian Polity It is necessary to look at these constraints within the setting provided by the emerging trends in the Indian polity and society. The most visible feature of the polity is the emergence of regional political and social forces and their urge for autonomy and empowerment. Over the last decade or so these urges have found a vehicle in regional political parties and they have played a key role in coalition governments at the Centre. The coalition governments have responded to the growing clout of regional parties by devolving more powers of decision-making from the Centre to the States. This trend cannot now be reversed as its roots go deep. Indeed, State governments are also under pressure to further decentralise power and resources to local bodies. Indian society is witnessing a process of great churning. The old order is dead. Sections at the lowest rung of society, the dalits1 and the backward castes, minorities and women are now seeking social equality and their rightful place in the power structure. Alongside, there has been a surge in the activities of thousands of non-governmental organisations seeking to find decentralised solutions to developmental, cultural and social problems faced by the people. This social change, as well as the people’s urge to participate in the development agenda and seek localised solutions to their problems, is bringing to the fore the role of local bodies, called Gram (i.e. village) panchayats, Nagarpalikas and Zila parishads. The initial phase of reforms under the Congress government (1991–96) was driven by compulsion, external pressure and a few committed individuals. By a quirk of fate, many parties that had long opposed structural reforms came to power in 1996 under the banner of the United Front government. The United Front government surprised its critics by not only reaffirming the reform process but vigorously pursuing reforms in new areas. For instance, it was the United Front government which reformed direct taxes, began dismantling the administered price mechanism for 1 The former untouchables who suffer the worst discrimination. TWENTy K .R . NARAyANAN ORATIONS 76 petroleum products, and won the approval of the Inter-State Council (a body comprising the Chief Ministers of all the States) to accept 29recommendations on Centre-State financial relations. That government also introduced a slew of draft legislations ranging from company law to income tax to foreign exchange to insurance. TheBJPled government which assumed office in March 1998 came in with areputation of being a right-wing coalition, rooted, however, not in reform but in atavism. After farcical posturing with outdated ideas like Swadeshi (self-reliance, or, more accurately, autarchy) and outrageous suggestions like withdrawal from WTO, the government settled down to the business of governance and categorically reaffirmed both the content and direction of the economic reforms that had started in 1991. The positive fall out of this was a new policy on information technology and a major overhaul of excise duties. Thus, the 1990s has witnessed the forging of an unspoken consensus among all the parties which cover the entire political spectrum of India. The Congress and the BJP have emerged as the two poles. Regional parties which dominated the United Front have shown a tendency to gather around one or the other pole. Many observers discern a definite trend towards a two-party system. While there is some basis for this conclusion, I do not think political life in India would ever be so simple. As the two major parties move towards the centre, they are in danger of losing their USP, although, I must confess, in the case of the BJP it would be better off if it loses its Unwanted Selling Points more rapidly! I also believe that there is political space for the Communist parties; there is space for a Green party as well. The two-party system would eventually dominate India’s system with a peculiar Indian variation: the Congress and the BJP will be the two dominant parties at the Centre, but at the State level it is possible that the two-party system may be dominated by two regional parties excluding either or both the Congress and the BJP. Even if single-party governments replace coalitions at the Centre, they will have to accommodate regional and sub-regional aspirations and even nurture them. They will also have to provide representation to backward castes, the dalits, the minorities and women. Indeed, both the leading national political parties, the Congress and BJP, are now supporting demands by sub-regional forces for formation of new States. Both are wooing the dalits, backward castes and minorities and debating legislation to reserve seats for women in elected bodies. There is a realisation across the political spectrum that if the country were to be governed effectively, 77 ORATION 4: STRONGER BRANCHES, DEEPER ROOTS its diversity would have to be respected and nourished. The constraints to India’s growth which I noted earlier would have to be addressed within this changing political matrix. Indeed, this framework is no different from the one visualised by the architects of India’s Constitution five decades ago. They clearly defined the division of responsibilities between the Centre and the States and enumerated them in the Union list, the States’ list and the Concurrent list. These lists entrust the State governments with substantial responsibilities for development. Thus, States play a determining role in development of agriculture, water resources, land relations, environment and forests, rural roads and state highways, minor ports, electricity and rural and urban services. They are also responsible for human development through investments in key areas as health and education. To enable them to fulfil their responsibilities, the Constitution also empowers them with rights to raise taxes, get a share in funds available with the Centre, and levy user charges on various economic and social services provided to the people. The Constitution also provides for rights and responsibilities of local bodies like panchayats and municipal bodies. The Indian Constitution envisages that the States are as much, if not more, responsible for development asthe Centre. One may ask that if the framework was already provided for in the Constitution, then what went wrong? The framework worked, but only for a few years after independence. Thereafter, India suffered a phase when the Centre encroached upon the powers and autonomy of the States. The States in turn usurped the powers of local bodies. This was a logical fall-out of the centralised model of planned development India chose in the mid-’50s, which ensured that all economic decisions were directed by the Centre. The result was that the Centre sought to assume a larger responsibility for development than assigned to it in the Constitution. It floated centrally sponsored schemes and procrastinated on sharing all the tax revenues with State governments. States were required to seek clearances from the Centre for setting up projects for infrastructure and human development. Before the economic reforms of 1991, the States had little autonomy in attracting private domestic or foreign capital because investment, financial, industrial, sectoral and locational policies were controlled by the Centre. Local initiatives, especially initiatives that would have been possible through local bodies, perished under the TWENTy K .R . NARAyANAN ORATIONS 78 Centre-directed and Centre-controlled economic model of development. In turn, States neglected their local bodies: in many States local bodies ceased to exist as elections to such bodies were not held for 10–20 years. The coincidence of economic reforms and the emergence of regional political forces in the ’90s have acted as a catalyst to trigger devolution of power to the States. The United Front government (1996–98) offered to abolish or transfer to the States centrally sponsored schemes. It also liberalised policies to allow States to attract more private capital. TheUnited Front government also accepted the recommendation of the Finance Commission that 29 per cent of all central tax revenues should be shared with the States. The change in the correlation of forces in favour of States is evident from the fact that the BJP-led coalition government that followed has continued with decentralising power to the States. Is Empowerment of States Enough? But empowerment of States is just one side of the coin. To deliver on the development front, the States will have to perform and not just rest content with acquiring more powers. The overall record thus far has been uninspiring. Most States’ finances are in a mess and they often have to resort to overdrafts to pay salaries to their employees. The latest figures show that the States’ combined fiscal deficit had increased to a high of 3.6per cent of GDP. In 1985–86, this figure was 2.7 per cent. Disturbingly, the States’ fiscal deficit is rising not because they are spending more on development. The bulk of the States’ expenditure is devoted to salaries and pensions, interest payments, and covering losses of public enterprises or losses incurred by electricity and irrigation boards. The interest burden on States has risen from 1.4 per cent of GDP in 1985–86 to 2.3 per cent now. Not surprisingly, their development effort is faltering: capital expenditure on social and economic services has fallen from 3.1per cent of GDP in 1985–86 to around 2 per cent now. The States’ expenditure on key social services like health and education is falling as a proportion of their total expenditure. Likewise, their commitment to developing critical infrastructure has weakened. They are unable to find resources even for maintenance of existing roads, public transportation systems and irrigation facilities. They cannot meet the growing energy needs of industry and agriculture because the state electricity boards have accumulated losses of over Rs 150 billion. The urban and rural settlements 79 ORATION 4: STRONGER BRANCHES, DEEPER ROOTS are in a state of decay. And even as their wasteful expenditures are going beyond control, their taxation systems have lost the ability to deliver the revenue growth needed to plug the widening resources gap. It will be evident that the three constraints to growth and development Ioutlined earlier are in full play at the level of the States. Since the States are responsible for a substantial part of the development effort, it is plain that reforms at the Centre alone cannot resolve the issue. The answer clearly lies in reforms at the State level: reforming States hold the key to India’s economic future. Fortunately, some States have seen the writing on the wall and launched welcome initiatives. Orissa, Haryana, Andhra Pradesh and Uttar Pradesh have launched comprehensive power sector reforms to dissolve their electricity boards and establish separate companies for generation and distribution of power, and have drawn up plans for privatisation of both generation and distribution. They have set up regulatory agencies to eliminate government’s interference in the power sector, and to set tariffs for various categories of consumers. Hopefully, the huge subsidies being doled out will now be phased out and the power sector in these States would become financially sustainable. The power reforms experiment in these four States has motivated other States like Karnataka to launch similar reforms. Incidentally, these five States are ruled by five different political parties. Similar initiatives have been launched in other areas of infrastructure. Karnataka and Andhra Pradesh have created infrastructure funds to boost investments in large infrastructure projects. Andhra Pradesh and Gujarat are upgrading their State highways and are revamping their road departments to improve the quality of road construction and maintenance. Many States are seeking private investors to rebuild high-density corridors into toll-based highways or expressways. Almost all States along India’s large coastline are inducing private investors to build new ports on a BOT basis. Some States have also launched new programs in the social sector. States like Rajasthan, Uttar Pradesh and Madhya Pradesh have embarked on improving their primary school systems to universalise primary education. Andhra Pradesh and Karnataka are reforming their health systems to improve the quality and reach of health services. Some States have launched ambitious programs for reproductive health and women and child development. Kerala and Tamil Nadu have already reached the replacement level of fertility of 2.1. TWENTy K .R . NARAyANAN ORATIONS 80 Fiscal Reform: The Critical Variable While all these are steps in the right direction they still fall far short of the truly enormous requirements of the large Indian population. Even as many States are deregulating to woo private investors, it is obvious that private capital cannot satisfy all the requirements. There are critical areas in social sector and infrastructure where only the government can provide the necessary money as well as drive. Many of the programs, especially in the social sector, are not backed by fiscal reform and realignment of public expenditure. In the absence of fiscal reform, the critical minimum effort in infrastructure and human development is sadly missing. Fiscal reform at the state level is the one crucial element for redirecting State governments’ energies towards the social sector and infrastructure. Furthermore, these programs would not be sustainable unless they are conceived, designed and owned by the people and communities themselves. Most Indian States have large populations: a good number have more than 60 million people and one is large enough to qualify as the sixth largest country in the world! Within each State there are substantial regional variations in social structures and ethnicity, resource endowments, land relations, agro-climatic conditions, cropping patterns and the like. Quite often programs and projects conceived in State capitals fail to account for such variations, and communities are not taken into confidence. Also, centralised implementation of projects prevents transparency and vested interests tend to gain at the expense of the people. A good example is the plethora of anti-poverty programs and subsidies targeted at the poor. Their achievements in terms of poverty reduction have been found to be questionable and far from commensurate with the huge amount of funds poured into them. If the States have to ensure that reforms deliver at the grassroots they have no option but to decentralise in favour of local elected bodies at the village and municipal levels. Panchayats: The Third Tier Over two-thirds of the 1 billion Indian population lives in over 500,000 small villages and the remainder in a few thousand urban and semi-urban settlements. As I said earlier, the setting for development may change from one set of villages to another. To ensure that these varying needs are addressed and programs are implemented in a decentralised manner, 87 Monetary Policy in a Developing Economy — The Indian Experience C . Rangarajan It is a great honour to be asked to deliver the K.R. Narayanan Oration of this year. It is an honour in more ways than one. First, the invitation has come from the prestigious Australia South Asia Research Centre of TheAustralian National University which has done commendable work in studying the political and economic developments in South Asia and particularly India. The growing integration of the world economy has made the work of the Centre extremely valuable and relevant. Second, the oration is named after one of the most distinguished sons of India, who today occupies the exalted position of the President of India. Narayanan’s contributions to India’s public life are immense. With quiet diplomacy and skilful and strategic interventions, he has steered the country during difficult times, particularly in the last few years. Through his scholarship and statesmanship, he has endeared himself to one and all. It is truly a great privilege to deliver the lecture bearing his name. Developments in Monetary Policy I have chosen to speak to you today on the Indian experience with respect to monetary policy as an instrument of economic management. Developments in monetary policy closely mirror the changes in overall economic policy. The decade of 1990s has seen far reaching changes in India’s economic policy. The content and approach to economic policy underwent a sea change. The country has become a more open economy. The roles of state and market are getting redefined. There is a common TWENTy K .R . NARAyANAN ORATIONS 88 thread running through the various measures introduced since 1991 and that is to improve the productivity and efficiency of the system. This is sought to be achieved by imparting a greater element of competition in the system. It is in this context that monetary policy in India acquired a new role. Financial sector reforms which were an integral part of the economic reforms program created a new institutional environment in which monetary policy had to operate. In industrially advanced countries, after decades of eclipse, monetary policy re-emerged as a potent instrument of economic policy, in the fight against inflation in the 1980s. Issues relating to the conduct of monetary policy came to the forefront of policy debates in the 1980s. The relative importance of growth and price stability as the objective of monetary policy as well as the appropriate intermediate target of monetary policy became the focus of attention. Over the years, a consensus has emerged among the industrially advanced countries that the dominant objective of monetary policy should be price stability. Differences, however, exist among central banks even in these countries as regards the appropriate intermediate target. While some central banks consider monetary aggregates and, therefore, monetary targeting as operationally meaningful, some others focus on the interest rate. There is also the more recent practice to ignore intermediate targets and focus on the final goal such as inflation targeting. A similar trend regarding monetary policy is discernible in developing economies as well. Much of the early literature on development economics focused on real factors such as savings, investment and technology as mainsprings of growth. Very little attention was paid to the financial system as a contributory factor to economic growth even though attention was paid to develop financial institutions which provide short-term and long-term credit. In fact, many writers felt that inflation was endemic in the process of economic growth and it was accordingly treated more as aconsequence of structural imbalance than as a monetary phenomenon. However, with the accumulated evidence, it became clear that any process of economic growth in which monetary expansion was disregarded led to inflationary pressures with a consequent impact on economic growth. Accordingly, the importance of price stability and, therefore, the need to use monetary policy for that purpose also assumed importance in developing economies. Nonetheless, the debate on the extent to which price stability should be deemed to be the overriding objective of monetary policy in such economies continues. 89 ORATION 5: MONETARy POLICy IN A DEVELOPING ECONOMy The Reserve Bank of India was set up in 1935. Like all central banks in developing countries, the Reserve Bank has been playing a developmental and a regulatory role. In its developmental role, the Reserve Bank focused attention on deepening and widening the financial system. Itplayed amajor part in building up appropriate financial institutions to promote savings and investment. In the realm of agricultural credit, term finance to industries and credit to export, the apex institutions that are now operating were essentially spun off from the Reserve Bank. Strengthening and establishing new institutions to meet the country’s requirements is a continuing process. The promotional role had taken the Reserve Bank into the area of credit allocation as well. Pre-emption of credit for certain sectors and that too at concessional rates of interest became part of the overall policy. Commercial banks over time had been required to provide a certain percentage of their total credit to certain sectors which were regarded as ‘priority sector’. An active role by the Reserve Bank of India in terms of regulating the growth in money and credit became evident only after 1950s. During the 1950s the average annual increase in the wholesale price was only 1.8per cent. However, during the 1960s, the average annual increase was 6.2 per cent and in the 1970s, it was around 10.3 per cent. In the early years of planning, there was considerable discussion on the role of deficit financing in fostering economic growth. The First Plan said: ‘Judicious credit creation somewhat in anticipation of the increase in production and availability of genuine savings has also a part to play’. Thus, deficit financing, which in the Indian context meant Reserve Bank credit to the government, was assigned a place in the financing of the plan, though its quantum was to be limited to the extent it was non-inflationary. Monetary growth, particularly in the 1950s, was extremely moderate. However, as each successive plan came under a resource crunch, there was an increasing dependence on market borrowing and deficit financing. These became pronounced in the 1970s and thereafter. The single most important factor influencing the conduct of monetary policy after 1970 had been the phenomenal increase in reserve money contributed primarily by the Reserve Bank credit to the government. To summarise, the system as it existed at the end of 1970s was characterised by the following features. The Reserve Bank of India as the central monetary authority prescribed all the interest rates on deposits and lending. The commercial banks were required to allocate a certain percentage of credit to what were designated as ‘priority sector’. Creditto TWENTy K .R . NARAyANAN ORATIONS 90 parties above a stipulated amount required prior authorisation from the central bank. After the nationalisation of major commercial banks in 1969, nearly 85 per cent of the total bank assets came under public sector. Apart from small private banks, foreign banks were allowed to operate with limited branches. The increase in the scale of borrowing by the government resulted in: (a)the steady rise in statutory liquidity ratio requiring banks to invest higher and higher proportion of their deposits in government securities which carried less than ‘market rates’; and (b) the Reserve Bank of India becoming a residual subscriber to securities and Treasury Bills leading to monetisation of the deficit. The Reserve Bank had, therefore, to address itself to the difficult task of neutralising to the extent possible the expansionary impact of deficits. The increasing liquidity of the banking sector resulting from rising levels of reserve money had to be continually mopped up. The instrument of open market operations was not available for this task since the interest rates on government securities were well below ‘market rates’. The task of absorbing excess liquidity in the system had to be undertaken mainly through increasing the cash reserve ratio. In fact, in mid-1991, the cash reserve requirement was 25percent on incremental deposits. Inaddition, the statutory liquidity ratio was 38.5percent. Thus, nearly 63.5 per cent of incremental deposits waspre-empted in one form oranother. In 1983, the Reserve Bank of India appointed a committee under the Chairmanship of the distinguished economist Professor Sukhamoy Chakravarty to review the working of the Indian Monetary System. I was a member of the Committee. The Committee’s Report covered a wide range. One of its major recommendations was to regulate money supply consistent with the expected growth rate in real income and a tolerable level of inflation. Recognising the fact that government borrowing from the Reserve Bank had been a major factor contributing to the increase in reserve money and therefore, money supply, the Committee wanted an agreement between the Central Government and the Reserve Bank on the level of monetary expansion and the extent of monetisation of the fiscal deficit. Without such a coordination, the Committee felt that Reserve Bank’s efforts to contain monetary expansion within the limits set by expected increase in output could become impossible. While this recommendation of the Committee was accepted in principle, it could take a concrete shape only in the ’90s. 91 ORATION 5: MONETARy POLICy IN A DEVELOPING ECONOMy In the wake of the economic crisis in 1991 triggered by a difficult balance of payments situation, the government introduced far reaching changes in India’s economic policy. Monetary policy was used effectively to overcome the balance of payments crisis and promptly restore stability. An extremely tight monetary policy was put in place to reap the full benefits of the devaluation of the rupee that was announced. However, it did not stop with that. Financial sector reforms became an integral part of the new reform program. Reform of the banking sector and capital market was intended to help and accelerate the growth of the real sector. Banking sector reforms covered a wide gamut. The most important of the reforms was the prescription of prudential norms including capital-adequacy ratio. In addition, certain key changes were made with respect to monetary policy environment which gave to commercial banks greater autonomy in relation to the management of their liabilities and assets. First and foremost, the administered structure of interest rates was dismantled step by step. Banks in India today enjoy the complete freedom to prescribe the deposit rates and interest rates on loans except in the case of very small loans and export credit. Second, the government began borrowing at market rates of interest. The auction system was introduced both in relation to Treasury Bills and dated securities. Third, with the economic reforms emphasising a reduction in fiscal deficit, pre-emptions in the form of cash reserve ratio and statutory liquidity ratio were steadily brought down. Fourth, while the allocation of credit for the priority sector credit continued, the extent of cross subsidisation in terms of interest rates was considerably brought down because of the reform of the interest rate structure. Monetary policy in the 1990s in India had to deal with several issues, some of which traditional but some totally new in the context of the increasingly open economy in which the country had to operate. In the first few years, monetary policy had to contend with the consequences of devaluation and the need to quickly restore price stability to obtain the full benefits of devaluation. While the fiscal deficit was being brought down, the question of monetisation of the deficit continued to remain an issue and a solution had to be found. This eventually led to a new agreement between government and RBI on financing deficit. The system of ad-hoc Treasury Bills under which the Government of India could replenish its cash balances by issuing Treasury Bills in favour of the Reserve Bank and which had the effect of monetising deficit was phased out. It was replaced by a system of Ways and Means Advances which had a fixed ceiling. TheReserve Bank of India continued to subscribe to the TWENTy K .R . NARAyANAN ORATIONS 92 dated securities at its discretion. During 1993 and 1994, for the first time monetary policy had to deal with the monetary impact of capital inflows with the foreign exchange reserves increasing sharply from $9.2 billion in March 1992 to $25.1 billion in March 1995. In 1995–96, the change in perception with reference to exchange rate after a prolonged period of nominal exchange rate stability vis-a-vis the US dollar brought into play the use of monetary policy to stabilise the rupee — an entirely new experience for the central bank. Similar situations arose later on also at the time of the East Asian crisis. Monetary policy had begun to operate within a changed institutional framework brought about by the financial sector reforms. Itis this change in the institutional framework that gave a new dimension to monetary policy. New transmission channels opened up. Indirect monetary controls gradually assumed importance. With the progressive dismantling of the administered interest rate structure and the evolution of a regime of market determined interest rate on government securities, open market operations including ‘repo’ and ‘reverse repo’ operations emerged for the first time as an instrument of monetary control. Bank Rate acquired a new role in the changed context. The ’90s paved the way for the emergence of monetary policy as an independent instrument of economic policy. Monetary policy in the 1990s had also to be conducted in the context of the financial sector reforms. The need to reduce non-performing assets and to conform to the new prudential norms put the banking industry under great strain. While introducing banking sector reforms, care had to be taken to ensure that there was no compromise with the basic objectives of monetary policy. In the post-reform period, the Indian economy has done well. Since 1992– 93 the average annual growth rate of the economy in real terms has been 6.3 per cent. The average inflation rate, as measured by the wholesale price index in the 1990s has been 7.2 per cent. However, thesignificant fact to note is that the average inflation rate since 1996–97 has been less than 5 per cent. Broad money grew at an average annual rate of 17percent per annum. The exchange rate of the rupee in terms of USdollar has declined by 24 per cent since July, 1997. This decline is smaller than what other countries in this region have experienced. Thecurrent account deficit has averaged since 1992–93 at 1 per cent of the GDP. The foreign exchange reserves in the country have risen from about $5billion to $43billion as of a recent date. These broad macroeconomic indicators show a substantial 93 ORATION 5: MONETARy POLICy IN A DEVELOPING ECONOMy improvement in the Indian economy, even though several concerns such as slow reduction in poverty ratio and slow growth rate in agriculture persist. Issues of Concern Let me now focus on some of the issues which came to be debated extensively during 1990s. These issues are not specific to India or developing economies. They have been debated in the context of the developed countries also. Nevertheless, these issues which I want to highlight have a special significance for developing countries like India. Objective The first question that needs to be addressed relates to the objective or objectives of monetary policy. A recurring question is whether monetary policy should be concerned with all the goals of economic policy. Theissue of ‘objective’ has become important because of the need to provide a clear guidance to monetary policymakers. Indeed, this aspect has assumed added significance in the context of the increasing stress on the autonomy of Central Banks. Autonomy goes with accountability and accountability in turn requires a clear enunciation of the goals. Since the inception of development planning, the broad objectives of India’s economic policy have been to achieve a faster rate of growth, ensure reasonable degree of price stability and promote distributive justice. Working of monetary policy in India over the past several decades would reveal that monetary policy has emphasised these broad objectives of our economic policy. In one of my earlier articles, I had said: In a broad sense the objectives of monetary policy can be no different from the over all objectives of economic policy. Thebroad objectives of monetary policy in India have been: (1) to maintain a reasonable degree of price stability and (2) to help accelerate the rate of economic growth. The emphasis as between the two objectives has changed from year to year, depending upon the conditions prevailing in that year and in the previous year. The question of a dominant objective arises essentially because of the multiplicity of objectives and the inherent conflict among such objectives. Jan Tinbergen had argued decades ago that there should be as many TWENTy K .R . NARAyANAN ORATIONS 94 instruments as there are objectives, if all objectives are to be fulfilled. Faced with multiple objectives that are equally relevant and desirable, there is always the problem of assigning to each instrument the most appropriate objective. This ‘assignment rule’ favours monetary policy as the most appropriate instrument to achieve the objective of price stability. It is this line of reasoning which has led to the single objective approach. The crucial question that is being debated in India as elsewhere is whether the pursuit of the objective of price stability by monetary authorities undermines the ability of the economy to attain and sustain high growth. A considerable part of the relevant research effort has been devoted to the trade-off between economic growth and price stability. Empirical evidence on the relationship between growth and inflation in a cross country framework is somewhat inconclusive because such studies include countries with an inflation rate as low as one to two per cent to those with inflation rates going beyond 200 to 300 per cent. These studies, however, clearly establish that growth rates become increasingly negative at higher rates of inflation. The case of price stability as the objective of monetary policy rests on the assumption that volatility in prices creates uncertainty in decisionmaking. Rising prices adversely affect savings while they make speculative investments more attractive. The most important contribution of the financial system to an economy is its ability to augment savings and allocate resources more efficiently. A regime of rising prices vitiates the atmosphere for promotion of savings and allocation of investment. Apart from all these, there is a social dimension particularly in developing countries. Inflation adversely affects those who have no hedges against it and that includes all the poorer sections of the community. The fiscal consolidation also becomes easier in an environment of reasonable degree of price stability. In a period of rising prices, the gap between revenues and expenditures widens. Expenditures tend to grow at a faster rate than revenues because many components of expenditures such as employees’ compensation are closely linked to variations in prices. The question that recurs very often in the minds of the policymakers is whether in the short run, there is a trade-off between inflation and growth which can be exploited. In the industrial countries, a solution is sought through the adoption of Taylor’s rule which prescribes that the signal interest rate be fixed taking into account the deviations of inflation rate from the target and actual output from its potential. In this rule, 95 ORATION 5: MONETARy POLICy IN A DEVELOPING ECONOMy the coefficient of inflation deviation term is fixed at a level higher than unity. While the rule is intuitively appealing, there are serious problems in determining the value of the coefficients. In this context, the critical question to raise is: At what level of inflation, do adverse consequences begin to set in? It is this inflation threshold which will provide some guidance to the policymakers. Below and around this threshold level of inflation, there is greater manoeuvrability for the policymakers to take into account other considerations. Interestingly, the Chakravarty Committee regarded the acceptable rise in prices as 4 per cent. This, according to the Committee, will reflect changes in relative prices necessary to attract resources to growth sectors. I have myself indicated that in the Indian context, inflation rate in the range of 5 to 6 per cent may be acceptable. There is some amount of judgement involved in this, as econometric models are not in a position to capture all the costs of inflation. This approach provides some guidance as to when policy has to become tight or to be loosened. It is also necessary for the policymakers to note that this order of inflation is higher than what the industrial countries are aiming at. This will have some implications for the exchange rate of the currency. While the open economy helps to overcome domestic supply shocks, it also imposes the burden to keep the inflation rate in alignment with other countries. Intermediate Target The second issue relates to the intermediate target. In India since the mid-’80s the target chosen has been broad money. The Chakaravarty Committee recommended a system of flexible monetary targeting. It is true that central banks in several countries in the industrial world have abandoned intermediate targets and have focussed on the final target such as inflation control. While this has the advantage of specifying the ultimate objective in clear and precise terms, it must be admitted that there is some uncertainty regarding the route through which this will be achieved. One of the reasons for the abandonment of intermediate targets in these countries has been the breakdown of the relationship between monetary aggregates and the inflation rate. The demand function for money has been found to be unstable. However, in India, studies show that the money demand function is a stable function of select variables and it can be used to reasonably predict inflation. Several statistical functions of the demand for money estimated by using the equilibrium and disequilibrium analysis provide overwhelming evidence on the long TWENTy K .R . NARAyANAN ORATIONS 96 run stability of the money demand function. Perhaps some of the factors that have contributed to the instability of the demand function for money in the industrially advanced countries such as financial innovations and large movements of funds across the border are yet to have the same impact in India. Inthe demand function for money in India, income emerges as the most dominant variable. Such a function enables the authorities to estimate the appropriate growth in money supply, given the expected increase in real output and the acceptable level in price increase. With the freeing of the interest rate structure, interest rate may also emerge as an appropriate intermediate variable in the coming years. In fact, with the inflation rate coming down and remaining in a narrow range, it will be possible to focus on interest rate along with overall monetary aggregates. However, as of now, money supply seems to be an appropriate target. Such a target is relatively well understood by the public and provides unambiguously the stance of monetary policy. The literature on monetary economics talks of four distinct monetary transmission channels. They are: (1) Quantum Channel, especially relating to money supply and credit; (2) Interest Rate Channel; (3) Exchange Rate Channel; and (4) Asset Prices Channel. While the emphasis in India so far has been on the quantum channel, with the development of financial markets and closer integration of such markets, the interest rate channel will assume importance. It must be noted that at the equilibrium both quantity and price are determined. Changes in interest rates cannot be ordained. The appropriate quantitative changes in money will have to be brought about even though the signal for change may be given by the price variable like interest rate. Level of Interest Rate Another question of importance that has arisen relates to the appropriate level of interest rate. The nominal interest rate comprises of three elements: (1) the real rate of interest; (2) inflation expectations; and (3) a discount factor for uncertainties. The effectiveness of monetary policy to bring down the nominal interest rate will depend on the impact that this policy will have on inflation expectations and on the perception of uncertainty in the economy. A monetary policy that is geared to maintain reasonable price stability, if it is successful, can help to bring down the interest rate in sympathy with the downward drift in inflation. Inflationary expectations can be broken, if the monetary authority enjoys high credibility. However, 103 Oration 6: 2002 K.R. Narayanan Oration Message from the President of the Republic of India I am delighted to know that the K.R. Narayanan Oration instituted at the Australia South Asia Research Centre (ASARC) of The Australian National University during the visit to this centre by my predecessorin-office during 1994 has now become a regular feature of the Centre’s calendar and that eminent personalities from various fields of life have delivered these orations on topics of immediate relevance to India. I am happy to note that ASARC is continuing with its high tradition of inviting those personalities who have made outstanding contributions in their sphere of work, which is relevant to India. It is in this light that I see the name of Professor Meghnad Desai of the London School of Economics who is delivering this year’s oration on ‘Democracy and Development: India 1947–2002’. Professor Desai needs no introduction. We are all aware of the intellectual prowess and the policy analytical framework, which he has brought to bear upon contemporary development economics and the related social sciences. Having seen the birth and the early days TWENTy K .R . NARAyANAN ORATIONS 104 ofindependent India first hand, I am sure there can be no better person to walk the august audience through the first 50 years of our Independence and the working of our democracy and its institutions. This will be an excellent opportunity for our friends in ASARC and in Australia at large to get to know about India’s experience of working a democracy after over 200 years of subjugation under alien rule. Wehave identified five areas where India has a core competence for an integrated action for transforming India into a developed nation: 1)agriculture and food processing — we have set a target of 360 million tons offoodand agricultural production, other areas of agriculture and agro-food processing would bring prosperity to rural people and speed up economic growth; 2) reliable and quality electric power for all parts of the country; 3) education and health care — we have seen, based on experience that education and health care are inter-related; 4) information and communication technology — this is one of our core competences, we believe this area can be used to promote education in remote areas and also to create national wealth; and 5) strategic sectors — this area, fortunately, witnessed growth in nuclear technology, space technology and defence technology. These five areas are closely inter-related and lead to national, food and economic security. A strong partnership among and between R&D academics, industry, business and the community as a whole with government departments and agencies will be essential to accomplish this vision. The key to success is in various forms of connectivity such as physical, electronic, knowledge, and economic. I am sure Professor Desai’s oration will also give the audience sufficient intellectual queries and knowledge. I wish the event all success A.P.J. Abdul Kalam New Delhi 2002 105 Democracy and Development: India 1947–2002 Meghnad Desai It gives me a particular pleasure to be giving the Narayanan Oration at The Australian National University. President Narayanan is a perfect example of how despite numerous obstacles merit will shine through. His life exemplifies the progress India has made, warts and all, over the entire 20th century but especially since Independence. Names of Harold Laski and Jawaharlal Nehru play a major part in his early story. On a personal note, he has also showed me immense kindness but perhaps more because I teach at his alma mater than for anything personal to me. It is also a great pleasure to come back to ANU where I twice spent a term teaching in 1980 and 1984 and where I claim many friends. Australia has taken a great interest in South Asia as the centres here and in other Australian universities testify. India Since 1991 It is 11 years since India had the economic shock of its life and had to rethink its economic policy and rearrange its economic institutions. Itwas nearly 10 years ago that I had the opportunity to welcome the drastic change and wish that it would be more rather than less drastic, not apopular position among my economist friends in India at that time (Desai 1993). This is thus a good opportunity to see how far India has got in its response to the shock of near bankruptcy in early 1991. TWENTy K .R . NARAyANAN ORATIONS 106 But a lot more has also happened to India in its political life since 1991. Indeed it is hard to say whether it is the political or the economic map that has changed more in the last 10 or more years. In various articles written over these years I have also tried to chart the political dynamics of the 1990s (see various references in the Bibliography). While there was always implicitly a political background to my economic comments and an economic background to my political comments, I would like to take this opportunity of the Narayanan Oration to try a synthesis. The separate strands which need to be synthesised are as follows: • In its first phase lasting just over three decades (1947–80), India’s economic policy was driven by a model of national self-sufficiency. It was built around, indeed pioneered, an Import Substitution Industrialisation (ISI) strategy. It also chose (and this is separate strictly from ISI) a capital-intensive program hoping that matters of employment creation, consumer goods supply especially foodgrains would take care of themselves. Political developments in the mid and late 1950s forced a situation in which the planning authorities had to reverse the neglect of agriculture. The Green Revolution, which occurred by accident in the 1960s, corrected the earlier urban biases of the Second and Third Five-Year Plans but the poor performance of the manufacturing sector — in terms of inefficiency, excess capacity and low quality — persisted in both the private and public organised sectors. The growth rate was low relative both to early aspirations (Bombay Plan for instance) and to the rates achieved by other countries. This was the so-called Hindu Rate of Growth: 3.5 per cent per annum and 1.3 per cent per capita. • Over this period 1947–80, India’s political life exhibited a lot of stability and a solid, indeed unique achievement among post-colonial polities in creating and sustaining a vibrant political democracy. Single Party Dominance nurtured this democratic life except during the infamous Emergency, which was brief and was reversed by that very democratic process it tried to subvert. The dominant vision of nationalism was built around secularism, non-alignment and socialism. There was however beginning to be an assertion of the various regional, caste and religious — by and large ‘subaltern’ forces — in the federal polity. Indeed the Janata Government of 1977–79 reflected this. • During the 1980s, there was a decade of restoration of Single Party Dominance but a relaxation of the imperative of economic self-sufficiency. There was borrowing from abroad — from the 107 ORATION 6: DEMOCRACy AND DEVELOPMENT IMF, from foreign commercial banks and then from NRIs. But the economic institutions of permit-license Raj did not change and there was no relaxation of domestic economic policy in parallel with foreign borrowing. Growth rate went up to 5.5 per cent, 3.5 per cent per capita. • The decade of the 1980s stored up much trouble for political life later on. Secularism was compromised into a parallel populism with accommodation of the orthodoxies of the two major religions as Rajiv Gandhi’s decisions on Shah Bano case and the shilanyas at Ayodhya showed. The subaltern elements continued to grow powerful at regional levels. • The 1990s ruptured the old model in two ways. Economic dirigisme — often mislabelled socialism — became untenable as India could not repay its commercial borrowings without drastic reform. At the same time the end of Congress dominance unleashed forces — implementation of the recommendations of the Mandal Commission with all it meant about valorisation of caste distinctions, rise of the Hindutva parivar, dalit militancy — which ended for the decade and more any hope ofasingle-party government. In a strange combination, the arrivalof globalisation saw India modernise and liberalise on the economic front but become less secular and more ethnically divided than before politically. Modernity in India thus took a different path from what its champions in the early days after Independence had charted for it. It is not a secular socialist democratic India but a liberal, increasingly Hindu nationalist democratic India that is shaping its own future. • On the economic front the reform forced upon India by the trauma of 1991 has proved irreversible and effective. Despite much hesitation, the reform process has persisted and raised the growth rate nearer to 6.5 per cent for GDP and 4.5 per cent per capita. The liberalisation process has been slow relative to countries of Eastern Europe but it has been consensual. Even as politicians compete in populist rhetoric about protecting the jobs and the poor, it is clear that no possible combination of parties exists which upon gaining power would or even could reverse the liberalisation process. • There is one solid continuity despite the change in party dominance and in economic philosophy over the last 55 years. This is the nationalist program of a militarily strong India. Even as India preached peace and non-alignment in 1950s it built up its military production capacity especially its atomic and nuclear research. Whether Congress TWENTy K .R . NARAyANAN ORATIONS 108 or BJP, whether Nehru, Indira and Rajiv Gandhi or Vajpayee, the determination to make India militarily strong has been common. There is no peace party in India. Indeed, it can be seen now that the ISI strategy and the insistence on self-sufficiency arose from a defence policy that meant India to be a powerful regional power. The election of President Narayanan’s successor has crowned that policy with official recognition. It is this cluster of trends that I wish to explore. The decline of secularism and socialism, the rise of liberalism and religiosity, the persistence of nationalism as a force even as its nature has changed. Democracy has been the universal solvent in this process. In order to appreciate the importance of Indian democracy, it is necessary to go back to the early history of Independent India. The Revolution of 1946–49: The Constituent Assembly in Action The decision to adopt universal adult franchise with a Westminster style parliamentary system was a revolutionary decision of the Constituent Assembly. It was not inevitable nor was it a conservative decision. Given the experience of almost every other post-colonial country with constitutional change, it is a miracle that the Constituent Assembly (theAssembly hereafter), elected as it was on a restricted franchise got it so right. But this choice revolutionary as it is, profoundly constricted and shaped the subsequent trends. The Assembly rejected the Gandhian option — a decentralised village republic with local autonomy and indirect democracy with an obviously weak Centre. A strong Centre was basic to Indian nationalism as its one great fear was, indeed is, of India breaking up into many nations. In the wake of Partition, a weak Centre was not going to be chosen whatever the Father of the Nation may say. The Assembly also firmly ruled out any role for the feudal order — the hundreds of native princes, for whom a role was envisaged in the 1935 Government of India Act. Unlike Malaysia, India did not give these kings even a ceremonial role. In copying the Westminster system, it replaced the Crown by an elected President with similar powers. It also rejected a single party polity which must have been tempting as it was for many African and Asian countries under the 109 ORATION 6: DEMOCRACy AND DEVELOPMENT spurious rationalisation that multi-party democracy was a Western luxury that a poor country could ill afford. The Communist alternative was also rejected. Private property, including foreign property, was not disturbed but could be subject to state takeover with compensation. Land was not confiscated or nationalised but land reform was made feasible. The democracy that was chosen was radical in other ways as well. There was to be no recognition of any ethnic, religious or caste basis of citizenship. There were to be no separate electorates, no religious qualification for holding office, nor a literacy test. Women were given the vote on the same terms as men when even in the developed countries, e.g. France, women’s suffrage had only recently (i.e. 1945) been granted. But by the same token there were no guarantees of minority rights qua minority; no consociational arrangement in a formal sense whereby a minority had veto rights over drastic abridgements of its rights by the Majority vote Minorities, like majorities were treated qua Westminster as collections of individuals rather than ethnic blocks and therefore were to be looked after as part of the democratic process by legislative or by executive actions. Thus despite its being elected from a small and restricted franchise which could have made it conservative, the Assembly chose an individualist atomistic model of democracy for India rather than one grounded in caste, religion and language identities. Secularism was the implicit guarantee that a religious minority had nothing to fear from majority rule. Religion was not to be a subject which could be legislated about.1 It will be my contention that this bold revolutionary choice was crucial in shaping subsequent choices and indeed in making some of these subsequent choices less bold than they could have been. In making the Constitution, ethnicity-blind and religion-blind, the Founding Fathers were rejecting the trauma which had led to the Partition and hoping to avoid further fragmentation. But they were also denying reality, not only of the country at large but even of their own personal identities. Indians were individuals of course like anyone else but they also lived in a vital sense their ethnic, religious regional, linguistic identities. These identities were not to be left behind when they entered the political arena. Nor were these identities an invention of the colonial masters or a badge of poverty or underdevelopment ready to disappear at the first whiff of economic progress as Nehru in his more passionate moments thought. 1 Lijphart (1996) has argued that India’s polity is de facto consociational. I have my doubts. TWENTy K .R . NARAyANAN ORATIONS 110 Indian democracy was shaped by these ignored identities as they asserted themselves in the daily course of electoral politics. At the elite level, their own orthodox upbringing, their upper caste loyalties if they were Hindus, their relatively prosperous state meant that the choices taken were their choices. But they were also the progeny of Macaulay and had absorbed western ideas of progress and equality, of liberty and the greatest good of the greatest number. They may have lived much as their fathers did at home but they thought and spoke the Englishman’s language. Social Conservatism and Economic Radicalism Two crucial choices were made early in the years after Independence. One was to be socially conservative and not use the State apparatus to abolish the caste system with its inegalitarian logic of hierarchy and status. Primary education and adult literacy were state subjects and thus left to stagnate in those conservative states in the Hindi heartland where literacy, especially female and dalit literacy, were seen to be threats to the social order. Although untouchability was made illegal in the Constitution, the attendant evils of caste were left undisturbed. Muslim society was even more delicately handled. As far as Hindu society was concerned an attempt was made mainly at Nehru’s behest to codify and systematise Hindu Family Law, though he met with resistance in his desire to modernise it from the then President Dr Rajendra Prasad. But Muslim Law was out of bounds even for Nehru. Thus political independence and the revolutionary decision to adopt democracy did not result in any state-led political program of social reform. Indian society was allowed to reform itself in a laissez-faire way. In the economic sphere, on the other hand, radicalism was the order of the day. India had, by 1947, one of the oldest modern industries in the Third World (though it was not so called till later). It had the largest group of native modern capitalist entrepreneurs, the largest jute industry, a cotton textile industry which was globally competitive and was the seventh largest industrial country in terms of volume of industrial output. But the perception of the nationalist movement was that India had been deindustrialised by British rule and that industrialisation was the first priority. Free trade and foreign capital imports were to be shunned. India would become a self-sufficient industrialised country by relying on planning led by the State. 111 ORATION 6: DEMOCRACy AND DEVELOPMENT This was not particularly surprising both in terms of the thinking of the Congress as moulded by Nehru and the climate of the times. Free market ideology was on the retreat and many thought that capitalism too was on its way out. India had been much taken by the Soviet example and indeed even by the German example of planning in a mixed economy. What was not necessary, however, to this strategy was to neglect if not punish the Industries already established, especially the cotton textile industry and shifting resources to machine building. There was rampant export pessimism, unjustified as subsequent investigations showed (seearticles in Ahluwalia and Little (1998) by Bhagwati, Desai and Sen). The strategy failed to take advantage of India’s early start in modern industry and reinvented many of the things which were there but were tarred with foreign brush. Thus India created a dependent entrepreneurial class in place of one that had survived foreign rule, depressed modern consumer goods industries and fostered small-scale ones which were capital wasting and inefficient, built at an enormous expense a basic goods sector with a long lead time before it could bring better consumer goods to the people and failed to generate industrial employment. The public sector, mainly in services, became the biggest provider of employment in the modern sector. Jointly the private and public organised industrial sector became a stagnant and highly privileged pool of a limited number of employees. Together the public services and the organised industrial sector employed 15 per cent of the labour force. This was called socialism (Desai 1993). The strategy was wasteful of scarce capital and quite perverse in its determined neglect of the rules of efficient allocation. It is one thing not to get prices right but quite another to deliberately get them wrong. Restrictions on interest rates, multiple exchange rates, subsidies to inefficient industries, taxation on movement of agricultural commodities which constituted a tax on agriculture, perks to labour in the organised sector and de facto taxation of the informal sector by a lack of subsidies, etc. All this was done by an elite fully economically educated but determined to flout the rules of western economics. The results were predictable — slow growth of output and employment and persistence of poverty and inequality through the first phase of 30years. With slow growth of jobs in the private sector, government jobs at all levels became much sought after and the democratic electoral system TWENTy K .R . NARAyANAN ORATIONS 112 was harnessed to provide patronage. The first task of government became provision of jobs through the public fisc and then the sale of permits andlicences. Triangulation Indian Style Thus we get a unique triangular interaction. Economic radicalism leads to slow growth biased towards elite jobs. Social conservatism strengthens caste, regional and religious loyalties. Political democracy allows the mobilisation of these loyalties in an electoral competition to capture governments at State and then at Central levels. This capture then translates into jobs for the newly included. Yet the economic surplus does not expand by this route. So the system crashes in the 1970s under the weight of its own demands. A way out had to be found. It was the economic radicalism which began to be abandoned because that was the only way surplus could be enhanced. This is the way the model unfolded itself. The interaction of social conservatism and economic radicalism in the context of political democracy produced a most interesting mutation. Toget the fruits of patronage, non-elite groups had to get organised and they did this through their caste and regional identities. Linguistic states had to be created during the 1950s in response to popular pressure from the local capitalists as well as local middle classes who wanted public jobs and public contracts. Next came in the 1960s the pressure from the rural areas to divert resources to agriculture. This happily bore fruits in the form of the Green Revolution with input subsidies as well as price guarantees for outputs. But even then the discontent due to slow growth continued. This broke into a flood of protest from tribal dalit and lower caste groups in the 1970s, and were brought together under the Lokayan banner. This was what unhinged Indira Gandhi and led to the Emergency. Groups previously downtrodden were finding their voices and using the unreformed social structures of caste and religion to make their claims on the surplus. But the surplus was not expanding due to the elitist policies being followed.2 2 See for a most thoughtful account of the lower orders’ entry into politics Christophe Jaffrelot (2002). 119 Oration 7: 2003 K.R. Narayanan Oration Political-Economy and Governance Issues in the Indian Economic Reform Process Pranab K . Bardhan I am grateful to ASARC for the invitation to deliver the 2003 Narayanan Oration and am happy to be here at The Australian National University. I do not know ex-President Narayanan personally but we have a good common friend (K.N. Raj) from whom I had often heard glowing accounts about Dr Narayanan. Exactly 20 years back I gave the Radhakrishnan Lecture1 at Oxford University, and I now have great pleasure in getting this opportunity to honour another distinguished south Indian ex-President. My subject today is political economy and governance issues in Indian economic reform. Political economy is concerned with distribution of economic and political power, and inequality in this distribution poses important questions in a democracy. In 1949, as the Indian Constitution was getting ready and the debates in the Constituent Assembly were being wound up, B.R. Ambedkar, a founding father of the Indian Constitution, said in a speech in that Assembly: 1 See Bardhan (1984). TWENTy K .R . NARAyANAN ORATIONS 120 On the 26th of January, we are going to enter a life of contradictions. In politics we will have equality and in social and economic life, we will have inequality … How long shall we continue to live this life of contradictions? More than 50 years later in India we still live this life of contradictions, although there have been many changes, some of which would even have taken Ambedkar by surprise. I will start with some historical and social factors which provide the context for Indian democracy and have shaped its complex unfolding in the last five decades, and then relate these to the various disjunctures between economics and politics that have developed in the ongoing economic reform process in the last decade or so. The historical origins of democracy in India are sharply different from those in much of the west, and these differences are reflected in the current functioning of democracy in India, making it difficult to match the Indian case to the canonical cases in the usual theories of democracy. At least five of these differences are: 1. While in Europe democratic rights were won over continuous battles against aristocratic privileges and arbitrary powers of absolute monarchs, in India these battles were fought by a coalition of groups in an otherwise fractured society against the colonial masters. Even though part of the freedom struggle was associated with ongoing social movements to win land rights for peasants against the landed oligarchy, the dominant theme was to fight colonialism. And in this fight, particularly under the leadership of Gandhi, disparate groups were forged together to fight a common external enemy, and this required strenuous methods of consensusbuilding and conflict management (rather than resolution) through co-opting dissent and selective buyouts. Long before Independence the Congress Party operated on consensual rather than majoritarian principles. Thevarious methods of group bargaining and subsidies and ‘reservations’ for different social end economic categories that are common practice in India today can be traced to this earlier history. 2. Unlike in western Europe democracy came to India before any substantial industrial transformation of a predominantly rural economy, and before literacy was widespread. This seriously influenced the modes of political organisation and mobilisation, the 121 ORATION 7: POLITICAL-ECONOMy AND GOVERNANCE ISSUES nature of political discourse, and the excessive economic demands on the state. Democratic (and redistributive) aspirations of newly mobilised groups outstripped the surplus-generating capacity of the economy, demand overloads sometimes even short-circuiting the surplus generation process itself. 3. In western history the power of the state was gradually hemmed in by civil society dense with interest-based associations. In India groups are based more on ethnic and other identities (caste, religion, language, etc.), although the exigencies of electoral politics have somewhat reshaped the boundaries of (and ways of aggregating) these identity groups. This has meant a much larger emphasis on group rights than on individual rights.2 A perceived slight of a particular group (in,say, the speech or behaviour of a political leader from another group) usually causes much more of a public uproar than crass violations of individual civil rights even when many people across different groups are to suffer from the latter. The issues that catch public imagination are the group demands for preferential treatment (like reservation of public sector jobs) and protection against ill-treatment. This is not surprising in a country where the self-assertion of hitherto subordinate groups in a hierarchical society takes primarily the form of a quest for group dignity and protected group niches in public jobs. 4. In western history, expansion of democracy gradually limited the power of the state. In India, on the other hand, democratic expansion has often meant an increase in the power of the state. The subordinate groups often appeal to the state for protection and relief. With the decline of hierarchical authority in the villages and with the moral and political environment of age-old deference to community norms changing, the state has moved into the institutional vacuum thus left in the social space. For example, shortly after Independence popular demands of land reform legislation (for the abolition of revenue intermediaries, for rent control and security of tenure), however tardy and shallow it may have been in implementation, brought in the state to the remotest corners of village society. With the advantage of numbers in electoral politics as hitherto backward groups get to capture state power, they are not too keen to weaken it or to give up the loaves and fishes of office and the elaborate network of patronage 2 One of the early leaders who carried in him the tension between individual and group rightswas Ambedkar himself, a formidable constitutional lawyer concerned with individual liberty, but who wasalso a major spokesman of an oppressed caste group. TWENTy K .R . NARAyANAN ORATIONS 122 and subsidies that comes with it.3 This serves as a major political block to the (largely elite-driven) attempts at economic liberalisation ofrecent years, as we will discuss later. 5. For a large federal democracy India, by constitutional design, differs from the classical case of US federalism in some essential features. Not merely is the federal government in India more powerful vis-a-vis the states in many respects (including the power to dismiss state governments in extreme cases and to reconstitute new states out of an existing state in response to movements for regional autonomy), but it has also more obligation, through mandated fiscal transfers (via the Finance Commission and the Planning Commission), to help out poor regions. In classical federalism the emphasis is on restraining the federal government through checks and balances, in India it is more on regional redistribution and political integration. Stepan (1999) has made a useful distinction between ‘comingtogether federalism’ like the US, where previously sovereign polities gave up a part of their sovereignty for efficiency gains from resource pooling and a common market, and ‘holding-together federalism’ as in multinational democracies like India or Belgium or Spain, where compensating transfers keep the contending nationalities together and where economic integration of regional markets is a distant goal, yet incompletely unachieved even in more than 50 years of federalism. Given these social and historical differences in the evolution of demo cracy in India its impact on inequality and poverty has been rather complex. In the history of western democracies extension of franchise has been associated with welfare measures for the poor. In the more recent data for a large number of countries cross-country regressions have found apositive association between democracy and some human development indicators4 (relevant largely for the poor) or incomes of the lowest quintile of income distribution.5 What has been the performance over time of the Indian democracy in terms of economic inequality and poverty? If we examine inequality in terms of the Gini coefficient there has not been much change overall. According to household consumer expenditure data collected by the National Sample Survey, during 1983 to 2000 3 In some sense this is familiar in the history of American municipal politics in big cities when one after another hitherto disadvantaged ethnic group captured the city administration and distributed patronage. 4 See Przeworski, Alvarez, Cheibub, and Limongi (2000). 5 See Lundberg and Squire (1999). 123 ORATION 7: POLITICAL-ECONOMy AND GOVERNANCE ISSUES for example, rural inequality in consumption decreased a bit whereas urban inequality increased somewhat. Poverty has fallen significantly, though. In1983, 46 per cent of the population was below the Planning Commission poverty line, whereas in 1999–2000 this figure was about 29 per cent. Despite this fall, India remains the largest single-country contributor to the pool of the world’s extremely poor, illiterate people. Anti-poverty programs constitute a substantial part of the budgets of federal and state governments, but it is widely noted that a large part of them do not reach the real poor. The poverty figures are based on NSS consumption data and not data on income. Some fragmentary data on income suggest that the Gini coefficient for income distribution remains quite high, around 0.41 (and the Gini coefficient for asset distribution substantially higher). Some people contend that in the last decade or so the top 1 per cent of the population has become much richer, and their income or consumption is not captured in the usual survey data. On the other hand, democracy has clearly brought about a kind of social revolution in India. It has spread out to the remote reaches of this far-flung country in ever-widening circles of political awareness and self-assertion of hitherto subordinate groups. These groups actually have increased faith in the efficacy of the political system and they vigorously participate in larger numbers in the electoral process. In the National Election Study6 carried out by the Centre for the Study of Developing Societies, the percentage of respondents who answered positively to the question, ‘doyou think your vote has effect on how things are run in this country?’, went up between 1971 and 1996 from 48.4 per cent to 58.7per cent for the total population, from 45.7 per cent to 57.6 per cent for ‘backward caste’ groups (designated as OBC in India), from 42.2percent to 60.3per cent for the lowest castes (designated as scheduled castes), and 49.9 per cent to 60.3 per cent for Muslims (only later data can show if this figure has now changed for Muslims in view of the recent happenings in parts of the country). Yet, this faith in the efficacy of the political system is very inadequately translated into concrete results on economic progress for the median member of the poor disadvantaged groups. Let us explore this particular disjuncture between economics and politics in India a bit further. Thepoliticians are seldom penalised by the Indian electorate for endemic 6 See Yadav (2000). TWENTy K .R . NARAyANAN ORATIONS 124 poverty; poverty is widely regarded among common people as a complex phenomenon with multiple causes, and they ascribe only limited responsibility to the government in this matter. In any case the measures of government performance are rather noisy, particularly in a world of illiteracy and low levels of civic organisation and formal communication on public issues. As we have indicated before, a perceived slight in the speech of a political leader felt by a particular ethnic group will usually cause much more of an uproar than if the same leader’s policy neglect keeps thousands of children severely malnourished in the same ethnic group.7 The same issue of group dignity comes up in the case of reservation of public sector jobs for backward groups which, as we have said before, fervently catches the public imagination of such groups, even though, objectively the overwhelming majority of the people in these groups have little chance of ever landing those jobs, as they and their children drop out of school in large numbers by the fifth grade. Even when these public job quotas mainly help the tiny elite in backward groups, as a symbol and a possible, though distant, object of aspiration for their children, they ostensibly serve a valuable function in attempts at group upliftment. Particularly in north India there seems to be a preoccupation with symbolic victories among the emerging lower-caste political groups; as Hasan (2000) points out, with reference to BSP, a politically successful party of the oppressed in UP, these groups seem less concerned about changing the economic-structural constraints under which most people in their community live and toil. Perhaps this is just a matter of time. These social and political changes have come to north India rather late; in south India, where such changes have taken place several decades back, it may not be a coincidence that there has been a lot more effective performance in the matter of public expenditures on pro-poor projects like health, education, housing and drinking water. This reflects the fact that in south India there has been a long history of social movement against exclusion of lower castes from the public sphere, against their educational deprivation, etc. in a way more sustained and broad-based than in north India. One may also note that the upper-caste opposition to social transformation is somewhat stronger in north India, as demographically upper castes constitute in general a somewhat larger percentage of the population than has been the case in most parts of south India. So new political victories of lower castes 7 For a formal analysis of the role of visibility in influencing government resource allocation across multiple public goods in an electoral framework, see Mani and Mukand (2000). 125 ORATION 7: POLITICAL-ECONOMy AND GOVERNANCE ISSUES in north India get celebrated in the form of defiant symbols of social redemption and recognition aimed at solidifying their as yet tentative victories, rather than in committed attempts at changing the economic structure of deprivation. From this major disjuncture between politics and economics in India let me now move on to the various kinds of disjuncture that have appeared in the Indian scene between the policy of economic reform and the ongoing political and administrative processes. Economists often ignore these, and are surprised when things do not proceed in the way they want. In the last two decades, particularly since the early ’90s, India has launched a widely heralded process of economic reform with a view to unleashing the entrepreneurial forces from the shackles of the nightmarish controls and regulations that have hobbled the economy for years. Yet many commentators have noted our ways of lumbering, proceeding two steps forward, one step backward. We need to have a better understanding of why reform is so halting and hesitant, why there is no substantial and durable political constituency for reform (outside the small confines of India’s metropolitan elite), why even the few supporters of reform underplay it at election time. In the rest of this lecture I shall point to 10different kinds of disjuncture that may be linked to this phenomenon. 1. Any process of sustained economic reform and investment requires aframework of long-term policy to which the government can credibly commit itself. But the political process in India seems to be moving in the opposite direction. While becoming more democratic and inclusive in terms of incorporating newer and hitherto subordinate groups, it is eroding away most of the structures of institutional insulation of long-run economic management decisions against the wheeling and dealing of day-to-day politics. There are very few assurances that commitments made by a government (or a leader) will be kept by successive ones, or even by itself under pressure. A political party that introduces some reforms is quick to oppose them when it is no longer in power. 2. With the extensive deregulation of the last two decades it was expected that corruption that is associated with the system of permits and licences will decrease. There are no hard estimates, but by most anecdotal accounts corruption has, if anything, gone up in recent years. Although there may have been some decline in smuggling, black market in foreign exchange, or real estate. Some of the newer TWENTy K .R . NARAyANAN ORATIONS 126 social groups coming to power are quite nonchalant in suggesting that all these years upper classes and castes have looted the system, now it is their turn. This has implications for the milking of the remaining obstructive regulations, particularly at the level of state governments (for example in matters of water and electricity connections to factories or enterprises, and in land acquisition and registration). As elections become more and more expensive the demands on business from the politician-regulator are unlikely to relent. 3. Much more than economic reform the major economic issue that captures public imagination, as we have noted before, is that of job reservation for an increasing number of ‘backward’ groups, which is accepted by all political parties. In the last decade of market reform more and more of the public sector job market has been carved up into protected niches. Cynics may even argue that the retreat of the state, implied by economic reform, is now more acceptable to the upper classes and castes, as the latter are losing their control over state power in the face of the emerging hordes of hitherto subordinate groups, and they are opting for greener pastures in the private sector and abroad. As these hitherto subordinate groups capture state power they are not likely to easily give up the lucrative benefits of office and the elaborate network of patronage distribution that goes with it. This is more acutely the case at the state government level where these groups are more secure in power. 4. There have been few substantive reforms in the agricultural sector, and the non-agricultural informal sector has been hurt by the credit crunch. Yet these two sectors constitute 93 per cent of the total labour force. No wonder they are not enthused by the reforms carried out so far. In fact even organised farm lobbies (with few exceptions) have not been very active in demanding reforms of agricultural controls like those on storage and distribution and on domestic and foreign trade. They may be worried that the dismantling of the existing structure of food, fertiliser, water and electricity subsidies in exchange of receiving, say, international agricultural prices may be too complex and politically risky a deal. In any case the high administered procurement prices for grains have now eroded India’s earlier (largely unexploited) competitive advantage in world grain markets. 5. Political power is shifting more to regional governments and regional parties, which makes national coordination on macro-policy more difficult. For example, fiscal consolidation in general and a substantial 127 ORATION 7: POLITICAL-ECONOMy AND GOVERNANCE ISSUES reduction in the budget subsidies in particular are difficult when the national government depends on the support of powerful regional parties that assiduously nurse their parochial interest lobbies with aliberal use of subsidies (implicit or explicit). As the logic of economic reform and increased competition leads to increased regional inequality, it is not clear how the Indian federal system will resolve the tension between the demands of the better-off states for more competition and those of other states (which a politically weaker Centre can ill afford to ignore politically) for redistributive transfers. Can, for example, a coalition government at the Centre, dependent for its survival on the large number of MPs from weak states (like Bihar or UP), ignore their redistributive demands to compensate them for losing out in the inter-state competition for private investment? Itis also the case that a large number of entry taxes on goods imposed by governments even in otherwise leading states in economic reform (for example, Maharashtra, Tamil Nadu) are making the goal of reformers to unify an integrated all-India market that much more distant. 6. While the political power of regional governments is increasing, at the same time their fiscal dependence on the Centre is also increasing. (Between the middle 1950s to middle 1990s, the fraction of states’ current expenditures financed by their own revenue sources declined from around 70 per cent to around 55 per cent.) A significant part of the central transfers is discretionary (examples are the numerous central sector and centrally sponsored schemes); these and discretionary subsidised loans are often used by the Centre more for political influence in selected areas than for the cause of fiscal or financial reform or of poverty removal. 7. Reform would have been more popular if it was oriented to aspects of human development (education, health, child nutrition, drinking water, women’s welfare and autonomy, etc.). Reformers usually are preoccupied with problems of the foreign trade regime, fiscal deficits and the constraints on industrial investments in the factory sector, and they believe that once these are handled right, trickle-down will take care of the issues that concern the masses. In particular, the reformers have paid little attention to the crucial problems of governance in matters of achieving human development, which will be inexorably there even if trade, fiscal and industrial policy reforms were successful. Ravallion and Datt (2002) show from an analysis of household survey data across 15 states over 1960 to 1994 that non-farm growth is less effective in reducing poverty in states with poorer initial conditions in TWENTy K .R . NARAyANAN ORATIONS 128 terms of rural development, human resources and land distribution. For example, nearly two-thirds of the difference between the elasticity of headcount poverty index to non-farm output for Bihar and Kerala is attributable to the latter’s substantially higher initial literacy rate. If the administrative mechanism of delivery of public services in the area of human development remains seriously deficient, as it is today in most states, chances of constructing a minimum social safety net are low, and without such a safety net any large-scale program of economic reform will remain politically unsustainable, not surprisingly in a country where the lives of the overwhelming majority of the people are characterised by a brutal lack of economic security. Of course, decentralisation of governance which the 73rd and the 74th constitutional amendments in the early 1990s ushered in most of the country (around the same time as serious economic reforms were also launched) has raised hopes for better delivery of public services, sensitive to local needs. In some sense this is quite a landmark in administrative reforms. But so far the progress in this respect has been disappointing in most states, both in terms of actual devolution of authority and funds, and the outcome variables of services actually delivered. Let me just quote from one general evaluation, by Pal (2001): ‘With some exceptions in Kerala, Madhya Pradesh, Tripura and West Bengal, nothing worthwhile has been devolved to the panchayats. The bureaucracy at all tiers of panchayats is holding the balance.’ Note also that in Kerala and West Bengal decentralisation with regular panchayat elections started long before the constitutional amendments. In many states not just the bureaucracy (which often has overlapping functions with the panchayats) has been reluctant to let go, the local MLAs, in order to protect their patronage turf, have hijacked the local electoral and administrative process (even in otherwise better-run states like Tamil Nadu). In Andhra Pradesh, a state supposedly at the forefront of economic reform, the Chief Minister is reportedly using information technology to further centralise (and personalise) the administrative process. Even in the relatively successful case of West Bengal the major role of panchayats has been in identifying beneficiaries of government programs and the management and implementation of local infrastructure projects like roads and irrigation, funded by tied grants from the Central or state government. There is no serious involvement of the panchayat in the management or control of basic public services like primary education, public health and sanitation or in raising local resources. 231 ORATION 10: INDIA’S SPACE ENTERPRISE To all of them and to the political system symbolised by the late Shri K.R. Narayanan, we owe the credit for touching the lives of millions of people towards a sustainable improved quality of life. References Dhawan, S. (1983), ‘Space and Industry’, Shri Ram Memorial Lecture, New Delhi, 7 February. Dhawan, S. (1985), ‘Application of Space Technology in India’, Aryabhatta Lecture, Indian National Science Academy, 2 August. Dhawan, S. (1988), ‘Prospects for a Space Industry in India’, Lala Karamchand Thapar Memorial Lecture, New Delhi, 26 February. Gupta, S.C. (2006), Growing Rocket Systems and the Team, Prism Books Private Limited, Bangalore. ISRO Report (1972), ‘Indian Program for Space Research and Applications’, Seminar, 7–12 August. Kale, P.P. and Sarlez, William F. Jr (co-chairs) (1971), ‘INSAT Satellite Systems’, study by MIT and ISRO, published by ISRO. Kasturirangan, K. (2001), ‘Space: An Innovative Route to Development’, 4th JRD Tata Memorial Lecture, Assocham, 31 August. Kasturirangan, K. (2004a), ‘Environment from Vantage Point of Space’, ThirdDarbari Seth Memorial Lecture, New Delhi, 19 August. Kasturirangan, K. (2004b), ‘Space — A Vision for the Next 25 years’, 40th Founder Memorial Lecture, Sriram Institute for Industrial Research, New Delhi. Kasturirangan, K. (2004c), ‘Space Science in India — Two Recent Initiatives’, Sir Jagdish Chandra Bose Memorial Lecture, delivered at the Royal Society, London, 14 December. Kasturirangan, K. and Becker, F. (co-chairs)(2004), ‘Space to Promote Peace’, IAA Commission — V Study Group Report, Paris, September. Logsdon, J.M. (ed.) (2001), Exploring the Unknown: Selected Documents in the History of US Civil Space Program, Volume V: Exploring the Cosmos, NASA History Series, NASA, Washington DC. TWENTy K .R . NARAyANAN ORATIONS 232 Narasimha, R. and Kalam, A.P.J. (eds) (1988), Developments in Fluid Mechanics and Space Technology, Indian Academy of Sciences, Bangalore. Rao., U.R. (1995), Space Technology for Sustainable Development, Tata McGraw Hill Co., New Delhi. Sankar, U. (2006), The Indian Space Programme: An Exploratory Analysis, Oxford University Press, New Delhi. Sankar, U. et al. (2003), ‘Economic Analysis of Indian Space Program: AnExploratory Study’, Madras School of Economics, Chennai, November. Sarabhai, V.A. (1966), ‘Exploration in Space: Sources of Man’s Knowledge’, National Program of Talks Series. Sarabhai, V.A. (1979), Sarabhai on Space — A Collection of Writings and Speeches, ISRO, Bangalore. 233 Oration 11: 2007 K.R. Narayanan Oration Message from the President of the Republic of India I am happy to know that The Australian National University, Canberra, has been organising an annual K.R. Narayanan Oration by eminent Indian personalities. The theme of this year’s oration ‘Coping with Climate Change: Is Development in India and the World Sustainable?’ isindeed topical. Climate change is a global challenge with strong economic, environmental and social dimensions. Both the developed and developing countries have to act in accordance with a common but differentiated responsibilities and capabilities. In order for developing countries to address climate change, access to appropriate technology is a key requirement. Collaborative research between institutions of developing and developed countries is the need of the hour. Institutions such as the Asia-Pacific Partnership on Climate and Clean Development, of which both India and Australia are members, are useful in this context though they are not a substitute for the Kyoto Protocol. TWENTy K .R . NARAyANAN ORATIONS 234 India is a signatory to the Kyoto Protocol and has been undertaking measures to reduce greenhouse gas emissions. While the government cannot compromise on the commitment for economic and industrial development of the country, it remains committed to addressing issues relating to our environment. Several measures have been taken by the government to reduce pollution, including emission of greenhouse gases. I wish to take this opportunity to convey my greetings to the people of Australia, particularly the staff and students of The Australian National University. I also thank all those associated with the oration and wish the event every success. Pratibha Patil New Delhi 8 August 2007 235 Coping with Climate Change: Is Development in India and the World Sustainable? R .K . Pachauri I feel deeply privileged at being asked to deliver the 11th K.R.Narayanan Oration. For me this is also a significant moment personally, because I had the privilege of knowing Shri K.R. Narayanan very well. Imet him first when he was minister of state for science and technology in the Narasimha Rao government in 1986. He was again a member of parliament, when, in 1992, The Energy and Resources Institute (TERI) was asked to develop the Indian segment of the Rockefeller Foundation supported program on Leadership for Environment and Development (LEAD). I asked Shri Narayanan to become a member of the steering committee of the program in India and he readily agreed. I kept in touch with him both when he was vice-president and then later president of the Republic. It was a unique honour for me to receive the Padma Bhushan from him, and I shall never forget the joy and pride on his face and his words on the occasion when he said ‘it is a special pleasure for me to pin this recognition on your chest’. He was truly one of the most shining models of humane, erudite and dignified leadership that our country has seen, and I feel this oration is afitting tribute to his memory. The theme of my talk today I hope reflects not only Mr Narayanan’s dedication to social causes and the protection of the environment, but something that is of critical importance to the future of India and the world in view of new knowledge that has now become available, and on which awareness has grown dramatically. TWENTy K .R . NARAyANAN ORATIONS 236 The concept of sustainable development was really enunciated and popularised through the report of the Brundtland Commission, and it is appropriate that we are focusing today on a report that was released 20 years ago. However, the importance of sustainability in development policies and practice has not been realised until recently. As is often the case, it is only the occurrence or the threat of a crisis that spurs human society to unusual actions and changes in pathways. In the case of sustainable development, I think the wake-up call has really come from the sudden growth in awareness and understanding of the scientific realities of climate change. I feel privileged to acknowledge that much of what is happening today is the result of the findings of the three working groups of the Intergovernmental Panel on Climate Change (IPCC). But some of the issues that are generic to all aspects of sustainable development and the reality of climate change really go back in time, since industrialisation began. For well over a century, human society derived growing satisfaction and, in some sense, exhibited a state of euphoria from the availability of a multitude of goods and services that industrialisation and its spread provided to different countries and communities. It was only some 50 years ago that concerns about the unfettered advance of industrialisation and all that it brought, particularly in the nature of environmental damage, received attention, and it was felt that the implications of unregulated growth needed careful reappraisal. Theclarion call perhaps was sounded first by Rachel Carson who published her pioneering book Silent Spring in 1964. This courageous lady withstood various personal attacks and the might of the powerful chemical industry in the US while highlighting the dangers of unlimited use of pesticides for a variety of purposes. She was essentially emphasising the need to evaluate externalities that were created by industrial processes and from specific products and their use, which, while providing benefits in one sense, could cause enormous harm to society in several other respects. Incidentally, this year, 2007, happens to be centenary of Rachel Carson’s birth, but I am not too sure whether we have honoured the memory of this great pioneer in this period adequately. A country like India needs to learn from her example and ensure that we do not emulate the excessive use of chemicals and pesticides that were prevalent in developed countries 50 years ago. The next stage of concern underlying sustainability issues related to development was attained when the Club of Rome published their influential study Limits to Growth in 1972. It is noteworthy that this 237 ORATION 11: COPING WITH CLIMATE CHANGE particular report sold 30 million copies in more than 30 translations. This has undoubtedly become the largest selling book in this general field that the world has produced. An updated version was published on 1June 2004, which brought in several refinements to the earlier study. The central thesis of Limits to Growth was based on the finite nature of several natural resources that the world had become accustomed to using on a large scale. The Club of Rome cautioned the world against the belief that these resources could be exploited and used at increasing levels without the danger of some discontinuity and disruption in the future. Significantly, the first oil price shock took place in 1973, which led to sudden concerns about the finiteness of oil on which the world had become increasingly dependent and about issues of energy security, a subject that haunts us perhaps to a much greater degree today. Limits to Growth also emphasised the problem of environmental pollution, but, in most of the material presented, the book focused on environmental quality at the local level. The world had to wait another 15 years before concerns about human induced climate change received due attention. This is when the IPCC was established and undertook the task of assessing all aspects of climate change by mobilising the best scientific talent and relevant expertise from across the globe. Today, I would like to present some major findings from the Fourth Assessment Report (AR4) of the IPCC contained in the contributions of the three working groups whose reports have been approved by the panel. In November, we hope to complete the Synthesis Report, which will provide a synthesised assessment of the major findings of the three working groups and form a relevant basis for policymaking and agreements in this area. A major finding of the Working Group I Report was: Warming of the climate system is unequivocal, as is now evident from observations of increases in global average air and ocean temperatures, widespread melting of snow and ice, and rising global mean sea level. Several other pieces of knowledge have been revealed in the three reports based on the advancement of scientific understanding and knowledge that has taken place since the Third Assessment Report (TAR) was brought out in 2001. First, ‘most of the observed increase in globally averaged temperatures since the mid-20th century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations’. This contrasts significantly with the findings of the TAR, which considered it ‘likely’ that TWENTy K .R . NARAyANAN ORATIONS 238 the climate system had changed because of human actions. The change in these qualifying terms represents a substantially higher level of probability attached to this finding in the AR4. Future projections of climate change are shown in Figure 1. ! Best estimate for low scenario (B1) is 1.8°C (likely range is 1.1°C to 2.9°C), and for high scenario (A1FI) is 4.0°C (likely range is 2.4°C to 6.4°C). Broadly consistent with span quoted fo r SRES in TAR, but not directly comparable . Figure 1: Projections of future changes in climate The AR4 has also advanced our understanding of the impacts of climate change on which we now have much greater regional detail as well as desegregation of sector-wise and ecosystem-wise impacts. Some of these impacts are not merely significant in terms of their threat to species but would clearly have unfavourable effects on economic activities as well. India, for example, is vulnerable to the impacts of climate change to a substantial degree. One major observation of concern relates to the melting of the Himalayan glaciers. This, of course, is a worldwide problem,but an issue of considerable significance to Indian society, since the large population located in the northern part of the subcontinent relies on water from rivers originating from Himalayan glaciers. The change in glacier mass balance across the globe is shown in Figure 2, wherein the decline in the Asian High Mountain region mass balance as shown issignificant. 239 ORATION 11: COPING WITH CLIMATE CHANGE Cumulative loss of glacier mass in many regions. During the 20th century, glaciers and ice caps have experienced widespread mass losses and have contributed to sea level rise. Figure 2: Glacier mass balance Any reduction in the flow of rivers in northern India will not only reduce water supply for irrigation and other purposes, but would also adversely affect recharge of groundwater in the region. The economic implications of these could be serious. The IPCC AR4 has also brought out the fact that annual precipitation in lower latitudes including parts of South Asia has been declining, and is likely to decline in the future as well. Yet, at the same time, extreme precipitation events are likely to increase in frequency and intensity. Overall, India would see more frequent floods as well as droughts. This would affect agriculture adversely. But the more serious effects on agriculture are already evident in the decline of yields of crops such as wheat and rice, resulting from an increase in temperature, particularly during certain periods of the crop cycle. It is estimated that a 0.50°C rise in winter temperatures can reduce the yield of wheat by 0.45 tonnes per hectare against an average yield of 2.6 tonnes per hectare currently. This would have serious implications for food security in India and the ability of the country to ensure adequate nutrition for a growing population. No doubt adaptation would be a critical part of response strategies to climate change in India, but given the existence of 300 million people who are undernourished today, the magnitude of the threat of hunger is likely to grow in the future. While agriculture contributes less than 30 percent of GDP in the country, it affects the lives and livelihoods of a very large number of people, most critically those who are involved in TWENTy K .R . NARAyANAN ORATIONS 240 rainfed agriculture. Nearly two-thirds of the area of land under agriculture is still rainfed. The scarcity of water that is likely to grow would affect not only agriculture, but also industry, household consumption and other areas. The gross per capita water availability in the country is projected to decline from 1,820 cubic metres per year in 2001 to 1,140 cubic metres per year in 2050. India, therefore, has to bring about a major transformation in its management of water resources. The challenge of supplying enough food for India’s growing population is becoming more difficult because the global food scenario does not look bright. Global food stocks in recent years have shown a substantial decline, with no prospects for improvement in view of growing demand for food grains worldwide and stagnation in productivity of major crops. There are over 850 million people in the world who do not have enough nutrition. As many as 54 nations do not produce enough to feed their people and, against the prospect of growing food prices in the global market, their economic prospects would also suffer. India would be no exception to thispossibility. The nature and intensity of the impacts of climate change for different levels of temperature increase are shown for specific sectors and ecosystems in Figure 3. Figure 3: Global mean annual temperature change 247 Why Environmentalism Needs Equity: Learning From the Environmentalism of the Poor to Build Our Common Future Sunita Narain I am honoured to deliver the 12th K.R. Narayanan Oration. It is aspecial occasion because our former president K.R. Narayanan was a very special person. Most of us, who knew President K.R. Narayanan, willremember him as an erudite, compassionate, thoughtful politician, who knew his mind and stood by his beliefs. We will remember him for his integrity and for his intellectual might. I remember him for all this and even more. I remember him for making the system ‘bend’ to make space for issues, people, ideas and what was right. He did this in his own style, giving of himself to what he believed in. Most importantly, he did this not by standing against the system, but by standing with the system. For me, he was the ultimate subversive: hemade power good. In the mid-1990s, when K.R. Narayanan was vice-president, my colleague Anil Agarwal, of whom he was very fond, asked if he would release abook on air pollution. But this was no ordinary book, which is ordinarily released in such ordinary functions of our leaders. The book was titled Slow Murder. It indicted the most powerful industrialists in the country for manufacturing highly polluting vehicles and demanded change with TWENTy K .R . NARAyANAN ORATIONS 248 the stridency of an angry rebel. This was also the time when the air of Delhi was toxic and dirty. It was also the time when nobody cared about issues of air pollution and its effects on our health and our bodies. K.R. Narayanan not only agreed to release the book, he agreed to do it from his own palatial and powerful vice-presidential house. In one stroke, the profile of the concern changed. It became acceptable. It became powerful. Since then, government has taken strong steps to combat air pollution in our cities, with some success. But I will discuss more on thislater. Later, Agarwal went back to K.R. Narayanan –– this time in the grandeur of the president’s house, to request him to inaugurate a workshop on traditional water harvesting. Again, you could say: so what is new? This was the time when rainwater harvesting was a non-issue, which was discounted by technocrats and policy. K.R. Narayanan agreed to inaugurate the meeting and to present awards to the unsung engineers and water managers of rural India; he also agreed publicly to learn from this knowledge. After speaking to the rural engineers who had built structures to hold and recharge rainwater in different ecosystems, he declared publicly that the most powerful house in the country would adopt their humble science and undertake water harvesting. And he did. My fondest memory is of him inspecting the rainwater harvesting recharge wells of the president’s estate, accompanied by his bewildered but respectful government engineers. Today, rainwater harvesting has caught the imagination of the nation. Today, rainwater harvesting is seen as an integral solution to building a water secure India. Still later, he agreed enthusiastically to visit the dusty and still unknown villagers who had done rainwater harvesting and brought their river to life. His visit to Alwar (a district in Rajasthan state) to recognise the achievements of the village of Bhaonta brought with it the pomp of thestate — the governor, chief minister and others trekking to the river to see the water that gave it life. Standing at the river, which had become perennial because of the water harvesting structures made by village communities, K.R. Narayanan said: I would like to congratulate the people of this village. Not only have the people revived their river, they have also established democratic institutions to manage their resource. Their initiative and self-reliance is an example and an inspiration to the rest of India. 249 ORATION 12: WHy ENVIRONMENTALISM NEEDS EqUITy Today, we need this voice of authority and reason more than ever in the world, as we hurtle towards growth, which can be divisive and destructive or can bring prosperity for all. The Age of Environment This is the time when the world is confronted with the knowledge of impending and potentially devastating climatic changes. It is also the time when the world realises that the model of consumption of a few cannot be supported for the majority. It is also the time when we, in India, are realising the pain of environmental degradation of our air, water and forests. This, then, is the time of crisis. It is also the age of environment. Today, environmental concerns — domestic and global — are defining the way of our economy and our everyday life. The world is battling different but linked developments. The oil price is rising, crippling economic growth as we know it and forcing governments to look for new answers to conservation. Prices of food are skyrocketing, leading to conflict in poor countries dependent on imports and putting pressure on poor communities struggling at the margins of survival. In addition, we see the beginning of signs of climate change in many parts of the world in the form of intensified tropical cyclones, variable and extreme weather events such as heavy rains leading to floods, bitter cold spells and frost that causes crops to fail. But this is also the time of opportunity. This is the time when we can use the ingenuity and inventiveness of science and society to find ways to ‘leapfrog’ to the future. We can reinvent the pathway of growth so that we can have economic wellbeing without the pain of pollution anddegradation. The world has to search for new answers to its growth paradigm. Forthis, it literally has to reinvent what growth and development mean. Thequestion we need to explore is: will these answers lie in the activism ofthe poor, who are dependent on the environment for their survival,or in the prescriptions of the consuming middle classes? It is also a fact that the movements of the poor and dispossessed against environmental degradation are demanding more than simple technological changes to suit the new generation of needs. They want hard and uncomfortable issues of access to natural resources to be resolved; they want equity and justice to be the bedrock of the environmental movement of the future. TWENTy K .R . NARAyANAN ORATIONS 250 These movements — emerging from the bottom of the world’s pyramid, often led by village communities and remarkable individuals — are today showing the way to the future. These movements are products of democracy, as change in any society is a product of negotiation andinnovation. In vast parts of the poor world, where these voices are becoming shouts, environmental warriors have a different relationship with their environment. They live on and off their environment — the land, the forests — and use its resources — medicinal plants, building material, firewood to cook and fodder to feed their animals. They get their water from streams, rivers and ponds. Here the destruction of the environment affects livelihoods and lives, not just lifestyles. High population pressure also means that there is no piece of land or water that is not used — and used with intensity — for daily survival. In these circumstances, if the environment is degraded or the margins of subsistence threatened further, conflict is inevitable. This is why dissent and dialogue has to be part of the alternative model of growth. Nature’s Way or Our Way A few years before he died, environmentalist Anil Agarwal wrote that the 21st century was going to be the century of the environment. Technological change, he said, would be driven by environmental imperatives. Agarwal believed that any nation that forgot to invest in environmental science and technology would imperil its economy and the lives and health of its people. He also said that, in future, human technologies would be forced to mimic nature’s cycles and gentleness. Today we must recognise these words and act on them. Let us look at the evolution of science itself in the 20th century. Scientists during the last century essentially asked four important questions. At the start of the century, the biggest question in the minds of scientists like Albert Einstein or Neils Bohr was: ‘What is Matter’. Bythe middle of the 20th century, scientists had begun to ask two other important questions, namely: ‘What is Life’ and ‘What is the Universe’. It was around the 1950s that Francis Crick and James Watson unravelled the structure of DNA. This discovery led to enormous developments in life sciences and, more recently, we have begun to see the emergence of biotechnologies based on 251 ORATION 12: WHy ENVIRONMENTALISM NEEDS EqUITy the knowledge gathered by life scientists in avery big way. But, by the last quarter of the 20th century, scientists had begun to ask yet another critical question: ‘What is the Web of Life’. This last question is not just about scientific curiosity but human necessity. The fact is that modern technologies and processes of production, so critical to our economies, have adverse impacts on our environment. This technological paradigm is beginning to go beyond the carrying capacity of the Earth’s environment and could easily destroy numerous critical geochemical cycles such as the carbon cycle and the nitrogen cycle. Science for ecological security is, therefore, our imperative. It is here that we will have to learn from nature itself, Agarwal had argued. Nature uses weak forces rather than concentrated forces to do its work. For instance, very tiny temperature differences can transport massive quantities — as much as 4,000 million hectometres or 40,000 billion tonnes — of water from the oceans and travel across thousands of kilometres to deposit it as rainfall over India. But humans still use concentrated energy sources like coal or oil, which then create enormous problems like local air pollution and global climate change. In the years ahead, we will have to learn from nature and move towards much weaker sources of energy — like solar energy, for example. It is for this reason that the world must begin to listen to the creativity of the action being proposed and practised in its vast but remote parts. These actions are driven with the understanding that progress for countries of the South will not lie in the models practised in other regions of the world. They will have to find new answers to old problems, from growing food without destroying soils to building factories without destroying rivers to building cities without drowning in excreta. And all this will have to be done with limited financial resources and even more limited choices of technology. This can only be done if the world begins to combine the confidence of the literate with the humility of the knowledgeable. Environmentalism of the Poor: Localisation and Growth India’s environmental movement, like so much else in the country, is about managing contradictions and complexities — between rich and poor, between people and nature. TWENTy K .R . NARAyANAN ORATIONS 252 But the movement in India has one key distinction, which holds the key to its future. The environmental movements of the rich world happened after periods of wealth creation and during periods of waste generation. So, they argued for containment of the waste but did not have the ability to argue for the reinvention of the paradigm of waste generation itself. However, the environmental movement in India has grown in the midst of enormous inequity and poverty. In this environmentalism of the relatively poor, the answers to change are intractable and impossible, unless the question is reinvented. Just consider the birth and evolution of the green movement. Its inception dates back to the early 1970s with former Indian prime minister Indira Gandhi’s famous words at the Stockholm conference on environment that ‘poverty is the biggest polluter’. But, in this same period, the women of the Chipko movement in the Himalaya showed that the poor, in fact, cared about their environment. In 1974, years before the environment became fashionable, the women of this poor, remote village, stopped loggers from cutting their forests. In other words, this movement of the poor women was not a conservation movement per se, but a movement to demand the rights of local communities over their local resources. The women wanted the first right over the trees, which they said were the basis for their daily survival. Their movement explained to the people of India that extractive and exploitative economies were the biggest polluter, not poverty. This is because in vast parts of rural India, as in vast parts of rural Africa and other regions, poverty is not about the lack of cash, but the lack of access to natural resources. Millions of people live within what can be called a biomass-based subsistence economy, where the gross nature product is more important than the gross national product. Environmental degradation is not a matter of luxury but a matter of survival. In these cases, development is not possible without environmental management. In the environmental movement of the very poor, there are no quick fix techno-solutions that can be suggested to people who are battling for their survival. In this environmentalism, there is only one answer: we must find a way reduce needs and increase efficiency for every inch of land, every tonne of mineral and every drop of water used. It will demand new arrangements to share benefits with local communities so that they are persuaded to part with their resources for a common development. It will demand new ways to growth. 253 ORATION 12: WHy ENVIRONMENTALISM NEEDS EqUITy I say this because it is also clear that the environmental movement of the relatively rich and affluent is still clearly looking for small answers to big problems. Today, everyone is saying, indeed screaming, that we can ‘deal’ with climate change if we adopt measures such as energy efficiency and some new technologies. The message is simple: managing climate change will not hurt lifestyles or economic growth — it is a win–win situation in which we will benefit from green technologies and new business. For instance, biofuels — growing fuel, not food, on land to run the cars of the rich — is one such techno-fix. There has been no discussion on whether biofuels, already competing for land with food crops and raising prices, will indeed reduce emissions when vehicle numbers are increasing. With biofuels under criticism for raising food prices and depleting water resources, the next generation technical solution is on the cards: hybrid cars. I am not against either biofuels or hybrid cars. But I know these are small parts of the big change we need. The transition to a low-carbon economy is not just about technology but also about redistributing economic and ecological space. This change will hurt, as indeed will climate change itself; variable weather events that are destroying crops are already hurting the most vulnerable and powerless. Relearning Knowledge: Water It is also clear that these new answers will lie in learning the frugality and rationality of societies, and in relearning technologies. Take water management. For many countries of the South, water insecurity, which on the one hand leads to declining agricultural productivity and on the other leads to waterborne disease and death, has become the biggest limiting factor for growth. Today, water management is the starting point for getting rid of poverty in the world. Water security is the starting point for food security. Countries of the water-stressed South have to plan not for drought relief, but for a relief against drought. This will demand a new paradigm of water management. It will demand realising that water and culture go together and that water shortage is not about mere failure of rain. It is about the failure of society to live and share its water endowment. TWENTy K .R . NARAyANAN ORATIONS 254 But, to get the water-practice right, we first have to deal with the poverty of the professional mind, which, over time, has become fossilised and rigid in its outlook. We literally need a movement for water literacy so that we can build a new understanding based on past traditions and wisdom of our people, who had learnt to survive and indeed make best use of their environment. Take the fascinating case of ancient Rome and Edo (the ancient Japanese city, on which modern Tokyo is built). Romans built huge aqueducts that ran for miles to bring water to their settlements. These aqueducts even today are the most omnipresent symbols of that society’s water management. And many experts have praised the Romans for the meticulousness with which they planned their water supply systems. But, no, these aqueducts represent not the intelligence but the utter environmental mismanagement of the great Romans. Rome was built on the river Tiber. The city did not need any aqueducts. However, as the waste of Rome was discharged directly into the Tiber, the river was polluted and water had to be brought from long distances. Water outlets were few as a result and the elite appropriated these using a system of slaves. By contrast, the inhabitants of Edo never discharged their waste into the rivers. Instead, they composted the waste and then used in the fields. Because they used common and shared rivers, Edo had numerous water outlets and a much more egalitarian water supply. When we turn our backs on the water around us, we are following Rome: out of sight, of mind; flush it and who cares — but care we must. Dying Wisdom: Building New Practice Ancient Indians understood the speed with which water, the world’s most fluid substance, disappears. They understood that the mathematics of water is simple: if you harvest just 100 millimetres of rainfall on just 1hectare of land, you will receive as much as 1 million litres of water. But,on the other hand, if we do not capture this rainfall, the wettest place on Earth will have water shortages. Research published by the Centre for Science and Environment (CSE) in the mid-1990s showed that countries like India must learn from their traditional community-based water management systems so that they can 255 ORATION 12: WHy ENVIRONMENTALISM NEEDS EqUITy build ways to the future. In today’s India it is imperative that groundwater is recharged so that the rate of abstraction is not greater than the rate of the water infiltration. The traditional water systems were designed to ensure that rainwater was stored in millions of disaggregated and diverse structures, which would in turn lead to local recharge of water into the ground. It is this distributed water harvesting that will build water security. In other words, India must rework the paradigm of water management so that it is designed to harvest, augment and use local water resources so that it leads to local and distributed wealth generation. It is also clear that local and distributed water infrastructure will require new forms of institutional management, as water bureaucracies will find it difficult to manage such vast and disparate systems. It is here that countries like India must learn from their traditional community-based water management systems so that they can build ways to the future. These ideas have captured the imagination of policy planners in the country. It is now well established that water management strategies will need to devolve power to local communities so that they can build structures for local water conservation and practise its use for efficiency and equity. This protest, alternative practice and policy research has converged into policies to build local water structures under employment guarantee schemes in which the state guarantees the right of employment to the poor. This employment is used to build water conservation structures so that drought relief can become relief against drought. The Great Water Leapfrog The problem becomes more intractable as the country progresses and moves from using water in traditional sectors like agriculture to industries and urban areas. It is for this reason that a country like India is considered a traditional water economy that has to make the transition to a modern water economy. In other words, the water sector has to become part of the formalised economy, with formal institutions and mechanisms for its management and pricing. The point to understand is what this modern and formal water economy means in the rest of the world and what it will mean for countries like India. In the industrialised world, industry and urban households use over 70 per cent of the water resources, while agriculture gets the remaining TWENTy K .R . NARAyANAN ORATIONS 256 30 per cent. In traditional water economies like India, the reverse is true: agriculture consumes over 70 per cent and industry and urban areas the rest. The point is not where we are, but where we are heading. The fact is that urban areas and industrial centres in countries like India are now putting greater pressure on water resources. Cities across the country need more water for their growing population and, more importantly, their growing affluence. Their growing demand leads to pressure to source water from further and further away. The capital city of Delhi will get water from the Tehri dam, over 300km away in the Himalaya; the software capitals of the country, Hyderabad, will get water from Nagarjuna Sagar Dam on the Krishna River 105km away; and Bangalore will get water from the Cauvery, about 100km away. The desert city of Udaipur used to draw water from the magnificent Jaisamand Lake but it is drying up and so the city is desperately seeking a way out of this new thirst. The problem is that the ‘informal’ water economy of rural India — its agriculture-dependent population — still exists. The economy has not transformed from being agriculture-dependent to one that is manufacturing and service sector driven. The water crisis is about the management of these competing needs: the vast rural economies, which need water for their food and livelihood security, and the newer growth economies of modern and industrial India. This water competition is leading to low intensity conflicts between different users. For instance, when the southern city of Chennai wanted to source its drinking water from the Veeranam Lake some distance from the city, farmers agitated against the withdrawal for the thirsty city. When the Gujarat city of Rajkot needed water, farmers drew fire and were killed. In 2005, in two separate incidents in Rajasthan, farmers were killed as they rioted against water withdrawal from their neighbouring reservoir or canal for distant cities. It is because of this imperative that water policy has to shun the dogma that dictates against the pricing of water and its efficient management. Cities and the industries of rich India must begin to pay for the water they use. But pricing and markets will not suffice. It is also equally imperative that water management paradigms and their technologies are reinvented for this poor-rich world. These rich cities of the poor world will have to invest in efficiency so that they do not become water wasteful and then learn the science and art of efficiency. Conversely, they will also have to invest in managing 263 ORATION 12: WHy ENVIRONMENTALISM NEEDS EqUITy What is tragic is that the world is hiding behind the poverty of its people to fudge its climate maths. The renewable sector is made up of biomass combustion — the firewood, cow dung, or leaves and twigs used by the desperately poor in our world to cook their food and light their homes. Itis this that is providing the world its space to breathe. We are the Change What then is the way ahead? First we must accept that the rich world must reduce emissions drastically. Let there be no disagreements or excuses on this matter. There is a stock of greenhouse gases in the atmosphere that has built up over centuries in the process of creating nations’ wealth. It is a natural debt. This has already made the climate unstable. Poorer nations will now add to this stock through their drive for economic growth. But that is not an excuse for the rich world not to take on tough and deep-binding emissions reduction targets. The principle has to be that they must reduce so that we can grow. The second part of this agreement is that poor and emerging rich countries need to grow. Their engagement will not be legally binding but based on national targets and programs. The question is to find low-carbon growth strategies for emerging countries, without compromising their right todevelop. This can be done. It is clear that countries like India and China provide the world with the opportunity to ‘avoid’ additional emissions. The reason is that we are still in the process of building our energy, transport or industrial infrastructure. We can make investments in leapfrog technologies so that we can avoid pollution. In other words, we can build our cities on public transport; our energy security on local and distributed systems — from biofuels to renewables; and our industries using the most energy (and,therefore, pollution) efficient technologies. We know it is in our interest not to first pollute, then clean up; or first to be inefficient, then save energy. But we also know that technologies that exist are costly. It is not as if China and India are bent on first investing in dirty and fuel-inefficient technologies. We invest in these, as the now rich world has done, to make money, which can then be invested in efficiency. TWENTy K .R . NARAyANAN ORATIONS 264 As yet, the rich world has found small answers to existential problems. It wants to keep its coal power plants (even as it points fingers at China and India). It wants to build new coal power plants. It believes it can keep polluting and keep fixing. This time, the answer it has hit upon is carbon capture and storage — to pipe the emissions underground and hope the problem will just go away. In this way, it hopes it can have its cake and eat it too. It also wants to keep its cars and add more. Or drive more. It can do this by simply growing fuel and pumping it into vehicles. It does not matter if this biofuel is a small blip in the total consumption of oil: all the corn in the US can only meet 12 per cent of current US petrol use. Itdoes not matter if there is not enough land to grow food and fuel in the world. The cynics will say, after all, that corporations rule the oil and food business. Scarcity will only increase their business. But the realists should say that the ‘illusion’ of solutions is the opiate of the rich. This way they do nothing while creating an illusion of action — and turn their attention to the countries that are just learning the mind-matter game. In spite of fact that science tells us that drastic reductions are needed, no country is talking about limiting their consumption: this is not ironical. Every analysis proves that efficiency is part of the answer but it is meaningless without sufficiency. Cars have become more fuel efficient so people drive longer and have more cars. Emissions continue to grow. The New Deal If we know that the emerging world can leapfrog to make the transition to cleaner technology, why is this not happening? Why is it that the world talks big but gives small change? When the Kyoto Protocol was being negotiated, the world decided to invent the clean development mechanism (CDM) to pay for the transition in the poorer world. But the mechanism was designed to fail. The obsession was to get the cheapest emission reduction options for the rich world. Asaresult, the price of the certified emission reduction (CER) unit used in this transaction has never reflected the cost of renewable and other high technology options. It is a cheap and increasingly corrupt development mechanism. It is also a convoluted development mechanism, in which rules bind governments not to think of big change. In fact, current CDMs provide disincentives for governments in the South to 265 ORATION 12: WHy ENVIRONMENTALISM NEEDS EqUITy drive policies forclean energy or production. Any policy, which is already designed for good is bad in the CDM portfolio. It is not additional and it will not qualify for funding. The world must realise the bitter truth. Equity is a prerequisite for an effective climate agreement. The fact is that without cooperation, this global agreement will not work. It is for this reason that the world must seriously consider the concept of equal per capita emission entitlements so that the rich reduce and the poor do not go beyond their climate quota. We need climate responsible action. We need effective action. Rights-Based Agenda In 1990, the Washington based World Resources Institute (WRI) published a report that showed that annual greenhouse gas emissions of the developing world almost equalled those of the industrialised world, and that, in fact, the emissions of the developing world would overtake the industrialised world’s emissions in the near future. However, CSE found that the methodology used by WRI to compute the responsibility of each nation favoured the polluter. Under the WRI methodology, each nation was assigned a share of the Earth’s ecological sink, but the assignment was proportional to the nation’s contribution to the Earth’s emissions. The sinks are natural systems, oceans and forests, which absorb emissions. Global warming is caused because emissions exceed this natural capacity of the Earth to clean pollutants. WRI had estimated that the world produced 31,000 million tonnes of carbon dioxide and 255 million tonnes of methane every year. It then estimated that the sinks of the Earth naturally assimilated 17,500 million tonnes of carbon dioxide and 212 million tonnes of methane annually. Onthis basis, it then computed a ‘net’ emission of each nation by allocating a share of the sinks to each nation based on its gross emissions contribution. CSE, in its critique, argued that there were two main types of ‘sinks’ where carbon dioxide is reabsorbed by the biosphere: the oceans and terrestrial sinks. While terrestrial sinks, such as forests and grasslands, may be considered national property, oceanic sinks belong to humankind. They can be regarded as common global property. CSE then apportioned the sinks on the basis of a country’s share in the world’s population, TWENTy K .R . NARAyANAN ORATIONS 266 arguing that each individual in the world had an entitlement to the global commons. This allocation, based on individual rights to the Earth’s natural cleansing capacity, changed the computation of nations’ responsibility drastically. For instance, under the WRI methodology, the US contributed 17 per cent of the world’s net emissions, while the CSE methodology computed that it actually contributed roughly 27.4 per cent. Similarly, China’s contribution of net annual emissions decreased from 6.4 per cent (WRI estimate) to 0.57 per cent, and India’s from 3.9per cent to just 0.013percent. This allocation of the Earth’s global sinks to each nation, based on its population, created a system of per capita emission entitlements, which, taken together, were the ‘permissible’ levels of emissions for each country. This, according to CSE, would create a framework for trading between nations, as countries that exceeded their annual quota of carbon dioxide could trade with countries with ‘permissible’ emissions. This would create financial incentives for countries to keep their emissions as low as possible and to invest in zero-carbon trajectories. We have also argued that, as much the world needs to design a system ofequity between nations, nations of the world need to design a system of equity within the nation. It is not the rich in India who emit less than their share of the global quota. It is the poor in India, who do not have access to energy, who provide us the breathing space. India, for instance, had per capita carbon emissions of 1.5 tonnes per year in 2005. Yet, this figure hides huge disparities. The urban-industrial sector is energy intensive and wasteful, while the rural-subsistence sector is energy-poor and frugal. Currently, it is estimated that only 31 per cent of rural households use electricity. Connecting all of India’s villages to grid-based electricity will be expensive and difficult. It is here that the option of leapfrogging to off-grid solutions based on renewable energy technologies becomes most economically viable. If India’s entitlements were assigned on an equal per capita basis, so that the country’s richer citizens must pay the poor for excess energy use, this would provide both the resources and the incentives for current low energy users to adopt zero-emission technologies. In this way, too, a rights-based framework would stimulate powerful demand for investments in new renewable energy technologies. This rights-based agenda is critical in the resolution of the climate change challenge. The fact is that climate change, more than anything else, teaches us that the world is one; if the rich world pumped excessive quantities of 267 ORATION 12: WHy ENVIRONMENTALISM NEEDS EqUITy carbon dioxide into the atmosphere yesterday, the emerging rich world will do so today. It also tells that the only way to build controls is to ensure that there is fairness and equity in the agreement, so that this biggest cooperative enterprise is possible. Strengthen Global Democracy In conclusion, there is no doubt we live in an increasingly insecure world. Indeed, the state of insecurity in the world is made more deliberate, more wilful, because of the intentional and unintentional actions of nationstates and governments — all in the name of development and global justice. So, if the rich world is increasingly paranoid about its defence from the failed, bankrupt and despotic states of the developing world, the poor are insecure because they are increasingly marginalised and made destitute by the policies of the rich. The challenge of climate change is adding a new level of insecurity for the world’s people. It is also equally clear that a business as usual paradigm of growth will lead the world towards a vortex of insecure people, communities and nations. It is here that the countries of the South face even greater challenges. They will need to rebuild security by rebuilding local food, water and livelihood security in all villages and cities of their world. And, in doing this, they will have to reinvent the capital and material intensive growth paradigm of the industrialised North that deepens the divide between the rich and the poor. They will have to do things differently in their own backyards. But, more importantly, these countries will have to become the voice of the voiceless, so that they can demand changes in the rules of globalisation in the interest of all. Sustainable development needs to be understood as a function of deepened democracy. As every society makes mistakes, it is the process of decision-making about sustainable development that will lead to fast rectification and resolution. Sustainable development is, therefore, not about technology, but about a political framework, which will devolve power and give people — the victims of environmental degradation — rights over natural resources. The involvement of local communities in environmental management is a prerequisite for sustainable development. The South’s quest for an alternative growth strategy will have two essential prerequisites. TWENTy K .R . NARAyANAN ORATIONS 268 First, a high order of democracy, so that the poor, marginalised and environmental victim can demand change. It is essential to understand that the most important driver of environmental change in these countries is not government, laws, regulation, funds or technology per se. It is the ability of its people to ‘work’ democracy. But democracy is much more than words in a constitution. It requires careful nurturing so that the media and the judiciary, and all other organs of governance, can decide what is in the public, and not private (read corporate), interest. Quite simply, this environmentalism of the poor will need more credible public institutions, not less. Second, change will demand knowledge and new and inventive thinking. This ability to think differently needs confidence to break through the historical ‘whitewash’ — the arrogance of old, established, ultimately borrowed ideas. A breakthrough — a mental leapfrog — is what the South lacks the most. The most adverse impact of the current industrial growth model is that it has turned the planners of the South into cabbages who believe they have no answers. The current model has only problems, for which the solutions lie in the tried and tested answers of the rich world. It is also important that this environmentalism of the poor — built from the bottom up and based on principles of equity and human need — influence the world. To combat climate change, it is essential that the world learns from these movements about the need to share resources so that we can all tread lightly on the Earth, and so that we can all remember, not forget. In closing, I would like to quote from President K.R. Narayanan. In his address to the nation, on the eve of India’s Republic Day, 25 January 2001, he said: Let it not be said by future generations that the Indian Republic has been built on the destruction of the green earth and the innocent tribals who have been living there for centuries. A great socialist leader has once said that a great man in a hurry to change the world who knocks down a child commits a crime. Let it not be said of India that this great republic in a hurry to develop itself is devastating the green mother earth and uprooting our tribal populations. We can show the world that there is room for everybody to live in this country of tolerance and compassion. This is the message the world must learn, fast. 269 Oration 13: 2009 K.R. Narayanan Oration Message from the President of the Republic of India I am happy to learn that the Australia South Asia Research Centre (ASARC) is organising the 13th K.R. Narayanan Oration on the theme ‘Rocket Science, Other Science: A Trajectory of Indian Science and Technology from 20th to the 21st Century’ at TheAustralian National University, Canberra on 2 November 2009. Since independence, Indian scientists have made noteworthy achievements in the field of science and technology, especially in successfully developed launch technology and launch vehicles. I hope that the oration will highlight the ways in which science and technology can be used for development of society. I wish the oration all success. Pratibha Patil New Delhi 23 October 2009 270 Rocket Science, Other Science: A Trajectory of Indian Science and Technology from the 20th to the 21st Century Roddam Narasimha The untapped resource of technical and scientific knowledge available in India for the taking is the economic equivalent of the untapped continent available to USA 150 years ago.1 I feel greatly honoured at having been invited to present the 2009 K.R.Narayanan Oration at this renowned university. Shri Narayanan was aperson that I came to know, and quickly learned to respect, especially during the period (1986–89) that he was union minister for Science and Technology in Delhi — a period that started shortly after my own tenure at the National Aerospace Laboratories (NAL) began at Bangalore. It was both a pleasure and a privilege to have a minister of Shri Narayanan’s erudition, with keen appreciation of the role that science and technology (S&T) could play in India’s development, and a regard and sense of friendship that he and the scientific community shared with each other. When, in 1986, NAL embarked on a parallel computing project, Shri Narayanan was one of the closest friends and supporters we had. This friendship continued even after he became president of the Republic, and I have the fondest memories of his visits to the National Institute 1 Milton Friedman (1955), Report to the Union Ministry of Finance. 271 ORATION 13: ROCKET SCIENCE, OTHER SCIENCE of Advanced Studies and the Jawaharlal Nehru Centre for Advanced Scientific Research, where he showed once again his warm and almost personal interest in the future of Indian S&T and the men and women who pursued science in India. It is a privilege, therefore, for me to be able to pay a tribute to a great diplomat, scholar, gentleman and friend of science, and I am grateful to my hosts at the Australia–India Council and the Australia South Asia Research Centre at The Australian National University (ANU) for providing me an opportunity to do so. It seems appropriate to use this occasion to sketch a personal view of the path that India has followed in S&T since 1947, the year that signalled the end of British rule, although (as I shall argue briefly later) the roots of national policy in this period are intimately connected with developments in Indian science in the first half of the 20th century. This lecture, however, is not intended to be a comprehensive survey of all the significant developments that took place during this period. Some of them have already formed the theme of previous Narayanan orations. Instead, I shall describe the path that has been followed in areas in which I have myself been involved in some way, in particular aerospace and computer technologies. *** Let me begin with space. The first, and indeed the most remarkable, aspect of India’s space program is how long ago it started. The Indian National Committee on Space Research was established in 1962 as a part of the Department of Atomic Energy by Homi Bhabha, with Vikram Sarabhai as the committee’s chairman. I shall return to the great impact that these two leaders have had on Indian S&T in the last half-century, but let me only note here a Bangalore connection. The speed with which space research was made part of the national agenda was perhaps in part due to the visions that Bhabha and Sarabhai shared on the way to build S&T in India. Bothhad been at the Physics Department of the Indian Institute of Science during the war years — Bhabha having been prevented from resuming his career at Cambridge by the war, and Sarabhai having been forced to wait to go to Cambridge to complete his doctoral degree. AsAmrita Shah says in her fine biography of Vikram Sarabhai: TWENTy K .R . NARAyANAN ORATIONS 272 It is tempting to speculate that Vikram and Bhabha, the two princes of Indian science, used their youthful days in Bangalore to spin dreams for the future … sharing their precocious hopes in the rambling wild landscape of the IISc or sealing a blood pact under the bright lights of the West End [Hotel] … because ofthe uncanny sureness with which they set about their plans and thesuggestion of complicity in so many of their actions.2 The modest National Committee set up in 1962 was eventually to lead to what is probably India’s most striking technology development programtoday. Vikram Sarabhai came from a well-known and wealthy family of businessmen and industrialists in Gujarat, but chose science as his career. When he first invited me in 1964 for a personal discussion at Trivandrum, two things struck me. The first was the dramatic Nike–Apache launch from the beautiful, unspoiled palm-fringed beaches near Veli Hill. And the second was the company that Sarabhai was travelling with. Itincluded not only some of the engineers and scientists who were then working with him, and a group of distinguished foreign scientists, but also artists, journalists and various other friends. Sarabhai asserted that India was not doing space for prestige, and, like the good businessman he was, insisted that sound economic evaluation of the required resources was necessary before embarking on the program. He also saw space science and technology as offering an opportunity for India to leapfrog from its backwardness and poverty. In the debate that still sometimes goes on between the virtues of leapfrogging vs those of piggybacking, Sarabhai (like most scientific leaders of his time in India) was definitely for leapfrogging. Having trained as a physicist who was used to balloons for cosmic ray work, it was natural for him to think of sounding rockets as providing another tool that would help his research. The first rockets launched in Trivandrum had to do with the upper atmosphere and the so-called electro-jet, a huge river of electric current that flows over themagnetic equator that lies across the southern tip of India. Unfortunately, Sarabhai died when he was only 52. He was succeeded by Satish Dhawan, my own guru when I was a student at the Indian Institute of Science, and it was left to him to set up a space establishment in the country that would realise Sarabhai’s dreams. In 1972, this establishment 2 Amrita Shah (2007), Vikram Sarabhai: A Life, Penguin, New Delhi. 279 ORATION 13: ROCKET SCIENCE, OTHER SCIENCE Nearly half the land area and nearly half the population of the world live in the tropics. The tropics receive two-thirds of total world rainfall; they also receive relatively more solar radiation, and export the surplus to higher latitudes keeping them warmer than they would otherwise have been. Interestingly, meteorological connections exist between India and Australia, as foreseen in the 1920s by Sir Gilbert Walker who, as head of the India Meteorological Department, reported the significant correlation between rainfall in India and pressure at Port Darwin and south-east Australia, for example (envisaging what is today called ENSO, or the ElNiño-Southern Oscillation phenomenon). Shouldn’t India and Australia be working more closely in atmosphere–ocean science? Such initiatives should become more feasible as the space program tends towards greater self-sustainability. Thanks to the progress achieved by Indian space scientists and technologists, that now no longer seems difficult to accomplish. Globalisation should make international projects more attractive, provided geopolitical considerations do not intrude. There is an excellent chance that such international ventures can in fact lead to both faster and cheaper projects and services for both collaborating parties. AWST talked about ISRO’s shoestring budget; a study carried out at the Madras School of Economics3 shows in specific cases how costeffective the Indian program is. So we may need a two-pronged policy. On the one hand it could be more oriented to commerce and wealth creation (of which Sarabhai the scientist-businessman would surely have approved). Conversely, it could emphasise the vigorous use of satellites in education and scientific research (helping to enhance the value of our human resources), including in particular the earth system (of which Dhawan the humane technologist would have approved). This would still be part of the developmental process that ISRO’s founding fathers placed before us. Commerce, basic science, education, land, water and the earth system as a whole can form a sustainable complex of goals. These goals, in part new and in part only a new version of the original vision, can be pursued with confidence, because of the sustained achievements of the Indian space program in the last 40 years. *** 3 U. Sankar (2007), The Economics of India’s Space Programme, Oxford, New Delhi. TWENTy K .R . NARAyANAN ORATIONS 280 I would now like to consider computer technology, which has some interesting parallels with space but also some striking differences. Inthe 1980s, it started with the need felt in India for high performance computing systems on a variety of national projects. However, it was soon discovered that, because of the technology embargoes prevailing at the time, it was not possible to import any of the supercomputers of that era to India (the exception was a Cray machine that was acquired by the National Centre for Medium Range Weather Forecasting at Delhi for numerical weather prediction). In the early 1980s, some scientists both in Europe and US had started experimenting with parallel computing (i.e. achieving higher computing speeds by using a large number of processors that would work in parallel). During the time that I was at NAL we began a parallel computing effort in a small way in 1986. To our (and everybody else’s) pleasant surprise, my colleague at NAL, Dr U.N. Sinha, was able to put together, before the end of the year, a small parallel computer that was already faster than the large mainframe that NAL had been using at that time. The demonstration of the way that the Flosolver (as the NAL parallel computer was called) could solve, for example, the transonic small perturbation equations faster than the mainframe removed all scepticism on the possibility of using parallel computers for tackling problems in fluid dynamics. (By the way, that scepticism was shared at the time by many experts in the West as well, and so was not limited to Indian scientists.) Through the Scientific Advisory Committee to Prime Minister Rajiv Gandhi, a proposal was made to the government in 1986 for pursuing a major national initiative in parallel computing. As is well known, Mr Gandhi was a great advocate of computers in the country at the time, and I recall that the less than 10 minutes that had been allotted to me to make a presentation to the prime minister extended to 90 minutes — because of his extraordinary interest in the project. At the end, Mr Gandhi said that the question was not whether we should make parallel computers but how fast we could make them and at what cost. (He was also all for leapfrogging.) Very quickly thereafter several parallel computer projects were undertaken in the country. These had different philosophies, and it was decided that each of them was valid in its own way and should continue with further development. I must mention here that Mr K.R. Narayanan, as minister for Science and Technology at the time, was a great supporter of the Flosolver project, and he kept asking me years later (even after he had become president of the Republic) how the project was going. What 281 ORATION 13: ROCKET SCIENCE, OTHER SCIENCE started as a small effort to acquire some additional computing power has now gone through six generations (Mark 7 is now operational), and has led to new technology development and new architectures (some of them patented). All this has been done at low costs compared to international levels, and with huge and enthusiastic student participation. But as these computers went from one generation to the next, the most important applications also slowly changed. Currently, modelling of the atmosphere and the oceans takes precedence over the other applications. Considerable commercial interest has been shown in the possibility of using these computers for financial modelling. A separate project, through a scheme called the National Millennium Initiative for Technology Leadership in India and conceived by the Council of Scientific and Industrial Research, has selected modelling monsoons as a targeted application. Forecasts are now being continuously made and sent to the India Meteorological Department for their use. An interesting aspect of the parallel computing effort in India is that, over the years, four distinct groups emerged, including one at the Centre for Development of Advanced Computing at Pune whose machines, known as the Param series, have probably had the widest use in the country (some of them even exported). Nevertheless, none of these efforts can be called a strong commercial success. At the time that the projects were undertaken, commercialisation was not ignored, but it would be correct to say that non-vulnerability to technological embargoes was an even more important consideration. After all, the first objective of Mrs Gandhi’s Technology Policy of 1983 was ‘to attain technology competence and selfreliance to reduce vulnerability’. To that extent, the projects have been most successful. But, in spite of serious efforts, it has not been possible to get the involvement of private industry in the project, although it has often shown considerable interest. The question of forging stronger links between the laboratory and the marketplace is one of major interest and continuing importance in India even today. A similar problem has also affected another computing initiative relating to what came to be known as the Simputer. The roots of this project can be traced to a meeting that was organised by the National Institute of Advanced Studies (NIAS) as part of the first Bangalore IT.COM show (as the series came be known later), held in 1998 with the support of the late Mr Sanjoy Dasgupta who conceived the idea. As part of the first event, NIAS organised an international seminar that considered the TWENTy K .R . NARAyANAN ORATIONS 282 future of IT in developing countries. In keeping with the broad objectives of NIAS, which in particular emphasise the bringing together of people in science, technology, the humanities and a variety of other sectors including business, industry and the political leadership, we included in the NIAS team that organised this event both distinguished academic scientists like Professor Vijay Chandru of the Indian Institute of Science, industry experts like Mr Vinay Deshpande, sociologists like Professor M.N. Srinivas and others. In fact, a Bangalore Declaration was passed at the meeting and had the wide approval of both the developing and the developed countries whose representatives were present at the meeting. That declaration highlighted a major concern at the time, which was what has been called the digital divide. In trying to see how the problem represented by the divide — that is, between those who have access to (for example) the internet and those who do not — the idea emerged that what India needed was a small handheld computer that could sell for afew thousand rupees (something less than $100). This led to the concept of the Simputer, which excited worldwide attention. The New York Times called it the most significant innovation in computing technology in 2003, Time magazine said it was ‘one of ten technologies to know on the planet’, and the MIT Technology Review rated it among the top 10 innovations of the year. Some examples of the Simputer were made, the product was officially released and something like a thousand test pieces were sold on a very special application — to the great satisfaction of its fastidious customer. Nevertheless, the Simputer did not become acommercial success. In retrospect, it has become clear that it is not enough to have a brilliant idea; to convert idea into reality in the marketplace takes a variety of other resources, capabilities and skills that together constitute what may be called the innovation ecosystem. This ecosystem has technology and the technologists as one component, but includes financing, promotion, advertisement, large-scale applications, the ability to take risks and accept failures and, increasingly, a globalised business model. That ecosystem is not yet in place in India, especially for the technologist–entrepreneur. So,interestingly, at the time the Simputer was first made, it could not break into the market, for whatever reason; it now looks as if there may be a resurrection: it has acquired a second life as newer applications are making demands for which it appears a very appropriate solution. 283 ORATION 13: ROCKET SCIENCE, OTHER SCIENCE But the Simputer is only one of the most well-known instances of a good idea that did not reach the market. There have been others that have had a similar experience. It is to be hoped that, as the country breeds more technologist–entrepreneurs, the rest of the ecosystem that is needed to convert such ideas into wealth will quickly emerge. Meanwhile, a major commercial entry into the supercomputer market is represented by the computer Eka, which the Tata Computing Research Laboratories in Pune have designed and constructed. At the time that it was put into operation (in 2007), the Eka was the fourth most powerful computer in the world; it remains to this day the most powerful in Asia. It is being used for scientific research, technology development, weather prediction and a variety of other applications. It appears that this project works to a different business model. Here much of the system may carry imported components, but the basic concept, the financial risk involved in the project and the business model supporting it are all completely Indian. The fact that private industry in India is now willing to undertake such projects (either moving away from piggybacking to leapfrogging, or making a pragmatic mix of the two) marks a significant departure in the way that technology development can take place in India. The Eka appears more ambitious than the interesting developments in some other sectors, for example, pharmaceuticals. Nevertheless, the number of industries that are beginning to see the economic advantages of technology development within India is slowly on the rise. In support of this view we may also quote the recent example of what may be the world’s cheapest car, namely the Nano. The interesting thing about both Eka and Nano is that they are primarily inspired by the needs of the Indian market, with the realisation that success achieved there may well take the product to other parts oftheworld. *** All these projects — whether in space or in computer technology — depend critically on management of the skills and knowledge ‘available in India for the taking’, as Friedman put it, and the world is slowly discovering this ‘untapped’ resource. If India has recently emerged as amajor exporter of automobiles and automobile parts, it is because of the discovery that India offers cheap skills (rather than cheap labour). Several years ago, Business Week and a whole host of multinational corporations (led by GE) discovered similarly that India was about the most costeffective location in the world for doing high-level R&D (research and TWENTy K .R . NARAyANAN ORATIONS 284 development). India’s scientific output, measured by the number of publications in well-recognised scientific journals, remains about the most cost-effective source of high-quality scientific research in the world. (But the total scientific output itself, although growing, remains stagnant at about 2.5 per cent of the global output.)4 We need stronger policies that recognise the natural advantage that India has in its youthful human resources, and provide all the supporting institutions and mechanisms — from education to counselling to encouraging technological entrepreneurship and domain scholarship — that can convert this untapped talent (the economic equivalent of the untapped American continent of the 19th century) into wealth and national wellbeing. I have in this lecture tried to trace the way that science and technology have evolved in India in two sectors in which I have some direct personal experience. (I could have added others, like the aircraft industry, where the situation is quite different from its space cousin, but the overall conclusions would not change.) After the economic reforms of 1991, the rate of growth of the Indian economy has risen and has typically been in the range of 6–8per cent in recent years. Business leaders are tackling more challenging and competitive technology-driven products and systems. The examples I have described show that there is plenty of talent in India to take on the most challenging tasks in modern technology (andthat talent is not confined to the metropolitan centres and the national institutes: it is spread across the country). Both the public and the private sector have demonstrated this, especially in the last five to 10 years. This augurs well for the future. At the same time, we have instances where brilliant ideas have not made it to the marketplace. It is my personal view that the ecosystem that can make this happen — all those advanced services that include venture capital, market survey, globalised manufacturing, being first to the marketplace and many others — are not yet in place; it needs to be a part of national endeavour to correct the situation as early as possible. Something similar is true in the field of basic science as well: in spite of the many new initiatives taken to promote it, we are still a relatively small force in global science, and that relentless pursuit of excellence that leads to game-changing ideas has not yet become part of the Indian academic environment. 4 Roddam Narasimha (2008), Science, Technology and the Economy: An Indian Perspective, Technology in Society, 30(3–4): 330–8. 285 ORATION 13: ROCKET SCIENCE, OTHER SCIENCE But things are changing rapidly, and we may expect further initiatives in coming years that will enable India to create systems that can tap its great human resources more effectively. Thank you, once again, for inviting me to deliver the 2009 K.R. Narayanan Oration. 287 Oration 14: 2010 K.R. Narayanan Oration Message from the President of the Republic of India I am happy to learn that the Australia South Asia Research Centre (ASARC) is organising the 14th K.R. Narayanan Oration on the theme ‘India’s Prospects in the Post-Crisis World’, at The Australian National University, Canberra on 29 November 2010. The Indian economy has weathered the global financial crisis of 2008–09 quite well. At a time when several other economies of the world have slowed down, India continues to register high rates of growth. This year, itis poised to continue its high growth trajectory. There is growing interestin the Indian economy and its development model. I have no doubt that the oration will go a long way towards addressing this interest, focusing on the challenges and the opportunities shaping the Indian economy and its growth and development in the years to come. TWENTy K .R . NARAyANAN ORATIONS 288 I wish the oration all success. Pratibha Patil New Delhi 18 November 2010 295 ORATION 14: INDIA’S PROSPECTS IN THE POST-CRISIS WORLD Let me now turn to the third determinant of growth, that is, total factor productivity. Economists know that total factor productivity is as important in determining the rate of growth of an economy as the growth of primary inputs such as capital and labour. These primary inputs are extremely important. One almost certainly cannot have high growth without rapid growth in both capital and labour inputs. However, it is also true that one can have a lot of growth in capital and labour inputs without getting much of total growth, if the factor productivity side is not looked after. This is what happened in the 1960s and 1970s. Our overall growth rate was low, and a large part of the explanation lay in low or even negative productivity growth. Investment was taking place, but we were not getting growth because of poor performance in productivity. This, in turn, can be attributed to the economic inefficiency associated with the pre-reform economic system. The economic reforms were designed to unleash productivity in the system by injecting much greater competition, both domestically and from abroad, and giving domestic entrepreneurship the freedom and flexibility it needed to invest and expand in search of profitable opportunities. Recent research has shown that the reforms did have the effect expected and total factor productivity became significantly positive in the post reforms period. This raises the question: will the pace of total factor productivity growth witnessed in the post-reform period continue and perhaps even accelerate? In tune, this question is usually transformed into the question: will the economic reforms continue and at what pace? The Agenda for Reforms It is well recognised in India that economic reforms are still a work in progress and much remains to be done. There is a substantial agenda of unfinished reforms, many of which are simply a logical extension of the reforms already undertaken. Their completion would improve the investment climate and add to productivity growth in the years ahead. Let me list some of the areas where reforms are in the pipeline. India has already made a substantial transition from a fairly closed economy with high levels of protection before 1990 to a much more open economy, with much lower protective levels and a marketdetermined exchange rate. It is a major achievement that this transition has been achieved with none of the economic disruption often feared when economies open up. However, it is often pointed out that India still TWENTy K .R . NARAyANAN ORATIONS 296 has somewhat higher tariff walls than other emerging market economies and more needs to be done to open up on the trade front. The comparison with other countries isnot entirely fair. India’s customs duties, which (with some exceptions) are now subject to a peak rate of 10 per cent are actually less protective than they seem as there is no countervailing duty to offset the sales tax levied by the state governments. If an amount equivalent to sales tax is netted out of thecurrent customs duty to arrive at the actual ‘protective duty’, itwould be much lower. Once the goods and services tax is in place, it will be possible to apply it to all imports, at which stage customs duties couldbelowered by around 5 percentage points. More importantly, the government has clearly signalled further movement towards reducing trade barriers as part of the Look East Policy, which is explicitly aimed at integrating the Indian economy more fully into the East Asian region. In pursuit of this policy, India has entered into anumber of free trade agreements with countries in East Asia. They are not always called free trade agreements, being referred to as ‘comprehensive economic cooperation agreements’, but they amount to the same thing. Such agreements have been signed with Singapore, Malaysia, Thailandand one with ASEAN (Association of South-East Asian Nations) as agroup. An agreement has been signed with Korea and negotiations with Japan have been completed and the agreement is expected to be signed in 2011. These agreements will ensure a steady decline in applied tariffs over the next five to seven years. FDI has been extensively liberalised with most areas open to FDI up to 100 per cent. However, there are several areas where limitations on foreign ownership remain and where liberalisation is being considered. Insurance is one such area, with foreign investment currently limited to 26 per cent. The government has introduced legislation to raise this limit to 49 percent, though the legislative process has yet to be completed. Investment in multi-brand department stores is another where FDI is currently not permitted at all. The Ministry of Industry has stated that this policy is currently under consideration for a possible relaxation. Mining is another area, and one of keen interest to Australian business, in which changes in the law are being considered. A new law governing the mining sector is under consideration that aims at establishing a more transparent regime for assigning mining leases, with a fairer system of compensation for those displaced. 297 ORATION 14: INDIA’S PROSPECTS IN THE POST-CRISIS WORLD The development of infrastructure, particularly power, roads, ports, airports, telecommunications and railways, is an important part of the ongoing reform agenda in which progress is being made but there is need for further acceleration. These sectors are widely regarded as constraining India’s industrial competitiveness and, therefore, its ability to accelerate growth. The Government of India recognises the enormous importance of infrastructure development in India and the government has a big role to play in promoting investment in infrastructure. However, although large investments in infrastructure are necessary, the task cannot be performed by the public sector alone. Public sector resources are scarce and have to be directed into other priority areas like education and health. The government has, therefore, outlined a mixed strategy of developing infrastructure through a combination of public investment and public–private partnership. Public investment in infrastructure will remain important but will be directed to areas in which the private sector is unlikely to come. The public sector effort needs to be supplemented by private investment wherever possible. The government has, therefore, launched a very major effort to attract private investment in all these areas. Investment in infrastructure was estimated to be about 5 per cent of GDP in the base year of the Eleventh Plan (i.e. 2006–07). We had expected to raise this percentage to around 9 in the last year of the Eleventh Plan (i.e.2011–12). The actual achievement is likely to be around 8 per cent. To maintain the momentum in infrastructure development, we estimate that the investment in infrastructure would need to increase further to say 10 per cent by the end of the Twelfth Plan (i.e. 2017–18). This implies that investment in infrastructure will increase from $500 billion in the five years of the Eleventh Plan period (i.e. 2007–08 to 2011–12) to about $1 trillion in the Twelfth Plan period (i.e. 2012–13 to 2017–18). What is more, whereas about 30 per cent of the investment in the Eleventh Plan period was projected to come from the private sector, the private sector share in the Twelfth Plan will have to increase to about 50 per cent. The challenge for the government is to design a policy framework that will attract private investment on the scale required. The policy has evoked apositive response thus far and substantial investments have been made by the private sector in all these infrastructure sectors. However, the level of involvement will have to be increased substantially to achieve the higher levels of investment that will be necessary in the years ahead. TWENTy K .R . NARAyANAN ORATIONS 298 While private investment in infrastructure needs to be encouraged, it is also necessary to ensure a high degree of transparency in the terms on which private investment is invited into infrastructure in order to protect the interest of the consumers of the service and to prevent the emergence of crony capitalists. Since infrastructure sectors are typically regulated, and in some cases amount to giving the concessionaire alimited monopoly, there are a number of difficult questions that need to be addressed. Private investors need the assurance of an adequate return and, in many cases (e.g. road transportation), the revenue that can be earned from the project may not suffice to service the total capital cost. In such cases, the government has to provide a capital subsidy, but the subsidy must be provided in a transparent manner based on competitive bidding. Competition takes different forms in different sectors. In the roads sector, concessionaires are selected based on competitive bidding for the lump sum capital subsidy they would need to undertake the project. In the case of airports and ports, competitive bidding is done on the basis of revenue share. Managing the award of concessions in a manner that ensures transparency and is perceived to be fair is crucial, as any slippage in this process runs the risk of appearing to promote cronyism. A long pending element of the unfinished reform agenda relates to labour market reform. Economists have repeatedly emphasised that the rigidity of labour laws in the organised sector, including especially the fact that retrenchment of labour needs government permission, which is typically not given, is a factor that discourages the growth of employment intensive industries in India. Many have argued that this makes it more difficult to absorb surplus labour into productive industrial employment and is, therefore, actually anti-employment and anti-inclusion. However, this is a politically sensitive area in which reforms face strong opposition from labour unions. The government has taken the view that labour reform is necessary, but we must work to develop a consensus with representatives of labour. Economic reforms aimed at achieving microeconomic efficiency and at rationalising some sector-level policies have to be underpinned by asound macro-economic environment characterised by fiscal sustainability and a well-functioning financial sector. India has had high levels of fiscal deficits in the past, with the combined deficit of the centre and state governments reaching 9.5 per cent of GDP in 2001–02. This was 299 ORATION 14: INDIA’S PROSPECTS IN THE POST-CRISIS WORLD progressively brought down to just over 5 per cent in 2007–08 just before the global crisis. However, it expanded again to 9.6 per cent in 2009–10 because of a conscious policy of fiscal stimulus. With recovery from the crisis now well established, the government has again outlined a path of fiscal correction that will reduce the fiscal deficit of the Central Government from 5.5 per cent of GDP in 2010–11 to 3.5 per cent by 2013–14. Allowing for a fiscal deficit of about 2 per cent for the states, the combined fiscal deficit of the centre and the states would be around 5.5 per cent in 2013–14. This order of deficit is high by international standards but it represents a substantial improvement from the current situation and is consistent with a steady reduction in the debt to GDP ratio given the high growth potential of the economy. An important part of the fiscal reforms expected in the years ahead is the integration of domestic indirect taxes, which are at present imposed by the central and state governments separately on different tax bases, into a unified ‘goods and services tax’. This will have separate central and state components but will be applied on a common base, with a provision to net out taxes at the input stage for the central and state component, respectively. This is an extremely important domestic reform initiative, which will contribute hugely to economic efficiency and also to revenue collection. However, it requires an amendment of the constitution and this calls for delicate political negotiation with the states. We had hoped that this process might have been concluded in 2010 so that the GST could be implemented with effect from 1 April 2011. It now looks as if it will take a little longer, but I am very hopeful that this reform will beimplemented. I could go on and list a number of other reform initiatives in the pipeline but the reforms mentioned indicate that we do have a well-defined agenda. Understandably, this leads observers to ask what is the time frame in which these reforms will be completed. I confess that it is difficult to set time lines in our system because of the nature of our democratic process. I have no doubt that the demonstrably favourable effect that the reforms have had on growth has created a broad constituency in support of the reforms, and we will see progress in this direction. However, progress is likely to be gradualist as it has been in the past. TWENTy K .R . NARAyANAN ORATIONS 300 The gradualism of Indian reforms has been much commented upon and a brief digression on this subject is perhaps appropriate. This gradualism hasoften led to impatience on the part of many observers and Iconfess Ihave often shared this feeling of impatience myself. However, it is important to recognise that gradualism is perhaps an inevitable consequence of the compulsions of the democratic process in a very large and heterogeneous country. The heterogeneity of the country has produced electoral outcomes that have produced coalition governments at the national level in the past 15 years. This environment does not lend itself to quick decision-making and rapid implementation. It puts a premium on consultation and consensus building, which often takes time. It is at times opportunistic. Reforms that are in the pipeline get done when it is felt that a sufficient consensus has been built. This inevitably makes reforms appear piecemeal rather than a coordinated advance on all fronts in an orderly sequence. This approach undoubtedly has costs. The good news, however, is that though the pace of reforms has been slow, it has been steady and irreversible. We have now seen many changes of government, both at the centre and in the states. As governments have changed, parties that were earlier in opposition, and were strongly opposed to the economic program of the previous ruling party, have had the wisdom when they came to power not to change the broad direction of economic reforms. A particularly encouraging feature of Indian elections in recent years is that governments that have a good record of economic performance can get re-elected on the basis of their performance. Ten years ago, the conventional wisdom was that the Indian electorate had a strong anti-incumbency bias, which meant elections typically led to incumbents being thrown out irrespective of performance. That is not what has happened in the last 10 years. Governments that have been seen to deliver have been re-elected, both at the centre and also in the states. All of this suggests that the reforms we have seen will continue as governments at the centre and the states give greater priority to the development agenda. The pace of reforms will remain gradualist, but it will be steady. The favourable effect of reforms in generating higher productivity growth and, therefore, higher rates of growth of GDP can be expected to continue. 301 ORATION 14: INDIA’S PROSPECTS IN THE POST-CRISIS WORLD Demand-Side Constraints The supply-side approach discussed above needs to be supplemented by analysis on the demand-side to establish that India will be able to generate a pattern of demand that can support higher growth. The most important demand-side constraint arises from the fact that the post-crisis world will be different from the world prior to the crisis. Growth in industrialised countries will be lower and the pace at which exports can increase to the US or Europe will be lower. This raises the question: if export prospects are likely to be weaker, how we can project more rapid growth for India? The answer is that we can do this if we can replace lost export demand with higher levels of investment demand, especially investment in infrastructure. India suffers from a significant deficiency in infrastructure and making up this deficiency will not only improve our competitiveness on the supply-side, but also will attract private investment. The strategy of replacing export demand with investment demand implies that imports will increase and, with exports expected to be subdued, this in turn implies that the current account deficit in the balance of payments will widen. This, as I have mentioned, is actually happening. Three years ago we had near balance on the current account. Today, the current account deficit is expected to be around 3 per cent of GDP. The viability of this strategy depends critically upon our ability to finance a current account deficit of this order. As I have mentioned earlier in this lecture, we are in a situation where we can reasonably expect to finance a deficit of this order through long-term capital flows, including through FDI. India has only recently begun to attract global capital and, as such, it is ‘under invested’ compared with other Asian countries, given the size of its economy and its growth potential. I conclude from this that whether we look at the supply-side or the demand-side, India is well positioned to experience a further acceleration in growth based on the continued pursuit of economic policies that have already yielded ample dividends. New Challenges Let me now turn to some of the challenges thrown up by rapid growth and the structural changes it produces. We have just begun the process of identifying these challenges for the Twelfth Plan so my list is necessarily TWENTy K .R . NARAyANAN ORATIONS 302 preliminary, but, subject to that caveat, I would list the following: i)achieving inclusiveness; ii) dealing with problems arising from imperfect and non-transparent markets that encourage market manipulation, corruption and cronyism; iii) managing the energy demands of rapid growth; iv) management of water resources; and v) meeting the challenge of urbanisation. Some of these challenges are not new but they will each be exacerbated by rapid growth. Each of them is formidable and calls for major policy initiatives. Because of the limited time available, I can only comment briefly on each of these. The Search for Inclusiveness The need to ensure inclusiveness is a major and continuing challenge. When the reforms were first introduced, critics charged that the new economic policies would damage growth and also hurt the poor. No-one today doubts that the reforms have accelerated growth, but there is concern that the growth unleashed by the reforms has not been inclusiveenough. The concern for greater inclusiveness surfaces in many different forms and all of them are relevant. In one variant, attention is focused on whether those at the bottom of the income ladder benefit sufficiently from growth. This leads to efforts to enhance incomes of the poor through various poverty alleviation programs. However, low incomes are only one part of the problem. Many families, whose incomes are above the poverty line, lack access to such basic services as education, health, drinking water and sanitation, and, where they have access, the quality of the service is unacceptable. Providing such access is also an important part of any strategy of inclusiveness. Inclusiveness, however, is not only about ensuring a defined minimum level of income and access to basic services. There are traditional concerns about inequality getting worse, or at any rate not getting better. There are also concerns about inequality across states and, in some cases, across regions within states. In the Indian context, inclusiveness also requires steps to overcome the exclusion experienced by social groups such as the Scheduled Castes and Scheduled Tribes, which have suffered historically from discrimination. These groups typically occupy the lower ranges of the income distribution and, as such, any strategy of poverty alleviation or even inequality reduction would definitely benefit them. But if inclusiveness is to aim at correcting for historical discrimination, and bring these groups on par with the rest of the population, it has to go 303 ORATION 14: INDIA’S PROSPECTS IN THE POST-CRISIS WORLD beyond mere poverty alleviation and reduction in inequality to address the larger issue of achieving equal proportional representation for these groups along the entire income distribution. Defined in this way, ‘group equality’ is not necessarily linked to reduction in overall poverty or reduction in general equality; it can in principle be achieved leaving the incidence of poverty and the level of inequality unchanged. Each of these distributional concerns is related to each other but is also quite distinct. It is perfectly possible for poverty to decline while inequality increases. Equally, inequality in the country as a whole may decrease or remain unchanged while inequality across states increases. Similarly, the economic conditions of the Scheduled Castes and Scheduled Tribes may improve but, if it leaves the gap between them and the others unchanged, it does not achieve social inclusiveness. Ideally, one would like to be able to claim an improvement in each of these multiple dimensions of inclusiveness, but that is not easy. This illustrates why it is so difficult to make an assessment about the inclusiveness of India’s growth process thus far. However, I think an apt summary would be as follows: 1. Available data firmly establish that the percentage of the population below a fixed poverty line, defined in terms of real consumption per head, has been falling. This means real income and consumption have increased even at the lower levels. The view sometimes expressed that ‘the rich have become richer and the poor have become poorer’ is, therefore, simply not borne out by the facts. However, the pace of reduction in poverty is much slower than one would have expected. The percentage of the population below the poverty line has been falling at about 0.8 percentage points per year. The latest Planning Commission estimate of poverty, based on the revised rural poverty line recommended by the Tendulkar Committee, indicates that 37 per cent of the population was below the poverty line. If this percentage declines at 0.8 percentage points per year, it would take 25 years to reduce poverty by 20 percentage points! This is clearly unacceptable and it should be the objective of policy to ensure that future growth must be made more inclusive. 2. There is evidence that overall inequality in consumption has increased but the increase is not alarming. The Gini coefficient of consumption has increased only marginally between 1999 and 2000 and 2004 and 2005 to 0.25 for rural areas and 0.35 for urban areas. These measures TWENTy K .R . NARAyANAN ORATIONS 304 of inequality are fairly low. The ratio of urban to rural consumption has remained more or less constant, suggesting no change in rural– urban inequality. 3. Inequality across states has increased in recent years, but it is not true that the poorer states have become poorer or experienced stagnation. In fact, some of the richest states (e.g. Punjab) have been growing more slowly than average while some of the poorest states (e.g. Rajasthan, Bihar and Orissa) have shown an acceleration in growth. More rapid growth has been experienced in states that were in the middle range (e.g. Andhra Pradesh, Tamil Nadu and Gujarat). 4. The size of the population that still does not have access to basic services (e.g. education and health) is larger than the percentage of the population below the poverty line. For example, whereas the latest estimates of poverty show 37 per cent of the population below the poverty line in 2004–05, in 2007–08, 43 per cent of children dropped out of primary school by the age of 11, 47 per cent of women gave birth unsafely (i.e. without at least a skilled birth attendant), 47per cent of children did not get full immunisation and 55 per cent of the population did not have toilets. It is important to note that all these indicators show improvement over time, suggesting that access to basic services is improving, but the extent of deprivation remains too high and, if the objective is, as it should be, to achieve universal coverage in these very basic facilities, we clearly have a long way to go. 5. As far as narrowing the gap between the Scheduled Castes and Scheduled Tribes and the others is concerned, there is no doubt that a narrowing is taking place, but the gap remains substantial in absolute terms. Accelerated progress in this area must be a major objective government policy and programs. 6. Equality of access to education is perhaps the most important factor for ensuring equality of opportunity, which is an important aspect of inclusiveness. The evidence here is mixed. On the one hand, enrolment in primary schools has increased significantly, being now almost universal, and is also now legally guaranteed by the Right to Education Act. However, dropout rates by the end of the primary level are 43percent. Besides, expanding access does not automatically ensure a narrowing in the quality of education across income classes, which is essential for improving opportunity. The quality of education in rural 311 ORATION 14: INDIA’S PROSPECTS IN THE POST-CRISIS WORLD economic use and to ensure effective maintenance of irrigation systems, but this is politically difficult. The alternative is to put in a system that will equitably ration water for different uses so that available water can be distributed to different uses and variations in supply can be met by fair adjustment of allocations for different uses. In practice, we have to use both prices and better regulation. Rational use of water calls for basin-specific strategies based on a scientific assessment of how available water resources in each basin can be allocated to different uses. It will be necessary to set up statutory water regulatorsto determine water allocation for different uses, such as household needs, agriculture and industrial use, with some method of varying entitlements for different uses in the event of variation in supply. A start has been made in some states (e.g. Maharashtra) but we have a long way to go. I am told that we could learn from Australia’s experience in the area of water management because water use in the Murray–Darling Basin showed many of the problems we are facing. Managing the Urban Transition A new challenge that the economy will face in the years ahead because of the acceleration in growth is that of urbanisation. The rate of urbanisation in India has been slow historically, but is expected to accelerate in future because of faster growth, especially non-agricultural growth. The urban population is currently around 30 per cent and is expected to reach 40percent by 2030, which means the urban population will increase from about 300 million today to 600 million by 2030. An expansion in urban population on this scale requires a massive expansion in urban infrastructure, especially if we keep in mind that only about half of those currently in urban areas are adequately served even by today’s standards. The resources needed to achieve this expansion in urban infrastructure are much larger than what the cities or local urban bodies can mobilise on their own. Lack of resources for urban development is partly a reflection of the fact that cities and urban local bodies in India have very limited capacity to raise their own resources. Most of the revenue generated from economic activity in the cities accrues not to the city but to the central or state governments, and there is much less devolution to city government levels [Document text truncated for crawler view.]