The process of economic reforms in India has had a curious pattern, lethargy punctuated by occasional bursts of activity. After dramatic reforms in the 1990s, recent years have seen only occasional and limited economic reforms with no coherent framework. It’s not for lack of ideas — proposals for reform flow in from all quarters. The usual explanation is to blame the UPA government for lack of political will and lack of courage.
Is this the basic cause or is there perhaps a deeper reason for this pattern — one due to the tension between our long-held notions of entitlements and the more recent ideas of economic incentives?
India has a long history of ma-bap sarkar, the idea that the state should provide. In the 20th century these feudal traditions joined with ideas of entitlements drawn from socialist thinking to become the dominant perspective. The concept of publicly funded education and basic health services rightly found wide acceptance. But in recent years many more economic ‘rights’ have been proposed.
Another perspective however also evolved in the 20th century by those who stressed the need to increase economic activity and production. They argued that those who invest and take risks needed a liberal policy framework that offers incentives and rewards. These ideas became widespread in developed countries and in developing countries such as those in Southeast Asia, but they were late in coming to India, essentially only (and partially) after the 1991 reforms.
The problem is that it takes several years before reforms lead to results, while the impact of entitlements and subsidies is immediate and visible. Not surprisingly, a powerful constituency has formed behind an entitlement approach to development and poverty reduction among political parties, academics and civil society organisations. Governments on the other hand also have to worry about paying the costs of entitlements.
So the UPA government, realising that the best way to finance ambitious entitlements is through rapid growth and rising revenues, has striven to continue the reform process that started in the 1990s. But the result has been a sort of stuttering process that disappoints everybody. Yet reforms and entitlements need not necessarily be in collision.
Agriculture, which still provides the livelihood to nearly 70 per cent of our people, provides a striking example of this. The 1990s reforms, which transformed trade and industry, largely bypassed agriculture, which still faces restrictions on internal trade and investment in value chain distribution networks (farmgate to dinner thali), a heavy role by government agencies and frequent changes in export/import policies. So, agricultural growth has remained low and, more worrying, yields of major crops have hardly risen — a big reason for the high inflation we are seeing. Agriculture cries out for reforms.
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Perhaps even well-informed (urban) observers do not realise how central agriculture is to overcoming mass poverty in India. We have about 100 million poor farmers with less than a hectare of arable land. Together with their families, they comprise about 500 million people and include a large majority — some 75 per cent — of India’s poor and food-insecure. Even in the medium-term, urban areas cannot possibly provide jobs to them. If we cannot address their poverty there is little chance of significantly reducing overall poverty. But if we can, migration to cities will ease and dealing with urban poverty will become much easier.
Smallholder families are hard-working farming people. What they need is access to better seeds and fertilisers, financing and extension services to utilise these inputs and undertake investments to improve farming practices and water use. And fair competitive markets for their produce. The capacity of poor farmers to use such opportunities to increase output and work their way out of poverty has been repeatedly demonstrated in India and elsewhere. And don’t forget — a growing smallholder farm economy will generate demand for local crafts and services and thus give jobs to other poor rural people. But somehow, the idea that poor but productive people require not hand-outs but a hand up the economic ladder still seems strange to many.
Of course, not all smallholder farmer families will be able to take advantage of opportunities that agricultural reforms will open up. There will be perhaps 25-30 per cent with too little land or skills, as well as particularly vulnerable groups like pregnant women, the old and infirm. For them a safety net providing food as well as cash directly or through schemes like MGNREGA is essential. Equally important, their children, especially girls, must have access to education with mid-day meals and basic health services, so that they can gain the skills for a brighter and more productive future. Hopefully, the proposed new food security bill and related programmes will assure such a safety net.
We pride ourselves on our unity in diversity. So shouldn’t we be able to harmonise economic reforms and entitlements? The key is that reforms must give attention to the needs of the poor, especially the rural majority of the poor, while entitlements should be seen as investments to empower the poor and not make them permanently dependent on subsidies. So, what we need is a second generation of reforms that cover not only industry and finance but agriculture, coupled with focused entitlement programmes that create a coherent safety net for the poorest.
Together they will foster rapid growth as well as equip the poor and hungry to enter economic processes and take advantage of the opportunities a growing economy will generate. Then we could have truly inclusive growth that will make our human development standing a matter of pride rather than embarrassment and shame.