Economics is viewed in most schools, colleges (Management institutes as well) and universities as a monolithic enterprise. It comprises mainly Microeconomics and Macroeconomics and uses Econometrics and Mathematical Economics as tools to understand the economy. Interestingly, tools like philosophy, history, sociology, anthropology lie forgotten. Or probably they are not viewed as tools anymore. Or they are not scientific enough!

This post deals with the dominant perception of Economics within India and how these perceptions adversely affect the spirit of economics in particular and of scientific inquiry in general.

Courses like History of Economic Thought are extended to include Classical Political Economy, Marxian Economics, etc. They are taught as outdated ideas and not as relevant approaches in understanding the economy. This is visible from the responses of students when works of Adam Smith, David Ricardo, Karl Marx etc are mentioned. I shall discuss Malthus in this post and in the next post, I shall discuss some of the theories of Marx.

Unfortunately, Malthus is known only for his ‘bad’ population theory. Interestingly enough, all that Malthus [1798] said was “that population, when unchecked, increased in a geometrical ratio, and subsistence for man in an arithmetical ratio.

Let us examine whether this position be just. I think it will be allowed, that no state has hitherto existed (at least that we have any account of) where the manners were so pure and simple, and the means of subsistence so abundant, that no check whatever has existed to early marriages, among the lower classes, from a fear of not providing well for their families, or among the higher classes, from a fear of lowering their condition in life. Consequently in no state that we have yet known has the power of population been left to exert itself with perfect freedom.” (Italics added)

Such an argument is what philosophers of science classify as a ‘thought experiment’. But mainstream economists classify this as a theory which has provided wrong predictions.

Thought experiments are devices of the imagination used to investigate the nature of things. And in our own time, the creation of quantum mechanics and relativity are almost unthinkable without the crucial role played by thought experiments. [Brown 2007] If one were to discredit and disregard Malthus’ theory, then there is no reason why the theory of perfect competition should be considered in Economics at all. The issue is that, there is hardly any work being done in methodological issues pertaining to economics and on the structure of a good economic theory, therefore one definitely needs to consider each and every theory in its own context. By context I refer to the historical background and the general argument that is being put forth.

Philosophical debates within Economics are very essential for the growth of both the disciplines, but more significant for economics. Methodological and epistemological issues are not commonly discussed in economics. This is very necessary because economics, economists and economies are ever growing in importance. Their policies have far reaching effects. And if they are not constructed in the right spirit, the objectives of the policy might not be fulfilled at all. The Indian budget 2008-09 is one such example. None of the Indian universities have a course pertaining to the Philosophy of Economics in its Masters’ courses. This shows the importance it has received vis-a-vis econometrics and game theory.

Also, economics claims to be a science and Professor Peter Englund, Secretary of the Economics (Nobel) Prize Committee thinks so as well when he says “In all relevant respects the committee understands and treats economics as a field of science.” I see it as a shirking away of economics from questioning itself- its methodology and its knowledge.

It is primarily this attainment of a scientific nature by mainstream neoclassical economics that is bringing doom to the people constituting the economy. The present analysis in mainstream economics is not only ahistorical but also asocial. Economics needs to understand its origins and its epistemology. It ought to be a pluralistic enterprise. And let theoretical anarchism prevail because “it is more humanitarian and more likely to encourage progress.” [Feyerabend 1975]

]]> http://alexmthomas.wordpress.com/2008/05/08/economics-education-the-indian-context/feed/ alexmthomas http://alexmthomas.wordpress.com/2008/03/27/budget-2008-09-whither-indian-economists/ http://alexmthomas.wordpress.com/2008/03/27/budget-2008-09-whither-indian-economists/#comments Thu, 27 Mar 2008 14:14:39 +0000 Alex M Thomas http://alexmthomas.wordpress.com/2008/03/27/budget-2008-09-whither-indian-economists/

Almost a month has passed since the Budget was announced. The media has stopped discussing loan waivers. Economists are done with their write ups on the same as well. I guess it is no more glamorous or more pressing matters might have cropped up. This post discusses some of the concerns relating to the loan waiver which had been voiced by the media and my concern for economics in general and economists (associated with policy making) in particular.

P. Sainath says that “The UPA government’s waiver is no solution to even the immediate crisis let alone long-term agrarian problems. Nothing in this budget will raise farm incomes.”

Satish Nandgaonkar writes in The Telegraph that the loan waiver was unjust because “the waiver helps only if the loan has been taken from a government-backed institution, but most farmers in Vidarbha borrow from moneylenders at the start of the sowing season to buy seeds.” Didn’t the economists behind the budget know this?

The economist from Harvard, P. Chidambaram said that “loan waiver will strengthen banking.” I had thought that the loan waiver was targeted at the farmers in India! But then, the FM talks about growth quite a lot and how it is the only fast remedy to poverty. I wonder what growth he refers to!

Gurcharan Das thinks that the loan waiver is immoral as it “wounds that moral universe. It tells the farmer not to bother to repay his next loan, because, who knows, another party will be in power and it too will cancel his debts. What message does this send to the honest village woman who struggles every week to repay her micro-loan?” He has brought in the ‘moral’ angle to the loan waiver. It is interesting because, the government frames laws and establishes morality which is then modified by the civil society. The concern should be whether the loan waiver achieves its objectives or not.

Mutiny.in does not question the FM’s ‘economic sense’ and goes on to say that “but, burdened no doubt by political considerations, the Finance Minister has made this unabashedly populist announcement.” Populist-in what sense?

“India cancels small farmers’ debt” says the BBC. It also has a picture of a representative small farmer. I wonder whether the objective of the waiver was to help the small farmers at all. The rationale behind the waiver is debatable. It has not fooled the public therefore it won’t help in the elections. It has done nothing to resurrect the farmers in distress.

According to Business Standard, the present budget is evidence for politics winning over economics. The author(s) have not studied anything but neo classical economics. Their notion of politics and economics as distinct disciplines is quite scary. This is where Classical Political Economy aids. They do not view economics as an independent arena. For them, it is very much a part of politics, society, etc.

India Today describes the budget as “Bad politics bad economics”. According to me, this is the best description of the budget.

The Indian Government consults famous economists who have been trained abroad and in India and also has talks with various eminent economists. Have they suggested ‘wrong’ policies? Or is that the Government decided not to accept their policies? To make such ‘loan waivers’, one does not need an academician.

Economists like Keynes, Smith, Ricardo, etc wrote ‘economics’ books not for fame or money but to help their respective economies. They studied economics to rectify the problems that existed then. Though a lot of research papers and articles are being published by Indian Economists, none of them seem to help the people of India. What are economists doing these days?

Prices- how are they formed? Economics fundamentally is concerned with the theory of value; wherein prices play a crucial role. Does the mainstream or marginalist (neoclassical theory) explain the formation of prices? In equilibrium, the forces of demand and supply interact to give the equilibrium prices and quantity purchased and sold. But, in reality, is it so? Does this theory explain the actual working of any economy?

In school textbooks, I remember being taught the law of demand, factors affecting demand and the exceptions to demand. The law of demand conveniently takes into account only one factor, which is its own price. And economists like Veblen and Giffen who tried to discuss demand were sidelined as exceptions.

Thorstein Veblen talked of ’social factors’ like status symbol, conspicuous consumption etc which affected demand. His book The Theory of the Leisure Class explains how interdependent individuals in an economy are, and how the individual is very much a part of the society unlike the ‘rationalist atomistic individual’ as assumed by the mainstream theory.

In Marshall’s Principles of Economics, he mentions Giffen effect- a rise in the price of bread results in a large drain of resources which force them to curtail the consumption of relatively expensive items like meat; and they consume more of bread as it is still the cheapest food they can get. In India, with more than 60% percent of the populace being poor [Guruswamy and Abraham], Giffen effect is the norm rather than the exception!

This post discusses some of the microeconomic concepts taught across schools and colleges.

Scarcity

I was taught that the central problems in economics were that of scarcity, of unlimited wants and how one chooses the best option. And here optimization (a mathematical apparatus) comes to the aid of economics- in finding the optimum. But are resources really scarce? If resources were really scarce, how could an economy grow? Land, of course is scarce; but the availability of land can be increased through reclamation, deforestation etc. Economics ought to be concerned about wants that are backed by purchasing power; otherwise the theory will be trying to reconcile dreams and scarce resources.

Equilibrium

Equilibrium is reached when the demand and supply curves intersect in the graph having quantity demanded and supplied on the x axis and price on the y axis. Joan Robinson (1973) wonders why one uses a metaphor based on space to explain a process which takes place in time.

This approach has for quite some time disturbed me. Why is it that we take ‘equilibrium’ to be favorable? Equilibrium is a thing very commonly found in Physics. One of the meanings is that ‘it is a state of rest’ and this is precisely the meaning economists provide. For, in equilibrium, the quantity demanded will be equal to quantity supplied and all is well. Coming to think of it more, why would a stagnant economy be favorable? What is more frightening is that, we are taught that it is what economic policies should aim at!

Prices

Prices, according to the mainstream neoclassical theory are determined based on the intersection of demand and supply; that too in a static set up. Prices, in today’s world is certainly not fixed in the before said manner. The producers decide the price based on the cost of raw materials and other items needed for production, wages and salaries of employees, advertising costs, existing taxes, etc. So this means, prices in an economy has more correspondence to the supply side than the demand side.

What is the significance of the demand side? One of the reasons could be to point out the importance consumers have in deciding the prices in a ‘perfectly competitive’ economy. It would signify consumer sovereignty in such an economy. Again, this belief of ‘consumer sovereignty’ is something one would like to have, but is absent totally.

Perfect Competition

No student of economics graduates without studying ‘perfect competition’. It is very much entrenched in economic theory as taught today. Why? The answer given is that it is the ideal state for an economy. Or rather, as the name suggests, it is ‘perfect’. Then we are taught about imperfect competitions keeping in mind what is good or ideal-perfect competition.

One of thoughts one could have is ‘why is it considered perfect’. The price is assumed to be given or it is said that the firm is the price taker. Another query would be- is perfect competition possible? The main driving force behind corporations and businesses is money or precisely speaking, profits. Would firms like an atmosphere where they are unable to fix prices and hence unable to earn more profits? It reeks of Orwell’s Animal Farm. Why would there be any competition at all? Aren’t differences that lead to competition? Would there be any incentive to produce or to diversify?

Conclusion

This post ends on a skeptical note. Is the current mainstream economics helping the economy by tailoring productive and progressive economic policies? Is they are not, why are they still being taught as compulsory topics? Is there an alternative approach?

I would like to put forth a question regarding the notion of prices.

50 years ago, one could buy a book for a rupee; but now, a book’s average cost would be about 100. This follows for all other goods and services too. What is that which accounts for this sustained rise in prices? Is it inflation alone?

This post is the first in the series- On Neoclassical Economics. This series attempts to look at the basic concepts of Neoclassicalism or Marginalism. The concepts that this series will cover are that of man being rational, measurement of utility, equilibrium from demand and supply, Micro and Macro economics and notion of perfect competition.

Remind yourself that what we (mostly) see in textbooks is Neoclassical economics (In India). Is there another approach to Economics which these textbooks fail to talk about? The answer is yes. It is known as ‘Classical Political Economy’.

Classical Political Economy

The concern of the classical economists from Adam Smith to David Ricardo was the laws governing the emerging capitalist economy, characterized by wage labour, an increasingly sophisticated division of labour, the coordination of economic activities via a system of interdependent markets in which transactions are mediated through money, and rapid technical, organizational and institutional change. In short, they were concerned with an economic system in motion. [Kurz and Salvadori 1998]

This approach does not break economics into monetary, fiscal, international trade, microeconomics, macroeconomics etc. Nowadays, economics has got lot many divisions and specialties, that I feel the essence is getting compromised. [Thomas 2006] Classical Political Economy does not make such compartments like the ‘mainstream economics’ and is also dynamic in nature.

Neoclassical economics began as a project to fashion an economic model in the image of Newtonian mechanics, one in which economic agents could be treated as if they were particles obeying mechanical laws, and all of whose behaviour could, in principle, be described simultaneously by a solvable system of equations. [www.paecon.net ]

This post delves into the origin and the importance utility enjoys in Microeconomics aka ‘the pet of Neoclassicalists‘.

Economists are subject to many vices, and one of them has been to talk about ‘utility’, which is a quantitative conception that there is no known way of measuring. [Robinson 1979] Still, hours and hours are dedicated to the task of measuring Utility and ‘Marginal’ Utility in colleges and universities. It forms the basis of Microeconomics and also helps in bringing more mathematics into the realm of economics.

Bernard Guerrien writes in Issue 12 of the Post-Autistic Economics Review that “The French students’ movement against autism in economics started with a revolt against the disproportionate importance of microeconomics in economics teaching. The students complained that nobody had really proved to them that microeconomics was of any use; what is the interest of going through “micro1”, “micro2”, “micro3”, etc., using lots of mathematics to speak of fictitious households, fictitious enterprises and fictitious markets?”

Can economic policies be made based on such ‘fictitious’ measurements? Is economics a policy science or an intellectual game? One becomes a skeptic when wondering about why ‘Microeconomics’ has come to dominate economics learning. Is it to make economics more mathematical?

A digression: Economy

The concept of the ‘economy’ is of utmost importance in this regard. Does the ‘economy’ occupy a separate existence from that of the community and the state? Very often, the headlines in the media say so, but it is not so. And economics is not tantamount to money.

According to C. T. Kurien, Economy is a structure of relationships among a group of people, in terms of the manner in which they exercise control over resources, use resources and labour in the production of goods, and define and settle the claims of the members over what is produced, emphasising that while the economy is concerned with goods and services, it should be recognised essentially as a set of social relationships.

The economy consists of two realms, namely the community and the market. Community refers to real, on-the-ground associations and to imagined solidarities that people experience. [Gudeman 2001] Gudeman goes on to say that ‘Neoclassical economics focuses on one value domain, the market, which is modified as a separate sphere making up the whole of economy in which all goods are priced and available for exchange.’

On Utilitarianism

Bentham played a crucial role in the development of ‘utility measurement’. He proposed the ‘felicific calculus’, namely the quantitative evaluation and the algebraic summation of pleasures and pains stemming as consequences from any given course of action. ‘Good’ is whatever gives as its result an algebraically positive felicific magnitude, and hence increases the ‘amount of happiness’ within human societies; ‘bad’ is whatever gives as its result a negative quantity, and as a consequence decreases the amount of social happiness. [Roncaglia 1999]

But, Mill in his Utilitarianism (1987) criticizes this notion of measurement of utility by stating that ‘Utility is an uncertain standard, which every different person interprets differently, and even ‘in the mind of one and the same individual, justice is not some one rule, principle, or maxim, but many.’

“If there is an intellectual field where the utilitarian attitude-namely, looking at the consequences of human actions-dominates, to the point of being identified with the scientific attitude tout court, this is economics” [Roncaglia 1999](Italics added)

Utility, when taught to students, appears very logical and thus is easily comprehended and imbibed. Of course, no individual would do any activity if it didn’t give him or her pleasure or rather, ‘utility’. As a philosophical concept, it does make sense. But when it is introduced into the realm of economics, it fails miserably. The demand function which is built on utility along with the supply is what determines the equilibrium price and quantity in neoclassical economics. But if one stops to think and to try and relate it to the real world, one would fail. Think of how prices are determined; and are prices based on demand and supply functions?

Conclusions

What has neoclassical theory taught us? That individuals do what they do because they get ‘utility’ out of it? And that this helps in calculating the demand of an economy which further helps in the determination of prices? Does it tell us anything about the working of the economy?

References

1) Kurz, H and Salvadori, N (edited), The Elgar companion to classical economics (A-K), 1998.
2) Robinson, Joan, Collected Economic Papers, 1979.
3) Kurien, C T, Rethinking Economics, 1995.
4) Gudeman, Stephen, The anthropology of economy, 2001.
5) Thomas, A M, Undergraduate Economist, The fellowship of economics, 2007.

The following three maps will show us that, though the spending in health by the private sector is comparatively much larger than the public sector, yet HIV prevalence is very high in India.

This shows the dire need for targeted public investment in health care. This is because private sector investment does not extend to the rural areas and regions with low purchasing power. [Investment is a part of spending]

Public Health Spending

Territory size shows the proportion of worldwide spending on public health services that is spent there. This spending is measured in purchasing power parity.

HIV Prevalence

Territory size shows the proportion of all people aged 15-49 with HIV (Human Immunodeficiency Virus) worldwide, living there.

Private Health Spending

Territory size shows the proportion of worldwide private spending on health services that is spent there. This spending is measured in purchasing power parity.

Source: Worldmapper

[Cross posted @ Krish World]

Four persons A, B, C and D have to share Rs 4 among themselves in units of one rupee. First A proposes a distribution and all of them, including A vote on it. If at least 50% of those voting agree with A, the proposal is accepted. If not, A loses her voting rights and B gets to propose a distribution and all except A vote on it. Once again B’s proposal is accepted if at least 50% of those eligible to vote agree on it. If not, B also loses her voting rights and C gets to propose and so on to D. Assume that each person prefers more money to less and will always vote against a distribution in which she gets zero. What distribution would A propose?

This is a sequential game. It is one in which players make decisions (or select a strategy) following a certain predefined order, and in which at least some players can observe the moves of players who preceded them. If no players observe the moves of previous players, then the game is simultaneous. [Game Theory.net]

This is also one of perfect information. If every player observes the moves of every other player who has gone before her, the game is one of perfect information. [Game Theory.net]

In the sequential game with perfect information, A will propose 3 for himself and 1 to D. This will be accepted by both A and D. D will accept anything more than 0; the reason being that, if all the proposals are rejected and the 4 rupees come in Cs hand, he will take all 4 for himself and since he will will vote for himself, the proposal will get accepted.

In such a game, the one makes the move first will have undue advantage.

On Perfect Competition

This market environment is extensively studied in Economics and is considered as a “Perfect” environment especially on the basis of efficiency.

This write up explains the concept of perfect competition succinctly.

Is such an environment favourable for all ? Competitive markets emphasise the importance of having perfect information as a pre requisite for a competitive equilibrium; one which is also Pareto Efficient.

The consumption decisions taken are sequential in nature. The consumer decides to purchase the commodity or service keeping in mind the price; which has been fixed earlier keeping in mind the consumers preferences. The outcome will always favour the producer (In a perfectly competitive market) as he makes the decision of pricing first.

On Pareto Efficiency

An outcome of a game is Pareto efficient if there is no other outcome that makes every player at least as well off and at least one player strictly better off. That is, a Pareto Optimal outcome cannot be improved upon without hurting at least one player. [Game Theory.net]

Conclusion

If the objective in an economy is Pareto Efficiency, then it can be achieved by a competitive market. But, it does not take into consideration equity in distribution. For example, in the game mentioned above, an allocation which leaves A with all the 4 rupees is Pareto Efficient, because in order to make someone better off, A has to be made worse off.

In India, the objective is to reduce Poverty and make growth more wide spread rather than growth being segregated in nature.

The idea that we cannot achieve the ideal state of perfectly competitive market equilibrium might seem pessimistic. Some economists insist upon holding the capitalist system to a standard of competitive equilibrium. Failure to meet this standard constitutes a “market failure” that warrants government intervention.[MacKenzie 2006]

So, is a market environment with perfect information desirable?

Economics has been getting more mathematical with the passage of time. Students opt for maximum papers in mathematics so that they can remain competitive academically at the international level.

Stark inequalities are present in the syllabi within India. In the South, the undergraduate degree does not lay much of emphasis on mathematics in comparison to the North, where the emphasis on mathematics is very high. One reason is that, in the South a degree is Economics is considered as one of the Arts subject, while in the North it is transitioning into a Science subject.

This affects the discipline of Economics. In certain areas of Economics, it requires analysis which needs the use of mathematics; but is it that Economics requires mathematics in all areas? But again, this depends on if one views Economics as a Positive or a Normative discipline.

Axel Leijonhufvud writes in his paper The Uses of the Past- The history of economic thought used to be part of the graduate studies in economics. Sixty or seventy years ago, it was common of famous teachers like Lionel Robbins or Jacob Viner to approach economic theory by way of its development. Today, of course, this is seen as an archaic way of going about it and it has become quite uncommon. The history of thought is still a tolerated subject-in at least a few places- but not one to be studied to improve ones understanding of today’s economics. [Via: New Economist]

For those who want to have a deeper understanding of the discipline of Economics, learning the history of economic thought will prove to be highly beneficial. It will help in understanding how the dominant theories came by and how the theories get refuted. When history of economic thought is aided with economic history, it will provide a clearer understanding of economics to the student.

References

1) The Uses of the Past, Axel Leijonhufvud, December 2006.

Further Readings

1) History of Economic Thought

2) History of Economics Society

3) History of Economic Thought Website

This post deals with the discipline of Economics as to how Alfred Marshall saw it in 1890. Here are some of the excerpts which i found interesting.

“Economics cannot be compared with the exact physical sciences: for it deals with the ever changing and subtle forces of human nature.”

“It is essential to note that the economist does not claim to measure any affection of the mind in itself, or directly; but only indirectly through its effect.”

“The economist studies mental states rather through their manifestations than in themselves. He estimates the incentives to action by their effects just in the same way as people do in common life.”

“A shilling may measure a greater pleasure (or other satisfaction) at one time than at another even for the same person; because money may be more plentiful with him, or because his sensibility may vary. It would therefore not be safe to say that any two men with the same income derive equal benefit from its use; or that they would suffer equal pain from the same diminution of it.”

“A stronger incentive will be required to induce a person to pay a given price for anything if he is poor than if he is rich. The benefit that is measured in the poorer man’s mind by the cost is greater than that measured by it in the richer man’s mind.”

“Economics takes man just as he is in ordinary life: and in ordinary life people do not weigh beforehand the results of every action, whether the impulses to it come from their higher nature or their lower.”

“Economists study the actions of individuals, but study them in relation to social rather than individual life; and therefore concern themselves but little with personal peculiarities of temper and character. The measurement of motive thus obtained is not indeed perfectly accurate; for if it were, economics would rank with the most advanced of the physical sciences; and not, as it actually does, with the least advanced.”

“It is the business of economics, as of almost every other science, to collect facts, to arrange and interpret them, and to draw inferences from them. “Observation and description, definition and classification are the preparatory activities. But what we desire to reach thereby is a knowledge of the interdependence of economic phenomena…. Induction and deduction are both needed for scientific thought as the right and left foot are both needed for walking.”

Reference

1)Principles of Economics, Alfred Marshall

The conflicting ideologies in Economics have more or less revolved around mainly two institutions- Markets and Governments. The Capitalists believe ‘Markets’ to be the panacea for all economic problems, while the Socialists replace the ‘market’ with the ‘government’.

On Markets

Market is the institutional framework within which the act of exchange takes place or the institutional milieu which is the context of the relationship of exchange between the parties. [Kurien 1993] Thus market is an institution which allows for exchange. This exchange is only possible if one of the parties have adequate purchasing power.

Markets exclude people as consumers or buyers of goods and services if they do not have any incomes, or sifficient incomes, which can be transalated into purchasing power. People experience such exclusion if they do not have assets, physical of financial, which can be used (or sold) to yield an income in the form of rent interest or profits. [Nayyar 2002]

So, relying on markets alone will exclude a large chunk of the populace of a nation. Those with relatively higher purchasing power will benefit over those will less purchasing power. And for the former, the world will become a flatter place, as Thomas L Friedman says.

On Government

A government is a body that has the authority to make and the power to enforce rules and laws within a civil, corporate, religious, academic, or other organization or group. In its broadest sense, “to govern” means to administer or supervise, whether over a state, a set group of people, or a collection of assets. [Wikipedia]

In our formal analysis of exchange and producation, the role of social norms ( Smith proposed that market exchange is sustained by the underlying social ‘norms’ resulting frm sympathy, for example, trust in exchange, respect for contracts etc.) are left out and we tend to exaggerate on one hand, the efficiency of an abstract market mechanism based on an invented ‘auctioneer’. On the other, we tend to neglect the roles which the state could play in either reinforcing or destroying these norms which are essential for the functioning of the market economy. [Bhaduri 2002]

On Globalization

Globalization is predominantly a ‘market’ centric process.

Globalization, both then and now, has been associated with an exclusion of countries and of people from its world of economic opportunities. [Nayyar 2002]

Economic globalization challenges the political authority, which the nation state had attained by undermining gradually many of the norms of the traditional civil society.[ Bhaduri 2002]

Globalization has resulted in high growth only in a selected few sectors. [Thomas 2007]

Conclusion

Relying solely on the Government to undertake the functions of the market will lead to social unrest and will result in economic inefficiency. And government regulations are a check on the markets so that a market failure does not occur.

Can markets and governments exist peacefully? Can market and governnment produced goods and services reach an equilibrium? Will this result in a state, where those excluded from the market will be included by the government machinery? Is this sustainable in the long run?

References

1)Deepak Nayyar (edited), Towards Global Governance, Governing Globalization, 2002.
2)Amit Bhaduri, Nationalism and Economic Policy in the Era of Globalization, Governing Globalization, 2002.
3)C. T. Kurien, On Markets in economic Theory and Policy, 1993.

There is a consensus about the crisis which the Agricultural sector is facing in India. The contribution to GDP has been falling and it is under 20% of the GDP now. The sector provides employment to about 60% of the population. Most of the farmers under this sector fall under the ‘informal sector’ where there is a dearth of reliable statistics. This can be one of the causes for the low share of agriculture in the GDP. From the figures of employment and ‘contribution to GDP’, we can conclude that there is the presence of a high degree of disguised unemployment.

Agriculture in the Budget

The proposals to revive the agricultural sector are:

• Farm credit raised to Rs 1,75,000 crore, providing relief to additional 50 lakh farmers.
• At 7 percent interest rate farmers receive short-term credit from NABARD, with Rs 3,00,000 upper limit on principal amount.
• The outlay for Accelerated Irrigation Benefit Programme (AIBP) has been raised by 58.22 per cent to Rs 7,120 crore for 2006-07 from Rs 4,500 crore during 2005-06.
• Banking sector to credit-link an additional 3,85,000 Self-Help Groups (SHGs) in 2006-07.
• NABARD to open a separate line of credit for financing farm production and investment activities.
• The corpus of Rural Infrastructure Development Fund (RIDF) in 12 tranches to be increased to Rs 10,000 crore.
• The programme for repair, renovation and restoration of water bodies to be implemented through pilot projects in 23 districts in 13 states. The estimated cost of the programme stands at Rs 4,481 crore.

[Via Surfindia]

The current budget has addressed the farm credit, pulses, plantation sector, irrigation, rainfed area development, restoring water bodies, ground water recharge, training of farmers, fertilizer subsidies, agricultural insurance, social security etc. [Budget 2007-08]

Are these enough to significantly affect the agricultural sector? Moreover since India claims to growing at over 8% in GDP, are these allocations sufficient?

An important constituent of the strategy to revive agricultural performance in the country must be to increase the level of public investment in agriculture research and development and rural infrastructure. Increase in public investment in agriculture in turn requires significant rationalisation and restructuring of government subsidies on food and agricultural inputs, including power, canal irrigation and fertilisers. Greater public investment in agriculture research and extension and rural infrastructure would stimulate private investment in agriculture and agro-processing. A policy of higher investments without commensurate reforms in the institutions endowed with the charge of managing the resources created is, however, unlikely to succeed. Participatory management and selective privatisation can contribute greatly to improving the delivery of major inputs to agriculture. [Sharma and Gulati 2005]

Reasons for the crisis

Only 2 reasons are being highlighted as all the other reasons are associated to there too or spring form these two. So broadly speaking, the crisis is due to

<!–[if !supportLists]–>1) <!–[endif]–>Pressure on land: Population has outstripped land supply. Faster growth of population goes with slower rise in per capita output. [Vaidyanathan 1988] The rate of growth of population is more in the rural areas than in the urban areas. Population growth can be said to be indirectly proportional to education. Where there are more family planning programmes and adequate education, which lays emphasis on both the male and female child, the tendency to have more children is less. Moreover, with the rapid expansion of SEZ’s, the pressure on agricultural land is further aggravated.

<!–[if !supportLists]–>2) <!–[endif]–>Structural deficiencies: Indian agriculture is characterized by inefficient distribution, marketing and financial institutions. As more of the agriculture falls under the ambit of the informal sector, there is a dearth of efficient institutions. The loans are hard to come by as they lack the necessary assets to keep as collateral. Moreover, with the current rates of inflation, the prices of inputs will rise, further adding to the farmers’ distress. The distribution systems fail as the agricultural produce most often does not reach the targeted population.

US and Indian Agriculture

Rich nations preach free trade but practice protectionism against poor nations, especially in agriculture. For example, the United States severely limits sugar imports from Latin America to benefit American sugar beet growers, even inhibiting imports of Brazilian cane-based ethanol, which is far cheaper and more energy efficient than domestic ethanol. [Noll 2006]

The subsidies that the developed nations offer their farmers’ vis-à-vis to what the developing countries can offer is very large. The developing nations find it difficult to withstand this competition in the world markets. If the subsidies are not reduced by the US and the EU, it will be the developing nations who will have to bear the brunt. [Thomas 2006]

Globalization and Indian Agriculture

Once again, there are some individual cases where globalization has led to deprivation and suicide. About 800 km away from Mumbai is the cotton-growing region of Vidarbha, perched on the Deccan Plateau. Hundreds of cotton farmers here have killed themselves in recent years. The reasons are complex and varied. Among the reasons is this one: farmers here cannot compete with cheap cotton imported from the United States, whose farmers are lavished with huge subsidies by a government that preaches the virtues of competitive markets to the rest of the world. Their deaths can be linked to imperfect globalization. More generally, though, reform and globalization have led to faster growth and sharp drops in poverty levels. [Knowledge Wharton 2007]

The article talks about individual cases which resulted from imperfect competition. I wonder if anything in this world can work in a perfect way! And in Vidarbha, it is not individuals who are dying but ‘groups of individuals’. Yes, globalization has led to faster growth but ‘sharp drops’ in poverty levels is hard to agree, though the statistics does say so.

Conclusion

On the whole, the condition of Indian Agriculture is bleak. If the current allocations of the budget will help the agricultural sector will be seen in the next few years. The sector is pressurised by the domestic as well as the international economy. Agriculture finds it hard to compete in international markets with other products which are highly subsidised. More of funds need to be devoted to research in agriculture which should aim at improving agricultural production and productivity. The size of agricultural markets needs to be increased. This can be facilitated by the extension and improvement of transport. [Vaidyanathan 1988]

Agriculture is a sector which cannot be neglected as majority of the Indians depend on it for their livelihood. Targeted policies which bring about favourable outcomes are necessary. Of late, the rhetoric is about the booming GDP and bulling bourses; that significant issues like ‘agriculture’ are not getting adequate attention.

References

<!–[if !supportLists]–>1) <!–[endif]–>Pooja Sharma and Ashok Gulati, Can the Budget Boost Agricultural Performance?, EPW, May 21, 2005.

<!–[if !supportLists]–>2) <!–[endif]–>Alex M Thomas, Why fear subsidies?, Undergraduate Economist, August 16, 2006.

<!–[if !supportLists]–>3) <!–[endif]–>Roger G. Noll, The Foreign aid Paradox, SIEPR Policy Brief, October 2006.

<!–[if !supportLists]–>4) <!–[endif]–>A Vaidyanathan, India’s Agricultural Development in a Regional Perspective, 1988.

Further Readings

<!–[if !supportLists]–>1) <!–[endif]–>On Private Participation in Agriculture- M Rajivlochan (Via the commenter, Chetana)