Following is the Summary of ECONOMIC SURVEY 2016-17 – Chapter 13 – The ‘Other India’: Two Analytical Narratives on States’ Development
Overview:
This chapter looks into
- If the problems associated with foreign aid and natural resources internationally also cause issues in the Indian states.
- If the redistributive resource transfers (RRT) from the Centre and revenue from natural resources for Indian states produce state outcomes, including per capita consumption, GDP growth, development of manufacturing, own tax revenue effort, and institutional quality.
- Can RRT be tied to fiscal and governance efforts of the states as provided for by the Thirteenth Finance Commission?
- Can a universal basic income (UBI) be provided directly to households in states receiving large RRT and reliant on natural resource revenues?
Introduction:
The Indian growth take-off since 1980 is associated with Peninsular India, the states of Gujarat, Maharashtra, Tamil Nadu, Karnataka, Kerala, and Andhra Pradesh—which have grown faster and advanced more rapidly economically when compared to the so called ‘Other Indias’ the states including not just hinterland India, but also the India of forests, of natural resources, and states with ‘Special Category’ status.
The success of Peninsular Indian states has offered three interesting and different models of development:
- The traditional East Asian mode of escape from development based on manufacturing (Gujarat and Tamil Nadu);
- The remittance-reliant mode of development exemplified by Kerala;
- The distinctive, “Precocious India” model based on specializing in skilled services (Karnataka, Andhra Pradesh and Tamil Nadu)
Other states have been relatively less successful, but they are interesting in their own right because they have conformed to other models of development. This chapter studies two such models of development:
- Those based on “aid” or special status,( North-eastern states and Jammu and Kashmir and Himachal Pradesh)
- Those based on natural resources. (Jharkhand, Chhattisgarh, Odisha, and Rajasthan.)
The definition of natural resources includes coal, onshore oil and natural gas, major and minor minerals but excludes forest cover.
This chapter examines in an analytical manner the experience of these states.
Impact of Redistributive Resources
- At the time of India’s independence, most economists held that developing countries were poor because they lacked capital, so the key to development was foreign aid.
- There was only one possible exception to this rule- countries with vast amounts of mineral resources could mine and sell them, allowing the proceeds to be invested in physical or human capital
- India was never completely convinced of this paradigm. For many years, it accepted aid, but tried to rely on its resources as much as possible, with the aim of winding down its aid dependence as quickly as possible.
This strategy has proved successful for us.
Why Aid doesn’t work?
- Aid perpetuates resource dependency, recipient countries may fail to develop their own tax bases or their institutions more generally.
- And it is institutions, tax revenues, and incentives that have been found to be critical for growth, much more than overall resource availability.
- Another potential downside of aid is that it could trigger “Dutch disease”, named after the impact that discovery of natural gas in the North Sea had on the domestic economy in the Netherlands.
- This windfall caused the real exchange rate to appreciate as the extra income was spent domestically, pushing up the price of non-tradables, such as services geared to the local economy.
- The higher prices for services then eroded profitability in export and import-competing industries, de-industrialising the economy, with the share of manufacturing in the economy falling.
- Similar effects have occurred in Canada, Australia, Russia, and Africa.
Despite these international examples and the lessons of India’s own experience with foreign aid, it has provided extensive transfers to certain poorer states in an attempt to spur their development.
What is “aid” in the Indian internal context?
State governments up to now have received funds from the Centre via different channels:
- a share of central taxes, as stipulated by Finance Commissions;
- plan and non- plan grants;
- Plan and non-plan loans and advances.
These funds constitute “gross devolution to states”.
The ‘Special Category’ states have been heavily dependent on such flows for their developmental needs vis-à-vis other states. However, redistributed resources from the Centre differ from traditional “aid” in two important aspects.
- These are intra-country transfers and do not increase overall national disposable income like foreign aid does;
- The donor- recipient relationship is also very different because states benefiting from transfers are part of national governance structures that determine them.
So this chapter utilizes the concept of ‘Redistributive Resource Transfers’ (RRT) instead of ‘aid’.
RRT to a state is defined as gross devolution to the state adjusted for the respective state’s share in aggregate gross domestic product.
In the descending order of RRT received in per capita terms and also per-capita gross devolution. The top 10 recipients are: Sikkim, Arunachal Pradesh, Mizoram, Nagaland, Manipur, Meghalaya, Tripura, Jammu and Kashmir, Himachal Pradesh and Assam (all ‘Special Category’ states).
Has RRT helped states perform better?
- The results are striking. The higher the RRT:
- The slower is growth.
- The smaller is the share of manufacturing in GSDP.
- The lower is own tax revenues.
What about the quality of overall governance?
- Transmission and distribution (T&D) losses in the distribution of power is used as an indicator of governance.
- Such losses reflect the quality of both infrastructure and institutions in a given state.
- Again it emerges that the highest RRT recipient states have lagged behind on overall governance. In the northeast Mizoram stands out as a significantly better performer.
What are the causes behind this?
- After all, poor performance is not necessarily the consequence of RRT.
Impact of natural resources
Initially, economists saw natural resources as a way out of the low saving-low capital development trap. But with the benefit of hindsight it has become clear that economies with abundant natural resources have actually tended to grow less rapidly than resource- scarce economies. (Economists call it Resource curse)
Three possible channels of causation have been identified.
- First, the exploitation of natural resources generates rents, which lead to rapacious rent-seeking (the voracity effect) and increased corruption.
- Second, natural resource ownership exposes countries to commodity price volatility, which can destabilise GDP growth.
- Finally, natural resource ownership – like foreign aid — makes countries susceptible to “Dutch Disease”.
Natural resources and Evidence from Indian States
- The value of minerals is the sum total of fuels (coal, lignite, crude petroleum and natural gas), all metallic minerals, non-metallic minerals as well as other minor minerals.
- As per this definition the mineral resource rich states are: Jharkhand, Chhattisgarh, Odisha, Rajasthan and Gujarat.
- One way to assess the impact of natural resource availability is to estimate whether populations in mineral rich areas have emerged out of poverty better than other areas.
- The Scheduled Tribes (ST) population of the mineral-rich states, which actually forms the predominant population in these areas, saw only a 17 % point decline in poverty, when compared to 22 % point’s fall in the other states.
Figure 1 Per-capita value of minerals
- It is clear those resource-rich states, especially Jharkhand, Chhattisgarh and Odisha (with the exception of Gujarat) are at low levels of per-capita GSDP, with low levels of monthly per-capita expenditure.
- Another important indicator of the same will be a decline in the share of manufacturing in GSDP (the “Dutch disease”). The relationship between the value of resources and the average share of manufacturing to GSDP is observed that the relationship is weak.
- This implies that the resource rich states need to bolster efforts to counter any possible downsides of a “resource curse” that may emerge in the future.
- As is clear from the diagrams above, despite significant resource endowments, some states, most prominently Gujarat has performed better than average on many indicators.
Infrastructure and Connectivity:
- It is, of course, possible, that the “RRT curse” and “natural resource curse” could be a result of poor connectivity in particular and poor infrastructure – physical, financial, and digital- in general that most of these states suffer from.
- This is clearly true of the north-east but also true of many parts of resource-rich India.
POLICY RECOMMENDATIONS
- Enhancing connectivity
- Physical – on a war footing (as the government has attempted for financial inclusion with the PradhanMantri Jan DhanYojana (PMJDY), expediting the optical fibre network, etc.) will have a moderating effect.
- The answer cannot be to remove RRT altogether, since in a federal system the Centre must play a redistributive role: it will always have to redirect resources to under-developed states.
- The centre will need to find ways of ensuring that the resources it redistributes are used more productively by following measure:-
- Redirecting flows to households: One possibility would be to redirect a certain portion of RRT and channel the resources directly to households as part of a Universal Basic Income (UBI) scheme as transfers directly to households could eliminate some of these problems.
- Conditioning transfers on fiscal performance: In which higher resource flow leads states to relax their own tax effort. We could revert to the practice of the 13th FC of conditioning transfers on the tax effort of states; in fact the weightage could be even greater than suggested by the 13th FC.
- Making governance- contingent transfers: Given that some high RRT recipient states have performed better than others, it is possible that the capacity of states to utilize funds optimally plays an important role. To encourage better governance and sound institutional practices, the fund transfer mechanism could explicitly include a few monitor-able institutional indicators as criteria for receiving transfers.
- Natural Resource Revenues
- Improve governance, to ensure a more productive use of the resources, especially in the states that are relying so heavily on them.
- The structure of revenue administration as it stands today is such that the government receives royalty from the mining of mineral resources. Robust mechanisms of citizen engagement will act as a constraint on large scale corruption and over-exploitation of resources.
- With the intention of ensuring that the revenue from minerals are utilized for the development and welfare of the citizens of the concerned states, the Mines and Minerals (Development and Regulation) Amendment Act, 2015 included the following in the Act:
- Establishment of a trust, to be called the District Mineral Foundation (DMF) for districts affected by mining related operations.
- The composition and functions of DMF are to be prescribed by the respective State governments. The foundation shall work for the benefit and interest of persons affected by mining related operations.
- One way to increase citizens’ participation is via creation of a dedicated Fund to which all mining revenue must be put into. The assumption here is that minerals are part of the commons, owned by the state as trustee for the people – including future generations. Therefore, the revenue from the natural resources should be saved in a non-wasting asset- in a Permanent Fund.
- The real income accrued by the Fund can be redistributed to citizens affected by and having a stake in the extraction of the resource.
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