$1 trillion economy for Uttar Pradesh: From Economic Revival to Intense growth

 

The new UP government is to be reconstituted on the 25^th of March 2022 by the BJP led NDA claiming victory on account of a strong pro-incumbency vote. Recent economic woes exacerbated by the once in a 100-year viral pandemic has been the proverbial Achilles heel for the NDA. The government has so far not been successful in providing opportunities for a very young and restless population of the state.

 

In this context the goal of growing the economy from the current Rs 19.05 trillion ($250 billion) gross state domestic product to $ 1 trillion is comparable with climbing the Everest in a snowstorm of pandemics, war like conflicts, natural disasters, and climate change. American author and strategist Jim Collins would call this a “Big, Hairy Audacious Goal” (BHAG). 

 

It is a laudable goal perhaps one that may mobilize resources and the economic engine in the heartland of Bharat. It must however be peppered with realism and objectivity. Quadrupling of the economic output as measured from today till March 2027 will require very intense alignment of capacity and tremendous economic activity. All the pistons of the economic engine must move with nothing less than missionary zeal. 

 

Based on the broad breakdown of 2018-’19 figures, Agriculture contributes to about 24%, Industry 26% and Services 50% of the state GDP. A realistic breakdown of this would mean the sector output would effectively double in 30 months. This requires very significant private and public investment. Limited State execution capacity implies the need for a very robust framework to monitoring and regulation to ensure each of the primary growth engines are to perform as required to reach the goal. 

 

A reforms-based approach is needed to unleash the pent-up performance capacity of the state population. A calibrated pathway must be designed with what the economist Joseph Schumpeter would call “Creative Destruction” measures. This requires careful reevaluation of the state laws and colonial rules from pre-independent India that hold us back. Decriminalization of penalties and arbitrary rent seeking must be stopped by design for the larger population to perform and the state to prosper. 

 

According to the multidimensional poverty index of the Niti Ayog, 37.8% of the state population is poor. While the central and state government schemes of “Antyodaya” inspired by ideals of Pt. Deen Dayal Upadhyay, have been instrumental in providing for the poor during a devastating pandemic, we require structural measures for ensuring long term prosperity of the state population. These schemes were instrumental in casting of the pro-incumbency vote. 

 

Any structural prosperity pathway that is chosen by the state government for growth must consider the following dimensions for the policy formulation: 

 

1.     About 77% of the population still lives in rural Uttar Pradesh in over 1,00,000 plus villages. Any economic progress for the state must have our villages at the very center of the chosen strategy. 

2.     A vast majority of the working population falls within the ambit of the unorganized sectors. This is estimated at over 90% of the working population. 

3.     Agriculture with 24% of the state output contribution provides for vast population of the state and remains the sustenance backbone. While the agriculture law reforms were retracted, effort must be made to address the infirmities and challenges of fragmented land holdings leading to non-remunerative outcomes. 

4.     Systematic and limited migration of labor towards construction, manufacturing and services must be planned to expand the output from all the sectors. 

5.     21^st century jobs for the young and educated population. This cannot be achieved without large scale expansion of technological sectors such as information technology, biotechnology, and other advanced domains. 

6.     Manufacturing resurgence is essential for ensuring the growth of jobs in the heartland especially in the MSME sectors. It is well documented that every manufacturing job indirectly creates four services jobs. 

7.     Strategy for widespread distribution of services jobs to TIER III and IV towns must be thought through. Intermediate infrastructure for supporting such jobs must be proliferated involving construction capacity of the private sector. 

8.     Decentralization as an economic mantra must be considered for enabling production and services that are widespread as opposed to only a cluster-based approach. 

9.     Strategic sectors such as Security and Defense could provide the backbone for the industrial development in the state through the development of the military industrial complex. MSMEs and technology start-ups in the state should become an essential part of this industrial complex. 

10.  Improving the relevance of education and training at the primary and secondary levels of schooling for the modern economy is needed. Technology enablement of the schools is essential for preparing the work force for the digital economy. 

11.  Dramatic increase in the healthcare footprint especially primary healthcare in providing better health outcomes must be considered. 70% of the health infrastructure must be centered and built around primary care reaching the last village of the state. 

12.  Some of the World’s most polluted cities are in the state. A new environmental deal is required to drastically reduce the air and water pollution in cities. Changes in municipal government in the state is required to improve our quality of life through this new environmental deal. 

13.  An expanding economy creates a self-perpetuating cycle. Complex, large scale and varied financial instruments must be used to deploy capital at the earliest to pump prime the state economy. 

14.  We cannot blindly import practices from developed economies and multilateral institutions. We must therefore consciously design instruments and outcomes based on our unique circumstances, demographics, economic and ecological conditions. This requires a fresh approach. 

15.  Any chosen pathway must take into consideration all stakeholders without any bias. Thus, wide public consultation is required so that end outcomes are widely spread, and prosperity is collectively shared. 

 

“Peace, easy taxes and tolerable administration of justice are preconditions for prosperity,” wrote Adam Smith, the Scottish professor of philosophy and logic in his treatise Wealth of Nations. The timeless words of wisdom translated for 21^st century Uttar Pradesh imply the state must ensure peace and security for all its citizens, a fair and equitable system of taxation and swift delivery of justice by the administration. Achieving and exceeding the goal of $1 trillion output for the economy in five years would then be more than possible. The transformational effect would truly be Antyodaya for all the citizens left behind on the prosperity curve. 

 

 

 

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Heartland as the engine of economic revival in India

The unprecedented COVID19 pandemic has unleashed an economic crisis across the world in addition to the medical emergency. Governments and the private sector that was already struggling with their finances and lack of growth have been dealt a devastating blow. As a consequence most decision makers have either discarded the rule books or kept them in dusty drawers. 

India in particular is facing serious challenges due to a very large population which is now unemployed, malnourished and very vulnerable to the medical crisis. It is certain that the current financial year will witness a large contraction in GDP with negative economic growth, disruption in supply chain and collapse of demand. We must examine imaginative ways of dealing with the economic fallout. 

We certainly know the Washington Consensus that has driven the neo-liberal agenda is broken. We definitely remember the communist manifesto was disastrous for the world and we do not want to go back to anything that is a failed collectivisation experiment forced upon people. 

There are very few examples of wholistic and balanced frameworks that can help us deal with the deepening economic and ecological crisis that is upon us in addition to the raging pandemic. Furthermore shrinking of trade and military aggression of neighbouring states has made matters worse. Amidst this crisis, we must chose the right policy instruments to realise our economic potential and the demographic dividend. 

Where does a country as large, socially and politically complex as India go from here? Considering the Schumpeterian creative destruction paradigm, an alternative pathway can be designed to mitigate the current economic quagmire. Ever since our economic liberalisation in the 1990s we have been focused on the city and urbanisation as the mantra for our growth. Large population migration to big cities has created growth but also massive urban degradation and ecological collapse. Our migrant worker population is one of the largest in the world at over 46 Crore (460 million) and has suffered the most for survival during the pandemic. 

It is therefore essential, that we must undo some of our development failings. Our focus should shift towards developing villages, Tier 3 and 4 towns along with the infrastructure connecting them. The Governance mechanisms and administrative capacity for both public and private goods needs to be enhanced. We have over 640,000 villages in India. Some of them had been hollowed out due to urban migration. The reverse migration of the last few months is likely to change the long term scenario. The recent revival of consumption in rural India is a significant testimonial of the potential.

Labour owning decent housing in villages live in abysmal conditions in cities to earn Rs 400 instead of Rs 300 a day they could earn around their villages. That Rs 100 differential is certainly not worth the degradation of dignity of life and ecology we are inflicting upon our fellow citizens. The migrant labour has tremendously suffered in the lockdown period and is unlikely to return to shabby working and living conditions in urban cities with little recourse to public support in testing times. A number of measures are needed to address the long term distress of the average citizen and set them on the path to prosperity. 

The first measure required is a large public programme for rural housing and agriculture infrastructure which would be a major driver for rural and economic revival involving and central to the well being of migrant labour. The recent reforms in agriculture by means of three ordinances, Farming Produce and Trade Commerce, Farmers Agreement on Price Assurance and Farm Service will unshackle the potential of Indian farms from regulatory chains. This will set in motion a long term virtous cycle of productivity for small farms and small enterprises in the heartland. Reforms aligned with rural infrastructure development programmes will immensely increase per capita income. 

The second measure required is making the rural markets more efficent. The market indigenously called the bazar is so pervasive that you would not have to go more than 5 kilometres in heavily populated states such as U.P. to find one. These can easily be restructured to produce and supply goods to urban areas. The mandis and bazars could do with large investment in infrastructure, information systems, digitilisation and logistics capacity to make two trade easy and feasible. These mechanisms would create high locomotive trade between the 720 urban districts of India and our vastly spread villages.  

The third measure would be concerted effort in agriculture, horticulture, agro-forestry and forestry to provide a large source of structured jobs. Our rural areas are not as polluted as our cities, thus best environmental practises of could be applied. That would generate lots of new jobs and reduce the ecological burden on water and air quality in cities. Stimulating food processing industry would require investment in cold chain infrastructure, mechanisation, logistics and services to begin with. These programmes and schemes could be expanded over time given that we can rely upon the demographic dividend over the next decade.  

The fourth measure would be the forward movement of rural society through mechanicatization, machines and technology. Road connectivity across states and electricity capacity has steadily improved. In brining urban amenities to rural areas, we would be able to retain the rustic charm while bringing in urban dynamism to communities. The proliferation of machines, consumer durables and consumer goods over a period of time has increased in rural area but not so much in the remote or backward villages. Instruments of economic progressivism will proliferate further in various development circles.

The sixth measure is the design of a labour market information system and skilling of the rural worker mapped according to regional competencies. Competencies that are aligned to production capability of the region. Demand based skilling liked to livelihood would generate the necessary push needed to improve the quality of life and wages. It is therefore essential to reorient the capacity for the supply chain to originate at the rural level from the rural enterprise. It is important that such a supply chain should be systems ready not only for reaching out to rest of India but also other parts of the world that may be source of demand for goods and services. 

The seventh measure would be to address our national vitality by strengthening of the primary healthcare network. The primary and community health centres in the heartland of India have suffered from neglect for far too long. They require a serious capacity, infrastructure and technology upgrade. The focus must be on standard universal health outcomes. The healthcare network in the heartland requires very large public and private investment as the COVID-19 crisis has adequately demonstrated. 

The eight measure required is the redesign of the primary school education to improve learning outcomes in the heartland of India. The new education policy will widely bring knowledge and learning back in to the primary school system. We must enable the public and private education establishments to effectively translate the policy in to learning mechanism. We have for too long ignored these capacity building measures at the cost of public good. 

The nineth measure would be the urgent empowerment of the Panchayati Raj Institutions. The self governance structure for organising activities at the rural level are robust through the Panchayati raj system which pre-dates the Westminster parliamentary system. It is not economically empowered enough to be able to translate its reach into welfare of local citizens. While the Finance Commission of India has provisioned funds for empowerment of the 2.5 lakh (250,000) gram panchayats (village council), some state governments have not yet taken the necessary steps to empower the gram panchayats. 

The financial architecture must be decentralised from central and state government headquarters to the district headquarter in the state and then devolving further to taluk or development mandals, if we are to realise the larger vision of economic resurgence. The mantra should remain centralisation of taxation by state and complete decentralisation of expenditure. 

The tenth measure is to improve the state capacity to effectively deliver services and ensuring regulatory compliance without creating undue duress for the citizen. Each state capital and region of importance must create autonomous Institutions to understand, study and monitor progress in their respective heartlands. Such Institutions must identify reforms needed locally and implement them at the earliest. While implementing reforms we must gradually scale the change to allow society to organise itself and reduce discretionary power and intervention of state agents. The goal being to ensure compliance and standards without any harassment. 

Private investment could thereafter be effectively mobilised for generating the economic progress necessary for the prosperity of the Indian heartland. An alternative investment fund for this purpose may be created for funding work in the identified area as per requirements of performance, equity and backwardness. 

An increased emphasis on the heartland of India will uplift large masses out of poverty while ensuring our urban settlements of India are still livable. Shifting our approach of the economic engine will diversify the sources of the supply chain, declutter the cities, reduce the burden on crumbling infrastructure and further lead to rejuvenation for the population in our tier 1 and 2 cities. 

The pandemic has tremendously damaged the prospects of an already fragile economic system. We as a nation have a limited window till 2040 to realise our demographic dividend and reach prosperity level of developed nations. This requires tremendous political will, unity of purpose, collective commitment, enhanced state capacity, deep reforms and most of all mobilisation of society to achieve this goal. All these measures must be undertaken simultaneously with firm resolve for the collective destiny of India hangs in the balance. 

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Is the Indian economic package for the Corona pandemic enough?

The impact of COVID-19 disease is being felt across all nations and globalised economies. Developing economies particularly with large populations and underdeveloped financial systems would be hit extremely hard. We are staring at 1930s like economic depression prevailing in many regions of the world.

The concurrent demand and supply shock hitting everyone at the same time will require an exceedingly long time to recover from. Systematic disruption of supply chain, impairment of production capacity and complete collapse in demand for certain products will hit enterprise and industry.

Trade and Investment is will also take a severe hit. The world is expecting to deglobalize further to address discontents of inequality and improve local opportunities for many more. While capital may still have global mobility, opportunities are highly likely to recede for movement of skilled people.

Earning at the top and middle of the economic pyramid will be seriously affected. Those at the very bottom will be the hardest hit. They will require to be held and guided through the pandemic and the economic abyss they will be in.

The world is likely to go into a collective recession. There are varying estimates, but sub-zero growth is the most likely global scenario. Even faster growing economies of India and China will hover under 0.5 % growth rate if they are lucky and do not contract severely.

Most governments now are panicking and paddling very hard underneath. Large relief and stimulus packages have been announced by developed nations, US economy has committed $ 2 trillion and European nations are committing Euro 500 billion in dealing with the fallout of the pandemic.

International bodies such as IMF have committed over $1 trillion of their lending capacity to help over 100 nations who are in serious distress. The World Bank and other major multi-lateral lending Institutions have committed hundreds of billions of dollars in lending for developing nations and those in most distress. Will that be enough is a question that is still troubling me?

The more troubling questioning for me is regarding the country of my birth and residence, India. Can an exceptionally large population of 1.3 billion sustain itself for 6 months in a state of lock down and economic seize? Do we really have the fiscal capacity to take care of our population at the bottom of the pyramid? What really can be done that is different to kick start the economy once we are at the end of the COVID-19 tunnel?

India has announced several measures so far. A Rupee 1.75 Lakh Crore relief and stimulus (just over $23 billion) package and a graded plan to start activities according to zoning rules. For the size of our country the relief package merely amounts to 0.9% of our GDP. That by no means is enough and an intelligent reader can make that out. There has been clamour for up to 10% of the GDP to be committed for relief. Can we afford to spend so much?

There are a whole host of financial instruments that can be applied right from cash transfer, food distribution, issuance of bonds, wage subsidies, waiver of loans, interest subvention to minimum support for the most vulnerable citizens. These must be exhausted before options such as quantitative easing may be applied, in other words for RBI to start printing money.

Our fiscal deficit as former RBI Governor Duvvuri Subbarao recently pointed out will be pushing over 10%. That means both the Central Government and State Governments are pushing their finances beyond their capacity to generate revenue through taxes. The Goods and Service Tax has not been meeting the goal as estimated for several quarters now. Tax earnings from petroleum and alcohol have also been severely curtailed during lockdown. Therefore, spending a large sum of money is not prudent especially when we as a country have not really earned it.

The primary focus now for the government is targeted cash transfers to farmers, women, elderly and the poorest. There have been calls to increase this up to Rupee 10,000 per person and giving away food stock that is in the government warehouses. The Jan Dhan-Aadhar-Mobile digital infrastructure is available to make that happen though admittedly it does not cover everyone yet.

India certainly has enough grain stock (over 80 million metric tonne) to feed the entire bottom of the pyramid for the next 12 months. The major challenge would be that between 10 to 20 million people may be without ration cards and are likely to get left out. Existing ration cards for non-domicile migrant workers must be reformed to allow accessibility of the stipulated grain allocation anywhere in the country. The government very promptly started distributing up to 5 kilogram (kg) of wheat or rice and 1 kg of pulses to the poorest every month.

Is all this enough? Will the economic package stop an estimated 633.88 lakh (63 million) MSMEs from becoming insolvent or in simpler terms avoid shutting shop? A workforce of 1109.89 lakhs (110 million) is at risk and about 30% of India's GDP according to the analysis by Indian Express.

The spread of MSME enterprises is 51% rural or 49% urban. It would be immensely challenging to keep these enterprises functioning for more than 3 months in the absence of direct financial intervention of the government through subsidies, loans with interest subvention and tax exemptions. The migrant labour relocation and hardship has added another disruptive shock to the MSME enterprise ability to function.

The government has provided relief to provident fund contribution of 4.5 million employees for three months. It certainly needs to do a lot more by means of financial interventions if it is to save production capacity of supply chains.

The fallout of the pandemic will make it extremely difficult for the marginal farmer in getting their due for his or her produce when the supply chain is broken. The absence of money in the hands of majority of working people and no clarity on future earnings, the demand for products and services is bound to be hobbled for a sustained period both in rural and urban India.

The current measures are only interim in nature. They are no long-term solution in sight, and we must be honest about that. The COVID19 pandemic and the economic fallout is expected to last at least 2-3 years. The government must therefore in my view allocate 6% of the current national GDP for providing relief to our citizens, economy, and productive capacity.

The amount may be spread by the government in three packaged tranches over three financial years. The current financial year of 2020-'21 must focus on relief to three fourths of our population with 3% of the GDP allocation. In the financial year 2021-'22 , the government must adequately begin the recovery and restructuring of the economy with 2% of the annual GDP spending. Finally, the government, must commit at least 1% of the GDP in the third-year post commencement of COVID19 to stimulate dynamism in rural and urban demand.

We are at a fork in our collective national destiny where the choices of our leadership will determine whether we move into the age of economic and environmental progressivism or regress in to an abyss from which it will be difficult for us to recover for another decade. These choices must be made very carefully by those who are in positions of authority today, for the lives of posterity and prosperity in our nation hinges upon it.

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Book Review - Backstage by Montek Singh Ahluwalia

Backstage is perhaps one of the best narratives, I have read on the economic reforms in India in the context of a very volatile political environment. 

Mr. Ahluwalia started in the World Bank after a stellar educational track record in India and Britain. He is perhaps one of the few highly qualified Indians who chose to return home in order to build a career and contribute to the growth of his home country in the late 1970s. He dedicated his life as a civil servant who came through lateral induction. An outstanding case study for opening the civil services to subject matter experts, technocrats and professional in the private sector. 

The book has touched upon all the key reforms from the 1980's that were undertaken by government, the underlying political will for change from socialist infrastructure to a more liberalised economy. The economic precipice at which we stood as a nation, when gold was air lifted to London in lieu of a loan, on account of the balance of payment crisis that the country had faced in the early 1990. 

The build up chapters refer to the foundation for many reforms such as the precursor to GST and VAT was the MODVAT. It is little acknowledged that it was initiated during the tenure of former PM VP Singh. There was plenty of will and support for similar change across the political class. 

The major change or the black swan event was the end of the license raj at the start of the 1990s which has been supported by the opposition and continuity maintained through all governments after the Congress. Governments led by National Front, BJP, UPA and presently NDA have maintained the change direction improving and building upon reforms to build a more liberal economic. 

Mr. Ahluwalia has been very straight in identifying the challenges that hobbled reforms, political pressure that governments had to go through and challenges the permanent bureaucracy has to continuously endure. He is poignant in narrating the causes of the issues that plague our economy presently. The issues and causes associated with NPA crisis in the banking system, the telecom and coal debacle. Numerous other scams and difference in opinion with CAG have also been highlighted. 

He has been a pillar of continuity for the civil services and a voice of reform. His voice would be sorely missed and the absence of his influence on the negotiating table especially when it comes to multilateral agreements like RCEP and trade deals. Further liberalisation and disinvestment had been stalled at the behest of the left wing influence and the Swadeshi lobby within the BJP and RSS combine. 

The book is a fine narrative on the build up, role and demise of the one of the leading Institutions, the Planning commission. He has spoken clearly of the learning, needs and reforms required for Institution building. All that Niti Ayog must do to maintain the continuity of the best from the commission era and bring in new best practises to supplement it. 

In my view, he has made a tremendous contribution as an economist to the growth of the country. He has been a quiet shadow to Dr. Manmohan Singh and core part of his think tank. Together the duo achieved a lot over decades of working together in embracing the libertarian view of the world for India. 

In due course, history would remember Mr. Ahluwalia well. His mediations as a civil servant should be mandatory reading for permanent bureaucracy and anyone involved in the reforms process. 

The one phrase that stands out in the entire book is "unrelenting optimist", an attitude that we must embody in our national character. We must persist in spirit and deed towards uplifting the remaining who have been left behind in the early stages of reform.

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