Economic Survey 2016-17: Chapter-13: The ‘Other Indias’: Two Analytical Narratives (Redistributive and Natural Resources) on States’ Development

In this chapter, the survey has focussed on Models of development in India; Analysis of aid led development in world; India’s redistribution transfer of resources on state development; Natural resources curses and the way ahead.

Peninsular Model of Development

Peninsular India enjoyed an advantageous geography which enable them to  grow faster and advanced more rapidly economically. State such as Gujarat, Maharashtra, Tamil Nadu, Karnataka, Kerala, and Andhra Pradesh being close to ocean grew faster and are prosperous than other state. Because of the success of this state it led to the peninsular model of development.

Peninsular India’s model of development can be categorised into

• The traditional East Asian mode of development based on manufacturing. Example are Gujarat and Tamil Nadu
• The remittance-reliant mode of development. Ex. Kerala
• “Precocious India” model based on specializing in skilled services Eg.Karnataka, Andhra Pradesh and Tamil Nadu.

Other models of development

• Aid model: The “aid” model is most applicable to the erstwhile ‘Special Category’ states that .includes North-eastern states and Jammu and Kashmir.
• Natural resources model: The definition of natural resources includes coal, onshore oil and natural gas, major and minor minerals but excludes forest cover. Ex. Jharkhand, Chhattisgarh, Odisha, and Rajasthan.

Does foreign aid translate into growth?

Developing countries were poor because they lacked capital. And they were unable to overcome this problem themselves, because their people were too poor to save. So the key to development, the only way to solve the conundrum, was foreign aid. However  Economist are finding it difficult to establish a positive relationship between aid and growth because

• One hypothesis is that aid perpetuates resource dependency, in the sense that since revenues flow in from outside, recipient countries may fail to develop their own tax bases or their institutions more generally.
• Another potential downside of aid is that it could trigger “Dutch disease”,( Dutch disease is the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves. The currency inflows lead to currency appreciation, making the country’s other products less price competitive on the export market.)

India’s model of development since independence has been a mix of foreign aid and self dependency rather than completely relying on foreign aid.

Despite  International examples and the lessons of India’s own experience with foreign aid the country follows same model within India:

When it comes to development within India, the country has followed the path prescribed by the first development economists. It has provided extensive transfers to certain poorer states

in an attempt to spur their development

Is Aid akin to transfer? Did this strategy succeed?

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; and
• Plan and non-plan loans and advances.

These funds constitute “gross devolution to states” and the entire amount is not “aid”. Gross devolution entails a strong redistributive element. However, redistributed resources

from the Centre differ from traditional “aid” in two important aspects

• First, these are intra-country transfers and do not augment overall national disposable income like foreign aid does
• Second, the donor recipient relationship is also very different because states benefiting from transfers are part of national governance structures that determine them.

Transfer of resources to states are done to avert regional inequalities and correct fiscal imbalances and are therefore extremely crucial. Hence economic survey has used the concept of  Redistributive Resource Transfers’ (RRT).

What is RRT?

RRT to a state is defined as gross devolution3 to the state adjusted for the respective state’s share in aggregate gross domestic product. Thus RRT is not identical to gross devolution.

The higher the RRT means

• The slower is growth of state
• The smaller is the share of manufacturing in GSDP.
• The lower is own tax revenues.

The economic survey pointed out that there is no evidence of a positive relationship between these transfer and economic outcome including per capita consumption, GSDP growth, institutional quality.

Why resource abundance state grow less rapidly than resource less state?

It is due to resource curse which is attributed due to following

• 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 destabilize GDP growth.
• Finally, natural resource ownership – like foreign aid — makes countries susceptible to “Dutch disease”.

Way ahead for development

Infrastructure and Connectivity:

• “RRT curse” and “natural resource curse”, could be a result of poor connectivity in particular and poor infrastructure – physical, financial, and digital in general
• This is clearly true of the north-east but also true of many parts of resource-rich India.
• Enhancing connectivity – financial and physical – on a war footing (as the government has attempted for financial inclusion with the Pradhan Mantri Jan Dhan Yojana (PMJDY), expediting the optical fibre network, etc will have a moderating effect.

Redistributive Resource Transfers

In a federal system the Centre must play a redistributive role: it will always have to redirect resources to under-developed states. Rather, the Centre will need to find ways of ensuring that the resources it redistributes are used more productively.

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.

Conditioning transfers on fiscal performance

Finance Commissions could revert to the practice of the 13th FC of conditioning transfers on the tax effort of states .This will offset the fiscal bias.

Making governance- contingent transfers

To encourage better governance and sound institutional practices, the fund transfer mechanism could explicitly include a few monitorable institutional indicators as criteria for receiving transfers.