A Glass of Milk and Plenty of Water

An economist lists five priorities for the next government

Joan Robinson, who taught Prime Minister Manmohan Singh at Cambridge in the 1950s, famously said, “Whatever you can rightly say about India, the opposite is also true.” Seven decades later, this statement is still in vogue. And especially during the cacophonous national election season, the claims and counterclaims about India’s economy are getting very shrill. For every positive report card of the economy put forth by the ruling UPA coalition, the opposing NDA produces convincing evidence to the contrary. As a non-partisan observer, you cannot even say that the truth lies somewhere in the middle, because the true picture is strewn all over. It’s nobody’s case that the economy is in the pink of health. But it also cannot be denied that its health indicators are not disastrous. The international credit rating agency Standard & Poor’s gives India an investment grade of BBB-minus. This puts India on par with Spain, slightly below Russia, and far above Indonesia, Turkey or Argentina. Even Brazil, India’s colleague in the BRIC club, got a rating downgrade from S&P earlier this month. The stock market in Mumbai is flirting with all-time high indices. The NDA camp claims that this is in anticipation of the election results. But the stock rally is also driven by global dollars rushing into India due to its relative attractiveness. Brazil has had a downgrade, Russia is untouchable in the wake of Ukraine, and China raises doubts due to corporate bond defaults and its out-of-control shadow banking. So India, with brighter growth prospects, higher interest rates and a strengthening currency bias, is the emerging world’s prime candidate for foreign investment in search of higher and safer returns.

Even if you step back from the immediate flux of the stock market and currency, the past ten years have some bright spots. Poverty reduction between 2004 and 2011 was the fastest it has ever been in any comparable period in the country’s history. We achieved three consecutive years of 9-plus per cent GDP growth. Installed electricity generation capacity has doubled. Inward foreign direct investment averaged about 1.5 per cent of GDP every year. Agricultural growth over the decade was higher than earlier decadal averages. Rural wages went up substantially. But then, this data has to be contraposed with several other indicators which show deteriorating conditions. Inflation has been persistently high for more than five years, a record unmatched in recent history. Food inflation in particular has remained in double digits for far too long, especially of protein items like milk, meat and eggs. In the last few years, industrial growth has been rather tepid, with the manufacturing sector at zero growth for more than two years in a row. Private sector investment, which used to grow at 10-15 per cent every year, has collapsed. Fixed capital formation, which represents investment in future capacity, has almost dropped to zero. Constrained capacity means supply bottlenecks that aggravate India’s inflation problem. Most shockingly, the economy is not generating jobs. Job creation in the industrial or services sector is woefully short of what’s needed by India’s young demography. Even more puzzling is that job shortages have coexisted with worker shortages, especially in sectors like textiles, construction, seasonal harvesting and other semi-skilled vocations. The much celebrated National Rural Employment Guarantee is blamed for industrial worker shortages.

In a nationwide survey conducted from last December to this February by the Association for Democratic Reforms and Daksh, the topmost priority on the minds of voters was jobs. This corroborates an earlier finding of the National Sample Survey. In response to an NSS query, 40 per cent of rural respondents said that they would gladly leave the farm sector, if only they could get a job elsewhere. No wonder that the narrative of job creation is prominent in party manifestos.

Against this backdrop of mixed signals, certain national priorities stand out. The current mood is more negative than what the economy data suggests. The job of policymakers and political leaders is as much mood management as delivering on promises of jobs and investment. In managing the economic mood, communicating clearly and frequently is an essential requirement of those in charge of running the economy.

Here are five priorities for a new government. These have already found place in the manifestos of both the NDA and UPA, but the emphasis is unequal. The following five points are not categorised as short or long term. These are achievable within relatively short political time horizons. So one need not resign oneself to Keynes’ dictum that in the long run we are all dead!

The outgoing parliament passed the Food Security Bill with support from all political parties. The bill was much discussed, and was reportedly opposed at first by both the Finance and Food ministers in the Union Cabinet. But despite internal differences, the Cabinet passed it and Parliament was happy to bless it. It provides highly subsidised wheat and rice to more than two-thirds of India’s rural and half of its urban population. It makes the availability of cheap foodgrains from ration shops a justiciable right. Of course, implementing the FSB will be a big priority for the new government. This has to be done ensuring fiscal soundness and minimising leakage. This is not the place to discuss an FSB implementation plan. But rather, to point to another angle of food security. India’s rank on malnutrition among children is lower than that of neighbours like Bangladesh and Nepal, and also many sub-Saharan African countries. More than 40 per cent of the world’s malnourished kids are in India alone. This is despite the fact that India runs the world’s largest midday meal scheme, covering over 100 million school kids. The one intervention that can substantially affect nutrition outcomes for kids is a glass of milk at school in the morning. If you examine NSS data sliced by income classes, the consumption of milk is shockingly skewed between the poor and the rich. It is not so for pulses. India has had a milk revolution and is presently the world’s largest producer. Surely, a glass of milk for every kid is an achievable target for ensuring greater food security in the country. This may go a long way in achieving better school attendance and health outcomes. By the way, the hot midday meal comes at noon time, but the breakfast meal of a glass of milk may be equally crucial for the kid.

As has been mentioned earlier, the youth crave decently paying and stable jobs. More than 12 million youth seeking jobs will enter the labour force every year for the next ten years. If they lack skills, then we will have the spectre of simultaneous job and worker shortages. An important point is that to generate 12 million jobs, the Government must ensure the creation of about 1 million enterprises annually. It is not that large public sector companies (or the railways or armed forces) are going to absorb the demographic surge. Most youth will want to be self employed. So job creation is as much about creating conditions for businesses to thrive. Globally, India is ranked 134th of 183 countries on ease-of-doing-business. This rank, computed by the World Bank, uses ten components. India fares okay on eight of these. But the two where India fares very poorly are the enforcement of contracts and securing construction permits. So job creation will happen only when business creation (and closure) is well enabled. The Licence Raj was done away with in 1991, but has been replaced by an inspector raj, a harassment raj and a paperwork raj. The experience of small and medium enterprises does not inspire newcomers to become entrepreneurs.

Half of India’s industrial output, industrial employment and exports are contributed by small and medium enterprises (SMEs). But these do not get even 5 per cent of bank credit. They often lead a hand-to-mouth existence, with narrow profit margins (thanks to competition from China). They depend on the mercy and goodwill of large corporations that are their customers and dictate their value chain. But SMEs face hardship in accessing credit, capital, markets, skilled and semi-skilled workers, and also from regulatory agencies (see ‘inspector raj’ above). They also face uneven electricity supply, and are ill prepared for the large risks of currency fluctuations and cheap Chinese imports. With a 5-per cent profit margin, a 10-per cent currency swing (say, from 66 to 60 to the dollar) can wipe them out. The SME sector must become a focus for policy experimentation and bold reforms. Let millions of SMEs bloom, and let not some black sheep become the lightning rod that attracts harsh regulation and affects the entire sector. SMEs form the backbone of industrially advanced countries like Germany and Switzerland, so there are plenty of working models to borrow from.

India faces a water crisis. It is often said that India has 18 per cent of the world’s population but only 2 per cent of fresh water supplies. The water crisis is manifest not just in agriculture, where ground water tables have sunk to unimaginable depths, but also in the industrial and residential sectors. Water is a crucial ingredient in chemical process industries as well as steel mills and coal washeries. What is not so well known is that India’s per capita availability of fresh water is the same as Germany’s, which is about 1,880 cubic metres per annum. Needless to say, Germany is not a country with a water crisis. So much of India’s water crisis is man-made, and can be unmade by better policies, management, practices and technology. The compulsory recycling and re-use of industrial and urban water should be top priority. The stoppage of water and soil runoffs is essential for agriculture. Modification of cropping patterns, and minimising water guzzling crops and their export, would be part of that strategy. The interlinking of rivers is a mega-scale solution that has uncertain environmental consequences. Hence it can wait until smaller scale measures are in place.

Agriculture contributes only 14 per cent to India’s GDP but still employs almost half the labour force. Little wonder that people are ready to leave their farms (recall the NSS survey mentioned earlier). The entire adjacent sector of agro processing is ill-developed in India. That may be due to infrastructure problems (cold storage chains, roads, market linkages to organised retail, food processing parks). The country’s debate on FDI- in-retail has obfuscated some real issues that need tackling. The gap between farm and fork prices is huge, and represents large inefficiencies. The national highway programme resulted in Bengal potatoes reaching farther corners of the country, just as eggs too travel far and wide now. This is an example of infrastructure development directly impinging on higher agricultural incomes. Rising incomes have changed consumption patterns, increasing demand for milk, meat and poultry. That, in turn, causes foodgrain demand to increase disproportionately, since it is also required for cattlefeed. India has had an exceptional decade of agricultural growth, and yet food prices have risen incessantly. So it is imperative to increase productivity in agriculture, ensure that it gets a higher share of the end consumer’s wallet, and push reforms that strengthen farm-to-consumer linkages. The Swaminathan Report of October 2006 is a good starting point. Channelling credit to food producing cooperatives (or companies) is an idea whose time has come. Maybe an exclusive NABARD-style bank focused on food producers?

These five listed priority areas are not exhaustive. Even a list of top ten priorities cannot do India justice. The manifestos of major political parties tend to converge on such themes as jobs, development, governance and anti-corruption. This means that a national consensus has evolved. The 16th Lok Sabha should then commence with all parties signing on to this common minimum economic agenda. We can then proceed to a glass that’s more than half full. Until then, it’s Joan Robinson’s India.

Ajit Ranade is a Mumbai-based economist. He is the chief economist of a leading Indian conglomerate and has had a prior career in research and teaching in India and the United States

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Ajit Ranade