Category Archives: Society

Collection of essays in English on social and economic issues.

A CNBC TV18 Column

June 19, 2018 – 2:27 pm

This is a fortnightly column. A new piece should be added to the list every two weeks.

https://www.cnbctv18.com/author/dipankar-dasgupta-297/

By dipankardasgupta | Also posted in English Compositions | Comments (0)

The Price Being Paid

November 15, 2016 – 5:06 pm

(This is a slightly revised version of an article published by The Telegraph, Kolkata on 15 November, 2016. The link for the Telegraph article is http://www.telegraphindia.com/1161115/jsp/opinion/story_119149.jsp#.WCs58vl97IU)

There is an elementary piece of economic truth that remains unshaken since time immemorial. Put simply, it runs: “Nothing comes from nothing”! Or, using economic jargon, there is a price to be paid to ensure any outcome that generates comfort. At the level of the individual, a decent dinner calls for a payment. At the level of society, weeding out black money from the system calls for hardships as well. To be borne by millions of innocent common men and women queueing up in front of ATM kiosks to withdraw measly sums of cash to try and satisfy their demand for daily essentials. According to reports, the hardship has been somewhat extreme, for some senior people at least are said to have collapsed as they waited endlessly on the streets for their Rs. 2000 in cash. And died, as NRI’s sitting in Japan were clapping and giggling away in vulgar glee that the motherland they never intend to return to was being cleansed.

Quite obviously, the shortage of cash in the pockets of the unlucky ones living in India will ensure that they restrict their expenditure to commodities that are truly necessities. Since creating a shortage of currency in the economy was never known to be an antidote to profane corruption, essential commodities can well disappear for a while from the markets, hand in hand with dirty money. The example that comes readily to mind is the case of common salt. The price of salt soared up for no obvious reason from Rs. 12 to Rs. 300 per kilogram, if the news channels are to be trusted. Despite claims to the contrary, in some areas of the country at least, salt appears to have turned into the scarcest of commodities. When an essential commodity turns scarce relative to the demand for it, people need to spend more to acquire it and the spending in the present instance is taking the form of toilsomely acquired cash, recognized white cash, that is turning instantaneously into black money.

This of course is the least important of examples of the re-emergence of black money even as the common man is bearing the labour pains necessary to deliver a clean India. A new class of middlemen has sprung up that, according to reports, is exchanging bad money for good by charging a premium. How they are managing to get rid of the bad money they are accumulating is for the law keepers to figure out. However, there were at least two persons who were interviewed by TV channels, one located in Delhi and the other in Mathura, who claimed to be ready to perform, and openly so. One of them was ready to offer coins in exchange, quite independently of the total sum of money being exchanged! Hence, one probably hears further that Rs. 10 coins too now stand banned. These individuals could well have been bluffing of course. However, given that the formal banking system is yet to penetrate vast areas of the country, one can easily guess the nature of happenings right now, beyond the boundaries of the metropolitan areas.

Powerful money lenders have not disappeared from our rural economy. Nor have poor farmers and landless labourers. These latter groups of people are doubtlessly being charged steep rates of interest for the white money they are borrowing to sustain their hand to mouth existence. Classroom economics too teaches us that interest rates rise with a fall in money supply relative to demand, though the channel through which the rise comes about is quite different.

The immediate impact of stripping Rs. 500 and Rs. 1000 notes of their legal tender status is a fall in the money supply. This results in the existing money demand as a whole (i.e. demand for currency plus money in the form of bank deposits) to exceed the new money supply (i.e. the sum total of bank deposits and the reduced currency supply). Textbook logic tells us that the excess demand for money leads to a sale of interest bearing financial assets in search of non-interest bearing money required to carry out daily transactions. The rush to sell off such paper assets leads to a fall in their prices relative to the face value of their nominal returns. This works out into a rise in interest rates. Whichever way we look at it then, interest rates in general are likely to go up in the near future, when the business sector, backed by the government, has been clamouring for lower interest rates. Ironically enough, we are told that Mr. Raghuram Rajan refused to serve a second term as RBI Governor on account of his disagreement with the government over the very same interest rate issue. He was not in favour of low interest rates, given his concern about inflation.

Higher interest rates can cause a fall in the demand for loans to purchase durable consumer goods, thus slowing down the manufacturing sector. It will also reduce the demand for loans on the part of the manufacturers to purchase raw materials. This in turn will weaken the demand for transport services required to deliver finished or semi-finished products and reduce along with it the incomes of daily wage earners in that sector.

There is yet another route through which such transport services can be affected and this is not linked to interest rates. Given the telltale signals that the problem surrounding the shortage of currency is not about to disappear soon, many of the markets where cash transactions dominate will come to a standstill. In such markets, neither will the grocers be able to sell, nor buyers be able to buy. Consequently, business activities will dry up in the “short run”, which in turn will affect the transporters to these markets.

The price then is being paid and will continue to be paid till the cash supply turns normal in the economy. Normalcy though does not mean smoothly working ATMs alone. Let us recall that a huge chunk of money has been banned from the system. Presumably the RBI will increase the money supply back to where it was before demonetization through repo rate reductions, open market operations and so on. The interest rate will fall again perhaps, but as most commentators have noted, this by itself is unlikely to eradicate corruption.

Instead it could well turn out to be a story of new black money driving out old black money. If demonetization turns out to be the chosen tool for getting rid of black money, then the policy has to be repeated over time. Perhaps this is what the government has in mind, going by the announcement heard from Japan. More is in store we were told, beyond 30 December. In the meantime though, the growth rate of the economy might fall during the second quarter. Combined with the first quarter low growth rate, the annual growth rate is almost certain to be lower than projected. And we have no clue at all about the inflation scenario that might emerge.

Robert Lucas, Nobel Laureate and father of the Rational Expectations School of thought had an important piece of advice for governments engaged with monetary policy. He believed, on the basis of his theory, that monetary policy was not likely to have any perceptible impact on an economy unless it took the shape of random shocks which caught the populace unawares. However, repeated random shocks, even if they produced intended results in the immediate future, were likely to destabilize the economy and result in unwarranted economic cycles.
Perhaps the Government of India has a lesson to learn from Lucas and stop gloating over the shock therapies it is planning for the nation. A price is being paid right now, but one cannot fool all men for all time.

The economy had better improve in the not too distant future.

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Naiveté of Civil Society and the Bengal Elections

May 9, 2016 – 7:56 pm


A slightly revised version of an article titled “Elections and naiveté – Dreams of change and their unexpected aftermath” published by The Telegraph, Kolkata on 6 May, 2016.

Photograph -- The Telegraph, 6 May, 2016

Photograph — The Telegraph, 6 May, 2016

The Holy Roman Empire – which, according to Voltaire, was neither “Holy”, nor “Roman” nor an “Empire” – lasted for a thousand years. And it took an insatiable Napoleon Bonaparte to bring it to its knees. By comparison, three decades and a half of Left rule in the state of Bengal would appear to be infinitesimally small, though it had managed to be viewed by all concerned as the Holy Bastion of Marxism during its tenure. No Voltaire was around to pronounce judgment on its Marxian virtuosity or its holiness for that matter, but few ever doubted the impregnability of the fortress. Yet, it was razed to the ground, and that too by a sundry political force, lacking any political philosophy worth noting, apart from its one point agenda to dislodge the Left. But it did have a mini-Bonaparte of sorts to chalk out its battle plans, beginning, among other things, with a much advertised fast.

The year 2011 might be compared to the year Napoleon won the battle of Austerlitz. It was the year the leftists succumbed under the sky resounding call for paribartan. To the extent that paribartan stands for change, it is not entirely impertinent to ask what it was that the Bengal electorate rushed forth to transform. Was it a political power that Bengal, especially its intelligentsia, wished to replace by another? Or was it an attempt to exchange one romantic dream for another? Before addressing this question, however, other issues call for attention.

The arrogance of the left and the superciliousness it handed down to those who failed overtly or covertly to tow the party line is far too well-known to merit discussion. Its conceit was meticulously doled out to the cadre in the shape of half-digested Marxist jargon. This columnist recalls for example the verbal torture he had to endure once at the hands of the babus of the Kalyani University administration during a train ride to Sealdah station. The inquisition he was subjected to concerned the academic discipline he was associated with. The subject being Economics, and not Physics or any other natural sciences, the cross examination was intense, as it brought up questions relating to the links between Das Kapital and the Economics courses students ought to be taught.

The incident described could not have been a solitary experience. Endlessly many had been subjected to such humiliation for the unpardonable crime of not chanting Marxist shlokas at random or, for that matter, not raising their fists in tandem with ear splitting lal selams. While the Left Front’s messing up of industrial growth was a cause of disenchantment therefore, there were other reasons too which might have peeved the voters in the state, especially those who didn’t lack the education to argue on their own. Unfortunately though, such persons were in the minority, given the Left Front’s policy of combining deindustrialization with the creation of brain dead supporters.

Nonetheless, the state of affairs could have continued to be in situ and the state might still have been under the Left Front rule, had it not been for two vital factors. The first of these of course was the Nandigram incident. At its height of power, the government had engaged in far greater violence in Marichjhapi. However, unlike Marichjhapi, Nandigram involved police firing on people who were unquestionably settled in West Bengal. Who was it that issued the lethal order was irrelevant. It was undeniably the police that had fired the bullets. The hypnotic power of the red rule was evidently shaken by its own colour. The colour of blood, extracted by gun wielding policemen. For the first time perhaps, rural Bengal began to think for itself. The Messiah, if not obeyed, was capable of resorting to tyranny. The Chinese government can get away with a Tiananmen Square, but not the Left Front in West Bengal. Decades of unquestioned rule notwithstanding, the fact remained that India’s democracy required a government to be elected every five years. It is easy enough to argue of course that political opponents had cunningly organized the suicidal mass movement in Nandigram. Such arguments, if correct, merely strengthen the perception that the Left Front’s influence was on the wane. What needs to be further emphasized is that the forceful acquisition of land in Singur left to itself, would probably not have caused the havoc that Nandigram did.

The second, and possibly more powerful factor that added fuel to the fire was the role played by civil society. As argued above, a section of the intelligentsia was anti-Left in any case. They were now joined by the Left defectors as well. Poets, novelists, well-known personalities from the world of entertainment took up the cause. They used their oratorial skills, the might of the pen, TV panel discussions and protest marches to bring down the ruler. And they lent their support to a candidate who had even fasted in the interest of the oppressed, even though the person’s political ideology remains unclear till this day. The change did come about, a monumental change, way beyond the realm of possibilities ever contemplated.

It is not difficult to guess what the rural masses expected of this brand new government. Return of Singur land perhaps, clean drinking water, negotiable roads, occasional visits from the freshly elected and, most importantly, jobs for survival. However, what had the urban intelligentsia asked for? Was it a new political philosophy that it had hoped to emerge? Probably not. The events preceding the 2011 Left debacle were unlikely to have aroused political thoughts in the minds of those who were expected to be capable of thinking. It appears as though that civil society was absorbed in playing out a fairy tale, involving the choice between good and evil. The Left was identified as the evil and the opponents as good. The much applauded paribartan was a clarion call for the arrival of the good.

The good managed to find a name for itself, the “Mother, the Earth and the People” (MEP), whatever the expression was meant to represent. If it stood for a political philosophy, it is unlikely that the eminent personalities, whose support catapulted the government to power, themselves understood it clearly. They were satisfied though that the Holy Marxist Bastion had been demolished. They forgot too that Napoleon had already declared himself Emperor at least two years prior to Austerlitz. Legend has it that Beethoven had reacted to the news with disgust: “Now … he will tread under foot all the rights of man, [and] indulge only his ambition; now he will think himself superior to all men, become a tyrant!”

History in Bengal, it would seem, followed a reverse course! It is well after 2011 therefore that the renowned personalities, who had sung paeans in praise of MEP (reminding one of Beethoven’s dedication of Eroica to Napoleon) and inspired the public to shoo away the Left, are now lining up before the Election Commission with complaints against their darling and idol. The Good Samaritan has spent five years since 2011 to lose the warm glow, and is viewed now by the intellectual admirers as neither Good, nor a Samaritan, but simply as a politician hankering after power, not unlike Napoleon once again.

Confusing a politician with a Good Samaritan shows depths of naiveté to say the least. MEP may lack philosophical underpinnings, but not the ability to engage in strategic planning. The intelligentsia too has produced its own supply of turncoats. A new breed of self-seeking intellectuals has emerged therefore to keep MEP rolling. As Orwell might have observed, the creatures outside, not excluding civil society itself, are looking from MEP to non-MEP, and from non-MEP to MEP: but it is impossible to say which is which. Perhaps Bengal has merely reached the thirty-ninth year of its own Holy Roman Empire.

 
 
 
 
 

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Investigating Investment

December 30, 2015 – 12:03 pm

 

Published in The Telegraph, Kolkata on 30 December, 2015.

grim

Listening to the acrimonious debates surrounding West Bengal’s inability to attract high profile investments, an economist ought to ask two important questions; ques-tions which might even appear to contradict one another. First, why are investors reluctant, if they indeed are, to invest in the state? Second, will a surfeit of investment help to eradicate the scourge of unemployment afflicting this economy?

Before proceeding to address these questions in turn, it is worthwhile to ask a third investigative question pertaining to the factual scenario. Is West Bengal truly lagging in terms of investment? The Annual Reports of the Department of Industrial Policy and Promotion (DIPP) published by the Ministry of Commerce and Industry can help resolve this issue. The latest report for 2014-15 throws up data on investment expenditure in the country during the period 2009 through December, 2014, listing in detail the number of investors and the corresponding total investments undertaken annually in the different states as well as the country as whole. For the sake of simplicity, however, it is helpful to study an average figure, investment per project, for the entire economy and that for the state of West Bengal. As the graph illustrates, West Bengal trails behind the country in terms of this average and that the gap appears to be increasing. The figures are not corrected for inflation of course, but the character of the picture is unlikely to change even if the calculations were to be carried out at constant prices.

Although West Bengal is worse off, it is suffering from a relative disadvantage at worst. In absolute terms all parties are affected. It is in this context that the first question assumes relevance. Why are potential investors shy at all, of investing not merely in West Bengal, but elsewhere as well? The science of economics, sadly, has no straightforward answer to the question, except to point out that entrepreneurs as a class cannot foresee with clarity whether the potential produce flowing out of the factories and machineries they set up will be matched by a demand for it. An unwillingness to install equipment results then from gloomy expectations about the future. And this, irrespective of the availability or otherwise of adequate infrastructure, cheap labour or what have you. Indeed, a shortage of infrastructure could not possibly have unleashed the sub-prime crisis in the US or the financial crisis of the far east in the late nineties. Infrastructure, such as electricity, roadways and ports are surely necessary to attract investment, but they cannot guarantee that investment will actually arrive.

Of course, one need not consult a trained economist to come up with this conclusion. However, the converse question is less easy to answer. What is it that does induce entrepreneurs to invest? It is interesting to recall John Maynard Kenyes’ views on the subject. In his classic, The General Theory of Employment, Interest and Money, he observed that the uncertainty facing an investor is hard to resolve by means of a mathematical calculation of probabilities. To quote from Chapter 12 of the book, “… a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits … Enterprise only pretends to itself to be … actuated by the statements in its own prospectus … Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. … This means, unfortunately, … that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man.”

If Keynes was right, and nothing noteworthy has happened to the world’s economies in the course of the 80 years or so since the publication of the book to prove him wrong, then large entrepreneurs, foreign or local, are possibly viewing the prospect of setting up shop in West Bengal (as well as in a few other parts of India) no differently from arranging a cricket match in Antarctica. Politicians travel far and they travel wide, governments create single windows, hold business summits and rope in stalwarts from the world of entertainment or sports to anchor reality shows, and ministries are said to be at their wits’ end to convince Central Banks to lower interest rates. But whether these campaigns will touch the right chords in entrepreneurial hearts and arouse their animal spirits remains as obfuscating a query as the mystery of the Holy Grail. So much then for the colour of the carpets being rolled out to invite private investment.

The stage is ready now to face up to the second question. Can a growing investment expenditure path serve as a panacea for every possible economic malady, in particular one as painful as unemployment? Although it is generally believed that investment cures unemployment problems, modern technology, which is moving rapidly towards automation, appears to suggest otherwise. Except for the super-skilled, labour is being relegated progressively to the status of a superfluous factor of production. Uninterrupted growth of investment in modern technology may then be accompanied by a concomitant growth in traditional labour intensive production processes. This is apparent from the way unregistered manufacture has been behaving in West Bengal for the last few years, its annual rate of growth being consistently higher than that of registered manufacture.

Quite apart from the automation question, a steady rise in investment expenditure, as Evesy D. Domar had pointed out in the distant past (1947), impacts the economy in two distinct ways. First, the expenditure creates incomes, and expenditure out of incomes create further incomes and expenditure. The total expenditure so generated represents a growth in demand for produced commodities via the so-called Keynesian multiplier channel. Second, investment in plant and machinery brings about an expansion in the capacity to produce more commodities. The stream of demand is determined by the propensity to spend out of investment led income growth. The second effect, viz. the expansion in capacity is a technology driven matter. There is no reason why capacity expansion should be matched by the demand expansion. If the former should exceed the latter, then excess capacity would emerge, which in turn may dampen the flow of investment. And the latter could end up throttling the growth in demand too.

Needless to say, an open economy will not depend on investment generated domestic demand alone. A surge in investment and capacity growth in China for example catered to large scale exports. Not that the multiplier led improvement in domestic demand was a silent bystander in China’s success story; but the fact that few or no commodities that do not display a “Made in China” stamp are sold in the US (or even in India, if one restricts attention to specified groups of commodities), proves that exports played a major role in lifting up the Chinese economy. And now that Chinese exports have weakened following the indifferent performance of world markets, even crude oil prices have assumed a wistful weeping willow appearance. China’s domestic demand has not been able to save the situation.
There is yet another major factor that needs to be borne in mind in the Chinese context. Keynes’ overt reference to political and social atmosphere is soaked in wisdom. One hears of incidents in China, such as waking up workers for Apple Industries in the middle of the night to ensure that a sudden arrival of order may be attended to with alacrity. A democratic society, however corruption ridden it may be, can hardly hope to replicate such tales.

Investment therefore, even if indispensable, can bounce back as well.

 

 

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Presidency’s Dilemma

May 16, 2015 – 2:18 pm

Published in The Telegraph, Calcutta on May 14, 2015

 

presidency dilemma


 
Intriguing things are happening in Presidency University once again. Students laid a night-long siege, demanding from the vice chancellor and other officials a uniform procedure across all disciplines for entry into the university. Having grown up in a world where infants barely out of their cradles are subjected to admission tests, their demand can hardly be described as unnatural. In fact, the very removal of an admission test itself may appear to them as a denial of a fundamental right. On the other hand, the right to “deny” clearly rests with the authorities in charge of running the institution. And the authorities do not appear too excited about the idea of admission tests. Nothing unnatural in this either. The institution lacks the necessary infrastructure as well as internal faculty strength to carry out the exercise.

As far as the scarcity of examination halls is concerned, the matter may presumably be attended to by renting in premises for the purpose. This procedure is not unknown, since it is a policy that many other reputable institutions follow. The faculty shortage difficulty is less easily addressed, especially since the university aspires to represent the quintessence of academic attainment. Academically outstanding people are usually not available on lease to evaluate admission-test answer scripts. Committed academics, with proven excellence, need to be located instead and shifted to the university as permanent employees. The university has succeeded to an extent in attracting such talent, though not fully so. Several faculty positions still need to be filled up and the VC cannot be held responsible for not being able to fulfil an impossible dream.

If media information is to be relied upon, the administration is engaged in discussions with the student body to find out possible ways of escaping the impasse. While that process is on, it is not entirely irrelevant to reflect upon the history of admission tests in the erstwhile Presidency College.

Prior to the mid-Seventies, the college did not conduct admission tests in a majority of departments. In particular, the science faculties depended solely on the “cut-off mark” criterion to determine the quality of students. At the same time, there were departments – such as economics, English and history – that did conduct admission tests. In this columnist’s perception, they did so primarily to judge the applicants’ command over the English language. Indeed, he was himself asked to write an essay on a subject quite unrelated to economics to prove his worthiness to being admitted to the economics department. It was a weighted average of the marks obtained in the admission test and the immediately preceding university or board examination that determined a candidate’s eligibility.

However, as noted earlier, most departments, including physics and geology that housed the cream of the student body, felt no need to arrange for admission tests. And neither students nor the faculty ever complained of any massive damage caused on that account. The college resorted to conducting admission tests for a majority of departments (possibly all of them) around the second half of the Seventies. As far as a teacher from that era can recall, the practice began in the year 1976 – that is, at the fag end of the Siddhartha Sankar Ray government and a year preceding the Left Front capturing the Writers’ Buildings. Thus, the Left Front, even though it has been accused of making a fetish of mediocrity during its tenure, was yet to take charge of the devastation of education in the state.

The state, however, was passing through a period of instability in the mid-Seventies and the Ray government will go down in history for precipitating a holocaust on teenagers of the time. How education suffered in those days is a matter of speculation perhaps, though many feel that the manner in which board as well as university examinations were run during the troubled times had little to recommend for itself. It is tempting to extrapolate from this observation that the college in its entirety began to question the merit of relying on the marks secured in higher secondary or similar examinations alone to judge the quality of entering students.

It is possible, therefore, that the college authorities decided, and decided rightly, to initiate admission tests in most departments, to ensure internally as well as externally the quality of the students being admitted. And this practice has continued ever since. In the meantime, with a stable government in place, the lawlessness surrounding board examinations was gradually brought under control, but this did not impact the authorities’ decision at Presidency College to conduct admission tests. There were two reasons it would seem why the college did not feel over-constrained to carry out the task. First, it had not yet graduated to a university and second, there was no shortage of faculty. The size of the institution was, therefore, substantially small and the size of the faculty adequately large. Consequently, there were few difficulties surrounding the handling of admission tests.

A pertinent question might nonetheless be raised in this connection. If indeed the school leaving or other examinations had turned into a peaceful affair, why did Presidency College not revert to the earlier cut-off point system in the science departments at least. And the answer probably lies in the Left Front government’s morbid decision to view academic excellence as a form of exploitation by the so-called elite class. Means were devised to remove the potential sharpness of examination questions to distinguish the bright from the non-bright. These devious machinations engendered the all-too-familiar tutorial homes that not only substituted for classroom instruction, but even made the latter irrelevant.

A solid drilling in tutorial homes was a sine qua non for students to perform with so-called brilliance, though the brilliant performers were practically indistinguishable from one another, a phenomenon reminiscent of a scene from Satyajit Ray’s Parash Pathar, where each participant in a dance show was awarded a gold medal. Unfortunately, a similar flattening out process was underway among the ranks of the faculty at the college too. It is a wild guess perhaps that the college perceived that higher secondary marks secured by a candidate seeking entrance into it were not adequate indicators of quality and, hence, an admission test was in order. Alternatively, the continuation of admission tests even after social violence was well under control could be an indicator of bureaucratic inertia induced largely by an unimaginative faculty.

In any case, given the mediocrity of average faculty members (though not all of them), one wonders how promising candidates were picked out of the flock of tutorial-home-trained indistinguishable students. One suspects that admission tests were not serving any purpose at all. This does not mean that the college did not have its pool of competent students. It was a case of serendipity perhaps that ensured that a reasonably large number of meritorious students continued to graduate out of the college.

Whatever the true state of affairs might have been, there is little doubt that conducting admission tests for the much larger Presidency University now is a Herculean task. Whoever might be advocating that cause needs to realize that admission tests for all the departments cannot possibly accomplish the purpose for which the tests are designed. Till such time that infrastructure issues, and this includes faculty recruitment as well, are resolved, there will be no way of judging if an admission test supplementing a cut-off criterion will be more potent than the cut off alone.

Of course, tutorial homes still thrive merrily. Hence, a simple cut-off score may not solve problems either. Moreover, the issues motivating the students’ admission tests agitation continue to remain a grey area. All these confusions notwithstanding, Presidency University needs to view as well as project itself as a centre for super-excellence.

And therein, alas, lies the rub.

 
The author is former professor of economics, Indian Statistical Institute, Calcutta

 
 
 
 

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Troublesome landing — They don’t grow land anymore

April 10, 2015 – 11:32 am

(Published in The Telegraph, Calcutta, April 9, 2015)

 
 
land_telegraph_09april15

Singur, the potato bowl of Bengal, appears to have landed in trouble again. Not on account of unwilling farmers grieving over their lost assets, but on account of overproduction by the ones who didn’t lose their land. Excess supply of the crop has pulled down prices, leading indebted farmers to slither down the precipice. According to media reports, matters have come to a dismal pass, with a section of the farmers demanding that the Tatas be recalled to help rectify the situation. Industrialization, presumably rapid, will bring along with it employment for the farmers, thereby leading them out of misery.

Simultaneously, the Central government is leaving no stone unturned to ensure the passage of the land bill. What with its minority status in the Rajya Sabha, it is relying now on repeat promulgations of ordinances, till presumably, a joint session of Parliament will beget the act itself, the promised blueprint for industrial bliss. Unleashing the forces of industrialization is believed to be the sine qua non for economic growth, an adored goal for governments across our planet. Growth increases output and growth creates employment, as the recent Singur message appears to suggest. In his radio broadcast, the prime minister, too, has assured a job for each land-losing family, over and above the compensation offered for acquired land.

Availability of land, of course, is an essential precondition for building factories. It is a basic factor of production along with labour and capital utilized by industry. Of these three, though, land enjoys a unique position in that while the other factors can grow, land cannot. Widespread industrialization makes land increasingly scarce vis-à-vis other factors of production, leading to a rise in its market price in the vicinity of industry.

Let us concentrate, however, on the nature of technology associated with growth. As every budding undergraduate student of economics is aware, extra doses of capital and labour, applied to a fixed plot of land, cause aggregate output from an enterprise to rise, but the incremental output brought about by the extra labour and capital begins to fall eventually. Elementary text-books refer to this as the law of diminishing returns. Put somewhat dramatically, a banyan tree cannot be grown in a flower pot, unless it is cultivated as a bonsai.

A sustained rate of growth of per capita aggregate output will call, then, for forces that can negate the tendency for diminishing returns to capital and labour as they are applied to non-augmentable land. Quite obviously, the forces in question will assume the form of technological upgrades that will improve the productivity of capital as well as labour. However, a rapid rise in labour productivity may not necessarily be a phenomenon that acts in the interest of the labouring class as a whole, for it implies that any given volume of output will require a smaller workforce to produce it. The labour required by the industrial sector could nonetheless rise over time, provided, of course, that the size of the manufactured produce itself grows at a high enough rate to engage not only more productive labourers, but also a larger number of them.

Indeed, this is the way employment in China’s industrial sector behaved from 2003 till 2012, during which period the number of workers engaged in industry expanded from 159.27 million to 232.41 million. These figures translate to 21.6 per cent and 30.3 per cent of the total workforce for China. As opposed to this, India employed 24.7 per cent of its workers in industry in 2012, while in agriculture it had engaged 47.2 per cent of the workforce. The land ordinance or act is aimed at reducing the size of the agricultural workforce through allocation of land to industry. Even if the land reallocation goal is achievable, what is not clear is how the displaced agricultural workers will be rehabilitated as industrial workers.

There are at least two issues that need to be borne in mind in this context. First, India’s land area is approximately 2.97 million square kilometres as opposed to China’s much higher 9.33 million sq km. Further, India’s population density is around 421 persons per sq km as opposed to China’s approximate density of 145. In other words, not only does China have more land available in absolute terms to be distributed in favour of industry, it is also likely to displace fewer people in the process relative to India. In comparison with China, the law of diminishing returns is likely to work with a vengeance in India therefore, to counter which India needs massive access to productivity improving technology. And this, as already pointed out, does not send a cheerful message to the agricultural land owners. More productive industrial workers will probably give rise to greater, not less, unemployment in the workforce, especially for those displaced from agriculture.

A second issue that needs to be emphasized is that employment generation in the industrial sector is not merely a technological phenomenon. Industry does not produce output unless it can be sold. And the market for Indian goods is no longer restricted to its geographical boundaries. The country’s open economy policies are gathering pace and this means that it is rapidly transforming into one amongst the many producers catering to world demand. Its producers have to compete with foreigners for a rising chunk of the world market, and this too when the world market itself has been in doldrums for the last few years. Even China is showing signs of a slowdown, in spite of a political structure that allows workers to be woken up in the middle of the night to attend to lucrative export orders.

Whether India can harness the forces of technological advancement in industrial production and compete in world markets is yet to be seen. But even if it is successful in its endeavour, we are likely to be caught in a Scylla and Charybdis paradox, namely, needing to compete in a weak world market on the one hand and preventing unemployment from rearing its head at home on the other.

The implication of technical progress for employment may easily be gauged from the performance of India’s service sector, which produced 56.27 per cent of the gross domestic product in 2012 by employing 28.1 per cent of the workforce. China’s share of services by contrast was 44.6 per cent and its employment share of the workforce was 36.1 per cent. It is no secret that India has a giant lead over China in services and the secret of our success lies in labour saving technological innovations. Exactly the reverse situation prevailed in Indian industry in 2012, where 24.7 per cent of the workforce produced 26.21 per cent of the GDP. China on the other hand utilized 30.3 per cent of the workers to turn out its 45.3 per cent of the industrial share.

It is not entirely clear, therefore, that the magic of competitive growth in industry can be achieved through a simultaneous increase in employment of land and labour, even though the media reported the government to have made precisely this claim following the re-promulgation of the ordinance. If the assertion turns true, what is almost certain to happen is a growth in the ranks of the unorganized labour force working in the fringes of industry in townships surrounding industries.

Since land acquired for industrial use cannot keep pace with the growth in industrial capital and output, a steep rise in the price of land in the neighbourhood of industry can hardly come as a surprise. This had happened in Singur before the Tatas took the curtain call. As Mark Twain had famously observed, the best way to get rich was to buy land, since people didn’t produce it anymore. Some people out there are awaiting a bumper harvest therefore. Not of potatoes anymore, needless to say.

(The author is former professor of economics, Indian Statistical Institute, Calcutta)

 
 
 
 
 

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The Growth Narrative

March 10, 2015 – 3:08 pm

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Published in The Telegraph, Calcutta on March 10, 2015

Now that the clamour surrounding the 14th Finance Commission, the Economic Survey and the Union budget has subsided, it is time perhaps to sit back and reflect on the loads of sermons recently delivered by those who matter on the current and future state of Indian economy.

Curiously enough, the budget speech expects the economy to grow at the rate of 7.4 per cent during 2014-15, when the Economic Survey itself has expressed doubts on that score. To quote from the first volume of the survey, “Until a longer data series is available for analysis and comparisons, and until the changes can be plausibly ascribed to the respective roles of the new base, new data, and improved methodology, the growth narrative of the last few years may elude a fuller understanding.” However, in spite of the caution so expressed, the survey, too, projects a growth rate of 8.1-8.5 per cent for the year, 2015-16.

If this is not awkward enough, the observation made on March 5 by the Chinese prime minister, Li Keqiang, that China’s growth rate has reduced to around 7 per cent and may move up to 7.4 per cent next year amidst more “formidable” difficulties should make us wonder. What is so special about India that makes our government express grand euphoria? Apart from the growth-rate estimate, it appears that the consumer price index inflation rate has fallen to 5.1 per cent and the current account deficit to 1.3 per cent. These, according to the government, indicate that it has succeeded in turning the economy around dramatically, restoring macroeconomic stability and creating conditions of durable double-digit growth accompanied by sustainable poverty elimination and job creation.

Once again, a contradiction of sorts crops up here, given the Economic Survey’s observation that estimates of employment growth in India are “noisy” at best, and that the elasticity of employment growth relative to economic growth has declined in the 2000s compared to the 1990s. The last observation ought not to raise eyebrows at all, since the information technology revolution continues with grim determination to make technologies increasingly robot-friendly, turning gainful employment of human beings, especially unskilled labour, into an impossibly complicated business. And this is a dilemma that afflicts not merely the IT sector, but most of modern manufacturing as well. If labourers themselves are irrelevant entities, one cannot be sure any longer how India will manage to appeal to capital, be it foreign or domestic, to employ its much advertised pool of cheap labour.

In this context, the government should perhaps be commended for its announced intention of allotting additional funds towards the MGNREGA scheme for asset creation. One does not know yet what the nature of these assets will be, but hopefully they will open up avenues for employing students that the government has promised to help graduate from secondary schools across the entire country. Of course, since these goals, too, will be linked to technology-driven direct benefit transfers – the Jan-Dhan-Aadhaar-mobile-number trinity – one needs to wait and watch how smoothly the job-creation aim is fulfilled.

Leaving the nitty-gritty aside, there is a deeper issue of economic philosophy that the budgetary exercise appears to propose. To appreciate the matter, let us quote again from the budget speech, “Our stated policy is to avoid sudden surprises and instability in tax policy.” And this observation is supplemented by yet another. The government will create an atmosphere of “minimum government and maximum governance to improve the ease of doing business”. The idea of avoiding surprises as an economic policy, along with a small size of the government, goes back to Nobel laureates like Milton Friedman and Robert Lucas of the Chicago School and the so-called “rules versus discretionary policy” debate. According to these prescriptions, the government ought to interfere as little as possible in economic activities by announcing a predictable (monetary) policy. It should also restrict itself mainly to governance alone, reducing thereby the size of the public sector. Any other plan of operation on the part of the government, claim the proponents, will lead to cyclical chaos. The American economy played for a while with the Chicago philosophy and the outcome was not particularly encouraging. Indeed, if the Chicago policies had any merit in them, the world would have been spared of the sub-prime crisis. Nonetheless, the present Indian government’s intentions probably have the blessings of organizations like the International Monetary Fund and the World Bank.

India, of course, is a small player in the world economy. Hence, any economic disaster arising from the policies it adopts will largely be confined to India alone. Going by the recommendations of the 14th Finance Commission, the increased devolution of the divisible Central pool among states, along with a withdrawal of the Centre’s participation in Centrally sponsored schemes, appears to indicate that the Union government, at least, is getting ready to reduce its participation in economic activities, if not immediately, at least in the foreseeable future. If it succeeds in unleashing these policies, Chicago could begin to appeal to the state governments as well. One tends to worry about the final outcome, but the fact that the government has restrained itself from big bang reforms in one go is cause for relief to say the least. Some believe that the apparent change of heart is linked to recent political reverses.

The reduction in the corporate tax rate, however, is a move in the direction of new economic policies. The argument given in favour of this decision is that high corporate taxes tend to make our domestic enterprises less competitive. Besides, according to the budget speech, the move “will lead to higher level of investment, higher growth and more jobs.”

As far as job creation goes, technological barriers stand in the way, except probably in the case of small-scale enterprises. Regarding competition, investment and so on, an elementary Keynesian logic suggests itself. If we were to divide our population into two broad groups, rich and non-rich, the owners of corporate enterprises will mostly belong to the first group. Notwithstanding the ultra-rich individuals (as distinguished from corporates) whose tax surcharge has been raised, it is a reasonable guess that the policy of reducing the corporate tax rate, leaving tax rates for individuals unchanged, will raise the share of the disposable income of the rich in aggregate national income relative to that of the non-rich. Since the rich tend to spend a smaller fraction of their disposable income on consumption compared to the less rich, the result of the tax change will be a fall in the average propensity to spend out of total income in the country. Falling oil prices might reduce prices of commodities for a while, but expenditure as a whole might nonetheless decrease. If this were to happen, then the market size will shrink and it is not clear why a shrinking market will attract greater investment, leave alone create more employment.

Immediately following the budget presentation, however, the Central Bank has unexpectedly lowered the repo rate and this could produce an overall downward pressure on the commercial banks’ prime lending rates. This is likely to boost the real-estate market. Besides, a low interest rate regime will bring India closer to the United States, Japan and the Eurozone. The Indian stock market will consequently be a less attractive destination for foreign funds, thus depreciating the rupee. Indian exports could well gain from the resulting fall in the dollar price of domestically produced Indian commodities. These possibilities should move in a direction opposite to the earlier noted negative pressure on India’s commodity markets. The net effect is not obvious, needless to say, but if the markets expand, the credit will go to the Central Bank’s discretionary as opposed to non-discretionary monetary policy, rather than the fiscal stance of the Central budget.

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The Black Legend

November 17, 2014 – 9:29 pm

Published in The Telegraph, Calcutta on November 17, 2014

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Manik Bandyopadhyay, in his classic short story “Prehistoric” (pragoitihashik) created an unforgettable heroine, Panchi, a beggar by profession. Her means for attracting public sympathy was a purulent ulcer that stretched from one of her knees down to the foot. And she employed every possible precaution to ensure that her ailment remained untreated. It was the capital on which depended her very livelihood.

Panchi was born in the world of fiction, but most of us are familiar with her true life counterparts, endlessly many of whom inhabit this country. And paradoxically enough, not all of them are street beggars. Quite a few amongst them belong to the highest echelons of society, people who travel in fashionable cars, fly business class every now and then and last, but not least, pontificate inside the cool comfort of television studios on the failure of governments in power to rid our society of the ills that plague it so. Moreover, like Panchi’s attachment to her ulcer, they are all too conscious of the dire necessity of the failures in question to defy mortality, or else, like Panchi, they stand to lose the very instrument ensuring their survival. Along with them, the all pervasive media suffers as well, for its survival too depends in turn on the survival of the professional grumblers, known otherwise as the hallowed opposition in Indian democracy.

In this context, one social malady that has resolutely withstood the test of time in India is the issue of black money, the accumulated flow of alleged tax evading Indian incomes stashed away in bank accounts located in tax havens lying beyond the reach of Indian tax authorities. The opposition benches, irrespective of the political parties occupying them, have never ceased to criticise the so called “incumbent” for its inability to recover Indian black money from foreign shores or even its deliberate policy of protecting the favoured few by turning a blind eye to the problem. Further, the criticised often become the critic with fluctuations in electoral fortunes. Amidst this table turning game, however, the allegation against the government that it is overtly or covertly continuing to avoid solving the grisly problem continues to act as an unalterable constant of nature. Not so much because it is an accurately diagnosed disease, but more probably because, like Panchi’s ulcer, healing it will leave the opposition without a meaningful occupation.

Whether a reliable method exists for estimating the quantum of black money is itself a million dollar question. Nonetheless, endlessly many estimates have been heard of. Amongst these is the startling figure of US $ 1.35 trillion, amounting to around 75 per cent of India’s GDP in 2012-13. This figure, according to unsubstantiated media announcements, was revealed by a confidential report for which the government commissioned a reputed academic institution. The total sum includes black money held both in India and abroad and does not probably clarify their shares in the aggregate. As opposed to this, the Swiss Bankers’ Association as well as the Government of Switzerland claimed that the citizens of India held no more than US $ 2 billion in Swiss banks. While no authentic figure has emerged so far, it is nonetheless interesting to compare the Swiss assertion with our own. The figure of US $ 2 billion turns out to be around 0.15 per cent of the estimated total of US $ 1.35 trillion. The Swiss claim could well be unsound, just as the Indian estimate might be wrong. However, both parties have to be more than horribly incorrect if black money hidden abroad were to be treated as a problem worth a government’s serious attention.

To go down to the bottom of the problem, the Supreme Court appointed a Special Investigating Team (SIT) to come up with a dependable report on the matter and the government is said to have handed over to the SIT a list of some 627 persons holding accounts in foreign banks. As the grapevine would have it, a substantial fraction of these 627 persons are NRI’s who are legally permitted to hold foreign bank accounts. Moreover, their deposits need not have been generated out of black money siphoned off from India. No numbers in this context have sprung up yet of course, and one needs to wait for the findings of the SIT before jumping to conclusions.

In the meantime, one must not lose track of other tidbits of information that are catching public imagination. Amongst them, one claims that the information regarding the 617 persons was not received from the Swiss or other suspected banks. It appears that an unnamed person had been able to access the details using unknown means at his disposal and they were passed on to Germany, France and possibly other countries. These countries then decided to oblige the Indian government by sharing the yet to be confirmed information. Why these other countries would find it in their interest to rely on a private person’s investigations relating to Indian black money in Swiss accounts is anybody’s guess. One wonders in fact how France or Germany would have reacted to a report submitted to them by the Government of India on black money tainted French or German nationals. Especially so, if the report were based on revelations made by a private person of dubious distinction.

On the other hand, if indeed it turns out that around 600 plus persons own US $ 2 billion worth of black money of Indian origin in foreign banks, then this must surely be viewed as a grievous fault, though one would need to devise a super-sensitive instrument to measure the grievousness itself. First, going once again by unsubstantiated reports, US $ 2 billion constitutes around 0.15 per cent of the estimated total of US $ 1.35 trillion of black money held by Indians. The lion’s share of the black money, viz. 99.85 per cent, is then held inside the country itself rather than abroad. One cannot help wondering why 0.15 per cent is a more worrisome figure than 99.85 per cent. Common sense suggests that the glaring fault lies in the 99.85 per cent, if indeed that figure is correct, though one is aware at the same time that the veracity of the these much advertised figures is yet to be confirmed.

If the quantum of the fault constitutes an important question, the flip side of the coin should address the nature of the fault, as far as the damage to the Indian economy is concerned. During the year 2012-13, US $ 5 billion constituted a meagre 0.27 per cent of Indian GDP, while the balance out of US $ 1.35 trillion, viz. US $ 1.345 trillion, added up to 74.72 per cent. If black money is to be treated as lost government revenue and hence potential capital for economic development, then the 74.72 per cent ought to be viewed as incremental capital output ratio for the economy that could not be utilized due to tax evasion by Indians living in India. On the other hand, the foreign black money constitutes a trivial 0.27 per cent from the incremental capital-output ratio point of view. The productivity potential of the latter is negligibly small compared to the former.

Yet, the battle continues. A battle based not on crystal clear evidence, but on the unfounded estimates of the sort that this article relies on. It is quite possible of course that, thanks to the Supreme Court’s directives, the cynics will be proved mistaken and we shall soon decipher the holy grail of India’s black money legend. However, the public at large had better realize at the same time that a complete resolution of the problem will run counter to the interests of Panchi’s peers, engaged as they are in expressing prime evening time indignation over India’s Black Money horror.

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Train to Promised Land

July 7, 2014 – 1:38 pm

The latest debate surrounding the government’s decision to hike passenger fares and freight charges for the railways has dragged a skeleton out of the closet making the country turn white with fear.

As any undergraduate student of economics should be able to explain, the price of a commodity is the sum total of payments needed to induce service providers to transform the raw materials they have paid for into final products meant for different uses. The services in question tend to flow towards the production of commodities that yield the best return for them and markets function in the nature of sluice gates that ensure free economic activity. Preventing the free functioning of markets amounts to closing the sluice gates during a flood or not opening them during a drought.

Of course, when the government itself assumes charge of production, the market law may not apply. The returns that attract the government are hard to measure in financial terms. The government’s much lauded objective is the generation of social welfare. And once social welfare takes the driver’s seat, dry economic logic begins to sink into long lasting coma. The disastrous impact of the economic coma is invariably perceived in the long run and this is exactly where violated economic principles have the last laugh as they watch the economy crumble.

The railways in fact are a case in point. It appears that the branch of the Indian Railways that is concerned with freight transport earns substantial profits. On the other hand, the passenger service division has been merrily generating losses, thereby making it next to impossible for the authorities to keep things in healthy shape since time began. It is not hard to observe here a conflict between the two goals, monetary returns and social welfare. As far as freight traffic goes, the railways are mostly serving the private business sector that is engaged in profit oriented ventures. Consequently, even though run by the government, profit seeking through freight transport need not be inconsistent with welfare motives.

Passenger travel on the other hand is a totally different story, if railways are run by a government instead of the private sector. The government’s objective in this case should be the generation of passenger comfort and safety. And for this to happen, the burden of the fare imposed on the public must not outweigh the latter’s perception of the value of the comfort. This is all the more true since a section of the passengers are daily commuters to workplaces in cities from suburban towns. Such passengers usually include a large number persons belonging to the lower echelons of society, viz. the informal sector labour force. These individuals are deprived of social welfare benefits, such as dearness allowance, provident fund and so on, that the so called formal sector takes for granted. A major reason why the passenger division of our railways runs at a loss relates to accommodating these passengers, whom the Indian Government, even after enjoying more than half a century of economic independence, has not been able to endow with economic liberty.

Hence the question of subsidizing the passenger section of the railways, that is charging a price for the service that falls short of the expenditure involved in producing it. The costs, being financial in nature, have to be incurred from some source or the other. In the case of the railways, the source is readily available in its freight division coffers. Freight transport generates profits and these are siphoned off to cover the losses incurred in passenger transport. According to the Finance Minister, the figure stands now at Rs. 26,000 crore.

Using the profit of one organization to meet the losses of another is referred to as cross-subsidization and cross-subsidization runs counter to the logic of economics. Profits earned by a producing organization is a major source for the enlargement as well as improvement of its capital base. In the case of the railways, the capital base consists largely of infrastructure. Maintenance and improvement of infrastructure, both its quality as well as quantity (the freight corridor being an obvious example), helps to reduce per unit cost of transportation. Even if other costs, such as the cost of fuel and labour were to rise, investment in infrastructure has the beneficial effect of keeping transport costs on hold and along with it the prices of the commodities transported. Needless to say though, infrastructure building is a time consuming process, and to that extent its favourable impact on prices cannot be realized overnight. A period of waiting is involved, after which prices might be tamed, but the immediate impact of a rise in freight rates can be inflationary.

Cross-subsidization, however, rules out even the delayed gains. It prevents adequate investment in the freight sector and this in turn clogs up avenues leading to cost reduction and inflation control. The government’s decision to remove cross-subsidization can therefore be easily defended, especially from the point of view of eventual price control. Indeed, not only has the government decided to do away with cross-subsidization, it has announced an increase in freight rates too by 6.5 per cent. Given that the freight division is making profits, it is not clear why the increase in freight rates was called for. It is possible that the government is planning for a massive improvement in freight infrastructure and this requires profits in excess of what the railway freight service is earning now. Hopefully, the upcoming Rail Budget will throw some light on the issue.

As far as the passenger section goes, the fare rise has to be justified, partly at least, by the decision to do away with cross subsidization. But the government has announced its intention to come up with world class passenger services as well. The extra fare to be raised from passengers is therefore expected not only to eliminate subsidies but also generate adequate surplus to create infrastructure. And it is here again that time plays a crucial role. The increased fare has to be shelled out immediately, but infrastructure investment will bear fruit with a lag.

The government wishes to initiate tough measures and make the railways follow market principles. This makes eminent sense provided the market logic is carried to its logical limit, which involves minimizing the time gap between payment by a customer and the delivery of the commodity. Quite clearly, the government needs the money right away and this is what lies at the root of its decision to increase fares. However, given that the fare increase (somewhat reduced now from the initial 14.2 per cent) is motivated by the need to improve infrastructure, it is essential to specify a time frame for its delivery. In the private sector, when a promoter accepts advance payment for constructing a new residential complex, there is a pressure on him to deliver the flats within a stipulated period of time. A government that believes in market principles and abhors subisidies cannot behave any differently from the promoter.

It is imperative therefore not only to announce a rise in fare, but also the time horizon chosen to deliver world class passenger comfort. The government itself admits that passenger services are in miserable shape and holds past governments responsible for their failure to meet international standards. The point is well taken and the government’s decision to raise fares to help Indian Railways reach the coveted destination makes eminent sense. However, till that destination is reached, passengers (and the less privileged in particular) will be paying more for a state of services that the government itself deplores.

If past governments have to be criticized for indolence, the present one needs to act with alacrity. The immediate escalation of fares ought not to yield results in the distant long run, when, as Keynes had observed, we are all likely to be stone dead.

(Published in Telegraph, Kolkata, July 7, 2014)

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Industrialization in a Land Hungry State – A Lesson from Robert Solow

January 1, 2013 – 5:50 pm

Originally published in The Telegraph, Calcutta on January 1, 2013 under the title Exploring the Possible

 

If surviving the test of time is proof of quality, then MIT Nobel Laureate Robert M. Solow’s model of economic growth has surely distinguished itself with flying colours. The work was published as far back in time as 1956 and survives in the academic world till this day, despite the ruthless attack it had to face from Professor Joan Robinson of Cambridge, UK and her associates. Rightly or wrongly, the latter questioned the logical underpinnings of Solow’s work and the debate was intense enough to metamorphose childhood friends into bitter enemies belonging to opposite camps in their adulthood. The controversies ultimately waned out though, possibly on account of a workable alternative model of economic growth that the critics failed to provide.

The Solovian prescription for growth and the plans for West Bengal’s industrialization, one might suspect, are strange bedfellows. However, this, curiously enough, may not be the case. For sustained growth, Solow visualizes all means of production to be growing at the same rate in the long run.  The situation resembles the cloning of production organizations, two of which, identical in all respects, particularly in the use of resources, would produce double the output produced by one, three producing three times and so on. Amongst the resources, population, which acts as a proxy for the labour force, is controlled by demographic rather than economic activities. Thus, all other inputs, most importantly capital, need to adjust and grow at the same rate as labour and this in turn leads output too to grow at the same rate.

Interestingly enough, Solow was not overly worried about the land problem. His cloning exercise involves replication of production organizations that are identical in their use of capital and labour. But common sense suggests that two factories that use identical quantities of capital and labour, can be constructed only on similar plots of land. On the other hand, while both capital and labour can expand endlessly, at least for argument’s sake, the total quantum of land available on the planet  is physically limited. Thus, Solow’s cloning comes up against a major barrier, viz. the scarcity of land, unless of course one imagines production units to grow vertically upwards in search of the moon rather than spread horizontally.

Land of course does not concern Slow. But if it did, how should he have proceeded? The answer could probably be found in the special manner in which labour is treated in his work. A worker is both an embodiment of nature endowed muscle power as well as socially available technological skills. The stock of muscle power grows with the population. This is the demography story. Technological skills multiply too over time, but Solow was vague at best as far as the technology tale went. What he was clear about though was that his labour resource was separable into two parts, ability to work and the skill associated with that ability. The cloning in Solow’s model involves replication of capital and the joint person cum skill input. Capital and the joint input, and hence output, grow at the same rate in the long run, but the joint input itself grows at a higher rate than the rate of growth of population in isolation, since its growth rate is the sum of the growth rates of population and technology. Consequently, even as output grows at the same rate as the joint population cum skill input, it grows faster than population. This means that output finally grows faster than population so that per capita output rises in the long run, which is the objective of economic growth and development in most societies.

It is not output alone that rises faster than population. So does capital, since the latter too grows at the same rate as the population cum skill input. Suppose, however, that labour lacked the skill attribute altogether. Then growth in capital at a rate faster than population would have given rise to the same absurdity as factories multiplying over non-augmentable land.

Economics text-books assert that the extra output one can squeeze out of  fixed size inputs diminishes with each extra squeeze with the help of inputs capable of growth. Therefore, in the absence of skill formation, as we are temporarily assuming, if capital were to rise at a higher rate than the growth in population, then the resulting output would be growing at ever slower rates. The only steady growth the system will be able to handle would involve capital, unskilled labour  as well as output growing at the same rate. To the extent then that a rise in output per head of population is a desired goal of development, the Solow model has a pretty dreary prediction to make if skills fail to grow.

Speaking more broadly, skill improvement signifies technical progress and the Solow message is that per capita output growth is not sustainable in the absence of a simultaneous growth in technology. Solow restricted his exercise to capital and labour resources alone. However, there is no reason why we should not interpret his work to include non-augmentable land too. Just as skilled labour qualifies for a larger number of workers than a mere a headcount, so should land services not be judged by the geographical size of land alone. Like labour, effective land size could be larger than its physical size in the presence of land augmenting technical progress.

Given this Solow insight, it is not enough for the authorities in charge of this land scarce state to simply send blank invitations to industrialists to invest in employment generating projects. Instead of adopting a rigid stand on land policy, attracting thereby criticisms from its political opponents and raising doubts in the minds of potential investors, the government might be able to do far better by laying down an acceptable road map for the sort of industries the Bengal economy should be able to cope with. As matters stand now, such industries ought to be equipped with technologies that are simultaneously labour intensive and frugal in the use of land.

A number of service sectors might easily qualify, though it is doubtful that the IT sector belongs to this category. The IT sector is mostly skilled labour intensive and, as elsewhere in the Indian economy, its growth, however phenomenal, holds little promise for unskilled or semi-skilled employment generation in a large scale. Heavy manufacture too cannot qualify as was evident during the 600 acres controversy in Singur’s Nano factory.

It makes little sense therefore to throw open the land markets to all and sundry. Land being scarce, its market price will be prohibitively high for new ventures to be initiated. A far better idea could be to set up an expert group to identify those industries alone that are endowed with technology that is either capable of converting small land holdings into effectively large ones or require small land holdings relative to output. These are the industries that the government should be luring into the state by offering whatever incentives it is in a position to offer.

Despite the clamour raised by the Chambers of Commerce, it is unlikely that large scale industries will fulfill the criterion. Agro-industries backed up by multiple cropping could well be a solution. The hotel industry in remote tourist spots could work as well. Both are semi-skilled labour intensive and hotels can actually expand vertically. The list, even if short, needs to be carefully prepared instead of wearing the mask of an unqualified industry friendly face. Even if a large industry or two were to move into the land hungry state, it cannot open the floodgates for heavy industrialization. Instead of criticizing and lamenting over the impossible therefore, our time will be far better spent in discovering the possible.

 

 

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