ECO     ECONOMIC HIGHLIGHTS

New      Delhi, 24 November 2005

 Creating More Jobs

NEED FOR LONG-TERM STRATEGY

By Dr. Vinod Mehta

The UPA Government had promised to create more jobs under the Common Minimum Programme (CMP). It has been in power for almost one and a half year and we have yet to see the results.  Generally speaking, increase in the level of investment will generate more jobs in the country, but it will not guarantee generation of more jobs on its own. People are already talking of jobless growth.

 The time, however, is ripe to devise strategies, both at the local and national levels, which lead to the creation of more jobs without resulting in mass migration of population from village/towns to large cities. Manufacturing sector is growing and the rate of growth is around 7 per cent. Many economists are of the view that we can sustain this growth rate in the coming years.

 It is common knowledge that about 74 per cent of the population lives in rural areas and 26 per cent in urban areas. In urban areas the problem of unemployment is not acute; it is serious mainly in rural areas.  The sheer size of the urban population in metropolitan cities like Delhi, Mumbai, Kolkata or Chennai  provide many job opportunities, more so in the unorganized sector. There is so much demand for various kinds of labour and services that anyone looking for a job can find some work even if it may not be to one’s liking; the labour that migrates to these areas is bound to find some work.

 It is a different matter that unregulated migrations leads to many problems in urban areas, like emergence of slums, increase in crime rate and so on but which needs to be checked.  But the real challenge of generating employment is in smaller towns and villages where the size of the population is so small that there are hardly any opportunities for generating remunerative employment. Setting up of factories or small businesses does not make any economic sense; where there are no factories or workshops the demand for labour is almost nil. Again the total population of the area is so small that it does not make economic sense to provide services or generate some kind of a work in these areas.

 According to the latest Census figures, out of a total number of 5,88,781 villages, 2,90,093, i.e. about 50per cent, have population less than 1,000. The number of villages having population between 1,000 and 2,000 is 1,14,395; the number of villages with population between 2,000 and 5,000 is 62,915; for villages with population between 5,000 and 10,000, the number is 10,597 and the number of villages with over 10,000 population is 2,779. It means that for 70 per cent of the villages the size of the population is less than 2,000.

 What impact can it  have on employment generation?  For one you cannot make massive investments as it would not be able to reap any economies of scale. It will not be able to supply the required skilled or semi-skilled labour. The demand for services from the villagers will not be enough to provide job opportunities. This means that the demand factor will also not work. Thus there will be almost nil opportunities for young people of these villages to find jobs even in the unorganized sector. This problem is acute in the North-East.

 In other countries, the rural population is small while urban population is very large. Less than 25 per cent  of the population is in rural areas. A large number of jobs are being created in the service sector, followed by the manufacturing sector. (Even though some of the services are being outsourced by these countries, it has also been noticed that some of the affected employees are also migrating to the developing countries.) Therefore, the employment opportunities are relatively more in these countries than in a country like India where the population is overwhelmingly rural. It is a sheer challenge how to generate employment in areas where the population is less than 2000.

 Therefore, the Government will have to have some kind of a strategy to generate employment in these villages in the coming years. One of the ways to overcome this situation would be to club these villages into viable economic zones on the basis of some economic criteria before making investment in these areas. Most of the activities may be centred around food processing of various agricultural products, including milk and milk products and smaller workshops, production units etc.

 For instance, the Government can help these villages to start food processing and marketing cooperatives, start small repair and maintenance workshops to attend to repair of mechanical equipments, to set up cold storages etc., which in turn will raise employment opportunities for the local people both in the organized as well as the unorganized sector.

 The second equally important point is to link all these villages with towns and metropolitan cities with all-weather good quality roads. This will help the rural people from these villages to take their products to nearby towns and metropolitan cities where there is a market for their  products. Good roads can facilitate the to- and-fro movement  of labour on daily basis to nearby towns where they are bound to find some work.  Once these villages are linked by good roads many of the companies in the private sector may find it economical to procure their raw materials or outsource their work from these places. They may even come forward to set up small units.

 Large-scale investment does not mean that one put in big money and set up bigger projects. Large-scale investment also means that one spreads out investment all over and helps people to engage in meaningful economic activity. Food-for-work programme is not just enough. What is needed is gainful employment on a sustained basis. This means easy movement of agricultural and other products from one place to another and easy to-and-fro movement of labour from village to nearby towns.

 In the long run, however, the emphasis will have to shift from creation of jobs in the agricultural sector to creation of jobs in manufacturing and service sector. The experience of developed countries shows that more jobs are created in the non-agricultural sector. Therefore, the creation of jobs in the rural sector can at best be a medium term solution to unemployment problem.

 The urban renewal mission and the Bharat Nirman mission for rural India, apart from creating assets, need to focus on creation of jobs on a large scale. Mix of appropriate strategies, both at the micro level and the macro level, can do wonders.---INFA

 (Copyright, India News and Feature Alliance)

ECONOMIC HIGHLIGHTS

New Delhi, 16 November 2005

Towards Common Market

Cooperation within SAARC Countries

By Dr. Vinod Mehta

The 13^th South Asian Association for Regional Cooperation (SAARC) Summit ended on a positive note in Dhaka. The leaders agreed not only to curb terrorism but also to increase economic cooperation among themselves and fight poverty in the region. Hopefully the SAFTA (South Asia Free Trade Area) would now take off, which is in the interest of all the member-countries.

Narasimha Rao’s Congress Government initiated the move, called Look-East policy but it was mainly confined to South-East Asian countries, especially the ASEAN. Now that India has established good relations with ASEAN it is high time that we also look at our neighborhood and try to work for a common market in the coming years.

The relations between India and Pakistan appear to be improving and hopefully would not come in the way of trade and economic relations between India and other SAARC countries. The potential of trade and economic links with Nepal, Bhutan, Bangladesh, Sri Lanka and Maldives are very high. It has been stated in this column on two occasions just before the Agra Summit that both India and Pakistan stand to gain immensely from trade and so also other countries. Together these countries constitute a vast market to tap and there is a demand for each others’ products.

Let us not become hyper-sensitive on being labeled as ‘big brother’ by some quarters in these countries. Both territory-wise as well as population-wise India is relatively much bigger than all the SAARC countries taken together. In economic terms also, India is very large; it is one huge market perhaps of the size of EEC. Its GDP is much higher than those of its neighbours and at the moment it is enjoying a very large and comfortable volume of foreign exchange reserves that it had not seen in the last 50 years. The Indian economy is by and large growing at an average rate of 6 to 7% per annum, which may not be good but is also not bad. Therefore, at this stage India can afford to be more liberal towards its neighbors than what it had been.

Apart from economic gains India is looking for, it should also aim at earning the goodwill of the people of these nations by being more accommodative to them. At this stage of our economic development, we can also afford to allow duty free imports of certain selected items from some of them. In fact, I had argued on similar lines more than a decade ago in this column. At the moment, Bangladesh is having adverse trade balance with India. Whether this measure will help reduce the adverse trade balance of Bangladesh vis-à-vis India has yet to be seen, but it will have good impact on the relations between two countries.

One would like to say that India should show similar gesture to other neighbouring countries, especially Nepal, Bhutan, Sri Lanka and Maldives, and allow their products to have an access to Indian markets in a big way. Let’s not get paranoid by the fact that the goods from these countries would flood the Indian market. Their production bases are so small that it will call for huge investment before they can produce goods on a scale which can flood the Indian market. In fact, after liberalization many Indian companies have shifted  their production bases to some of these countries.

At the moment, India’s external trade is mainly oriented towards OECD countries and some West Asian countries. ASEAN  countries would come second. The trade turnover between India and the individual SAARC countries is so small that it does not attract attention even in our annual Economic Surveys.

 A few years ago it was said that the cheap Chinese goods would swamp the Indian market when India would open up its economy. The Chinese goods entered the Indian market in a big way but had to beat a retreat as the quality of Chinese goods was low that the Indian consumer did not accept it even though they were relatively cheaper. Compared to China, our South Asian neighbours are small in every respect and unlike China would not be able to dump their goods on the Indian market.

There are also several additional opportunities to expand cooperation with the SAARC nations. For instance, the tourist sector within the SAARC region has been neglected for a very long time. Tourism sector has low capital investment but relatively high earning potential. At one point of time there was an idea to start daily air services to link the capitals of all the SAARC countries. That the idea has been revived is welcome. We can learn from the ASEAN experience. All the ASEAN capitals are linked by air and they have special low fares for travel within ASEAN countries. In fact India is prepared to have open sky policy with SAARC countries provided they also reciprocate.

Apart from this wherever possible rail, road and sea links must be strengthened among the SAARC countries. With Nepal and Bangladesh we can develop world class road and rail links for speedy movement of goods and people, extending beyond their borders to China, Myanmar and Thailand. With Sri Lanka, Maldives and with Bangladesh we can develop sea links

India has also taken a lead in admitting more members.  The Dhaka Summit has admitted Afghanistan as a new member. We should work to admit China and Central Asian countries as dialogue partners. It is India which can again take the initiative in this direction by lobbying with SAARC countries. Even if it calls for amending the original SAARC Charter, India should be able to carry the other members along with it on this issue.

Afghanistan at the moment is engaged in reconstructing its economy. It not only needs humanitarian aid but also trade to put its economy on a strong footing in the long run. Now it would be more easier for countries like Nepal, Bhutan, Bangladesh and India to send goods to Afghanistan  by road through Pakistan.  It would then be difficult for Pakistan to block transit facilities to Afghanistan.

As for the land, locked Central Asian nations like Uzbekistan, Tajikististan, Kyrghistan and Kazakhstan, they are also looking for trade opportunities through land routes with India. If they become dialogue partners or associate members of the SAARC, then Pakistan will find it profitable to allow the movement of Central Asian goods to India, Nepal and Bangladesh through its territory and vice-versa.

ECONOMIC HIGHLIGHTS

New Delhi, November 10, 2005

India’s White Revolution

Dairy Industry Should be Global Player

By Dr. Vinod Mehta

Thanks to the Operation Flood Programme, India has today emerged the largest producer of milk in the world and will retain this position in the coming years.  In 1950-51 the country was producing only 17 million tonnes of milk, while in 2003-2004 its production reached the level of 92 million tonnes; the projection is 114 million tonnes in 2010 and 138 million tonnes in 2015.

However, behind this dry statistics lies the fact that this increased milk production has also brought about a social change in the rural sector by way of dairy cooperatives which put reasonable earnings in the hands of the poorest of the families owning one or two cattle only.   There are more than 77,500 Dairy Cooperative Societies organized in more than 170 milk sheds involving over 10 million farmer members.  A major feature of our white revolution is that the Government has ensured that a large percentage of the total milk produced in the country is made available to the general public as fresh liquid milk.

With the opening of the agricultural sector under the WTO agreement, fears were being expressed that all these achievements may be in danger if the Government did not take appropriate measures to protect the consumer as well as the farmer from the “unjust competition” and “unjust practices” of the milk exporting countries.  The multi-national corporations already operating in India in the fast moving consumer goods sector or the multinational companies that may be thinking of entering the country may change rules of the game and the gains made in the rural sector in the form of social change may be lost. 

If one goes by the experience of the past two years, the fears appear to be unfounded. The Indian Dairy Industry need not worry about multinational companies, but should concentrate on capturing a slice of the international market, especially for milk-based products like cheese, dahi, ice cream etc.

Though India is the largest producer of milk today in the world, yet it is not the largest exporter of milk.  According to the data available for the year 2001, India produced 80.5 million tonnes of milk (the projection for 2002 is 82 million tonnes), followed by USA 75 million tonnes, Russia 33 million tonnes, Germany 28 million tonnes, France 25 million tonnes, New Zealand 15 million tonnes, Australia 11 million tonnes, China 10 million tonnes and Japan 8.3 million tonnes.

Since milk is a perishable item it is converted first into milk powder to increase its shelf life.  The powder is again reconverted into liquid milk and some chemicals added to prolong its shelf life.  Apart from conversion of fresh liquid milk into powder, liquid milk is also converted into various dairy products like butter, cheese, butter oil, ghee, ice cream, flavoured milk and so on.  All these are value added products that fetch high prices to the manufacturer and not for the producers.   This is the normal practice in the developed countries.

With the opening of the agricultural sector multi-national corporations may   enter the dairy sector in a big way in the coming years and two of them, which are already in India, are trying to get a foothold in the Indian dairy market. The cooperative milk sector, led by Gujarat Cooperative Milk Marketing Federation (GCMMF) has taken the competition seriously and pushing ahead in a very big way.  However, to ensure level playing field, the multi-national corporations should also be asked to ensure the supply of fresh liquid milk to the Indian consumers before they can market the reconstituted milk or milk products.  The proportion of fresh liquid milk to be marketed by the multinational corporations must be clearly defined.  Again while marketing fresh milk, they must be asked clearly to state on the carton or pouch whether the milk is fresh milk or reconstituted milk. 

In a situation where MNCs are likely to enter the milk sector, it is essential to protect the interests of the consumers.  It is common knowledge that most of the multinational corporations, especially in the fast-moving consumer goods sector resort to various kind of undesirable practices to sell their products.  Many a time they resort to play of words to mislead the public. 

This is most of the time true with many products.  For instance, the reconstituted milk in tetra packs is either described as pure milk or natural milk, which clearly means that it is not fresh liquid milk.  Since people cannot distinguish between fresh liquid milk and reconstituted milk they buy the reconstituted milk as if it is fresh milk.  Again the milk powder they use to reconstitute milk comes from various sources. 

Therefore, the time is ripe to put in place strict quality control norms for the sale of milk and milk products, both for the domestic and the international market. It is thus important that, as a first step, the Government makes it mandatory that every packet of milk and milk product should carry the exact information whether a particular product is made from fresh milk or reconstituted milk etc. 

After having met the liquid milk needs of the consumers, the domestic milk producers are now going in for value added products like butter, cheese, curd, ice cream in a big way. It was feared that such a move will lead to increase in the prices of milk and milk products, but surprisingly the prices of milk and milk products in India have remained relatively stable in the past three years.  This is to the credit of our dairy The cooperative and private dairy sectors should slowly look  at the foreign markets where the prices are quite remunerative for products like butter, cheese, ice-cream etc.  The GCMMF has already taken a lead by exporting large quantities of liquid milk to Singapore every day. It is now eyeing the milk markets of Thailand, Malaysia and Indonesia. The day may not be far when India may export milk to China also. They should also enter the international market for dairy products.

It should also be understood that in most of the countries the farmers get large amounts of subsidies to maintain the production of milk at a certain level.  This factor should be taken into account while allowing foreign companies to sell milk and milk products in India by levying appropriate customs duties.

Now the project patent regime has come into force from  January 1, 2005 and all dairy processes and products will become patentable and we should move fast to patent our processes and products so that we are not edged out our own market.  For instance, it is India which has perfected the processes of producing milk powder and cheese from buffalo milk, which needs to be patented immediately if not done so far.

In the new WTO regime, India must keep its edge over milk production and should aim at to emerging as largest exporters of milk and milk products. For this we need not rear more cattle but increase the milk yield through better feed to cattle and by improving the pedigree of cattle stock.  Moreover, we must enforce stringent quality norms that conform to international standards for the marketing of milk and milk products, both in India and abroad.  We must also move fast to obtain patents for our processes and products. This is very important if we have to develop and sustain international markets for our milk and milk products. – INFA

(Copyright, India News and Feature Alliance)

ECONOMIC HIGHLIGHTS

New Delhi, 4 November 2005

India’s Great Curse

Budget Must Tackle Sick Industries

By Dr. Vinod Mehta

The budgetary exercise for the next fiscal has started. Though the matter of sick industries is a serious one, it has not been adequately addressed yet. The next year's budgetary proposals should, therefore, seriously address the question of "sick industries" which is one of India's great industrial curses today.  Far from adding to the growth of gross domestic product (GDP) they are in fact eating into it.  How long can this go on?

"India has many thousand ‘sick companies’ that in most other countries would go bankrupt and disappear.  India's system keeps them struggling on for years with subsidies (including cheap power), tax breaks, debt forgiveness and other life support instruments.  Because of this "exit policy", as it is curiously called, assets including workers--which could be more efficiently employed elsewhere go to waste.  Sometimes factories are simply abandoned.  The owners strip them of everything portable and sneak away in the night. People with claims against the firm are left without remedy. Creditors, suppliers and workers-- despite (more accurately, because of) their formidable legal protection--get nothing", The Economist of London once observed.

A few years ago the Reserve Bank of India (RBI) had reported that the total outstanding bad debt of the sick industries stood at Rs 12,474 crore. Today, this figure might be much higher.   If these resources were to be recovered, they could be used to set up power plants and many other infrastructure projects in the country.  But in the absence of any exit policy the scarce resources of the country are blocked for the last so many years.

Moreover, bank loans to such industrial units have become non-performing assets for some of the banks.  There is little production in these units, the machine and equipment lie idle, the labour force is idle but gets some payment for not doing any work, the unit cannot be closed down because of our company and labour laws and these units cannot be taken over by better managements. Look at the sick textile or jute mills. The Government does not have the money to revive them and the workers would not like them to be taken over by another management in the private sector, the result, scarce funds remain locked and assets remain idle. Some special package has been announced for the revival of sick textile units but it had very little impact.

In most parts of the world takeover of inefficient units by healthier units is an accepted norm.  It is for this reason that there is no concept of "sick industry" in the economic literature of most countries; the production units are either efficient or inefficient but never sick; the inefficient units, which are unable to improve their efficiency, are generally taken over by the healthier units or are allowed to close down.  This saves the society from wasteful investment and ensures efficient use of scarce resources.

It is for this reason that from the very beginning of economic reforms both the domestic and foreign investors have been asking for an exit policy, so that if something goes wrong with their investment because of changed investment climate, (changed market scenario etc.) they are able to get out of it with the least loss.

It was hoped that in the absence of an exit policy, the takeover code, which was introduced five years ago, would substitute for an exit policy, which the industrialists have been clamouring for.  It is not that there have been no takeovers in the past.  There have been takeovers in the past, but they are of no significance and have been mainly for the existing profit-earning units and seldom sick units.  And, whatever takeovers have occurred has never been transparent.  It was thought that in the absence of an exit policy the takeover code could be used to nurse the sick units back to health, of course with the change of management. However, the so-called takeover code has miserably failed in tackling the problem of sick industries.

Either the Finance Minister should come out with the long-needed exit policy or make amendments in the existing takeover code and turn it into some kind of an exit policy. In fact, the takeover code if modified and vigorously implemented in the case of sick companies could very well redeem the situation of sick industries. Under the takeover code the inefficient and mismanaged companies should be openly encouraged to be taken over by the stronger companies. 

There is no reason why the ailing Indian Iron and Steel Works be taken over by the existing steel units or by foreign companies? There is no harm if inefficient Indian companies are taken over by foreign companies as it will bring not only foreign capital, latest technology but also modern management practices.

While on the one hand it will encourage all the companies to efficiently manage their business or risk takeover by others, on the other hand it will save the exchequer lots of precious funds; the banks would also be saved from non-performing assets and the workers and employees from shortfall in their income.  No more would the financial institutions be required to write off their bad debts or the Government to contribute from the central budget.  The sick company should be allowed to go to the highest bidder without any interference from any quarter.

It is common knowledge that the primary capital market has totally dried up for the past almost seven years while the secondary capital market is volatile.  The takeover of sick industries may perhaps also have salutary effect on the capital markets and may contribute to their revival. It is now up to the Finance Minister to tackle the problem of sick industries in the shortest possible time and enable the country to redeploy the resources to more meaningful areas like infrastructure development.  Now with the foreign investors showing interest in investing in India, the time is opportune to allow takeover of sick industries by the healthier units.--- INFA

(Copyright, India News and Feature Alliance)