The state governments should design strategies so as to make them inclusive, says subir gokarn.
Tata Motors’ formal announcement of their decision to move the Nano project out of Singur brings to an end a rather complex story. It is complex because it is not at all clear who won and who lost, and whether the gains outweighed the losses. The collective stakeholders in Tata Motors obviously lost at one level, because, apart from the unrecoverable costs that they had already incurred, their strategy has been derailed. But, who knows? Locating the Nano project in a more conducive environment may ultimately prove to be its saviour.
The state of West Bengal may also have lost out in its ambitious plan to re-invent itself as a place to do business in. In the process, the government’s attempts to accommodate the changing aspirations of the state’s younger generations may have been permanently de-railed. But then, perhaps this episode shows us that the whole strategy was inadequately designed. It did not take into consideration the totality of stakeholder interests and, if not in Singur or Nandigram, it would have de-railed somewhere sooner or later.
And, while many people will portray Mamata Banerjee as the villain of the piece, there is always something appealing about the stubborn, determined underdog who brings down the rampaging giant — David vs. Goliath, Asterix vs. the Romans, Bhuvan of Lagaan vs. the British — the little guys are usually the good guys, at least in the story books. Will Ms Banerjee benefit from her role in this story to the extent that she will defeat the ruling Left Front in the next elections and give the state a new direction after 35 consecutive years of Communist rule?
There are all very important and interesting questions, but I would like to shift focus to what I think are some very significant messages from Singur for the fundamental transition that the Indian economy is going through. These are about some of the most basic issues that are dealt with in typical economics and political science textbooks — simple to comprehend in the abstract but, as Singur and many other episodes demonstrate, complicated in real life.
At the core of the situation are two economic issues — property rights and market efficiency. It would be fair to say that the entire history of land acquisition in pursuit of development in India has been plagued by problems related to the two. In the first few decades of the industrialisation-led growth strategy, large amounts of land were acquired for projects, but since these were typically set up in the public sector, permanent lifetime employment was an attractive proposition for the people in the area, whether they owned land or not. Pricing was also not as significant an issue because there really weren’t any obvious benchmarks set by competing bidders.
That scenario is now obsolete and the dominant role of private enterprise in large industrial projects completely changes the equation. Nobody can be guaranteed a job, even a temporary one, even people with appropriate skills, let alone those without any. This immediately differentiates between those who “own” land and those who don’t, since only the former are likely to benefit from the transaction. Even with this group, there are potential problems. First, in our agrarian context, property rights are difficult to establish. Second, in a market framework, ownership is, by definition, a full and exclusive claim on the market value of the asset owned.
In many instances, if this value were paid, the economics of the project would suffer. State intervention will certainly help to make the whole transaction more efficient and transparent, but it can also hinder the process of price discovery, so essential to an efficient market. The question is: are the benefits from the first large enough to offset the possible losses from the second as far as land-owners are concerned?
The second economic issue is essentially the problem of differential benefits. The threat to the livelihood of agricultural wage labour is significant. In any realistic scenario, the majority of people who worked on the land without owning it are unlikely to be considered for employment in the project that displaces them. The public sector would hire them all, with state finances effectively subsidising it. Private investors, however large-hearted, cannot afford this luxury. If a state government wants to promote industrial investment in previously agricultural areas, it better have a plan to mitigate the threat to the livelihoods of a large number of people who cannot claim property-related compensation.
The political issue is about the ability of a pluralist democracy to make long-term commitments. The economics of large projects are based on time horizons far beyond the span of one or two governments. They will become unviable if the commitments made by one government are at risk of being retracted by a successor. The current trajectory of the Indian economy represents several fundamental changes in the roles and significance of various stakeholders.
Public investment is making way for private enterprise in an increasing range of activities. The overarching industrial policy framework, which determined where investments would be made and how much, has long since disappeared, being replaced by an openly competitive bidding process being conducted by state governments. Dealing with the transformation will require concrete and credible long-term commitments by government to both investors and workers. This can only happen when parties across the entire political spectrum in a state agree to a common policy framework and stand by it whether they are in office or out of it.
“Multipartisanship” is essential to the government of the day being able to compete successfully in the race for new investments. This means that its industrial policy statement needs to have the endorsement of, at the very least, all parties who have the potential to form a government in the future. The need for such endorsement may impose limits on what the government can offer investors, but, it will undoubtedly provide the assurance that what is offered will not be retracted. For the typical project, a stable environment is more important than a fiscal or regulatory concession.
The simple message from Singur to state governments is: don’t assume that you have a monopoly on advancing the interests of the state. The more inclusive the process of designing your strategies is, the more likely they are to succeed — whether you are in office or not.
The writer is Chief Economist, Standard & Poor’s Asia-Pacific. The views are personal
